Atlas Energy Solutions Inc. (NYSE:AESI) Q4 2023 Earnings Call Transcript February 27, 2024
Atlas Energy Solutions Inc. misses on earnings expectations. Reported EPS is $0.37 EPS, expectations were $0.61. AESI isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the Atlas Energy Solutions’ Acquisition of Hi-Crush and 2023 Fourth Quarter Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Kyle Turlington, Vice President of Investor Relations. Thank you. You may begin.
Kyle Turlington: Hello and welcome to the Atlas Energy Solutions’ conference call and webcast for the fourth quarter of 2023. With us today are Bud Brigham, CEO and John Turner, President and CFO. Bud and John will be sharing their comments on the company’s operational and financial performance for the fourth quarter and full year 2023 and insights on the acquisition of Hi-Crush that we announced today. After which, we will open the call up for Q&A. Before we begin our prepared 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 or results could differ materially. You can learn more about these risks in the prospectus we filed with the SEC on September 12th, 2023 in connection with our recent corporate reorganization, 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 this morning’s press release.
With that said, I will turn the call over to Bud Brigham.
Bud Brigham: Thank you, Kyle. Today, it’s an exciting day, not only for Atlas, but for Hi-Crush and their stakeholders, the Permian Basin sand and logistics market, and our customers. Atlas is acquiring Hi-Crush for $450 million, which consists of $175 million in equity, $150 million in cash, and a $125 million deferred cash payment in the form of a seller’s note. The acquisition of Hi-Crush further strengthens Atlas’ position as a leading provider of proppant and proppant logistics in the Permian Basin. Our increased scale and enhanced offerings are tailored to meet the needs of our large-scale customers in the Permian Basin. As it relates to the importance of scale and reliability, we recently heard a high-level executive from the leading oil service company, coin the phrase “more sand, more barrels” and he is exactly right.
With surface intensity rising, scale and reliability are paramount today with the leading edge frac crews now pumping over 100,000 tons of sand per month. In my opinion, Atlas and Hi-Crush have been the two most innovative proppant companies within the Permian Basin, with the rollout of Hi-Crush’s Encore mobile mines and the development of our Dune Express conveyor system, which remains on time and on budget, coupled with our innovative multi-trailer delivery solution. These disruptive offerings are currently helping to take trucks off the public roads and making the communities in the heart of the Permian Basin, safer places to live and work and we anticipate that the Dune Express will further enhance these benefits. We have the utmost respect and appreciation to what the team at Hi-Crush has built, and we are looking forward to combining best practices from our respective organizations to help our customers become even more efficient.
The $450 million acquisition of Hi-Crush includes all its Permian Basin operations, consisting of two plants at Kermit, which share the same giant open boon as our existing Kermit facilities; seven currently deployed Encore Mobile mines, of which five were in the Midland Basin and two were in the Delaware Basin, with an additional Midland Basin deployment slated for the second quarter of 2024 and a night deployment planned for later in 2024. Atlas is also acquiring 100% of Pronghorn Energy Services with this acquisition of Hi-Crush, which is the leading provider of damp sand last-mile solutions. We are excited to combine Pronghorn’s last-mile expertise with Atlas’ innovative multi-trailer last-mile offering. We believe that the broadened offering will be well-received by our customers.
The acquisition of Hi-Crush will add 12 million tons to our production capacity, which consists of 5 million tons of dry sand production at their two Kermit mines and approximately 7 million tons in the aggregate of wet sand production across their Encore mines. In some pro forma, Atlas will have approximately 21 million tons of dry sand production capacity and around 7 million tons of wet sand production capacity for a total of 28 million tons of overall production capacity. This scale is unmatched in the Permian Basin. The merits of this acquisition are numerous. First and foremost, this transaction enhances our geographic footprint and customer base in the Midland Basin, logistically advantaging us to more Midland Basin operators, while also providing a complementary damp sand offering through the Encore Mobile mine portfolio.
This is a significant improvement in our ability to compete for work in a subset of the market in the Midland Basin. Similarly, there is little customer overlap between the two companies, and Hi-Crush has very strong relationships with certain key operators in the Midland Basin. The broadening of our customer base as a result of the acquisition will be very beneficial, further aligning Atlas with one of the largest operators in the Permian. With the recent consolidation that has taken place in the Permian, size and scale have quickly become an absolute imperative to aptly service the development programs of these large-scale Permian operators and to help drive further efficiencies in the industry. We believe the acquisition pushes us to the forefront of the industry in that regard.
This acquisition adds meaningfully to Atlas’ competencies, product and logistics offerings, and makes us a better organization as a whole, more fit to lead the industry from the front. Atlas and Hi-Crush are two of the lowest-cost producers of proppant in the Permian Basin. This acquisition will provide us with valuable insights for optimization of our production and logistics strategies and methods to lower costs and enhance efficiency. Hi-Crush has been one of the most innovative companies in sand and logistics and our acquisition of its techniques, processes, and technologies should be exciting to our customers in the Permian. This transaction meaningfully increases the cash flow profile of Atlas pro forma for the acquisition and exhibits double-digit accretion across key share metrics.
We expect to fully realize $20 million in annualized synergies by 2026. We now have a potential low-cost solution to increase volumes down the Dune Express and we accomplished this without adding new supply to the market by absorbing Hi-Crush’s Kermit operations, which sit about two miles from our plants at Kermit where the Dune Express begins. Finally, with the acquisition of Pronghorn, we will have created the largest logistics in last-mile service in the Permian with the capacity to move more sand on a yearly basis than anyone else that we know of. The acquisition allows us to further leverage our logistics offerings with additional scale, which should also increase efficiencies. Ultimately, our scale should provide even greater growth opportunities with market share expectations that better align with our sand production share.
In summary, 2024 is already set up to be a very exciting year for Atlas. First, we were just a few quarters away from the commencement of the Dune Express, which remains on time and on budget and which should have a very positive impact on our cash flows next year. Second, the highly accretive acquisition of Hi-Crush provides our shareholders with greater visibility for 2024 and beyond due to the heavily contracted nature of our combined production and a more diverse customer base. And third, and partly as a result, Atlas is uniquely positioned to match up with the growing scale of our Permian Basin customers such that we can uniquely provide the differentiated capacity and throughput as well as associated efficiencies and reliability that Permian operators need.
Our pro forma production capacity of over 28 million tons following the completion of acquisition, is easily the largest in the Permian. It also makes us the largest proppant manufacturer in North America. Furthermore, this production is nearly 80% contracted for 2024. I will now turn the call over to our President and CFO, John Turner.
John Turner: Thanks, Budd. And I also echo your enthusiasm for the Hi-Crush acquisition. In addition to providing more color on the transaction, I will also provide some initial commentary on our fourth quarter 2023 standalone results and provide some additional guidance on our outlook for 2024 post-acquisition. As Bud mentioned earlier, following the closing of the acquisition, on a combined basis, we’ll have 28 million tons of annualized production capacity increasing to about 29 million tons in 2025 with a full year’s contribution and the benefit of these additional Encore deployments. The effective date of the transaction is February 29th, 2024. As our contracted volumes and Permian activity levels remained strong and completion efficiencies continue to compound proppant usage, we’d expect to continue to operate at greater than 85% to 90% utilization going forward.
Taking into account Hi-Crush’s contracts, we expect our sand prices for 2024 to average between $26 and $28 a ton. Assuming just over three quarters of contribution from Hi-Crush, we expect 2024 adjusted EBITDA to range between $425 million to $475 million. We expect total CapEx for 2024 to be between $335 million and $360 million. This includes between $285 million and $305 million in growth CapEx, consisting of $220 million for the construction of the Dune Express between $25 million and $45 million on Encore deployments and another $40 million in other CapEx. We are forecasting maintenance CapEx for 2024 to be between $50 million and $55 million. The $175 million equity component of the acquisition consideration consists of approximately $9.7 million of newly issued shares of our common stock, which amounts to just under 9% of our outstanding shares on a pro forma basis.
The upfront cash portion of the consideration and the near-term capital expenditures of Hi-Crush have been financed with a new $150 million acquisition term loan with Stonebriar Commercial Finance under an amendment to our existing credit facility and with a draw of $50 million under our amended and upsized ABL facility. The $125 million in deferred cash consideration is secured by a seller’s note, which bears interest at either 5% in cash or 7% when paid in kind at our option. The maturity of the seller’s note is in 2026, but can be paid off at any time prior to that without penalty. Our net debt as of December 31st, 2023, pro forma for the acquisition and related financing is approximately $245 million, consisting of $505 million of debt less $260 million of cash.
We will have a modest 0.5% net leverage ratio at closing and plan to methodically pay down debt using a portion of our significant expected free cash flow, while also returning capital to shareholders as we have done consistently in the past. Our acquisition of one of the leading proppant suppliers in the Permian Basin greatly enhances our ability to increase shareholder returns. As Bud highlighted earlier, our anticipated enhanced cash flows from the acquisition supports a 5% increase in our total dividend, which is now $0.21 per share, comprised of a $0.16 per share base dividend and a $0.05 per share variable dividend. Pro forma maintenance CapEx beyond 2024 is expected to be between $50 million and $60 million annually, providing Atlas with multiple avenues to further increase shareholder return once the remaining growth CapEx associated with the Dune Express and additional Encore mine subsides.
The heavily contracted nature of our operations post-acquisition reduces our cash flow volatility and with the commissioning of the Dune Express, our ability to increase shareholder return to strengthen by this transaction. Given the transaction structure, which includes an equity component and a deferred payment, our balance sheet and liquidity will remain healthy. The acquisition of Hi-Crush sets Atlas up to thrive in tough market conditions and positions Atlas to deliver enhanced returns in a normalized environment. I will now turn my attention to our standalone fourth quarter and full year 2023 results. 2023 was a remarkable year. We sold 18 million shares and raised approximately $324 million in gross proceeds in our initial public offering in March.
Accounting for our latest dividend amount, we will have paid out $146 million in total dividends and distributions to our investors since inception. We delivered full year total company revenue of $614 million, an increase of 27% year-over-year. Total company adjusted EBITDA was $330 million, up 25% year-over-year. We achieved our first sand delivery with our assets in January, our first double trailer delivery in March and our first triple trailer delivery in April. Our logistics revenue was $146 million, up 96% year-over-year. We completed our new Kermit plant facility in December on time and on budget, increasing our standalone production capacity to 16 million tons, up from 10 million tons. In October, we announced a corporate reorganization transaction or UP-C Simplification that enabled us to trade under a single class of common stock.
2024 will be another exciting year as we look forward to the integration of our new operations following the completion of the Hi-Crush acquisition, the completion of the Dune Express, and the arrival of our two new state-of-the-art dredges. For the fourth quarter of 2023, we reported total sales of $141 million. Our revenue from profit sales was $100 million. Our profit sales volumes were down more than expected quarter-over-quarter to 2.6 million tons. Aside from typical holiday and weather slowdowns, we saw our customers taking extended holiday breaks given budget exhaustion driven by efficiencies. However, we have seen our customers return to normal activity levels in the first quarter of 44%. Our average sales price for the fourth quarter was $39 per ton.
Moving to service sales, which is revenue generated by our logistics operation, we reported $41 million in revenues for the quarter. As of February 1st, we have taken delivery of all 120 trucks, which is up from 27 trucks from our third quarter update. In total, cost of sales excluding DD&A for the quarter decreased by $1 million to $67 million. For the fourth quarter, our per ton plant operating costs were $10.63 per ton, which is above the prior period, driven by lower volumes. Further, we expect the delivery of our new specialized dredging equipment in early 2024 to provide incremental improvements in operational performance and further reductions in our mining costs once these assets are fully commissioned by the middle of this year. Royalty expenses for the quarter were down 17% to $3 million due again to lower volumes.
SG&A expense for the quarter was $14 million. Gross interest expense for the quarter was $5 million, which is offset by $3 million of interest income generated during the period, resulting in net interest expense of $2 million. We expect our interest income to decline in future quarters as we draw down on our cash reserves from a normalized level as we complete our growth projects. Depreciation, depletion, and accretion expense for the quarter was $12 million. We generated net income of $36 million for the quarter, representing a strong net income margin of 26% and earnings per share of $0.36. Net cash provided by operating activities for the quarter was $86 million compared to $55 million during the third quarter. Adjusted EBITDA for the period was $69 million, representing a sequential decrease of 18% and an adjusted EBITDA margin of 49%.
Adjusted free cash flow, which we define as adjusted EBITDA less maintenance CapEx for the quarter was $57 million, representing a sequential decrease of 18% and adjusted free cash flow margin of 40%. Lastly, we spent a total of $106 million on growth projects in the fourth quarter, which includes our new Kermit facility, the Dune Express, our Wellsite Delivery Assets, and production enhancement in our existing facilities. We incurred $12 million of maintenance CapEx during the quarter. With that, I will now turn the call back over to Bud.
Bud Brigham: The near-term merits of this acquisition are easy to see that the real value will be created over the next five years as the entire basin will benefit from a larger, more innovative, and more reliable proppant and logistics provider. We will have the ability to supply incremental sand in a tight market similar to the first half of 2023 and adjust production in periods of low activity, creating a more stable market for our investors and our customers. Since our inception, Atlas has looked for ways to bring proppant closer to the wellsite in order to lower costs and reduce traffic on public roads. We are innovators and disruptors and with this acquisition, we are even better positioned to deliver further innovations and advancements to the most prolific shale basin in the world. That concludes our prepared remarks and we will now let the operator open the line for questions. Thank you all for joining us on our fourth quarter call.
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Q&A Session
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Operator: At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Don Crist with Johnson Rice. Please proceed.
Don Crist: Morning gentlemen. I think most of us were pretty surprised with the announcement this morning. But after kind of looking — stepping back and looking at it, the proximity of the Kermit mines and the addition of the wet sand, mobile mines makes a lot of sense. But in your eyes, how does this make Atlas a better company going forward, not only for 2024, but 2025 and 2026 and beyond?
Bud Brigham: Thank you. And I will start with that, and John may want to add to it. But you’re right, we’ve talked about the fact that it’s been a high bar for us given our differentiated margins associated with that low cost structure. But this deal is really special. As you touched on, two things. One, extremely complementary asset base that it’s really a one plus one equals three transaction. That, combined with the fact these guys like us have been the leading innovators. And so we share the similar cultures and values, an innovative entrepreneurial environment. So, it is going to be more apparent how powerful those synergies play out — or are going to become more evident over the next five years. A couple more specifics.
And you’ve heard us say this over and over the scale is really important. I mean operators are demonstrating that, scale gives you the opportunity to drop down cost, drive up margins, increase automation and we need to match up with that. And on proppant, it’s about throughput and reliability associated with that scale. This gives us more redundancy in the field, more options for the operators so that we can debottleneck sand. We had said and that it ties in with logistics, we want to be logistically advantaged to every single operator in the Permian. This is a big step forward for us in that regard, particularly in the Midland Basin. Associated with that, it’s really a complementary customer base because it brings logistically advantaged assets and logistics in the Midland Basin that brings complementary customers into our portfolio.
So that’s beneficial to our shareholders. And last, and John may want to add to this. I mean this is a very accretive transaction even before all the synergies and application of best practices on our respective assets. And so we believe, over time, it’s really going to help us to accelerate returning capital to our shareholders. John, do you want to add anything?
John Turner: Yeah. I mean, Don, when we looked at the acquisition, we needed something that was going to meet both our financial and operational goals, like Bud said, it’s very complementary on the operational side and what our goals are and what we want to accomplish. One is on the logistics front. Atlas has quietly become one of the leading logistics providers in the Permian. But when you look at what Pronghorn has as well, they have — they are one of the largest logistics providers in the Permian. So when you look at that on day one, you’re going to have the largest logistics — sand logistics frac sand provider in the Permian. So it meant on the operational side, there were other things that met like — but said, it expands our footprint into the Midland Basin.
We’re we’ll have more sand logistically advantaged located to well sites. And then also on the Dune Express, I mean, obviously, there’s been some questions about our plant capabilities and the ability to produce 13 million tons. I mean, the proximity of their termite mines we’ll be very complementary to what’s going to happen with the Dune Express as we get to do Dune Express up and launch. And then also operationally on OpEx side, I mean we’re going to — obviously, there’s going to be a lot of synergies on that side. And then on the financial side, I mean, this met our goals as a company. I mean, it’s a very high return rate re-internal rate of return project, less than a three-year payback on heavily contracted volumes. It’s going to support any acquisition or anything that we — any investment that we make in the future or whether it be this one and the other one is going to have to really support our return profile that includes a significant return of cash to shareholders through dividends — and so this one really supports that.
So look, I mean, over time, I mean the larger company reduce — will reduce our cost to produce is going to — we’re still going to have the leading margins in the industry and I mean across all the oilfield service companies in the space. So we think that supports us our future as a company going forward, our goals and then also that for our shareholders.
Bud Brigham: Hope that helps, Don.
Don Crist: Yes. And just one kind of semi-related follow-up. As you were bringing in the electric dredges this year, we had — as the analysts had your costs coming down quite a bit for 2024. As you roll in the high crush assets, I don’t know what their operational costs are today to produce. Can you give us a little bit of guidance around that? And is this going to increase that — what we had previously?
John Turner: Back in 2021, we were at $650 a ton on our — when we had 100% dredge feed into our mining process. That number has come up to 10:30 as we increase production and our drug just couldn’t keep up. These two new dredges that one is already being commissioned out there, another one live in here shortly. Once we get those dredges incorporated into our mining operation, we’re expecting our costs — our long-term mining cost is going to be down in the, say, mid-amid-$7s per ton. That’s just for mining. On Hi-Crush, their OpEx in 2023 was just over $11 a ton. Obviously, that’s higher than our 7. But we do think there’s going to be that — I mean, we are optimistic that we’re going to be able to get this number down over time.
