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?

Bud Brigham: Yeah. I’ll start on that. The M&A — it’s just certainly inevitable that it’s going to continue. There’s real leverage with scale. And given the opportunity to leverage down for our unit costs and benefit from that scale and with more automation outlets it’s very much differentiated in that regard. It’s the largest proppant producer with growing logistics offerings that nobody else can match. So it really plays to our strength over the long-haul. Nobody is better at providing large amounts of proppant timely and reliably than Atlas. And with our growing logistics offerings and the solutions we’re providing particularly to Dune Express it’s only going to get better. So the M&A activity plays to our strength and will continue to over time. So do you guys want to add to that Jeff or John?

Jeff Allison: Yeah. I’ll just say that one example. The recent M&A has created an overall market share increase opportunity within the NUCO [ph] as a result of one our current position in both sand and logistics within the independent entities of the M&A, our proven reliability that we demonstrated internally; and three our new industry-leading scope scale and offerings. So this is all translating into an Atlas addend for the NUCO moving forward. So overall creating an accretive union.

Bud Brigham: Yeah. I mean just in the big picture. When I think back to several decades ago the Permian was probably dominated to a degree by smaller operators mom-and-pops. And I think that day has gone past. And now it’s all about scale and the leverage associated with that. And so these operators need to have scale proppant and logistic solutions provider. And that’s what Atlas is positioned to provide.

Derek Podhaizer: Great. Appreciate the color. I’ll turn it back.

Operator: Our next question comes from Jim Rollyson with Raymond James. Please proceed with your question.

Jim Rollyson: Good morning, gentlemen. And Bud you mentioned just — when we talked about pricing and the different dynamics in the market on wet sand versus dry scale guys that need to hit the spot market versus contracted. And obviously you guys have done a fantastic job over your history of growing the scale and being reliable et cetera. I’m curious how you view the value to that scale and reliability when it comes to kind of pricing premium over the spot market numbers that we all see quoted in a market like we’ve been in where things have kind of softened a little bit. Now we feel like we’re bottoming and starting to turn. But just maybe some color commentary on pricing premium for what you guys actually provide?

Bud Brigham: Yes. Well, thank you. Well first just some general comments. There’s a reason that some companies specifically Atlas are fully contracted while others have proppant to offer on the market — in the spot market. And as I mentioned in my comments a lot of it does — is a function of reliability and dependability. And as an operator, there’s nothing that will upset your quarter, your return on your projects and your production and your goals than not having the proppant when you need it and not having quality proppant when you need it. And so, that is mission critical for us. And I think it’s what differentiates us in the market. Some of the smaller proppant providers and some of the different wet sand, has its own issues, et cetera.

They’re just not as optimal for the large-scale operators who really are dependent on that reliability and dependability as well as the other infrastructure solutions that we’re offering that continue to enhance that. So I think there is a real bifurcation in the market. And so, I do think spot pricing can kind of be a little bit indicative of pricing trends directionally. But I do think there’s been too much attention on the spot pricing in the market and maybe an over extrapolation of what that indicates on sand.

John Turner: Yeah. We’ve been told by a number of our customers that they contracted Atlas because of our reliability and service. And they also indicate that they pay more at Atlas more than they do other sand and logistics companies. I really don’t know how to answer toward that — we don’t have an answer what that amount is. Our customers don’t tell us what they’re paying our competitors for sand and service. But what I will say is that, I do think an example of our quality is shown in our level of contracting or high level of activity over the past few quarters. I mean you’ve seen a 20% decrease in the frac market over the past six months. And we’ve maintained very high activity levels during that time.

Chris Scholla: Yeah. And I’ll add that this is nothing new, right? We know those players and folks that come in and offer extremely low prices. We’ve seen that throughout our five years of existence and throughout the cycles. I think what — we don’t have any peers that are pure play at Permian sand and logistics companies that are public to see that and qualify that price for you. But I will say that we price our products and services according to that value proposition for our customers. And we’ve been extremely successful pricing them appropriately.

Jim Rollyson: Yeah. I didn’t expect you to give an absolute number. So the color is very helpful. And John, maybe as a follow-up. When we think about costs, obviously, you guys had to step up in cost late last year as you were rolling from third party to internal on the dredging side. And those had come down. It seems like they flattened out. As we think about this over the next four quarters or so, should we think about OpEx generally being relatively stable until the new dredges come in and are fully functional and operating in mid next year? And then maybe just a little color on how much that should improve costs as –maybe on a percentage basis.

John Turner: Back in — so we have plateaued. I do think we’re working on some things right now that could potentially have an impact on that. But the biggest impact you’re going to see is, like you said, when the dredges come on fully commissioned which is expected by middle of next year. Our lowest ever I guess OpEx per ton was around $6.50 a ton. And that’s when we were 100% the dredge mining. That dredge mining provides us with around a $2 to $3 cost advantage versus traditional mining, which we still are doing quite a bit of that. So at least, at some point next year, you’re going to start seeing our cost trend down more towards that $6.50 — I mean probably more in the $7, $7.50 mid-seven type range. And that’s where we’re focused right now.

Jim Rollyson: That’s helpful. Thank you.

Operator: Our next question comes from Ati Modak with Goldman Sachs. Please proceed with your question.

Ati Modak: Hi. Good morning team. You noted some progress on the Dune Express. Obviously, it stays on track. But maybe help us understand the steps that you’re looking at until it gets commenced in the fourth quarter of next year and any factors that you are keeping an eye on?

Bud Brigham: Yes. Maybe I’ll just start. These guys may add to it. We built both of our plans. We did the expansion that’s nearing completion here in the fourth quarter ourselves. And obviously, our team is really very skilled and been very successful at these probably more complex projects than building the Dune Express which Dune Express is kind of a rinse-and-repeat process, down the length of the line building it. I don’t know if you guys can answer. Is there an area — given that we’ve ordered the majority of the material and contracted the labor, I think as I mentioned in my conference call text that really mitigates the risk to the budget.

John Turner: Yeah.

Bud Brigham: It’s not a very complex project in terms of the construction of the Dune Express.

John Turner: I mean, there’s like — as far as that equipment goes, I mean there is the opportunity to make sure that it comes in on time and making sure that it comes in meeting our specs. And so we’re reaching out to a lot of our vendors right now. We’re actually doing these vendor audits. We do this pretty periodically to make sure that the equipment we’ve ordered it making sure that it will show up on time and on spec. We’ve taken — like I said, we’ve taken — we’ve already having, so — so we’ve already — the number of the equipment are starting to arrive. You’ve got — concrete sleepers are starting to arrive. That’s what the Dune Express will sit on. We’re starting to take delivery of like a lot of fiber optic cable. So I mean there’s, a number of things that we’re currently working on. And as we currently continue to construct it. I think what we can do it in the interim is just to make sure that the Dune Express comes on time and on budget.

Ati Modak: Got it.

Bud Brigham: Did that answer your question?

Ati Modak: Yeah. Thank you so much. Appreciate the answer. Just on a follow-up. You mentioned in the press release that there were some quarterly price resets on certain contracts. Maybe help us understand that a little better. Like what does that exposure look like on your overall contracted volumes? And how does that actually work?

Bud Brigham: Jeff, do you want to take that?

Jeff Allison: Yeah. As we — depending on the market and how it’s working the quarterly resets have been a part of pricing strategies and portfolios for a long time. Within some of the pricing agreements that we have now, we have some quarterly resets. And you can see some of our pricing is in this third quarter and moving into the fourth quarter an effect of the pricing. Roughly, — we have roughly 25% to 30% of our pricing historically on quarterly resets probably moving to more of a 50% as we move into 2024. And the quarterly resets really adjust to the market pricing not only with regard to numerically but with regard to the trend. And so we feel that with that up-tick in the activity moving forward in the back half this should yield some positive results for us.

Bud Brigham: Yeah. I mean, our view is — and I think everybody can see it — that we moved through a trough, in the rig count and the frac spreads. And I think, we certainly — and I think most of the industry’s anticipating a pick-up in activity in 2024. So I think — I mean the quarterly resets give customers and us comfort. We have great relationships with these guys that we’ll be able to adjust to changing market conditions. And in my view is it sets up very well for 2024.

Ati Modak: Thanks. I’ll turn it over.

Operator: Our next question is comes from Saurabh Pant with Bank of America. Please proceed with your question.

Saurabh Pant: Hi. Good morning Bud and John. Maybe I’ll just start with a quick one on the Dune Express. Clearly you’re making a lot of good progress on that, including on the ground. Just want to ask in terms of how customers look at it and they see that progress. Are you seeing more interest customers coming to you asking on the project getting familiarized with that and showing interest in contracting volume through that? Just talk to how your customers are responding to the progress that you’re making on the ground.

Bud Brigham: Well, I mean, — I think, clearly the customers are excited about the Dune Express coming online. And so I do think that those — and Jeff can talk about — of course we have our existing customers. But we have a number of new potential customers that we’re in discussions with that we think it’s obvious that the Dune Express is very attractive to them and compelling. So we’ll be having those discussions over the next three to four months and we expect to grow our customers. Jeff, I don’t know if you want to …

John Turner: Yeah. One thing though is this — if the Dune Express is just over a year away. And so any contracting that we’re doing right now in the Delaware basin is going to — it’s contemplating taking sand off the Dune Express. And yes, there is a lot of interest from some operators that are out there in the Permian, especially the — I mean, the Delaware that are looking for that size and scale.

Bud Brigham: And both side [ph] you get the trucks off the road. That’s a real issue out there.

John Turner: Yeah. The efficiency that’s coming with this is you know with the Dune Express. So Jeff, do you want?

Jeff Allison : Yes. As John stated earlier, it’s not a race to get to 2024 volumes contracted, but more of an effort to align with high-quality clients both EMPs as well as pressure pumpers that are sustainable on a go-forward basis. Current contract discussion are not just sand and logistics supply agreements, but a more complex and long-term conversation about revolutionary infrastructure-based solution for the Permian. And let me define infrastructure solution based — infrastructure-based solution. It means a compilation of sand production expansion to meet the needs of our large scale high efficiency customers. A unique logistics solution that Chris alluded to earlier with three to four times transit capacity was a phased interface of multi-trailer delivery from the drop depot model to the eventual Dune Express delivery solution, but just approximately a year out.

This all leads to security and reliability of supply for years to come. So it’s a journey and we’ve had tremendous amount of attraction early on. So we’re working these — we’re just taking these ideas and putting them to paper right now with the customer.

John Turner : I mean, this is something we’ve been talking to these customers for about a long time three or four years now. And now it’s just within a year. And so…

Saurabh Pant : Yes. It’s become very [indiscernible] yes, yes, yes. Now that the project is within a year of completion right customers see progress on the ground. There should be more traction right? And it sounds like there is more traction. So that’s encouraging. Okay, perfect. And then a quick follow-up or more of a housekeeping question on CapEx, cash CapEx particularly. John maybe you can remind us how much of CapEx associated with the Dune Express has been spent at this point? How much more is left? And then just for the fourth quarter, how should we think about CapEx and the residual CapEx related to the Kermit expansion that’s coming online this quarter?

John Turner : And Brian has those numbers. I’m going to let him answer those.

Brian Leveille : Yes. We’ve spent $180 million on the Kermit expansion. So there’s $20 million, $25 million left. And on the Dune Express, we’ve got $132 million behind us. So another $268 million over the course of the next five quarters.

Saurabh Pant : Okay, okay. Okay, guys. Thank you. Yes, I got that. Okay. Thank you. I send it back.

Bud Brigham : Thank you.

Operator: Our next question comes from Geoff Jay with Daniel Energy Partners. Please proceed with your question.

Geoff Jay : Hey, guys. Just a quick one for me. This is about — it’s actually M&A question a little bit. Obviously, as companies get together, or I guess rumored to get together in the future and lateral links increase, I’m just curious what that does in your mind to overall sand demand and what that kind of means for you guys in your business.

Bud Brigham : Yes. This is Bud. I’ll start and these guys may want to add to my comments. But I did touch on it earlier. I think first that’s hit or miss is the acquiring company. Is it an existing customer or not? But generally, the larger customers — the larger operators are customers of Atlas Energy Solutions, because we match up really well to provide the scale and reliability that they need. So I do think long-term it is very beneficial for Atlas. That’s more difficult for mom-and-pop type operators to match up with these large scale operators particularly given increasing pad drilling and completions; increasing simul-fracs, which just require a lot of profit very quickly. And we’re uniquely positioned to provide that. So I think it’s very beneficial. And our scale — and our growing scale is really important in that. I don’t know if you guys want to add to that.

John Turner : No, I think that — I agree with you. I think that larger scale operations means larger scale services that need to go along with that. And we’ve seen it in other basins. You saw it in the Eagle Ford for like 15 — 10 to 15 years ago. I mean, when the larger operators move in, it’s a larger service companies that can service their needs across the entire — and across their entire operations is what they’re really looking for. They need that reliability because they’re putting a lot of money in on this and they want to make sure they execute on that.

Bud Brigham : I’ll mention one other thing because your question may also stem from a concern. Does it mean less drilling activity? And again, it can in that some of the smaller private operators maybe are actively growing their production to make them more attractive as an acquisition target. However, as you’ve seen from us on a quarter-to-quarter basis our results are very stable, because we’re contracted to a large degree with these large operators that have very steady and longer-term planned activity. So, again, we just match up really well with these companies that are combining and creating more scale. So I don’t think — and the other thing is — and we’ve included the Rystad chart in the appendix of our presentation.

It really is remarkable what a great job that operators and pressure pumpers are doing increasing the efficiency in the field. And so the profit pump per day per frac crew just continues up into the ride. So I think all these drives for more efficiency that to some degree are associated with scale to drive up the efficiencies and drop down the cost per unit. Again, they all play to our strengths.

Geoff Jay: Excellent. Thanks. That’s really helpful.

Bud Brigham: Thank you.

Operator: Sorry. Go ahead sir.

Geoff Jay: Oh I’m sorry. That answered my question. Thank you.

Bud Brigham: Thank you.

John Turner: Thanks, Geoff.

Operator: Our next question comes from Michael Scialla with Stephens. Please proceed with your question.

Michael Scialla: It sounds like you’re pretty confident you can be fully contracted on about 16 million tons per year next year. Is it fair to think you can go beyond that if the demand is there at a price you’re okay with and you don’t need to spend any additional capital to do that with the efficiencies you’re seeing at Kermit? And is the CapEx number that the consensus has yet right now for next year about $325 million. Does that seem like a good number to you?

Bud Brigham: Yeah. As Jeff touched on, we are in discussions for volumes. And John touched on as well that are in excess of that 16 million tons. That said when we built our original plants we thought — the expectation was they would produce three million to four million tons and they produced 5.5 million tons. And so our expansion — we’ll see. We might be able to produce more at Kermit with the expansion than what we’re anticipating. So time will tell on that. And we do have opportunities to further grow our product in those. John, I don’t know if you want to add that.

John Turner: Yeah. And I mean, like we said earlier, I mean it’s 16 million. I mean our goal is 80% of 16 million — I mean of 15 million really. If you — when you look at that we want to keep some on spot. It’ll at least be a decision that we need to make at the time on whether or not — it depends on what our customers want. Like we said there’s new opportunities that are out there that we’re evaluating to see what those additional volumes were looking like. And so on the CapEx numbers, I think we’re going to have to — I mean we’ll need to come back on those. Because I know that there’s a lot of — we do our best to forecast how CapEx is going to be spent. And we’re never ever successful in forecasting that — the ebbs and flows of that the timing of it.

But right now I mean the Dune Express we plan to spend $400 million total on that. And then obviously, the Kermit plant expansion is on time and on budget. I think we mentioned those numbers in our call, but we can circle back on that.

Bud Brigham: Did that help you?

Michael Scialla: It does yeah. Yeah. Thank you. I guess on the logistics side do you expect — you’ve obviously had some tremendous growth there. Surprised now for a couple quarters in a row. Do you expect any further step up there before Dune Express is completed? Is it just a matter of further adoption of these double and triple trailers? I know you mentioned the next drop depot that you’re planning for the fourth quarter. I guess just any visibility on further growth before Dune Express goes into operation.

Bud Brigham: Yeah. We’ll make Chris answer that for you.

Chris Scholla: Yeah. Look we’ve always projected that growth into the Dune Express. And you look at where we’ve come from this year to where we’re at now — as you said, right? Dedicated fit-for-purpose assets multi-trailering offering that is differentiated in the market no one else can offer, and all of that while meanwhile opening and expanding our drop depot footprint. That growth that you will see over the next year, the plan is not to show up with Dune Express day one, hit a button and expect everything to be delivered at that point. Well in advance of the Dune Express, we want to be delivering 100% of those volumes sand and logistics to the well site. So that when the Dune Express comes on from a customer perspective it’s a seamless transition and they don’t even see a difference. Hopefully that answers your question.

Bud Brigham: We’ve added another heat zone drop depot. You might touch on that. It’s a step towards that.

Chris Scholla: Yeah, exactly. From a transitionary period, we’ve got over 1000 miles of accessible — 1000 square miles of accessible multi-trailer operations out there and plan to add another one in Q4. While we plan it — while we show flattish in Q4 based on just the activity volumes as we talked about earlier, we do expect to grow in that last mile with the Q1 pop as well.

Bud Brigham: Did that help you?

Michael Scialla: It does. Thank you very much guys.

Bud Brigham: You’re welcome.

Operator: Our next question comes from Doug Becker with Capital One. Please proceed with your question.

Doug Becker: Thank you. I wanted to follow-up on logistics but on the margin side. It looks like you were down just a little bit in the third quarter at least in part because of the shorter haul distances. What’s the expected trajectory on margins as we move toward Dune Express at the end of next year?

John Turner: Yeah. I think through next year we run in a — historically in that 10% to 13% margin. I think as we get into next year, we’re going to see more of a 15% to 20% margin business approaching the Dune Express.

Bud Brigham: Is that longer term?

John Turner: I mean, longer term once the Dune Express is up and running upward 50% margins.

Doug Becker: And so just to refine that 15%, 20% through the first three quarters of next year and then a step up as Dune Express comes on?

John Turner: That’s right.

Chris Scholla: As we ramp into it. I wouldn’t expect it to happen immediately, but I think as we ramp into it.

Bud Brigham: Not day one. But it’ll be a ramp up with the Dune Express volumes.

Doug Becker: Makes sense. And just on the timing of Kermit, I know we’ve been highlighting late fourth quarter. I’ve been assuming December 1st, but just wanted to get a sense. Is there potential or any visibility it’s a little bit earlier a little bit later? Obviously it can have a pretty big impact on the fourth quarter.

John Turner: I think we’re still looking at a December start up on that when it comes to coming on that. I don’t know that we’re going to get that on any sooner than that or have those volumes available earlier than that.

Doug Becker: Thank you very much.

Bud Brigham: Great. Thank you.

Operator: Our next question comes from Keith Mackey with RBC Capital Markets. Please proceed with your question.

Keith Mackey: Hi. Thanks and good morning. Just following up on Doug’s question on the Kermit volumes. Can you just talk a little bit more about how those volumes should trend — the sales volumes should trend through 2024 as the plant expansion comes online? Is it a step up in Q1, or is it a slow and steady ramp throughout the year?

John Turner: We haven’t given any guidance on that. But it’s going to be more of a slow, it’s probably a more — probably a slow and steady ramp is what we’re thinking. However, we do — we’re bringing this on because we were asked to by our customer. So I think we could see some increased activities, but we’ll just have to see if it’s probably a more slow and steady it’s probably what we’re thinking.

Keith Mackey: Yeah, got it. Got it. And just one last one on the Dune’s Sagebrush Lizard, I know there was some discussion about that potentially becoming added to the endangered list — endangered species list. And you feel you’ve mitigated a lot of potential risk around that. But can you just give us an update on your latest thoughts around that potential?

Bud Brigham: Yeah this — I’ll start and these guys can add. I mean, we feel like obviously we’re in great shape given that we’re one of the early members of the conservation agreement. So even if it is listed, we should be fully operational and it shouldn’t affect our business. The numerous and very voluminous responses have been filed to the potential listing. It’s going to take — I’m told by our general council, Rick Fletcher that it’s going to take probably quite a while for the Department of Interior and Fish and Wildlife to work through and respond to all of those. And so it’s probably — at least a year or a couple of years out is our best projection right now before a determination on that.

John Turner: Yeah. And I — and so we just — like Bud said, we just responded to the question period for the Department of Interior that put it out.

Bud Brigham: So we’re coming in that way.

John Turner: We’re in that CCAA. We’re early adopters. We were instrumental in getting it put in place. And so we feel like it’s — in the event of a listing — that we’re pretty well covered.

Q – Keith Mackey: All right. Thanks very much. Appreciate the comments.

Operator: Our next question comes Scott Grubber with Citi Group. Please proceed with your question.

Q – Scott Grubber: Yes. Thanks for squeezing me in. Just a quick follow up on logistics. If the revenue trend there is flat-ish in 4Q where you continue to add trucks, it seems like you guys will be a bit underutilized. Just trying to get a sense of — as you step into 2024 and completion activity improves how quickly do you think you can get the asset turns on the trucks, back to where you were mid year in 2024. Is that a 1Q event? Is it 2Q? How quickly do you get those assets nearly fully utilized?

John Turner: Yeah. Thanks, Scott. Just as a reminder from an asset side of things, we’ve been fully utilized. Our trucks and trailers — at this point, we do have strategic third-party partnerships as we started this business with third parties and transitioned to a mix of having our own and third parties. We do still run a significant amount of third-party trucks on that. So as we continue that flat and growth trend in the future, we’ll make sure that our trucks are also — remain at that 100% utilization rate.

Q – Scott Grubber: Yes. So you’ll be able to – well, we did some tracking revenue per truck. So will the 1Q be back to a 3Q rate then?

John Turner: Yeah. Our revenue per truck should on the 1Q I would agree with that being aligned to the Q3 rates.

Q – Scott Grubber: Okay. Okay. That’s it. Thank you.

Bud Brigham: Good. Thank you.

Operator: We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Bud Brigham for closing comments.

Bud Brigham: Well, I want to thank everybody for joining our call. And we look forward to reporting on our fourth-quarter results. Thank you, again.

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