Mammoth Energy Services' (TUSK) CEO Arty Straehla on Taylor Frac, Stingray Energy Services and Stingray Cementing Acquisitions (Transcript)

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Mammoth Energy Services, Inc. (NASDAQ:TUSK) Acquisition of Taylor Frac, Stingray Energy Services and Stingray Cementing March 21, 2017 11:00 AM ET

Executives

Don Crist - IR

Arty Straehla - CEO

Mark Layton - CFO

Analysts

John Daniel - Simmons & Company

Jason Wangler - Wunderlich

Daniel Burke - Johnson Rice

David Anderson - Barclays

William Thompson - Barclays

Operator

Good day ladies and gentlemen, and welcome to the Mammoth Energy Service Acquisition Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded and will be available for replay on Mammoth Energy Service website.

I would now like to introduce your host for today’s conference, Mr. Don Crist, Mammoth Energy Services Director of Investor Relation. Sir, you may begin.

Don Crist

Good morning and welcome to the Mammoth Energy Services energy conference call discussing the pending Acquisitions of Taylor Frac, Stingray Energy Services and Stingray Cementing. Joining me today call is Arty Straehla, our Chief Executive Officer, and Mark Layton, our CFO. Before I turn the call over to them, I would like to read our Safe Harbor Statement.

Some of our comments today may include forward-looking statements, reflecting Mammoth Energy Services’ views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Mammoth Energy Services Form 10-K, recent current reports on Form 8-K and other Securities and Exchange Commission filings.

We undertake no obligation to revise, or update publicly any forward looking statements for any reason. Our comments today may also include non-GAAP financial measures. Additional details and reconciliations of the most directly comparable GAAP financial measures are included in our fourth quarter and year end press release which can be found on our website, along with our fourth quarter and full year earnings presentation.

Now, I’ll turn the call over to Arty.

Arty Straehla

Thank you, Don and good morning everyone. This morning we're pleased to announce the signing of the definitive agreement to acquire three businesses in all stock transactions. In keeping with the plan initially outlined at the time of our initial public offering on last call, to grow both organically and through accretive acquisitions, we expect the addition of these companies will future integrate our service offerings, provide us capital demand and an ability to compete more effectively on price and service for our customers.

If you would direct your attention to Page 2 of the acquisition presentation, posted to our website this morning, I will walk you through the details of the transaction. First and foremost, these assets are strategic and are being acquired at a price level that is accretive to our shareholders.

Based on currently projections of roughly $40 million in EBITDA for Mammoth in 2018, based on current sand prices, the purchase price for all three of these businesses based on our current stock price is a multiple of approximately 3.3 times. This compares favorably to Mammoth's current 2018 multiple of 5.3 times measured by consensus EBITDA. By using our stock as currency we expect these deals upon closing to immediately enhance cash flow, while securing a vertically integrated sand supply for our expanding Frac fleets.

We have been providing certain management, administrative and in treasury functions to the three companies for the past several years, so we expect minimum integration cost and a seamless transition. While Taylor Frac is the largest business being acquired, Stingray Cementing and Stingray Energy Services are equally important to our integrated model. As they bring cementing service, fresh water transfer, water recycling and a rental business that is integrated into our Stingray pressure pumping business. Each of these businesses presently operate primarily in the North East, having all of these services under one umbrella will allow us customers a single point of contact for majority of the service required throughout the completion of these wells.

Turning to Page 3 of the presentation, let me a give you additional details on Taylor Frac. The sand mining processing plant located in Taylor, Wisconsin. As you can see the current capacity of the dry plant is 700,000 tons per year with a world class cost structure with approximately $10 to $12 per ton, which puts it in this top quintile of North Midwest sand mines according to the IHS measurements.

Due to a significant increase in demand over the past three months Taylor is operating at or near full capacity. This is not a situation, we expect will change in the near-term. Therefore the Mammoth Board of Directors has authorized an expansion of Taylor’s capacity by 2.5 times to 1.75 million tons per year by year-end 2017 at a cost of approximately $23 million. The Taylor mine comprises 393 acres with recoverable reserves of 37.1 million tons of high quality Jordan substrate white sand that meets or exceeds all API standards.

As you can see on the lower right portion of the slide more than 73% of reserve in place at Taylor consist of 47 and 100 mesh, both of which are in high demand in the current market. In addition 30-50 comprises 19% of the reserves, which has seen increased demand over the last few weeks as supplies of the finer grades have been sold out. As the frac company, the benefit of having a sand supply in-house is crucial to our success. Well, we have been able to source sand from outside parties in the past with the market tightening in the way it is over the past six months, we feel that we need to have the steady low costs supply and it accomplishes two things. It ensured that our frac fleets will have the sand required to complete our customer's wells, as well as capturing a larger portion of the revenue in the completion process.

Today leading edge pricing for 40-70, is that or around $40 per ton at the mine, which is up significantly from high-teens we experience in December. 100 mesh and 30-50 grades are also -- have also seen material increases over the past few months as supplies of 40-70 have tighten with current pricing for this grades in the mid-30s per ton. In keeping with our integrated model Taylor also holds infrastructure in place to move all those produced sand into basin. A transload facility owned by Taylor located on the Canadian National Railway is strategically locate in next the Taylor mine and provides a low costs way to transport fracs and into the Utica/Marcellus and into Canada.

The current capacity of this transload is 200 rail cars with an expansion underway to increased capacity of 400 rail cars once construction is complete. Taylor currently has 564 rail cars under lease at an average cost of roughly $500 per month. With several of the contracts in place are central roll off over the next 12 months, which should help lower our average lease costs. When you add in the rail cars leased by Muskie or subsidiary that owns the sand processing plant in Peers County, Wisconsin, we should have approximately 1,500 rail cars leased at the time of closing with a forecasting costs of blended cost of approximately $320 per month. Through ongoing negotiations, we believe, we can lower those costs even further going forward.

The combination of advanced logistics and attractive fine sand reserve base and moderate facilities as allowed Taylor to have some of the lowest costs in the industry. We estimate costs in the $10 to $12 per ton range, putting in Taylor facility in the top quintile of current Midwest Mines according to IHS research as shown on the right. We expect to maintain this cost structure as Taylor is expanded.

On Slide 4, we highlight our integrated service offering. Through these acquisitions, we will control nearly all aspects of the completion process. Having these different facets of the process under one provider accomplishes several things for our customers, including the establishment of single contact point if an issue may arise and eliminate potential bottlenecks, as all teams are communicating directly through the process.

Turning to Page 5, you will see a description of Stingray Energy Services and Stingray Cementing. Starting with energy services, bringing this business under the Mammoth umbrella will provide several benefits for our customers, as we will be able to offer a majority of the service require to complete a well, including fresh water transfer, produced water filtration for reuse in completions and a full suite of rental equipment. In addition, we will be able to offer pressure control units and refueling services.

All of these businesses have seeing increased demand over the past six months from several operators in the Appalachian Basin. Many of you know that I have a manufacturing background and that I like to control the inputs to all of our operations. There have been many times in the past, when we are waiting for third parties to provide a vital product such as water or rental equipment that impedes the efficiencies, we have built into our pressure pumping division. This acquisition removes more of the variable that could slow down our operations and should benefit the entire process going forward.

While a majority of our services currently under the Mammoth umbrella revolve around the completion process, given our experienced reputation and customer base, a move into cementing is a logical next step. Stingray Cementing has built a strong reputation over the past four years and actually grew throughout 2016. The cementing process is one of the most vital parts of the drilling and completion process and the customers Stingray are working for today value the professionalism and quality job that the team has provided.

The fact is Stingray Cementing has grown by 66% and stayed fully utilized throughout the down turn speaks volume. Two new twin cementers were added to the fleet in early 2017 expanding this business to five units. The company performed a 145 job for multiple operators in 2016 with an increase in activity expected in 2017. I will now turn the call over to Mark Layton to talk about our updated CapEx budget.

Mark Layton

Thank you, Arty. If you would turn to Slide 6, you will see our updated 2017 CapEx budget including the spending associated with the expansion of the Taylor facility. As a result, our total CapEx program has increased by 23 million to 143 million. All the other CapEx items remain unchanged from our prior CapEx guidance. Mammoth exited 2016 with total liquidity of approximately 175 million including more than 28 million of cash. We continue to expect to fund our CapEx program through cash flows from operations, cash on hand and only modest draws on our undrawn revolver.

As more of our new pressure pumping equipment is delivered over the coming months, we should have the ability to expand the borrowing base under our asset backed credit facility should we seek to do so. We remain focused on maintaining our strong balance sheet and ensuring our equipment is adequately maintained.

Let me take a minute to clarify one item we’ve heard in the market place recently regarding our recently ordered equipment. The 132,500 horse power, we currently have on ordered includes all of the associated equipment needed to fully equip three high pressure frac fleets. Both of the transactions were opportunistic and exceptional in today's market place, with a blended cost of only $478 per horse power. Given the market value of horse power is now ranging between $1,500 and $2,000 as referenced in many sale side reports, these were exceptional buys.

We believe the current market price of a new 50,000 horse power high pressure frac fleet with all of the associated equipment is approximately 42 million to 45 million or $850 to $900 per horse power. While it has only been three weeks since our earnings conference call, let me share a few thoughts on the state of oil field service market and the deliveries of our equipment currently on order. We continue to see strong demand for our frac services with all three of our spreads in the Northeast working today. We remain engage in negotiation with operators and the Scoop/Stack and expect to put both of our spreads destined for the area to work as soon as they are delivered.

Today, we have tested and accepted delivery of 20 of the 30 pumps ordered in November, with 8 of the pumps ordered in February expected to be delivered in approximately two weeks to three weeks. Once the controls are upgraded to standardize them with the rest of our fleet. We remain on track to begin completing the wells in the Scoop/Stack in late Q2, once all the associated equipment is delivered and tested.

This concludes our prepared remarks. Thank you for your time and attention. We will now open the call up for questions.

Question-and-Answer Session

Operator

Thank you [Operator Instructions] And your first question comes from John Daniel from Simmons & Company. Your line is now open.

John Daniel

Hi, guys. Couple of for me, just modeling ones. With the forecast -- the EBITDA forecast in '18, what are your volume assumptions embedded in that?

Arty Straehla

We’re assuming full capacity at the Taylor plant, expanding to 1.75 million tons.

John Daniel

Okay. And you're just using current prices, as of today day high 30s?

Arty Straehla

We’ve been pretty conservative in our modeling. So, we’re a little below that high 30 mark in our model for 2018.

John Daniel

Okay. And then the $10 to $12 production cost. Does that include any trucking cost to the rail head or?

Mark Layton

Yes. That is all the way into the railcar, John and we suspect that with the higher production we’ll be able to get into single-digits. This is very cost effective plan at the 0.7 -- at 700,000 tons, but at 1.75 million tons with no additional or very limited additional SG&A, we believe we’ll be in the single-digit on a cost into the railcar.

John Daniel

Got it. Okay. Turning to the cementing business, what's the optimal size for a cementing operation? I mean five units is good for the niche market you are in, but do you need to acquire to get that bigger or are you comfortable with just being in Apelicia right now?

Arty Straehla

Right now we are comfortable with Appalachian, we'll always be opportunistic as we look at other basin. And of course we’re moving with the Stack/Scoop with our frac. And in fact they've gotten very good traction, we’ve already got jobs booked into Q2 with our fleet that will be arriving. So, we’ll be opportunistic about our growth and opportunities. We like to buy new equipment, we as opposed to acquire and we believe that cementing is a very specialized, that is, that high quality business and especially with the crews that we have in the Northeast.

We think that from an operator's perspective, if you're sitting there and you’ve got a well, something goes wrong with the frac, you can fix it, you can put in to different horsepower and things like that, something goes wrong with the cementing job it can cost you [Audio Gap] sales on a $7 million to $9 million well. So, we believe this is a very [Audio Gap] specialized area and we’ll continue to grow it.

John Daniel

Okay. [Audio Gap] Last one for me just given your preference for new equipment. Have you put any deposits down yet for fleet 7?

Arty Straehla

No. We are still going through on finishing up. As Mark alluded to in the call, we are finishing up fleets 5 and 6 on receiving equipment, we received 20 of the 30 pumps and 8 of the February order as well. We do not have yet, we have not put down anything for fleet 7 yet.

John Daniel

Okay. Thank you, guys.

Operator

Thank you. And our next question comes from Jason Wangler with Wunderlich. Your line is now open.

Jason Wangler

I was curious about the Taylor sand. Can you maybe just talked about the customer based that you have there, I guess both regionally and even on a customer specific side to your historically working with and who you are looking for going forward?

Arty Straehla

Well, Jason good morning to you and thanks for jumping on the call. Basically a Taylor has -- we have refocused Taylor in the last 30 to 45 days, because of the tightness of the sand market to provide sand for our own operations. Prior to that, we were sending to several people, with several pressure pumping groups, several E&Ps and a lot of the Taylor sand was going to Canada as well, as they were upsizing their frac operations. So we have come back to where we are making sure that our frac crews always have sand and the market has tightened to a position to where we had to do that. So we have kind of pulled in to supply ourselves.

Jason Wangler

That’s great color. And then maybe just as you’re obviously going to be moving down to the Scoop/Stack with the new crews. Is this something that you can push down -- the rail down to Oklahoma as well or is that going to be something you just stand Apelicia and what the source stand elsewhere?

Arty Straehla

We’ve got both options Jason, we’ve got strategic access being located on the CN to get the Apelicia. But we’ve also got the option to move the sand to the Scoop/Stack as well, so we’ll be opportunistic.

Jason Wangler

That’s great. And then maybe Mark just one, quick one for you on just the nominal amount of debt that you’re bringing on. Will you just be paying that off or is that in a structure that's going to stay on the books, just curious on that?

Mark Layton

We will likely pay that debt off in current with closing.

Arty Straehla

Jason, just reminder about preceding balance sheet at year-end. We have $28.6 million in cash and we had 145 million runway on our revolver. So that’s one of the things about Mammoth is keeping the balance sheet very clean, very foreseen. So we will be the opportunistic about getting out of debt.

Jason Wangler

And that’s why I ask. Thank you. I’ll put it back.

Operator

Thank you. And our next question comes from Daniel Burke from Johnson Rice. Your line is now open.

Daniel Burke

Just curious in the fact that you’re using Taylor to supply Gulf Fort might make this a harder one to answer. But how far forward are you sold out of the finer grades sands right now?

Mark Layton

Right now, we’re 45 to 60 days sold out on the finer grades. As already mentioned in the prepared remarks. The demand for the final grade is increased dramatically in the last couple of months and we moved to supplying our own frac fleets and that’s really participated the urgency to acquired Taylor.

Daniel Burke

Okay, that’s helpful Mark. And then looking forward towards and really following up on Jason's question earlier, what's the cost to transition over the UP.

Mark Layton

Its about $4 to $5 per ton to transition via short line from CN to the UP.

Daniel Burke

Okay thanks and just one other one, just sort of more longer dated. Is there a timeline or interest in expanding these newer Stingray entities into additional basins or at least for the near team '17, '18 is it likely they remain Appalachian based entities?

Mark Layton

Daniel, we always like to -- and one of the things about energy services that we control our inputs and we control the water transfer, which in a lot of cases controls the efficiency of your frac crews. So we will be opportunistic about moving it, we've got equipment and then obviously we could purchase additional equipment as we go. We like the one stop source of being able to handle these things for our customers between water transfer and the frac group and the sand. Remember our model is based a lot on vertical integration and being able to control those inputs. So we would be opportunistic if we see the need for it.

Operator

Thank you. And our next question comes from [indiscernible] from Raymond James. Your line is now open.

Unidentified Analyst

Just had a couple of quick questions, so within the business lines the Stingray business lines particular, what level of pricing power have you have see as you of come up from basically since the start of the year or over the last six months or so?

Mark Layton

We've seen moderate increases, certainly hasn't been to the level we've seen in other services specifically on the frac side. In general I would characterize the increases as high single digits to low double digits on the Stingray entities.

Unidentified Analyst

Okay, and then also just thinking about the utilization of Muskie as Taylor begins to rollout, it was Muskie still fully utilized today and if not, can you talk about the ramp of there, given the cost difference between Taylor and Muskie and whether any of them have a logistical advantage versus one another?

Mark Layton

We're still going towards full production at Muskie and remember that this movement from 700,000 tons to 1.75 million tons will take us about eight months, and as I stated a little bit earlier we're scrambling from sand. And we're trying to make sure that we have it, so we're running Muskie and we're still moving towards full production with it.

Operator

Thank you. [Operator Instructions] And our next question comes from David Anderson from Barclays. Your line is now open.

David Anderson

That was actually sort of my question, I'm curious how we think about Muskie and that Taylor kind of combined. So do you think between the two of them, between Taylor and Muskie that will pretty much cover all of your own capacity of the entire -- I'm assuming entire three fleets up in the North East of the Appalachian, is that correct, I'm just kind of curious, how am I might thinking about how those all interact with the North East?

Mark Layton

It moves us to 2.45 million tones and you look at the delineation between the grades that you have to have in that type of thing, we will have all six of fleets covered.

David Anderson

All six of the fleets covered, but aren’t three of those fleets going to be in the Scoop/Stack though right?

Arty Straehla

That’s right. And we can get to Scoop/Stack, a little bit of cost increase with that Mark just alluded to is the $4 to $5 that gets us to the UP that gets us into the Scoop/Stack with our stand.

David Anderson

So, of that 1.75 you're expecting all of that to be used for your own needs is that correct?

Mark Layton

We will supply ourselves first and that the key to our vertically integrated strategy. So, we will supply our fleets first and if we have excess capacity, we'll sell to the rest of the market.

Arty Straehla

See, I think we’re making a good key point on the difference between having send contracts -- I've had sand contracts in the past and when you're a smaller operator you get squeezed out by the larger guys, and the difference is, we own the assets and we control ourselves, and we will control our own fate with our sand. We are very, very, very much differentiated from our other competitors, they may have contracts in place and people may be able to supply them and they may not, we control our own destiny.

David Anderson

Well, I think what is interesting is Muskie though, you're trying to find the lowest cost supply out there, right, for those operations. So, I'm just kind of curious, how does that -- what do you see out there today in terms of getting that supply out there. How does that compare to the cost that you have at Taylor?

Arty Straehla

As we’ve indicated before, Muskie has a higher cost structure than where Taylor is at. Given the demand in the marketplace we made the decision earlier this year to restart the Muskie plant as already eluded earlier, we continue towards our progress to run Muskie at full capacity, to put some specific dates to that, we’re about 20 days out from being full capacity at Muskie.

David Anderson

Okay, great. Thanks guys.

Operator

Thank you. And we have a question from William Thompson from Barclays. Your line is now open.

William Thompson

Sorry to piggy back on Dave, trying not to be good cop, bad cop. But I just wanted to ask about Taylor. What are the limiting capacity constraints on expanding Taylor past that 1.75?

Arty Straehla

At 1.75, you're limited by both the wash and dry plants, so it would require an expansion of both in order to exceed 1.75.

William Thompson

So the expansion to 1.75 from the 700,000 today is that you have those -- I'm just trying to -- in light of that comment, where are the $22 million going to?

Arty Straehla

That’s to expand both the wash and dry up to 1.75 from the current capacity of approximately 700,000 tons per year.

William Thompson

Okay. But you could hypothetically add to that, I mean there is no physical limitations of the mine footprint to go beyond that 1.75?

Arty Straehla

No, there are no physical limitations.

William Thompson

Okay. That’s it. Thank you.

Operator

Thank you. I'm showing no further questions. I will now like to turn the call back to Arty Straehla, CEO for any further remarks.

Arty Straehla

Well, thank you very much. And this reiterates what we’ve been saying all the long that about our organic and our exquisites and we’ve talked many times about the -- that we have been managing these assets and trying to make them as efficient as possible and we are finally gotten through the process of doing the acquisition.

We believe that we protected the balance sheet as we went through and we did this. And we believe that this acquisition will be very accretive to our shareholders. And it will be very strategic for us over for our long-term growth and supporting our frac crews from the sand perspective and then bringing on two differentiated lines of services that we provide. With that, thank you everybody for your time and good luck.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.

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