FTS International Inc's (FTSI) CEO Michael Doss on Q2 2018 Results - Earnings Call Transcript

FTS International, Inc. (NYSE:FTSI) Q2 2018 Earnings Conference Call August 1, 2018 10:00 AM ET

Executives

Michael J. Doss - CEO

Lance Turner - CFO

Buddy Petersen - COO

Analysts

Jim Wicklund - Credit Suisse

Judson Bailey - Wells Fargo Securities

Michael LaMotte - Guggenheim Securities

Connor Lynagh - Morgan Stanley

George O'Leary - Tudor, Pickering, Holt & Co.

Mark Bianchi - Cowen & Company

John Daniel - Simmons & Co.

David Anderson - Barclays Capital

Operator

Thank you and good morning everyone. We appreciate you joining us for the FTS International Conference Call and Webcast to Review Second Quarter 2018 Results. As a reminder this conference is being recorded for replay purposes. Presenting today are Mike Doss, CEO; Lance Turner, CFO; and Buddy Petersen, COO.

Before we begin, I would like to remind everyone that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management's current expectations, assumptions and beliefs. Forward-looking statements can often be identified by words such as expect, anticipate, intend and similar expressions and variations or negatives of these words. These forward-looking statements include, but are not limited to, statements regarding our operations, capital expenditures, and business strategy. They are not guarantees of future results and are subject to risks, uncertainties, assumptions that could cause actual results to differ materially from those expressed in any forward-looking statement.

Listeners are encouraged to review the company's earnings release that was filed with the SEC and other recent SEC filings for a more complete discussions of the risks and other factors that could affect the forward-looking statements. Please note that the information reported on this call speaks only as of today, August 01, 2018 and therefore you are advised that time sensitive information may no longer be accurate at a later reading of this call's transcript or listening of the recording. Except as required by law, the company does not undertake any obligation to publicly update or revise any forward-looking statements.

This conference call also includes a discussion of adjusted EBITDA and non-GAAP financial measure. Our earnings release filed with the SEC also includes further information about this measure and a reconciliation of net income or loss to adjusted EBITDA. I would now like to turn the conference over to Mike Doss, FTS CEO. Please go ahead, sir.

Michael J. Doss

Thank you and good morning everyone. I'm pleased to announce that in the second quarter we were able to put the weather related disruptions of the first quarter behind us and achieve outstanding results in an absolute sense though slightly below consensus. We completed 334 stages per active fleet up 13% from the first quarter. This level exceeded the stages per fleet reported in each of the last three quarters which helped us to drive our profitability higher during the second quarter. Net income for the quarter was 103.6 million or $0.95 per share and adjusted EBITDA was 141.3 million. We had an average of 28 fleets active during the quarter and our annualized adjusted EBITDA per fleet was 20.2 million up from 18.8 million in the first quarter.

As we discussed in our last earnings call and as several of our peers have confirmed, the market for pressure pumping services began to soften in the latter part of the second quarter. We believe the current market has become oversupplied due to four star [ph] additions combined with increased choppiness and customer demand. Some of our competitors both well established names and new entrants are bidding work at meaningful discounts in the spot market.

At the same time several of our customers have reduced activity as a result of changes in their capital budgets and higher than expected completions efficiencies. Over the last couple of years it's not unusual for us to experience one or more customer transitions in any given quarter. In each case our commercial team gets to work, finding replacement work while managing or improving profitability. However in the third quarter of this year three of our larger customers have reduced their programs at the same time. This has led to more than usual whitespace in our operations calendar compelling us to look for work in the competitive spot market.

While we have found replacement work for some of these fleets strategically we've chosen not to chase pricing down in order to keep all of them busy. There's a tradeoff between market share and profitability in this business and our disciplined approach is geared towards profitability. As a result at the end of the second quarter we chose to warm stack two fleets and we are in the process of stacking additional fleets. We expect to have an average of 24 active fleets during the third quarter compared to 28 in the second quarter. But we are not happy about this, we are confident that we will quickly redeploy these fleets when our customers resume activities or other opportunities arise preferably on a dedicated basis.

Despite a choppy operations calendar for the third quarter we expect these conditions will be temporary. One of our large customers that reduced activity due to higher than expected completions efficiency has already put one of our fleets back to work this week. In addition we are in conversations with customers who are adding work for later this year and even more customers who are planning their 2019 programs. We are encouraged by the current sales pipeline and the number of fleets we already have committed in 2019.

Regardless of where we are in the cycle our company culture emphasizes cost and continuous improvements but never at the expense of safety or service quality. At all levels of management we are treating these near-term headwinds as an opportunity to tighten the ship by reviewing all of our operating expenses, ensuring that our support functions are fit for purpose, and improving computation fee. In a competitive and cyclical business like ours we believe a disciplined and opportunistic commercial approach combined with a low cost structure is how you best create value for shareholders over time.

As a demonstration of our fiscal discipline and operational flexibility we are reducing our total expected CAPEX for 2018 by 30 million. Our annualized maintenance CAPEX remains at approximately 2.5 million per active fleet in order to keep them in optimal operating condition. We have already completed the refurbishment of Fleet 29 but have decided to hold off on refurbishing three additional fleets until conditions improve. That leaves us with the two new built fleets that we have previously discussed. One of those will be completed as a dual fuel fleet and will be deployed later this year under a contract with an existing customer. The other will be completed at a future time.

Our manufacturing capabilities continue to provide us with a meaningful and durable cost advantage. By manufacturing and rebuilding our own equipment we estimate that each year we save as much as $2 million per fleet in maintenance CAPEX and an additional 2 million per fleet on operating expense for fluid in. Even in a softer market this allows us to generate solid returns on capital deployed compared to our industry peers.

To conclude I'd like to highlight just one of the many things that our innovative operations leadership team has accomplished. I am pleased to announce that we have opened our new operations, national operations center located in Aledo, Texas. The facility is fully operational and monitors real time job and equipment data on all of our fleets 24 hours a day, seven days a week. Engineers at the NOC monitor our fleets to ensure greater consistency across locations and applications of best practices. Analytical data from the NOC will be used to improve equipment up time while squeezing out as many operating hours as possible between rebuilds. Our approach which borrows from other industries gives us the opportunity to further improve efficiencies and continue to lower the cost curve. With that I'll now turn it over to our CFO, Lance Turner.

Lance Turner

Thank you Mike. Revenue for the second quarter was 493.3 million up 6% sequentially. Total stages completed increased 15% from the first quarter driving revenue higher despite underutilization on two of our fleets in the back half of the quarter. This benefit from increased efficiencies was partially offset by a slight reduction in average pricing primarily in the second half of the quarter due to customer mix. SG&A cost totaled 20.8 million for the quarter including 3.4 million in stock based compensation. We expect this figure to remain at or slightly above this level as we look into the third quarter.

As Mike highlighted net income for the quarter is 103.6 million or $0.95 per share. Adjusted EBITDA was 141.3 million or 20.2 million per fleet on an annualized basis. The second quarter exemplified the cash generating power of FTS. Despite a working capital build of 30.7 million, cash flows from operations was 99.2 million for the quarter. Capital expenditures for the second quarter were 28.5 million, this level of spend was in line with our expectations for the quarter and brings the total spend to 66 million for the first half. We previously provided a range of 130 million to 150 million in CAPEX for the full year. Given a revised deployment plan that Mike outlined we are now guiding between 105 million and 115 million for the year.

During the second quarter we repaid an additional 100 million in debt to bring our gross debt down to 635 million. Yesterday we repaid another 30 million of our term loan. At the end of the second quarter our net debt was just above 500 million. As our second quarter results convert to cash in the third quarter we expect to end the quarter with approximately 400 million in net debt. This continued deleveraging will further reduce our run rate interest expense to less than 11 million per quarter and continue to decline.

Due to our high profitability, CAPEX advantage, and tax attributes our cash flows from operating activities less capital expenditures or free cash flow has been positive for five quarters in a row. Over the last four quarters we have generated 252 million of free cash flow while also building working capital by $91 million. In absolute terms and on a per share basis we believe this is the best in the industry by a wide margin.

Despite the market softness we're seeing our pricing continues to be at attractive levels and we expect to continue generating attractive EBITDA and cash flow. In the near term we will focus on expanding our customer base and manage our active fleets to optimize our business. Looking further out, we're encouraged by the commodity price environment and outlook and we will be ready to deploy fleets. We recognize the demand for pressure pumping equipment is at an all time high and could move higher next year. Over the last two years we've demonstrated our ability to react quickly and optimize results in any environment. We will continue to do so as we look beyond the temporary challenges in the back half of the year to the anticipated improvements in 2019.

With that I'll turn the call back to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question coming from the line of Jim Wicklund with Credit Suisse. Please proceed with your question.

Jim Wicklund

Good morning guys. A question, following just off on what you had said Lance and what Mike had said, what makes you think activity will increase next year and if you're right and it does, do you expect to have all 29 crews working by the end of 2019 or in 2019?

Michael J. Doss

Well so, our comments about later this year in 2019 is driven by the conversations we're having with customers. And West Texas remains remain strong, that's where a lot of our opportunities are despite some of the concerns about takeaway capacity. You know as far as fleet count go into next year, so our every expectation that it will increase. It's hard to pinpoint a number we will be in a position to deploy over 30 fleets if the opportunity presents itself.

Jim Wicklund

And from the sound of you it you think the opportunity is going to present itself?

Michael J. Doss

We think so.

Jim Wicklund

Okay, my follow up if I could, Mike you talk about turning down work and profitability over utilization and I wish all of the companies who believed that would have said that but they didn't, I congratulate you for bringing that out. Can I ask what was the leading edge pricing on the work that you decided not to pursue?

Michael J. Doss

Well it varies in each case and it has changed over -- really over the last month or two. I would say it's not unusual for us to miss a bid by 20%, something of that magnitude and we're just unwilling to continue to go down and chase it down even further.

Jim Wicklund

Okay, gentlemen. Thank you very much, appreciate it.

Michael J. Doss

Thank you.

Operator

Thank you. Our next question coming from the line of Judd Bailey with Wells Fargo. Please proceed with your question.

Judson Bailey

Thanks, good morning. Wanted a quick follow up on Jim's last question there, ask it a little bit different way, it sounds like you've had some crews released, you also had won some additional work, can you can you give us a sense perhaps for new dedicated work, how to think about where EBITDA per fleet would be relative to what you did in the second quarter, is it 10% below, 20%, just to give us a sense of where kind of new work would be priced today as you pick up new dedicated type of arrangements?

Michael J. Doss

Sure, well at least in terms of near term dynamics we're not picking up a lot of additional dedicated work. Most of the dedicated work is done on an annual basis. We will be going into contracts seasons towards the end of this year. So we won some spot work, not at radical price discounts but certainly lower than our total fleet average for the second quarter. Our anticipation on dedicated work and we have picked up some including as I mentioned in the prepared remarks some of our customers are resuming their activities, dedicated customers. And that's at the same pricing that we already have under contract.

Judson Bailey

Okay, so is it reasonable to think that 3Q EBITDA per fleet assuming pumping efficiency is the same it should be in line with what you did in the second quarter or does it deteriorate a little bit?

Michael J. Doss

We think it would deteriorate a little bit and that's mostly a function of utilization, white space in the calendar when you do spot work. You typically don't get 25 to 30 pumping days per month, you get less than that. And so that's a factor that's impacting us in the third quarter more than previous quarters.

Judson Bailey

Okay, alright, that's helpful, thanks. And then my follow up is how to think about fleet count I guess for the fourth quarter, you got a new build coming in, should we -- is it reasonable to think it stays around 24 or does it step back up as you add the new build or I guess is the potential utilization is more work as well so or gain some, how would you help us think about the fourth quarter given seasonality, given that the new builds you plan to deploy as well or that already has a contract?

Lance Turner

Sure, well our expectation is it will be up in the fourth quarter. There's a lot of moving parts as you alluded to in your question with work coming and going. Fourth quarter is also usually impacted by just seasonal declines, it is not typical for new fleets to be added in the fourth quarter but I did mention the one. There's another one that we have committed as well to begin work in the fourth quarter. And so other things being equal that would take us to 26. Yeah, I think probably uncertainty relates to the holidays, what that may mean for late in the year in terms of utilization. But all of our conversations now are positive about us improving utilization and fleet count in fourth quarter.

Judson Bailey

Okay, great. Thank you, appreciate it.

Operator

Thank you. Our next question is coming from the line of Michael LaMotte with Guggenheim. Please proceed with your question.

Michael LaMotte

Thanks, good morning guys. Maybe buddy you could address what warm stacking means for y'all particularly in terms of what was going to happen with the labor and what that incremental carry cost Lance means in terms of the margin deterioration, EBITDA per fleet deterioration that we're seeing Q2 to Q3?

Buddy Petersen

Sure, great question. We kind of think about the warm stack, the assets themselves kind of get all part together in a predisposed place and the labor component winds up almost being a furlough basis. We hold them down in terms of from an hours per week and then there are certain supervisors and certain really talented people that we can plug in other Basins. As we kind of go through the typical labor rotation and the typical labor churn. So that's how we think about these first initial fleets when we warm stack them.

Lance Turner

And in terms of cost when we warm stack a fleet we get the costs out pretty quickly say within a month or less, we are getting the majority of all the costs out of the system. I think the white space would be more around the profit that might mention what you're referring to as far as the reduction.

Michael LaMotte

Okay, and then I hate to be sort of simplistic about it but as you think about chasing spot work down, the margin loss if you will of working at say 15 million per fleet versus 18 million to 20 million on the three or four fleets that you're warm stocked, versus warm stacking them, is there risk that in your contract three openers if you have too many spot fleets at 15 that you end up pricing down you know your dedicated work at the reopeners, is that part of the calculus in terms of deciding to warm stack versus keeping things working regardless of the margin?

Michael J. Doss

It is, that's a great question and we do see that impact especially if it's work with an existing customer. We often will do spot work for a customer that's dedicated so we may have one, two, three dedicated fleets working for a customer and we'll do spot work for them occasionally just to help them fill out their calendar. I think in the current market where it is, if we go in and do spot work that's 20% below the dedicated work. I think it puts the dedicated work at risk and so we're very mindful of that. We want to hold pricing where we can on the dedicated work. We do think what's going on in the spot market is a temporary phenomena and so for us just to lower the boom on all of our fleets we think that has consequences for the portfolio and being disciplined we think is the right long-term move.

Michael LaMotte

Okay, that's great. Thanks Mike, thanks guys I'll turn it back.

Operator

Thank you. Our next question is coming from the line of Connor Lynagh with Morgan Stanley. Please proceed with your question.

Connor Lynagh

Yes, thanks. Good morning. Wondering if you guys could give us a little information on the geographic mix of things now, were the fleets disproportionately dropped in one market, do you expect to reposition the other markets to gain work, just some color on that?

Michael J. Doss

Sure, so the 24 active fleets that we expect to average in the third quarter they're positioned as follows. We got 11 in West Texas, 6 in the Northeast, 3 in South Texas, 2 in Mid-Continent, and 2 in East Texas. And there will be some movement, there's always movement depending on whenever we -- whenever we look at this. But in terms of the opportunities I think I'd mention in one of the earlier questions, we are seeing quite a few opportunities in West Texas. I would say that's our strongest market at the moment. In terms of what has impacted us, we've seen some pull back in the Marcellus [ph] with one of our large customers reducing fleets. We're having discussions with them, we think that we will be putting some of those fleets back to work in 2019 but it's a little bit too early to say that. We're certainly working towards that end. That's where we are.

Connor Lynagh

Got it, that's helpful, thanks. And I apologize if I missed this but could you guys sort of give us an order of magnitude, we're talking about in terms of the EBITDA per fleet degradation in Q3 versus Q2?

Michael J. Doss

You know it's difficult to pinpoint that now because of all the moving parts. We know what July looks like, can have a good indication of what August looks like. We think it's going to be down $2 million to $3 million per fleet, something in that magnitude given the white space primarily. A little bit of an impact from the spot market pricing on some fleets.

Connor Lynagh

Okay, that's helpful. Just one last one for me, so pretty strong implied free cash flow guide on the third quarter here. How do you think about how much of that is working capital release versus what you can sort of generate even if you're just running 24 fleets in the underlying business?

Lance Turner

Well, there is some working capital release in there but by and large our expectation is to kind of build the cash position and retain most of the working capital to release. And so most of this free cash flow will be some collections that we should have actually got in Q2 along with our Q2 results kind of converting to cash.

Connor Lynagh

Got it, thanks a lot guys.

Operator

Thank you. [Operator Instructions]. Our next question is coming from the line of George O'Leary with TPH and Company. Please proceed with your question.

George O'Leary

Good morning guys. Just thinking through the progression of [indiscernible] just want to make sure I had this conceptualized correctly. Did you guys end the quarter at 24 fleets or at some level below that and expect to ramp up such that you average 24 across the quarter or are you starting at a more elevated level and kind of sloping down through the quarter?

Michael J. Doss

Yeah, so we stacked two at the end of the second quarter so we ended at 26. And then over the course of this month, early next month, excuse me, we are in August now, recently we've stacked two more fleets and so that will take us to 24 and we think that's going to be our average for the quarter.

George O'Leary

Okay, that's very helpful. And I thought the commentary around budget exhaustion was interesting, seeing a few E&Ps and note that they may overspend in the first half and probably partly due to the largely driven by the efficiency turn as well, just wondering given your comment that there's some aggressive pricing behavior out there as well, have any of the fleets been dropped just due to somebody coming in and offering a steep price discount or is it really all driven by the former up until this point?

Michael J. Doss

It's driven all by the former, so this was dedicated work. The customer has said they want to take off two months to catch up on their schedule or catch up on their budget or they're just delaying things because they cut their capital budget just in its entirety for 2018. So we've seen a couple of instances of that and that's what impacting us.

George O'Leary

And then maybe one more if I could, it seems like there's a potential for there to be some cost deflation later in the year given what's going on and for example on the labor side now you guys aren’t going out and chasing a bunch more -- so maybe not deflation but some flattening of costs, I guess are you seeing that or is there still coaching in the industries such that costs are staying elevated and then anything of note on the cost side from a consumable standpoint whether it's sand or chemicals would be helpful as we think about incrementals or detrimentals is going forward?

Michael J. Doss

Sure, well I don't think that you're going to see material changes in terms of impact on frac company margins because of that. I think it is still a competitive labor market and so despite things slowing down and some choppiness in the calendars that we're seeing and we think that it's impacting other customers as well, it's still competitive. We didn't see a large amount of labor cost inflation. I think it was a management challenge but in terms of our cost per fleet it really didn't change all that much. We'll take the opportunity to look at all of our costs as a result of what's going on to try to move that down slightly lower but don't really expect much in that category. In terms of the consumables, that's very much commodity market. We think that with this choppiness in demand and with supply additions as well in some of those markets that you can see some deflation. We will be there to take advantage of that but almost all of that flows through to the customer. Those are effectively pass throughs for us so in the end it's good for the customer and if it is good for the customer it is good for us, not much margin impact though.

George O'Leary

Thanks for the color Michael.

Operator

Thank you. Our next question is coming from the line of Mark Bianchi with Cowen. Please proceed with your question.

Mark Bianchi

Thank you. I want to go back to the spot pricing versus dedicated for a second, it sounds like you guys have an expectation sort of the market gets a little bit better towards the end of the year and spot prices maybe from up a little bit and there's no sort of repercussions for your dedicated pricing, but just curious what's the mechanism to adjust dedicated pricing if spot pricing were to stay where it is today, do we start to see some reset and perhaps that's the beginning of the year, I don't know how your contracts work, can you kind of talk us through that dynamic?

Michael J. Doss

Well sure, so on our dedicated contract it is typical for us to have a quarterly reopener and the conversation starts with materials and other specified elements of any cost inflation to make sure that we get recovery on that. Efficiency is always part of that conversation as well thanks the customer can do things that we can do that will improve that for both sides. And then margin expansion. And so that's certainly been the case as we rode the wave up in 2017 and early this year with our quarterly pricing ticking up. Some quarters more strongly than others. It does work the other way, there's typically limits 5% to 10% I think in a severe market condition it's a competitive market out there and a lot of companies are hearing from their service providers and so we're going to have to be competitive on whatever the market is when we get into contract season. We think that we could experience some pressure, it's too early to say at this point what the magnitude of that could look like but we're going to be competitive when those discussions come up.

Mark Bianchi

Okay, thanks for that Mike. In terms of your mix right now, so if we have 24 average in third quarter, how many of those would be on dedicated versus spot and then four that are on the sidelines, are those -- how many of those were dedicated that could be picked back up?

Michael J. Doss

Yes, so the four that were stacked were all dedicated and so those could be picked back up with the same customers or other dedicated work that we are seeking to find right now. I will say at the moment and this does change over time so historically we're 85% to 90% dedicated. Our target portfolio is 90% plus dedicated work. We just work better under a dedicated arrangement, you get greater efficiencies, more pumping days per month. It's more of a machine which is how we operate. So in the current market with what's happened with some of our dedicated customers pulling back activity, we have seven to eight fleets currently in the spot market. Some of those are working for dedicated customers so it may not be dedicated work but it's doing spot work for dedicated customers. So I know that can get a little confusing but that's the case here in the third quarter.

Mark Bianchi

Okay, okay, thanks and then maybe one for Lance or both you guys I guess, the CAPEX guide for the year now implies kind of I guess $80 million run rate, if we stay or if you average between this 24 to 28 fleets do you feel like you're maintaining refurbishment of those at that level or is this just sort of a temporary kind of pinch on expenses for you guys just to kind of get the debt down?

Lance Turner

Absolutely maintaining, our maintenance CAPEX wasn't touched in this and so certainly if we were running fewer fleets which is what we're going to see in Q3 then it'll come down a little bit but on a per fleet basis we're very committed to ensuring we spend every bit of it just to keep it -- keep everything in optimal running condition. The reduction was primarily the growth related, we deferred the new fleet and then the refurbishment of the three fleets that Mike mentioned.

Mark Bianchi

Got it, thanks very much, will turn it back.

Operator

Thank you. Our next question is coming from the line of John Daniel with Simmons & Company. Please proceed with your question.

John Daniel

Hey guys, first congrats on the continued improvements of the balance sheet and the CAPEX disappoints, it has been really nice turnaround to watch. So here's one for you Mike, look deep into your crystal ball and opine on this for me if you would Mike, it seems reasonable that E&P spending is flat to down heading into year-end. I mean we have already seen some customers drop weights as you've talked about and others look to have less well completion plans as you get into Q4. So consequently we're seeing the industry, some of your peers slashing price and one would think that the pricing pressures would intensify should more slowdowns materialize coupled with more capacity in the market because there are still some private startups adding. So assuming that's right one would think that any E&P company with a pretty savvy corporate procurement function would quickly put their 2019 work out for bid. And knowing that the industry has historically fought for market share it just seems to me that industry pricing could be down a lot as people -- as we sort of exit the fourth quarter. Notwithstanding all of the efficiencies and the stuff that you guys bring to bear which is important but they're still going to try to drive price lower. And I'm just wondering if I'm being too extreme with that sort of scenario. And if I'm not where could these EBITDA per fleet that you will normalize and what should still be a decent year next year from an activity standpoint but just a bit more competitive --?

Michael J. Doss

Sure, I think the dynamic that you describe is pretty accurate and so like I said this is a competitive market. There are a lot of players out there that chase market share. We don't think that's the wise move and so we're being disciplined in our approach. And so whatever the situation ends up being we're going to navigate it and optimize what possibly can. And so I will say the conversations we're having with customers about 2019 is more positive than you might expect. And so we feel pretty good about that. And then as it relates to supply additions maybe a silver lining from this choppiness that we're seeing in the market, a silver lining could be some pull back in the supply additions. Hard to really quantify that, what individual players may or may not do but I think it would definitely take off some of the impetus which may actually be a healthy thing in the longer term.

John Daniel

Well, going back to the improvements in 2019 for activity, are you able to sort of discern from the discussions whether if the customer actually is looking to expand the number of fleets that are running or are they sick and tired of their incumbent frac provider and they're coming to you to talk about replacing that competitor, sort of sensitive [ph] growth or just… growth for you or growth for the customer, if that makes any sense?

Michael J. Doss

It's a little bit of both but it's primarily growth in the customers programs.

John Daniel

Got it, okay and then the last one for me, I think if I heard correctly you talked about some improvements with fluid ins. I may have missed that but did I hear that correctly, could you just elaborate a little bit on that?

Michael J. Doss

Sure, well what I was referring to is just because we manufacture our own fluid ins we estimate that that's a $2 million cost savings per year compared to if we bought from third parties. But speaking of fluid ins I mean we do have a continuous program, continuous improvement program around fluid ins to try to extend useful lives. And so we are always playing with the alloys and different ways that we operate our equipment in order to maximize the fluid in life and we've seen some really good results.

John Daniel

Got it. Thank you for your time and again congrats on the balance sheet.

Michael J. Doss

Thanks John.

Operator

Thank you. Our next question is coming from the line of David Anderson with Barclays. Please proceed with your question.

David Anderson

Great, thanks. I was just kind of curious about similar commentary regarding the E&P and particular the Marcellus [ph] we saw. One operator dropping some fleets because they are talking about completion efficiencies. But you talked -- you just mentioned before that the reason your fleets were dropped was because of really budgetary purposes but could you talk about some of those completion efficiencies that you're seeing out there, is it a concern for you that you might see less demand I guess per well or I guess per given production, if we continue on this trend and what is actually driving these completion efficiencies?

Michael J. Doss

Well I'm not entirely sure I understand your question so let me answer a little bit and then you can let me know if I am addressing it. And so when we heard a higher than expected completions efficiencies our customers have a plan for how they are managing their rigs and their frac crews. And so if the frac crew runs ahead of schedule it can bump up against the rig and cause a lot of scheduling jams. And the operator will need to put some whitespace in there. And so that's impacted us on a couple of customers for sure. And then we have had just the straight budget reductions where they just decided for balance sheet reasons, capital discipline reasons, what have you to just reduce spending and they've reduced activity accordingly.

David Anderson

So I was referring to specifically one customer who had said that because they've been getting so many their completion efficiencies have improved so much that they need fewer frac crews going forward that was what I was implying. It would hurt but specifically on Marcellus comment, I'm just wondering if that's something you've seen it all from your customer discussions?

Buddy Petersen

Well one of the ways we look at that as you increase stages per day through fracing or design or lateral link effectively you are doing more per day than you were before. But in terms of having the same number of fleets on location for said period of time we haven’t been impacted that way.

David Anderson

And just one follow-up question. You mentioned that the four fleets that were dropped on were on dedicated agreements. So how do those dedicated agreements work now, I mean do they simply just pick up when they go back to work like how did -- is it just kind of go back, is it just like sort of I guess whitespace I guess in that dedicated agreement and does that continue going forward, I just a little uncertain as to exactly what dedicated agreements mean, is there a set time on that dedicated, in case you can expand that a little bit more to put together to replace those four fleets.

Michael J. Doss

Sure, well even though we referred to dedicated arrangement there's still quite a bit of flexibility in it really from both sides. It's really -- it's an MSA, it's an understanding of how the work is going to proceed. One of the reasons we like what it call dedicated workers is that it is pad after pad after pad. You get the efficiencies, you maximize your pumping days, you get all the efficiencies and that's really how we best operate. There's still some features in these contracts, they're not take or pay so if the customer has a reduction in activity the termination provisions can be relatively light they just need to give us a certain amount of notice and we can work on that. That can accrue to our benefit too in another environment. And so typical dedicated arrangement is 12 months. When it comes to these breaks in activity and other market shifts it's always an ongoing negotiation with the customer. What it will look like when we go back perhaps is under the exact same terms which is certainly the expectation to the extent we need to change those to be more competitive, we'll have that discussion.

David Anderson

Okay, thank you very much.

Operator

Thank you. Mr. Doss I will now turn the call back to you. Please continue with your presentation or closing remarks.

Michael J. Doss

Okay, well just to close out we recognize that the third quarter is presenting us with some challenges but I'm entirely confident that we're going to overcome them. We remain close partners with each of our customers and will be ready when they resume their activity levels. Our commercial team is intensely focused on filling out our calendar with additional work from both new and existing customers to allow us to redeploy fleets. Our operations team will continue to provide the highest level of service quality which is what attracts our customers to use us each and every day. Thank you to everyone for joining us today and I look forward to updating you on our next call.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.