Target Hospitality - Earnings Call - Q3 2019
November 13, 2019
Transcript
Speaker 0
Greetings, and welcome to Target Hospitality's Third Quarter twenty nineteen Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. Would now like to turn the call over to your host, Mr.
Narinder Sahai, Senior Vice President, Treasurer and Investor Relations. Thank you, Mr. Sahai. You may begin.
Speaker 1
Thank you. Good morning and welcome to Target Hospitality's third quarter twenty nineteen earnings conference call. The news release we issued yesterday and the presentation for today's call are posted on the Investors section of our website. Joining me on the call today are Brad Archer, our President and Chief Executive Officer and Eric Alimaris, our EVP and Chief Financial Officer. After prepared remarks by Brad and Eric, there will be a question and answer session.
Troy Schrenk, our Chief Commercial Officer, will also join us for the Q and A session. Before we begin, I'd like to remind you that some of these statements, including a discussion of our 2019 outlook and responses to your questions in this conference call may include forward looking statements. As such, they are subject to future events and uncertainties that could cause our actual results to differ materially from these forward looking statements. Non material factors that could cause our actual results to differ from those implied by the forward looking statements are described in our news release issued yesterday, our most recent 10 ks, most recent 10 Q and other periodic filings with the U. S.
Securities and Exchange Commission. We wish to caution you to not place undue reliance on any forward looking statements, all of which speak only as of the date hereof. We undertake no obligation to publicly update or revise any of our forward looking statements after the date they are made. In addition, on today's call, we will reference certain non GAAP measures. More information regarding these non GAAP measures, including reconciliations to the most comparable GAAP measures, are included in the news release issued yesterday.
With that, I'll now turn the call over to Brad.
Speaker 2
Thanks, Narendra, and good morning, everyone. Thank you for joining us today to discuss our third quarter twenty nineteen results. Before we get into the specifics, I want to thank the 800 women and men of Target Hospitality for their hard work and dedication in taking care of our customers each and every day. Their commitment to delighting our guests in every interaction, big or small, is exemplary and a true reflection of our customer centered culture and service promise. Now let's turn to the quarter.
As you know, our energy end market customers are predominantly in the Permian Basin. This is our largest segment and a significant driver of revenue and earnings growth for the company. Drilling and completions activity in the Permian Basin experienced a deceleration in the third quarter. Front loading of exploration and production as well as energy service capital spending for the first half of this year has constrained activity for the second half as future capital needs are assessed. This, combined with keeping production spending within cash flows, is having cascade cascading effects.
The equipment utilization index is at its lowest level since 2016 for oilfield services firms, and construction employment in the Permian Basin has experienced some contraction through the end of the third quarter. Amid this backdrop, I am proud of the resilience of our business as the third quarter was a solid operational quarter for us, and we delivered strong financial results. As promised, we executed on our growth strategy, generated attractive margins, and at the same time, initiated shareholder returns. Our cash generation was the highest it has ever been, allowing us the flexibility to simultaneously grow the company and return capital to our shareholders. We had tremendous operational momentum in the quarter.
Our system wide total beds reached 13,000 for the first time. This helped us cross 10,000 utilized beds in this quarter, a key milestone for the company. We have executed this growth in a very disciplined manner and remain confident in producing consistent through cycle returns. On a combined pro form a basis, which includes results of Signor for the 2018, we saw growth in both our revenue and adjusted EBITDA. Year over year, we grew our third quarter revenue by 6% to $82,000,000 Revenue growth was driven by increases in volume from having more utilized beds and average daily rate mainly due to benefits from our Signore enhancement program, both of which also translated into year over year growth and adjusted EBITDA, which was up 3% to $41,000,000 All of this is particularly impressive in a period of record growth and change for Target Hospitality, including becoming a public company earlier this year.
Let me now take a few minutes to discuss our markets before turning the call over to Eric for our third quarter financial results and updated 2019 outlook. The government side of our business is stable and highly predictable, so I'll focus my comments on our distinctive positioning within The U. S. Energy end market. We have long standing relationships with a blue chip customer base that we have built over decades.
The larger customers that partner with us tend to have longer investment horizons, and they view secured employee accommodations as part of their own competitive advantage. The mutually beneficial relationship with our customers is managed through long term contracts with exclusivity and guaranteed payment provisions. For customers, this contract structure provides utilization flexibility and certainty of spending. In turn, it allows us to achieve stability and visibility into our future earnings and cash flows. This is a win win for both our customers and us.
We believe that our playbook of aligning with the right customers and being disciplined with capital deployment is working. We spend a lot of time upfront in selecting the right location and the right size for our communities. Many of you also know that we do not commit capital to develop new communities until we have long term agreements with our customers. This approach provides a high degree of certainty on returns. Historically, the third quarter has been the strongest quarter of activity for our U.
S. Energy customers. Clearly, that is not the case this year. Further, an expected seasonally weaker fourth quarter implies that activity will likely not pick up at least until next year when E and P capital budgets are reassessed. We don't expect the lower activity anticipated for the second half of this year to turn into a prolonged downturn in the energy market.
This view is confirmed in our recent discussions with some of our key customers. So how does this dynamic in The US energy market impact us and what we are doing about it. We expect a continuing bifurcation between those companies that are taking a long term view of their resource assets and those that are likely to scale back in the short run. Our core business, which comprises contracted revenue from our long standing customers, remain resilient. Excluding TC Energy, revenue from our top 30 energy customers was higher sequentially in the third quarter versus the second quarter of this year.
Many of our core customers continue to invest in the Permian Basin and expect their workforce accommodation needs to remain relatively unchanged. We continue to align our services with the largest and best capitalized players in the market. Our contract renewal rates remain above 90%, which demonstrates our strong partnerships with customers due to our network and exclusivity advantages. And importantly, as we make our way through the fourth quarter and head into 2020, we do not have any significant contract roll offs. Our uncontracted business is largely comprised of customers with less predictable workloads and select high probability commercial opportunities.
We continue to work on converting promising commercial opportunities and more of the transient customers to multiyear contracts. While we experienced some impact on demand in the third quarter due to diminished visibility for transient customers and deferral of certain commercial opportunities into the next year, availability of our uncontracted beds allowed us to be opportunistic as a result. We are well positioned to take market share from expensive hotels as they are the first to experience attrition in this environment, and we are typically the first call for such customers wanting better value. We recognize that one size does not fit all, but we are also leveling the playing field with regional accommodation providers through our flexible terms and contract structures. This approach allows us to better serve customers with differing needs.
Target Hospitality's largest network of communities, value added services, and exemplary service are unmatched, and we will be assertive in demonstrating that. Additionally, as we have done in the past, we continue to work to further strengthen the resilience of our total business by pivoting even more of our portfolio to large integrated producers that are making investments over multiyear horizons. That's important to us because in the current environment, we have retained all core customers. As activity levels recover and as customers reset budgets, our existing contracts with exclusivity provisions should allow us to grow utilized beds seamlessly with our customers' needs. Let me also reiterate, Target Hospitality is a growth company, and we have established a consistent track record of profitable growth.
We have a mature pipeline of organic growth opportunity and healthy prospects for value enhancing acquisition, and we plan on executing both tracks simultaneously. We have evolved into a much more resilient business today than it was even a few years ago. We are confident the initiatives we have underway position us to continue our growth trajectory as we continue to strengthen our product offerings and service competency. At the same time, we are diligently working to diversify into end markets where we can apply our core competencies, add value, and generate returns for our shareholders. Our fundamentals are strong, and we expect to build on our progress going forward by balancing our resources to drive sales and margins while making investments in our future.
It is now my pleasure to turn it over to Eric for additional remarks on our third quarter financial results and our updated 2019 outlook.
Speaker 3
Thank you, Brad, and good morning, everyone. This is my inaugural call with Target Hospitality, and I am pleased to be joining a high quality organization with excellent leadership and great growth potential. As Brad indicated, we delivered solid third quarter results. I will begin the discussion of our results, review our capital program and follow-up with details of our updated 2019 outlook. In the third quarter, we continued to benefit from our growing network, new builds and expansions, the successful integration of our recent Superior Lodging and ProPetro acquisitions, as well as a sharp focus on operational execution.
While overall results were modestly impacted by the slower than expected pace of the TCPL project and slower growth in our energy end market, we still achieved nice year over year growth in both revenue and adjusted EBITDA. Total revenue increased 35% to $82,000,000 and adjusted EBITDA increased 30% to $41,000,000 and an adjusted EBITDA margin of nearly 50%. The year over year growth in adjusted EBITDA was a result of higher sales and improved operational cost leverage with improvements from an increase in utilized beds while total cost of services declined. Recurring corporate expenses for the quarter were $9,000,000 The increase from last year is primarily associated with the transition to being a public company as well as infrastructure investments that allow us to scale the business and to support additional growth with minimal incremental costs. We expect our recurring corporate costs to remain around $8,000,000 to $9,000,000 per quarter.
Turning to our segment performance, the Permian Basin delivered third quarter revenue of $57,000,000 an increase of 65% versus the prior year quarter. This increase was primarily driven by an increase in average utilized beds as a result of the Signal integration as well as new community additions and expansions. We added 1,091 new available beds in the quarter. Average available beds more than doubled, and average utilized beds increased 72% despite declines in the overall basin activity levels. ADR decreased 4% primarily from lower average ADRs and acquired signal communities.
Recall, there is a twelve to eighteen month timing lag to convert customers to our pricing model. In the Bakken Basin, we deliberately rightsized our footprint late last year, which drove the expected decline in average utilized beds while significantly improving utilization and creating cost efficiencies. This led to a nearly 300 basis point increase in adjusted gross profit margin. Revenue declined by 19%, mainly due to a decrease in average utilized beds at lower ADR, reflecting lower activity levels compared to the same period last year. In the government segment, revenue of $17,000,000 was flat compared to the prior year quarter due to unchanged average available bed and ADR.
The contractual nature of this asset provides relatively stable ADR utilization and revenue. Adjusted gross profit margin increased 500 basis points primarily due to lower occupancy costs. Our All Other segment, which consisted primarily construction fee revenue from the TCPL project, had revenue of $2,000,000 and adjusted gross profit margin of 34% for the third quarter. This was driven by significantly lower than anticipated pre FID activities. While we are hopeful of a contract start, we are expecting negligible contribution from this project for the remainder of 2019.
We had another significant period of cash generation. We generated $26,000,000 in net cash flow from operations during the third quarter. This is particularly notable considering that we paid $17,000,000 in cash interest in the quarter and still produced the same level of net cash flow from operations as in the second quarter of this year. Since much of our capital spending is discretionary, given nominal maintenance capital needs, this quarter provides a clear glimpse of the exceptional cash flow generation ability of our business. We expect to continue to generate meaningful cash flow, allowing us the flexibility to fund our growth objectives.
Capital expenditures in the third quarter were $27,000,000. Almost all of this capital spending was for revenue enhancing investments, including construction of two new communities in Carlsbad, New Mexico and Orla, Texas expansions, and high grading of legacy signal communities. Capital expenditures also included $5,000,000 for the purchase of ProPetro's Midland, Texas community earlier in the third quarter. Year to date, growth capital expenditures, excluding acquisitions, was $74,000,000. We ended the quarter with $410,000,000 of total long term debt, including $70,000,000 drawn on our revolving credit facility and consolidated net leverage of 2.4 times.
We commenced stock repurchases in the third quarter pursuant to the $75,000,000 stock repurchase authorization announced on August 16. To date, we have repurchased shares for approximately $13,000,000 or approximately 18% of the total share repurchase authorization. We plan to continue spending our discretionary cash flow on attractive investment opportunities that generate superior returns for our shareholders, whether those are organic growth opportunities or through attractive acquisitions. Our robust cash generation and solid balance sheet provide us with significant financial flexibility to accomplish both of these objectives. These are aligned with our broader capital allocation priorities to invest in growth, maintain a flexible balance sheet, and deploy capital into long run value enhancing initiatives.
Turning to our 2019 financial outlook. The contracted portion of our business remains largely intact. The slowing drilling and completions activity that we have experienced has primarily impacted the uncontracted and variable portion of our business. This has resulted in declines in demand, which has affected both pricing and utilization as well as deferred some commercial development opportunities. In addition, run rate contribution from construction activities related to the TCPL project has not materialized as expected.
As a counter to these headwinds, we offset these impacts from incremental growth in utilized beds in the third quarter from our two new communities in Carlsbad and Orla as well as cash flow from our acquisitions. With this background, we are now expecting full year 2019 combined pro form a revenue to grow between 58% and be in the range of $318,000,000 to $328,000,000 and combined pro form a adjusted EBITDA to grow between 58% and be in the range of 157,000,000 to $162,000,000 As our new build and expansion capital programs near completion, we expect the pace of our capital spending to decelerate for the remainder of this year, and expect non acquisition growth capital spending to be between 80 and $90,000,000 for 2019. We're confident in the structural advantages of our business model and our strategic focus on large, long term oriented customers. Our network and exclusivity focused business model, coupled with our ability to generate significant cash flows, allows us to control not only the quantum, but also the pace of our capital spending, and gives us confidence not only in our updated full year 2019 outlook, but also our ability to execute on our growth initiatives through time.
With that, I will turn the call back over to Brad for closing comments.
Speaker 2
Thanks, Eric. In summary, our continued solid operational momentum and execution is delivering strong financial results. We have continued to deliver on our growth strategy and our relationships, and contracts with our core customers underpin the stability of our business, and this was clearly evident in this quarter. We grew our bed count in the quarter and generated exceptional cash flow from operations. While we cannot control the market, our value proposition to shareholders is the confidence that we have in the structural advantages in our business.
We maintain a line of sight on a significant majority of our revenues. And as I reiterated today, we are actively working to further increase our mix of business from high quality integrated producers and large oilfield service company. We are also focused on return. Our solid balance sheet and significant cash generation ability allows us to execute our growth strategy without sacrificing returns for our shareholders. Our team is committed to executing our strategy, winning in our markets and delivering outstanding results.
Thank you again for your interest in Target Hospitality. Operator, you may now open up the line for questions.
Speaker 0
Thank you. We will now be conducting a question and answer session. Thank you. Our first question comes from the line of Steven Gengaro Please proceed with your question.
Speaker 4
Thank you and good morning, gentlemen. Start Can with the fourth quarter guidance? We sort of back of the envelope, try to figure out what your fourth quarter contracted revenue looks like, we came up with a number around $77,000,000 And I think your revenue guide implies 73,000,000 to 83 Can you talk about the moving pieces in the fourth quarter that kind of lead to the variance in your range of about $10,000,000 And kind of what portion of that is part of that sort of 85% of revenue that's contracted?
Speaker 2
Hey, Steven. This is Brad. Thanks for joining here today. Let me take high level kind of on the business. And then if Eric wants to jump in and get some more color, to to more specifically on that number, he can.
But look, as we've as we've mentioned in the past, our core business is our strength, and, this is part of the business that's still intact. We've got great visibility on the business due to our long term contracts. Now, conversely, the uncontracted portion of our business, which can be variable, we have less direct visibility on, and we experienced softness in this portion of our specifically, two areas, the spot transient market and and commercial opportunities, pushed to the right. Look, we believe, the softness is short term through the fourth quarter. And when budgets reset in the first of the year, we expect this portion of the business to improve.
And here's why I I say that. You know, I'm out there quite a bit. Troy is, and and the business hasn't gone away, and the market's not shut down in the Permian. It's still very busy. The good thing is a lot of the work, we don't have to rebid for because it's under our exclusivity contracts.
So when budgets reset, we're we're set up to get this work back. And and, you know, I look at this and some customers maybe have dropped some headcount in the in the fourth quarter. They haven't went away. And in talks with them, we know some of this work is coming back in the New Year. So again, not rebidding it.
If they come back to the basins, they go into our rooms. So that's a good point to look forward for, you know, past the fourth quarter. And then I'd tell you, remember, on a high level, the goal is to always convert this variable portion of our business to long term guaranteed contracts. And we'll continue to gain momentum in doing this.
Speaker 3
I think you know, Steven, good morning. This is Eric Calamaris. I I think the only thing that I would that I would add is, you know, as we think about fourth quarter, relative to the to the what we've seen in 2019, you know, our structural, our contracts that, you know, have not have not changed. Right? So there's no there's no there's no real change there in what we see what we've seen historically, what we're seeing now in q four, frankly, into 2020 for that matter.
You know, substantial portion of that revenue, as you mentioned, is is fully contracted. And, you know, you know, I I wouldn't quarrel with your number. I think it's directionally correct. But look, I mean, nothing structurally has has really changed here. I think as Brad mentioned, the variable portion of the business, you know, has been impacted, and that's really what's driving the spread in the outlook.
Speaker 4
Okay. Thank you. And then when you think about 2020, and you mentioned it just now, when you think about the comments you've made over the last several quarters at 85% of sort of revenue is contracted, I'm assuming that 85% was based off of a 2019 guidance number. Is that because what I'm getting at is when I think about that, it's it would seem to suggest that there's, you know, two hundred eighty to three hundred million of revenue contracted and visible for 2020. And I'm just trying to get a a sense on is that a reasonable number?
Is that too high? Is that too low? Sure. No. Thank thank you
Speaker 3
for the question. So, so I would say this. So we're we're not ready to to give a a, you know, certain more of a detailed, you know, 2020 outlook at this time. Okay. Here's what here's what I can say.
Right? So so and, you know, what I what I guess what I would say is, you know, we we see these short term, you know, activity levels that have come down. You know, we're we are seeing some impact on the on the variable, you know, portion of the business. I do do expect, you know, some of these commercial opportunities to reemerge through through 2020. You know, I don't wanna specifically opine on what the contracted portion of the business looks like until we get through our our business planning cycle, through the back half of the back part of the of this year.
So, you know, allow us to come back with a more fulsome update on that. And I would just leave it at that for now.
Speaker 4
Okay. But is it it was I right in saying that when you talk about 85% being contracted, that that was relative to your 2,019 revenue guidance?
Speaker 3
That's that is correct. The the one thing I would add the one thing I would add, I think, that would help as you think about 2020 and in the meantime is, you know, we have no significant roll offs, contractually coming through into 2020. So I think as you think as you think about that, you know, look, I mean, the the the outlook that was previously provided, you know, certainly was predicated upon the the prior 86% number. So you're directionally, right on that.
Speaker 4
Okay. Great. Thank you.
Speaker 0
Our next question comes from the line of Scott Schneeberger with Oppenheimer. Please proceed with your question.
Speaker 5
Good morning, guys. It's Daniel on for Scott. Honing on utilization a little bit, you noted in the release that the year over year decrease was due to a higher number of new bed additions in the third quarter that's now been contracted by quarter end. How have you progressed in the fourth quarter twenty nineteen with contracting those beds? And how will utilization be impacted by the 200 additional beds at new the communities?
Speaker 6
Hey, Daniel. Good morning. It's Troy. Appreciate the question. Look, as we look forward and think about the fourth quarter, we do expect utilization to be soft as it was in the third quarter.
And again, largely, that's attributable to the variable portion of the business, which is the uncontracted portion. Look, I'm pleased with some of the progress that we've made, but candidly, as Eric and Brad have both mentioned and we mentioned in our remarks, is that we have had several commercial opportunities that have been deferred in 2019. Now, that work hasn't gone away. We have direct line of sight on that work. And we have reasonable confidence in 2020 that we can capture that work by virtue of our exclusive contracts, as Brad mentioned.
We're set up very well to really capture that work on its return when budgets reset first half of the year. Is that helpful?
Speaker 5
Got it. No, perfect. Thank you. Switching gears to ADR a little bit. You noted that excluding the Signal communities, ADR has been pretty stable at remaining communities on a year over year basis.
Could you provide us a perspective on ADR in the fourth quarter here, both excluding Signor and including Signor? How we should think about it both quarter over quarter and a year over year basis?
Speaker 3
Sure. I'll make a comment and I'd like Troy to jump in as well. I think as you think about ADR moving, we see a modification mix as we head into Q4, right? So I think you may actually see you know, some positive trends there heading into heading into q four and perhaps in the part of 2020. So, you know, I I think I think it's gonna be a really a mix issue, more than really more than anything else.
Speaker 6
Yeah. So, Daniel, I think the only thing that I would add, I mean, again, just to reiterate, you know, as we've said, the core is intact, and this portion of the business is not impacted by the spot or the transient, including ADR. Look, I I think it's important, you know, to recognize recognize that look. We're we're balancing price, terms, utilization to maximize profitability. So when you when you think about the uncontracted portion, we're we're we're focused on balancing those price that pricing, that ADR, and the terms, and utilization, again, for max profitability, but that core is intact from an ADR perspective.
Speaker 2
Yes. Daniel, it's Brad. Just one one addition there and just to call it back out. You know, when you look at q three versus q, q two, our top 30 customers spent more with us in q three than they did in in q two. So so what when we continue to say our our core is intact, that that's part of it.
Right? And then you take it down further to we're still 90% plus on our on our renewals. So those things hold up consistently, and that renewal is even in the variable part of our business. So so so the business part of that, we feel good about it fundamentally, continuing continued on, not just in the fourth quarter, but as we roll into 2020.
Speaker 5
Got it. Thank you very much.
Speaker 0
Our next question comes from the line of Jeff Grampp with Northland Capital Markets. Please proceed with your question.
Speaker 7
Good morning, guys. I was curious, Brad, you talked about in your prepared remarks evaluating maybe some new end markets for the company. Was hoping maybe dig into that a bit more. Can you kind of touch on maybe from a high level characteristics of the markets that you guys might be looking at and how you kind of see Target fitting into kind of the ecosystem, if you will, of whatever markets and understanding maybe you don't want to get too specific here, but just trying to get a little bit more, I guess, details on how you guys are seeing that opportunity.
Speaker 2
Sure. And I'll hit this on a kind of a larger scale too, starting with look, we're going to continue to invest in the Permian. We continue to look at organic and inorganic where there's good returns and visibility. We invested there because we believe it's a long term play and that hasn't changed. So that part of our the way we look at the business has not changed at all.
We'll continue to be disciplined in how we deploy the capital as we have for many, many years. On the diversification piece, look, we're in the early stages of this. I would tell you the great thing is with our cash flows, which I don't think can be overstated, gives us the ability to be opportunistic as we look at adjacent markets and industries to add diversification. So we've started that process. I'm not going to tell you the playbook because to be honest, we're not too far down that road.
But it is something that we look at internally and we'll keep pushing forward. The last part of that is, you know, we'll always put our capital to work in the areas that deliver the best returns for shareholders. So and when I tell you, we'll continue to invest in the Permian, there's other things out there that we are looking at, such as diversification.
Speaker 7
Got it. Got it. Appreciate that. And for my follow-up, trying to frame, I guess, 2020, understanding you guys are still in the early process and don't want to get too specific. But on the capital side, excluding any potential acquisitions or new build communities, is there any other CapEx we should be thinking about outside of maintenance CapEx, whether that's maybe upgrades at acquired facilities or things like that?
Speaker 3
Hi, good morning. This is Eric. Yes, it's a great question. We really have you know, we're very fortunate to have a really flexible capital plan at this point. And so I would say heading as we head into 2020, we're still trying to shore up what that looks like, but but really, we have pretty, pretty minimal, capital needs.
The the caveat there would be, again, we have we have some deferred Right? So so that would be the one the one hole that, we would look to, to fill. But but right now, it's it's pretty flexible.
Speaker 2
And then I would just add for for for Eric there. Remember, our playbook's still the same. If we don't have a contract that supports that returns, we're not gonna go out and invest in a new facility or a a new build or an or an add on. So, you know, as they come, we'll take a look at them. That's the organic piece of the business.
And even the same thing with the inorganic. You know, it's a buy versus build scenario as as we look at that. We're not gonna get the returns, even though we have the cash to go and prosecute this, then we're not gonna do it. So we're gonna be very disciplined in that approach.
Speaker 4
Yeah. I think the other thing that I would
Speaker 3
that I would add is is partially off of Brad's comment is, you know, we generate a lot of cash in this business. And so to the extent that, that we have minimal capital spending heading into, into 2020, there's a lot of discretionary cash flow that's available to us. And so that's a pretty look. That's a pretty enviable position to bring in, you know, for us as we look to, to move the business forward and to grow it.
Speaker 6
Understood. I appreciate the time, guys.
Speaker 4
Thank you.
Speaker 0
Our next question comes from the line of Kevin McVeigh with Credit Suisse. Please proceed with your question.
Speaker 8
Thank you. Hey, can
Speaker 9
you just give us a
Speaker 8
sense of how much ProPetro and Superior Lodging contributed to Q3 and what the impact is on the full year 2019 guidance?
Speaker 3
Sure. Hi, Kevin. Good morning. I don't to specific numbers on that. You know, suffice to say that there there wasn't there was a contribution there, you know, mid mid single digits or so in in terms of EBITDA, but I I don't wanna give specific numbers.
That's okay.
Speaker 8
Yeah. No. That's fine. And then, I guess the other thing, it looks like the midpoint of the range kind of implies, Brad, to your point, kind of a 17% decline in revenue. Q3 seasonally stronger.
It didn't happen this time. Just as you think about again, I know you're not giving 2020 guidance, but is that base two eighty to 300, is that a reasonable like is that the worst downside scenario as we think about know, at least a a bottom up from a modeling perspective?
Speaker 6
Your again, I'm not sure we're ready to
Speaker 2
give that number. Here's what I'd say high high level. Right? And and that is what I wouldn't do is take the fourth quarter nineteen as a barometer for for predicting our future business. We feel good about the business.
We have a lot of long term contracts. We believe this fourth quarter is, you know, short term scenario. We have talked to we've doubled down talking to our customers and making sure we understand where they're at next year, what they believe their customer is doing. No significant roll offs in in in 2020. But we we think we have a lot of protection, on that side of our business.
When you look back at history, it supported us. So, you know, I'm not gonna give you a number, but I would tell you that, you know, again, fourth quarter nineteen is not the barometer to be looking at for '20.
Speaker 3
Yeah. And and I think, Kevin, the other thing that you're seeing in in the outlook as well is, you know, recall that, you know, this year alone, right, we've had we've had a a, you know, a decent amount of TransCanada, kind of what I call base base revenue coming through from from some of the pre work activities while we were waiting for the larger contract, which which was, you know, certainly added added to to growth beyond the beyond the outlook. You know, during the second half, we won't see much in the way of that at all. Right? So that also impacts q four.
That's also embedded in the in the outlook as well.
Speaker 8
Got it. And then, Eric, if it's too specific, I get it. But, from the TCPL, any sense of, you know, where you thought that was gonna be versus where it came in?
Speaker 3
I I would say look. I don't I don't wanna give specific numbers on that. I would just say just look. Generally, I would say for q, you know, for q three, it was probably about of what we thought what we thought it might be. I would say for q four, just to put an order of magnitude on it, it's probably looking to be about about a a third light, if not if not more.
Speaker 8
Great. Thank you.
Speaker 0
Our next question comes from the line of Ashish Sabadra with Deutsche Bank. Please proceed with your question.
Speaker 9
Thanks for taking my question. So the guidance was reiterated on the last call, which was in mid August. So I'm just wondering how quickly did the environment change. Can you just talk about the trends within the quarter and how you exited the quarter? Thanks.
Speaker 2
I'm sorry. Can you repeat your question? We were breaking up here.
Speaker 9
Sorry about that. Yes, I was just my question was just the guidance was reiterated on the last quarter and that it also excluded the expansion and the acquisition. And so my question was how quickly did the environment change? Can you just talk about the trends in the quarter? And how did you like, what like, how, when you entered the quarter versus exiting the quarter?
Speaker 2
Yeah. High level. Let me you know, again, I I I point you back to, you know, definitely, the the core business, remained intact. We were we were good at kind of putting our finger in that. The variability part of our business, that variable portion, definitely, that was the change that we've seen starting sometime in q three going, what we believe is a a a deeper down, which we've we've changed the range for for q four.
So that was the biggest portion of that as well as the deferred commercial opportunities that have moved to the right. Look, these were fairly sizable on that, and we think those don't go away. They're moved to the right. And then TCPL was a portion of that as well. So those three things really made up you know, the what we're telling you today for the for the fourth quarter.
Speaker 3
Yeah. And the big the biggest pace the only thing I'd add is the biggest the biggest portion of that was was really the deferral of opportunities that that really start kinda picking up in in the back half of q three. And so we really didn't start seeing that until, you know, until really just a month or so ago.
Speaker 9
That's helpful. And just given where the stock price is, how do you think about the use of capital for growth versus just buyback? You have a lot of authorization still remaining buyback authorization still remaining. So just as we think about, use of capital going forward.
Speaker 4
Sure. Sure.
Speaker 3
This is this is Eric. So, you know, I'll make a couple
Speaker 4
of
Speaker 3
comments on on on cash flow and capital combined. They they do go hand in hand. Yeah. So, you know, so we generated about $43,000,000 in in cash flow from ops, ex interest interest expense. So gives us a lot of flexibility.
And and when we think about that, and then we look at that relative to our our, you know, return of capital opportunities, we like we like the idea of being opportunistic. We're going to continue investing in this business for growth. And so I can't comment on, you know, certainly specific plans, you know, for any capital market activity, buybacks included. But look, you know, we're we're gonna execute all options that that are, that are in concert with our, you know, bigger strategic plans. And so to the extent buybacks are part of that, great.
But I think at the end of the day, we're a growth company, and we we're going to facilitate, you know, growth in for the best long run use of of capital and shareholder returns.
Speaker 9
That's helpful. Thanks. And maybe one final question on the gross margins or gross profits in the Permian. Those moderated a bit from second to third quarter. How should we think about that trajectory going forward?
Thanks.
Speaker 3
Sure. No. No problem. So, look, I I think I think as we as we, you know, as we move forward, you know, we've clearly expressed that there's a, you know, there is a little more challenge in the in the variable part of the the market. However, some of that is offset by some high high higher ADR mixes as we've talked about.
So look. I I think you see a I think you see a little bit of degradation on the on the margin in in the Permian. I I wouldn't I don't think it's I wouldn't call it, you know, substantial, though.
Speaker 9
Okay. Thanks.
Speaker 0
Our next question is a follow-up question from Steven Gengaro with Stifel. Please proceed with your question.
Speaker 4
Thanks. A couple of things, actually. But just following up on the prior question on cash flow flexibility. In oil service world, companies with debt or a lot of debt, and you don't have a lot of debt from a leverage perspective, but like from a debt cap perspective, people see it as having a lot of debt, there's a desire to see a reduction in leverage over buying back stock. And I and I understand, you know, how you feel about your valuation and your free cash flow visibility.
But have you thought about those that as another option as far as delevering and kind of getting this debt to equity conversion if the multiple remains the same? Mean, how do you think about that relative to just buying back stock?
Speaker 3
Yeah. Sure. Look. It's it's a great question. There's always there's always a balance there.
Right? And it really comes down, just even to strategic intentions as to as to how you wanna execute and prosecute growth of your business going forward. Right? So so what's more advantageous to you? I think, you know, what you're hearing us say is, look, we're we're we are, you know, investing, you know, in our assets for the for the long run here.
We do have $70,000,000 in pre payable debt. And if if you just think about the cash we generated this quarter, you know, look, you could theoretically pay down all your revolver in a in a couple quarters. So, look, we look at our leverage at at roughly, you know, two and two and a half times or or less and think about where that, you know, portends in the future. And frankly, we feel pretty pretty good about it. So, look, I think we wanna we wanna maintain flexibility there, But, look, we'll just we'll just, you know, play it by ear.
But I would just tell you that, you know, we're pretty we're pretty pleased with where we are from a balance sheet perspective. Albeit, I'd love to have more flexible, you know, more flexible capital structure through time, and we'll always look at ways to to to maximize that.
Speaker 4
Okay. Thank you. And you mentioned, Brad, I think you mentioned twice your top 30 customers. Are you willing to tell us what percentage of the revenue they account for?
Speaker 2
No. So we're not I I won't do that, but I appreciate
Speaker 4
your time. Your word, but I figured I'd ask.
Speaker 2
You had to ask her. Right?
Speaker 4
Okay. And and then just as as a as a as a final one for me, when when you, when you think about your when you think about your your mix, and and I'm not sure if you can add a little color here. But when you look at the the mix of revenue from the oral service companies versus revenue from the E and P providers, I I think some the oral service companies are are larger customers. And clearly, in oil service world, I mean, we see all The U. S.
Pressure pumping companies, etcetera, seeing a pretty sharp drop off in the fourth quarter with an expected recovery in 1Q. But can you give us a sense for the relative importance from a revenue perspective of the service companies versus the E and Ps?
Speaker 6
Yes. Stephen, this is Troy. Good morning, by the way. Look, good question. And look, the way to think about this is, and I think it's the two new facilities, greenfield that we announced and built this year in the Permian Basin, both of which were integrated producers in the Permian Basin.
But clearly, I think that's a good example of us really migrating the business and leaning into the E and Ps that are there for the long term, look at the Permian as a long term investment. And so look, our business has matched that, right? So make no mistake, oilfield service sector is an important part of the business on the upstream side and will continue to be. But as we think about the Permian on a long term basis, we have made a concerted effort strategically to lean into the integrated producers and other E and P companies that have strong balance sheet, strong free cash flow and a great operating base with great acreage in the Permian. I think we've had I think we've demonstrated great success thus far.
And we've got a pipeline that remains intact for further organic growth with those producers.
Speaker 2
Look, I'll add just one statement You know, it it's doing business with the right people in the right places. We continue to say that, and and and it and I think it's proven true today. It'll prove true in in 2020. When you look just at the Permian Basin, it's a fairly bifurcated market today.
We have lodges that we are totally sold out of. You can't put another person in. And then there's a few areas that are softer, which is where we're seeing some of this variability. But when you look at some of the large integrated producers, as Troy said, where we're leaning into, those guys are continuing to spend, continuing to add rigs. And some of the others are becoming more disciplined in their approach until they get some of their financial orders in place.
But overall, that business is is very healthy for us out there. So again, right you know, doing business with the right people in the right places continues to pay off for us.
Speaker 4
Thank you. And then just one final quick one. Yes, think you alluded to this earlier that the sort of other segment without the without visibility on the pipeline work, I mean, that going to kind of be a $1,000,000 per quarter revenue run rate type business until we hear more about pipeline work. Is that reasonable?
Speaker 3
Yeah. It's you know, look, I would say I would say, probably for for q four, it's maybe a little little more than that. Going out, it's probably you know, your number's probably about right.
Speaker 4
Okay. Great. Thank you, gentlemen.
Speaker 9
Thank you. Thank you.
Speaker 0
You. We have reached the end of the question and answer session. Mr. Archer, I would now like to turn the floor back over to you for closing comments.
Speaker 2
Sure. Thanks. I would like to thank you for joining the call today. We appreciate your continued interest in Target Hospitality and look forward to speaking to you next quarter. Thank you.
Speaker 0
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.