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Edited Transcript of TUSK.OQ earnings conference call or presentation 11-May-20 8:00pm GMT

Oklahoma City Jun 22, 2020 (Thomson StreetEvents) — Edited Transcript of Mammoth Energy Services Inc earnings conference call or presentation Monday, May 11, 2020 at 8:00:00pm GMT

Mammoth Energy Services, Inc. – CEO & Director

Mammoth Energy Services, Inc. – Director of IR

Mammoth Energy Services, Inc. – CFO & Company Secretary

Stifel, Nicolaus & Company, Incorporated, Research Division – MD & Senior Analyst

Good day, ladies and gentlemen, and welcome to the Mammoth Energy Services First Quarter 2020 earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded and will be available for replay on Mammoth Energy Services’ website. I would now like to introduce your host for today’s conference, Mr. Don Crist, Mammoth Energy Services Director of Investor Relations. Sir, you may begin.

Donald Peter Crist, Mammoth Energy Services, Inc. – Director of IR [2]

Thank you, Don. Good afternoon, and welcome to Mammoth Energy Services First Quarter 2020 Earnings Conference call. Joining me on today’s call are Arty Straehla, Chief Executive Officer; and Mark Layton, Chief Financial Officer. Before I turn the call over to them, I’d like to read our safe harbor statement.

Some of our comments today may include forward-looking statements reflecting Mammoth Energy Services’ views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Mammoth Energy Services’ Form 10-K, Form 10-Q current reports on Form 8-K and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Our comments today may also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in our first quarter press release, which can be found on our website along with our updated presentation.

Now I’ll turn the call over to Arty.

Arty Straehla, Mammoth Energy Services, Inc. – CEO & Director [3]

Thank you, Don, and good afternoon, everyone. Over the past 2 months since we last talked, the world has changed significantly as the COVID-19 pandemic impacted nearly every aspect of our lives, our first priority is and has always been the safety and health of our team, and we have taken several steps to ensure that our team members are protected from the virus. The first quarter of 2020, was challenging on several fronts as the COVID-19 pandemic affected the world’s economy and an oil price war broke out between Russia and Saudi Arabia. The disagreements between Russia and Saudi Arabia were ultimately resolved through a historic agreement involving OPEC and 23 additional countries to curtail oil production through April of ‘22. We believe this agreement will provide support to oil prices once the global economy reopens.

While the oilfield service portion of our business is being impacted by an oversupply of oil and significantly reduced economic activity. The infrastructure portion of our business has been relatively unaffected by the COVID-19 pandemic. The diversification strategy that Mammoth implemented nearly 3 years ago is working. As we have stated in the past, our infrastructure offerings are a vital part of our strategy to diversify Mammoth into an industrial company, and the strategy is starting to come to fruition.

While the revenue for our U.S. infrastructure business was relatively unchanged quarter-over-quarter, the EBITDA improved by 54% due to implementation of several cost-cutting measures, the structure of the business has improved significantly over the past 4 months and additional savings are expected to be realized in the future.

Our operating subsidiaries, Higher Power and 5 Star are well-respected among the utilities they work for and are expanding their customer base from our 2 core geographic locations. These businesses have expanded significantly since acquisition and are currently comprised of approximately 600 experienced field personnel spread across 130 crews. Our customer base is diverse and is aware of our technical abilities. The new management team that is now in place and is leveraging current operations to introduce our capabilities to potential customers. The backlog for our infrastructure division currently stands at $425 million, and we believe industry demand and bidding opportunities remain robust.

With our cost structure streamlined in our core base of operations, we are positioned to grow both our customer base and geographic footprint over the coming years.

Turning to oilfield service. The first quarter of ’20 started off strong but weakened rapidly due to significant price volatility in the commodity markets. As you can imagine, job visibility for pressure pumping is limited at this time, given current market dynamics. With the recent strength in the gas strip, we believe that gas stations should have a higher utilization than oil basins over the coming months.

During the first quarter of 2020, we pumped 1,482 stages with 2.7 fleets utilized throughout the quarter on average. The upgrading of our fleets to dynamic gas blending, or DGB, is progressing. We expect to upgrade additional units over the coming months.

Our sand division sold approximately 239,000 tons of sand during the first quarter of 2020. The average sales price for the sand sold during the first quarter of 2020 was $13.67 per ton while our blended first quarter production costs remained at approximately $12 per ton. The 2 new businesses we first discussed late last year, manufacturing and engineering are both growing.

Starting with Aquawolf, our engineering based business, we added several new customers during the first quarter, and we are looking at ways to integrate engineering into our infrastructure business to begin bidding for engineering, procurement and construction, or EPC work. In addition, we are looking at ways to utilize our manufacturing facility, materials and products used by our infrastructure teams. We continue to seek collections from PREPA for the quality work that our teams performed in Puerto Rico. Unfortunately, Puerto Rico has experienced several large earthquakes recently. The infrastructure team — the infrastructure our teams rebuilt remains unaffected and is operating as designed.

As you can imagine, we are limited in what we can say about pending litigation as it progresses through the courts. While the events of the past few months have been unprecedented, Mammoth’s diverse portfolio of companies across several industries has performed as expected. The infrastructure business has been relatively unaffected through the COVID-19 outbreak and continues to improve. While the oilfield service side of our business has been affected by commodity pricing through watching our costs and rightsizing operations at current activity levels, we are reducing our expenses, protecting our liquidity and preserving our equipment.

Let me turn the call over to Mark to take you through the financial performance during the first quarter of 2020, after which we will take questions.

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Mark Layton, Mammoth Energy Services, Inc. – CFO & Company Secretary [4]

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Thank you, Arty, and good afternoon, everyone. I hope that all of you have had a chance to read our press release, so I will keep my financial comments brief and focus on certain highlights. .

CapEx during the first quarter of 2020 was approximately $1.5 million. Our full year 2020 CapEx budget remains at up to $20 million but is biased downward as oilfield service utilization and pricing remains challenged.

Operating cash flows came in at a positive $1.5 million while net debt stayed relatively flat at approximately $75 million.

We thank our shareholders for their support. This concludes our prepared remarks, and we thank you for your time and attention. We will now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we do have a question from the line of Daniel Burke.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division – Senior Analyst [2]

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Let’s see. I guess a question or 2 on the infrastructure side then. Arty, you referenced a $425 million backlog. I think that’s down from $490 million, $500 million — $490 million at year-end. So it feels like there’s been a little bit of churn there. Can you address what you’re seeing in that backlog? And what trends look like there?

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Arty Straehla, Mammoth Energy Services, Inc. – CEO & Director [3]

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Yes. We — first of all, I hope you and your family are safe during all this, Daniel. But we’re very encouraged with the new management team and what they’ve accomplished in the short time they’ve been together. Throughout 2019, the backlog was highly biased towards distribution, which is lower margin work. We’ve now started to work hard on that mix and starting to look more and more at transmission projects. And I think that’s what you’re seeing is a change in the mix a little bit and running off of some contracts. And we think that as we go forward, we’ll have equal amounts of transmission substation distribution work because distribution is an entry point into the business. And certainly, we had a lot of that, but we are wanting to change our mix towards more transmission and more substation. And it allows us to do that. One of the things that will help us is our engineering group that’s headquartered out of Denver. That will help us as part of our vertical integration aspect. So we’re very encouraged with our infrastructure group. What they’ve done, what they’ve accomplished as they’ve come on and what they’re going to do into the future. We think that the demand outstrips the supply. And we believe that the infrastructure bill that has been talked about quite a bit in Congress will eventually see the light of day, and we think that will be a big boon for us.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division – Senior Analyst [4]

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Okay. That’s helpful. And then, Arty, whether for you or Mark, I mean, as you rebuild and refashion that backlog, it sounds like, can you maybe give us your latest thoughts about what we can think about in terms of margin progression in that business? I don’t know if it’s easy to make headway in terms of margins here in the very near-term because I’m sure even in that business, you’re contending with some higher cost. But how do we think about where you can go with margins in infrastructure?

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Arty Straehla, Mammoth Energy Services, Inc. – CEO & Director [5]

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Daniel, I think in the near term, we had communicated at the last call that we expected have a shot at possibly seeing some positive EBITDA in Q1. Recent developments we have seen positive EBITDA for April out of the 2 operating entities, Higher Power and 5 Star. So as we look forward to Q2, I think our band for margins would be high single digits from the infrastructure segment and then improving throughout the year to the target ranges we’ve communicated historically. .

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division – Senior Analyst [6]

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Okay. That’s helpful. And then I guess, maybe just to go at the OFS side for just a moment. Arty, I mean, you guys have talked about idling some services businesses in the past. You mentioned it again in this press release. I just want to make sure I’m current with what’s been idled? And then I guess, kind of compare and contrast that with the CapEx budget? And I guess I recognize that budget is still elective, but interesting, are you guys still considering putting dollars into water transfer as we sit here today? Or what other places might warrant some growth capital on the OFS side, given just how tough that market is?

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Arty Straehla, Mammoth Energy Services, Inc. – CEO & Director [7]

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One of the things that you’ve always known about us is we’ve been very conservative with our capital. We spend it when we see a good return and right now, in oilfield services, there are not many things that are showing a good return. We are spending money to help convert our fleet over to dual fuel. And that’s the biggest part of the expenditures that we saw in Q1. So we will continue to do that. That’s a customer demand that they want to see, especially in the Northeast, where we have some traction and where we’re currently working. So they’re wanting to have more and more dual fuel units. But our CapEx budget still sits at $20 million, and we’ll be conservative as we go. Certainly in the oil and gas side, it’s about preservation of cash and being very cognizant of where things are. Nobody knows exactly when things are going to pick up. We think that it will come back a little bit with natural gas before oil, but we kind of want to wait and see, and see how that’s going. But the businesses that we do, we will have them ready to respond when the time is there. And we’ll have the core leadership group that can bring people on extremely quickly. We’ll be very agile during this time period.

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Mark Layton, Mammoth Energy Services, Inc. – CFO & Company Secretary [8]

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And just to frame it for you, Daniel, the only other business that we’ve idled since the last time we reported, which was year-end is rig moving. So as of our latest report, we have cementing, flowback, the rigs and rig moving that’s idled right now temporarily.

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Operator [9]

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Your next question comes from the line of Stephen Gengaro with Stifel.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division – MD & Senior Analyst [10]

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I hope everybody is well. I guess 2 things. One, just to start with from a balance sheet and cash flow perspective, how should we think about — and I might have missed the very beginning of the call, but how should we think about working capital as we go through 2020?

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Mark Layton, Mammoth Energy Services, Inc. – CFO & Company Secretary [11]

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So we move through 2020. You strip out the receivables from PREPA. I think from a modeling perspective, we should model working capital relatively flat throughout the remainder of the year.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division – MD & Senior Analyst [12]

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Okay. And then when you think about the pressure pumping business, you mentioned sort of the DGB suites. Are you seeing — and I know it’s really hard right now to markets in such a state of disarray, but are you seeing a different demand pull for those assets versus conventional assets? And how do you think that plays out as we start to come out of this, whatever the second quarter obviously looks pretty bad. But how do we think about that as we come out of this these low levels and maybe return to some level of normalcy?

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Arty Straehla, Mammoth Energy Services, Inc. – CEO & Director [13]

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We think the dual fuel is definitely the way to go. Certainly, I don’t know of anybody that are going to make major investments into electrical fleets and that type of thing. Our conventional assets are still good. But primarily, we were pulled by customers in the Northeast that said that they wanted us to be able to have the dual fuel capability. We feel good about where we’re at and the conversion rate that we’ve done. And as the teams that started working with it, they’ve moved very quickly into a normal operating procedure. So we think that’s more — there’s going to be more dual fuel, and we’ll be prepared for that as we go forward.

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Operator [14]

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And your next question comes from the line of Tommy Moll with Stephens.

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Thomas Allen Moll, Stephens Inc., Research Division – MD [15]

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I wanted to start on pressure pumping. If we look over the last quarter, pretty good sequential improvement on the bottom line for that segment. But there’s obviously been a lot of turmoil in that market of late, maybe less so in the gas basin, though. So my question is, how many fleets do you have active currently? And how are you thinking about go, no-go decisions on whether to keep those active as the market corrects here or has been correcting? And then just on a net basis for the next quarter, you think fair to say flat, up or down on EBITDA for the segment or just too early to tell.

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Arty Straehla, Mammoth Energy Services, Inc. – CEO & Director [16]

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Let me answer the first part of your question first. And up to a week ago, we had 2 fleets running up in the Northeast. And now we’re currently down to one. We do see enough of the schedule in front of us and schedules change. I mean this is one of the more dynamic times in the oil and gas service sector that you’ll ever see, as you well know. But we see 1 fleet. We have pretty good clarity into July and then a little bit beyond. So — but that could change in a matter of at any point in time.

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Mark Layton, Mammoth Energy Services, Inc. – CFO & Company Secretary [17]

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And then Tommy to comment on Q2 expectations, it’s a little early to dial in Q2 expectations. But at a high level, based on what we know today, we’d expect Q2 EBITDA from the segment to be mid- to high single digits in terms of EBITDA. So $6 million to $9 million.

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Thomas Allen Moll, Stephens Inc., Research Division – MD [18]

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Okay. Okay. Similar question on sand, and then I’ll pivot to infrastructure, but they’re still on the negative side for EBITDA for the quarter, but an improvement sequentially. And now we’re confront with just a lot of turbulence for the end market that you’re selling into there. You’ve got a lot of leverage you can pull, though. You’re low on the cost curve. There’s a brokered component that can sometimes help the bottom line. So what can you tell us in terms of how you’re managing costs there? And anything you’re seeing on the demand side that will just give us kind of the latest update for sand.

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Mark Layton, Mammoth Energy Services, Inc. – CFO & Company Secretary [19]

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We’re tightly managing costs, Tommy. We do have subsequent fixed costs as far as expectations on a go-forward basis. Demand has significant headwinds as the number of completion crews drops. We do have the benefit of a handful of contracts that are holding up in this environment. So as far as our expectations for Q2 and Q3, we think EBITDA is in the same ZIP code for that segment as it was in Q1. And then beginning in Q3, we start rolling off some railcars, which decreases our cost profile and should improve the performance of that segment on a go-forward basis.

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Thomas Allen Moll, Stephens Inc., Research Division – MD [20]

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Okay. Last question for me on the PREPA side. What would you give us just to guide expectations on the process? And any range of outcomes there. There’s still a big receivable on the balance sheet. Obviously, from our seats, it’s sometimes hard just to have a sense of what’s a reasonable time frame and resolution, but anything you could do for us there would be helpful.

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Mark Layton, Mammoth Energy Services, Inc. – CFO & Company Secretary [21]

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The legal process is inherently slow in nature. So we continue to work our way through that process. We believe in the quality of the work that our teams performed and the quality of that work has shown up and withstanding several earthquakes on the island. We’ll continue to maintain a dialogue with PREPA and with all parties involved and use all the tools we have. But in regards to forecasting a time line, there’s not really a goal post that we can put out there for you. We continue to be aggressive and we’ll be aggressive, but I don’t have a firm time line for you right now.

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Arty Straehla, Mammoth Energy Services, Inc. – CEO & Director [22]

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Yes. The only thing I would add, Tommy, is that we continue to vehemently pursue our receivables, and we are going to use a number of different strategies to do that, and we’ll continue going forward. Our 10 points of the island, our teams executed at an extremely high level. We want to be paid. So we’re going to continue to pursue as hard as we can.

Thank you, Tommy, and thanks for everybody that got on the call. We want to thank everybody. We hope that your families are doing well. I want to personally thank our team. We believe the future is bright for Mammoth and our team members as we intend to strategically develop our service offerings to grow and deliver shareholder value in the years to come. Thank you to our shareholders for your support and interest in our company. While the current oilfield market conditions are challenging, the infrastructure side of the business is seeing growth. We are working hard to control costs and continue to pivot Mammoth into a more industrial-focused company. This concludes our first quarter conference call. Good day.

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Operator [23]

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Thank you for participating in today’s conference call. You may disconnect at this time.

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