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C&J Energy Services (NYSE:CJES)

Q3 2013 Earnings Call

October 31, 2013 10:00 am ET

Executives

Lisa Elliott - Principal

Joshua E. Comstock - Founder, Chairman and Chief Executive Officer

Randall C. McMullen - President, Chief Financial Officer, Treasurer and Director

Analysts

Robin E. Shoemaker - Citigroup Inc, Research Division

John M. Daniel - Simmons & Company International, Research Division

Michael Cerasoli - Goldman Sachs Group Inc., Research Division

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Michael R. Marino - Stephens Inc., Research Division

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Marc G. Bianchi - Cowen and Company, LLC, Research Division

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the C&J Energy Services Third Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, October 31, 2013. I would now like to turn the conference over to Ms. Lisa Elliott with Dennard Lascar Associates. Please go ahead, ma'am.

Lisa Elliott

Thank you, operator, and good morning, everyone. We're pleased to have you joining us on this conference call to discuss C&J Energy third quarter results for 2013. Before we get started, I'd like to direct your attention to the forward-looking statements disclaimer contained in the news release that C&J put out yesterday afternoon, a copy of which is available on the company's website at www.cjenergy.com.

In summary, the cautionary note states that the information provided in the news release and on this conference call that speaks to the company's expectations or predictions of future; including projections, assumptions and guidance; are considered forward-looking statements intended to be covered by the Safe Harbor provision under the Federal Securities law. Although these forward-looking statements reflect management's current views and assumptions regarding future events, future business conditions and outlook based on current available information, these forward-looking statements are subject to certain risks and uncertainties, some of which are beyond the company's control, that could impact the company's operations and financial results and cause C&J's actual results to differ materially from those expressed or implied by these statements. I'll refer you to C&J's disclosure regarding risk factors and forward-looking statements in its SEC filings for a discussion of known material factors that could cause actual results to differ materially from those in the forward-looking statements.

Please note that the company undertakes no obligation to publicly update or revise any forward-looking statements, and as such, these statements speak only as of today and the date that they were made. A replay of today's call will be available and accessible via webcast by going to the IR section of the company's website and also by telephone replay. You can find the replay information for both in yesterday's news release. And as a reminder, information reported on this call speaks only as of today, October 31, 2013. So any time-sensitive information may no longer be accurate.

Now I would like to turn the call over to Josh Comstock, C&J's Chairman and CEO.

Joshua E. Comstock

Thank you, Lisa. Good morning, everyone. We appreciate you joining us for our third quarter 2013 earnings conference call. With me today are Randy McMullen, our President and Chief Financial Officer; and Don Gawick, our Chief Operating Officer. Following my comments, Randy will discuss our financial results in more detail.

Jumping into the third quarter. Our third quarter results reflect continued strong performance across our Wireline and coiled tubing divisions. These results were offset by a decline in utilization in our hydraulic fracturing operations. Results from our hydraulic fracturing operations were impacted by an unexpected increase in spot market exposure, primarily due to a highly active customer significantly reducing its onshore activity, and as a result, no longer having a need for our services. We redeployed this equipment with a longstanding customer, and beginning in November, we expect this equipment to be fully utilized in the foreseeable future.

Our third quarter utilization rate was also impacted by the postponement of several large jobs due to customer well delays that unexpectedly left open gas in our backlog. Due to the over spot market conditions, we were unable to immediately redeploy this equipment on short notice. As our long-term contracts have rolled off and our spot market exposure has increased, we have taken advantage of the opportunity to introduce our best-in-class hydraulic fracturing services to new customers and into new areas.

During the quarter we successfully broadened our customer base and strengthened our relationships with certain significant existing customers. Over the past several months, we have bolstered our sales and marketing team and are beginning to see the results of these efforts. To highlight an example, we recently expanded our presence into the Mid-Continent area and have established demand for our services in that market with new customers. As a result of our marketing efforts, we have experienced an uptick in activity entering the fourth quarter. Although we are expecting a typical seasonal slowdown, we are encouraged by current activity levels, and we believe utilization will continue to improve as we enter 2014.

In response to a recent increase in demand from new and existing customers, we are committed to manufacture 20,000 hydraulic horsepower, which we expect to deploy during the first quarter of 2014. If we see any indication of a pullback in demand, we have the flexibility to immediately cease all manufacturing and lease the components in our existing fleet. This is one of the many benefits of owning the manufacturing process.

Moving on to our other divisions. We improved our coiled tubing results quarter-over-quarter. We generated higher revenue and completed more coiled tubing jobs as our larger diameter coiled tubing units were met with strong demand. We believe that the experience and reputation of this well established service line provides a solid position from which we can take advantage of strategic opportunities, both domestically and internationally. We have also successfully leveraged the customer relationships and operational reach of our Wireline business to advance the expansion of this division.

Turning to Wireline, we generated another record quarter of outstanding results with an 11% sequential increase in revenue, and a tremendous performance across our operations. We have steadily expanded this business since acquiring it in June 2012, and as we have added new equipment, demand has continued to drive capacity to its limits. Over the past year, we have continued to generate healthy cash flows, which we have used to strengthen our balance sheet and execute our growth strategy.

During the third quarter, we invested approximately $24 million in the growth of our business, while also repaying an additional $30 million of debt. We will continue to maintain our balance sheet flexibility as we position C&J for continued long-term growth.

Our confidence is underscored by the announcement of our new stock repurchase program. Our Board of Directors has authorized us to repurchase up to an aggregate $100 million of our common stock through December 31, 2015. The timing and amount of any shares we purchase will be determined based on our evaluation of market conditions among other factors. This repurchase program demonstrates our commitment to continue growing our company while delivering value to our customers, employees and shareholders.

I will now turn the call over to Randy to discuss our third quarter results in more detail.

Randall C. McMullen

Thanks, Josh. Good morning, everyone. In the third quarter we generated $262 million of revenue and $0.24 of earnings per share. Revenue decreased 2% quarter-over-quarter, as lower activity levels across our hydraulic fracturing operations offset the solid results delivered by our coiled tubing and Wireline operations. Revenue from our hydraulic fracturing services, which accounted for approximately 55% of our overall third quarter revenue, declined 10% sequentially to $144.8 million due to a lower utilization rate as we completed 6% fewer fracturing stages quarter-over-quarter. These results, which were significantly below our expectations, were attributable to customers' specific issues, as detailed by Josh earlier.

Entering the fourth quarter, we have seen an increase in activity levels. And based on demand, we believe utilization will improve as we move into 2014, notwithstanding the expected seasonal slowdown. As a result, we are committed to build additional hydraulic fracturing capacity. Much of this new equipment will be built by our Manufacturing division, which enables us to control delivery schedules, specifications and costs.

Our coiled tubing revenue of $34.2 million grew 5% sequentially, and we completed 4% more jobs. Again we capitalized on our in-house manufacturing capabilities to quickly respond to a rising industry trend toward extended reach, large diameter coiled tubing. The rollout of our large diameter coiled tubing units was met with strong demand as we added new equipment and redeployed our modified units. Current activity levels remain steady, and in spite of the typical year-end slowdown, we expect our fourth quarter results to be consistent with the third quarter.

Our Wireline business has continued to impress, and this service line reached new highs with an 11% sequential increase in revenue coming in at $74.9 million. We achieved this record performance by taking market share and focusing on high-utilization customers. These results will perform while operating the same asset base as last quarter. While we are encouraged by the consistently high utilization in this division, we anticipate that Wireline operations will be impacted by the upcoming year-end slowdown, particularly given our concentration in Northern regions.

Given the attractive view and the economics in both our Wireline and coiled tubing divisions, we are continuing to invest in these service lines, as evidenced by the 4 new Wireline trucks and 1 new large diameter coiled tubing unit that will be added during the fourth quarter. We will continue to add capacity and invest in the growth of these business in line with customer demand and our growth strategy.

Our Manufacturing Operations generated $3.1 million of third-party revenue during the quarter. Although a substantial increase over last quarter's results, we haven't seen meaningful improvement in this industry, and slow third-party sales are expected to continue over the foreseeable future. However as I touched on earlier, our manufacturing capability enhances the flexibility of our other service lines, enabling us to quickly respond to shifts in industry demand. It also provides us with control over our equipment delivery, refurbishment and repair needs. Additionally we benefit from the significant cash flow savings associated with those intercompany transactions.

Turning to gross margins. Third quarter gross margins of 30% decreased 236 basis points sequentially. The decline in gross margins was driven by lower hydraulic fracturing activity in the third quarter.

Moving on to SG&A. SG&A costs increased around 7% quarter-over-quarter to $35.8 million, representing approximately 14% of revenue. The increase in SG&A is due to costs associated with the growth of our business, including vertical integration efforts across our service lines, the build-out of our research and technology capabilities and further geographic expansion, including opening an international office. These initiatives contributed approximately $4.4 million of additional SG&A expense for the third quarter and $8.9 million of additional SG&A expense for the first 9 months of 2013.

We believe that our investment in these initiatives will yield a competitive advantage over the long term and fuel our future growth. Adjusted EBITDA decreased 20% from the second quarter to approximately $43 million, and adjusted EBITDA margin was 16% in the third quarter versus 20% in the second quarter. Our tax rate has increased since last quarter, primarily due to a decrease in forecasted income for the full year in connection with our third quarter results.

As our book income decreases, permanent differences between book and taxable income have a greater impact on our rate. For the third quarter, the impact was intensified as the cumulative effect of this change for the year end -- for the year-to-date period got pushed through during the quarter. This resulted in a tax rate of approximately 40% for the third quarter. We expect our tax rate to end up at approximately 37.5% for the year.

With regard to the balance sheet, at the end of the third quarter, we had a cash balance of approximately $28.7 million and $275 million available under our $400 million revolving credit facility. Even with current market challenges, we have continued to generate strong cash flows, which enabled us to repay an additional $30 million of debt over the course of the third quarter. We had and will continue to aggressively reinvest in the enhancement and diversification of our service lines to drive growth and further differentiate C&J from our competitors.

Now on to our cash flow statement. During the third quarter, we generated $73.4 million of cash flow from operating activities, an increase from $33.1 million for the second quarter. This large increase is primarily a result of significant improvement to our DSO. In terms of capital expenditures, we had $28.5 million of CapEx during the third quarter, bringing the total to $108 million for the first 9 months, the majority of which consisted of construction and maintenance costs for our equipment. We anticipate that our 2013 capital expenditures will total approximately $155 million. Our remaining 2013 planned capital expenditures primarily relate to the manufacturing of new hydraulic fracturing capacity as well as the coiled tubing and Wireline equipment.

At this point, I will turn the call back to Josh for closing remarks.

Joshua E. Comstock

Thank you, Randy. As we wrap up the call, I'd like to share a few updates on some of the actions we have taken this quarter to further our growth strategy. Last quarter, we shared several internal initiatives that we are pushing around service capabilities, cost controls and vertical integration. Our research and technology division has made considerable progress in identifying new technologies and processes so it will enhance the quality and breadth of our product offering, increase profitability and boost efficiency throughout the organization. We recently opened a state-of-the-art research and technology center, marking a significant step in our strategy to differentiate C&J from our peers. We believe these efforts will provide a competitive advantage over the long term and will allow us to more effectively compete against the major oil service companies, both domestically and internationally, by increasing our service quality and offering at a reduced price point to our customer base.

We have also made progress on our international expansion efforts, and we hope to make an announcement in the near future. For now we can tell you that we have officially opened our office in the Middle East, and we are assembling a solid team of sales, operational and administrative personnel. We are actively pursuing a number of opportunities, and we are optimistic about our future prospects.

Looking to the remainder of 2013 and into 2014, we see many opportunities across our service lines. Although we anticipate some seasonal slowdown in the fourth quarter, we are optimistic about 2014. We believe that the strategic investments that we have made and we'll continue to fund have positioned us for further future market improvements. And then our focus on lowering our cost base and improving our operational capabilities will lead to improve profitability over the long term. We look forward to reporting our developments on future calls as we continue to grow our company into a leading large-scale, geographically diversified spot provider of the most technologically advanced services delivering value to our customers, employees and shareholders.

So with that, operator, we like open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Robin Shoemaker with Citigroup.

Robin E. Shoemaker - Citigroup Inc, Research Division

Josh, I think you've got a couple of contracts coming up or expiring, I think, one in December and one in January. And I'm just wondering about will those stay with the current customers most likely, and I also wanted to ask about Fleet #9, the deployment there?

Joshua E. Comstock

So the one that you're talking about in December is -- those are in the pricing agreements. Price are not the long-term, take-or-pay contracts as they used to be. So -- but we do expect them to stay with -- the one in January, definitely, stay with the current customer. The one in December, most likely not. They won't have the work. As far as Fleet 9, we specifically stopped talking about the fleets, indefinitely, as fleets. We're talking about horsepower now. The reason we're doing that is the fleets -- the fleet size has changed as we got into the spot market, and so it's not as specific as fleet by fleet by fleet anymore. And so we talk about horsepower in general. But all of our horsepower is deployed. That said, some of that horsepower, at any given time, is being either worked on, refurbished, in for repairs. But we had over 300,000 horsepower by the end of the quarter, all of that will be a utilization rate that we think justifies building another fleet.

Robin E. Shoemaker - Citigroup Inc, Research Division

Okay. So the 20,000 that you're building is in addition to the -- what you have that you used to call Fleet 9.

Joshua E. Comstock

Yes.

Robin E. Shoemaker - Citigroup Inc, Research Division

Yes. Okay. I understand. So also I wanted to ask you, you didn't include in your press release this time monthly revenue per unit of horsepower. Is that something you intend to continue to disclose or not?

Randall C. McMullen

Robin, this is Randy. We're putting less focus on that metric. If you need it for the quarter, it was approximately $173 revenue per horsepower. But going forward, we will not be disclosing that.

Operator

Our next question is from the line of John Daniel with Simmons & Company.

John M. Daniel - Simmons & Company International, Research Division

Randy, I wanted to just see if I could you to opine briefly on margin expectations for Q4, presumably down a bit, given the seasonality. But given the expected utilization improvement and the expansion of the fleet, how do you see the trend in Q1 and Q2, assuming the utilization reviews play out as you expect?

Randall C. McMullen

Well, as far as Q4, our -- just to go ahead and give you guys the margins by segment that we disclosed in the Q. So giving you the comparison to the last quarter. The Stimulation and Well Intervention segment, the adjusted EBITDA margin was 18.7%, and Wireline was 30.4%. And again, that does not include corporate expenses. And so given those margins, I think our expectation for Stimulation and Well is to be similar. Obviously job mix and a year-end slowdown can have an impact there. But generally, I think that, that segment, that's our expectation. On the Wireline side, as we noted in the script, we are expecting to be hit there a little bit more than the other 2 lines. So that will play through on the margin side. Going forward, with the increase in utilization, our internal expectations are that we can continue to improve upon our margins through throughput -- stages. And also given the emphasis that we have internally on cost controls and further vertical integration, we're continuing to seek opportunities to boost that margin.

John M. Daniel - Simmons & Company International, Research Division

Okay. Fair enough. The utilization improvements, how do you see that, if it all, playing into just the pricing strategy in the first half of the year on the frac?

Joshua E. Comstock

Yes, I mean, the pricing, as we said it for several quarters, is flat. We are not -- the utilization we're seeing, where we believe that, that is specific to us based off of our sales and marketing efforts that we put forth over the past few months, just as you've seen in our results in Wireline and coiled tubing. Unfortunately in those divisions, we didn't have contracts where we were selling up with just 1 particular customer or a handful of customers. We were always out in the market, and so we had a pretty wide customer base with those services. And even in a tough market, we've been able -- when others have struggled in those service lines, we've been able to succeed in those lines and continue to add capacity. On the frac side, we had the contracts and had all of our capacity sewn up. So it put us at a bit of a disadvantage when we did enter the spot market. Behind our peers as far as having a sales and marketing effort that was competitive in the spot market. But we've been able to get our costs down, our pricing down, and we've been able to get out for new customers. And so we don't see real price increase -- the strategy is more around utilization increase and targeting those customers that are 24 hours and doi3G to zipper fracs and travel full month utilization and were -- or we can keep 1 fleet out and have less mode [ph] and demode [ph] time. And we've really, over the past few months, have been successful in targeting those customers and had some recent wins lately. Yes, so we expect, if we get margin increase, it's going to come from that, not from pricing.

Operator

Our next question is from the line of Michael Cerasoli with Goldman Sachs.

Michael Cerasoli - Goldman Sachs Group Inc., Research Division

Just coming back to that 20,000 incremental horsepower. I'm curious to know, right now, just to confirm, this would be a speculative increase in capacity? And then also the other question would be where -- what's the most likely play this would head to?

Joshua E. Comstock

Well, right now, it's not a speculative increase in capacity. This is based off of what our customers are telling us and what the demand is. Our current fleet will be, if everything holds true to what we think we won, we will be out of equipment. And so we will need that fleet to further service our customers, and that's why we're building it. As far as where it'll go, it will be in our existing operating regions even for the Permian and Mid-Con, Oklahoma.

Michael Cerasoli - Goldman Sachs Group Inc., Research Division

Okay. So that would float or you're just saying it would go to 1 of those regions.

Joshua E. Comstock

It would go to 1 of those reasons based on -- and the reason it's not specific, it's based on which -- we move horsepower around dependent on where the -- which customer comes up first. And we have some customer wins, right now, that some are set to start this month. Some are set to start next month. Some are set to start in January. If there's any delays, you may move 1 fleet that was originally going to go to Mid-Con, you may put it in Eagle Ford. And then this next one may go to Mid-Con to cover that one. So there's not a specific said, this one is going to here. It's just going into the fleet to cover the customer base.

Michael Cerasoli - Goldman Sachs Group Inc., Research Division

Okay. And I guess that's just the kind of what happens when you kind of get into a spot market base. But I guess my followup question would be on horsepower that might service as replacement horsepower for units, not necessarily this 20k, but kind of -- maybe just an update on the state of your existing fleet, not by fleet anymore, but by kind of as a whole, what might be retiring -- what might be nearing retirement age? Or does your manufacturing arm materially reduce that kind of retirement risk?

Joshua E. Comstock

Yes, we don't have any retiring. We have right over 300,000 horsepower now. Our oldest fleet has gone through or is going through refurbishment. Some of it is through refurbishment, and some of it is still in refurbishment. But less than 8% at any onetime is in maintenance.

Operator

Our next question is from the line of Byron Pope with Tudor, Pickering, Holt.

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

I have sort of a qualitative question for you. I know we're in this period of the year where you all and others are talking to customers about their 2014 work programs. Aside from changes in market tiers, and clearly you guys have had some recent wins, but as you have those conversations with customers, are you getting the sense that customers generally speaking are migrating more toward kind of stable multi-well programs in 2014 and the type of work that plays to your historical strengths?

Joshua E. Comstock

Yes, I mean, it definitely feels like more and more customers are focused on manufacturing type drilling, CAD drilling, stable drilling programs, full utilization-type work.

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. And then just with regards to Wireline services, I appreciate the margin guidance there. But in thinking about the topline sequential impacts for Q4, I mean, Q4 of last year seemed particularly harsh just given the E&P operators meaningfully curtailing budgets, it wouldn't seem as though the art of magnitude of the topline, sequential decline for Wirelines would be nearly as severe as last year, particularly given that you've got some new units that will be deployed. Is that fair?

Randall C. McMullen

Byron, it's Randy. Yes, I'd say probably not as significant. I mean, obviously, as mentioned, we're expecting an impact. And that impact can vary based on winter weather conditions as well as the extent of the slowdown. But I don't think the type of headwind that we were going into last year with so much of the slowdown being driven by a pullback in operations related to budget constraints. We're not feeling that. It's just more the sort of standard year-end slowdown.

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. And then last question for me just relates to the share repurchase authorization. Do you tend to think of it as being opportunistic with regards to it or more methodical and systematic in terms of actually how you implement it?

Joshua E. Comstock

Opportunistic.

Operator

Our next question is from the line of Ryan Fitzgibbon with Global Hunter Securities.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

First off, can I clarify something? The 306,000 horsepower, does that work the entire quarter for Q3?

Joshua E. Comstock

Say that 1 more time now?

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

The 306,000 horsepower in your fleet, was that active all Q3 or was that final 32,000 kind of staggered maybe halfway into the quarter?

Randall C. McMullen

Yes. Ryan, we started to work that fleet in as a rotational fleet, in the third quarter specifically, as we brought down our oldest fleet for refurbishment.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Okay. Got it. And then maybe, Randy, it sounds like Wireline probably down sequentially, but coiled and Stim on the frac side are flat in Q4. Should I think of Q4 on the P&L looking somewhat similar to Q3?

Randall C. McMullen

Well as previously mentioned, I mean, and sort of on the margin side, we gave them a little bit of direction there. SG&A as mentioned on the last call, our expectation for the year end is still online with what we described, which you're looking at a slight increase in the fourth quarter. So given all that, those are our general expectations for the quarter.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Okay. And then second question for me. Josh, it sounds like you guys have had a couple of contract wins per your commentary. Are those pricing agreements or should we think of those as guaranteed frac days in a monthly basis for a couple of crews?

Joshua E. Comstock

No, it's all pricing agreements. It's just -- the contracts now are not contracts like we had before, take-or-pay. These are commitments from customers saying, I have x amount of wells I want you to do, this is the price that we agree to, or we're committed to using you for 100% of our work under this price. So that's what they look like. We have to perform, and we have to keep the work. But it's not work that they're going out and rebidding every time there's a job. They're selecting a fleet. They're selecting a vendor. And then that vendor, as long as they perform, will be doing the work.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Okay. So it's safe to assume utilization for the spread on price agreements was much better from what was on spot in the quarter, and that's your expectation...

Joshua E. Comstock

Yes. The utilization on pricing agreements will be better than utilization on the spot for sure. The contracts, the take-or-pay nature of the contracts, we used to -- you'd here us talk about effective utilization, I mean, we can have utilization on the pricing agreements and have fleets that are 90% utilized and have 90% utilization on their contract. And the contract utilization will generate a lot higher revenue, a lot better margins, it's because the take-or-pay nature of those that if the customers finds work from no matter what, and moves them from job to job to job, has little to no downtime. However that said, definitely, the pricing agreements and finding the customers that have the ability to work a fleet for a solid month or 2 weeks a month is much, much more higher effective utilization and more profitable than going out one on 1 job and then rigging down and going to -- trying to go find the next job.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Sure. That makes sense. And maybe to that point, can you help us with how much of your frac horsepower right now is on those pricing agreements and where you think that adds up the year?

Joshua E. Comstock

Well, going forward, it's going to be probably half.

Randall C. McMullen

It's just dependent on our success to secure the work going into '14. Right now, as Josh has mentioned, we've had one roll-off and then beyond that, it's consistent that where it was going into the quarter. But just depending on our success and the open market to secure a few of these fleets, and then our success to secure the existing work we have. That number will vary. And that will be something we'll update and address in the next call.

Operator

Our next question is from the line of Michael Marino with Stephens.

Michael R. Marino - Stephens Inc., Research Division

Josh, it sounds like the level of inquiries has ticked up of late in the frac business, at least from what you're saying. Do you think this is C&J specific or are you hearing and seeing kind of a more general pickup as guys look out into next year? And if -- and maybe some color as to how far you think guys are looking out and planning their frac calendars into next year?

Joshua E. Comstock

Well, I think, several things are happening, right. I mean, I definitely think it goes like -- from an activity level, E&P operators are -- seemed to be a lot more bullish than they were fourth quarter of last year. A lot of that has to do with costs are down and they have the capital to do what they need to do and they're confident in the commodity price, and they've proven these fields. With that said, you also have, typically, this time of year, guys are setting budgets, and that's when guys are going out and bidding work and bidding these pricing agreements and looking for vendors. We've had, across the industry in the past 1.5 years, guys -- our competitors, especially smaller ones that have dropped pricing and that have done things that have made it hard for them to keep the quality of their service up, which we've actually seen recently, examples of failures, companies that have failed. And all of that plays into quality service providers and -- which is what we are. And so that's played well into our hands. And just as it has with coiled tubing and in Wireline. It's playing that way with frac now, and so operators are looking for guys that are going to be there and be able to provide the work and provide a quality service. And we've been able to capitalize on that. And so all of that, along with the timing of it being year end and guys focusing on next year and thinking about the budgets and thinking about the vendors, we've been able to get out there, and we're competing. It feels like we're competing in a smaller market even though there's more -- there's plenty of capacity out there. It seems like there is definitely a flight to quality, and so we're competing head-to-head more against quality players instead of just low-price players. And so that's helped.

Michael R. Marino - Stephens Inc., Research Division

One more kind of bigger picture. Josh, how do you think about -- I guess, you've got a lot of potential uses of capital now, including a buyback, international expansion, organic CapEx, M&A opportunities. I was wondering how you could -- you talked a little bit about the buyback already, but how you rank order kind of the M&A opportunities out there versus the organic and the international expansion? And then, Randy, your kind of thoughts on your ability or willingness to use the balance sheet and how much of it as you kind of target those avenues?

Joshua E. Comstock

Yes, I mean, for us, we are comfortable with $100 million worth of debt on our balance sheet, especially, with the revolver that's at a very low interest rate. We're spinning off cash flow, building cash. And so we are actively looking for acquisition opportunities. We have not necessarily found those opps so far, an opportunity that's been attractive under all the categories that we need for it to be attractive, which is not only from an equipment standpoint, we want more than just equipment. We want -- if we're going to acquire a company, we want an acquisition like we did with Casedhole, something that brings a lot more to the table than just equipment. So we're continuing to look and -- that would be a priority for us. From an organic standpoint, we have set forth initiatives that we think that we can grow organically, and we're going to continue to work on those, international being one of them, research and technology. And within research and technology, there's several initiatives, tools and other vertical integration, components in that. And so we think we can build that organically, no problem. And we are going to do that regardless of -- we're going to do that in normal course of business until from a user capital standpoint, we'll continue with our organic growth we're going to search for the M&A opportunities, and then we'll go from there.

Randall C. McMullen

Michael, it's Randy. I mean, given the cash flow generation the company's putting off, that's frankly funding all of our organic efforts. And then obviously, on top of that, allowing us to reduce our debt load. So our aggressiveness to lever a balance sheet to be strategic and making a sizable acquisition, that opportunity exists and would exist in a fairly low cost of capital. Given the right opportunity, we would definitely look to pursue that on the balance sheet to enhance the accretiveness of the acquisition.

Operator

Our next question is from the line of Matt Conlan with Wells Fargo.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

So there's no doubt, hearing from your customers, that you are undoubtedly a quality service provider. And I understand why they'd want you to expand your capacity. It's less clear the kind of return that you're getting from the investment at this point when you have so few in the industry, you're adding capacity at this point. So I mean, is the initial work going to give you an adequate IRR, or is this kind of a calendar cyclical investment where the returns are going to be achieved after pricing recovers?

Randall C. McMullen

Yes, Matt, we wouldn't be adding additional capacity if we weren't getting adequate returns on the equipment. So we're obviously a growth company looking to continue to expand our service. We have opportunities in several markets that we don't even have a presence in, so its a long-term approach for us, obviously. But this is not a bank on proxy and recovery. This is opportunities that we see today, demand that's coming to us that are dictating our opportunities to add equipment.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Okay. I mean, so can we infer that if pricing stays at these levels, you'll be -- you'll continue to add capacity so long as you can put the work -- the equipment to work?

Randall C. McMullen

Given that right opportunities, that's correct. Absolutely.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Okay. Is this influenced at all by the deferred tax position?

Randall C. McMullen

No.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Okay. So straightforward cash on cash returns.

Operator

Our next question is from the line of Marc Bianchi with Cowen and Company.

Marc G. Bianchi - Cowen and Company, LLC, Research Division

My question -- first question has to do with a number of moving parts here with the frac capacity, new equipment coming in, Fleet 9 kind of being redistributed, and then the mix of stuff that's on sort of pricing agreements, longer-term contracts, and they're all associated with those. Can you kind of help us understand, if you look at stage count going from third quarter to fourth quarter and then ramping into the beginning of next year, what sorts of percentage changes would we expect just looking at the visibility that you guys have with your customers in the conversations?

Joshua E. Comstock

I mean, it's difficult to predict because the stages are changing. And for example, you have 1 customer, a very large active customer for ours in the Eagle Ford that does a small number of stages on the Eagle Ford wall, but those stages have very large, large pump times. So we -- and we generate our revenue by pumping hours. So when you have other guys that have recently started shortening the stages and adding stages, placing the unilaterals, bringing stages closer together, spacing closer together. And so you have a higher number of stages, so that stage count is even across spaces is in the process of changing right now. So from a stage count perspective, it's very hard to predict what that stage count will be. But what we can say is that we expect others in the seasonal slowdown, we expect utilization to be up.

Marc G. Bianchi - Cowen and Company, LLC, Research Division

Got it. Okay. Okay. And then kind of in a followup to your comment about the spacing between stages and sort of some of the changes that are taking place there, we hear about some anecdotes of E&Ps changing their completion technique, trend towards increased use of prop in. Can you kind of talk to how that is impacting your results and maybe how you expect that to have an impact going forward?

Joshua E. Comstock

Yes. We've, obviously, some E&P operators have begun doing that. It depends on the operator. It depends on the field. It depends on the well. They don't -- just because a certain operator does it and happens to do it in the field, he doesn't do it every well. But it is -- you are starting to see some of it. You're starting to see more cropping [ph] style work, your stages retires. It's not necessarily more sand per stage, it's a higher sand concentration with smaller stages. But that said, it would be more sand per well, more chemicals per well. When we have that, it's more intensive for us, higher revenue, it's lower margin because it's pass -- it's more of a pass-through, it's less service margin and more pass-through margin. So it's high, definitely, higher revenue versus...

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Okay. Is there any generalization between the spot work you do, the contract work and then the pricing agreement work where you may be using more gel on -- maybe the contract and price agreement work versus more slickwater on some of the spot work?

Randall C. McMullen

No, it's totally dependent the customer. It has nothing to do with contract versus spot. Its customer and the field and the job design. And to be honest, what we typically see is the guys who have fewer wells, smaller drilling programs are the ones that are doing the higher-end fracs, which is the more cross-linked [indiscernible] -- the ceramics, those other guys that are trying to get the best frac in the ground and not as concerned about IRRs, is the guys that are doing the multistage -- I mean, multi-pad drilling and have a large drilling program.

Operator

Our next question is from the line of Brandon Dobell with William Blair.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Just want to make sure I understand the international opportunities you guys are talking about. There is no relation between that and the extra capacity you're building here right now. And if that international stuff progresses, and it sounds like you think it may, should we expect a similar addition in horsepower at some point in early '14, maybe with some Wireline or coiled tubing along with it to address international?

Joshua E. Comstock

International will most likely be coiled tubing to begin with, not frac.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Okay. I just want to make sure I got that straight.

Joshua E. Comstock

And then the frac that we are building has no -- it's not -- there's no international influence on the decision to build.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Okay. Got it. And then given the, I guess, the utilization strength that you're seeing or the customer inquiries in your, I guess, your thesis on grabbing more of the wallet share from a particular customer. Should we expect that a step up in investment in coiled tubing and Wireline, if you keep it in utilization, that you would expect on the frac fleet side?

Joshua E. Comstock

Yes. I mean, we've already announced that we've been continuing to add Wireline and coiled tubing equipment, and we'll continue to do so. We've recently, on the coiled tubing side, bought Wireline, I'll address that one first, and we continue to add equipment and add pump-down charge and just remain sold out. Every time we add them, we deploy them instantly. On the coiled tubing side, we've been rapidly expanding geographically. I mean, just a few years ago we were only in Texas, and since the acquisition of Casedhole and some new hires that was in the coiled tubing, we're in Pennsylvania, North Dakota, Louisiana, Oklahoma, Texas. And we're -- so we have opportunity to add there, and every time we add, we're deploying that equipment. And so we will continue to do that until we see a softness. The 1 thing that really helps that effort is when we're seeing others shut their coiled tubing operations down.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Is that to your -- the last point, is that as a function of the diameter they're using or is it just the service provider is not getting the kind of inquiries from customers or people consolidating vendors around, you guys are bigger providers. What's the driver behind guys shutting it down?

Joshua E. Comstock

I think -- well, one of them, one of the guys is -- one of the big 4s, they had their own set of circumstance. But I do think that the ones we're seeing now, it was not their primary service. They jumped into it when the market was good. The market from the diameter perspective was different. It has changed. The larger diameter extended reach takes a much more experienced skill set. The coiled tubing is a prominent business for us. It's one we've been in since 2000, and one that we do really well. And it's a skill set that when we get in to this larger pipe that really differentiates guys that know how do it from guys that just have the equipment. It's more than just buying equipment. And so I think that's -- the extended reach larger diameter has really pushed a lot of guys into making their decisions just to not trying to make the investment and compete.

Robin E. Shoemaker - Citigroup Inc, Research Division

Okay. And final one for me. What kind of capital should we expect you guys to put to work next year for Wireline and coiled tubing?

Randall C. McMullen

We're finalizing that right now. So I'm not going to give you a firm number. And obviously, we'll have that on the next call, but without question there will be capacity added.

Operator

[Operator Instructions] Our next question is a followup from the line of John Daniel.

John M. Daniel - Simmons & Company International, Research Division

Josh, just a big picture question here on international demand for coil and not necessarily as it applies directly to you guys. Which countries and markets are going to be the first movers in the adaptation of large diameter coil? And just a ballpark lag, if you will, how may units do you think are needed over the next couple of years?

Joshua E. Comstock

Well I'd rather not talk to that online. I mean, that's just -- in my opinion, if we know that and others don't, that's a competitive advantage.

John M. Daniel - Simmons & Company International, Research Division

Fair enough. Another one here, just today, CARBO announced a real good quarter, huge increase in ceramic volumes. Are you seeing any signs with your customers that they are shifting back to ceramic?

Joshua E. Comstock

Not hugely. But a few months ago, I was asked in a conference about that. And as well price comes down, just -- the same thing that happens to then when well price went up. When well price comes down, you will see that, in my opinion. I don't know how large a shift you'll see back to that, but you'll see that. I mean, customers like us [indiscernible] profits. It's all about cost. If they can keep -- if ceramic cost coupled with the pricing of well is low enough, then it makes sense for the E&P operator. You will see that shift. But not everyone will do it, but you'll see some do it, which is evidenced by the volumes you saw today.

John M. Daniel - Simmons & Company International, Research Division

Well then let me just wrap up with one here. And of course, I'm going to try to put you on the spot. And I understand that utilization is important. But if there's a flight to quality, as you alluded to earlier, and given that you guys are a quality provider, and assuming utilization raises, why shouldn't the higher quality providers attempt to nudge pricing higher with the customers?

Joshua E. Comstock

Well, I think, we will. Basically I just what you asked me, previously, in the first or second quarter, we think what would be the pricing strategy, and I don't think in the first or second quarter will be the opportunity to be nudging pricing higher. I think the opportunity will be after we get some of these lower quality providers out of the market, you're already starting to see them start to fall like Dominoes. As that happens -- but the bigger thing, it's not about nudging pricing. It's about correction and getting costs down across the board, costs -- operators costs and getting costs down so that the E&P operators want to continue to drill, expand their drilling programs and do more completion. If we can get them doing more completions and get the price point where utilization and effective utilization is such that we can generate a solid return, that would be a bigger win than just jumping price up on them every time there are times things get a little tight. [indiscernible]

John M. Daniel - Simmons & Company International, Research Division

I get that. But I think you would presumably agree that the returns right now are unsustainably low for [indiscernible] the frac industry, and you need to see some improvement, right?

Joshua E. Comstock

Yes. We definitely want to see improvement.

Operator

There are no further questions at this time. I'd now like to turn the call back over to Mr. Comstock for closing remarks.

Joshua E. Comstock

All right. We appreciate everybody who joined us for the call. I hope everyone has a happy holidays, and we'll talk to you all after the first of the year.

Operator

Ladies and gentlemen, this concludes the C&J Energy Services third quarter conference call. If you would like to listen to a replay of today's conference, please dial 1 (303) 590-3030 with the access code of 4644882. ACT would like to thank you for your participation, you may now disconnect.

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