C&J Energy Services Management Discusses Q1 2014 Results - Earnings Call Transcript

May. 1.14 | About: C&J Energy (CJES)

C&J Energy Services (NYSE:CJES)

Q1 2014 Earnings Call

May 01, 2014 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

Donald Jeffrey Gawick - Chief Executive Officer and President

Analysts

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

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

John David Anderson - JP Morgan Chase & Co, Research Division

Brad Handler - Jefferies LLC, Research Division

Robin E. Shoemaker - Citigroup Inc, Research Division

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

Michael R. Marino - Stephens Inc., Research Division

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

Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the C&J Energy Services First Quarter Earnings Call. [Operator Instructions] This conference is being recorded today, May 1, 2014.

I would now like to turn the conference over to Lisa Elliott with Dennard Lascar. Please go ahead.

Lisa Elliott

Thank you, operator, and good morning, everyone. We apologize for the technical problems. We're pleased to have you joining us on the call to discuss C&J Energy's first quarter results for 2014.

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 information provided in the news release and in this conference call speaks to the company's expectations or predictions of the 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 currently available information, these forward-looking statements are subject to certain risks and uncertainties, some of which are beyond the company's control and 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 in these statements.

I 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 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 C&J's website and also by telephone replay. You can find the replay information for both in yesterday's news release. As a reminder, information reported on this call speaks only as of today, May 1, 2014, so any time-sensitive information may no longer be accurate at the time of the replay.

And with that, I'll turn the call over to Josh Comstock.

Joshua E. Comstock

Thank you, Lisa. Good morning, everyone. We appreciate you joining us for our earnings conference call for the first quarter of 2014. With me today are Randy McMullen, our President and Chief Financial Officer; and Don Gawick, our Chief Operating Officer. I will review our first quarter achievements, after which, Randy will discuss financial results in more detail.

For Q1, we posted a total revenue of $316.5 million, which was a record for C&J Energy Services and a 19% increase for the fourth quarter of 2013. These outstanding results were driven by higher utilization across our service lines as we leverage the investments we made over the last several quarters, and responded to the anticipated increase in demand.

We are steadily gaining market share in each of our service lines with targeted sales and marketing efforts, deployment of additional capacity and are maintaining our operating strategy of delivering exceptional customer service, superior execution and best-in-class efficiency.

Taking a look at our individual service lines. Our hydraulic fracturing operation experienced the greatest improvement, with a 27% sequential increase in revenues generated without asset additions during the quarter. We began the year strong, with record revenue and utilization levels in January, and have carried that momentum into the second quarter. As we said in our entire calls over the course of the last year, we managed our transition into the spot market as our legacy contracts expire, with the last one rolling off in February 2014.

In response to our increasing spot market exposure, we bolstered our sales and marketing efforts and took advantage of the opportunity to introduce our best-in-class hydraulic fracturing services to new customers. We also leveraged our strong relationships with existing customers to generate additional high-volume work.

Confident in our strategy and future prospects, we invested in equipment and made sure we were well-positioned to take advantage of anticipated market improvements.

As a result of our efforts, we ended the new year with strong demand from the expanding customer base, who were able to successfully capitalize on the increasing activity. Additionally, as a testament to our operational excellence, following the scheduled expiration of our last remaining legacy contract in February, that customer awarded us continuing work in the Permian at similar utilization rates as before.

Based on current activity levels and visibility from our customers, and barring any negative unforeseen changes in current conditions, we believe that we will be able to maintain solid utilization across our hydraulic fracturing operations throughout 2014. As a result, we intend to continue adding capacity as we push to further grow this business and improve revenue.

We recently deployed an additional 20,000 hydraulic horsepower, which we ordered early in the fourth quarter of 2013, after seeing an increasing demand and filling the industry circuit turn up. Confident in the strength of our company and in the anticipation of market improvement, we're on track to add 40,000 more hydraulic horsepower in July.

Additionally, in response to strong demand for new and existing customers, and believing that activities going to continue to increase, we recently committed to manufacture another 40,000 hydraulic horsepower for deployment by the fourth quarter of 2014. We're manufacturing most of this equipment in-house.

As we said before, one of the many benefits about owning our own equipment manufacturers is that we're able to quickly respond to changes in market conditions. And as we see any indication of pullback in activity, we have the flexibility to immediately cease manufacturing and use any excess components in our existing fleet through our continued maintenance efforts.

Our coiled tubing and wireline operations also produced strong results, with sequential improvements in revenue, even with the weather conditions that impacted operations in Mid-Con, Bakken and Marcellus. With respect to coiled tubing, we increased revenue 7% quarter-over-quarter. We benefited from significantly higher utilization across our asset base due to the increasing depletion activities following the new year.

Demand for our extended reach, large diameter coiled tubing units remained strong across our operating areas, and we intend to increase our coiled tubing capacity over the course of 2014. Our coiled tubing services are well established in the most active basins in the U.S., and we're committed to further grow this business in terms of capacity, geographic reach and market share.

In wireline, we generated a 12% sequential increase in revenue by taking market share, concentrating on high-utilization customers and securing more 24-hour horizontal work. To better capitalize on increasing demand for these services, we intend to bring online additional wireline and pumpdown capacity throughout the year. We are now the leading wireline provider in most major U.S. shale basins, and we are confident that we will continue to increase market share in these regions due to our superior service and performance.

During the first quarter, we continued to execute our long-term strategy and advanced our strategic initiatives, including service line diversification, vertical integration, technological advancement and international expansion. A few highlights in that regard, as previously announced during 2013, we completed strategic acquisitions of 2 private companies that complement and enhance our existing service lines, and our integration efforts are going well. We are pleased to report that all our successful infill testing drilling wells in West Texas, our drilling motors, are now available for lease, and we are in the early stages of development with respect to related downhole tools and enhanced proprietary directional drilling technology.

During the first quarter, we also continued to invest in the infrastructure necessary to support our projected international expansion. That was coiled tubing equipment, crews and logistics on the ground in Saudi Arabia ready to service our first international contract, with operations scheduled to begin in late May.

As we previously discussed, the initial scope of our work under this provisional contract requires a coiled tubing unit and associated equipment. Given the costs associated with the salvaging operations overseas, we are not expecting this initial project to be a material contributor to our earnings in the near term. However, we believe this is a valuable opportunity to introduce our superior customer service, efficiency and execution for the region. We're optimistic that our efforts will lead over time, so long-term relationship and additional revenue opportunities across multiple services with this key customer can accelerate our expansion plans with our other potential customers in the Middle East.

I will now turn the call over to Randy to run through our first quarter results in more detail.

Randall C. McMullen

Thanks, Josh. Good morning, everyone. As Josh mentioned, we had record company revenue of $316.5 million for the first quarter of 2014, a 19% increase compared to $265.4 million for the fourth quarter of 2013. First quarter adjusted EBITDA of $43 million rose 18% compared to $36.5 million for the prior quarter, and adjusted EBITDA margin decreased slightly to 13.6% in the first quarter compared to 13.8% in the fourth quarter.

Net income increased 59% to $11.6 million or $0.21 of earnings per diluted share compared to net income of $7.3 million or $0.13 per diluted share for the fourth quarter of 2013.

Our improved results were primarily driven by stronger utilization across our operations, as we attracted new customers and expanded market share. The increases in first quarter adjusted EBITDA and net income were partially offset by greater input costs associated with the larger volumes of certain proppants and other consumables used in our hydraulic fracturing services. These additional input costs, as well as increased cost of approximately $8.1 million associated with our ongoing investments in our strategic initiatives, negatively impacted adjusted EBITDA margin.

In the first quarter of 2014, revenue from our hydraulic fracturing operations increased 27% sequentially to $186.9 million, accounting for 59% of our overall first quarter revenue. We completed 2,225 fracturing stages during the first quarter of 2014 compared to 1,408 fracturing stages for the previous quarter. The increase in revenue was primarily driven by higher utilization across our asset base without an increase in capacity, as we attracted new customers and expanded market share. An increase in sand volumes due to a job mix requiring larger volumes of sand also grew revenue.

Due to strong efforts by our operations and procurement teams, we did not experience any job interruptions or delays as a result of the weather or logistics around sand. As I mentioned, however, margins for our hydraulic fracturing services were negatively impacted by greater input costs.

Stage count for the first quarter increased due to higher utilization, coupled with an overall job mix that was weighted towards a higher number of smaller, more intense stages. As we have previously discussed, because the number of fracturing stages performed at any given period will fluctuate based on the job mix during that time, this metric is not representative of utilization, pricing for our services or our financial and/or operational performance. Accordingly, and as stated in our earnings release, we do not intend to provide stage comp going forward.

Our strategy for improving profitability for this service line remains focused on driving top line growth by generating high utilization, adding capacity and expanding market share to the growth of our customer base. As part of this effort, we will continue to target customers who focus on horizontal drilling efficiency, service-intensive 24-hour operations and multi-well pad drilling. We believe that our experience and reputation will enable us to capitalize on these trends and that we are well-positioned to benefit from the overall strengthening in demand.

Shifting to our coiled tubing operations. Revenue increased 7% quarter-over-quarter to $40 million, making up 13% of our total revenue for the first quarter. We've completed 1,201 coiled tubing jobs during the first quarter of 2014 compared to 1,055 coiled tubing jobs completed for the fourth quarter of 2013. Coiled tubing revenue improved due to high activity levels throughout the first quarter, and the addition of 3 coiled tubing units was met with strong demand.

Our wireline operations increased revenue 12% sequentially to $83.1 million, contributing 26% of our overall first quarter revenue. This service line has consistently generated tremendous results, with revenues steadily increasing their line with the investments we have made in expanding this business.

Third-party revenue from our manufacturing business was flat at $2.2 million for the first quarter. We utilized our manufacturing capabilities to capture cost savings from intercompany purchases, including equipment manufacturing, repair and refurbishment. Through this division, we were also able to integrate key innovations from our research and technology division to enhance and create efficiencies in the equipment used by our core service lines.

First quarter gross margin decreased to approximately 27.2%, representing a decline of about 160 basis points from the fourth quarter of 2013. The decline in gross margins primarily resulted from greater cost for certain proppants and other consumables used in our hydraulic fracturing operations, as well as the investments we are making in our strategic initiatives.

SG&A and R&D costs increased approximately 9% quarter-over-quarter to $40.4 million and $2.8 million, respectively. The increases in SG&A and R&D were due to higher costs associated with our strategic initiatives, including service line diversification, vertical integration, research and technology capabilities and international expansion.

Inclusive of both SG&A and R&D, these initiatives contributed approximately $8.1 million of additional cost for the first quarter of 2014 compared to $7 million of additional cost for the fourth quarter of 2013.

As we continue to execute our long-term growth strategy and advance our strategic initiatives, we anticipate that our SG&A and R&D costs will total between $45 million and $47 million for the second quarter of 2014. Even though the spending associated with our strategic growth initiatives have impacted margins and are not expected to generate substantial cost savings or revenue in 2014, we are maintaining a long-term perspective: We believe these investments will increase our ability to generate higher returns and drive shareholder value over the long term.

Now let's move on to the balance sheet. At the end of the first quarter, we had a cash balance of approximately $17 million or $163 million in borrowings under our credit facility and $37.7 million in long-term capital lease obligations. Capital lease obligations increased during the quarter, as we moved into our new corporate headquarters and incurred a $25.6 million capital lease obligation in connection with the commencement of this lease.

Looking at our cash flow statement. We generated $51.4 million of cash from operations during the first quarter of 2014, an increase from $18.4 million for the fourth quarter. The significant increase is primarily a result of improvement to our DSO, as well as the decline in inventory, driven by higher activity levels over the quarter.

Capital expenditures were $57.4 million during the first quarter of 2014, a $21.9 million of depreciation and amortization expense. Our primary use of CapEx during the first quarter was to expand our operations and includes construction cost for new equipment for our service lines. Our remaining 2014 capital expenditures are expected to range from $200 million to $220 million, a majority of which will be spread across our services.

Corresponding with our increasing capital spend, D&A expense is also expected to continue to increase. We expect these trends to result in depreciation and amortization expense between $24 million to $26 million for the second quarter.

Our effective tax rate for the first quarter came in at approximately 40%, as expected. We currently anticipate our effective tax rate to remain consistent with first quarter levels for the remainder of 2014. Our balance sheet has remained strong and we have continued to generate robust cash flow, which we'll consistently reinvest in the growth of our business as strategic opportunities have arisen. We will continue to add capacity to our core service lines as we focus on growing our business and increasing our market share, due to the expansion of our customer base and geographic footprint.

We will also continue to explore other available opportunities to enhance and diversify our service offerings, including acquisitions of technologies, assets and businesses that represent a good operational, strategic and/or synergistic fit with our existing service offerings. Our free cash flow and strong balance sheet allows us to be flexible with our approach for organic growth and acquisition opportunities.

We believe that our return on capital continues to be amongst the highest in the industry, and we are well-positioned to capitalize on available opportunities as we continue to execute our long-term growth strategy.

I will now turn the call back to Josh for closing remarks.

Joshua E. Comstock

Thanks, Randy. In closing, we are very pleased with the current activity levels and excited about the opportunities that lie ahead. We delivered first quarter results in line with our expectations, and we maintain our previously announced outlook for steadily growing revenue throughout the year. As a result of the strategic investments we made in 2013, we entered 2014 poised and ready to take advantage of the many opportunities we see as we capitalize on market improvements. We have and will do just that.

Looking forward, we are confident in our strategy, and we will continue to focus on growing market share to increase utilization, enhance scale and further diversification of services, customer base and geographic reach.

So at this point, operator, we'd like to open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from the line of Byron Pope with Tudor, Pickering, Holt.

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

I'm struck by the strong Q1 stimulation revenue that suggests that you guys are doing a lot of 24-hour work and -- but also your existing asset base, as you mentioned. So as we step through the next couple of few quarters, how do you think about further opportunities to increase that type of work on your existing asset base? I mean, clearly, you guys have telegraphed the incremental capacity, but I'm just wondering about your existing asset base, further room to improve there.

Joshua E. Comstock

Yes. Well, if I heard you right, you said you were struck by that. Is that correct? The performance?

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

In a good way.

Joshua E. Comstock

Yes. No, I understand. I understand. I mean, we've been very clear that over the past several quarters, right, that the type of work we target, and we have always targeted, while we were contracted and then once we entered the spot market is 24-hour work. And all of our crews is set for 24-hour work, and that's how the crews that are coming -- the additional horsepower that's coming is set up. And the customers we target are 24-hour customers. And we target those customers that have their asset base, from a drilling perspective and completion perspective, that can think if we can utilize that pretty consistently month-over-month, doing 24-hour work. And so we fully expect that trend to continue. It has been that -- that has been the case for us since the inception of our frac division, and it has not changed. And we do not -- with the exception of a little bit of vertical work that happens early on in the Permian, we do not expect that trend to discontinue at any rate. We -- one important note about Q1 is the additional horsepower requirements that we are adding require additional labor. And we have staffed up on labor, and we're back in growth mode. And so we're staffing labor to add these additional fleets, which will continue throughout the year. So that's not going to change. But point being is, we're constantly running heavy on labor, training guys up to deploy new fleets. And so as in a growth mode, that continues with each fleet, we are staffing for 24-hour work, and we are targeting customers and have the customer demand for that work.

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

Okay. So based on hearing that, I mean, it's clearly safe to assume that the prior way you guys are guiding top line growth for the full year seems conservative at this point, just because there's nothing really transitory in the Q1 top line results for stimulation. Is that fair?

Joshua E. Comstock

Well, we said 15% to 20% 1st quarter -- I mean, for the year. On the first quarter call, we had 19% for the first quarter. I was asked on the last call if the majority of that would come in the second half of the year on that revenue growth and answered, "Yes, the majority would come in the second half of the year." At the time when that answer was given, we were seeing consistent weather disruptions, we were seeing logistical problems around sand and not understanding exactly when and how that would play out. Fortunately, we have an extremely talented logistical team and purchasing team. And for us, other than additional cost, we were able to cover all of our work and not miss work -- not miss jobs. And so they did a good job, and we ended up at 19% revenue increase as we add fleets. We could have envision that, with that type of increase, will continue. But we all know anything can happen in this market. What we are seeing today and the momentum we are seeing for second quarter, we don't expect the current trends to change in a downward direction.

Randall C. McMullen

Byron, it's Randy. One other thing I'd like to add is that given the continued backlog of work that we're building on the frac side, it's given us more and more of an ability to maximize the type of work that we're doing and really maximizing the efficiency in equipment. I wouldn't characterize the first quarter as perfect in that regard. So there's still upside to generate more with the existing asset base.

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

Okay. And one last quick question for me. I know this information is usually available in the 10-Q, but I'm just curious if you have it handy, if you could share the Q1 EBITDA margin for simulation and well services versus wireline services, because I would've thought that there may have been a little bit of a weather impact on wireline services. But just given the strong top line growth, I'm trying to think about the sequential movement in EBITDA margins for those 2 business segments or reporting segments.

Randall C. McMullen

Sure, Byron, I got it right here. For stimulation and well intervention, it was -- the EBITDA margin was 14.5%. The wireline was 29.8%.

Operator

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

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

Josh, in light of the -- again, you referenced the 15% to 20% on the last call. Fantastic top line growth this quarter. You've got strong backlog, so the visibility is good. I mean, are we inside the ballpark if we start thinking about, call it, 35% to maybe 40% revenue growth for '14 versus '13?

Joshua E. Comstock

I'm not going to make that call. I mean, I hope that that's the case, John. But I'm not going to make that call. I mean, I'll stick my neck out, but not that far up. I've been probably the most bullish of anyone. We started calling this turn in Q3 when others made a call in 1 quarter. We definitely took time and started filling -- we were filling the shift. I will say that it's extremely important for the market, and everyone understand that on the top line revenue growth, I mean, obviously, you've seen margin compression, and we said that's attributable to proppants and chemicals. And there were some additional costs associated with -- due to weather and logistics around the proppants that raised those costs. But in addition and outside -- just take normal operating conditions and say there wasn't weather, you would have still seen profit and chemical cost rise because what we have said in the past is beginning to play out, which is, as more prices fell, as completion services prices are falling and drilling costs have come down, we are seeing operators build that to more intense fracs. And so they are changing -- we're seeing chemical usage go up, proppant usage go up per stage, and that does drive the top line revenue number. And then in addition to that guide, we do have what we believe is an increase in utilization due to just market share growth, and we're seeing fewer and fewer companies pricing work. When we're bidding work, that bid to us has definitely shortened. I think that's due to a much higher attrition rate than folks have realized. It's happening. Our folks have admitted in the past, it's happening. And frankly, some of the guys, the smaller players, have not performed well enough, as pricing fell and pricing relatively flattened and we were all kind of in the same ballpark with regard to pricing. There's a few of us that outperformed the rest, and those are the guys you see performing financially. And so those are the guys that operationally are the performers and those are the guys that customers want. So within that -- in that regard, we think our utilization's increasing faster than the pace of any drilling increase or any industry demand increase. We are definitely seeing our utilization and our demand increase faster than what we're seeing, just as an industry demand increase. And that's market share. There's absolutely no doubt in my mind, that's what it is. And we see it in all of our services. And when others got coiled tubing and wireline part, we're adding units and taking market share. So that's a really long answer to your 35% to 40% growth. It's not -- look, in this market, it is definitely not impossible. It takes price increase to get there. It takes more equipment to get there. We are working on both. And the more equipment is a no-brainer, and we're generating the right returns to justify that equipment. We've been doing that since Q3. We've been adding equipment and ordering equipment in all lines. And we're going to continue to grow. And we think that all the strategic initiatives that we put in place over '13, when others were shrinking their businesses and laying off people, we were taking advantage of our performance and setting up our company for this type of turn. And it's, fortunately for us, played out like we believed it would. And in that regard, we're really poised to take advantage of it. And the thing that will enhance that more than anything is scale. And as we enhance our scale, which we intend to do, organically, through M&A or a combination of both, we will definitely see revenues increase substantially and hopefully, margin.

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

Okay. Well, I don't want to hog the line, so 2 quick ones. One is, Randy, if you -- your thoughts on the gross margins, can they get back to the 30% level, either in Q2 or Q3? And then, Josh, in light of the positive outlook from an activity standpoint, is it reasonable to assume that C&J, if things stay as they are, will add additional capacity in 2015? That's it for me. On the frac side.

Joshua E. Comstock

Yes, I'll go first on that. There is absolutely no doubt that we're going to add additional capacity and additional scale, whether it be organically or through M&A, that will happen, if market conditions stay where they are currently.

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

Got it. And then, Randy?

Randall C. McMullen

John, on the margins, we feel pretty confident that, from a gross margin perspective, we will see some improvement in the second quarter. I would not characterize that as materially and definitely would not say it's going to be around 30%. We definitely feel like we sort of have borne the brunt of the input costs and better balance our business and should see improvement going forward, but not at the rate that you're asking, and especially not with significant movements on pricing.

Operator

Our next question is from the line of David Anderson with JPMorgan.

John David Anderson - JP Morgan Chase & Co, Research Division

I guess a question, I guess -- a question for Randy, I guess. So if we look at revenue for horsepower and how this trended over the last couple of years, you broke through 200 horsepower this quarter, you bought them in the fourth quarter. I guess, if I look back to 2012, you averaged around 290 for the year. I was just wondering, on just utilization alone, do you think you can kind of bridge that gap and get halfway there by the end of the year on just utilization?

Randall C. McMullen

We expect it to improve, just consistent with what I mentioned earlier about our body of work and getting on more work. I mean, the complication that we have now is just the additional horsepower, the intensity of the jobs, more horsepower, push spread than we've historically had. So all of that sort of plays into dragging that metric down, as well as having -- you always have a certain percentage of your fleet down for maintenance. So that's a big difference in today's environment than what we were seeing in 2012. But to your point, yes, it did improve first quarter over fourth. And our expectation is, is that it will improve 2Q over 1Q.

Joshua E. Comstock

I would just like to add to that, the fact of the timing you're referring to, we were peak pricing contracted what we were working for customers and in a lot of cases, retrain the new when they were staying on one pad a month at a time or moving within the fuel. So short moves, repetition work, the work wasn't changing between well to well. And obviously, in the spot market, we do have a different mix and variety of work from day to day. That said, at the peak, pricing our hours per month on a full utilization fleet may average 2 to 220 hours a month and we have seen in some cases now with the efficiencies, over 300 hours. And so you can -- you don't have to get back to peak pricing if you get that revenue per horsepower number up. I don't know if we could get to the levels that it has been before, but it's not an impossible feat.

John David Anderson - JP Morgan Chase & Co, Research Division

No, Randy, I think you said more horsepower per spread there. How do you think about -- is that from the clients that are -- if they're asking you for more backup? What's driving that?

Randall C. McMullen

Well, I mean, it's around our focus on the continuation of the work and maintaining the level of service. It's around the maintenance. It's around the amount of prop that we're pumping in the largest stages that we're pumping. I mean, it's sort of a little bit of a combination of everything, but it's just sort of -- some of this equipment, as it's worked through the years and the intensity that been on it, it's just required a little bit more backup, not significant, but just a little bit more backup.

Joshua E. Comstock

The intensity of the wells, horsepower is the calculate -- horsepower needed is the calculation of rate times pressure divided by 40.8. And that's how you determine how much horsepower is needed to pump a frac job. And then you figure out regarding -- depending on the customer and depending on who the frac company is and how much maintenance they do, that's how you determine how much backup horsepower you need. And for us, that number has typically been about an additional 50% and it remains there. It's creeped up a little bit but as we've seen more prop and more gel, those pressures go up. It still pumps the same rate and so when we do that math, the required horsepower per fleet to do the well, just from a requirement standpoint, it's higher. And so then when you then multiply your 50% backup, that makes it higher. And so It makes [indiscernible] a little bit bigger.

John David Anderson - JP Morgan Chase & Co, Research Division

That makes sense. Two quick questions or one last question on the kind of pricing side. I'm just kind of curious, your fleets, you've all come up, the take-or-pays are all gone, you talked about that. I'm just wondering if you're seeing opportunities out there for pricing agreements. Is that starting to emerge out there? And if so, is that something you want to entertain or with this market starting to improve, like you're talking about, everything kind of keeps going accordingly. You saw the turn before you keep moving ahead. Do you just kind of stay on the spot here and then talk about that a little bit later?

Joshua E. Comstock

Yes. Well, I'll say that, yes, we're starting to see interest. I can tell you that especially around the smaller E&P companies that are concerned that they are not going to be able to get frac equipment or I would say the quality frac equipment that they have been enjoying over the past year at the price that they've been enjoying it. So we're definitely seeing some reach out, we actually, believe it or not, had a couple, now the word is and take-or-pay. Those are not anything we're interested in today at current rates. Now, that said, larger E&P customers have also reached out to us more around alliances and not around take-or-pay, but alliances and coming up with a price increase that's acceptable and locking into those price increases and doing a multi service deal and multiple years. And depending on the customer and the return that you can generate, that would be something that we would be interested in entertaining if the price increase is an acceptable amount. And we are definitely starting to see some turn on pricing and some availability, some pushing on pricing when we're sold out, where we push pricing and had a -- and it's been accepted. And so nothing material, nothing to beat your chest about yet, but when the customers are accepting now because they understand it, they want a quality service provider and they understand the market's turning.

Operator

The next question is from the line of Brad Handler with Jefferies.

Brad Handler - Jefferies LLC, Research Division

Following on the same line, I guess, I'm curious whether the pricing conversations have been more around recovery of the input costs, which as you -- I don't know if that's a function of cost pressure and input cost, you can clarify that for us, but also, you've highlighted that as a driving dynamic here for higher input cost. So I don't know if it's more structured around that or if it's an aggregate pricing conversation. Which is it, please?

Joshua E. Comstock

Yes, it's 2 separate conversations. As we have input costs, whether or not we get pricing on our services is a different conversation. As we have input cost pricing, we try and tend to go our customer and say, "Hey, we've had logistics go up or sand go up or tune cools [ph] go up and this is the proof. Here's the proof, here's our cost and we need some price to recoup that." And the quality customers out there, which is who we work for, are for the most part, understanding of that and will let you recover. The other price increase conversation is more around our services and what we're doing and it's a different conversation. And that conversation is, listen we're sold out, the calendar's full, we have 3-month visibility, we have extra backlog and we're customer A where we can generate this. We've been working for you for a year and we need to get our pricing up and when we do that, typically, our good customers [indiscernible] quality relationships with, understand that as well. I mean, you don't -- we're not going in there and demanding these price increases. It's a conversation and if there's pushback, we fill the pushback and we negotiate and we reach something that's acceptable for both of us. But all that said, I will tell you that there's definitely backlog, I think everyone has said that, our competition has said that. We have as much visibility today, I would say as far out as we had when we were contracted, as far as -- what I mean by that is, where we're going to -- what wells we're going to be on and what the calendar looks like. When we were contracted, obviously when we had take or pays or when we're locked in for a couple of years, and so we don't have that financial visibility. But from an operational perspective, we know 60, 90 days out and sometimes more, what the calendar looks like and have well known [ph] the locations for the equipment to go to, which is much different than it was 9 months ago in the spot market.

Brad Handler - Jefferies LLC, Research Division

Right. Maybe a different, unrelated follow-up. At times, you've spoken about initiatives, which relate to efficiencies in the fields, presumably, some initiatives related to extending field life in between maintenance work or limiting maintenance work as well. I guess I'm curious whether or not that 50% redundancy figure that you just cited, to what degree is it in your sights to try to reduce that number? Is that something feasible to do?

Joshua E. Comstock

That's not the number we're trying to reduce. The number we're -- what we're trying to do is increase the hourly number, which is the number I gave you, right, so the pumping hour number. And as I said, late 2011, early 2012, pumping out a zone of 24-hour fleet, 7 days a week, working 28 days a month, you may get $200 a month on that fleet. With pumping hours, working in the same field, we have now been able to get those hours at times above $360, which shows you the efficiencies that have been gained around equipment life and operational strategy. I would argue that there's not many others out there that can get those as easy as those types of hours, pumping hours on the fleet. We don't have average out across all of our fleets by any means, but that's just due to the customer base. I'm talking about full utilization.

Operator

Our next question is from the line of Robin Shoemaker with Citi.

Robin E. Shoemaker - Citigroup Inc, Research Division

I wanted to ask a little more about this sand procurement issue that arose in the quarter. Are you basically saying here that you didn't fully recover the cost of procuring sand and/or chemicals for your customers in the quarter?

Joshua E. Comstock

What we're saying is the sand and chemical costs increased per well, not per unit of sand or per unit the chemical, right? That is per well because there's more sand and -- per stage because there's more sand and more chemical used per stage, so it's a bigger portion of the stage and there's less margin on sand and chemicals than there are on services. That's the first part of it. The second part of it is during the quarter, which is no secret, everyone has discussed it and the weather interruptions, there were logistical problems with sand delivery around rail cars and getting the sand to the nearest trans-loading facilities that are closest to the wells. So that cost increased trucking cost, which is all tied into our sand cost, right? We classify it on sand cost. That trucking cost, in most cases, we were trucking sand from further away to make sure that we weren't missing a job. I know we've had some of our competitors that were shut down and not pumping because they couldn't get sand and fortunately for us, we didn't have that problem. That happens -- that trucking happens real-time. For example, if you're on a 3-stage zipper, you're pumping 6 million pounds of sand, it's 50,000 pounds of sand a truck, 2 trucks per 100,000 pounds. You do the math and figure out how many truckloads that is. And you only got about 1 million pounds of storage on location. So it's all in concert and choreographed and you have to make sure that you're timing it right and properly and so it's happening real-time or while you're pumping the job. And a lot of these cases, these are jobs that were scheduled and priced 2, 3 months prior to the time they're being pumped and their trucking costs are occurring right then and there and are larger than what was expected. And so those costs we're not able, in a lot of cases, to that be passed onto the customer because these jobs had already been priced. And what we have done since then, that wasn't an anomaly, what happened in the first quarter. But what we have done since then is, it's surely important to have real time data, which we've done a really good job in building out. But with that real-time data, we'll need to also be communicating that real-time data real time to the customer. And so since then, we've made sure that we try to -- if we see any of that again, we try to get it to the customer immediately, instead of after the job's pumped, trying to recover it. So, the short answer to your question is, yes, we have some costs that were not able to passed on because they incurred after the job was priced. So the job is priced before the cost.

Robin E. Shoemaker - Citigroup Inc, Research Division

Okay, that helps. Then, I was generally -- kind of big picture question. We were, once upon a time at 30% EBIT margins that you were generating, we're now in the equivalent margins are 6% to 7% and you're adding capacity, looks like about 100,000 hydraulic horsepower this year, which may actually be one of the largest -- maybe even more than Halliburton, I don't know, but -- so you clearly got a return on investment calculation here for adding horsepower. And clearly, it's not today's margins. But do you have -- I'm not sure if you actually want to share this, but in terms of the kind of run rate that we might expect, if we -- I understand your point that you get to more hours per frac-ing spread and that helps the margin in addition to pure pricing. But do you think you can recover much of that margin erosion since 2011?

Randall C. McMullen

Robin, it's Randy. We do expect improvement, obviously. What's going on along with the margin erosion, we've seen on the frac side at the same time, we have had this big push internally on these various initiatives that are also weighing on our margin. But when you look similarly at the performance on the frac side and some of the improvements that we expect, both the utilization and then more longer-term, pricing, yes, we absolutely have the viewpoint that these investments will generate higher returns, top of returns that dictate continuing to grow your business.

Operator

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

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

I was just hoping you could first clarify the attrition comment that you made earlier. Is that attrition of equipment or is that attrition of competitors that are maybe, closing up shop because they're not profitable?

Joshua E. Comstock

It's both, right. I mean, we've seen -- well, we've seen the latter part of your comment happen with some competitors. I would say 4 or 5, at least. But the attrition on the equipment is, I think, especially on the private side and then with the big guys, that they don't disclose who have a turn of the equipment and a lot of the -- one in particular, talks about their new equipment, new version of their frac. So that tells you there's a lot of old equipment out there. Anyway, I think that as margins have fallen and a lot of these cases, these companies are negative net income and negative operating margins in their pressure pumping business, they're not reinvesting in the maintenance. And we see it, our guys in the field see it. We hear from our customers about problems on jobs and so we think that there's quite a bit of equipment that's been cannibalized and then it's been parked, and it's probably a much higher, faster pace than what people realize and I don't think it was in a fast-pace in the beginning. I think it was -- someone said 10% attrition, that was probably a fair number but what has happened is that 10% has intensified and as the equipment has gotten older, it is continually increased. And I believe, this is just me personally, given just what we're seeing and what we're hearing, that, that number is much bigger than what people realize and things are beginning to become more imbalanced than they have been in the past several quarters.

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

And with that backdrop, it seems like you are feeling good enough to be adding capacity. Your peers are adding some capacity. Is there an aggregate level of capacity additions that would worry you?

Joshua E. Comstock

We're not looking at initially -- I mean, and I don't -- I mean, make sure this comes across because we pay attention to everything our peers do or we do not respond and plan our company and our operational moves around what our peers are doing, right? And I don't mean that in an arrogant way, I mean that in -- we are looking solely at our customer demand, listening to what our salespeople and our operational people are telling us and looking at our financial returns and we are using those metrics to drive our decisions around equipment and we have always done that, which is why at the end of Q3, we announced additional equipment when people thought we were crazy to do it. And we ended up doing it, getting a jumpstart on this turn up. And we were doing that because -- not because everyone else wasn't adding equipment or parking equipment, we were doing it because our operations team, our sales teams were telling us we have demand and we can deploy it and we can deploy it at decent pricing and a good return or adequate return. And so, that's how we look at it. I don't put much stock in the numbers, honestly, that people disclose because the one thing that never gets asked is how many blenders are you deploying, how many sand units are you deploying, how many manifolds are you deploying. Everyone always asks horsepower. The horsepower does not tell you anything. Horsepower is the number that is irrelevant. You can take one of the largest privates [ph] out there, they have a 1.6 million-horsepower, they disclosed 29 fleets that are working and they said they have 32 fleets, that's 50,000 in horsepower. C&J's 300,000 and say in 10 fleets, that's a 30,000 horsepower fleet. That's a huge difference. A fleet is a job and it takes 2 blenders to do a job and so the real answer -- the real question that people should be answering is, hey, how many blenders are you to deploying with that horsepower. Because if someone puts out a 200,000 horsepower number and they're only deploying 2 blenders, they're only deploying one fleet, unless that horsepower was either back up or fill problems that they've had through attrition. So you don't know what's incremental and you don't know what's additional. I can tell you -- I mean or what -- just to back up their equipment that's been parked or cannibalized or they've lost through attrition. Either way, the argument that it's new horsepower coming into to the market and it's workable fleet, is a fair argument, right? We're deploying horsepower that we have demand for and we don't think that, that demand is going to change with regard to someone else adding horsepower.

Operator

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

Michael R. Marino - Stephens Inc., Research Division

Josh, where is the new equipment headed in terms of basin?

Joshua E. Comstock

I'll let Don address it.

Donald Jeffrey Gawick

Yes. Depending on the service line, I think we're obviously focusing a lot of our discussions, say, on frac. And I will tell you the frac additions are going principally to West Texas and South Texas.

Michael R. Marino - Stephens Inc., Research Division

Okay. And the, I guess, a lot of the commentary within the industry has been around the tightness in the Permian. Are you guys seeing similar tightness developing in the Eagle Ford and maybe, should we stop thinking about kind of the pumping tightness as isolated to the Permian and more broad-based. I'd be curious to hear your kind of thoughts on that.

Donald Jeffrey Gawick

By tightness, you're referring to availability of equipment and people?

Michael R. Marino - Stephens Inc., Research Division

Correct.

Donald Jeffrey Gawick

Yes. It's certainly the case in both the Permian and the Eagle Ford. It's an area that it is difficult to have people come in and start up a fleet or add to what they're doing. We've had tremendous success though, in being able to both move fleets in and get the people that we need. As Josh mentioned, we do rely heavily on the labor side at a time like this because we're obviously pre-hiring and pre-training people. Our folks in the field have done a great job with staying ahead of that curve. And again, as Josh has mentioned, the demand that we're seeing in both of those areas for our equipment right now is very strong. We have a number of new customers on an ongoing basis, I would say, asking us to come and perform more work for them. So we're seeing the number of people we work for expand quite dramatically and we've been able to address the needs that we've got on the people side. It's not easy to do it, but our guys have made very great, very good progress there.

Joshua E. Comstock

And I would just add [indiscernible] so you're aware, not only are we seeing tightness in Eagle Ford and obviously, Permian is the tightest but we are seeing increased demand out of Eagle Ford, especially more around the pad drilling, they're becoming very advanced in the Eagle Ford around pad drilling. But we're initially seeing demand out of Bakken and the Northeast and are constantly having customers requesting that we come up there with the frac. We have a big coal presence up there and an extremely large wireline presence up there and we will deploy frac up there. But as we've been able -- as we've gotten these fleets in, the demand in our existing area has continued to rise and so it's not made sense to jump up into a new area with the fleet, when we have demand right in the backyard.

Michael R. Marino - Stephens Inc., Research Division

If I could squeeze one more in on the pricing side. I guess, all the conversations you're having today about cost recovery and things like that. Randy, at what point does these pricing gains show up in the results? Is it a Q3 event, you think or Q4?

Randall C. McMullen

From a materiality perspective, as far as an increase from where we are today, I would say the likelihood is it shows up more in Q3. Hopefully, we'll see some of that in Q2, but we're sort of in the beginning stages of both pushing pricing, as well as on the input recovery side. But I would say our expectation is we'll have a full quarter benefit to Q3 of that, whereas it may be a bit partial on Q2.

Joshua E. Comstock

So one more to add into that is the one thing that we have to do and we've done a very good job so far but as this demand grows and as we add fleets, we got to keep sand and chemical pricing in check. We control the chemical side of it, through our chemical business. Sand is the one thing that we can't control the pricing on, other than do some contracts that we have, but high demand is definitely increasing on sand, as well as the entire industry. And so, that could be an ever moving target throughout the year and another moving obstruction with your customer about recovering increased costs on the profit side. So we're definitely doing what we can to keep those under control. We've done a good job so far but you can have a price increase that is significant and then instantly have a potential of a profit increase afterwards and you're back in front of your customers trying to recover that. And so, from a materiality standpoint, as Randy said, if we can keep our costs in check, Q3, I think on materiality, right, would be the point of infraction where you'd see it.

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

Maybe some expectations for the number of coiled tubing units and wireline units you guys expect to take delivery of this year and what kind of schedule should we expect on those deliveries?

Randall C. McMullen

Brandon, it's Randy McMullen. On the coal side, we've got another 6 or 7 units that will be delivered over the course of the year and that'll be fairly evenly spread. So it's probably 2 or 4 of them heading in the fourth quarter and the rest in the third. And then on the wireline and pressure pumping side, we added several units during the first quarter and have continued to add throughout the year. I think from going back to January 1, we added 9 wireline trucks and 8 additional pressure pumping units. But that's throughout the year. But what we continue to evaluate, the lead time on those items, unlike coal, is very short. So as we continue to see opportunities for growth and expansion, we're looking at pulling the trigger on more equipment.

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

And then a pricing and a nice [ph] kind of a cost question in coil in particular. Are the dynamics somewhat similar to what you're seeing on the frac side or the particular basins which you're starting to get tied into the utilization or shorter lead times on equipment? Is it making it any easier for people to keep price from going up?

Joshua E. Comstock

I mean, on the pricing on coal has remained relatively flat and we're not seeing, obviously, pricing. Pricing is fairly decent there and -- for us, anyway. We're generating a good returns, we're not seeing -- we're not going in and asking for price increases on coal.

Randall C. McMullen

Brandon, one clarification that maybe I wasn't clear on. Coil tubing is the one equipment out there that has the longest lead time.

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

Okay, yes. That's why I thought, it didn't make -- yes, it didn't make sense. Okay, got you. Okay. And with -- any I don't know, costs or weather-related issues that you guys saw in coil or wireline in the first quarter. It didn't seem like it from your comments, so I want to make sure I separated the business segments in terms of any issues you guys saw. It didn't seem like it but I want to make sure.

Randall C. McMullen

No cost issues on either of those. In the middle of some weather disruptions is obviously both in the Bakken and in the Marcellus. But I can say that we exited the quarter at very short run rates for the lead service line.

Operator

At this time, there are no further questions in queue. I'd like to turn the call back over for closing remarks.

Joshua E. Comstock

We appreciate you all joining us today. Sorry for the snafu at the beginning of the call but hopefully, we've made it up by running over a little bit for everybody to get their questions in. We look forward to talking to you all next quarter. Thank you.

Operator

Ladies and gentlemen, this does conclude our conference for today. If you'd like to listen to a replay of today's conference, please dial (303) 590-3030 and enter the access code 4678936. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!