NexTier Oilfield Solutions Inc. Price & Performance (NEX)

Thank you, operator. Good morning, and welcome to the NextEra Oilfield Solutions earnings conference call to discuss our Q2 2023 results. With me today are Robert Drummond, President and Chief Executive Officer Kenny Picchu, Chief Financial Officer Matt Gillard, Chief Operating Officer and Kevin McDonald, Chief Administrative Officer and General Counsel. Before we get started, I would like to direct your attention to the forward looking statements disclaimer contained in the news release that we issued yesterday afternoon, which is currently posted in the Investor Relations section of the company's website. Our call this morning includes statements that speak to the company's expectations, outlook and predictions of the future, which are considered forward looking statements. These forward looking statements are subject to risks and uncertainties, many of which are beyond the company's control, which could cause our actual results to differ materially from those expressed in or implied by these statements. We undertake no obligation to revise or update publicly any forward looking statements except as may be required under applicable securities laws. We refer you to next year's disclosures regarding risk factors and forward looking statements in our annual report on Form 10 ks, Subsequently filed quarterly reports on Form 10 Q and other Securities and Exchange Commission filings.

Additionally, our Comments today also include non GAAP financial measures. Additional details and a reconciliation of the most directly comparable GAAP financial measures are included in our earnings release for the Q2 of 2023, which is posted on our website. With that, I will turn the call over to Robert Drummond, Chief Executive Officer of NextGear.

Thank you, Mike, and thanks to everyone for joining the call today. The Q2 was another strong quarter for next year. Consistent with our guidance, revenue was moderately higher sequentially resulting in improved EBITDA and operating profits, And we delivered another quarter of strong free cash flow and a high return on capital. Our fleet activity levels remain resilient even as the broader completions market temporarily slowed, demonstrating the value of our wellsite integration strategy both NextEer and our customers, the performance is a testament to the strength of the team we've built at NextEer and I could not Be prouder of the way we continue to deliver through a challenging environment. Our commercial strategy aligned us With like minded customers that strive for excellence and appreciate the value that we create and our operations team delivered another efficient quarter. This combination will serve us well at all points in the cycle. From our customers' perspective, NextEer controls a critical path to maximizing their returns. Their trust in our team to deliver has helped us retain customers Even as those same customers have slowed spending with several key customers choosing a next tier fleet over other service providers. In the second half, we believe we enjoy a strong competitive position relative to the peer group.

The previously announced merger with Patterson UTI will allow us to apply our strategy across a larger asset base, Including utilizing our power solutions to accelerate the transition to a more fuel efficient and emissions friendly fleet, while also enhancing our digital capabilities and growing our wellsite integration addressable market. For the 4th consecutive quarter, we generated an annualized return on invested capital of more than 35% And free cash flow was very strong again. Adjusted net income was $158,000,000 for the quarter And our adjusted diluted earnings per share of $0.68 was up 3% from last quarter. Total revenue of $945,000,000 was up 1% sequentially and was 12% higher than the same quarter last year. We delivered the highest top line in the company's history. We once again saw growth on another modest increase in pricing relative to the Q1, Even as our active fleet count exited Q2 lower than where it started. Adjusted EBITDA of $234,000,000 was 3% higher sequentially and up 41% from the Q2 of last year. We saw strong incremental margins and improved our adjusted EBITDA for the 9th consecutive quarter. And we again operated in a very capital efficient manner. We generated strong free cash flow of $128,000,000 despite Making the final Alamo earn out payment during the quarter, which negatively impacted free cash flow by $37,000,000 Our CapEx budget was also weighted toward the first half, and we anticipate free cash flow will remain strong in Q3.

During Q2, we repurchased more than 2,000,000 shares of stock for around $18,000,000 In the first half, we purchased more than 8,000,000 shares for roughly $71,000,000 We have $66,000,000 remaining on our commitment to return $250,000,000 to shareholders by the end of 2023. Given the pending merger with Patterson, we have suspended our share repurchase program, although the combined company remains committed targeting a return of 50% of free cash flow to investors consistent with the next tier capital allocation strategy. Shifting to the macro, overall U. S. Land completion activity slowed as Q2 progressed Following the decline in the U. S. Rig count that started late last year, in natural gas basins, Activity has so far played out as expected. The Marcellus is proven to be relatively resilient, While the Haynesville is taking the brunt of the activity decline, natural gas basin activity is already down almost 20 fleets From the peak and we think natural gas activity is now approaching the trough. Already the Henry Hub Natural Gas forward strip has started to reality that activity will need to move higher from here to ultimately fill the growing global call on U. S. Natural gas. Haynesville has already seen a large increase in drilled but uncompleted wells, which we believe indicates producers are preparing to add In oil basins, completion demand has softened, albeit Only modestly so far, while in the near term there has been more noise than we previously expected in the oil basins, Our views over the long term remain largely unchanged.

Despite near term economic uncertainty, all signs point Higher global oil demand over the coming years and accordingly, we believe U. S. Land oil activity We'll need to move higher than current levels as production will need to increase. We see the availability of In the near term, we think the U. S. Land rig count will likely bottom this summer with Industry frac activity potentially down further from current levels with a trough likely coming later this year. Importantly, we anticipate trough utilization will be significantly higher than the industry has traditionally experienced, a strong indication That the long term uptrend for the industry is still intact. As we've said previously, our customers are looking through commodity volatility More than they have in the past, a positive for next year that should help reduce the historical volatility in our sector. The scenario in 2022, where frac fleets were in short supply is still fresh on our customers' minds. Many are hesitant to give up high performing crews given the positive early view for 2024 frac supply and demand. We believe the call on U. S. Land oil and natural gas production in 2024 and beyond means industry demand could return to levels we saw earlier this year.

Considering newbuild frac equipment has likely been insufficient To fully replace fleet attrition, we see a scenario where demand for our services could once again exceed supply by next year. Against this positive long term macro backdrop and consistent with what we've previously said, If demand softens in the near term, we will choose to stack or redistribute horsepower rather than work at pricing that results and sub threshold returns. During Q2, we idled 2 frac fleets and redistributed the horsepower to our remaining fleets With opportunities to optimize horsepower levels across all fleets, given the high intensity required by the modern frac job, We could idle up to 3 additional fleets in Q3. We continue to run our business on returns And through cycle free cash flow and not market share or short term EBITDA targets. Our balance sheet is healthy Strong free cash flow expected again in Q3 and we will not accelerate the depreciation of our quality assets just to keep working in the near term. Instead, we will use any downtime as an opportunity to invest to fully maintain our fleet and prepare for what we see is a strong recovery in 2024. Our customers are expressing an appreciation for our efforts To strengthen the U.

S. Land oilfield services industry, which will help U. S. Land maintain its position as a low cost global producer. Our customers are choosing to remain with NextGear due to the value created by the fuel cost arbitrage from our integrated Natural gas powered model, which is enhanced by our Power Solutions CNG fueling business. Our partnership matters and given the strong setup into 2024, many customers see no reason to make a change today that could disrupt our extremely safe and efficient operations in a recovery. This is not to say that we do not expect to See an impact from the industry slowdown, but however, we have so far been more resilient than the industry average We expect that will remain the case. Just over a month ago, we announced that we had agreed to merge Patterson UTI, another leader in the U. S. Land oilfield services market. The combination allows both companies to expand our product offerings And drive value for our customers with Patterson's premier U. S. Land drilling franchise complementing the combined company's premier U. S. Land Completion Service product portfolio. We believe the merger of these 2 great companies has the potential for Significant value creation for our shareholders with enhanced scale and $200,000,000 in expected synergies within 18 months after the merger closes.

Applying our successful well site integration strategy across a larger asset base should lift the performance of the entire enterprise. Standalone, each company was already operating a disciplined capital allocation strategy And the increased scale of the combined company should allow us to tap into larger universe of potential investors that we believe will appreciate Our shared focus on free cash flow and shareholder returns and the data analytics capabilities of both companies should not be underestimated. Over time, we are confident that we can monetize the combined drilling and completion data to drive further value creation. The new company will be a leader across the U. S. Onshore market, positioning us to more effectively allocate capital and accelerate shareholder returns while also investing in next generation technologies that should create a sustained competitive advantage that is highly complementary to their drilling business. Patterson's acquisition of Ultera drill bits follows a very similar playbook To our integration strategy, in our view, Ultera offers mission critical products and processes around the core asset, in this case, The drilling rig that can be leveraged with a fully integrated package to improve the process and create value for both the service provider and the customer.

In addition, Ultera's international exposure also offers another potential path for NextEer shareholders to benefit from an expanded geographic footprint. We believe the Ultera acquisition will further strengthen the combined company Next year's shareholders will greatly benefit from this transaction. On our prior conference call, we introduced Next year's Chief Operating Officer, Matt Gillard. Matt has played a crucial role in the success of NextEer since he's joined the company and he will continue in his role as a leader the combined completion franchise post merger. So with that, I'm going to turn the call over to Matt.

Thank you, Robert. Upon the anticipated closure of the merger of Equals transaction with Pattison, I'm honored to have the opportunity to lead the combined NextEer and Universal completions teams, And I'm thrilled to help unlock the potential that lies ahead. Just as we have done at NextEa and as Universal has done under Patterson, We will continue to strive for operational excellence in the most capital efficient way possible. Winning the next cycle will require maximizing asset efficiency, And we believe the combination of these 2 great companies will give us a strong advantage and allow us to help keep U. S. Shale oil and gas producers In a strong position on the global cost curve. By now, our investors and customers understand our well site integration strategy. This strategy aims to lower the total cost to complete the well, reduce emissions and raise the efficiency and safety of the completions process, All combined on our XHUB digital platform, it has allowed us to earn superior results while offering our customers a superior product and has been important in our differentiated financial and operational performance this cycle. We continue to prove that integrating our natural gas powered frac fleets With our natural gas fueling service, our wireline and our last mile logistics business can enhance margins for us and for our clients.

The data supports this and we consistently see more pump hours per fleet relative to jobs where the customer hires third parties for these services And those hours come at a very high return. The combination of the Next Tier fleet with the universal fleet We'll increase the addressable market for our integrated services, and there is a huge opportunity to apply this strategy across a larger footprint, much of which can be done with very little incremental capital. And most importantly, the WellSite integration strategy Also allows us to control more of the safety process and protecting the hard working men and women on our completion well sites is one of my highest priorities. As an example, we have been dealing with extreme temperature this summer. In these conditions, it is important to us and our employees That we can ensure the pad is as safe as possible. I am very proud of the way that our team has protected each other through these difficult conditions. On the frac supply side, headwinds continue to limit efficiency as has been the case over the last 18 months. The maintenance cycle remains a challenge And the number of pumps in the maintenance process today is still near the cycle high.

While some major components such as engines and transmissions Are becoming easier to source. Other issues are arising that are interrupting our maintenance lines. The extreme summer heat is very hard on our equipment Recently, we have seen a spike in heat related equipment issues. While the nature of the issues is minor, They are frequent and require us to take pumps out of service for repairs, which lowers our pumping efficiency. Along those same lines, protecting our employees from extreme heat is the highest priority, and we require all employees to move slower when the temperatures get to these extremes. In the Northeast, the Canadian wildfires impacted air quality on several occasions, forcing us to temporarily suspend operations When we felt it was unsafe for our employees to be outside. These anecdotes should serve as a reminder that frac efficiency is a function of many changing factors, some of which are outside our control. Successfully navigating and anticipating these challenges can differentiate us from our competitors. In addition to maximizing asset efficiency, we see technology as another path to differentiation. Our Power Solutions natural gas fueling business has been a huge success and has improved the marketability of our natural gas powered fleets.

We are consistently displacing more diesel And helping lower the total cost to operate when our dual fuel fleets are paired with our Power Solutions offering. We expect our Power Solutions product line to create even more value and lower emissions if applied across a larger natural gas powered frac fleet. We also continue to make advances in rolling out our next generation frac fleets. We now have 2 fleets in the field with deployed electric horsepower. We intend to continue converting our fleet to 100 percent natural gas powered responsibly over time. The measured pace of our capital deployment has been the winning strategy so far as technology is changing very rapidly. This has helped us maximize free cash flow and returns during the upgrade process. At NextEer, we have built what we believe is one of the most capital Businesses in U. S. Land with a focus on employee safety, operational excellence and financial returns. Balancing these priorities should be a winning strategy. With the inclusion of Universal and the knowledge and experience we expect to receive from that team, We believe we are set up to add significant value for our shareholders over the next several years and beyond.

With that, I'll turn it over to Kenny.

Thank you, Matt. 2nd quarter revenue totaled $945,000,000 compared to $936,000,000 in the 1st quarter, Up 1% sequentially. We saw modestly higher net service pricing on average and an increase in sales from our wellsite integration services. Meanwhile, execution was strong despite the heat waves that we saw in June. This was somewhat offset by lower fleet count Sequentially, as frac activity exited the 2nd quarter lower than where it started, adjusted net income was $158,000,000 for Q2, up 1% from the prior quarter and totaled 17% of revenue. Our adjusted net income Our diluted share was $0.68 Total second quarter adjusted EBITDA was $234,000,000 An improvement from $228,000,000 last quarter. Our adjusted EBITDA improved for the 9th consecutive quarter, even as activity slowed modestly As the quarter progressed, profitability was up sequentially on several factors. First, We saw a slight increase in net pricing relative to Q1, driven by service pricing and higher well site integration revenue. 2nd, we continue to see efficiency improvements relative to the prior quarter. Our decision to lower our fleet count and reinforce the remaining fleets had a positive impact on average pumping hours per fleet, which in turn improved fleet level profitability. The final factor was costs.

We have been very diligent with cost controls throughout the year and we will continue to look for ways to optimize our cost structure. In short, we delivered a strong adjusted EBITDA incrementals of more than 65% sequentially, a function of our winning commercial strategy and operational performance. In our Completion Services segment, 2nd quarter revenue totaled $906,000,000 compared to $896,000,000 in the Q1, sequential increase of approximately 1%. Completion Services segment gross profit improved to $260,000,000 on the increase in revenue as well as a modest increase in margins. In our Well Construction and Intervention Services segment, 2nd quarter revenue totaled $40,000,000 essentially flat compared to the Q1. Gross profit totaled $9,000,000 down slightly on less favorable job mix. 2nd quarter selling, general and administrative Adjusted SG and A expenses totaled $31,000,000 EBITDA for the 2nd quarter was $221,000,000 Management adjustments include $8,000,000 in stock comp with other items totaling a net of $5,000,000 which are non recurring in nature. Management adjustments include $5,000,000 in acquisition, integration and expansion costs, mostly associated with the merger with Patterson. Now on the balance sheet, we exited the 2nd quarter with $310,000,000 in cash. Total liquidity was $721,000,000 which included Cash as well as $411,000,000 available on our undrawn asset based loan.

Total debt the end of the second quarter was $355,000,000 net of debt discounts and deferred financing costs and excluding finance lease obligations, We have no term loan maturities until 2025. Net debt at the end of the second quarter was approximately $44,000,000 down more than $95,000,000 from the prior quarter. Cash flow from operating activities was $226,000,000 Profitability was very strong once again with cash flow negatively impacted by $37,000,000 associated with the final Alamo earn out payment. This earn out should serve as a reminder of the value that the acquisition created for NextEer shareholders. We once again were very prudent in managing our working capital. Our cash used in investing activities was $98,000,000 during the Q2. CapEx totaled $102,000,000 Mostly driven by normal maintenance, funding for the transition of our frac fleet to natural gas powered, as well as investments in our well site integration We continue to make investments in high return Non horsepower growth projects that are critical to the efficiency of our frac fleet. This resulted in free cash flow of $128,000,000 which would have been even greater without the $37,000,000 associated with Alamo earnout. Given the pending merger with Patterson, We will not provide detailed financial guidance.

On activity, we could see our deployed fleet count fall by as many as 3 fleets by the end of the 3rd quarter And we also expect to see increased white space with our average pumping hours per fleet also expected to decline slightly. For Q3, we anticipate CapEx of roughly $85,000,000 which is down from Q2. We expect to reduce CapEx further in Q4. Free cash flow should be strong again and we expect that we will exceed Our target of 0 net debt by the end of Q3. In conclusion, the Q2 was simply more of the same for next year We could not be happier with the way the company has performed so far this year in the U. S. Land and oilfield services market that has seen demand soften As the year has progressed, since the recovery started back in 2021, we have been one of the most consistent companies in the oilfield. The entire time, our message has been the same. Build a foundation with a strong commercial strategy, Operate as efficiently and effectively as possible for our customers and remain good stewards of capital for our shareholders. This strategy has served our company and our investors well.

What makes the pending merger with Patterson so exciting is that their management team shares these same principles And the opportunity to replicate the complementary strategies across a larger asset base and capital structure should mean even greater value creation for all stakeholders. In my role as Chief Integration Officer of the combined company, It will be my focus to ensure that the best practices from each company survive. I cannot be more excited to take on this new responsibility and other roles the combined company's future. I'll now turn it back to Robert for closing remarks.

Thank you, Matt and Kenny. Now let me close with a few key takeaways. 1st and next year, we're proving that our wellsite integration strategy is a winning strategy Across all points in the cycle, we have generated above average returns during the period of frac undersupply over the past 18 months. And already during the recent temporary slowdown, we are seeing steadier activity levels than the industry average. We believe we should continue to fare relatively well as activity levels bottom. 2nd, we These investments include the continued transition of our fleet to next generation natural gas power. We do not plan to accelerate the depreciation of our equipment to hold work in the near term and we will operate our business with a focus on through cycle, Finally, our long term macro view is unchanged. Both oil and natural gas activity will likely need to increase over the next 18 months to meet growing global demand. Considering there have been insufficient frac capacity additions to replace attrition, we still see a scenario During my time as CEO, we've completed several transformative deals that have positively reshaped the company And the industry, bringing Keane and C and J together in 2019 to form next year was hugely The Alamo acquisition in 2021 was well timed and allowed us to accelerate our transition to natural gas powered equipment and was the pinnacle of our successful countercyclical investment strategy.

We believe the merger Patterson is the next step to value creation for our shareholders, our industry and our employees. I'm excited to help lead the new company in the Vice Chair role, where we will continue to pursue what has made NextEer and Patterson successful over Past several years, I've learned a significant amount from all the NextEer stakeholders, including our employees, Our executive team, our board members and our investors, I've enjoyed my time as CEO and I will always appreciate being given such a unique opportunity. And with that, we'd now like to open the lines for Q and A.

We will now begin the question and answer session. Our first question today will come from Luc Lamoine of Piper Sandler. Please go ahead.

Hey, good morning.

Good morning, Luke.

Hey, morning. Thanks for the fleet outlook through the end of 3Q. Just want to see if you guys could maybe outline how you see 4Q activity shaping up. And then do you think 4Q will jump start 'twenty four? And then third part, If you could just step a bit further and expand on your outlook for 2024, which you described as looking more like 1Q 2023 and maybe what level and type conversations you're having with customers right now.

Thanks for the question, Luca. I think that What we're seeing in Q3 in my view is the customers managing their budgets. They're balancing production targets with our balance sheet and their commitments to cash returns versus their outlook what they think about oil and gas price and I think it's a bit of a unique scenario. We're sitting here with oil at $79 and seeing the drilling Count being down a little bit. So when you think about that playing into 2024, I believe that there's like 2 potential scenarios. One is that we have a traditional Q4 Holiday impact that some people call budget exhaustion, that kind of scenario where you see Q4 down a little bit From Q3, but there's another scenario in my view and the more likely one in my view for this year And that is that the customer base prepares to get a run and start into 2024. There's a number of reasons perhaps for that. One is that they're in good shape at this point this year with their production targets. In 'twenty four, we've started to get a little more takeaway capacity in the gas markets and more even in 'twenty five than that.

And the oil outlook seems stronger and stronger on the oil price. So I feel like that the most likely scenario is that you start to see People getting ready for 2024 in Q4. And in fact, Matt and I have been taking Discussions with some of our customers are about those kind of plans for ramping up in 2024. I guess you would probably get a variable answer depending on which company you talk to. But we do try to line up with like minded customers that Have a long term view about the market. So I think that we may be influenced by that a bit, but I believe that that probably Got some macro pretty well.

Got it. That's perfect. Thanks, Robert.

Thank you, Luke.

Our next question today will come from Arun Jayaram of JPMorgan. Please go ahead.

Yes. Good morning, gentlemen. I wanted to first start off with the planned integration activities with the team at Patterson. I wanted to see if you could talk about your plans to integrate the Universal team within NEX. What are your early observations on fleet quality and any upgrade work that needs to be done? And then maybe Kenny can give us an update On the synergy capture from the deal, I think you've outlined up to $200,000,000 over an 18 month period.

Thanks for the question, Arun.

One thing I'd say is that we are on the track that we said we'd be on related to that integration And the concentration of talent has been very impressive from where I sit. Kenny, would you make some comments about where you are with beginning of the plans?

Good morning, Arun. So obviously with the Ultera deal in the background, We're kind of just getting started on our integration planning process. So I don't have a lot to report there. But what I can tell you is, as Robert mentioned, is that It's very exciting. Our focus right now is going to be not disrupting the current very high performing drilling and completion businesses And we're developing our day 1 plans. On your point on the synergies, look, nothing really to report at this point. We put the $200,000,000 out there. Everything we see so far that's obviously still intact. So there'll be more news on that in the coming quarters. Matt?

Yes. Hey, good morning, Arun. I think just on the integration side, like Kenny said, it's pretty early and we're obviously operating independent. I just think from my side on the fleet and equipment side, the NexSys is pretty happy with the progress that we've made upgrading our fleet to DGB and natural gas. With the deployment of the e fleets, we're around 70% of the fleet and now able to operate on fuel efficient natural gas. I think these fleets have been extremely easy to keep busy As we've seen some movements in Q3 or Q2. I think as Patterson has publicly stated, they've also made a large conversion recent years to a good percentage in natural gas capable fleets. So once the close is complete, one of the things that we really look forward to It's a synergy that we can see with applying our power solutions to further reduce the diesel consumption. So I think that's something that will be work in progress and what we're looking forward to as the deal closes.

Great. My follow-up is maybe for you, Robert. Last quarter, you mentioned That given, call it, the bifurcation in equipment between premium equipment and call it more legacy equipment That you didn't see the need to adjust your pricing strategy at that time. Fast forwarding, call it 90 days or so, You guys have talked about a couple of fleets in the quarter where you integrated the horsepower with the existing units and you could lose A couple of 3 more fleets in terms of demand. And so I wanted to get your thoughts on Your updated views on the pricing strategy in NEX and how do you think pricing will trend as we get into The 2024 kind of buying season as things are reset based on 2024 budgets, etcetera.

Got it, Arun. Look, reflecting back on Q1, we said that We were going to be looking at fleet configuration enhancements and driving trying to drive record level efficiencies out of that fleet, Propping it up, making it stronger, focusing on integration that we'd get pricing up a little bit Q2 versus Q1 and free cash flow will be high. I'm glad to say that from an accuracy standpoint, Those things happened. And we continue to look at the commercial aspects that includes pricing On a profitability per metric, profitability per fleet or more likely for us is some profitability per hydraulic horsepower deployed. And what that means really is besides the net pricing aspects, the contract terms and the scheduling, do you have Likelihood of white space, the operating efficiency for the combined operations between us and our customer base, How many pumping hours do we get per month, for example? How much is integration uptake been there? And then also The cost structure that we deal with in the commodities, how do we put all of that into a commercial aspect to optimize it for both us and our customers? And we've got a history of working with the same customers for a long time and that's because we can demonstrate flexibility with them and we have all those different knobs to turn in order to do it.

So when we said that we weren't going to be focusing on price Because we weren't going to do that. We haven't had to do that. And we've operated in a market that allowed that to be the case The relationship we have with our long term customers. But when I go back to my comments earlier about some of our customers and some of the E and Ps in general are managing their budgets in the middle of the year instead of at the end of the year. I think that put some fleets on the market that would ordinarily be a dedicated fleet. So when that happens, you get into a very volatile scenario and maybe there's a number of fleets chasing A bunch of smaller opportunities that are one off wells or one off pads and that's a different environment. So we Proactively made some decisions like that to take those fleets out. I mean, Matt, you'll comment on that a little bit. I know we got a lot of catch up that we needed to do on the fleet Maintenance wise?

Yes. And I think so. We talked a little bit about short term softness in Q3. But I think if you remember, I think we've all talked about this We probably worked the fleet too hard in Q1 and Q2. And one of the reasons we thought to redeploy our horsepower To deploy those extra couple of pumps on fleets, which will increase our efficiency. It also increases our gas substitution, right? So again, just by working those fleets a little bit Less hard. We're able to offer more fuel savings. And I think as we go forward into Q3, again, there's some upgrades that we wanted to do to the fleet In the prior quarters, we weren't able to pull them from operations. So I'd ask you to have a little bit of a breather in Q3 and continue to upgrade and improve the fleet It's actually a good thing for us.

When you ask about the trend as we start to go into next year, the way We look at it as we've spent a lot of time trying to understand the macro supply and demand in frac. And as we made comments in our prepared remarks a bit that We see that 2024 could be another case where frac is a bottleneck again. In other words, there's more demand than There are fleets, particularly in the upper tier of the equipment base that uses natural gas. So we see Huge strong demand there still. And I would argue that that's a very supportive environment in 2024 For that, obviously everything prefaced on what oil price does. I mean, I think we've got probably more visibility on natural gas prices over the next Couple of years and we do oil, but I think everybody's got their view about oil price. I'm not here to try to predict that. It's just that we see it set up Pretty good for 2024.

Great. Thanks for the wholesome answers.

Thank you, sir.

Our next question will come from Derek Poddlevar of Barclays. Please go ahead.

Hey, good morning guys. I just wanted to keep going on Arun's comment around pricing. I think the bear case out there and what investors worry about is that we're going to get this wholesale reset on pricing going into RFP season. So maybe can you help us dismiss those concerns? I mean, is it something to be said that Your fleet mix is much more improved to start 2024 compared to 2023. Just maybe some things to help investors be too concerned about a wholesale pricing reset as we enter next year.

Yes. I mean, I think that the cycles themselves Are becoming shallower. I mean, it means that you don't have to be worried about necessarily A real long period of time, I think that as Matt described, having an opportunity to catch your breath a little bit and get your maintenance cycle We revamped up is somewhat what's happening that's taking capacity off the market right now. Think in the spot market, people sometimes want to make a judgment about what's going on in the overall market based upon what's happening In a situation where people are just trying to decide, do I keep a fleet going for a little while at really Submarket pricing versus doing what we do and some of our other competitors have said that they were doing. So I mean, I would just say, Derek, that is one factor and another factor is the fact that the fleets evolved a lot. Now when you're talking about using a fleet That uses diesel versus one that's using natural gas, there's a big difference in the total cost profile for that fleet for the operator. And he has the ability to continue working with the providers who can bring that fuel arbitrage to the table.

And then the other part of it is when you have the workflows that are really running really well for you and you have a number of Services integrated around it and it's clicking and you measure that by pumping hours per fleet. We mentioned it a little bit in our comments in the Mary Marshall, we had an unbelievable Q2 and people don't want to mess with that too much. And I would just say that, That supported by the fuel arbitrage for gas powered is a lot of reasons why. And I think that There's always going to be people sometimes make short term decisions that or it might be best for them in certain circumstances. But I think in large part, We agree with some of our previous competitors' comments about how the market is acting.

The last thing I'll just throw in there, Derek, is the fact that we've spent 100 of 1,000,000 of dollars on upgrading the fleet and that has to have a return. So I think that's what's buoying a lot of the pricing discussions for the high tiered fleets is that we have to generate that return on investment.

All right. Yes, that makes a lot of sense. Robert, maybe on that cycle being shallower comment, just thinking about how the decrementals Should look in the back half of the year, how will it differ from this cycle versus past cycles? I mean, should we expect them to be more controlled than what we've historically seen? Just trying to gauge where profitability could bottom out by the end of the year before we start up 2024?

No, I think that's a good question. Matt alluded a little bit to our supply chain, which has been struggling up until lately as far as Making deliveries and on driving cost into our system, I think that we're on a campaign to try to back some of that out And through not just pricing, but through how those services or equipment are utilized within our workflows. So I think that'll have a lot to do with the ultimate decrementals. I'd point out that the incrementals in our last quarter were very good. And I think one thing that we've been able to do is be pretty proactive because we are pretty good at assessing the macro And deciding where things are going to be and then start planning and getting ahead of that. For example, we actually put a merit raise in place for our employee base At the beginning of this quarter and our attrition rates are down. That's actually a net positive For the company and I would say that we have not had to have a reduction in force Matt was proactive in balancing our hiring in tune with the expectations of how that would flow through the system.

So all I'd say is decrementals are a function of all of those things and Because our customers are so efficiency focused and our workflows are so married together now, I think we can manage it decrementally very well through this downturn. In fact, I mean, Kenny, you got any comments you want to make on that? Yes.

I would just add that we can't really give any Specific margin guidance, Derek, but what I would like to say is that we expect our margins to be to remain higher Than what they were at similar revenue streams in the past. So everything that Robert said, we have a lot of factors that we have that can limit our decrement As we go forward.

Great. That's helpful. And if I could squeeze just one more. I know last call you guys mentioned the LOI. An update on that, is that still valid or just given the merger with Patterson is just no longer in place?

Look, the value proposition for that Kind of deal for us is still intact and arguably better with increased scale that We have around the completion business in the NewCo. So I think that it requires a little Patience from everybody involved because we do have a lot on the table and we are very diligent about wanting to Mike, the already announced mergers never miss a beat. So I would say is, Derek, yes, I think I Speak for the new company. I'm just speaking on behalf of us right now is that we still see value in that kind of deal. So, I would say stay tuned.

Perfect. Awesome. All right, guys. I'll turn it back. Thank you very much.

Thank you.

Next question today will come from Stephen Gengaro of Stifel. Please go ahead.

Thanks and good morning everybody.

The one of the things I wanted to ask you about just from your Dave, and I'd ask others this as well. The consolidation we've seen in the industry has clearly helped industry dynamics in it. As we think about the frac market and frac pricing, I know there's been spot market pressures, especially among some small operators. But are you seeing like can you point to things that support that the dynamics are better and that Pricing is holding up better. Are you getting anecdotes from conversations? I'm just trying to get sort of validation that that sort of theory is playing out.

Well, it's hard for me to be able to comment on that right now. I would just say that in general, The supply demand balance of the thing is still there and I don't really have any particular data points I could bring up or anything about that.

Maybe I'll say something, Robert. I think one thing is size and scale. And we talked about this a little bit in our Investor Day. Having that size and scale and integration together allows us to offer value savings and cost savings to the client. And so I think we've had a lot of great discussions recently with clients Asking how we can improve the total system completion cost. We're able to take additional services like sand or chemicals or power solutions. I think we're able to have a win win situation where we provide savings to client. And you maybe in the past that we don't have to go so deep on the service pricing that we've had to.

I think our customers appreciate any measures taken that we got this certain amount of fixed cost in the industry and if we spread it out broader across The fleet that's good for everybody. I think the customers appreciate that aspect of it.

Thanks. That's helpful. And I appreciate you guys not wanting to Give a whole lot of guidance. When I think about your I'm just going to use Liberty is an example just because they're probably the biggest other press number that has already reported. The consensus seems to be around the second half of twenty twenty three being 20 ish, 25 percent below the first half. Do you think that's in the ballpark based on what you see? Like just for I'm not talking about revenue, just talking as a general view based on activity and pricing that you're seeing right now that EBITDA in the second half is 20% to 25% below the first half?

All I'd say is that Q3 Pretty well kind of baked in a little bit when you look at what's happened with the drilling rig count already. And I go back to my comments about that 2 phase potential scenario for Q4. 1 being that traditional Holiday relaxation that occurs in many cases versus a run and start on to 2024. I'm leaning toward the second one more likely than the first simply because it's uncommon for customers at this current oil price Levels to be balanced at managing our budget in the middle of the year like you're seeing with this drilling rig count reduction. One of those Competitors that reported, you mentioned, Ed said that there was a lag in frac activity a quarter Behind drilling rig activity, I think that's we don't disagree with that 60 to 90 day kind of lag. So I think we have to watch that and To make that prediction, I think would be a coin toss on what happens in Q4.

Okay. No, that's fair. I appreciate the color. Thank you, gentlemen.

Thank you. Thank you.

Next question is from Sean Mitchell of Daniel Energy Partners. Please go ahead.

Hey guys, good morning. Just wanted to ask you the noise you referred to, Robert, in the oil basins, you referred to noise in the kind of oily basins earlier in the call. And maybe just take a minute, is that more a function The frac fleets moving into those oil basins from gas basins, because we've recently heard a couple of anecdotes around, some of the gas basin Frac fleets are just now moving, which seems a little surprise to me, but I guess the lag you guys just talked about, maybe that's part of that. Are you seeing more assets move into the oil basins from the gas basins on the frac side today, which might be driving some of what you're seeing in Q3?

Look, I think that it's all linked to that comment about the customers managing their budget too. I mean, in the Middle of the year, kind of dropping a little bit of activity because they're already on the production targets. It's also Has to do with what you're referring to. And I'd say that maybe people are prospecting there before they actually move to If they can find something, but I mean, at the end of the day, go back to the beginning of all that, I'd say it was a bit undersupplied in the oil basin. So that's a dynamic that is rebalancing. And I'd also say the whole dynamic about what kind Are you talking about one that's pure diesel? Are you talking about some sort of gas powered fleet? And the dynamics around those are different Just an idled up Tier 2 diesel looking for whatever it could get. So yes, I think that's Fair assessment on your part book, Jay.

And then maybe one to follow-up on labor. I mean, I guess it sounds like you guys aren't having to lay people off yet. But On the labor side, are you guys seeing other people kind of let people go and are they coming to you saying, hey, I'm looking for work?

Well, I'd better let other people disclose what they got going on. We have our view about that. But I would say that we do see a little bit of Anecdotal evidence when applications show up. Right. So, yes, I mean, I think it Depends on where you are and who you've been working for and what status your equipment is in and everything else like that. We've just been I'm just trying to stay ahead of it on the planning phase and balancing hiring with what the expectations are, because Opel Services It's got a amount of churn in the business when it comes to field staffing.

Got it. Thanks guys. I'll turn it back.

Thanks, Sean.

Our next question is from Connor Jensen of Capital Markets. Please go ahead.

Hey, this is Connor Jensen for Jim Rolison with Raymond James. Thanks for taking my call today.

Thank you, Tom.

Just a couple of quick questions from me. Given you're not giving guidance for the Q3, do you expect the merger could close sooner than anticipated or am I reading too far into that?

Well, for us, all I would say is that we haven't changed any of our Messaging around the timing, everything from a filing perspective is kind of going on track. And I would just say standby. I think that That's pretty much out of our control at this stage.

Got it. And then you mentioned the 3 fleets You may drop in Q3. Any insight on whether those may skew early or late in the quarter?

Yes, Tushar, this is Matt. I'll take that one. Again, I think we've stopped talking about absolute We count for a while because we constantly reconfigure that fleet either based on the needs of our client on the pads or to optimize the returns. Well, I think it's probably helpful to answer your question. Kenny and Robert mentioned that we may take out to 3 fleets in Q3. But if I add a little color to that, I can probably say that we'll start Q3 with 2 less fleets than we ran for most of Q2. But I will say we're keeping our options open on that 3rd fleet drop. As we see it today, July pumping activity is very strong. And I think Robert mentioned we're seeing some requests already for possible additional activity in Q3 and Q4. So I think we're just going to watch the quarter closely Before we make that decision on the 3rd fleet.

Great. Thanks for the answers. I'll turn it back over.

Thank you, Conor.

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

Thank you, Allison. I just want to end by saying next year had a great first half of the year and I'm so proud of the people. We're very well positioned as we're going into this merger. We're going to take Very healthy cash balance, a hot foreign group of employees and a fleet is a very efficient equipment into the new company. I can't thank the Next Tier employees enough for the high level of performance, especially in the field where we're dealing with extreme weather conditions. You guys are an amazing group. Thank you very much.

Conference has now concluded. Thank you for attending today's presentation and you may now disconnect your lines.