Keane Group (FRAC) CEO Robert Drummond on Q3 2018 Results - Earnings Call Transcript

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About: Keane Group (FRAC)
by: SA Transcripts

Keane Group (NYSE:FRAC) Q3 2018 Results Earnings Conference Call November 1, 2018 8:30 AM ET

Executives

Kevin McDonald - EVP, General Counsel and Secretary

Robert Drummond - Chief Executive Officer

Greg Powell - President and Chief Financial Officer

Analysts

Sean Meakim - JP Morgan

Tommy Moll - Stephens

Chase Mulvihill - Bank of America Merrill Lynch

Judd Bailey - Wells Fargo

Scott Gruber - Citi

Operator

Greetings, and welcome to the Keane Group's Third Quarter 2018 Financial and Operating Results Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Kevin McDonald, Executive Vice President, General Counsel and Secretary. Please go ahead.

Kevin McDonald

Thank you, and good morning, everyone.

Joining me today are Robert Drummond, Chief Executive Officer, and Greg Powell, President and Chief Financial Officer. As a reminder, some of our comments today will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, reflecting Keane's views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. The company's actual results could differ materially due to several important factors, including those risks and uncertainties described in the company's Form 10-K for the year ended December 31, 2017, recent current reports on Form 8-K and other Securities and Exchange Commission filings, many of which are beyond the company's control.

We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Additionally, we may refer to non-GAAP measures, including adjusted EBITDA and adjusted gross profit during the call. Please refer to our public filings and disclosures, including our earnings press release for definitions of our non-GAAP measures and the reconciliation of these measures to the directly comparable GAAP measures.

With that, I turn the call over to Robert.

Robert Drummond

Thank you, Kevin, and thanks, everyone, for joining us on this call this morning. It's been an exciting first 90 days. It's been especially great working closely with James, Greg, and the rest of the executive team. Since joining Keane in early August, I spent a lot of time travelling to our various field locations getting to know our people. I also spent time with customers, learning more about their relationship with Keane and exploring ways we can continue expanding our already strong partnerships.

These visits with customers have been particularly exciting, giving me the opportunity to reconnect with many of the folks I've worked with at other points in my career. So while it's been only a few short months, I feel right at home. Keane's platform is best in class, and I'm truly excited about the team's performance and the company's future. Many have asked about my early observations since joining. I highlight 3.

First, I've been impressed by Keane's people, including our management team, many whom I've known for many years. People like me who have long resumes working in this sector excel in environments like that offered here, where you can use the skills you've picked up along the way while also being nimble in the decision-making process. This is a refreshing environment where we can make things happen quickly that add value to our stakeholders.

Second, I've been impressed by Keane's customer relationships. Keane's clearly defined dedicated fleet model provides a solid foundation to build strong bonds with high quality, like-minded customers. It seems to me that the definition of dedicated fleet used in the market varies widely, so let me describe what this means for us.

It means having contracts in place with terms that require both parties to commit via written agreement, dedicated resources in customers' offices, key performance indicators to monitor and track performance, technology injected across the operation and having relationships up and down the chain. This is the approach that James, Greg, and Keane team have built and employed since the beginning, and I can say firsthand that it's unique and a key differentiator in this market. Our customers embrace this arrangement because it provides financial alignment and a platform for continuous improvement that drives efficiency at the well site.

Third, I've been impressed by Keane's execution. This all starts with safety, where Keane is second to none. It's ingrained in how we work every day, and our safety track record is what gives us the license to work with the caliber of customers that we do. And most importantly, it's what allows our employees, those of our customers, as well as third parties to go home safely at the end of each day.

Our execution is evident in the high operational efficiency achieved by our crews, which is a key ingredient for ensuring we provide value for our customers and shareholders. As I mentioned, the partner relationship with our customers creates the ideal situation not only for risk mitigation, but also for ongoing improvement in operational efficiencies. This relationship, combined with the fact that the large majority of our frac spreads are paired with our own pumpdown wireline perforating crews, creates alignment completion teams and an environment where continuous improvement is easier to achieve. I found it difficult to create this multi-product line environment in the past, but at Keane, it was built that way from the start.

One key indicator that has continuously improved is hours pumped per completions crew. For the third quarter, this important metric finished at an all-time high and remains the major focus of our service delivery. With data and analytics, we are tracking and analyzing our operating procedure time in minutes to find additional ways to optimize our techniques, to further improve operating efficiency and profitability.

Our efforts to continuously improve operational efficiency and production results are enabled by technology. Our engineering and technology center is working closely with our clients and our field operations to drive both frac effectiveness and production enhancements with products like ReLease, that improves the performance and utilization of produced water for fracturing fluid.

We are a company focused primarily on the U.S. land completions business, which allows us to dedicate our technology efforts completely to this portion of the market, which I consider an advantage. Our technology strategy focuses on both surface and downhole frac efficiency for this market. The surface technology effort is focused on lowering total cost of ownership and improving the reliability of our equipment. We see this as a really opportunity-rich environment.

We're able to discuss our third quarter performance in greater detail, but overall, I can say that we are pleased with the results. For the third quarter, we reported revenue, EBITDA, and annualized adjusted gross profit per fleet above the guidance provided in September. Our operational performance in the Permian Basin was especially strong, driven by the efficiency gains mentioned earlier.

Our completion efficiency is outperforming our original plan, and in the third quarter led to some cases where our completion crews were catching up with our customers' drilling rigs, creating white space in our frac schedule. As highlighted in our updated guidance, we achieved 89% utilization of our 27 deployed fleets, resulting in the equivalent of 24 fully utilized fleets. Also in the quarter, we completed our acquisition of RSI and have quickly and efficiently absorbed this horsepower into our portfolio.

From a broader market perspective, here's what we're observing in the field and hearing from our customers related to the fourth quarter. In addition to the impacts of improved frac efficiency that surfaced in the third quarter, our fourth quarter completion schedule is likely to develop additional white space due to customer budget exhaustion, early achievement of production targets, ongoing commodity price differentials, and typical weather and holiday-related seasonality.

It's important to note that we believe all of these are temporary, and we expect our operations to ramp as we progress through 2019. From a commodity price perspective, fundamentals remain strong and even more constructive as we look ahead into 2019. Year-to-date, through the end of the third quarter, WTI crude oil prices have averaged approximately $67 per barrel. According to the EIA, crude oil prices are expected to average $69 per barrel in 2019 or roughly 15% above the approximately $60 per barrel at the start of 2018. On the natural gas side, prices remain strong, currently standing at approximately $3.20, with the strip calling for similar prices next year.

With all this in mind, we're bullish on how 2019 is shaping up. To begin, we expect capital budget recess to be a catalyst to growth entering 2019. For example, we have one independent customer in the Permian who decided to slow down in mid-November but have communicated his intention to start back up at prior activity levels in January. Additionally, our customers are building strong balance sheets. The U.S. drilling rig is stable and expected to grow further in 2019, budgeting is occurring at higher commodity prices, the drilled uncompleted well count continues to grow, and our customers are benefitting from deflation associated with the increased adoption of local sand and general reduction in frac sand pricing. These are all very bullish factors for the U.S. completion business going forward.

Keane, with our well maintained 1.4 million horsepower of completions equipment, is very well positioned to take advantage of this healthy market environment. We are using the fourth quarter to prepare for the robust activity that we expect next year by investing in our people and equipment to ensure that we are best positioned to take advantage of the opportunities that we expect to encounter. This provides us confidence that even through current market softness, our relative performance will be industry-leading and we will be ready to continue that role as the sector ramps up in 2019.

With that, I'd like to turn the call over to Greg.

Greg Powell

Thanks, Robert. Before we further discuss our third quarter performance, I'd like to provide a brief review of our accomplishments this year. While we do expect transitory effects from the factors Robert discussed, the actions we've taken so far this year and continue to take today position Keane to win and outperform. We understand this is a cyclical business and we've always run our company with that in mind. We point to 5 key approaches through which we've successfully added shareholder value by executing on high-return initiatives.

First, we initiated a stock repurchase program earlier this year, enabling us to acquire our stock at attractive values. And as I'll discuss in more detail momentarily, we purchased $88 million of shares to date, and we continue to believe that buying back our own stock represents an attractive way to drive shareholder returns.

Second, we've managed our balance sheet responsibly, positioning us with maximum flexibility in all markets as demonstrated by our debt refinancing earlier this year. This transaction extended maturity, lowered interest expense, and provided a covenant-free facility, allowing us to be offensive and defensive through cycles.

Third, we've continued to build on our track record of being thoughtfully acquisitive, executing on opportunistic and strategic M&A. This includes the attractive bolt-on acquisition of RSI in July, which bolstered our existing asset base at attractive value.

Fourth, and more broadly, we continue to pursue more strategic consolidation, including the potential for peer consolidation. While these deals are more difficult to achieve, we continue to pursue aggressively on our end and believe there are several targets of scale that could make sense at the right time and valuation.

And fifth, we've continued to grow our fleet. While organic growth carries the highest threshold to execute, we have a strong track record of expanding our asset base responsibly when linked directly with long-term customer demand. In 2018, we have organically grown our fleet by approximately 10%.

Turning now to where we are today. In early September, we provided third quarter guidance to reflect efficiency dynamics that began to emerge in our business. As we've been discussing since becoming a public company, our efficiency on the job site is industry leading. We've always maintained a focus on efficiency, constantly targeting improvements. Early in our efforts, we were able to go after structural improvements driven by pad drilling, zipper fracs and 24-hour operations.

We've been working diligently at it, and while our efforts allowed us to focus on cutting nonproductive hours over the last 12 months, more recently we've been working to shave off minutes. This includes initiatives aimed at reducing time between stages and leveraging technology, and when you do this successfully across the board, it adds up.

For the third quarter, all 27 of our fleets were deployed, however, when factoring in white space, we had the equivalent of 24 fully-utilized fleets. While we've always operated at very high efficiency levels, our efficiencies went through a step change as we progressed through 2018. This has resulted in a narrowing of the wedge between drilling efficiencies and frac efficiencies, causing our crews to catch up to several drilling rigs. Said another way, when we finished one pad and move to start on the next, our customers weren't yet ready for us. At the same time, while DUC inventories have been building across the industry, we've been able to keep pace with these as well.

Turning to our financial performance for the quarter, total revenue totaled $558.9 million, a decrease of approximately 3% compared to the second quarter total of $578.5 million. Third quarter revenue came in slightly above the high end of the guidance range.

Revenue for our Other Services segment, which includes our spending operations, totaled $10.5 million for the third quarter of 2018. This represents a sequential increase of approximately 22% as compared to the $8.6 million reported in the second quarter and reflects the continuing ramp of our spending operations. We've experienced continued interest in the business from both existing and new customers. We're also seeing further benefits of greater scale as we roll out new units in the Permian and Bakken, and expect this business to experience further ramp in utilization and profitability over the coming quarters.

The company total adjusted EBITDA in the third quarter totaled $100.9 million, above our revised guidance and compared to the $111.3 million we reported in the prior quarter. Adjusted gross profit totaled $122.3 million for the third quarter, compared to $130.8 million in the prior quarter. On a per-fleet basis, annualized adjusted gross profit was $20.5 million, slightly above the prior quarter and guidance.

Adjusted EBITDA for the third quarter excludes approximately $6.8 million of one-time gains. This represents the net of $14.9 million of gains from insurance proceeds received associated with the previously disclosed incident in July 2018, partially offset by $4.8 million for non-cash stock compensation expense, $2.8 million for legal contingencies, and approximately $500,000 of cost associated with our acquisition of RSI completed in July.

Selling, general, and administrative expenses totaled $27.8 million for the third quarter compared to $24.1 million in the prior quarter. Excluding one-time items, SG&A totaled $19.9 million compared to $18.9 million in the second quarter of 2018. One-time SG&A items for the third quarter of approximately $7.9 million was primarily driven by $4.8 million for non-cash stock compensation expense and $2.8 million for litigation-related matters. Our SG&A efficiency remains best in class, with third quarter SG&A, excluding one-time items, representing just 3.5% of total company revenues.

Turning to the balance sheet. We exited the third quarter with cash and cash equivalents of $82.8 million compared to $109.5 million at the end of the second quarter. We generated positive operating cash flow of approximately $108 million for the third quarter. Capital expenditures during the third quarter of 2018 totaled approximately $90 million, driven by spending associated with our newbuild fleets, normal maintenance CapEx, as well as investments in technology.

Total debt at the end of the third quarter was approximately $341 million net of unamortized deferred charges and excluding capital lease obligations, essentially unchanged as compared to the second quarter. On an annualized run rate basis, third quarter adjusted EBITDA was approximately $404 million, reflecting a leverage ratio of approximately 0.8.

Net debt at the end of the third quarter was approximately $258 million. We exited the third quarter with total available liquidity of approximately $291 million, which includes cash plus availability under our asset-based credit facility.

Our 3-pronged approach to capital allocation remains unchanged. This includes investing in growth, maintaining and improving our balance sheet, and capital return. We are proud of the further progress we made with regards to our share repurchase program during the third quarter. Following the $100 million program becoming effective in the second quarter, we got off to a strong start repurchasing $40 million through the end of the second quarter. In July, we announced that the board authorized a reset in the program back to $100 million.

During the third quarter of 2018, we completed an additional $29 million of repurchases, and thus far during the fourth quarter we've completed a further $18 million of repurchases. Taken together, we've repurchased $88 million of our stock, retiring approximately 6.6 million shares, or roughly 6% of outstanding shares prior to the program's implementation.

Yesterday, we announced that our board of directors has authorized an increase in the program's capacity back to $100 million. This marks the second such increase authorized by our board since the program's implementation earlier this year. Additionally, the program's expiration was extended to September 2019 from a previous expiration of February 2019.

We continue to believe the stock repurchases at attractive value represents one of the best uses of our cash to drive investor returns, and Keane remains committed to opportunistically executing on additional repurchases.

Turning now to our outlook. The fourth quarter always carries its own set of variables, including weather and seasonality, but also present this year are the factors Robert discussed, including budget exhaustion, early achievement of production targets, and commodity price differentials. While our business does a good job in mitigating many of the headwinds faced by the industry, like others, we're not immune to the emerging market dynamics.

During this quarter, we're investing in people and equipment, keeping several crews hot to maximize our speed to market, given our constructive view for 2019. For the fourth quarter, our assets will be comprised of 29 fleets, of which we expect 25 to be deployed. Of these 25 deployed fleets, we expect to achieve utilization of approximately 90%, driven by white space in the frac calendar, resulting in the equivalent of 22 fully-utilized fleets for the quarter.

On this base, total revenue is expected to range between $470 million and $500 million. We expect annualized adjusted gross profit per fleet for the third quarter to range between $16 million and $18 million. Included in these numbers is approximately $15 million of labor and maintenance cost associated with keeping the bulk of our capacity hot so that when the market picks up, we're ready to go.

So when looking at our fourth quarter, if it were representative of a prolonged period, we would right-size and believe Keane would generate approximately $90 million of adjusted EBITDA per quarter.

For cementing, we previously guided to run rate performance by year-end of between $70 million and $90 million on margins of between 20% to 25%. And while we're seeing a continued ramp in the business, we're seeing the timing of the growth shift somewhat to the right. We reiterate our expectation to achieve these original targets, but now expect to do it in the first half of 2019. We now expect to exit 2018 at run rate revenue of approximately $50 million to $60 million on a margin of approximately 15%.

Looking further out, while it's too early to approach 2019 with too much precision, we wanted to frame how we're thinking about next year. Robert discussed the constructive commodity price environment that we expect in 2019, which we believe will support robust spending by our customer base.

First, let's think about how our business performed in 2018. Year-to-date through the third quarter, we've delivered approximately $300 million in adjusted EBITDA. Our guidance for the fourth quarter, assuming approximately $20 million in G&A, implies approximately $75 million at the midpoint. This means we're anticipating achieving approximately $375 million of adjusted EBITDA for the full-year 2018.

Looking back at our performance in the second and third quarter of 2018, we delivered annualized gross profit per fleet of approximately $20 million. Applying that to our full base of 29 fleets and layering in $80 million of annualized G&A would imply run rate adjusted EBITDA of approximately $500 million. Framing the downside, our annualized fourth quarter guidance, excluding the $15 million of expense associated with keeping our assets market-ready, would equate to approximately $360 million of adjusted EBITDA. Taking the midpoint between these 2 scenarios would result in approximately $430 million of adjusted EBITDA.

Now let's layer in potential scenarios for the cadence of growth in 2019. Not that this represents our base case, but let's assume for a moment that conditions do not improve during the first half of the year and we see a similar environment to what we're expecting in the fourth quarter. That would deliver approximately $180 million of adjusted EBITDA for the first half of 2019. Now let's assume for a moment that you have a bullish outlook on the second half like we do. Taking our second quarter and third quarter performance as just discussed, we would deliver approximately $250 million of adjusted EBITDA during the second half of 2019.

Taken together, this would imply a full-year adjusted EBITDA performance of $430 million. Even if you apply a discount for ramp inefficiency, the potential outcomes for 2019 are attractive. Again, it's way too early to truly forecast 2019, but based on what we know today, this hopefully provides a framework on how to think about the year. We would expect the momentum and earnings generated during the second half of 2019 to carry into 2020, driven by the inventory of DUCs, likelihood of a constructive commodity price environment, and more than ample takeaway capacity in the Permian.

With that, we'd like to open up the lines for Q&A. Operator?

Question-and-Answer Session

Operator

At this time, we’ll be conducting a question-and-answer session. [Operator Instructions]

Our first question comes from the line of Sean Meakim from JP Morgan. Please proceed with your question.

Sean Meakim

Thank you for that framework. I think that was a really helpful scenario analysis, and I think it suggests that as long as profitability holds, and that's really where investors have been quite concerned, then the negative revision cycle for your numbers have already, you know, the numbers have already over-corrected on the sell side. So, I think a common pushback that we hear from investors is that 2Q 2018 was really peak levels of profitability because it's enough at that point where capacity can come in, and it comes in pretty quickly. So in a different type of scenario analysis, how do you think about what peak profitability looks like for the business versus mid-cycle? Where does that $20 million fit in?

Robert Drummond

We agree, by the way, that stock price correction is already got kind of the worst side, down side in already. When you look at Q2 and you look at the efficiency levels that we were generating at that time, we did improve upon that a bit in Q3, and despite white space in the schedule, we still managed to deliver the over $20 million in gross profit per fleet. I think there's more efficiencies to be had in the market, in our pumping hours per day or frac generated per fleet per month, but there's also going to be some more pricing opportunities once the market influx and activity begins to go up again. And based upon a large DUC count that's out there and increasing and the likelihood that the drilling recount actually increases in 2019, that's an environment, we believe, in the second half that provides opportunities for us to revisit pricing to the upside. So I don't think that $20 million is necessarily the upside for us as we look at the back half of, say, 2019.

Sean Meakim

So we'd say that we think $20 million is somewhere between mid-cycle and peak cycle? Is that fair?

Robert Drummond

Yeah, I think so.

Sean Meakim

Okay. And then just, I think the commentary on the completion deficiency was also really timely. As we think about pumping times hitting all-time highs for your crews in the middle of this year, leading to gaps in the schedule, can you help us -- Robert, you mentioned there's some more efficiencies to be had. How do we frame how much more runway we have for efficiency gains? I think when investors recall the specter of drilling efficiencies and what that did for the rigs, of course, you're getting paid on volumes pumped, not on days on site. But could you help us frame how much is left there because I think that's a key part of people trying to understand the supply-demand dynamic for all of the U.S. market?

Greg Powell

Sean its Greg. You know, we've been going hard after this efficiency, and I think we started off kind of squeezing a grapefruit, and it's getting down to a lemon. And the structural improvements with the pad drilling and the zipper fracking were step function and now, like we said in the prepared remarks, we're going after minutes, so time between stages. And the next round of improvements is going to take heavier lifting. It's going to take technology and some more investment. So we saw high-single-digit improvements in pump time over the last kind of 3 to 4 months, and year-to-date we're probably at 15%. I think you'll still see improvements in the future, but they're going to be, number one, harder to get, and number two, probably of a smaller magnitude.

Sean Meakim

And just to follow up there, if they're going to get harder to get, do you think you'll see more bifurcation between different pumpers in terms of ability to capture those harder-to-get pieces?

Greg Powell

Yeah, I think you will. And the other thing, on the supply side, is in order to hit those efficiency levels, the equipment's being pushed harder than ever and it makes the maintenance cycle more difficult. So that's where the investments in pump technology come in to improve your reliability, but while we're making those improvements I think as an industry and the service intensity continues to improve, what's offsetting the efficiency and not creating a bunch of excess supply is these jobs are requiring more horsepower on the well site, as well as more horsepower available for a maintenance rotation. So I think those two are balancing each other out.

Operator

Our next question comes from the line of Tommy Moll from Stephens. Please proceed with your question.

Tommy Moll

Good morning. Thanks for taking my questions. So it sounds like with your dedicated fleet model, as completion activity slows into year-end, it's primarily a utilization response or maybe exclusively utilization-driven without any adjustment to price. And I wonder if you can confirm that, and do you see that changing into 2019 with the various scenarios you laid out? Maybe we ramp quickly in the first quarter or we don't, but in any of those cases, do you see it continue to be primarily a utilization response to customer demand rather than price for the dedicated model? And then if you could just compare that to how you see it playing out for others in the industry, dedicated versus spot, large versus small, public versus private. Just how you see other competitors in the market responding to the slow-down here in the second half of the year.

Robert Drummond

That's a good question. Look, I would say our dedicated model that we're very committed to is serving us very well, and our partners are not rushing out to buy out and cancel contracts, contract commitments, to take advantage of a temporary spot market pricing softness. So, and I don't think that will change as we roll into 2019. But obviously as contracts roll off, our customers will then be looking at pricing in the market that is influence significantly by what's going on in the spot market. Although it might be temporary, it's happening a bit right now.

So, in my view, during this kind of -- where we're at in this part of the cycle right now, I think it's disadvantageous to be having a high percentage of your business linked to the spot market. So the competitors who are more influenced by that will certainly have a more difficult period, I think. You know, as we roll into Q1 and have some of our dedicated agreements coming up for renegotiation, we'll have opportunities there to take a look at what that looks like from a pricing perspective versus our economic hurdles to decide. But we wouldn't mind and we like being positioned as we go into 2019 so that we can take advantage on the back side, particularly perhaps Q2 or as we go into Q3, a situation in the market that we believe that'll be pricing-positive for deploying the part of our fleet that is not dedicated at that point.

So I think that addressed most of your questions. Related to our competitors, I think you hear a lot of talk about people trying to move toward a dedicated model. And I would say one of my observations, as I mentioned in my prepared remarks, is, "dedicated," the definition of that varies pretty widely across the marketplace, and I've been impressed with the contracts that Keane has in place with customers who are like-minded. And when I think about our customer base here, I've been very impressed by that. You're talking about customers with large programs that are focused on completion efficiency like we are. They like to adopt technology quickly and work -- and I think this is important -- as a partner with their service company to be able to address these efficiencies together.

And because of that, I think that's why we're running into a little bit of white space in Q4 because these customers have met and exceeded their production targets. In some cases, they've accomplished more with their capital budgets than they perhaps had planned to do, and that's what's impacting us, mostly, in Q4. If you asked of the decline Q4 guidance versus Q3, it's largely, dramatically so, largely driven by activity associated with that white space.

But I'd also say that those same customers who are tapping the brakes a bit in Q4 are also guiding, they're going back to work in Q1. And for us, we don't know exactly what day that is in

January, but most of them are saying January is the case. But, typically, we've all seen it. The holiday sometimes drags into early part of January, you've got a little bit of additional weather issues typically. So maybe that's mid-January, maybe that's later in January.

But bottom line is that they're all guiding activity levels that are kind of back on par what they were doing as they rolled out of, say, Q3. Long-winded. I apologize for that, but I was trying to give a little color.

Tommy Moll

No, I appreciate it. Thank you. Shifting gears a little bit to M&A, Greg, one of the comments you made I think is going to get a lot of investors' attention, specifically on the potential for strategic consolidation in a peer-to-peer context. Could you lay out what you think are some of the advantages of that?

Greg Powell

Yeah, thanks, Tommy. I mean, this isn't the first time we've talked about that. We're believers that scale matters in this business. We think the benefits are to fixed cost business, you could get more leverage, you can get density within your basins. There's new basins that we're not yet in today, that that would give us the opportunity to develop a presence. We think you can take bigger swings at R&D and technology and amortize it over a larger installed base. You can look more seriously at vertical integration where it makes sense on equipment or some of your inputs because you've got a bigger base, again, to amortize that over. Do you want to look at specific targeted international opportunities, would that size award you that opportunity.

So we think there's a lot of benefits to scale besides just the cost synergies of combining 2 similar-size companies, and we think the industrial logic's there and we'll continue to pursue those. And it comes down to two things. Number one, it's really important to find the right cultural fit so 1 plus 1 equals 3 for what you're delivering to your customers. And then number two obviously comes down to valuation.

Operator

Our next question comes from the line of Chase Mulvihill from Bank of America Merrill Lynch.

Chase Mulvehill

I guess the first question, kind of follow-up on the M&A. When you're thinking about M&A, is it more kind of just frac-focused, or are you thinking about more diversified completion services as well?

Robert Drummond

Look, I would say from an M&A perspective, anywhere that our current footprint would enable us to deploy, say, a new product line is something that we've got our mind open around. But we do like being a completion company focused on U.S. land when we think the macro for that business is really good. When the supply side globally becomes under a little bit of stress, there's going to be more, I think, opportunity. So growing our capacity in completions pumpdown perforating frac is something that we would love to do inorganically without adding additional resource total capacity to the market.

Chase Mulvehill

Okay. And Greg, when you think about M&A, what's your comfort level in leverage ratios?

Greg Powell

I think any bigger deal would be like Tommy referenced, kind of a merger of equals and the conversion of stock. The smaller deals, we're comfortable using our balance sheet with their, our current leverage is under 1. But I think, you know, you guys have seen how we've operated the company. We're 5 years private building the company and 2 years now public, and we're very conservative on the balance sheet. So we're less than 1x leverage now. We like that. So any meaningful deal I think would have to have a significant equity component, because we have a very low tolerance for leveraging up the balance sheet, given the cyclicality of the business.

Chase Mulvehill

Good to hear. And then when we think about pricing, how is pricing holding up on the dedicated fleets, and is there any risk as we roll into 2019 that we'd get some reset on some of these dedicated fleets on the pricing side?

Greg Powell

Yeah, like Robert mentioned, most of the degradation in the numbers has been driven by utilization, and the pricing's been holding up pretty well. I mean, we've got a pretty, on the dedicated, it's been holding up solid because I think our customers understand that this is a temporary dislocation, and the other side of this is going to be very strong and the customers want their, the cost of change is high and they want their dedicated partner that's kind of integrated with them on a set of goals. So the dedicated, we've been very pleased with how that's held up, as have our customers.

On the ones that are expiring or the other fleets, I'd tell you it's pretty tenuous out there. And like Robert said, we're going to be very disciplined on economics even if that comes at the expense of parking some fleets because we think the other side of this is very robust and the activity, we expect a sharp recovery in activity in both utilization and pricing. It's hard to put a pin in exactly the data on that, but as we get through 2019, we think it's going to get better. And our strategy is to kind of position those fleets to participate in that as opposed to feeling like we're pressured to get into deals that we're locked into that don't have great economics.

Robert Drummond

And I'd say meanwhile, we are keeping an eye on the spot market and maybe there's opportunities there that are short-scope, short-term, that meet our pricing hurdle. We would look at those too because we're keeping, as Greg pointed out, the 4 fleets that we have idle right now, we're both investing in those as well as keeping those crews hot with our people ready to go so that we can move on opportunities.

Greg Powell

Yeah, just to further that, in our fourth quarter guidance, as I mentioned, there's $15 million of cost that's, I'd say, 80% labor and then a little bit of routine maintenance on the equipment. We do not have a big deferred maintenance nut to get the equipment ready or anything to that effect, so it's all routine maintenance or upgrades we're doing to the fleet to attack new opportunities. But there is $15 million in the P&L to maintain the muscle so that we're ready to go as activity picks up with work that meets our economic thresholds.

Chase Mulvehill

Yeah. I mean, if you get your crystal ball out, when do you think that spot pricing bottoms, and then how much further down do you think spot pricing can go?

Greg Powell

The crystal ball is in the maintenance bay. Look, we think bottom is some combination of fourth quarter and then kind of early into first quarter, and I think there's just a little bit of, like Robert said, a holiday and a weather kind of carryover into the first quarter. So we would say the bottom of the market, as opposed to calling it a discrete fourth quarter for us, would be kind of fourth quarter into early first quarter, and then after that we're very bullish from what we're hearing from our customers on a recovery into the end of the first quarter and then continued momentum into 2019.

Chase Mulvehill

Okay. Last one and I'll turn it back over. It should be pretty easy. Sand contracts. Any sand contracts that cause you some heartburn?

Greg Powell

No. We're not upside down. We've done a good job of kind of managing to a percent contracted threshold, and also mixing in in-basin sand. So we're comfortable where we are from a contract perspective.

Chase Mulvehill

Alright then. Thank you. Robert more ego.

Robert Drummond

I hate you, man.

Operator

[Operator Instructions] Our next question comes from the line of Judd Bailey from Wells Fargo. Please proceed with your questions.

Judd Bailey

Thanks good morning. Greg, as you kind of think about your active fleet count, you've got 29 fleets, 25 deployed and 22 are fully utilized. If you were to think about the first half of 2019, would you expect to be back to full utilization on those 25 fleets at some point in the first quarter? And do you have any visibility on getting that active fleet count back up to 28, 29, or is it just too early to say at this point?

Greg Powell

Yeah, thanks Jud. I think it's too early to say. We feel better -- we feel the momentum's going to start to pick up kind of mid-first quarter. So I think it's realistic to assume exiting the first quarter, you start to get back to that 25 level and then with continued momentum, you could get back to the fully utilized level kind of by second quarter with what we see today. And it's very dynamic with the opportunities that are out there, and as the customers are finishing their budget process, we'll obviously get some more data on that. But that would be a conservative baseline to lay out.

Robert Drummond

You've kind of got to balance timing with the momentum of the activity in the market, you know?

Judd Bailey

Okay. And my follow-up is, you guys have highlighted something we've heard from some of your peers as well in terms of the frac crews kind of completing the wells and running up against the rigs. Are you in discussions with your customers for 2019 yet on how to smooth things out a bit more, to adjust for the efficiencies that you've made this year and how to avoid the white space developing over courses of the next year?

Robert Drummond

Yeah, absolutely. Our customers are very smart about how they're scheduling, and their models, they improve every year how fast they drill wells and how fast they complete them. I would just say, point out that some of the customers that I mentioned that had tapped the brakes in Q4, part of the logic for that is to also build up an inventory that allows you to be more efficient as you roll into the future. So, yes, that's a constant and ongoing discussion, and I think -- for example, we've improved our frac efficiency as measured by pumping hours by 15% year-to-date, and they'll put those factors in their models and we'll put them in ours as well, and pricing structure will adjust to that as well as timing and scheduling. So, yes, I believe that we will continue as a team, us and our dedicated partners, to get better that way.

Judd Bailey

Okay. And if I could squeeze one more in, I guess I'll ask the obligatory electric frac fleet question. I know you guys have probably looked at it, but just your thoughts on what you've -- evaluate so far and the cost and how you see the economics on those right now.

Robert Drummond

Well, certainly I would say that it would be silly not to be paying attention to that dynamic. And you ask yourself what's driving it. Maybe the biggest driver for the whole thing is the fuel efficiencies associated with it, and there's other ways to get that. But I would say, yeah, we're keeping an eye on it, and wouldn't want to be the first mover necessarily because we kind of feel it's a bit nichy right now, but wouldn't want to be left behind either. So we're going to be watching closely, and perhaps making other investments to allow us to take advantage of that driving dynamic around fuel savings.

Operator

[Operator Instructions] Our next question comes from the line of Scott Gruber from Citi.

Scott Gruber

Yes, good morning, and Robert, welcome, and congrats on your new seat.

Robert Drummond

Hey, thanks, Scott.

Scott Gruber

So a couple ones for Greg here. Greg, how should we think about startup cost as you add crews next year, given that you are carrying the extra $15 million in 4Q?

Greg Powell

I don't think there's anything beyond that, so we're going to keep the labor hot. There's a little bit of routine maintenance here in the fourth quarter. But I don't think there's any particular startup cost. We'll just continue to carry the labor until those crews get revenue to put against it.

Scott Gruber

Got it. And maintenance CapEx for next year on a per-fleet basis? Is the volume of refurbs any greater or less than 2018?

Greg Powell

No. That $4 million maintenance CapEx we've been running per fleet per year, we feel good about that and we tend to -- we keep up with our maintenance, and if there's not any deferred amounts out there and -- I think you might look at our maintenance CapEx numbers and they might seem higher than some things. I mean, there's mixed bag out there in the industry, but what I can assure you is we've got very sophisticated run-the-fleet models [ph] and we keep engines, transmissions, and power ends in our pumps fresh so they can handle the service intensity that's demanded out there today.

I think in other situations, you might see some more lumpy numbers, but our goal is to never have that lumpiness and keep our fleets fresh so that they're always updated and they're ready to meet the demands we have in the market and can be responsive.

Scott Gruber

Got it. And then one last one back on capital deployment. So if we put the M&A decision to the side because I think that's somewhat unique, and not to say it's not appealing, I think it's needed in the industry -- but if we just limit the capital deployment decision down to cash return to investors or investment in new pumps, how do you guys think about the parameters that if we're looking at an improving market here in 2019 and into 2020, improving spot pricing, how do you decide whether it's better to buy your own horsepower or better to go out in the marketplace and order some new horsepower?

Greg Powell

Look, I mean, my view is that the numbers that we laid out in the 2019 framework are going to give us the opportunity to execute on all those strategies. Capital return to shareholders is important to us, and I think we've shown a track record of executing that on here in 2018, and we continue to. But we laid out some scenarios on EBITDA. I mean, at the high end of that, at $500 million EBITDA, we're generating over $300 million in free cash flow. At $400 million, we're generating $200 million, et cetera. So there's enough cash flow in there to keep a responsible balance sheet, return capital to shareholders, and then make strategic investments.

On the newbuilds, we put a very high threshold on that. Not only do you have to have a good economic return, but you've got to have a demand signal from your customers that you think is sustainable. So I'll tell you right now, newbuilds are completely on hold for Keane. We've got some work to do on getting these fleets utilized and driving the pricing and the utilization up. So that's our focus right now, and returning capital to shareholders. Should we get different signals from the market as we enter 2019, we'll stay nimble on that. But the good news at the end of the day is we're confident we'll have enough capital to execute on that myriad of strategies.

Robert Drummond

And if you refer back to the guidance, too, getting all 29 of our fleets optimally deployed allows us to generate $500 million EBITDA numbers on a 12-month run rate basis with essentially minimal growth CapEx of any kind. So that's a very good spot for us to be in to have options going forward.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Robert Drummond for closing remarks.

Robert Drummond

Thank you very much, and look, I appreciate your interest in our company and thanks for joining the call. In closing, we're prepared for and excited about the future, and we expect the fundamentals of this overall market to be very favorable for our business for the next few years. And we're busy building the company to systematically take advantage of this long term and will continue to look hard for growth opportunities.

I'd like to take this opportunity also to thank all of our hardworking Keane employees for their dedication to helping our customers be successful while keeping themselves safe. This concludes the call. Thank you.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.