Mammoth Energy Services - Q1 2023

Transcript

Operator (participant)

Greetings, welcome to the Mammoth Energy Services First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A brief Q&A session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard. Thank you, Ken. You may begin.

Ken Dennard (Founder and CEO)

Thanks, operator. Good afternoon, everyone. We appreciate you joining us for the Mammoth Energy conference call to review 2023 first quarter results. This call is also being webcast and can be accessed through the audio link of the Events and Presentations page of the investor relations section at mammothenergy.com. Information reported on this call speaks only as of today, April 27th, 2023. Please be advised that time sensitive information may no longer be accurate as of the time of any subsequent date. Pardon me. I would also like to remind you that statements made in today's discussion that are not historical facts include statements of expectations or future events or future financial performance are forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995.

Management will be making forward-looking statements as part of today's call that, by their nature, are uncertain and outside of the company's control. Actual results may differ materially. Please refer to the earnings press release that was issued today for our disclosure on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's filings with the SEC. Management may also refer to non-GAAP measures, including adjusted EBITDA. The definitions of these non-GAAP measures and their reconciliations to the most comparable GAAP measures can be found at the end of the earnings release and in our investor relations presentation, which can be found on the website. Mammoth Energy assumes no obligation to publicly update or revise any forward-looking statements. Now, with that behind me, I'd like to turn the call over to Mammoth Energy CEO, Arty Straehla. Arty.

Arty Straehla (CEO)

Thank you, Ken, and good afternoon, everyone. We had a solid first quarter that I'm pleased to discuss on today's call. I will also provide an update regarding our ongoing pursuit of the PREPA receivables owed to us before turning the call over to Mark to review our financials in more detail. Our first quarter performance was in line with our expectations, contributing to significant year-over-year growth in revenue, net income, and adjusted EBITDA. For the first quarter of 2023, net income came in at $8.4 million compared to a net loss of $14.8 million in Q1 of last year. First quarter 2023 adjusted EBITDA was $30.7 million compared to $9.3 million in Q1 of last year.

I'm proud of the hard work across all of our business segments by our talented teams that contributed to the meaningful growth we have realized over the last year in this most recent quarter. While we face no shortage of challenges every day and have experienced persistent supply chain constraints and logistical problems over the last few years, we have and intend to continue to operate to the best of our ability to meet the needs of our customers. Recently, we have experienced some improvements throughout the supply chain. We anticipate more improvement to come in the back half of the year. We believe it is important to note that these constraints still remain an obstacle that we must navigate. While we may never return to the way things were pre-COVID, we're proud of the adaptability of our team to adjust to this new normal.

I'll walk you through each of our major business segments. In our Well Completion Services, we generated strong growth in the quarter. We exited the quarter with three of our six pressure pumping spreads actively operating. Today, we are seeing regional production slowdowns due to lower natural gas prices, particularly in the Northeast, where we have a concentration of frac crews. Natural gas prices have been cut nearly in half compared to what they were at the end of 2022. While we remain bullish long term on natural gas in the near term, the lower prices are reducing activity in our Well Completion segment are leading to more calendar white space. We have a deep understanding of how this pullback impacts our business and have already made changes to manage the large variable cost in the Well Completion segment.

However, we expect this will reduce near term utilization as we adjust to current market conditions. We plan to offset this reduction by significantly lowering our capital expenditures for the year. Turning to our infrastructure services division, operational improvements, team performance, and higher utilizations of crews and equipment continue to drive improved results. Revenue, net income and adjusted EBITDA grew year-over-year in this segment despite increases in SG&A and legal expenses. We expect these expenses to have less of an impact in the coming quarters. The bidding and pricing environment for infrastructure services throughout our footprint continue to be robust, with added opportunities expected from the historic federal investment in our nation's infrastructure through the Infrastructure Investment and Jobs Act.

We continue to view this sector as a key growth driver for Mammoth over the long term, and I'm pleased with the continual progress we are achieving. As a reminder, we have grown this division strictly by organic means over the past five years. The sand business also grew in the quarter, and we are pleased with our team's performance. As we have mentioned before, we entered into two strategic sand supply agreements late last year at attractive pricing. These contracts are providing a solid foundation for predictable cash flow in our natural sand proppant division. As we have stated before, we believe our diverse portfolio and ability to adapt quickly to changing environments positions us well in these segments. Before I turn the call over to Mark, I'd like to provide an update regarding PREPA.

On March 27, 2023, Cobra was notified that FEMA had approved $233 million in Cobra invoices related to the December 21, 2022 Determination Memorandum. The 90% federal cost share of the approved amount was $210 million, which was obligated and made available for drawdown on March 27, 2023. Of this $210 million, approximately $99 million has been represented by both PREPA and FEMA as intended to pay Cobra for outstanding invoices, and the remaining $111 million is a reimbursement to PREPA for payments already made on Cobra invoices.

PREPA inexplicably refuses to pay Cobra for the work accomplished in the aftermath of Hurricane Maria and has so far failed to take the steps necessary to obtain the funds from COR3, funds that were appropriated by Congress to FEMA and then obligated to COR3 for payments to Cobra. We continue to vigorously pursue payment of the over $390 million owed to us from PREPA and continue exhaust efforts with congressional members, legal teams, and frequent meetings with decision-makers. Let me turn the call over to Mark to take you through our financial performance in greater detail.

Mark Layton (CFO)

Thank you, Arty. I hope everyone is doing well, and we appreciate you joining us today. As I usually do, I'm going to take this time to provide additional details on some meaningful metrics and several key highlights. A detailed breakdown of our results can be found in our earnings release and in our 10-Q, which we expect to file tomorrow after market close. Mammoth's total revenue during the first quarter of 2023 came in at $116.3 million compared to $62.3 million during the same quarter last year. In Q1 of 2023, we pumped 2,018 stages with approximately 3.6 fleets utilized on average compared to 699 stages and an average utilization of 1.6 fleets during the same quarter last year.

This 87% year-over-year increase in revenue is a key indicator that we have capitalized on favorable market conditions and have driven improved operational efficiencies. Looking forward, as already mentioned earlier, we are seeing some softness related to natural gas prices, which may adversely impact results for our Well Completion Services division in the near term. We plan to offset this by significantly reducing our CapEx as we progress through the year. Our sand division sold approximately 391,000 tons of sand during the first quarter of 2023, compared to 329,000 tons of sand during the same quarter last year. The average price for sand sold during the first quarter of 2023 was approximately $31.02 per ton, compared to $21.44 per ton during the same quarter last year.

Our infrastructure services division contributed revenue of $28.3 million for the first quarter of 2023, compared to $23 million for the same quarter last year. As already mentioned, there were some cost headwinds in the quarter that we anticipate becoming less impactful as we progress through 2023. We expect this, coupled with operational execution, to drive improvement as the year progresses. Net income for the first quarter of 2023 was $8.4 million, compared to a net loss of $14.8 million for the same quarter of last year. Adjusted EBITDA, as defined and reconciled in our earnings release, was $30.7 million for the first quarter of 2023, an increase of 230% compared to the $9.3 million for the same quarter of 2022.

CapEx for the first quarter of 2023 was approximately $6 million. In light of the commodity price softness that we're seeing and its direct impact on some of our customers' spending, we intend to continue to prudently manage our costs, and as a result, we are reducing our previously announced full year 2023 CapEx budget to approximately $24 million. As of March 31, 2023, we had cash on hand of $11.7 million and debt of approximately $84.6 million. Our total liquidity was approximately $29.1 million. As always, to conclude our call, we would like to thank our 975 employees throughout the company for their hard work, dedication, and commitment to maintaining safe and sustainable work sites for themselves and their teammates.

Despite some of the softness that we're seeing on the horizon, our businesses continue to perform well, and we're confident that the diversified and differentiated nature of our service offerings positions us well to continue generating favorable results in 2023. We will maintain our focus on operational excellence and efficient execution in each of our businesses, which we believe will enable us to drive meaningful shareholder value. Operator, we would now like to open the call up for questions.

Operator (participant)

Thank you. We will now be conducting a Q&A session. If you would like to ask a question, please press star then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star then 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 key. One moment please while we poll for questions. Our first question is from Ignacio Bernaldez of EF Hutton. Please go ahead.

Ignacio Bernaldez (Analyst)

Hey, good afternoon. Thank you for your time today, and congratulations on the quarter. Two quick questions. The first, any more color on the bidding and pricing environment for infrastructure services, and specifically how the Infrastructure Investment Jobs Act is bolstering or contributing to that environment?

Mark Layton (CFO)

We continue to see an increase in bidding activity primarily for projects. We think that bodes well for the remainder of the year. To date, we've not seen a lot of activity in relation to the Infrastructure Act. We expect that bidding activity to start hitting the market late this year.

Arty Straehla (CEO)

I'd add on to that, Ignacio, that we are seeing some of the activities, some price increases that are going through to our customers. Utilities started out a little bit tight this year. You know, as it was described to us from some of our key customers, which were larger, investor-owned utilities. Their the goods or their products that they use had inflation hit them about 20%-30%. I'm talking about poles and transformers and wooden poles and metal poles and all those type of things that they utilize. They trimmed back a little bit at the very beginning on crews, and now they're going back out and they're regenerating. We're seeing activity move up pretty quickly.

In addition to that, we have worked out some of the issues we've had previously with bonding and that type of thing, and we feel pretty good about where the team's going, specifically in being able to do some of the higher-priced transmission and substation work and some things away from the distribution. All in all, a good quarter for our team.

Ignacio Bernaldez (Analyst)

That's really helpful. I appreciate that. Then just secondly, you mentioned white space on the calendar through 2023. I guess, you know, what's the extent of that? Maybe, again, a little more color on that.

Arty Straehla (CEO)

Sure. As we exited the fourth quarter, natural gas was averaging around $5.56 per MMBtu. We saw some prices less than $2, and that's caused some of the operators to pull back. We are seeing a lot of it is just delays because they still have amounts of gas that they have to get to hit their quota for the year. So we've just seen some delays on things. We've also seen it where some of the folks that are delaying are also continuing to drill, but just not complete right now.

Ignacio Bernaldez (Analyst)

That's really helpful. Thank you again for your time, and congratulations on the quarter. Really appreciate it.

Arty Straehla (CEO)

Thank you.

Operator (participant)

The next question is from John Daniel of Daniel Energy Partners. Please go ahead.

John Daniel (Founder and President)

Hey, guys. Thanks for including me. First is a housekeeping. Mark, can you remind me what the budget was for 23?

Mark Layton (CFO)

We had started out, for a CapEx budget of just over $60 million. We've peeled that back, $30+ million.

John Daniel (Founder and President)

Okay. Are you guys still proceeding with the Tier 4 dual fuel upgrade? Or can you walk us through what might have been put on hold?

Mark Layton (CFO)

We're still proceeding with the Tier 4 upgrades. That is one area where we continue to see some supply chain difficulties on those engines, but we are continuing to proceed on that front.

Arty Straehla (CEO)

John, I'll give you a little bit more color on that particular piece on the supply chain aspect. I think as we stated in our last call, went up to Cat and visited them at their factory and all those type of things. They've continued. They have the engine. We have the first Tier 4 dual fuel engine that was delivered. It was not delivered with all of its parts. It's like getting an automobile and not getting the steering wheel or tires to go with it. It continues on. We are still working it out of our manufacturing facility, of course. It's just gonna be a little bit slower going.

John Daniel (Founder and President)

Got it.

Arty Straehla (CEO)

Part of that reflection that Mark talked about on that delay is just purely the supply chain that we see and we've encountered.

John Daniel (Founder and President)

Okay. The last one for me. I've got some cell phone issues, so I apologize. Just given sort of you had a really successful ramp in bringing those fleets back and now a modest pause. Can you just walk us through how you handle the labor situation?

Mark Layton (CFO)

We've had to cut back on frac crews as a result of the white space in the calendar. Historically, we've been able to ramp up and find qualified crews, so we're not too concerned about having to ramp back up. We've certainly, you know, actively managed that staffing level at the frac side to align with the activity that we've got on the calendar.

John Daniel (Founder and President)

Fair enough. Not trying to put you in a weird spot, when, you know, the customers, you know, given they're ultimately the ones that sort of drive the slowdown, are they trying to work with you at all? I would assume that they will be coming back and using that equipment, you know, down the road.

Mark Layton (CFO)

Yes. The customers have absolutely been great in working with us. The schedule has been very dynamic. Our sales team has done an excellent job of filling in those gaps and working with each of our customers.

John Daniel (Founder and President)

Okay, great. Thanks for including me, guys.

Arty Straehla (CEO)

Thanks, John.

Operator (participant)

The next question is from Don Crist of Johnson Rice. Please go ahead.

Don Crist (Analyst)

Good afternoon, Arty, Mark, and Brittany. How are y'all today?

Arty Straehla (CEO)

Hey, Don. How are you?

Don Crist (Analyst)

I'm doing well. I'm doing well. Thanks for including me. you know, your commentary about white space has been very kind of widespread across the industry this quarter. I wanted to take that a step further, given your divisions that you have, and namely sand. you know, there's a lot of talk that there's gonna be a lot of gas completions going into the end of the year, I didn't know if you were having any customer conversations on the sand side, from a demand perspective, specifically related to that can be construed into the, you know, the frac side of the business, i.e., you know, demand for sand is a leading indicator, obviously. I didn't know if there was any kind of color you can provide there.

Arty Straehla (CEO)

Of course, we're backstopped with our two contracts and that certainly helps things. What we are seeing is still strong demand for sand. Obviously, you have a little bit of a break with the breakup in Canada because as you know, we go to Canada and to Colorado and to the Northeast primarily with the sand. We're still seeing strong buildup and coming in June and July. You know, it's. We still. That business has performed as good as it ever has during this winter time period.

Don Crist (Analyst)

One further on sand for me. It sounds like pricing has been fairly stable over the last three or four months. Do you see that continuing, or do you think it kind of pulls back for a month or two and then kind of goes forward with demand?

Mark Layton (CFO)

Based on what we've seen over the next two to three months, it looks like pricing will be fairly stable.

Arty Straehla (CEO)

Don, one of the things you know about us is that, we are always, a lot of our pricing is determined by the mix that we have. Obviously, 40/70 is the gold grade, and then everything else trails. When you're seeing it, we're still seeing pricing remain pretty strong. If you see any lapses with it's because of the mix with 30/50 and 20/40. Getting in mixed with the 40/70.

Don Crist (Analyst)

I appreciate all the color, and thanks for including me.

Mark Layton (CFO)

Thanks, Don.

Operator (participant)

The next question is from Michael [inaudible]. Please go ahead.

Speaker 8

Good afternoon, gentlemen, and thank you for taking my question. With everyone else, I congratulate you on the quarter, big increases.

Arty Straehla (CEO)

Thank you.

Speaker 8

Kind of looking at the demand environment where there's cutbacks in drilling activity, cutbacks in Well Completion. You previously forecast adjusted EBITDA of around $15-$18 per frac spread that's out there operating. In today's demand environment, are we still within that range or dropping a little bit, do you think?

Mark Layton (CFO)

Likely peeling back a little bit, to put that in perspective, closer to the $12 million-$15 million per spread on an annual EBITDA basis.

Speaker 8

Good. Got it. If you can allow one more question. Coming back to that news on PREPA, I just wanna make sure that I've fully got the implications. Is the Fed share that has been approved, payable directly to you, or does it have to go through PREPA and is complicated by their unwillingness to play?

Arty Straehla (CEO)

It has to go. The way the system is set up is COR3 is the grant recipient, and they have to submit. They receive the paperwork from PREPA. PREPA has to do an RFR, or request for reimbursement. Then COR3 will pay them. Then PREPA will pay us. Inexplicably, you know, you know, we're a month into this. We found out about it on March 27th through some of our congressional leaders that were inquiring for us. We think that they have received that they put in a request for requisition of $130 million. The timing for that is starting to come upon us. I'm not trying to indicate that payment is imminent and all that type thing.

PREPA has been tough in this regard. They have, as I said in the, as we went through the earnings part, they have funds that have been appropriated by Congress for a specific FEMA Determination Memorandum. Those funds have been made available to COR3 as the grant recipient. You know, they can continue to refuse to pay, but I don't think Congress will appreciate that very much that they, that those funds are not going to the people who perform the work.

Speaker 8

Right. I, you know, again, was struck by their unwillingness to pay even when they themselves have been paid. I wanted to make sure, understanding, when money is likely to fall into your hands. It sounds, though, like if I understood what you said, there's some possibility of getting $130 million, you know, maybe sooner rather than later. Is that fair?

Arty Straehla (CEO)

To clarify, the portion of that 210 that relates to unpaid invoices for Cobra is $99 million.

Speaker 8

Correct.

Arty Straehla (CEO)

That money, to the extent that COR3 draws it, is not fungible. That money can only be paid to Cobra once drawn.

Speaker 8

Okay, great. Thank you for all of that information. Very helpful.

Arty Straehla (CEO)

Thank you.

Operator (participant)

The next question is from Carter Dunlap of Dunlap Equity Management. Please go ahead.

Carter Dunlap (Managing Member and Portfolio Manager)

Hi, gentlemen. Is there any plans to mobilize any of the spreads from, let's say, the Northeast to your other basins?

Arty Straehla (CEO)

We don't have any near-term plans, but we've certainly got the capability to move those spreads and can do so, fairly quickly. Our crews are, you know, able to be moved along with those spreads and have been fairly mobile. To the extent that the sales team lines up work in the Mid-Continent, we're certainly willing and capable of moving those spreads.

Carter Dunlap (Managing Member and Portfolio Manager)

One last question. You, you cited 3.6 as the average for the quarter. What, remind me what, how many stages are, I'm sorry, spreads are converted? Not the natural gas dual fuel, but weren't you trying to finish four or five? Number four or five?

Arty Straehla (CEO)

We've currently got almost two spreads converted to Tier 2 dual fuel. As we referenced earlier, we're in the process of converting one spread to Tier 4, but that conversion has been impacted by supply chain restraints.

Carter Dunlap (Managing Member and Portfolio Manager)

Okay, thank you.

Arty Straehla (CEO)

Thanks, Carter. With no other questions.

Operator (participant)

Next question.

Arty Straehla (CEO)

Thank you everybody for joining us.

Operator (participant)

Next question.

Arty Straehla (CEO)

Thanks, operator. Thank you again for joining us on the call today. We maintain our belief that Mammoth is well-positioned for continued growth and supported by experienced team members that are among the best in the business. This concludes our conference call, and we look forward to speaking to you again next quarter. Thank you.