Solaris Oilfield Infrastructure, Inc. (NYSE:SOI) Q1 2024 Earnings Call Transcript

Solaris Oilfield Infrastructure, Inc. (NYSE:SOI) Q1 2024 Earnings Call Transcript April 27, 2024

Solaris Oilfield Infrastructure, Inc.  isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Solaris Oilfield Infrastructure First Quarter 2024 Earnings Teleconference and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Yvonne Fletcher, Senior Vice President of Finance and Investor Relations. Please go ahead.

Yvonne Fletcher: Good morning, and welcome to the Solaris First Quarter 2024 Earnings Conference Call. Joining us today are our Chairman and CEO, Bill Zartler, and our President and CFO, Kyle Ramachandran. Before we begin, I'd like to remind you of our standard cautionary remarks regarding the forward-looking nature of some of the statements that we will make today. Such forward-looking statements may include comments regarding future financial results and reflect a number of known and unknown risks. Please refer to our press release issued yesterday, along with other recent public filings with the Securities and Exchange Commission that outline those risks. I would also like to point out that our earnings release and today's conference call will contain discussion of non-GAAP financial measures, which we believe can be useful in evaluating our performance.

The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release, which is posted in the news section on our website. I'll now turn the call over to our Chairman and CEO, Bill Zartler.

Bill Zartler: Thank you, Yvonne, and thank you for everyone for joining us this morning. Solaris is off to a great start in 2024. We produced another quarter of strong free cash flow, returned incremental cash to shareholders and continued to deliver service quality to our customers. To recap our first quarter results, we generated $68 million in revenue, $23 million in adjusted EBITDA and $14 million of free cash flow. We returned a total of $13 million to shareholders, including $8 million of share repurchases and $5 million of dividends. Last year, we announced an enhanced framework to return at least 50% of free cash flow to shareholders over the long term. To date, we have returned far above that minimum commitment. During the first quarter, we distributed $5 million in dividends and opportunistically bought back just over 1 million shares for about $8 million.

Yesterday, we announced that our Board approved the second quarter of 2024 dividend of $0.12 per share. Including these scheduled returns in the second quarter, we will have returned $178 million to shareholders in dividends and share repurchases since 2018. These returns represent nearly half of our current market capitalization. As we think about uses of our cash going forward, we remain committed to our shareholder return framework with our dividend remaining paramount to that strategy. We built a track record of stable and growing dividends. We've now paid 22 consecutive quarters of dividends without a cut, and we’ve grown our per share dividend by 20% since inception. Opportunistic share repurchases since 2018 have also allowed us to reduce share count by 7% on a net basis, which in turn has helped us grow the per share dividend without meaningfully growing the total cash outlay for the dividend.

We borrowed on our revolver to help fund those share repurchases as well as organic fleet investments. We also expect to pay that debt down with free cash flow over the coming quarters. Our strong free cash flow generation this year also provides an attractive opportunity for us to build cash, which provides flexibility for reducing revolver borrowings, participating in consolidation and remaining ready for future potential organic growth opportunities. Additionally, we remain committed to shareholder returns. Turning to a broad look at the industry. I'd like to reiterate a few themes that we see continuing to materialize as it relates to the maturation of the US shale industry and how Solaris is positioned to benefit from these themes. Consolidation, efficiency and electrification have been and likely continue to be the key themes for the industry, and we expect to play a role in each of these.

Electrification continues to be a dominant theme in the US oilfield and other parts of our economy. We've seen growing adoption of electric frac fleets and related equipment and the development of remotely powered independent grids to support production activity. Solaris' systems have been all electric from the start. Traditionally, we provide generators to power our equipment, but we've experienced increased demand and adoption from our customers to operate our equipment using distributed power available on location, including natural gas powered reciprocating generators and turbines and grid power. Our equipment can easily run off these power sources, saving our customers' money on fuel and reducing overall emissions. Consolidation among operators and service providers is likely to continue over the coming years as inefficiency remains a key catalyst for consolidation.

For operators, larger contiguous anchorage blocks allow for significant operational efficiencies in oil and gas development. And for service providers, diversifying through the combination of multiple product lines can grow revenue opportunity and drive financial and operational synergies. While we have not been a direct participant in consolidation and mergers yet, we continue to look for the right fit that will enhance our cash flow and shareholder returns profile, keep our balance sheet healthy and complement our culture of innovation. Operators also continue to find ways to count resources more efficiently. Despite the reduced number of active rigs and frac crews in the market today, North American oil production continues to flow at record levels driven by drilling and completion operational efficiency gains.

These efficiency gains have resulted in record daily pumping hours, longer laterals, more stages pumped per day and unprecedented daily sand usage, all of which have driven significant cost savings. While Solaris systems represent just a small fraction of the total well cost, operators have benefited from a lower cost per ton of sand delivered as our solutions offer greater optimization of the raw material supply chain. As an example, the upgrades we made to all of our silo systems and top fill equipment for enabling belly dump trucking drive industry-leading reliability and sand offloading rates. Some of these upgrades include customer-focused software tools that allow better visibility and control over inventory and trucking as well as increased truck unloading rates.

Our top fill systems, which are present on more than half of the frac crews we service today, helped produce the total delivered cost of sand by reducing the number of truckloads required through higher payloads and increasing truck turns. As total sand usage grows, we believe our high throughput material handling solutions become crucial for maximizing capital and operational efficiencies in logistics. I'd like to summarize by highlighting that we continue to expect strong cash flow generation in 2024 as our capital spending is at maintenance levels and our products, both new and old, continue to generate meaningful returns. The Solaris team continues to support our customers with the highest level of innovation, reliability and safety against a somewhat choppy backdrop of near-term drilling and completions activity.

We are confident in our ability to add value to our customers through addressing the growing nature of completions intensity with the right solutions and for our shareholders through increasing liquidity, growing substantial cash returns, maintaining a healthy balance sheet and remaining ready for future potential organic and inorganic growth opportunities with a strong cash position. With that, I will turn it over to Kyle for a more detailed financial review.

Kyle Ramachandran: Thanks, Bill, and good morning, everyone. I'll start with recapping our first quarter financial and operational results. Operating cash flow was $17 million. After $3 million in capital expenditures, we generated $14 million in free cash flow. We returned $13 million to shareholders, which was made up of our $0.12 per share quarterly dividend and the repurchase of about $8 million of shares. Total debt on our revolving credit facility remained at $30 million. Together with $3 million in cash at the end of the quarter, net debt was $27 million. We ended the quarter with approximately $41 million of available liquidity. Our activity in the first quarter, as measured by fully utilized systems of 102 systems, was essentially flat with the fourth quarter of 2023.

We followed an average of 64 frac crews, which was also flat with the fourth quarter. Our prior expectations for the quarter were for modestly growing system count, which we saw in January. Throughout February and March, industry activity continually weakened throughout the quarter, as job starts and gas-exposed basins pushed to the right. Annualized contribution margin per fully utilized system, excluding ancillary trucking services, improved 4% sequentially, as we benefited from a pricing reset in January and some improved cost efficiency. Ancillary services contribution improved in the first quarter sequentially and was stronger than expected due to a more favorable job mix. As a result, total annualized contribution margin per fully utilized system, including ancillary trucking services, improved 7% sequentially to $1.1 million.

On a per frac crew followed basis, total annualized contribution margin improved 6% sequentially to nearly $1.8 million. SG&A in the first quarter was approximately $8 million, and including noncash stock-based compensation of $2.2 million. Net interest expense was $800,000. Working capital was a seasonally higher use of cash at $5 million and included the payment of annual cash bonuses and the annual resetting of overhead expenses. Capital expenditures of $3 million were in line with our prior guidance of less than $4 million per quarter or less than $15 million for the year 2024. Turning to our guidance for the second quarter. We expect North American land activity to be relatively flat from current levels in the second quarter as natural gas weakness impacts completions activity in gassier basins while strong oil prices support stable activity in basins such as the Permian.

As noted earlier, our system deployments in the first quarter trended down as the quarter progressed. Exiting April and heading towards the second half of the quarter, we're seeing some increases in our system deployments for both sand systems and top fill units. Based on our current outlook, we expect that the number of frac crews we follow and thus, our fully utilized system count on average in the second quarter could be down 5% to 10% from the first quarter average. While we do see some oil-directed activity additions weighted towards the back half of the second quarter, we also continue to see program delays in gassier and even combination basins such as the Eagle Ford. We expect SG&A in the second quarter to be lower sequentially and approximately $7.5 million.

We expect the total pro forma tax rate to be roughly flat at 26% and the pro forma dilutive share count to be flat at 44.1 million shares. We are maintaining our capital expenditure guidance for the year 2024 of less than $15 million, which largely reflects maintenance levels of spending with some continued rollout of system upgrades. We expect these puts and takes to translate into a sequential increase in free cash flow to between $15 million and $20 million in Q2. We expect to use this cash to continue to fund our quarterly dividend, opportunistically evaluate share repurchases and pay down debt. We expect adjusted EBITDA to be down a couple of percentage points lower than activity sequentially as pricing remains steady, but activity softness, job mix and cost absorption impact profitability.

Before we open the call for questions, I'd like to reiterate that we have spent the last couple of years making strategic organic investments that are driving earnings and cash flow growth and have enabled us to grow free cash flow and provide meaningful cash returns to shareholders. We believe the first quarter of 2024 is already showcasing the strengthened cash flow generating capability of our expanded service offering. All else equal, we believe our investments will enable us to deliver stronger earnings power and cash flow resilience moving forward as compared to prior cycles. We will continue to focus on sustaining and growing our shareholder returns program, increasing our liquidity, strengthening our balance sheet and executing on the right organic and inorganic opportunities that enhance our return on capital.

With that, we'd be happy to take your questions.

See also

10 Best Streaming Service Stocks To Buy and

10 Best E-Commerce Stocks To Buy According to Analysts.

To continue reading the Q&A session, please click here.