Atlas Energy Solutions - Q3 2023
October 31, 2023
Transcript
Operator (participant)
Greetings, and welcome to the Atlas Energy Solutions third quarter 2023 financial and operational results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kyle Turlington, Vice President of Investor Relations. Thank you, sir. You may begin.
Kyle Turlington (VP of Investor Relations)
Hello, and welcome to the Atlas Energy Solutions conference call and webcast for the third quarter of 2023. With us today are Bud Brigham, Chairman and Chief Executive Officer, John Turner, President and CFO, and Chris Scholla, Chief Supply Chain Officer. Bud, John, and Chris will be sharing their comments on the company's operational and financial performance for the third quarter of 2023, after which we will open the call for Q&A. Before we begin our prepared remarks, I would like to remind everyone that this call will include forward-looking statements as defined under the U.S. securities laws. Such statements are based on the current information and management's expectations as of this statement and are not guarantees of future performance. Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict. As such, our actual outcomes and results could differ materially.
You can learn more about these risks in the prospectus we filed with the Securities and Exchange Commission on September 12, 2023, in connection with our Up-C Simplification, our quarterly reports on Form 10-Q, and our other SEC filings. You should not place undue reliance on forward-looking statements, and we undertake no obligation to update these forward-looking statements. We will also make reference to certain non-GAAP financial measures such as Adjusted EBITDA, Adjusted Free Cash Flow, and other operating metrics and statistics. You will find the GAAP reconciliation comments and calculations in yesterday's press release. With that said, I will turn the call over to Bud Brigham.
Ben Brigham (Founder, CEO and Executive Chairman)
Thank you, Kyle, and thanks to everyone for joining us today for our third quarter conference call. Despite a 10% drop in the Permian rig count since the beginning of the year, demand for Atlas proppant remains resolute, and we are rapidly growing our logistics platform. We are pleased with our third quarter operational and financial results, as our team continues to deliver across a range of operational and profitability metrics, including total sales, sales volumes, net income, and adjusted EBITDA. Importantly, to investors, Atlas continues to generate industry-leading margins, which in my view, are underappreciated, benefiting from our exceptionally low cost structure. We continue to work to drive costs down even lower.
Over the course of 2023, we reduced our operating costs on a per ton basis, and we expect to achieve further reductions in the middle of next year when our two new fit-for-purpose dredges come online and achieve their planned utilization levels, all of which should benefit our industry-leading margins. Our three major capital projects to grow our business, the Dune Express Conveyor System, the new Kermit facility addition, and the build-out of our trucking fleet, are progressing as planned, on time and on budget. Now, I will briefly review our growth initiatives, but I also encourage you to watch the video update summarizing these initiatives, which is linked on page 3 of our updated presentation. Starting with our production expansion, our new facility at the Kermit location is now in the commissioning process, with commercial in-service expected late in the fourth quarter.
As a reminder, this new facility will increase our Permian leading production by approximately 50% to over 15 million tons, further enhancing our scale, which is crucial in order to reliably match the scale, demand, and efficiencies of our large-scale customers. The second area is our logistics offering, which includes our innovative high-capacity trucking and delivery assets. Our logistics and delivery assets enhance efficiencies and reliability for the industry, and as a result, our market share is growing, as Chris will discuss in a bit. Our logistics offering is also important, given that these trucking and delivery assets will seamlessly interface with the Dune Express, which is expected to come online late in 2024. As a reminder, we rolled out our innovative high-capacity trucking and delivery assets to prepare the market for the Dune Express and facilitate a more seamless transition to that infrastructure-based solution.
This brings me to our third major growth initiative, our Dune Express Conveyor, which is really more similar to a midstream asset. Like the other capital investments, the Dune Express remains on time and on budget, with an expected commencement in the fourth quarter of 2024. We have ordered approximately 90% of the equipment and materials for the project and have also contracted approximately 80% of the installation and labor, which significantly reduces budget risk. To date, we have taken delivery of more than 57 miles of conveyor belts and over 100 miles of fiber optic cable. We believe the Dune Express and our logistics offering will provide substantial environmental and societal benefits as we aim to vastly reduce the number of trucks on commercial roads in the Permian, which is expected to reduce emissions and save lives.
Furthermore, our logistics offering has the potential to enable our customers to realize efficiency gains by increasing the throughput potential of proppant to serve frac crews that continue to find ways to pump faster and consume sand at increasingly impressive rates. In terms of sales, despite an estimated 10% reduction in completion activity in Q3, Atlas sales volumes remained sold out in Q3 and were flat sequentially, demonstrating correct alignment with prominent Permian Basin customers. For 2024, we currently have 6.2 million tons of production contracted, which represents 40% of our anticipated production capacity of 15.5 million tons for next year. It is worth reminding investors that oil and gas companies have been working on their 2024 budgets and are just now entering the early stages of contracting their sand and logistics needs for 2024.
These negotiations will run from now through the first and into the second quarter of 2024. As expected, there was very little contracting in August and September with our existing customers and potential new customers. Our sector-leading margins, benefiting from our low-cost structure, which should only get lower with the fit-for-purpose dredges around mid-year 2024, and lower again in 2025 with our Dune Express, combined with our expanding revenue streams, provides us with confidence that we will be able to layer on the additional contracts and accomplish our financial goals, which includes growing distributable cash flow into next year and the years to come. Of note, Atlas has adjusted its overall portfolio over the last two years to ensure contractual continuity through staggered terms with regards to both contract duration and timing of renewals.
Our goal remains to have 80%+ of our capacity committed in 2024, and we remain confident in that goal for several reasons. First, we're currently in negotiations for several million annualized tons of sand and logistics in rolling contracts with existing customers, where historically, we have had very high retention rates. Current contract discussions include not only sand and logistics supply agreements, but also some more complex and long-term conversations about a revolutionary infrastructure-based solution for the Permian. In addition, we have a number of meaningful opportunities to add volumes with new customers, including large customers that stand to benefit from the Dune Express. Our growth in the logistics business and our progress on the Dune Express, combined with our unmatched reliability and scale, uniquely positioned Atlas to meet the growing demand, but to also grow our market share in the Permian.
While operators generally control the timing of the initiation of these contracts, we control the access to future volumes that will go down the Dune Express. For these reasons, we remain assured that we will exit contract season with not only a strong contract backlog, but alignment with the most efficient and highest quality customers. Regarding sand pricing, investors should recognize that there is stratification and differentiation in the proppant and logistics markets. Some of the factors in proppant marketability, and thus pricing, include the company's ability to scale up to reliably meet the needs of increasingly large operators in the Permian, particularly given the increase in pad development drilling and simul-frac activity. In this regard, Atlas is unmatched in our ability to deliver proppant with the scale and reliability required for these projects in order to effectively debottleneck sand in these massive completion operations.
Associated with that are our innovative logistics offerings and the associated incremental dependability and reliability, which they provide to our customers. Our expanded logistics offerings differentiate Atlas in the market, further enhancing our industry-leading dependability and reliability. In my view, as a former operator, I can state unequivocally that dependability and reliability are of major importance to our customers, and they are absolutely mission-critical in the value proposition we offer. Given our unmatched scale, our historical delivery execution, and our ongoing logistical innovations, we feel confident in our ability to deliver the step change in performance that our large-scale operators need. Another point on sand pricing is the fact that there are numerous variables involved. For example, are you selling wet or dry sand? Atlas currently sells only dry sand, and we've been sold out all year, while others have had to sell meaningful sand volumes on the spot market.
All of that to simply say that investors should not read too much into discussions of spot pricing. While lower spot pricing can directly be indicative of pricing trends, there are reasons that some products fly off the shelf and are even contracted before other products are sold, and there are reasons that some products on the shelf have to be discounted. And of course, the distance to the wellhead and associated delivery cost plays an important role in sand pricing and the all-in cost for the operators. Importantly, the Dune Express will eliminate the distance-related benefits of some of the wet sand options in the Delaware Basin.
Further, when you add in the advantage Atlas has in inventory, security of supply, quality, and throughput potential, our customers' ability to pursue operational excellence on a scaled basis will only be enhanced. As the largest proppant producer in the Permian, with the largest and highest quality reserves, our differentiated advantage also makes our results less volatile, as evidenced by our quarter-to-quarter performance. While that benefits and is of significant value to our customers, those attributes, including our unique dredging operations, also benefit us by lowering our cost structure. Regarding the macro environment we're operating in, despite the drop-off in activity, the Permian proppant market remains healthy, driven in part by the continuing advancements in efficiencies. Frac crews are continuing to pump more proppant on a per-day basis.
On the supply side, Permian proppant producers have been disciplined, with modest supply additions recently coming in response to a long period of significant undersupply in the Permian, bringing the market into a more balanced position as we enter 2024. Optimism surrounding the recent movement in oil prices and early signals from customers leads us to believe that a strong recovery in frac activity is around the corner. An expected ramp in activity next year, combined with continued increases in proppant per frac crew per day, against a supply side that is much more patient in making growth investments than we've seen historically, leads us to believe that the sand market will tighten again next year. Again, we remain sold out in Q3 and expect to remain very busy in Q4, particularly given how heavily contracted we are.
With the current geopolitical uncertainty, the call for more Permian barrels has never been greater and more crucial for energy security in the United States. In addition, the previously announced corporate reorganization transaction, or Upstream simplification, closed on October 2nd. We now trade under a single class of common stock, with the previous dual-class stock structure now eliminated. We are optimistic that our simpler, more efficient corporate structure will enable us to broaden our investor base. Finally, given our strong margins and quarter-end liquidity, we're excited to put forward another quarterly dividend of $0.20 per share. Similar to the previous quarter, the dividend is comprised of a $0.15 per share base dividend, with a $0.05 per share variable dividend. Last, I want to point investors to slide 12 in our investor presentation.
As previously mentioned, Atlas leads all the other public companies in the oilfield service sector in both margins and growth. This is truly a remarkable enterprise, and we've now demonstrated that performance on a consistent quarter-to-quarter basis, without the volatility experienced by others in our space. Given those margins and the growth we expect to achieve in 2024 and 2025, while our major CapEx initiatives are winding down, we expect to enjoy exceptional cash generation flexibility, which should increasingly be recognized in the market. With that, I will turn the call over to our Chief Supply Chain Officer, Chris Scholla, to provide you with an update regarding our trucking and logistics business.
Chris Scholla (Chief Supply Chain Officer)
Thank you, Bud. We continue to build out our fleet of high-capacity logistics assets and provide seamless delivery of double and triple trailers to our customer well sites, with payloads that exceed the industry standard tonnage by 3x-4x, respectively. Our customer base and multi-trailer operations continue to grow, as evidenced by an over 100% increase in multi-trailer jobs and adoption by some of the largest operators in the Permian since the beginning of this year. As shown in our investor presentation, we added an additional drop depot facility during the quarter, which almost doubles our existing heat zone multi-trailer delivery areas to over 1,000 sq mi. We expect to commission our third drop depot facility during Q4 of this year, which will expand our multi-trailer delivery area to over 1,500 sq mi in the Delaware Basin.
We also commissioned our remote in-field command center, which is presently located 18 miles west of our current facility. This command center was designed to be completely remote and mobile. It will eventually be placed in the heart of the Delaware Basin, near our end-of-line load-out facility, upon completion of the Dune Express. Our new in-field command center puts our logistics base of operations significantly closer to customers' well sites, ultimately supporting superior in-field customer service. With that, I will turn the call over to our President and CFO, John Turner.
John Turner (President and CFO)
Thank you, Chris. Today, I will review our third quarter 2023 financial and operating results and comment on our financial position. For the third quarter, we reported total sales of $158 million. Our proppant sales revenues were $115 million. Our proppant sales volumes were relatively flat over the period, while our average mine gate price declined moderately. The sequential price decline is a function of higher priced, shorter duration contracts rolling off and being replaced by new contracts at lower rates, as well as quarterly pricing resets on certain contracts. Moving to service sales, which is revenue generated by our logistics operations, we reported a quarterly record of $43 million in revenues for the quarter, representing a 17% increase when compared to our prior period.
This increase in service sales is related to an increase in the number of active jobs during the period enabled by an increase in the number of trucks deployed and continued customer adoptions of our single and multi-trailer logistics offerings. As of October 31st, we had taken delivery of 97 trucks, which is an addition of 35 trucks since the last quarter, and expect to take ownership of a total of 120 trucks by year-end. In total, cost of sales, excluding DD&A, for the quarter increased by $4 million to $68 million. This increase was primarily driven by higher trucking and last mile logistics costs resulting from the increase in the size of our fleet and increasing number of active jobs.
For the third quarter, our per ton plant operating costs were $9.66, which is in line with that of the prior period. Further, we expect the delivery of our new specialized dredging equipment in early 2024 to provide for incremental improvements in operational performance and further reductions in our mining costs once those assets are fully commissioned by the middle of next year. Royalty expenses for the quarter were down 16% to $3.6 million due to lower realized mine gate prices. SG&A expense for the quarter was $14 million, representing a sequential increase of 17%. The increase was driven primarily by increases in consulting and professional fees, which includes $3 million in non-recurring transaction costs related to the Upstream simplification and the refinancing of our term loan.
Interest expense for the quarter was $5 million, which was offset by $3 million of interest income generated during the period. We expect our interest income to decline in future quarters as we draw down on our cash reserves to fund our growth projects. Depreciation, depletion, and amortization expense for the quarter increased 8.4% to $10 million. This increase was due to an additional depreciable assets placed into service as compared to the prior period. We generated net income of $56 million for the quarter, representing a strong net income margin of 36% and earnings per share of $0.51 per share. Net cash provided by operating activities for the quarter was $55 million, compared to $104 million during the second quarter.
$38 million of this decrease was associated with changes in operating assets and liabilities that were largely associated with an increase in accounts receivable during the quarter, combined with lower net income. We have seen the accounts receivable balance normalize since the end of the quarter. Adjusted EBITDA for the period was $84 million, representing a sequential decrease of 9.4% and an adjusted EBITDA margin of 53%. Adjusted free cash flow, which we define as adjusted EBITDA less maintenance CapEx for the quarter, was $69 million, representing a sequential decrease of 21% and an adjusted free cash flow margin of 43%.
Looking to the fourth quarter of this year, we expect our EBITDA to be flat to down slightly when compared to the third quarter, depending on the degree of seasonal and holiday impacts we see this year. During the third quarter, given our low levels of required maintenance capital expenditures, we converted just over 81% of our adjusted EBITDA to adjusted free cash flow. Capital expenditures for the quarter were $139 million. This includes $124 million spent on growth projects, which includes our new Kermit facility, the Dune Express, our well site delivery assets, and production enhancements at our existing facilities. We incurred $16 million of maintenance CapEx during the quarter.
We expect growth capital expenditures to continue to increase as we progress on Dune Express construction, which will be partially offset by declining new Kermit facility expenditures as construction activities taper off as we approach commercial in-service of that additional capacity before the end of this year. As of September 30th, we have spent $132 million out of our budgeted $400 million on the Dune Express. For our new Kermit facility, we have spent $180 million, with an additional $25 million remaining. The new Kermit facility is currently being commissioned and is expected to be fully online by the end of this year. As of September 30th, 2023, our total liquidity was $439 million.
This was comprised of $265 million in cash and equivalents, $74 million of availability under our ABL facility, under which we had no borrowings outstanding, and $100 million of availability under our delayed draw term loan facility. We streamlined our capital structure during the period with a new $180 million term loan that refinanced our previous term loan and finance leases. The principal balance of our new term loan sits at $180 million, and our current finance lease balance is $500,000. So our total debt outstanding currently is $181 million, and we ended the quarter with a debt to LTM adjusted EBITDA ratio of 0.5x. That concludes our prepared remarks, and we will now let the operator open the line for questions. Thank you all for joining our third quarter call.
Operator (participant)
At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star-one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star-two if you would like to remove your question from the queue. We ask that you limit yourself to one question and a follow-up so that others may have an opportunity to ask questions. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Luke Lemoine with Piper Sandler. Please proceed with your question.
Luke Lemoine (Managing Director)
Hey, good morning. Bud, you talked about 6.2 million tons already contracted for 2024, and then you talked about, you know, in negotiations for several million tons with existing customers, which would pretty much take you to your 2023 production levels. I guess within that 6.2 million tons you've already contracted, can you talk roughly about new versus existing customer mix? And then on the incremental production volumes you're adding, is the goal to try to place as much of this as possible with operators that can offload, you know, from the Dune Express, or is there a wet versus dry consideration as well, or just kind of some of the variables there?
John Turner (President and CFO)
Yeah. So hey, Luke, this is John. You know, obviously, talking about our contracting, you know, we don't really talk about specifics on what we're currently working on, but as you said, we're currently have 40% of our 2024 volumes contracted at very attractive pricing. You know, we're currently in discussions with a number of existing customers and new customers regarding volumes. You know, we expect these particular discussions to go on throughout the quarter and be wrapped up by the end of this quarter and early next. And we also have a lot of contract renewals coming up in the first and second quarter of next year. You know, many of those discussions have not yet started, and we don't expect them to until we get closer to the renewal dates.
Finally, there are a number of new opportunities that are starting to come out. You know, we're evaluating these to see if we have the tonnage to meet these additional contracts. So just as a reminder, you know, you know, our run rate is 11 million tons this year, and, you know, we currently plan on selling 15 million tons next year. You know, we're currently working on contracts that would far exceed those numbers. You know, our stated goal for next year is to be 80% contracts on 15 million tons. It should be noted that, you know, it's not a requirement to exit this year and be 80% on 2024 volumes, given all the renewals that happened in the first and second quarter.
You know, this is not really a race to see how much of our 24 volumes we can contract as quickly as we can. There are more than enough opportunities out there for us to be 100% contracted. You know, and our primary goal here is to secure contracts with high-quality operators and pressure pumpers who stay busy, will take the, you know, take what they contract and pay on time. So anybody want to add anything to that?
Ben Brigham (Founder, CEO and Executive Chairman)
No. Hopefully, that helps you, Luke.
Luke Lemoine (Managing Director)
Yeah, yeah. Definitely. I appreciate the comments on, you know, working on deals for over 15 million times. That's definitely helpful and kind of paints the picture. I appreciate it.
Ben Brigham (Founder, CEO and Executive Chairman)
You bet.
Operator (participant)
Our next question comes from Derek Podhaizer with Barclays. Please proceed with your question.
Derek Podhaizer (VP of Equity Research)
Hey, I just want to ask about fourth quarter seasonality in particular. So you said in your opening comments, you're going to be very busy in the fourth quarter. The guide was EBITDA to be flat to down slightly compared to third quarter. We have to think about the Kermit expansion online by the end of the year. You talked about the wet plant coming online. Could you help quantify for us how you're thinking about volumes, pricing, and activity as we go into fourth quarter?
Ben Brigham (Founder, CEO and Executive Chairman)
Yeah, maybe I'll start, and then, John and the team may want to add to it. You know, as per our release, we were sold out during the third quarter. We've also continued to be very, very busy here through October. You know, but it is, it is the holiday season, and so, it just, it does create more of an error bar as far as, the winter weather and then the holidays and, and all of that. But, we're in a really good place right now in terms of activity and sold out. I don't know if you guys want to add to that.
John Turner (President and CFO)
Yeah, I mean, we always expect to slow down in the fourth quarter. You know, in December, you see the holidays, like Bud said, and then there's the weather. That's always very unpredictable. So, you know, we do use this time for some needed maintenance. You know, like Bud said, October is one of our busiest months since inception from a volume and service perspective. You know, based on what we know right now for the fourth quarter, you know, volumes will likely be flattish. You know, we had a busy October, and as of right now, we see activity slowing in November and December. And if the weather is worse than expected, then those numbers may go down some. You know, on the logistics side, we see activity as flattish too, as well.
As far as activity in the fourth quarter, you know, we hear both sides of the coin. Some companies are taking breaks and some are continuing and potentially picking up activities. Recently, we have a couple of companies indicate they plan on extending some activity in the fourth quarter. As of right now, you know, we really don't know if that's going to happen. If it does, there could be some upside in the fourth quarter. You know, we really expect a real pickup in activity to begin in the first quarter of 2024.
Ben Brigham (Founder, CEO and Executive Chairman)
Yeah, I might add, I think John makes an important point there. You know, as a former operator, you know, I know we would, we would be thinking about, you know, activity, recognizing that activity is going to pick up in 2024, that we want to be at the front of the line. Generally, we wanted to be at the front of the line on that. So that's the question is, how many operators kind of pick up a little bit earlier, here in the fourth quarter as opposed to the first quarter of 2024? I'm highly, highly confident there is going to be a, a meaningful uptick in activity in 2024. It's just a question of how much. We are getting some positive signals, but it's a question of how many, how many of the operators do pull forward a little bit into Q4.
Derek Podhaizer (VP of Equity Research)
Got it. Okay, that's all helpful. So, fair to say, if you think volumes should be likely flattish, we don't know how November, December are going to shake out. It seems like the EBITDA guide flat to down, it's more of the, some more pricing reset that might drive that down, more so pricing than volume?
Ben Brigham (Founder, CEO and Executive Chairman)
Well, I mean, maybe I'll start, and these guys might add to it. You know, our third quarter our sand price is just over $40 a ton. You know, the market is pretty balanced right now, and as we're moving through the fourth quarter. So we'll see. We're in discussions now regarding next year, but anticipating an uptick in activity, we're having those discussions right now, and we'll see how it plays out for next year. I don't know what if you want to say anything.
John Turner (President and CFO)
No, I mean, look, the guidance is there. I mean, you know, we may have some maintenance expense in there. I mean, there's just, you know, there's you know, we said flattish. You know, there's obviously opportunity for weather, but, you know, that's kind of what we're seeing right now.
Derek Podhaizer (VP of Equity Research)
Got it. Okay, that's helpful. And then follow up on operator M&A. Obviously, we're seeing a lot of deals going on, Exxon, Pioneer, Chevron has a lot of public buying up privates. This tends to lead to potentially more customer risk around customer concentration, around pricing and volumes. I guess, how are you guys approaching and attacking this M&A wave that we're seeing, and how do you win in this type of environment?
Ben Brigham (Founder, CEO and Executive Chairman)
Yeah, this is Bud. I'll start on that. The M&A, you know, is certainly inevitable that it's going to continue. There's real leverage with scale. And you know, given the opportunity to leverage down per unit costs and benefit from that scale and with more automation, Atlas is very much differentiated in that regard. It's the largest proppant producer with growing logistics offerings that nobody else can match. So it really plays to our strength over the long haul. Nobody is better at providing large amounts of proppant timely and reliably than Atlas is, and with our growing logistics offerings and the solutions we're providing, particularly the Dune Express, it's only gonna get better. So the M&A activity plays to our strength and will continue to over time. So do you guys want to add to that, Jeff or John?
Jeff Allison (EVP Sales and Marketing)
Yeah, I'll just say, you know, one example is a recent M&A has created an overall market share increase opportunity within the NewCo as a result of, one, our current position in both sand and logistics within the independent entities of the M&A. Our proven reliability that we demonstrated internally. And three, our new industry-leading scope, scale, and offerings. So this is all translating into an Atlas event for the NewCo moving forward. So overall, creating an accretive union.
Ben Brigham (Founder, CEO and Executive Chairman)
Yeah, I mean, just in the big picture, when I think back to several decades ago, you know, the Permian was probably dominated to a degree by smaller operators, kind of mom-and-pops, and I think that day is kind of is gone past and now it's all about scale and the leverage associated with that. And so these operators need a scaled proppant and logistics solution provider, and that's what Atlas is positioned to provide.
Derek Podhaizer (VP of Equity Research)
Great. Appreciate the color. I'll turn it back.
John Turner (President and CFO)
Our next question comes from Jim Rollyson with Raymond James. Please proceed with your question.
Jim Rollyson (Director and Equity Research Analyst)
Good morning, gentlemen. Bud, you mentioned just when we talked about pricing and the different dynamics in the market on, you know, wet sand versus dry, scale, guys that need to hit the spot market versus contracted. Obviously, you guys have done a fantastic job over your history of growing the scale and being reliable, et cetera. I'm curious how you view the value to that scale and reliability when it comes to kind of pricing premium over the spot market numbers that we all see quoted, you know, in a market like we've been in, where things have kind of softened a little bit, now we feel like we're bottoming and starting to turn. Just maybe some color commentary on, you know, pricing premium for what you guys actually provide.
Ben Brigham (Founder, CEO and Executive Chairman)
Yeah. Well, thank you. Well, first, just some general comments. There's a reason that some companies, specifically Atlas, are fully contracted, while others have proppant to offer on the market, in the spot market. And as I mentioned in my comments, a lot of it is a function of reliability and dependability. And as an operator, there's nothing that will upset your quarter, your rate of return on your projects and your production and your goals than not having the proppant when you need it, and not having quality proppant when you need it. And so that is mission critical for us, and I think it's what differentiates us in the market.
You know, some of the smaller proppant providers and some of the different, you know, wet sand has its own issues, etc., are just not as optimal for the large scale operators who really are dependent on that reliability and dependability, as well as the other infrastructure solutions that we're offering that continue to enhance that. So I think there is a real bifurcation in the market, and so I do think spot pricing can kind of be a little bit indicative of pricing trends directionally. But I do think there's been too much attention on the spot pricing in the market and maybe an overextrapolation of what that indicates on sand.
John Turner (President and CFO)
Yeah, look, we've been told by a number of our customers that they contract with Atlas because of our reliability and service, and they also indicate that they pay more at Atlas more than they do, you know, other standard logistics companies. You know, I really don't know, have an answer toward that. We don't have an answer what that amount is. You know, our customers don't tell us what they're paying our competitors for standard service. But what I will say is that I do think an example of our quality is shown in our level of contracting, our high level of activity over the past few quarters. I mean, you've seen a 20% decrease in the frac market over the, over the past, over the past six months, you know, and, you know, we've maintained very high activity levels during that time, so.
Jeff Allison (EVP Sales and Marketing)
Yeah, I'll add that this is nothing new, right? We know those players and folks that come in and offer extremely low prices. We've seen that throughout, you know, our five years of existence and throughout the cycles. You know, we don't have any peers that are pure play Permian standard logistics companies that are public to see that and quantify that price for you. But I will say that we price our products and services according to that value proposition for our customers, and we've been extremely successful pricing them appropriately.
Jim Rollyson (Director and Equity Research Analyst)
Yeah, I didn't expect you to give an absolute number, so the color is very helpful. And, John, maybe as a follow-up. When we think about costs, obviously, you guys had to step up in costs late last year as you were rolling from third-party to internal on the dredging side, and those have kind of come down. It seems like they've flattened out. As we think about this over the next, you know, four quarters or so, should we think about OpEx generally being relatively stable until the new dredges come in and are fully functional and operating in mid-next year? And then maybe just a little kind of color on how much that should improve costs, as, you know, maybe on a percentage basis.
John Turner (President and CFO)
You know, so, you know, we have, we have plateaued. I do think we're working on some, some things right now that, that could potentially have an impact on that. But the biggest impact you're going to see is, like you said, is when the dredges come on fully commissioned, which is expected by, you know, middle of next year. You know, at, you know, our lowest ever, I guess, OpEx per ton was around $6.50 a ton, and that's when we were 100% dredge mining. You know, that dredge mining provides us with around a $2-$3 cost advantage versus traditional mining, which we still are doing quite a bit of that. So, you know, at least, you know, at some point next year, you're gonna start seeing our costs trend down, more towards that, you know, probably more in the $7-$7.50, you know, mid-$7 type range, and that's kind of where we're focused right now.
Jim Rollyson (Director and Equity Research Analyst)
That's helpful. Thank you.
Operator (participant)
Our next question comes from [Eki Mura] with Goldman Sachs. Please proceed with your question.
Speaker 16
Hi, good morning, team. You noted some progress on the Dune Express. Obviously, it stays on track, but maybe help us understand the steps that you're looking at till it gets commenced in the fourth quarter of next year, and any factors that you are keeping an eye on?
Ben Brigham (Founder, CEO and Executive Chairman)
Yeah, maybe I'll just start, and then Scholla may add to it. You know, we've built both of our plants. We did the expansion that's nearing completion here in the fourth quarter ourselves. And obviously, our team is really very skilled and have been very successful at these probably more complex projects than building the Dune Express. Which Dune Express is kind of a rinse and repeat process down the length of the line building it. I don't know if you guys can answer. It's an area. Given that we've ordered the majority of the material and contracted the labor, I think, as I mentioned in my conference call text, that really mitigates the risks to the budget. It's not a very complex project in terms of the construction of the Dune Express.
John Turner (President and CFO)
I mean, there, there's like, as far as that equipment goes, I mean, there is the opportunity to make sure that it comes in on time and making sure that it comes in meeting our specs. So we're reaching out to a lot of our vendors right now. We're actually doing these vendor audits. We do this pretty periodically to make sure that, you know, the equipment we've ordered, making sure that it will show up on time and on spec. You know, like I said, the equipment starting to arrive. You've got concrete sleepers are starting to arrive. That's what the Dune Express will sit on. You know, we're starting to take, you know, delivery of, like, a lot of fiber optic cable. You know, so I mean, there's a number of things that we're currently, I mean, as we currently work, continue to construct it. You know, things that we can do in the interim is just to make sure that the Dune Express comes on time and on budget.
Ben Brigham (Founder, CEO and Executive Chairman)
Did that answer your question?
Speaker 16
Yeah. Thank you so much. Appreciate the answer. Just on a follow-up, you mentioned in the press release that there were some quarterly price resets on certain contracts. Maybe help us understand that a little better. Like, what does that exposure look like on your overall contracted volumes, and how does that actually work?
Ben Brigham (Founder, CEO and Executive Chairman)
Jeff, do you want to take that?
Jeff Allison (EVP Sales and Marketing)
Yeah, as we, you know, depending on the market and how it's working, the quarterly resets have been a part of pricing strategies and portfolios for a long time. Yeah, within some of the pricing agreements that we have now, we have some quarterly resets, and you can see some of our pricing is in this third quarter and moving into the fourth quarter, an effect of the pricing. Roughly, you know, we have roughly 25%-30% of our pricing historically on quarterly resets, probably moving to more of a 50% as we move into 2024. And you know, it, the quarterly resets really adjust to the market pricing, not only with regard to numerically, but with regard to the trend. And so we feel that, you know, with an uptick in the activity moving forward in the back half, this should yield some positive results for us.
Ben Brigham (Founder, CEO and Executive Chairman)
Yeah, I mean, our view is, and I think everybody can see it, that we kind of moved through a trough in the rig count and the frac spreads. And I think we certainly, and I think most of the industry is anticipating a pickup in activity in 2024. So I think, I mean, the quarterly resets give customers and us, you know, comfort. We have great relationships with these guys, that we'll be able to adjust to changing market conditions. And, but I, in my view, is it sets up very well for 2024.
Speaker 16
Thanks. I'll turn it over.
Operator (participant)
Our next question comes from Saurabh Pant with Bank of America. Please proceed with your question.
Saurabh Pant (VP and Equity Research Analyst)
Hi, good morning, Bud and John. Maybe I'll just start with a quick one on the Dune Express. Clearly, you're making a lot of good progress on that, including on the ground. Just want to ask in terms of how customers look at it, and they see that progress, are you seeing more interest, customers coming to you, asking on the project, getting familiarized with that and showing interest in contracting volume through that? Just talk to how your customers are responding to the progress that you're making on the ground.
Ben Brigham (Founder, CEO and Executive Chairman)
Well, I mean, I think clearly the customers are excited about the Dune Express coming online. And so I do think that that does. Jeff can talk about, you know, of course, we have our existing customers, but we have a number of new potential customers that we're in discussions with, that we think it's obvious that the Dune Express is very attractive to them and compelling. So, we'll be having those discussions over the next three to four months. And we expect to grow our customer base. Jeff, I don't know if you want to add.
John Turner (President and CFO)
Yeah, one thing though is this, you know, the Dune Express is just over a year away, and so any contracting that we're doing right now in the Delaware Basin is gonna, is contemplating taking sand off the Dune Express. So, yes, yeah, there is a lot of interest from operators that are out there in the Permian, especially the Delaware, I mean, the Delaware, they're looking for that size and scale.
Ben Brigham (Founder, CEO and Executive Chairman)
They're both ready to get the trucks off the road. That's a real issue out there.
John Turner (President and CFO)
The efficiencies that's coming with this, you know, with the Dune Express. So, Jeff, you want-
Jeff Allison (EVP Sales and Marketing)
Yeah. I, as John stated earlier, it's not a race to get to 2024 volumes contracted, but more of an effort to align with high quality clients, both E&Ps as well as pressure pumpers that are sustainable on a go-forward basis. Current contract discussion are not just sand and logistic supply agreements, but more complex and long-term conversation about revolutionary infrastructure-based solution for the Permian. And, let me define infrastructure, solution-based, infrastructure-based solution. It means a compilation of sand production expansion to meet the needs of our large scale, high efficiency customers.
A unique, logistics solution that Chris alluded to earlier, with 3x-4x transit capacity, with a phased interface of multi-trailer delivery from the drop depot model to the eventual Dune Express delivery solution, but just approximately a year out. This all leads to security and reliability of supply for years to come. So it's a journey, and we've had tremendous amount of traction early on. So we're working this. We're just taking these ideas and putting them to paper right now with the customer.
John Turner (President and CFO)
I mean, this is something we've been talking to these customers for about a long time, three or four years now, and now it's just within a year.
Ben Brigham (Founder, CEO and Executive Chairman)
Yeah.
John Turner (President and CFO)
Yeah.
Ben Brigham (Founder, CEO and Executive Chairman)
Yeah.
Saurabh Pant (VP and Equity Research Analyst)
Yep. Now that the project is within a year of completion, right, customers see progress on the ground, there should be more traction, right? And it sounds like there is more traction, so that's encouraging. Okay, perfect. And then a quick follow-up on more of a housekeeping question on CapEx, cash CapEx, particularly. John, maybe you can remind us how much of CapEx associated with the Dune Express has been spent at this point? How much more is left? And then just for the fourth quarter, how should we think about CapEx and the residual CapEx related to the Kermit expansion that's coming online this quarter?
John Turner (President and CFO)
If Brian has those numbers, I'm going to let him answer those.
Brian Leveille (VP of Finance)
Yeah, we've spent $180 million on the current expansion, so there's, you know, $20 million-$25 million left. And on the Dune Express, we've got $132 million behind us, so another $268 million over the course of the next, you know, five quarters.
Saurabh Pant (VP and Equity Research Analyst)
Okay. Okay, perfect.
Ben Brigham (Founder, CEO and Executive Chairman)
Okay, guys. Thank you.
Saurabh Pant (VP and Equity Research Analyst)
Yep, I got that. Okay. Thank you. I hand it back.
Ben Brigham (Founder, CEO and Executive Chairman)
Thank you.
Operator (participant)
Our next question comes from Geoff Jay with Daniel Energy Partners. Please proceed with your question.
Geoff Jay (Partner)
Hey, guys. Just a quick one from me. And thinking back to the M&A question a little bit. Obviously, as companies either get together or, you know, or I guess are rumored to get together in the future and lateral links increase, I'm just kind of curious what that does, you know, in your minds, that kind of overall sand demand, and sort of, you know, what that kind of means for you guys in your business?
Ben Brigham (Founder, CEO and Executive Chairman)
Bud, also these guys may want to add to my comments and. But I did touch on it earlier. I think, you know, first, it's hit or miss, as the, you know, the acquiring company, is it an existing customer or not? But generally, the larger customers or the larger operators are customers of Atlas Energy Solutions because we match up really well to provide the scale and reliability that they need. So I do think, you know, long-term, it is very beneficial for Atlas. You know, it's more difficult for mom-and-pop type operators to match up with these large-scale operators, particularly given increasing pad drilling and completions, increasing simul-fracs, which just require a lot of proppant very quickly, and we're uniquely positioned to provide that. So I think it's very beneficial and our scale and our growing scale is really important in that. I don't know if you guys want to add to that?
John Turner (President and CFO)
No, I think that I agree with you. I think that larger scale operations means larger scale services that need to go along with that. And you know, we've seen it in other basins. You saw it in the Eagle Ford, like 10, 15 years ago. I mean, when the large operators move in, you know, it's the larger service companies that can service their needs across, you know, the entire and across their entire operation is what they're really looking for. They need that reliability because, you know, they're putting a lot of money in on this, and you know, they want to make sure they execute on that.
Ben Brigham (Founder, CEO and Executive Chairman)
And I'll mention one other thing, because, yeah, your question may also stem from a concern, does it mean less drilling activity? And, again, it can in that, you know, some of the smaller private operators, you know, maybe are actively growing their production to make them more attractive, as an acquisition target. However, as you've seen from us on a quarter-to-quarter basis, our results are very stable because we're contracted to a large degree with these large operators that have very steady, and longer-term planned activity. So again, we just match up really well, with these companies that are combining and creating more scale.
And the other thing is, and we've included the Rystad chart in the appendix of our presentation. It really is remarkable what a great job that operators and pressure pumpers are doing, increasing the efficiency in the field. And so the proppant pump per day, per frac crew just continues up into the rise. I think all these drives for more efficiency, that to some degree, are associated with scale, to drive up the efficiencies and drive down the cost per unit. Again, they all play to our strengths.
Geoff Jay (Partner)
Excellent. Thanks. That's really helpful.
Ben Brigham (Founder, CEO and Executive Chairman)
Thank you.
Operator (participant)
Sorry. Go ahead, sir.
Geoff Jay (Partner)
Oh, I'm sorry. That answered my question. Thank you.
Operator (participant)
Our next question comes from Michael Scialla with Stephens. Please proceed with your question.
Michael Scialla (Managing Director)
It sounds like you're pretty confident you can be fully contracted on about 16 million tons per year next year. Is it fair to think you can go beyond that if the demand is, is there at a price you're okay with, and you don't need to spend any additional capital to, to do that with the efficiencies you're seeing at Kermit? Is the CapEx number that the consensus has yet right now for next year, about $325 million, seem like a good number to you?
Ben Brigham (Founder, CEO and Executive Chairman)
Yeah. As Jeff touched on, we are in discussions for volumes, and John touched on as well, that are in excess of that, you know, of that 16 million tons. That said, you know, when we built our original plants, we thought, you know, that the expectation was they would produce 3 million tons-4 million tons, and they produced 5.5 million tons. And so our expansion, we'll see, you know, we may be able to produce more at Kermit with the expansion than what we're anticipating. So time will tell on that. And we do have opportunities to further grow our production. But, John, I don't know if you want to add to that.
John Turner (President and CFO)
Yeah, and I mean, like we said earlier, though, I mean, it's $16 million. I mean, our goal is 80% of $15, really. If you, if you and you look at that, we want to keep some on spot. It will just be a decision that we need to make at the time, whether or not. It depends on what our customers want. Like we said, there's new opportunities that are out there that we're evaluating to see what those additional volumes were looking like.
And so on the CapEx numbers, I think we're going to have to, I mean, we'll need to come back on those because I know that there's a lot of, you know, we do our best to forecast how CapEx is going to be spent, and, you know, and that we're never, ever successful at - you know, forecasting that, the ebbs and flows of that, but, you know the timing of it. The timing of it, but you know, right now, I mean, the Dune Express, we plan to spend $400 million total on that. And then, you know, obviously, the Kermit plant expansion is on time and on budget. I think we mentioned those numbers in our call, but we can circle back on that.
Ben Brigham (Founder, CEO and Executive Chairman)
Does that help you?
Michael Scialla (Managing Director)
It does, yeah. Thank you. I guess on the logistics side, do you expect, you've obviously had some tremendous growth there, surprised now for a couple of quarters in a row. Do you expect any further step up there, before Dune Express is completed? Is it just a matter of, further adoption of these double and triple trailers? I know you mentioned the next drop depot, that you're planning for the fourth quarter. I guess just any visibility on further growth before Dune Express goes into operation.
Ben Brigham (Founder, CEO and Executive Chairman)
Yeah. We'll let Chris answer that for you.
Chris Scholla (Chief Supply Chain Officer)
Yeah. You know, look, we've always projected that growth into the Dune Express. When you look at, you know, where we've come from earlier this year to where we're at now, as you said, right, dedicated fit for purpose assets, multi-trailering offering that is differentiated in the market, no one else can offer and all of that, while meanwhile opening and expanding our drop depot footprint. You know, that growth that you will see over the next year, the plan is not to show up with Dune Express day one, you know, hit a button and expect everything to be delivered at that point. Well, in advance of the Dune Express, we want to be delivering 100% of those volumes, you know, sand and logistics to the well site, so that when the Dune Express comes on from a customer perspective, it's a seamless transition, and they don't even see a difference. So hopefully that answers your question.
Ben Brigham (Founder, CEO and Executive Chairman)
We've added another heat zone drop depot. You might touch on that as a step toward that.
Chris Scholla (Chief Supply Chain Officer)
Yeah, exactly. From a transitionary period, you know, we've got over 1,000 sq mi of accessible multi-trailer operations out there and plan to add another one in Q4. While we, you know, show flattish in Q4, based on just the activity volumes as we talked about earlier, we do expect to grow in that last mile with the Q1 pop as well.
Ben Brigham (Founder, CEO and Executive Chairman)
Does that help you?
Michael Scialla (Managing Director)
It does. Thank you very much, guys.
Ben Brigham (Founder, CEO and Executive Chairman)
You're welcome.
Operator (participant)
Our next question comes from Doug Becker with Capital One. Please proceed with your question.
Doug Becker (Managing Director)
Thank you. I wanted to follow up on logistics, but on the margin side, it looks like they were down just a little bit in the third quarter, at least in part because of the shorter haul distances. What's the expected trajectory on margins as we move toward Dune Express at the end of next year?
Chris Scholla (Chief Supply Chain Officer)
Yeah, I think through next year, you know, we've run in a, you know, historically in that 10%, 13% margin. I think as we get into next year, we're going to see more of a 15%-20% margin business, approaching the Dune Express.
Ben Brigham (Founder, CEO and Executive Chairman)
Then longer-term?
Chris Scholla (Chief Supply Chain Officer)
Longer-term, once the Dune Express is up and running, you know, upward 50% margins.
Doug Becker (Managing Director)
And so just to refine that kind of 15%-20% through the first three quarters of next year, and then a step up as Dune Express comes on?
Chris Scholla (Chief Supply Chain Officer)
That's right.
John Turner (President and CFO)
As we ramp into it, I wouldn't expect it to happen immediately, but I think as we ramp into it.
Ben Brigham (Founder, CEO and Executive Chairman)
Not day one, but it'll be a ramp up with the Dune Express volumes.
Doug Becker (Managing Director)
Yeah. Makes sense. Just on the timing of Kermit, I know you've been highlighting late fourth quarter. I've been assuming December 1st, but just wanted to get a sense, is there potential or any visibility as a little bit earlier, a little bit later? Obviously, can have a pretty big impact on the fourth quarter.
John Turner (President and CFO)
You know, I think, we're still looking at a December start-up on that when it comes to coming on. I don't know that we're going to get that on any sooner than that, or have those volumes available earlier than that.
Doug Becker (Managing Director)
Thank you very much.
Ben Brigham (Founder, CEO and Executive Chairman)
Great. Thank you.
Operator (participant)
Our next question comes from Keith Mackey with RBC Capital Markets. Please proceed with your question.
Keith Mackey (Director of Global Equity Research)
Hi, thanks, and good morning. Just following up on Doug's question on the Kermit volumes, can you just talk a little bit more about how those volumes should trend, the sales volumes should trend through 2024 as the plant expansion comes online? Is it a step up in Q1, or is it a slow and steady ramp throughout the year?
John Turner (President and CFO)
You know, we haven't given any guidance on that, but it's going to be more of a slow... Probably a slow and steady ramp is what we're thinking. However, you know, we're bringing this on because we were asked to by our customers. So, you know, I think, you know, we could see some increased activities, but we'll just have to see. But it's probably going to be more slow and steady is probably what we're thinking.
Keith Mackey (Director of Global Equity Research)
Yeah. Got it. And just one last one on the Dune Sagebrush Lizard. I know there was some discussion about that potentially becoming added to the endangered list, the endangered species list, and you feel you've mitigated a lot of potential risk around that. But can you just give us an update on your latest thoughts around that potential?
Ben Brigham (Founder, CEO and Executive Chairman)
Yeah, this, but maybe I'll start, and these guys can add. I mean, we feel like obviously we're in great shape, given that we're one of the early members of the conservation agreement. So even if then it is listed, we should be fully operational and it shouldn't affect our business. You know, the numerous and very voluminous responses have been filed to the potential listing. It's going to take, I'm told, by our general counsel, Rick Fletcher, that it's going to take probably quite a while for the Department of the Interior and Fish and Wildlife to work through and respond to all of those. And so it's probably at least a year or a couple of years out, is our best projection right now, before a determination on that.
John Turner (President and CFO)
Yeah, and so we just, like I said, we just responded to the question for the Department of Interior that, that put out.
Ben Brigham (Founder, CEO and Executive Chairman)
We're kind of in that window.
John Turner (President and CFO)
We're in that CCA, we're early adopters. We were, you know, instrumental in getting it put in place, and so, you know, we feel like it's, you know, in the event of a listing that, you know, we're pretty well covered.
Keith Mackey (Director of Global Equity Research)
All right. Thanks very much. Appreciate the comments.
Ben Brigham (Founder, CEO and Executive Chairman)
Thank you.
Operator (participant)
Our next question comes from Scott Gruber with Citigroup. Please proceed with your question.
Scott Gruber (Director)
Yeah, thanks for squeezing me in. Just a quick follow-up on, on logistics. You know, if, if the revenue trend there is, is flattish in 4Q, but you continue to add trucks, it seems like you guys will, will be a bit underutilized. Just trying to get a sense of, you know, as you step into 2024 and completion activity improves, you know, how quickly do you think you can get the, the asset turns on the trucks, you know, back to where you were kind of mid-year, you know, in 2024? Is, is that a 1Q event? Is it 2Q? Kind of, you know, how quickly to get those assets, you know, nearly fully utilized?
Chris Scholla (Chief Supply Chain Officer)
Yeah, thanks, Scott. Just as a reminder, you know, from an asset side of things, we've been fully utilized. You know, our trucks and trailers at this point, we do have strategic third-party partnerships as we started this business, right, with third-parties in transition to a mix of having our own and third-parties. We do still run a significant amount of third-party trucks on that. So as we continue that flat and growth trend in the future, we'll make sure that our trucks are also, you know, remain at that 100% utilization rate.
Scott Gruber (Director)
Got you. So you'll be able to, well, you know, we did some kind of tracking, you know, revenue kind of per truck. So will the 1Q kind of be back to a 3Q rate then?
Chris Scholla (Chief Supply Chain Officer)
Yeah, our revenue per truck should on the 1Q. I would agree with that being aligned to the Q3 rates.
Scott Gruber (Director)
Okay, that's it. Thank you.
Chris Scholla (Chief Supply Chain Officer)
Great, thank you.
Operator (participant)
We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Bud Brigham for closing comments.
Ben Brigham (Founder, CEO and Executive Chairman)
Well, I want to thank everybody for joining our call, and we look forward to reporting on our fourth quarter results. Thank you again.
Operator (participant)
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.