C&J Energy Services' (CJES) CEO Donald Gawick on Q2 2014 Results - Earnings Call Transcript

Jul.31.14 | About: C&J Energy (CJES)

C&J Energy Services (NYSE:CJES)

Q2 2014 Earnings Call

July 31, 2014 10:00 am ET

Executives

Danielle Foley -

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

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

Brad Handler - Jefferies LLC, Research Division

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

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

Benjamin Swomley - Morgan Stanley, Research Division

Operator

Good morning, and welcome to the Second Quarter 2014 C&J Energy Services Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference call is being recorded, and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. Thank you.

I would now like to turn the call over to Danielle Foley, Associate General Counsel. Please go ahead.

Danielle Foley

Good morning, everyone, and thank you for joining us on this call to discuss C&J Energy Services second 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 the news release 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 on this conference call, that speak to the company's expectations or predictions of the future, are considered forward-looking statements intended to be covered by the Safe Harbor provision under the Federal Securities Laws. 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 in or implied by these statements.

I refer you to C&J's disclosures regarding risk factors and forward-looking statements in its filings with the SEC for a discussion of the known material factors that can cause our actual results to differ materially from those indicated or implied by such 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.

As a reminder, today's call is being webcast live and a replay will be available at C&J's website. Please note that the information relayed on this call speaks only as of today, July 31, 2014, so any time-sensitive information may no longer be accurate at the time of replay.

Finally, as recently announced, we have entered into an agreement to combine with Completion and Production Services businesses of Nabors' industry. During our prepared remarks, we will comment on the proposed combinations. Please note that our communication today does not constitute an offer to sell or the solicitation of an offer to buy any securities, or a solicitation of any vote or approval. We and the subsidiary of Nabors will file a joint proxy statement describing the proposed combination with the SEC, and mailed to C&J stockholders following clearance by the SEC.

With that, I'd like to turn the call over to Josh Comstock, Founder, CEO and Chairman of C&J Energy Services.

Joshua E. Comstock

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

The second quarter was a tremendous quarter for C&J. We announced a transformative deal that will immediately and significantly accelerate our long-term growth strategy. We completed an acquisition that introduced our company to the West Coast, and we accomplished all of this whilst continuing to deliver strong growth in our core businesses.

I will discuss our strategic acquisitions more in a moment. First, I'm proud to announce that during the second quarter we produced record revenue of $367.9 million, a 16% increase over our prior quarter, in the first quarter of 2014. Adjusted EBITDA and adjusted net income, excluding costs related to our second quarter transactions also increased significantly over the prior quarter. These improvements were primarily driven by high utilization across our core service lines, as we built our momentum from earlier in the year.

We successfully capitalized on the upswing and completion activity and trends towards greater service intensity, gaining market share as we deployed new equipment to meet existing demand, and expanded our customer base through targeted sales efforts. Our hydraulic fracturing operations led our growth with a 19% sequential increase in our revenue. Primarily due to higher activity levels, coupled with more service intensive work, which together, involved larger volumes to certain consumables. In late April, we added 20,000 new hydraulic horsepower to support increasing service intensity; and in July, we deployed an additional 40,000 hydraulic horsepower in line with rising customer demand.

Anticipating that completion activity and service intensity levels will continue to increase, we remain on track to deploy an incremental 40,000 horsepower later in the year. Most of this equipment is currently being constructed by our manufacturing business, which enables us to control delivery schedules, specifications and cost. Additionally, this will be the first of our equipment to include our proprietary control systems since acquiring this technology in 2013. We believe that the enhanced functionality and cost savings provided by satisfying one more of our needs in-house will yield strong returns on our investment as we move ahead.

Our wireline operations also delivers double-digit growth of 13% quarter-over-quarter, due to strong demand for our wireline and pumpdown services by high utilization customers. We have aggressively grown this business since acquiring Casehole Solutions in June of 2012, steadily expanding our customer base and geographic reach, while maintaining strong margins.

Based on the strength of this business and then the furtherance of our growth strategy, on May 30, we acquired Tiger Cased Hole Services, a leading provider of cased-hole wireline services on the West Coast. The addition of Tiger established our presence in a new market, and provides a solid platform with identical growth opportunities for all of our service lines. We intend to continue investing in the broadening of our wireline operations, and we're confident that we can leverage Tiger's experience and relationships with many of the top operators in the region to introduce our other services. We believe that we are now the leading cased-hole wireline provider in the U.S., and we are beginning to work at expanding further north to subsidiaries of Canada.

Other highlights from the second quarter include reaching another milestone in our overseas expansion efforts. We're now working in Saudi Arabia under our first international contract which we entered into earlier this year. Last quarter, we discussed that we had established equipment, crews and logistics on the ground, as we prepared to commence operations. In late June, we mobilized 2 locations for our customer, and in early July, we completed our first coiled tubing job. The customer chose to give us a complex and technically demanding first project, and we're proud to have performed flawlessly and received exceptional positive feedback from the customer.

I want to take a moment to extend my appreciation and gratitude to our stellar operational team for performing with such excellence and capability, demonstrating C&J's superior execution and efficiency, which has become synonymous with our brand. I also want to thank all of our employees, who worked tirelessly to make this opportunity possible and did so in record time. We believe these successes are a further testament to our ability to effectively compete against much larger competitors, and we're optimistic about the significant potential we see in this emerging market.

Finally, and most notably, as previously announced, during the second quarter, we entered into an agreement to acquire Nabors' Completion and Production Services, which we refer to as NCPS. We're extremely excited about this combination, which will create the fifth-largest completion production services provider in North America and vastly accelerate our long-term growth strategy.

Among the many key strategic benefits that we have highlighted, are the immediate increases in scale, geographic footprint and customer base, as well as enhanced opportunities for further growth. Our international expansion efforts will also benefit from the global alliance agreement we entered into with Nabors upon closing of this transaction. We are pleased to have the opportunity to partner with a preeminent global drilling company on an international project, which we believe will bolster our credibility and facilitate our entry into new markets.

We look forward to completing this transaction, which is expected to occur before the end of the year. Closing is subject to approval by our stockholders and customary closing conditions, including certain regulatory approvals. We have been granted an early termination of the HSR Antitrust waiting period, and we're working Nabors to file a joint proxy statement with the SEC as soon as possible. We appreciate the enthusiasm and support this proposed combination continues to receive from our employees, customers, vendors and investors.

In order to ensure a smooth transition, we've engaged a management consulting firm to work with our integration team to develop a comprehensive plan for combining our companies. We're eager to integrate NCPS' highly complementary services and experienced employee base into our operations, and we are ready to leverage the greater size, capability and resources of our combined companies to take advantage of the existing market improvement and maximize to projected synergies.

With that, I will now turn the call over to Randy to run through our second quarter results in more detail.

Randall C. McMullen

Thanks, Josh. Good morning, everyone. As Josh noted, we are pleased to post record revenue of $367.9 million for the second quarter of 2014, representing a 16% sequential increase. Excluding a $4.6 million after-tax charge or transaction cost, primarily related to the proposed NCPS transaction, adjusted net income increased 35%, to $15.7 million, representing $0.28 of earnings per diluted share, compared to net income of $11.6 million, or $0.21 for diluted share, for the first quarter of 2014. Second quarter adjusted EBITDA of $53 million was 23%, compared to $43 million for the prior quarter. And adjustment EBITDA margin increased to 14.4% in the second quarter, compared to 13.6% in the first quarter.

Our improved results were primarily driven by strong utilization in our hydraulic fracturing and wireline businesses as we successfully capitalized on the increasing completion activity in our primary operating areas attracting new customers and expanding market share. The improvements in second quarter adjusted EBITDA and adjusted net income were offset by additional cost of approximately $9.5 million, associated with ongoing investments in our strategic initiatives, as well as the general increase in support costs related to the company's growth.

In the second quarter of 2014, revenue from our hydraulic fracturing operations increased 19% sequentially, to $221.6 million, accounting for 60% of our overall second quarter revenue. The increase in revenue was the result of higher activity levels coupled with more service intensive work, which, together, involved larger volume of certain consumables. While these factors contributed to revenue, the greater input costs, together with increased logistics expenses, negatively impacted second quarter margins. Our strategy for improving profitability for our largest service line remains focused on driving top line growth by maximizing the utilization of our assets.

Integral to our strategy is targeting operators who focus on efficiency, service intensive 24-hour operations and multiwell pad drilling. We believe that our reputation for achieving optimal efficiency on the most complex and technically demanding jobs ideally positions us to take advantage of current market trends.

Shifting to our coiled tubing operations, revenue increased 8% quarter-over-quarter, to $43.1 million, making up 12% of our total revenue for the second quarter. These results were driven by continued demand for our high-capacity units. And we also gained traction in some of our new operating regions, which improved overall utilization. Our wireline operations grew revenues 13% sequentially, to $93.6 million, contributing to 25% of our overall second quarter revenue. This includes revenue of $20.8 million contributed by our pumpdown operations, which we have grown significantly over the last year with consistently strong margins.

Revenue increased primarily due to higher activity levels with added benefit from the deployment of new equipment, as well as contribution from Tiger Cased Holed Services, which we acquired on May 30. Our equipment manufacturing business contributed $3.4 million of revenue, representing an increase of $1.2 million over the prior quarter. Our in-house manufacturing capabilities enable us to minimize costs and control the specifications and delivery schedules of new equipment, which makes us able to timely respond to customer demand. This provides a strong competitive advantage, particularly in the current market. This segment is also key to our vertical integration efforts, providing us with the means to integrate our strategic initiatives to implement technological development and enhancements to capture additional cost savings. Second quarter gross margin was consistent with the first quarter, coming in at 27.2%. Based on current visibility, we do not expect gross margin to materially change in the near future.

SG&A cost increased approximate 8% quarter-over-quarter, to $43.5 million, excluding $7.4 million of transaction cost; and R&D expense increased to $3.6 million. The rise in SG&A and R&D primarily resulted from prior costs associated with supporting the company's growth, including a growing employee base and continued investments in our diversification, vertical integration and technology initiatives. Expenses related to our international expansion initiative, including SG&A, will also steadily increase as we build the construction needed to support operations in the Middle East and establish equipment, crews and logistics in Saudi Arabia to perform coiled tubing services under our first international contract.

Inclusive of both SG&A and R&D, these strategic initiatives contributed approximately $9.5 million of additional cost for the second quarter of 2014, compared to $8.1 million of additional cost for the first quarter. As we continue to execute our long-term growth strategy and advance our strategic initiatives, our SG&A and R&D cost will also continue to grow, although we believe that these investments will enhance our ability to generate higher returns and drive shareholder value over the long term. We anticipate that SG&A and R&D will range between $49 million to $50 million for the third quarter of 2014. In addition, we expect to incur significant costs associated with completing the NCPS transaction in integrating our combined companies.

Now let's move on to the balance sheet. At the end of the second quarter, we had a cash balance of approximately $19 million, $261 million in borrowings under our credit facility and $37 million in long-term capital lease obligations. Borrowings increased during the second quarter due to a number of factors, including increased capital expenditures for new equipment, funding the Tiger acquisition, higher working capital and NCPS transaction costs.

Looking at our cash flow statement, we generated $20 million of cash from operations during the second quarter of 2014, a decrease from $51 million for the first quarter. This change resulted from an increase in our receivables balance in line with higher activity over the quarter, as well as a supply build up in inventory. Capital expenditures totaled $86.3 million during the second quarter of 2014, with $25.4 million of depreciation and amortization expense.

Our second quarter CapEx primarily consisted of construction costs for new equipment. Capital expenditures, year-to-date, totaled $143.7 million, and our remaining 2014 capital expenditures are expected to range from $120 million to $140 million based on current equipment orders and further development of our strategic initiatives. Corresponding with our increasing capital spend, depreciation and amortization expense is also expected to continue to increase, coming in at approximately $29 million for the third quarter. We anticipate that some of our remaining 2014 capital expenditures may get pushed into next year if there are any delays in the equipment deliveries currently scheduled for the fourth quarter.

Looking at 2015, we currently expect that much of our capital expenditure plan will be directed to maintenance CapEx, given the significant asset base that we will acquire with NCPS. That said, it's worth noting that we continually monitor the market, but we will invest in new equipment to capitalize on growth opportunities and meet customer demand. As we have said before, one of the many benefits of our in-house manufacturing capabilities is the competitive advantage of being able to quickly respond to changes in market conditions and customer demand.

Additionally, by using equity to fund a significant portion of the consideration for the NCPS transaction, we will maintain a strong balance sheet and position the combined company to generate significant free cash flow. This will allow us to continue to reinvest in the growth of our business as strategic opportunities arise, with flexibility in our approach to grow both organically and through acquisitions. We will continue to explore compelling opportunities to enhance and diversify our service offerings.

Lastly, our effective tax rate for the second quarter came in at approximately 39%, consistent with the first quarter. We currently anticipate that our effective tax rate will remain at this level for the remainder of 2014. Upon combining with NCPS, C&J will be incorporated in Bermuda, which has the potential to lower our effective tax rate overtime.

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

Joshua E. Comstock

Thanks, Randy. In conclusion, we're proud of our operational and strategic achievements during the second quarter; and based on current activity levels and indications of demand, we're very optimistic about the future. Our fundamental strengths are well aligned with the current concentration on service intensive completion work, which is where we can best differentiate our services from our competitors. We believe in our reputation for providing superior execution and efficiency, on the most complex and technically demanding jobs, will continue to drive above-market demand for our services.

The combination with NCPS will further enhance our ability to capitalize our growing completion activity. NCPS will also add a fleet of industry-leading production services, which we believe positions us to benefit, as operators begin the rework mature basins. We look forward to welcoming all of our new employees from NCPS, and integrating our operations as soon as possible. In the meantime, we remain focused on maximizing equipment utilization, operating efficiently and expanding market share through our core businesses. We will also continue to make further investments in our strategic initiatives including service line diversification, vertical integration and technological advancement. We believe that these investments will yield significant returns and meaningful cost savings to us over the long term.

And the benefits provided are scalable. We're positioning the company to capture synergies, create value and maximize the expanded asset base that we will gain with NCPS. Our research and technology division continues to develop innovative, different-purpose solutions that will enhance our core service offerings, increase completion efficiencies, provide cost savings to our operations and add value to our customers. During the second quarter of 2014, we began field testing several new products, and several other new products are planned for field testing over the remainder of 2014. We think it's very impressive that the development process for most projects are taking less than 1 year from conception to field test, compared to as long as 4 to 6 years at many other service companies.

As Randy mentioned, our equipment manufacturing business provides the perfect platform for the efficient implementation of these technological developments and enhancements that reduce costs. We believe that the speed, with which we can develop and implement new technologies, provides us with a competitive advantage by, among other things, providing the flexibility that quickly respond to changes in customer requirements and industry trends; being able to control our equipment specifications and construction schedules; ensure continuing improvement and drive more efficient maintenance and repair, enables us to avoid undo disruptions, delays, for downtime in our core service lines. This business has provided significant value to C&J since our acquisition of Total Equipment in April 2011, including approximately $15.5 million of cash flow savings at a net acquisition cost of $27.2 million.

I would also like to congratulate the team at Total Equipment for a record third straight [ph] month in June, which greatly benefited our operations by allowing us to deploy equipment on time. In an effort to drive greater cost savings from intercompany purchase, we expanded the capabilities of our specialty chemicals business during the second quarter, and also focused on strategic third-party growth. Through this business, we have begun blending our [indiscernible], which should allow us to further reduce our costs going forward.

For the final point on our strategic initiatives, last quarter, we mentioned that we recently began manufacturing and leasing proprietary drilling motors, building on the technology that we acquired in April 2013. This acquisition was one of the first steps in our strategy to add the rest of drilling to our service offerings. And during the second quarter, we continued our multifaceted integrated approach to develop our international drilling capabilities. Our recently hired vice president of Directional Drilling Services has been working to assemble a team of expert personnel in highly specialized equipment, technology and processes. He will uphold C&J's reputation for superior service quality, efficiency and execution. We have already demonstrated this new service offering to a few customers. And as a result of the progress made to date, we expect to fully launch operations by the end of the year. Although not at the outset, our goal is that, over time, our Directional Drilling Services will be provided exclusively using our integrated downhole tools and directional drilling technology. We look forward to updating you about our progress on this front on future calls.

In closing, I want thank all of our employees for their hard work and dedication. We know that your efforts are behind all that we have accomplished, and we are thankful to have such an incredible group of talented and the passionate people committed to making C&J the best company in the industry. We have a lot of work ahead of us and I'm counting on each of you to help us achieve a successful and seamless integration with NCPS. As we combine our companies and plan our future course, it is important that we take full advantage of the significant synergy and execute on the new opportunities provided by greater scale of capabilities and resources. At all times, we must maintain our passion and remain focused on our priorities, which are providing the most efficient and effective solutions for our customers and creating value for our shareholders. I want to ask all of you for your support in ensuring that our operations continue to operate safely and with excellence.

At this point, operator, we'd like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of John Daniel of Simmons & Company.

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

Just a couple from me. First, how much of the revenue improvement in Q2 was thought to be 20,000 horsepower versus just better utilization of the existing asset base, right, [indiscernible] intensity and all that good stuff?

Randall C. McMullen

John, it's Randy. The improvement came from the utilization of the underlying equipment. As we discussed in the last call, we have the ability to continue to drive the performance within our fleets, and we saw a significant improvement in Q2 and Q1 on the top line basis, really, on a per-fleet basis as well.

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

So, we will be incorrect to think that, that 20,000 horsepower was a new fleet, more rotational or extended capacity? Is that right?

Joshua E. Comstock

Yes. That's right. I mean, that's right, John, that's a way to look at it. The 20,000, as we said before, as we entered the spot market, we need the ability to -- the flexibility to move from customer to customer, and the 20,000 gave us the ability to do that.

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

Okay. Just 2 more from me and I'll jump off. But any color, Randy, on the transaction price for Tiger, run rate on quarterly revenue, number of wireline units, just anything to be more descriptive on the business.

Randall C. McMullen

Sure. The purchase price was just over $33 million for the business. The business is doing just over $2 million -- I'm sorry, just over $6 million in total revenue.

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

Of EBITDA?

Randall C. McMullen

No of revenue.

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

Fixed [indiscernible]?

Randall C. McMullen

Yes. And...

Joshua E. Comstock

Quarterly.

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

Okay, good. All right.

Randall C. McMullen

And the general estimate of purchase price in '14, expectations for the business, is a little over 4x. And the amount of trucks, they currently got 16 wireline trucks.

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

Okay. And then just the last one for -- I'm sorry?

Randall C. McMullen

12 units -- 12 of those units are active on a full-time basis.

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

Okay. And last one from me is just -- given the growth in the wireline operation, as well as better utilization of frac fleet, and understanding you've got little logistics cost and all that. But why won't gross margins improve here in Q3?

Joshua E. Comstock

Well, there are several reasons. I mean, the first and foremost is that sand and chemicals have become an -- as the jobs have become more intensive, they've become a much bigger part for the overall frac to get, right? So there's lower margin on consumables than there are in the services. And then you couple that with the fact that frac is growing more rapidly than the other services and it's a much bigger ticket item, right? So frac becomes a larger percentage of revenue. And frac being a lower margin than coiled tubing and wireline, it's just math that the margins would -- as the lower margin business becomes a greater percentage of your overall revenues, margins would typically decrease so much. You've seen some pricing increasing in that lower margin business, okay? What we're seeing, margins stay flat.

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

Okay. So pricing -- there's no expected pricing improvement for you in Q3?

Joshua E. Comstock

Well, no, I don't think that's what we're saying. Yes, there's pricing improvement. What I said was frac is a lower margin business, right? And it's becoming a larger percentage of your overall revenues, so just -- with no pricing increasing, that would drive overall margin down. We're seeing overall margin is going to remain flat to slightly up. So that would indicate price increase in your lower margining business, which is the frac business.

Operator

Your next question comes from the line of Brad Handler of Jefferies.

Brad Handler - Jefferies LLC, Research Division

Maybe we'll stick with the same theme. But, Randy, if you would, could you give us the EBITDA margin per segment, as you have done traditionally?

Joshua E. Comstock

Sure, Brad. Stimulation and well intervention, 14.2%; wireline services, 33.3%; and equipment manufacturing, 21.6%. And worth noting, Brad, that the simulation and well intervention segment is where the strategic initiatives run through. So obviously, as those costs continue to rise, they're a negative drag on the margin for that particular segment.

Brad Handler - Jefferies LLC, Research Division

That was anticipating question number 2. Okay. I guess, I'm wondering if there's -- I think I'm -- I guess, I'm wondering if there's a way to kind of isolate for us how much sand and chemicals in these input costs rose sequentially? How much of that growth is a function of that? And I'm parsing out jobs here, and I recognize that's difficult. But I guess, what we're reaching for is some sense of this intuition that you're underlying margins of higher utilization should be higher, right? And I'm wondering if there is a way for you to kind of carve that out for us and show us that, that might be true?

Joshua E. Comstock

Well, quarter-over-quarter, as a percentage of sales, for the 2 items, that grew anywhere from 5% to 10%. And then, of course, with that comes lower margin pass-throughs. And then on top of that, as noted in the release and both in the script, we were combating in increases on the logistic side as well. That would have a negative effect on margins.

Brad Handler - Jefferies LLC, Research Division

The sand and chemicals grew 5% to 10% sequentially. Okay. Right...

Joshua E. Comstock

As a percentage of sales.

Brad Handler - Jefferies LLC, Research Division

Okay. Okay. Can you describe the logistics challenges a little bit more? And maybe, does that continue to be a problem? Or can you get that maybe, again, on a percentage of sales basis? Can that go down as you move your way through the second half of the year?

Randall C. McMullen

Yes, for the -- logistics problems mainly occur on the trucking side, what you had through 2013, you had a lot of guys that were trucking sand, they got out of sand trucking business due to pricing pressures, and started hauling other items. As sand volumes have increased significantly since beginning of the year, there's a need for more trucking. And trucking pricing it's just supply-demand. Trucking pricing has gone up. And so we think that we have started seeing additional capacity come in the market. On sand cost, we have that under control, we believe. And on the sand -- on the trucking and logistics side, I wouldn't say it is completely under control, but it is beating there rapidly, and we're growing our customers and passing those through -- those costs through, and are doing that successfully. So going forward, I would think that we would have those under control. And, Don, if you have anything else to add there.

Donald Jeffrey Gawick

Yes. Generally, the impact that we've seen, of course, it tends to be happening real time. And with the shortage of trucking, you put together your pricing quotations and the estimates for the customers, and so there tends to be a little bit of a lag there in terms of being able to pass that cost through to the clients. And that's something we aggressively did through Q2, continue to do in Q3. We have adjusted a number of the throughput costs with those items to our customers and continue to do that. We're at the point now where we've gotten on top of that. So the negative impact you saw in Q2 has essentially been -- largely mitigated, and that affect should really dissipate in the third quarter.

Operator

Your next question comes from the line of Marc Bianchi of Cowen and Company.

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

I'm just curious if you could first -- as I try to run the percentage margins you just provided with the revenue freight segment, I'm coming up with a little bit of a shortfall in kind of the total EBITDA. Is there something else there that I might be missing?

Randall C. McMullen

Well, I mean, the only item that we didn't give was for a segment was the corporate eliminations. But I covered all the numbers that are typically in the table that we supplied there.

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

Right. Okay. Is the corporate eliminations in the kind of $20 million range?

Randall C. McMullen

Yes, it's $24 million.

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

Okay, okay. Got it. Okay, great. And then just kind of thinking about the potential for the Nabors acquisition and how you're going to turn the business around. I was hoping you could just discuss a little bit more about some of the initiatives there. There's a lot of people that'll be coming into the merged entity. It's a -- there's a lot of scale there, and we've gotten a lot of questions about what are the specific initiatives in terms of bringing the frac business, in particular, up to C&J's standards.

Joshua E. Comstock

Well, I start by saying that I won't -- I don't think that, operationally, there's any operational issues with layovers. And so we say the C&J standard is more of a target of efficiency and a customer target. Customers that do 24-hour work on just about all of our fleets in -- are the most efficient customers. And so, one of the most attractive items when we looked at Nabors was actually no customer overlap. Internally, we looked at organic growth, at the same time when we looked at transactional growth and we have and had and have a need of additional equipment with customers that are the types of customers that C&J work for that we can't currently supply, and Nabors is not supplying those customers either. So we believe that -- we can look at Nabors' fleet and the areas where they're not working the most efficiently and generating the most efficient revenue with that equipment, that they can, we will adjust that and address that through targeting the right customers. That said, those are their areas of improvement around cost. You saw all of the strategic initiatives that we're spending all this money on that impact SG&A, which is $9.5 million this quarter -- or second quarter, that we spent a lot of capital around IT, around manufacturing and vertical integration to bring more support in-house. And when we -- as we spent that money, we've done so with the forethought that we were going to grow scale considerably. And so we expect that having the scale come to us essentially in a very short timeframe, will allow us to take advantage of these vertical integration efforts and all of the strategic initiatives and spending that we've been doing. And that's going to also help us reduce costs. So we'll have revenue improvement from targeting high-efficiency customers, and we'll have cost improvement through our vertical integration, through our IT and just through general consumables in the market.

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

Okay. I guess, the question about the vertical integration and how you're able to help there with the recent experience and having some challenges with the input costs. It begs the question, is there really something that you can bring to the table there with these costs...

Joshua E. Comstock

Yes. I mean, I guess the best answer is you guys will have to wait and see. But we believe there is, then we wouldn't have made the acquisition if we didn't think we could. And we did the diligence, did -- determined we could, and just I'm [indiscernible]. And without trying to sound offensive, we did the input costs have not been necessarily an issue for us, it's the logistics around the sand. As Don said, we think we've got that under control. And we believe that our cost, in most places, are below or at industry norms. So that was definitely not being above cost as maybe others are, and so we think there's room for improvement, definitely room for improvement on the cost front.

Operator

[Operator Instructions] Our next question comes from Brandon Dobell of William Blair.

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

Based on your comments about the additional 20,000 you guys added in April, how do we think about the 40,000 that you're going to add later this year, maybe a little bit more color on specific timing. I guess, early customer's feedback on your ability to put that to work pretty quickly. Just a little more color there?

Donald Jeffrey Gawick

Yes, so as we said, we added the 20,000 horsepower in April and that certainly helped us to improve our coverage and utilization with the customer base that we have. We brought 40,000 horsepower online early in July, and you'll see the results of that through much of the third quarter. And basically, that went right to work. Quite frankly, it's completely booked. So that constitutes some additional fleets working for new customers for us. We anticipate the additional 40,000 horsepower that we're talking about coming online for a good portion of the fourth quarter and again we have customers waiting for that capacity. It'll be put to work immediately standing with another fleet, essentially. And again, that work is essentially in West Texas where we, in fact, have a backlog right now. It's very significant, looking out over the next 3 or 4 months we've fully covered up. And we've got a number of customers that are very high utilization clients, they're hoping that we can continue to add capacity.

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

Okay. And then maybe, Randy, kind of keep going with you for a second. On the strategic initiative spending, the R&D, stuff like that. How do we think about the dollars of that spending looking out the next, I don't know, 4 to 6 quarters? Should it stay at this level? Do you see a trending down to a much more modest number looking out a year or so? And as a follow-on to that, you guys mentioned your own control systems as -- it sounded like an outgrowth of that effort, over the next year or so. Kind of how large of an impact, do you think, some of the things coming out of those initiatives can be, either on your cost structure or in terms of other revenue sources?

Randall C. McMullen

Well, to your first question, we do expect it to slightly increase in Q3. And then the estimate that you gave for SG&A, R&D, included that, and expect a slight increase in the fourth quarter as well. However, 2015 is where we expect to really start to see the benefit of the investment of these initiatives. And as we've said, that is the year that we expect to frankly overcome all of the costs with the spending around those initiatives, and that's either through the vertical integration. A plan and -- thus, reducing our costs on the various projects that we're working on with the existing service lines; or through new product deliveries. We'll start capturing more margin and overcome a lot of the investment that we've been experiencing throughout '14. And then, of course -- well, beyond that, '16 is where we'll really start to see the returns on the basis of what we gained, we'll really start to see margin expansion as it relates to the various initiatives that we're working on.

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

Okay. And then final one for me, given the recent start of the recent job in Saudi Arabia, what's the next step there? Is there opportunity? What's -- is there a qualification period that you guys now have to sit and wait for to figure out if there's more jobs to come here in Q3 and Q4? Or is there already some plans in place to keep you guys working there?

Joshua E. Comstock

We're already on our next job. So it's going forward and going forward well. And so they put us on a second job, almost immediately after finishing the first one. So we think that, going forward, there's going to be increasing demand and we're going to be able to deploy more equipment to that region.

Operator

Your next question comes from the line of John Daniel of Simmons & Company.

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

Randy, take the -- by the way, more modeling questions. But as we think of Q3 for top line frac, I mean, you've got the benefit of some pricing and then the 40,000 horsepower, do you -- because if you think about the revenue growth you had the last couple quarters, it's impressive; 27% growth in Q1, 19% growth in Q2, are we decelerating into the low teens in Q3, just given the other stuff is probably fully utilized?

Randall C. McMullen

Well, with the addition of the equipment and the continued...

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

Yes.

Randall C. McMullen

Right -- and the continued improvement and the underlying asset base, we expect to continue to grow the revenue sequentially, like consistent with what we've done Q2 over 1Q.

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

So somewhere between -- low 20% is achievable, I guess?

Joshua E. Comstock

A lot of that'll depend on the delivery of the second fleet that Don mentioned, and when that comes in. But just generally, as we discussed last call, there was ability to perform the revenue that was generating on a per-fleet basis in Q2, and we've done that. But we also still continue to feel confident there's even more ability to drive more out of these fleets by continuing to maximize the utilization and looking for the most potential to match up the profit dollars on a per-fleet basis.

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

And then given the visibility that you guys have today, which is clearly strong. Has there -- has anyone given you any indication of the Q4 seasonal slowdown at this point?

Joshua E. Comstock

No, we haven't. We haven't seen any of that. I mean, obviously, it's always occurred, it's just that, to what level, right? I mean, the year before last, it was significant. Last year, depending on the service line it was in somewhat impactful. In terms of service lines, obviously it wasn't. We're not expecting anything out of the norm that's significant, currently.

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

And then, Josh, given the wireline exposure in California and, soon, in workover and trucking express in California, have any of those customers, at this point, reached out to you guys about potential frac services in California? And does that have any interest to you?

Joshua E. Comstock

No, not only that. The customers haven't reached out. I mean, obviously we just, I mean, literally closed the small wireline acquisition at the end of May, right? So I mean, the short answer is no, they've not reached out about fracturing. The interest question is we have discussions internally about the basins in California. We think that, obviously, they are much slower moving, and technically there are a variety of reasons. But we think that, that market is a market that is less fragmented than the rest of the industry. And we think that's a market that frac-ing will eventually happen and could happen in big way. And we believe that having a strong presence there will be key to the success of [indiscernible] frac into that market, and we intend to do that.

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

Okay. And then just 2 last quick housekeeping ones. The G&A and R&D guidance, I just want to confirm, that does not include the transaction costs?

Randall C. McMullen

That's correct, John.

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

And that will be reflected as we model EBITDA margins for the -- sort of the frac segment?

Randall C. McMullen

Correct.

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

Okay. And then the job counts for coiled tubing, is that something that you guys will disclose in the Q? Or are you going to stay still in the...

Joshua E. Comstock

At this point, John, as we mentioned last quarter, we're not going to be disclosing the CT jobs on a go-forward basis.

Operator

Your next question comes from the line of Ben Swomley of Morgan Stanley.

Benjamin Swomley - Morgan Stanley, Research Division

I just wanted to dig in a little bit more, and I know that you mentioned on your consumables cost that you're not at a disadvantage, you're probably in line with market and it's not putting that much, it's more the logistics side. But I am wondering, given the increase within the Nabors acquisition, into 2015, you'll be a much larger buyer of some of these consumables. How do you think about the ability to, perhaps, generate even greater purchasing synergies? I mean, can you get volume discounts at this point? Or should we be thinking about that at all?

Joshua E. Comstock

Well. I mean, to say that being a larger entity, right, you're -- just like you said, you're buying volume. And we would expect, and we have seen in the past, that the bigger we get, the more pricing power we have or the more ability -- greater ability we have to push pricing down from our vendors, and because you are buying much more volume. We have great relationships with our sand vendors. And that -- sand is really the only item now that we don't own ourselves on the vertical integration side, especially on the frac side, and so that's the biggest ticket item that we can really drive outside costs down on. And so we believe that it's the number of sand vendors that we deal with. They're large companies. We have great relationships and so we think we could probably reduce those costs, and expect to further reduce those costs. [indiscernible], you're listening, so they're going there with me as we grow. And we would fully expect volume discounts going forward.

Benjamin Swomley - Morgan Stanley, Research Division

Now you mentioned that's the only the piece of sort of the vertical integration puzzle that you don't have right now. Does it, at some point, makes sense to vertically integrate that way?

Joshua E. Comstock

I wouldn't say never. What I've said in the past and what I continue to believe is we've just seen profit change, and the type of profits that are used in different basins change over the course for several years. And so that's a business that, I think, is better suited for companies that are in it for a long haul and have multiple outlets besides just one single frac company. And so there's no near-term plans to jump in the sand, but I'll never say never.

Benjamin Swomley - Morgan Stanley, Research Division

All right. That's helpful. Just one last quick one. Did you mention how much sort of more volume you're pumping on a percentage basis, maybe versus the beginning of the year or year-over-year?

Joshua E. Comstock

Yes, I mean...

Donald Jeffrey Gawick

Yes.

Joshua E. Comstock

I meant to say, sand volumes from December to now have almost doubled.

Operator

That concludes our question-and-answer period. I would now like to turn the call back over to Josh Comstock for closing remarks.

Joshua E. Comstock

All right. We appreciative everyone joining us for this quarter's call. Hopefully, by the end of next quarter or close to it, we'll be in a position to update everyone on the NCPS transaction, and we look forward to speaking soon. Thank you.

Operator

Thank you. That does conclude today's conference. This is the Second Quarter 2014 C&J Energy Services Earnings Conference Call. You may now disconnect your lines at this time and have a wonderful day.

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C&J Energy (NYSE:CJES): Q2 EPS of $0.28 beats by $0.02. Revenue of $367.9M (+37.8% Y/Y) beats by $29.36M.