Mammoth Energy Services (NASDAQ:TUSK) Q3 2017 Earnings Conference Call November 2, 2017 11:00 AM ET
James Wicklund - Credit Suisse
Jason Wangler - Imperial Capital
John Watson - Simmons & Company
Henry Shortess - Johnson Rice
Donald Crist - Director of Investor Relations
Arty Straehla - Chief Executive Officer
Mark Layton - Chief Financial Officer
Ladies and gentlemen, please stand by your conference will begin momentarily. Once again thank you for your patience and please stand by. Good day, ladies and gentlemen, and welcome to the Mammoth Energy Services' Third Quarter 2017 Earnings 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 Services' website.
I would now like to introduce your host for today's conference, Mr. Don Crist, Mammoth Energy Service's Director of Investor Relation. Sir, you may begin
Thank you. Good morning and welcome to Mammoth Energy Services' third quarter 2017 earnings conference call. Joining me on today's call are Arty Straehla, Chief Executive Officer; Mark Layton, Chief Financial Officer.
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, Forms 10-Q, 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 to the most directly comparable GAAP financial measures are included in our third quarter press release, which can be found on our website along with our third quarter earnings presentation.
Now, I will turn the call over to Arty.
Thank you, Don, and good morning, everyone. The third quarter of 2017 was a very active one for the entire Mammoth team and a pivotal point in our portfolios development. We executed on the substantial expansion of our frac and sand businesses into the Mid-Continent and grew our energy infrastructure services business known as Cobra while realizing company wide margin improvement.
Starting with our frac business, the expansion into the Mid-Continent occurred in line with previously announced plans and we are very pleased with our team’s performance. We rolled out two new fleets to the area with our fifth and sixth fleets starting in August and October respectively and find ourselves fully utilized today operating in that SCOOP/STACKS to your customers.
We had approximately 4.6 spreads active during the period with closer to full utilization expected to contribute to our Q4 2017 results. Our team executed well broadly in our customer base getting stages in the ground in limiting margin compressions associated with the start-up.
As we look forward, we are examining near-term options which may include shifting some assets between Ohio and Oklahoma to supplement further work as well as building out a seventh fleet from some of our existing fleets with minimal investment. Leading edge pricing continues to march higher, but not quite to the level needed to support new build economics.
As you may recall, our prior expansion of new capacity was done with lower equipment prices giving some unique opportunities. Looking ahead, we expect our frac assets to be fully utilized into 2018 and inbound calls have been increasing versus just three months ago when we last met.
It is important to point out, all three crews that work in the Mid-Continent are being supplied from Mammoth sand mines and last mile logistics we have in place. We feel this is integrated approach remains a differentiating factor Mammoth bring to this table versus our pure play peers.
Prices in margins have continued to improve across both frac and sand we have been in a position to participate in both. The Dough backlog has continued to grow and we believe that there is still a shortage of pressure pumping horsepower in the market today possibly as high as 1.5 to 2 million horse power.
We remain pleased with our frac margin of 27% during the period which is up sequentially from 24% in the second quarter of 2017. We pumped 1617 stages in the third quarter which is up 26% sequentially and our equipment has been properly maintained during the period. We look forward to a strong fourth quarter and start to 2018 with our pressure pumping platform.
Turning to sand, the third quarter incorporate a full period of ownership of two new mines substantially increasing our capacity. In addition the 1 million ton expansion of our Taylor mine is on track with construction expected to be completing in the coming months bringing our total capacity to 4 million tons per annum.
At Toronto province the integration of Chieftains assets has been smooth with the plant operating at approximately 50% of capacity today slightly ahead of forecast. Toronto sand is shipping on the Union Pacific rail road and supporting our [indiscernible] operations in the Mid-Continent.
Once our Taylor expansion is complete, we expect to begin shipping upwards of 4 million tons per annum by early 2018 with half of that capacity to be consumed internally, approximately 1 million tons to be sold under contracts already in place at attracting pricing with remaining 1 million tons to be sold in the spot market.
We have identified a low costs [indiscernible] opportunity out of Piranha mine that is expected to add 400,000 tons per annum of capacity by mid-2018 increasing our overall capacity or approximately 4.4 million tons per annum. We sold approximately 439,000 tons of sand during the third quarter of 2017, which was 25% was brokered.
The average sales price for the sand sold during the third quarter of 2017 was $41.14 per ton. Sand demand and pricing remains strong with our current available capacity sold out for the remainder of the year. Current pricing for 40/70 is approximately $48 to $50 per ton with some spot market trades in the mid-50s per ton. Our team has done an excellent job at selling all grades.
It is important to point out, the third quarter calls are not representative of where envision our cost to be given the ramp-up that is underway. We remain focused on lowering our costs as we expanded and envision to continue decline in our sand production cost per ton towards a mid-teens by mid-2018. We hope to be well within the top of quintile of the industry, and we are well position logistically with unit train access on both the sand and UP.
Let me some time to talk about the regional sand market, as there has been significant discussion on the topic of late. We have reviewed many opportunities in this area and have taken a hard look at potentially entering this market and we continue to be inquisitive, but we have nothing to report at this time.
Logistics and last mile trucking specifically has gotten very tight with trucking rates up materially over the next few months and to merge now in place. The expansion of our last mile operations is now complete the 62 trucks and trailers in the portfolio, largely operating in the Mid-Continent. While some of our competitors have experienced logistical issues during the third quarter, we have been more insulated than many of our peers by having this business line as a part of Mammoth.
As we sit today, a majority of our logistics needs or been met through internal sources. Let me shift now to our energy infrastructure services business that we have been working since late 2017, Cobra. The Team D business, the transmission and distribution business, has historically been somewhat fragmented haven’t seen larger players undertaking consolidation strategy for years on both the public and private basis.
Over the summer, we identified, negotiated and closed two acquisitions and continue to evaluate others. These acquisitions help develop our customer base and further broaden our management team. The acquired companies were start of capital which Mammoth has been able to provide together with our long-term experience on the equipment, logistics and infrastructure side.
Strategically Cobra provides Mammoth a platform in a counter-cyclical industry, it offers quick deployment, earnings diversifications, stability and the ability to serve the infrastructure needs of our existing customers.
The team, we brought on, has an average of 25 years of experience providing top-tier infrastructure service to many investor own and municipal utilities as well as oil and gas companies. This business has been reported within our other energy services division.
Upon the acquisition of the two infrastructure companies, we quickly integrated them and deployed capital to expand their operations during the summer and plan to continue that expansion through year-end, unrelated to storm-related activities.
Our crews were able to respond to the disasters in Texas and Florida associated with Hurricane, Harvey and Irma, and our teams executed very well. We have reported 14 million in revenue and 2.4 million in EBITDA across the division with our quarter results somewhat offset by small loss at our lodging business.
As a part of our strategic plan we expect all of our operations to continue to grow sequentially into a more meaningful contributor to the portfolio in 2018. Two weeks ago we signed a contract with Puerto Rico Electric Power Authority known as PREPA, to aid in the restoration of the electrical utility infrastructure in Puerto Rico.
The contract called for services and payments of up to 200 million over 120 days period. To give you an update after the contract became effective on Friday October 20, we mobilized the initial 60 people to Puerto Rico to set up our command and control base.
Over the past week we have mobilized equipment to the island via barges and heavy lift aircraft with all of our equipment and personal expected to be in place in the coming days. Our team has been in daily dialogue with the team at PREPA to coordinate the arrival of equipment and manpower. We expect to deploy more than 500 people in short order in close coordination with PREPA and other agencies to restore power as soon as possible.
The third quarter was a turning point for Mammoth and a positive one for our shareholders. We have built critical scale in our frac, sand and energy infrastructure business lines while seeing margin improvements across the entire portfolio. Consistent with the substantial expansion of our asset base, we have also made critical additions to our team during the period and we have welcomed the new members of our acquired introduce to the Mammoth family.
We currently have more than 1400 employees under the Mammoth umbrella up from 554 at year end 2016 and expect that number to grow substantially within our portfolio. Our support teams across accounting, HR, IT and safety have all done an excellent job absorbing the growth. I'm very proud of how our team executed during the third quarter and I’m thankful to both our customers and vendors as we move forward.
Let me turn the call over to Mark, to take you through the financial performance during the quarter after which we will take some questions.
Thank you, Arty. I hope that all of you have had a chance to read our press release, so I will keep my financial comments brief and focus on certain highlights.
Mammoth had a strong third quarter of 2017 with revenue coming in at $149 million, up more than 50% from the second quarter of 2017. The start up of our fifth and sixth lease the incorporation of two new sand lines, improved equipment utilization and improved pricing for our services all contributed to the higher revenue compared to the prior periods.
Net loss for the third quarter of 2017 came in at $800,000 million, which is an improvement of approximately 32% when compared to the second quarter of 2017, which came in at a loss of $1.2 million. On a per share basis, net loss came in at $0.02 per share during the third quarter of 2017 as compared to a loss per share of $0.03 during the second quarter of 2017.
Adjusted EBITDA for the third quarter of 2017 came in at $28 million, up approximately 84% from the second quarter of 2017. Our adjusted corporate EBITDA margin remained strong in the third quarter, coming in at 19% up more of the 19% from the second quarter of 2017. We remained confident that our corporate EBITDA margins will remain in a similar range in the coming quarters.
Selling, general, and administrative expenses came in at $8 million in the third quarter of 2017 generally in line with the second quarter of 2017. SG&A expenses as a percentage of total revenue came in at 5% in the third quarter of 2017 compared to 8% during the second quarter of 2017.
Going forward, we expect SG&A to trend slightly higher on a nominal basis as we grow but remain in the range of 5 to 7% of total revenues which we feel compares favorably versus our peer group. As it relates to Cobra, we expect the core continental United States business to generated EBITDA at least in line with our current corporate margins.
As you can imagine, we are mobilizing substantial resources to Puerto Rico to support our contract and it is still premature to provide any margin guidance at this time. We are focused on a seamless execution of our restoration efforts over the next weeks as resources arrive to island and our teams can be fully deployed restoring power.
CapEx during the third quarter of 2017 was approximately 36 million. The majority of which was related to the acquisition of new pressure pumping horse power and associated equipment. The expansion of our logistics business and growth capital for Cobra’s continental U.S. operations.
With approximately 102 million spent during the first three quarters of the year, we are maintaining our 2017 CapEx expectations as 143 million. CapEx for the remainder of the year primarily relates to the expansion of the Taylor facility and growth CapEx at Cobra.
Our borrowing base remains at 170 million with net debt of approximately 80 million. Net debt was comprised of 94 million drawn at the end of the third quarter offset by cash on hand of approximately 14 million resulting in liquidity of approximately 90 million.
As stated previously, we expect this net debt balance to decline going forward as our aggressive addition of assets during 2017 supports an increase in free cash flow in 2018. We thank our shareholders for their support and look forward to a strong end to the year.
As many of you are aware, we filed a registration statement on Form S-3 with the Securities and Exchange Commission at the close of business yesterday. November 1st was the first day that we were eligible to file a registration shelf borrowing our IPO on October 14th 2016. This filing once declared effective by the SEC will provide us flexibility over the next three years to access the equity markets on an opportunistic basis.
This concludes our prepared remarks. Thank you for your time and attention. We will now open the call for questions from the research analyst that cover our shop.
Thank you. [Operator Instructions] Our first question comes from the line of Jim Wicklund with Credit Suisse. Your line is open.
Good morning guys. Just as the first conference call of the season where nobody mentioned the word Permian Basin. So as you all didn’t mentioned I will bring it up, you are obviously taking a huge piece of market share and booming business in Oklahoma in the SCOOP/STACK. You have got some exposure to the Permian that hasn’t been your primary area of growth which is different from everybody else. Can you talk about Arty, what you do plan to do, what’s TUSK going to do in the Permian over the next year or so? And what are the expansion plans?
Jim in fact we did expand in the Permian with our logistics operations. We bought 20 trucks that we are placing down there. We think logistics and trucking becomes a critical element of everything down there. So we have been spending some money down there in the Permian and I will tell you.
We see a lot of opportunities especially with E&Ps that are looking for contractual opportunities for us to move in. So we have moved our logistics in there and you always got to have an answer on how you move stand and from trans loads to the wellbore, and we have that answer. And we are looking very hard to things in the Permian.
As you well know, we get an off a lot of deal flow. We look at 142 deals so far this year. We continue to working some of them are located. We have done some things, we look at some of the regional sands and we are also as you well know a group has focused on internal capital and we are not going to say a lot of blue sky for the investments that we make out there.
And for that we very, very much appreciate it, I think it’s an interesting thing all service industries focused on return on capital before the E&P industry knows how to spell it.
Again, the best part of our story all the way from when we talked about last year. The first 75,000 of horsepower that we got at $0.37, the additional 60,000 that we going to [sooner after (Ph) the mine that we bought out of bankruptcy for 36 million. We are absolutely focused on return on capital for our investors.
And I’m glad you are going to keep that up. So keep that is a focus or I appreciate it. Cobra has made news lately because of Puerto Rico, but not just Puerto Rico, but because of another company that’s operating there. And I know you both called to Washington, I don’t expect you to make any comments about the Montana-based company, but I don’t think you guys have hire the secretary of interior, so is an intern and I know you have more than two full time employee. So we all talk about the Montana company. But can you talk about how you guys expect to address the hearings in Washington on Puerto Rico?
Yes. We haven’t, there is not been anything. And I will tell you, we did everything absolutely right. Let me give just a little bit of the backdrop of how we get this. We get this the old-fashioned way. On the 13th of October and we have this competency within our group. We have performed extremely well, where the hurricanes unfortunately hit South Texas when Harvey and Irma went through.
So we had disability built on our logistics group that we have, built on our lodging group that we have an experience. So myself and my President glued down to Puerto Rico on the 13th of October. We met with people start meeting at Saturday at the convention center where everybody was there that’s the Commanding Control Center.
We went from meeting-to-meeting talking with FEMA of officials, talking with the governors officials, talking with officials from PREPA that resulted in a meeting that evening, Saturday evening at around 7 o'clock with PREPA. We had a fully self contained plan that nobody else has had put together for them. That includes having building barge that includes housing our folks.
We have in fact begin the logistic aspect of that with the first barge that departed on the 29th loaded with 75 pieces of equipment mostly buckets and diggers. Yesterday, another barge departed from to Fourchon, Louisiana with 28 pieces of equipment, we will have more barges departing. We have actually sent large cargo planes with full of equipment as well.
So our mobilization the way that we have done this it's been right from the very beginning and our goal and operational is to give the lights turn back on in Puerto Rico with our team. We have got a...
A very legitimate effort, very legitimate effort. And finally if I could on sand we have had a couple of sand companies who report. Can you talk about what pricing momentum is that you guys see in the industry for Sam and I know frac intensity has been a issue [indiscernible] said that sand per well is going and replaced but in the Permian nobody else seems to have seen that. Can you talk about frac intensity in terms of sand used and sand price just brief one.
Jim we are continuing to see our customers pump a high level of sand in both the Utica and in our operations in the Mid-Continent so we continue to see the frac intensity. In regards the pricing we are seeing spot market trades on 40/70 right now in the low 50s. So the sand pricing has moderated a little bit, but we are still seeing some increased pricing on the sand side and demand for all grades.
Okay guys. Thank you. Very good quarter. I appreciate it.
And our next question comes from the line of Jason Wangler with Imperial Capital. Your line is open.
Good morning guys. You mentioned in the prepared remarks Arty about of the potential of maybe move from frac equipment down to the Oklahoma from Utica, would that be the one crew not contracted or could you just may be some color on the thought processes as you look at the markets and how they are shaping up for next year?
Sure. Most of our work has been up in the high-pressure that requires a lot of additional equipment. We are now seeing some of the lower pressure work that gives us ability to put less pumps on and we think for a minimal investment we would be able to come to the Mid-Continent area and probably we would have to buy a blender, we would have to buy hydration unit. It's very, very small amount that we would have to spend in order to do that.
As you make the transition from pads that use 20 pounds versus pads that use 12 or 14 in some cases. So that is something that we have already considered and you know us very well Jason we try to get the most out of what we got before we go. And we just don’t think the prices are there quite yet for new build economics.
And so then the idea would be there to move I guess not necessarily an entire crew so to speak, but just to maybe shift the horsepower allocation between the two and try to maximize that is that a fair way to look at it?
That’s right, it's been moving pieces and parts to maximize that effort.
Okay. Great, I appreciate it. I will turn it back.
Jason, thank you.
And our next call comes from the line of John Watson with Simmons.
Hey guys thanks for talking my call. Arty, one of the things that we have seen out there and I'm sure you guys know there are few sand mines in Oklahoma and just given your exposure to SCOOP/STACKS can you speak to opportunities to potentially develop a mine in a state?
John we are very, very seriously at it, we have hired actually a geologist to help us out to look at different areas and different things and we think regional sands with the 100 metro going to be a player in the future. So it's very logical that we are doing and I can't comment on anything specifically, there is nothing to comment on, but we are absolutely looking at regional sands on a very strong basis.
Okay thank you. Just two more from me. One is the expected cost improvement in terms of the production cost. Can you just give us a few examples of some of the maybe specific examples and our initiatives that you got going on that to bring it down?
So John as we have gotten in primarily into the Piranha plant, we have identified a few efficiencies as we have done across our other plants you have seen the improvement at Taylor since we have operated that mine. The team has gone through Piranha and done an excellent job of identifying some processes to reduce some of the cost involved with transporting the sand from the washed to dry plant and then some efficiencies within the drive plant that we expect to reduce our cost.
We also have identified some things from a very small capital expenditure that would get us some additional 400,000 tons a year that we would anticipate to put in place next year.
Okay, got it. And then the final one from me is just as I look at the slide a thing that jumped out was the need to get 500 people more to tackle the project in Puerto Rico. I’m just curious, where you find these folks and I think the same labor pool that you target for traditional oilfield work and could that be a potential limitation?
John this is very highly specialized with our Cobra operations. These are professional linemen that are really situated all over the U.S. and these guys are highly qualified experts of doing everything from changing out transmission distribution polls, all the way to bare hand to a lot of the other type of work that you have to do with it as far as pulling cable and everything like that. So these are very highly qualified professionals that we have been able to recruit and bring on.
Got it, okay, that’s all I have got. Thank you.
Thank you. [Operator Instructions]. Our next question comes from the line of Henry Shortess with Johnson Rice. Your line is open.
Hey guys good morning. So a quick question, kind of a two part question on the sand side. The large take or pay contract that started in October. Are the volumes there under that contract currently running at 720,000 tons per year or are they still ramping. And then a little more broadly if you can just address how you are fulfilling that contract and supplying all six suites moving to the fourth quarter?
That contract actually went into place in October 1st and we are supplying that on a full time basis. Now there isn’t other 300,000 sand contract that goes along with [indiscernible] so we do have million tons per year that are contracted out and we are fulfilling that as well as we speak. But we are able to with the ramp up of our additional mines able to satisfy the sand elements here in the Mid-Continent for ourselves and for those customers. So we are very effectively moving that sand.
Thanks that helpful. And then maybe if we can just discuss a little bit, the strong performance EBITDA wise, there is a non-contractual committed go [indiscernible] fleet. So if you could just talk about the performance as there is fleets and maybe the ability to drive further pricing and efficiency gains going forward?
So we are very proud of the execution of the team and the rollout of the Mid-Continent fleets. On a go forward basis, we would expect efficiencies in mid-cont to pick up as we move from more of a single well pack completion type environment to hold acreage to more of a full scale field development type scenario.
Great. That’s helpful color guys. Thanks, I’m going to turn it back.
This concludes today’s Q&A session. I would now like to turn the call back over to Arty Straehla for closing remarks.
Thank you. We want to thank everyone for dialing in today during this very busy time. I want to personally thank all of our employees without each of you, we would not be where we are today. 2017 has been a very busy year so far as we have been in dramatic growth mode. As we look to 2018, we anticipated that the first of our labor will be realized.
As we have stated previously, the maintenance capital required to maintain our asset bases relatively low, which is expected to allow for increased cash flow which will be use initially for debt repayment. We look forward to speaking with you again on our year-end call in early 2018. Good day.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may now disconnect. Everyone have a great day.