Atlas Energy Solutions - Q3 2024

Executive Summary

• Q3 2024 revenue was $304.4M, up 6% q/q, while Adjusted EBITDA fell to $71.1M (23% margin) due to elevated Kermit plant OpEx; diluted EPS was $0.04.
• Management lowered Q3 guidance mid‑October to revenue $300–$310M and Adjusted EBITDA $70–$75M, primarily on higher operating costs; actual results landed near the low end, a significant miss versus the prior Q2 call’s $90–$100M EBITDA outlook.
• Q4 outlook: EBITDA expected “flat to down” vs Q3 amid E&P budget exhaustion and extended holiday slowdown; last‑mile crews to step down in December after holding 26–28 in November.
• Capital returns accelerated: dividend raised to $0.24/share (from $0.23) and a $200M share repurchase authorization announced; commissioning of the Dune Express began, positioning 2025 for margin and free cash flow inflection.

What Went Well and What Went Wrong

What Went Well

• Dune Express commissioning began on-time/on-budget; management reiterated structural logistics advantages and customer enthusiasm for taking trucks off roads in the Delaware Basin.
• Logistics execution: service revenues held at ~$159.1M with a high watermark of 28 crews; ~75% of volumes delivered via Atlas assets, underscoring integration strength post Hi‑Crush.
• Return of capital expanded: dividend increased to $0.24/share and $200M buyback authorized, reflecting confidence in cash generation ahead of the Dune Express ramp.
  • “It is our belief that Atlas’ advantages in both resource base and logistical infrastructure position it to be a differentiated vehicle for return of capital to shareholders within the OFS universe.” — CFO Blake McCarthy.

What Went Wrong

• Q3 Adjusted EBITDA materially below prior guidance owing to higher-than-anticipated Kermit OpEx (rental equipment, repairs, dredge commissioning delays), with OpEx per ton at $14.87 (above normalized levels).
• Net income compressed to $3.9M (1% margin) as cost of sales rose 11% q/q to $225.3M and loss on disposal of assets hit $8.6M; pricing pressure persisted in West Texas sand markets.
• Q4 visibility cautious: E&P budget exhaustion likely extends holiday downtime, pressuring sales volume and crew counts; EBITDA guided “flat to down” vs Q3.

Transcript

Operator (participant)

Welcome to the Atlas Energy Solutions Q3 2024 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. Should anyone 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, VP Investor Relations. Thank you. You may begin.

Kyle Turlington (VP of Investor Relations)

Hello, and welcome to the Atlas Energy Solutions Conference Call and webcast for the Q3 2024. With us today are Bud Brigham, Executive Chairman, John Turner, CEO, and Blake McCarthy, CFO. Bud, John, and Blake will be sharing their comments on the company's operational and financial performance for the Third Quarter 2024, 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 defined under the U.S. securities laws. Such statements are based on 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 annual report on Form 10-K we filed with the SEC on February 27, 2024, our quarterly reports on Form 10-Q, and 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 refer 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 the press release we issued yesterday afternoon. With that said, I will now turn the call over to Bud Brigham.

Bud Brigham (Executive Chairman)

Thank you, Kyle, and thanks to everyone for joining us today for our Q3 Conference Call. Before I let John and Blake run through the quarter and our outlook, I want to take a quick moment to take a step back and reflect on where Atlas as an organization stands. When we founded Atlas back in 2017, we believed there was a huge opportunity to drive improvements across the Proppant Value Chain with regard to both how the sand is mined and how it's delivered to customer well sites. Our stated goal is to do our part, as we are uniquely positioned in this regard, to help transform the Permian into a more efficient factory on the ground.

We have already succeeded in becoming a low-cost provider of reliable proppant for Permian operators and are now on the cusp of a step change relative to traditional delivery systems by implementing the Dune Express to take thousands of trucks off the public roads. By doing so, we will both enhance efficiencies and reliability while also reducing emissions. Most importantly, the Dune Express will make the roads and our communities in the Permian safer. Today, we are just weeks away from realizing that vision. The Dune Express continues to be on track and on budget. All the major highway and lease roads crossings are now complete, and more than 95% of the belt has been placed on the conveyor. From the outset, we knew the electrical infrastructure had the potential to be one of the big gating items for the project.

But with the factory testing complete for the four electric houses now either being currently installed or en route to West Texas, this piece has also been de-risked. All the credit goes to our wonderful construction team, our employees, and our trusted suppliers who have turned what seemed like a pipe dream to many into what will become a revolutionary piece of infrastructure in the Delaware Basin. Thanks to them and our customers who are stepping forward for the benefit of the communities and the environment, the Permian Basin will be further differentiated as the premier domestic oil and gas basin in the country and as a much safer, cleaner, and better place to live and work. With that, let me hand the call over to John Turner.

John Turner (CEO)

Thanks Bud. 2024 has been an eventful year for Atlas. At the outset, we knew that we needed to work hard this year to ready our organization for the start of the Dune Express, ensuring that our mining operations could consistently provide the increased volumes we hope to gain in the Delaware Basin while continuing to supply our key customers elsewhere in the Permian. With the completion of the Kermit plant expansion and the integration of the Hi-Crush personnel and assets into our organization, we added both productive capacity and asset diversity to strengthen our mining operations. After the fire at our current facility in April, we took a long, hard look at where we stood from an operational excellence standpoint.

We felt it was necessary to make some hard decisions around our operational leadership, and once the rebuild process was completed, we began a full review of our plant systems and processes. This almost immediately began bearing fruit as it revealed multiple opportunities for improvement and standardization, but the implementation of these improvements required some costs, as Blake will detail in a moment. Additionally, during the quarter, one of our new dredges at the Kermit facility was severely damaged during the commissioning process, resulting in a total loss to that asset. While the second dredge is currently operating and feeding the plant, we have made the decision to pivot to a well-known domestic dredge manufacturer in pursuit of better real-time support and improved lead times on spare parts.

We have a long track record of success with this OEM's equipment and are excited about working with them to drive down our mining costs back to our normalized levels. We have placed an order for two new dredges from this manufacturer and expect to receive the equipment in early 2026. In the meantime, we are using our existing dredges in combination with traditional mining to feed the Kermit plant. While this is delaying the next step change in our pursuit of lower mining costs, we still expect to see improvement in our overall OPEX per ton metrics moving forward. The combination of lingering expenses from the fire-related temporary loadout operations at Kermit, our operational improvement initiatives, and the delays in dredge commissioning resulted in higher than anticipated operational expenses for the quarter.

This was almost entirely driven by higher OPEX at our Kermit facility, as mining operations at all our other facilities performed very well throughout the quarter. At Kermit, it's important to note that July experienced the highest OPEX per ton, with each subsequent month showing sequential improvement, a trend we expect to continue through year-end when we expect to be closer to our normalized levels. Just as important, the work we have undertaken at our Kermit facility has enhanced our confidence in our ability to produce the volumes required by the Dune Express. Further enhancing this confidence, this fall, we started construction of a road and offload system that connects the Dune Express to our adjacent 115 and 874 plants that we acquired with Hi-Crush.

Upon completion of this tie-in project in late 2024, all four of our Kermit facilities will have the capability to feed the Dune Express, creating a reinforced sand supply to ensure a sufficient volume feed to the Dune Express, and that's imperative as we are highly encouraged by conversations we are having with our customers this RFP season. We are currently committed on more than 60% of our nameplate capacity for 2025, with more than 10 million of those tons slated to be delivered in the Delaware Basin. This is the first RFP season where Atlas is not only selling the advantages of the Dune Express with our high-quality sand, but our entire suite of logistical offerings that was enhanced by the acquisition of Hi-Crush. While Atlas's differentiated position is always valuable, it is in markets like today where we really shine.

With the decline in rig count, continued E&P capital discipline, and the recent large-scale consolidation we have witnessed among the operators, the overall domestic oilfield service market is experiencing a challenging pricing environment, and while sand demand has performed better than other verticals, it's always been one of the more volatile pieces of the value chain from a price perspective and has not been immune in this market. Spot prices for West Texas sand are now trading at levels where much of the supply stack is operating at break-even, gross margin, and negative cash flows. At today's prices, we anticipate much of our competition will be forced to elect to defer necessary maintenance and reinvestment in their plants, and we are increasingly hearing anecdotes of shift reductions and potential mine closures.

All of this points to current prices being at unsustainable levels, and just as sand prices move fast to the downside, they have also historically moved to the upside sooner and harder than we expect. However, Atlas's unique combination of advantageous reserves and distinct logistical advantages positions us to significantly outperform our peers in today's market. Our customers are smart and know that market conditions like today can result in distressed suppliers that become significantly less reliable. It is significantly more expensive to have sand you were depending on not show up than it is to pay for reliability and peace of mind. This has been a key differentiator for Atlas in our recent customer conversations, and we expect it to only grow in importance over the coming months, particularly with large operators who are making the Permian Basin a key part of their global development plans.

Before I hand the call over to Blake, a quick update on our autonomous trucking initiative. Early next year, we plan to begin a small commercial rollout of our partnership with Kodiak Robotics with an initial fleet of two driverless trucks with the hope of continuing to grow that partnership throughout the year. We remain excited about applying autonomous driving technology into large swaths of private lease roads that are prevalent in the Delaware Basin off the Dune Express, where traffic is light and speed limits are under 20 miles per hour. With that, I'll now turn the call over to our Chief Financial Officer, Blake McCarthy, to discuss our third quarter financial performance outlook.

Blake McCarthy (CFO)

Thanks, John. For the third quarter of 2024, Atlas reported revenues of $304 million, up 6% sequentially from second quarter levels. Adjusted EBITDA was relatively flat sequentially to $71.1 million, or 23% of revenue, and net income was $3.9 million, or 1% of revenue. Revenues from product sales were approximately $145.3 million on volumes of 6.0 million tons, yielding an average sales price of approximately $24.34 per ton for the third quarter. Service revenues were approximately $159.1 million. During the quarter, we hit a high watermark of 28 crews and delivered roughly 75% of our volumes via our own assets. Looking ahead to the fourth quarter, we expect E&P budget exhaustion to result in a longer holiday slowdown than typically seen, which will negatively impact both sales volume and last-mile crew counts.

We expect our last-mile crew count to remain in the 26-28 range through November, after which we expect to see a few crews dropped during December as operators take a break before initiating their 2025 drilling and completion plans. Service margins are expected to hover around our historical average levels. Also, sales, excluding DD&A, were approximately $225 million. Plant operating expenses, excluding DD&A but including royalties, were approximately $88.8 million, or $14.87 per ton, significantly above our normalized levels. Higher than anticipated rental equipment expenses, repair and maintenance expenses, dredge expenses, and a greater mix of traditional mining than anticipated all contributed to the elevated production expenses.

As John stated earlier, we expect the combination of improved production at Kermit and the implementation of our operational process improvements to result in OPEX per ton metrics reaching normalized levels by year-end, setting the stage for improved operational financial performance in 2025. Average OPEX per ton for the fourth quarter is expected to be improved sequentially, but still above our normalized levels. Q3 SG&A was approximately $25.5 million, a figure that was inflated by approximately $2.4 million of acquisition-related costs and approximately $6.3 million of stock-based compensation. Moving forward, cash G&A is expected to be approximately $15-$16 million per quarter. Royalty expense was approximately $5.7 million. Cash interest expense was approximately $10.7 million.

Operating cash flow for the third quarter was $85.2 million, and Adjusted Free Cash Flow, which we define as Adjusted EBITDA plus maintenance CapEx, was $58.7 million, yielding an Adjusted Free Cash Flow margin of 19%. Capital expenditures during the quarter totaled approximately $86.3 million, $68.5 million towards growth, with the remainder to maintenance. Our growth CapEx consisted of $50.1 million spent on the construction of the Dune Express, with $15.1 million associated with Encore expenditures. Maintenance CapEx for the quarter was approximately $12.4 million. Cash equivalents stood at $78.6 million against total debt of $475.3 million. Looking ahead to the fourth quarter, we expect operator capital budget exhaustion to result in a prolonged holiday slowdown in completion activity.

While we do expect improvements in our average OpEx per ton to partially offset some of the impact to our margins, we expect Q4 EBITDA levels to be flat to down relative to Q3 levels. Due to the strong cash flow profile of our business, we are increasing our dividend to $0.24 per share, which represents a 5% increase over the prior period, but $0.01 per share. Based on our closing share price on October 27, our annualized dividend yield is approximately 4.8%. In addition, I'm pleased to announce that our Board of Directors has authorized a share repurchase program under which the company may repurchase up to $200 million of outstanding stock over the next 24 months.

It is our belief that Atlas's advantages in both resource-based and logistical infrastructure position it to be a differentiated vehicle for return of capital to shareholders within the OFS universe, and we are excited to expand our optionality of means by which we can distribute this capital. That concludes our prepared remarks. We will now let the operator open the line for questions. Thank you all for joining in our Third Quarter call.

Operator (participant)

Thank you. We will now 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 your line is in the question queue. You may press Star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. One moment, please, while we pull for questions. The first question is from Jim Rollyson from Raymond James. Please go ahead.

Jim Rollyson (Analyst)

Hey, good morning, guys, and congrats, I guess, on getting to the finish line on Dune Express. John, or maybe you talked a little bit about some of the issues at Kermit and kind of what you're focused on. Maybe just expand a little bit on what some of the key issues that you're trying to address or improve as you roll into next year and volumes pick up and maybe kind of the timeline and confidence in getting to the finish line on those things.

Blake McCarthy (CFO)

Yes, Jim, thanks. I'll start it off, and then I'm going to let Chris take a walk through some of the other parts of your question. But obviously, it's a great question, and it would be easy to point to these things and say, "We've just had a run of bad luck," but we're in the business of making our own luck. 2024 has obviously been a rough year with respect to our operations, and we're 100% committed to getting it right from the ground up. We've put some new operational leadership in place at the plants that have been applying fresh eyes to the entire system. And while the conclusions they draw can sometimes be painful to hear, the steps we are now taking are setting Atlas up for long-term success.

We have the right assets both in our reserves and our logistics, and it's imperative that we maximize their value by developing and deploying them as efficiently as possible. So I'm going to go ahead and let Chris kind of walk through the things that we're doing. And so, Chris, you want to take it away?

Chris Scholla (COO)

Yeah, thanks, John. So in my experience, large operational failures, right, they're often the result of smaller underlying issues that compound over time, and those issues eventually bubble up into something that really no one saw coming. The postmortem spotlight often exposes deeper operational problems that require immediate attention but catalyzes profound long-term change within an organization. For all intents and purposes, the fire was that for us. It was the catalyst that kicked off a comprehensive assessment of our current operations. We rapidly addressed those items that needed immediate response, but concurrently, we've been identifying and eliminating those efficiencies, inefficiencies, bottlenecks, and areas of underperformance in our operation. Our communications have been streamlined and structured in a way that facilitates the sharing of information across both teams and departments. This leads to faster problem-solving and a more cohesive approach to organizational strategic initiatives.

We've also made procedural and structural changes to enable almost real-time visibility into revenue, costs, and profitability. Through all of this, though, the bottom line is that our team has stepped up and executed. We are already seeing results from the hard work. We've been able to meet and exceed commitments to our customers. We have increased our delivery percentage. If you look at as of now, 75% of our produced sand is delivered to the blender. We are now setting new volume records for both total sand production and sand delivered to the blender. More specifically, for Kermit, in October, our Kermit plant beat our historical wet plant production record by almost 40%, and three of our top four Kermit dry sand production months on record have been August, September, and October.

Jim Rollyson (Analyst)

While operations will inherently always have issues, overcoming these challenges in the way we did has not only made our organization stronger, but it helped shape our multi-year operational excellence roadmap that will continue to differentiate Atlas from our competition. Appreciate all that. And then maybe as a follow-up, Blake, you mentioned OPEX, obviously high this quarter, and you also mentioned that it's been improving steadily, and you'll kind of start getting back to something more normalized. But with the dredge orders that don't come till 2026, you maybe don't take that final step down till further down the road. Maybe a little bit of timeline of kind of how you see OPEX trending over the next four, five, six quarters?

Blake McCarthy (CFO)

Yeah. Jim, that's pretty much dead on. You kind of walked through that pretty well. So iterating the lowest cost OPEX per ton across the industry is pretty core to the Atlas strategy. As John mentioned, we have the best resources, but a key part of our company culture is developing those in the most efficient manner, constantly seeking for better processes, more standardization. That's why that Q3 figure of $14.87 per ton, that really sticks in our crawl. One thing that is misleading about that number is that it was entirely driven by the elevated expenses at our Kermit plant. The other plants were humming along pretty efficiently during the quarter, or quite efficiently during the quarter, and the leadership and crews of those plants actually should be very proud of their results.

So Q3, the issue was primarily our large Kermit plant, but as it's by far our largest facility, it really drives the ship. So our operational leadership, they've been hard at work getting the plant back on track. And even in Q3, we saw meaningful improvement from the beginning of the quarter through the end of September. So it was a pretty steady line of improvement there. We expect the optimization efforts to begin to bear more fruit during Q4 at a pretty steady level. The primary issue for Q4, though, is that we do expect to see that decline in throughput related to reduced demand driven by the operator budget exhaustion we talked about. And that, of course, negatively impacts fixed cost absorption across the complex. So while we do expect average OPEX per ton to decline sequentially, the improvement won't completely reflect the entirety of the underlying improvements.

So you really won't see that until 2025. However, as we mentioned and prepared remarks several times, we are increasingly optimistic about our outlook for volumes in 2025. So we'll get that improved plant throughput, and we should see the average OPEX per ton trend towards the low double-digit range in relatively short order. However, as you mentioned, due to the issues we experienced in commissioning the new dredges and the lead times on getting our hands on those new domestic dredges, we won't fully reach our target levels in 2025. So we'll still be the low-cost producer of sand in the market next year, but we won't really be satisfied until we widen that gap to its full extent, which is part of our long-term strategy.

Jim Rollyson (Analyst)

Got it. That's helpful. Appreciate it, guys.

Operator (participant)

The next question is from Kurt Hallead from Benchmark. Please go ahead.

Kurt Hallead (Senior Analyst)

Hey, good morning, everybody.

Blake McCarthy (CFO)

Good morning, Kurt.

Kurt Hallead (Senior Analyst)

Hey, thanks for the incremental color. Just want to maybe take another step to that as well, right? Maybe if you kind of talk about the bridge here between where we were in the third quarter through the fourth quarter and into the first quarter next year, I guess the first element of what I'm curious about is what kind of magnitude of volume decline are you expecting to see? And maybe the same kind of context of what kind of magnitude of pricing either you're seeing through the fourth quarter or how your discussions on pricing are evolving for 2025 deliveries.

Blake McCarthy (CFO)

Yeah, no, it's a really good question. From where I wish we had a better answer for you right now, but the truth of the matter is that we're a little bit in the dark right now as it is, so the real variable that's still open right now is sales volume. So we've got a good line of sight on what our costs are going to be, and we've got a good base of contracted volumes for Q4. We entered the quarter with a really strong contracted volume backlog, but I think the prospect of that prolonged holiday slowdown in the oil field is a very real prospect this year. Of course, you're not hearing that just from us. I think that's a pretty common refrain across the space, and so there's just, from what we know now, it's pointing to volumes being down slightly.

But I think that there's just going to continue to be some horse trading with customers where they come to us asking for a little Q4 relief in exchange for significant volume commitments in 2025. And so, fair to say, most of the time we're happy to help our customers out in those scenarios as those trades ultimately end up being greatly to our advantage. At this point in the quarter, I can't confidently say that we won't have more conversations of that nature. Ultimately, we're looking to maximize Atlas's cash flow to shareholders, and if that entails giving some grace to key customers in the near term for some long-term gain, I'm going to take that trade every day. So I'd like to give you, say, like, "Hey, it's going to be right here." But a lot of those conversations can sometimes happen the week after Thanksgiving.

They're like, "Hey, 10 days out," and decide, "Look, we're going to shut down for the last two weeks of the year," and it just feels that that's a very real risk this year. That being said, the tone of the conversations around 2025 is the flip side of that, where it's very positive. I think that the Atlas story is really resonating with a lot of the ideal customers that we designed this company for.

Kurt Hallead (Senior Analyst)

That's great. Appreciate that color. Second one would be, so I think everybody's aware here that there's been a significant reduction in trucking rates, right? And one of the key dynamics around the Dune Express was the ability to deliver all the things you said it would deliver in your prepared commentary. So maybe you can give us some insights here as to how, if at all, the margin profile for Dune Express has changed since inception versus where we are now given the dynamics of the market. And again, in the context of you referenced that your unit cost per ton are going to be coming down a little bit in 2025, but not to the full extent of what you experienced. So maybe you could package that all together and give us some context on how much of that is Dune Express versus non-Dune Express.

Blake McCarthy (CFO)

I'll start on that, and then others feel free to chime in. Obviously, when we originally modeled the returns on the Dune Express, we modeled historically low trucking rates, and we still feel like those rates that we're currently seeing are above what we had, the conservatism that we put into that forecast, and yes, depressed trucking rates do, obviously, trucking rates do compress the margin opportunity on the Dune Express some, but like I said, I think it's important to remember a few things. Obviously, we don't think these trucking rates can simply maintain at these current levels much longer. At these current levels, these trucking operators are barely able to cover their cost of fuel and the driver and much less maintenance expenditures and unforeseen issues.

They quickly go into the red if they take an extended break at the truck stop for a breakfast taco and for coffee, or if they have a flat tire or an engine issue. So we've mentioned that we've been hearing anecdotes of our mining competitors starting to institute shift reductions. Well, I think it's significantly worse in the third-party trucking space. I mean, Chris may be able to talk, maybe Chris can talk a little bit about that, but there's multiple local operators who have been closing their doors. So the long story short, if these types of rates are cutting into industry muscle, this is going to have some blowback. It's going to have blowback at some point here in the future.

And so, and like I said, when we were forecasting this off the Dune Express, when we were doing this underwriting this, the Dune Express itself, I mean, we were underwriting to those rates that were lower than what we're currently to see, so what we're currently seeing. So the advantages of the Dune Express are going to last significantly longer than the next six months. This is obviously a long-lived asset that's going to make Atlas margins for years to come through the up and down cycles. And all that being said, we remain very excited about the impact the Dune Express will have on Atlas's margin profile and free cash flow in 2025 and going forward. I mean, do you want to say something, Chris, about the?

Chris Scholla (COO)

Yeah. I mean, look, from a logistics and trucking perspective, this is nothing new, right? Very cyclical. We've seen this over the last couple of quarters in the associated margin compression. But as John said, at the end of the day, as those costs compress, so do our costs compress at the end of line. But that structural logistics advantage of being 68-72 miles closer than any of our competition, that doesn't go away no matter how low the prices go. But I do think that we are at a point right now where the amount that it will fall moving forward is incrementally almost zero. So I think we are at the low point, and we're looking forward to getting into that in 2025.

Kurt Hallead (Senior Analyst)

Thank you. Appreciate that.

Operator (participant)

The next question is from Keith Mackey from RBC Capital Markets. Please go ahead.

Keith Mackey (Analyst)

Hi, good morning. Just first curious on CapEx, namely for next year, you should see a bit of a ramp down in CapEx spending with the completion of Dune Express. Just how should we be thinking about the main pieces of CapEx? And then as a second part to that, what should we be thinking for buyback utilization given potentially a ramp in free cash flow?

Blake McCarthy (CFO)

Yeah. There's a lot in that question, Keith, but it's a great question. So honestly, we're still working through our budgeting cycle, so it's a bit early to give hard guidance on 2025 CapEx. We certainly don't have anything in the hopper with the scale of the Kermit expansion or the Dune Express by any means. So it will be down meaningfully year over year. We're always going to make sure that we're investing enough in maintenance CapEx to preserve our core assets. Additionally, we have a number of exciting growth initiatives in incubators that are aching for some CapEx, but all of those have to be weighed against further growth to the dividend and now buying back our own stock, as you mentioned. So thus, to get through the budgeting process, these projects are going to need to display a very concrete path, covering a very high return threshold.

As we are defending that Atlas is at pretty attractive levels currently. So on top of that, we do continue to have frequent customer inquiries around future Oncore mines. We continue to state that we aren't going to speculatively build more mines, but if there's concrete customer demand, the Encore model remains a very attractive growth avenue. I'll obviously have more detail on CapEx for you on next quarter's call. With respect to buyback authorization that we now have in place and how we're thinking about CapEx allocation going forward, from the start, Atlas's management board have felt the company provides a unique platform for differentiated returns both on and of capital shareholders, particularly relative to the rest of the OFS space, which historically hasn't displayed the relative scores on those metrics, the best relative scores on those metrics against the broader market. But we have a unique position.

So we've got the right assets in the right locations, and then we're in the finishing stages of completing what, in our opinion, is an irreplaceable infrastructure advantage that's going to widen that return gap even further. So you take a step back, and if we think about CapEx allocation, just forgive me for the trite analogy, but I think about the balance sheet as the foundation of CapEx allocation, particularly in a cyclical industry like ours. So leverage is always really enticing when you layer it up with an upcycle and an Excel model. But down cycles in this industry are always deeper and oftentimes longer than we expect. And we have enough collective time in the oilfield and the scars to go with it to know that maintaining a fortress balance sheet is essential.

So we're currently in a great leverage position, which is only going to improve next year. However, we do have approximately $148 million due on the note related to the Hi-Crush acquisition next year, which is a pretty large use of cash. After the balance sheet, you do have to continue to invest in the core business. As we talked about, maintaining those assets to enable our superior returns remains imperative. On average, we think that that's approximately about $60 million per annum, but that can go up or down depending on the type of project work required. So those two are your foundation. And after that, it's balancing the demands between growth CapEx, inorganic growth, and incremental return of capital shareholders.

Typically, the growth CapEx our operations and commercial teams put in front of us are the highest returns of cash, where we see with returns often well in excess of 20%. However, those projects aren't infinite, and we run through them. We run them through a pretty strenuous justification process that sees more fall off than get through. With respect to inorganic growth, we continue to look for ways to accelerate the growth of Atlas's cash flows, but we're going to be very disciplined in that process. So we have a great core business and absolutely don't need to do anything that dilutes our current portfolio. So any acquisition we pursue is going to bring with it further competitive differentiation and an attractive valuation that will accelerate the growth of our cash flows and ultimately our ability to grow the dividend and buybacks.

Which brings me to what you're really asking about, which is how are we thinking about incremental return of capital? We've steadily grown our common dividend, so it's now sitting at $0.24 per share, which represents about 4.8% annualized yield, which I believe is the second highest amongst the entire OFS universe. So we're sitting pretty well there. We think about the common dividend as that's a sum of money that we hope we can know we can return to our shareholders on the rainiest of rainy days. So as our business grows and hopefully achieves even greater levels of cash flow stability, we're going to constantly evaluate growing that number. But we also want to make sure that it's at a level where investors know they can bank on receiving that check every quarter.

So, however, we sell a very cyclical commodity, and while today's sand pricing is at depressed levels, it's going to snap back up just as violently as it goes down. In those markets, our business model generates significantly more cash than required by our other capital needs. We wanted to make sure with the buyback that we had another means of accelerating returns to our shareholder base at our disposal when the market begins to turn. Ultimately, our purpose is to reward Atlas shareholders for going on this ride with us, and we're going to do it with all the tools we've got at our disposal. With respect to how we're thinking about deploying the buyback, we're going to be constantly watching the market, but we're certainly not going to do anything that's going to stress the balance sheet.

We have this step change in free cash flow coming with the Dune Express, and so once we get that online, I think that is something that we're constantly evaluating as a management team and at the board level.

Keith Mackey (Analyst)

Okay. No, that's super helpful. Thanks, Blake. Maybe just stepping back and thinking about the sand market a little bit, certainly in your presentation to see a long tail of smaller sand providers and prepared remarks. You talked about break-even gross margins for a lot of the market and negative free cash flow. As you think about 2025 and where we are now, do you think that it's more a matter of supply has to drop out of the market to make the market a little bit more healthy, or do prices really just have to come up because of increased demand? How do you think about the sand market heading into 2025? Is there more softness that you can see, or do you think that we'll see some of that rational behavior and maybe some capacity drops out that supports prices?

How do you see that playing out?

Chris Scholla (COO)

Yeah. I think from my perspective, this is Chris. From my perspective here, as we come into RFP season, we got a few different factors going on, right? The first is a number of the contracts that were historically signed are going to be rolling off here at the end of the year or into first quarter. I think we do have some depressed sand pricing out there that is low and bumping up against our competition's OPEX, right? So they're going to have to make some really hard decisions here. I think what you also have is a little bit of a hope and dream for our competition coming into RFP season, right? They're going to hang in there through Q4, through the low prices, and really bank on, if you will, getting those volumes from the RFP.

And then I think you're going to see typically we have a nice pop in Q1 with refreshed budgets and activity. I really think what you'll see from that is our competition either, one, reducing shifts and therefore capacity, or two, dropping out of the market overall. But I don't think you're going to see that in Q4 just because that's what everyone's waiting for is that RFP volume. But as we progress into Q1 or late Q2 of next year, I think you'll really start to see the fallout from the market, which really provides fundamentals, if you will, for where you were going is those higher sand prices on a long-term basis.

Keith Mackey (Analyst)

Thanks very much. Really appreciate it.

Operator (participant)

The next question is from David Smith from Pickering Energy Partners. Please go ahead.

David Smith (Analyst)

Hey, good morning. Good morning. Thank you for taking my questions.

Chris Scholla (COO)

Good morning, everyone.

David Smith (Analyst)

Wanted to ask, how are you thinking about the cadence of commercial deliveries ramping up on Dune Express into next year? Maybe when you think you could get to that annualized 11 to 12 million tons for annual run rate?

John Turner (CEO)

Yeah. I'll start off, and Chris can follow up on that. Look, obviously excited about the launch of the Dune Express in the fourth quarter. There is going to be a ramp-up period for that, getting company operators working through the, what I'd say, all the ramp-up and commissioning phase for us, getting the operators to fully utilize sand coming off the Dune Express. Obviously, I think what you're going to find, Chris, to say is like, I wouldn't expect that to be fully ramped up until sometime mid-next year on those volumes. But I do think we have a lot of operator buy-in on the Dune Express. I think a lot of our customers and actually new customers are very excited about taking volumes out there, taking volumes off the Dune Express and doing their part and taking trucks off the road.

But here, I'll turn it over to Chris. He can elaborate more on that.

Chris Scholla (COO)

Yeah. I mean, so as we've approached this from a commercial perspective, it's always been go get the work, prove our reliability to the customers, and simply roll them into the Dune Express, right? From a customer perspective, whether sand comes off the Dune Express or doesn't come off the Dune Express, they really shouldn't see any operational difference out there. Now, looking at our customers, you can look back a few years and it was, this is never going to happen. Dune Express, is this real? And what we've come to is now that you're seeing it cross public roads, you're seeing the completion almost there. Those number of customer visits out to the Dune Express have gone up substantially.

I think what you're seeing take place over the last quarter is really that realization from our customer base that, yes, this is real, this is coming, and we'll take trucks off the road. Not only take trucks off the road, but provide solutions to deliver more sand to the blender, right? More and more, that's what we're hearing is we want to move to 24/7 operations and combining the Dune Express closer deliveries with multi-trailer operations. That's what delivers sand to the blender 24/7 and removes those constraints that are existing today and allows our customers to become more and more efficient.

David Smith (Analyst)

Yeah. Appreciate that, Kyle wanted to follow up with that on maybe how we should think about the margin progression for DX during the ramp-up, presumably some under-absorption cost until you get to the full run rate, but maybe there's an element of introductory pricing proving out the concept. Just kind of compared to how you think about the Dune Express margins when it's fully running in two years from now. How should we think about that maybe for the first half of 2025?

Kyle Turlington (VP of Investor Relations)

So Dave, the one thing is we don't sell Dune Express-specific contracts where it's like, okay, there's a discount to the standard Dune Express price. It's a logistics price of delivered sand. And so there's no introductory pricing to the Dune Express or anything like that. Now, every contract is specific with large customers, and we keep a pretty tight lid on that price. But we're looking to move towards more of a fully delivered price over time where it's not breaking out price of sand versus the price of delivery. And so as the industry matures and as we mature in our business model, we'll continue to move in that direction. No real change to our previous guide. We'll give more clearer guidance.

We're still working through the 2025 budget process, and we'll give clearer guidance on the next call on exactly how to model going through next year's on the margin standpoint as we iron that out ourselves.

David Smith (Analyst)

All right. Had to try. I appreciate it. Thank you.

Kyle Turlington (VP of Investor Relations)

Got it.

Operator (participant)

The next question is from Sean Mitchell from Daniel Energy Partners. Please go ahead.

Sean Mitchell (Managing Partner)

Hey, guys. Thanks for taking the question. Just curious, you guys see, obviously, and talk to a lot of customers that are using your product. Is there any change in the mix in terms of and what I mean by that is there any change in mix for wet sand versus dry sand? And as people kind of move to these, we hear a lot on these conference calls, guys moving to simulfrac, trimulfrac. Are guys moving? Are you seeing that in your business at all, just this kind of move to wet sand more and more?

John Turner (CEO)

I'll start off on that with Sean and then maybe Chris or Blake could follow up. Look, I think it's more about getting sand, locating sand that the assets closer to the well site. I think once you look at some of the most sand pumped out there by our customers, you look at them, look at who those customers are, and it's actually the Encore mines out there in the Midland Basin where the sand is located 10-15 miles, maybe less from the well site where they can more efficiently utilize the trucking assets, more efficiently utilize the storage on location. It's just more efficient. You can just serve the well site better with fewer assets.

I mean, it's kind of like when you look at on the Dune Express, you look at what the Dune Express is going to do. It's going to take the best asset, best sand mine, set of sand mines in the basin, dry sand mines, and it's going to take those sand mines and it's going to place them right in the middle. That's one of the things Chris talked about is a lot of our operators, a lot of our customers are looking at how to increase the amount of time that they can pump. And a lot of that, a lot of that bottleneck is sand and its distance from the well site. So I think it really depends upon what, and I think it really depends upon where the assets are. And so, Chris, you want to.

Chris Scholla (COO)

Yeah. No, John, I think you summed it up really well, right? As logistics at this point where sand pricing has eclipsed sand in terms of that percentage of total delivered cost, right? A much larger portion than it had been historically. Location, location, location, that's the name of the game in reducing those total delivered costs to our customers.

Sean Mitchell (Managing Partner)

Got it. Thanks.

Operator (participant)

The next question is from Neil Mehta from Goldman Sachs Asset Management. Please go ahead.

Neil Mehta (Managing Director)

Yeah. Thank you. Neil Mehta from Goldman Sachs Research. Blake, first question is just on operating expenses per ton on the mining side and just your perspective on how you see that evolving as we make our way through 2025 and into 2026 potentially as well. What are the moving pieces and what's inside your control and what's not in your control?

John Turner (CEO)

Give me one second. Yeah, sure. I think we touched on this earlier, but we expect a lot of the issues in that $14.87 per ton number for Q3, that was a result of incremental inefficiencies in the system that were basically as coming out of the rebuild process, the month of July was our highest OPEX per ton quarter. And we saw sequential improvements as a lot of the operational improvement plans were put in place. Just as that process continues to mature and move along, we'll see that continue to drive the OPEX per ton down. We expect it would be in the low double-digit range by the end of the year and then expect to kind of remain in that range through the process through the course of 2025. We're a very high fixed cost leverage business.

And so the more tonnage we can push through the plant, the better that average OPEX per ton gets. So we will next year, we expect to be a big volume year for Atlas. The next step change, though, really would be when we get our hands on those incremental dredges. And that's not going to be until early 2026. But that's really only for the Kermit plant, which only represents about a third of the OPEX of our overall complex. So what we've always talked about publicly is that represents about, I think, $1 to 2 at the top of incremental OPEX improvement. But you think of that only being about a third of the complex that obviously split that amongst the average of the portfolio. It's less of an impact, but that's probably the next step change.

We're never going to get like Atlas, if you think about the pre-Hi-Crush acquisition, we were at these very, very low OPEX per ton levels. We're never going to get back there just because we have a different asset base now, particularly with the mobile mines, which bring their own advantages on the OPEX side, but more on the logistical end. So we're going to constantly be looking for ways to drive that average OPEX per ton down. We've got a new operational excellence team in place. They are coming up with ideas every day that we never solved. Again, it's fresh eyes on the system. You bring in talented people and they start to pay dividends very early.

Neil Mehta (Managing Director)

That's really helpful, Color. And then just your perspective on return of capital as Dune Express comes online, as the free cash will inflect, and hopefully the commodity starts to normalize here, you're going to be in a position to return a lot to shareholders. So just how do you think about buybacks versus dividends? And when you talk to your investors, do you see there's a preference?

Kyle Turlington (VP of Investor Relations)

Yeah. Talking to investors, they like it all, which is a big surprise there, right? The more cash and the more value you can return to them, the happier they are. And we are happy to serve them lots of different courses. Again, as I mentioned before, we think about that common dividend being a number that we feel very confident that we can pay out in the worst of the down cycles. We don't want to get that to a level where at any point it would start to stress like we'd be using the balance sheet to pay it. If that's it, we want to remain at a very not conservative level, but a significant amount of money that we know that we can pay out every quarter.

And we want our shareholders to be able to put a count on that to come into their pocket every quarter. The buyback, that's one of the reasons that we wanted to put that buyback authorization in our back pocket, is that we know that this business is going to generate significantly more cash than that common dividend requires and that that is required by the amortization of our debt that we see coming on the coming years. So Atlas is going to continue to deliver. We're going to continue to pay out that common dividend. And on top of that, we'll look to use that excess cash flow to return that through the buyback. This is something that we talk about every quarter with our board too, is that we are constantly discussing incremental means of returning capital to shareholders.

So just because this is what we currently have on the table doesn't mean this is where we're going to be our endpoint either.

Neil Mehta (Managing Director)

That's great, guys. Thanks for your time.

Blake McCarthy (CFO)

Thanks, Neil.

Operator (participant)

This concludes the question and answer session. I would like to turn the floor back over to John Turner for closing comments.

John Turner (CEO)

I'd like to thank everybody for joining and participating in everybody's call. Obviously, the fourth quarter is going to be very exciting. We're going to be talking about the Dune Express. The Dune Express makes operators more efficient, which makes the Permian Basin more efficient. Efficiency is the name of the game when it comes to manufacturing. The Permian Basin is the largest and most important manufacturing process in America. We look forward to reporting to you guys here coming up on the fourth quarter. If you guys have any questions, please don't hesitate to call Kyle. Thank you.

Operator (participant)

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.