Atlas Energy Solutions Inc. (NYSE:AESI) Q3 2023 Earnings Call Transcript

Atlas Energy Solutions Inc. (NYSE:AESI) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Greetings, and welcome to the Atlas Energy Solutions Third Quarter 2023 Financial and Operational Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Kyle Turlington, Vice President of Investor Relations. Thank you, sir. You may begin.

Kyle Turlington : Hello, and welcome to the Atlas Energy Solutions conference call and webcast for the third quarter of 2023. With us today are Bud Brigham, Chairman and Chief Executive Officer; John Turner, President and CFO; and Chris Scholla, Chief Supply Chain Officer. Bud, John and Chris will be sharing their comments on the company’s operational and financial performance for the third quarter of 2023. After which, we will open the call for Q&A. Before we begin our preparatory remarks, I would like to remind everyone that this call will include forward-looking statements as defined under the U.S. securities laws. Such statements are based on the current information and management’s expectations as of this statement and are not guarantees of future performance.

Forward-looking statements involve certain risks uncertainties and assumptions that are difficult to predict. As such, our actual outcomes and results could differ materially. You can learn more about these risks in the prospectus we filed with the Securities and Exchange Commission on September 12, 2023 in connection with our Up-C simplification; our quarterly reports on Form 10-Q; and our other SEC filings. You should not place undue reliance on forward-looking statements and we undertake no obligation to update these forward-looking statements. We will also make reference to certain non-GAAP financial measures, such as adjusted EBITDA, adjusted free cash flow and other operating metrics and statistics. You will find the GAAP reconciliation comments and calculations in yesterday’s press release.

With that said, I will turn the call over to Bud Brigham.

Bud Brigham : Thank you, Kyle, and thanks to everyone for joining us today for our third quarter conference call. Despite a 10% drop in the Permian rig count since the beginning of the year, demand for Atlas proppants remains resolute and we are rapidly growing our logistics platform. We are pleased with our third quarter operational and financial results, as our team continues to deliver across a range of operational and profitability metrics including total sales, sales volumes, net income and adjusted EBITDA. Importantly to investors, Atlas continues to generate industry-leading margins, which in my view are underappreciated, benefiting from our exceptionally low cost structure. And we continue to work to drive costs down even lower.

Over the course of 2023, we reduced our operating costs on a per-ton basis, and we expect to achieve further reductions in the middle of next year, when our two new fit-for-purpose dredges come online and achieve their planned utilization levels, all of which should benefit our industry-leading margins. Our three major capital projects to grow our business the Dune Express conveyor system, the new Kermit facility addition and the build-out of our trucking fleet are progressing as planned on time and on budget. Now I will briefly review our growth initiatives. But I’ll also encourage you to watch the video update summarizing these initiatives, which is linked on Page 3 of our updated presentation. Starting with our production expansion, our new facility at the Kermit location is now in the — process with commercial in service expected late in the fourth quarter.

As a reminder, this new facility will increase our Permian-leading production by approximately 50% to over 15 million tons further enhancing our scale, which is crucial in order to reliably match the scale demand and efficiencies of our large-scale customers. The second area is our logistics offering, which includes our innovative high capacity trucking and delivery assets. Our logistics and delivery assets enhance efficiencies and reliability for the industry. And as a result, our market share is growing, as Chris will discuss in a bit. Our logistics offering is also important given that these trucking and delivery assets will seamlessly interface with the Dune Express, which is expected to come online late in 2024. As a reminder, we rolled out our innovative high capacity trucking and delivery assets to prepare the market for the Dune Express and facilitate a more seamless transition to that infrastructure-based solution.

This brings me to our third major growth initiative our Dune Express conveyor, which is really more similar to a midstream asset. Like the other capital investments, the Dune Express remains on-time and on-budget with an expected commencement in the fourth quarter of 2024. We have ordered approximately 90% of the equipment and materials for the project and have also contracted approximately 80% of the installation and labor, which significantly reduces budget risk. Today, we have taken delivery of more than 57 miles of conveyor belts and over 100 miles of fiber optic cable. We believe the Dune Express and our logistics offering will provide substantial environmental and societal benefits as we aim to vastly reduce the number of trucks on commercial roads in the Permian, which is expected to reduce emissions and save lives.

Furthermore, our logistics offering has the potential to enable our customers to realize efficiency gains, by increasing the throughput potential of proppant to serve frac crews that continue to find ways to pump faster and consume sand at increasingly impressive rates. In terms of sales, despite an estimated 10% reduction in completion activity in Q3, Atla’s sales volumes remained sold out in Q3 and were flat sequentially, demonstrating correct alignment with prominent Permian Basin customers. For 2024, we currently have 6.2 million tons of production contracted which represents 40% of our anticipated production capacity of 15.5 million tons for next year. It is worth reminding investors that oil and gas companies have been working on their 2024 budgets and are just now entering the early stages of contracting their sand and logistics needs for 2024.

These negotiations will run from now through the first and into the second quarter of 2024. As expected there was very little contracting in August and September with our existing customers and potential new customers. Our second leading margins, benefiting from our low cost structure which should only get lower with the fit-per-purpose dredges around mid-year 2024 and lower again in 2025 with our Dune Express, combined with our expanding revenue streams, provides us with confidence that we will be able to layer on the additional contracts and accomplish our financial goals which includes growing distributable cash flow into next year and the years to come. Of note, Atlas has adjusted its overall portfolio over the last two years to ensure contractual continuity, through staggered terms with regards to both contract duration and timing of renewals.

Our goal remains to have 80%-plus of our capacity committed in 2024. And we remain confident in that goal for several reasons. First, we’re currently in negotiations for several million annualized tons of sand and logistics in rolling contracts with existing customers, where historically, we have had very high retention rates. Current contract discussions include not only sand and logistics supply agreements, but also some more complex and long-term conversations about a revolutionary infrastructure-based solution for the Permian. In addition, we have a number of meaningful opportunities to add volumes with new customers, including large customers that stand to benefit from the Dune Express. Our growth in the logistics business and our progress on the Dune Express combined with our unmatched reliability and scale, uniquely positioned Atlas to meet the growing demand, but to also grow our market share in the Permian.

While operators generally control the timing of the initiation of these contracts, we control the access to future volumes that will go down the Dune Express. For these reasons we remain assured that we will exit contract season, with not only a strong contract backlog but alignment with the most efficient and highest quality customers. Regarding sand pricing, investors should recognize that there is stratification and differentiation in the Proppant and Logistics markets. Some of the factors in proppant marketability and thus pricing include the company’s ability to scale up to reliably meet the needs of increasingly large operators in the Permian, particularly given the increase in Pad Development Drilling and Simul-Frac Activity. In this regard Atlas is unmatched in our ability to deliver profit with the scale and reliability required for these projects in order to effectively de-bottleneck sand in these massive completion operations.

Associated with that are our innovative logistics offerings and associated incremental dependability and reliability, which they provide to our customers. Our expanded logistics offerings differentiate Atlas in the market further enhancing our industry-leading dependability and reliability. In my view, as a former operator, I can state unequivocally that dependability and reliability are of major importance to our customers and they are absolutely mission-critical in the value proposition we offer. Given our unmatched scale, our historical delivery execution and our ongoing logistical innovations, we feel confident in our ability to deliver the step-changing performance that our large-scale operators need. Another point on sand pricing is the fact that there are numerous variables involved.

For example, are you selling wet or dry sand? Atlas currently sells only dry sand and we’ve been sold out all year while others have had to sell meaningful sand volumes on the spot market. All of that to simply say that investors should not read too much into discussions of spot pricing. While lower spot pricing can directly be indicative of pricing trends, there are reasons that some products fly off the shelf and are even contracted before other products are sold. And there are reasons that some products on the shelf have to be discounted. And of course, the distance to the wellhead and associated delivery cost plays an important role in sand pricing and the all-in costs for the operators. Importantly, the Dune Express will eliminate the distance-related benefits of some of the wet sand options in the Delaware basin.

Further, when you add in the advantage Atlas has in inventory, security of supply, quality and throughput potential, our customer’s ability to pursue operational excellence on a scaled basis will only be enhanced. As the largest proppant producer in the Permian with the largest and highest quality reserves, our differentiated advantage also makes our results less volatile as evidenced by our quarter-to-quarter performance. While that benefits and is of significant value to our customers those attributes including our unique dredging operations also benefit us by lowering our cost structure. Regarding the macro environment we’re operating in, despite the drop-off in activity, the Permian proppant market remains healthy driven in part by the continuing advancements in efficiencies.

Frac crews are continuing to pump more proppant on a per day basis. On the supply side, Permian proppant producers have been disciplined, with modest supply additions recently coming in response to a long period of significant undersupply in the Permian, bringing the market into a more balanced position as we enter 2024. Optimism surrounding the recent movement in oil prices and early signals from customers leads us to believe that a strong recovery in frac activity is around the corner. An expected ramp in activity next year, combined with continued increases in proppant per frac crew per day against a supply side that is much more patient in making growth investments than we’ve seen historically, leads us to believe that the sand market will tighten again next year.

Again, we remain sold out in Q3 and expect to remain very busy in Q4, particularly given how heavily contracted we are. With the current geopolitical uncertainty, the call for more Permian barrels has never been greater and more crucial for energy security in the United States. In addition, the previously announced corporate reorganization transaction or Up-C simplification closed on October 2. We now trade under a single class of common stock with the previous dual-class stock structure now eliminated. We are optimistic that our simpler more efficient corporate structure will enable us to broaden our investor base. Finally, given our strong margins in quarter-end liquidity, we’re excited to put forward another quarterly dividend of $0.20 per share.

Similar to the previous quarter the dividend is comprised of a $0.15 per share base dividend with a $0.05 per share variable dividend. Last, I want to point investors to slide 12 in our investor presentation. As previously mentioned, Atlas leads all the other public companies in the oil field service sector in both margins and growth. This is truly a remarkable enterprise and we’ve now demonstrated that performance on a consistent quarter-to-quarter basis, without the volatility experienced by others in our space. Given those margins and the growth we expect to achieve in 2024 and 2025, while our major CapEx initiatives are winding down, we expect to enjoy exceptional cash generation flexibility, which should increasingly be recognized in the market.

With that I will turn the call over to our Chief Supply Chain Officer, Chris Scholla to provide you with an update regarding our trucking and logistics business.

Chris Scholla: Thank you, Bud. We continue to build out our fleet of high-capacity logistics assets and provide seamless delivery of double and triple trailers to our customer well sites with payloads that exceed the industry standard tonnage by three to four times respectively. Our customer base and multi-trailer operations continue to grow, as evidenced by an over 100% increase in multi-trailer jobs and adoption by some of the largest operators in the Permian since the beginning of this year. As shown in our investor presentation, we added an additional drop depot facility during the quarter, which almost doubles our existing heat zone, multi-trailer delivery areas to over 1000 square miles. We expect to commission our third drop depot facility during Q4 of this year, which will expand our multi-trailer delivery area to over 1,500 square miles in the Delaware basin.

We also commissioned our remote in-field command center, which is presently located 18 miles west of our current facility. This command center was designed to be completely remote and mobile. We will eventually be placed in the heart of the Delaware basin near our end-of-line loadout facility upon completion of the Dune Express. Our new in-field command center puts our logistics base of operations significantly closer to customers’ well sites, ultimately supporting superior in-field customer service. With that I will turn the call over to our President and CFO, John Turner.

John Turner: Thank you, Chris. Today, I will review our third-quarter 2023 financial and operating results and comment on our financial position. For the third quarter, we reported total sales of $158 million. Our profit sales revenues were $115 million. Our profit sales volumes were relatively flat over the period while our average mine gate price declined moderately. The sequential price decline is a function of higher-priced, shorter-duration contracts rolling off and being replaced by new contracts at lower rates, as well as quarterly pricing resets on certain contracts. Moving to service sales, which is revenue generated by our logistics operations, we reported a quarterly record of $43 million in revenues for the quarter, representing a 17% increase when compared to our prior period.

This increase in service sales is related to an increase in the number of active jobs during the period enabled by an increase in the number of trucks deployed and continued customer adoptions of our single and multi-trailer logistics offerings. As of October 31, we had taken delivery of 97 trucks, which is an addition of 35 trucks since the last quarter and expect to take ownership of a total of 120 trucks by year-end. In total, cost of sales excluding DD&A for the quarter increased by $4 million to $68 million. This increase was primarily driven by higher trucking and last mile logistics costs resulting from the increase in the size of our fleet and increase in number of active jobs. For the third quarter, our per-ton plant operating costs were $9.66, which is in line with that of the prior period.

Further, we expect the delivery of our new specialized dredging equipment in early 2024 to provide for incremental improvements in operational performance and further reductions in our mining costs once those assets are fully commissioned by the middle of next year. Royalty expenses for the quarter were down 16% to $3.6 million due to lower realized mining prices. SG&A expense for the quarter was $14 million, representing a sequential increase of 17%. The increase was driven primarily by increases in consulting and professional fees which includes $3 million in non-recurring transaction costs related to the Up-C simplification and the refinancing of our terminal. Interest expense for the quarter was $5 million, which was offset by $3 million of interest income generated during the period.

We expect our interest income to decline in future quarters as we draw down on our cash reserves to fund our growth projects. Depreciation, depletion and accretion expense for the quarter increased 8.4% to $10 million. This increase was due to an additional, depreciable assets placed into service as compared to the prior period. We generated net income of $56 million for the quarter representing a strong net income margin of 36% and earnings per share of $0.51 per share. Net cash provided by operating activities for the quarter was $55 million compared to $104 million during the second quarter. $38 million of this decrease was associated with changes in operating assets and liabilities, that were largely associated with an increase in accounts receivable during the quarter combined with lower net income.

We have seen the accounts receivable balance normalizing into the quarter. Adjusted EBITDA for the period was $84 million representing a sequential decrease of 9.4% and an adjusted EBITDA margin of 53%. Adjusted free cash flow, which we define as adjusted EBITDA less maintenance CapEx for the quarter was $69 million representing a sequential decrease of 21% and an adjusted free cash flow margin of 43%. Looking to the fourth quarter of this year, we expect our EBITDA to be flat just down slightly when compared to the third quarter depending on the degree of seasonal and holiday impacts we see this year. During the third quarter, given our low levels of required maintenance capital expenditures, we converted just over 81% of our adjusted EBITDA to adjusted free cash flow.

Capital expenditures for the quarter were $139 million. This includes $124 million spent on growth projects which includes our new Kermit facility that did express our well site delivery assets and production enhancements at our existing facilities. We incurred $16 million of maintenance CapEx during the quarter. We expect growth capital expenditures to continue to increase as we progress on Dune Express construction, which will be partially offset by declining new Kermit facility expenditures as construction activities taper off, as we approach commercial in-service of that additional capacity before the end of this year. As of September 30, we have spent $132 million out of our budgeted $400 million on the Dune Express. For our new Kermit facility, we have spent $180 million with an additional $25 million remaining.

The new Kermit facility is currently being commissioned and is expected to be fully online by the end of this year. As of September 30 2023, our total liquidity was $439 million. This was comprised of $265 million in cash and equivalents; $74 million of availability under our ABL facility under which we had no borrowings outstanding; and $100 million of availability under our delayed draw term loan facility. We streamlined our capital structure during the period, with a new $180 million term loan that refinanced our previous term loan in finance leases. The principal balance of our new term loan sits at $180 million and our current finance lease balance is $0.5 million dollars. So our total debt outstanding currently is $181 million and we ended the quarter with a debt to LTM adjusted EBITDA ratio of 0.5 times.

That concludes our preparatory remarks, and we will now let the operator open the line for questions. Thank you all for joining our third-quarter call.

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Q&A Session

Operator: At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Luke Lemoine with Piper Samar. Please proceed with your question.

Q – Luke Lemoine: Hi. Good morning.

Bud Brigham: Good morning Luke.

Q – Luke Lemoine: Bud, you talked about six – hey, morning. Bud, you talked about 6.2 million tons already contracted for 2024 and then you talked about in negotiations of several million tons with existing customers which would pretty much take you to your 2023 production levels. I guess within that 6.2 million tons you’ve already contracted, can you talk roughly about new versus existing customer mix? And then on the incremental production volumes you’re adding, is the goal to try to place as much as possible with operators that can offload from the Dune Express? Or is there a wet versus dry consideration as well or just kind of some of the variables there?

John Turner: Yes. So hi, Luke. This is John. Obviously, talking about our contracting we don’t really talk about specifics on what we’re currently working on. But as you said, we currently have 40% of our 2024 volumes contracted at very attractive pricing. We’re currently in discussions with a number of existing customers, and new customers regarding volumes. We expect these particular discussions to go on throughout the quarter and be wrapped up by the end of this quarter and early next. And we also have a lot of contract renewals coming up in the first and second quarter of next year. Many of those discussions have not yet started, and we don’t expect them to until we get closer to the renewal dates. And finally, there are a number of new opportunities that we’re starting — that are starting to come out.

We’re evaluating these to see, if we have the tonnage to meet these additional contracts. So just as a reminder, our run rate is 11 million tons this year. And we currently plan on selling 15 million tons next year. We’re currently working on contracts that would far exceed those numbers. Our stated goal for next year is to be 80% contracts about 15 million tons. It should be noted that, it’s not a requirement to exit this year and be 80% on 2024 volumes given all the renewals that happened in the first and second quarter. This is not really a race to see how much of our 2024 volumes we can contract as quickly as we can. There are more than enough opportunities out there for us to be 100% contracted. And our primary goal here is to secure contracts with high-quality operators and pressure pumpers who stay busy will take the — take what they contract and pay on time.

So, anybody want to add anything to that?

Bud Brigham: Hopefully that helps you, Luke.

Luke Lemoine: Yeah, yeah definitely. Appreciate the comments on working on deals for over 15 million tons. That’s definitely helpful and paints the picture. It’s appreciated.

Bud Brigham: You bet.

Operator: Our next question comes from Derek Podhaizer with Barclays. Please proceed with your question.

Derek Podhaizer: Hey. I just want to ask about fourth-quarter seasonality in particular. So you said in your opening comments you’re going to be very busy in fourth quarter. The guide was EBITDA to be flat to down slightly compared to third quarter. We have to think about the Kermit expansion online by the end of the year. You talked about the wet plant coming online. Could you help quantify for us how you’re thinking about volumes pricing and activity as we go in the fourth quarter?

Bud Brigham: Yes. Maybe I’ll start. And then John, and the team may want to add to it. As per our release, we were sold out on the third quarter. We’ve also continued to be very, very busy here through October. So it’s — but it is the holiday season. And so it just — it does create more of an air bar as far as the winter weather and then the holidays and all of that. But we’re in a really good place right now in terms of activity and sold out. I don’t know, if you guys want to add that.

John Turner: Yeah. I mean, we always expect to slow down in the fourth quarter. In December, you see the holidays like Bud said, and then there’s the weather that’s always very unpredictable. So we do use this time for some needed maintenance. Like Bud said, October is one of our busiest months. It’s a concession from a volume and service perspective. Based on what we know right now for the fourth quarter, volumes will likely be flattish. We had a busy October. And as of right now we see activities slowing in November to December. And if the weather is worse than expected then those numbers may go down some. On the logistics side, we see activity as flattish as well. As far as activity in the fourth quarter, we hear both sides of the coin.

Some companies are taking breaks and some are continuing to potentially picking up activities. Recently, we have a couple of companies indicate they plan on extending some activity in the fourth quarter. And as of right now, we really don’t know, if that’s going to happen. If it does there could be some upside in the fourth quarter. And we really expect a real pick-up and activity to begin in the first quarter of 2024.

Bud Brigham: Yeah, I might add. I think John makes an important point there as a former operator. No, we would be thinking about recognizing that activity is going to pick up in 2024 that we want to be at the front of the line. Generally, we wanted to be at the front of the line on that. So that’s the question here. It’s how many operators can pick up a little bit earlier here in the fourth quarter as opposed to the first quarter of 2024? I’m highly, highly confident, there is going to be a meaningful uptick in activity in 2024. It’s just a question of how much. And we are getting some positive signals, but it’s a question of how many of the operators do pull forward a little bit into Q4.

Derek Podhaizer: Got it. Okay. That’s all helpful. So fair to say if you think volumes should be likely flat-ish you don’t know how November-December are going to shake out. It seems like that EBITDA guide of flat to down it’s more of the similar pricing reset. I might write that down more so pricing than volume?

Bud Brigham: Well I mean maybe I’ll start and these guys might add to it. Our third quarter — our selling prices were just over $40 a ton. The market is pretty balanced right now as we’re moving through the fourth quarter so we’ll see. We’re in discussions now regarding next year, but anticipate an uptick in activity. We’re having those discussions right now and we’ll see how it plays out for next year. I don’t know, John, if you want to say anything. Yeah.

Derek Podhaizer: Got it. Okay.

John Turner: No. I mean look the guidance is there. I mean we may have some maintenance expense in there. I mean there’s just — we said flat-ish. There’s obviously opportunity for weather. But that’s what we’re seeing right now.

Derek Podhaizer: Got it. Okay, that’s helpful. And then a follow-up on operator M&A. Obviously, we’re seeing a lot of deals going on Exxon Pioneer. Chevron has a lot of publics buying up privates. This tends to lead to potentially more risk around customer concentration around pricing and volumes. I guess how are you guys approaching and attacking this M&A wave that we’re seeing? And how do you win this type of environment?