And I guess the Variperm deal proved that — I mean, good acquisitions and return of capital probably don’t have to be mutually exclusive events. You can do both. And just when you’re thinking about the debt, I guess, could you just spend some time on that and kind of the recap and the options you’ve looked at there? Because it seems like the catalyst now is if you’re — if you have a business with a 20% free cash flow yield and your peers trade at low to mid-single digits, I mean, there’s a lot of room to return some cash to shareholders, either with buybacks or dividends or both, but you have to clear out the debt to do that. And that probably is the catalyst that drives share price meaningfully higher as people want to see that the cash you’re generating can hit their account, whether that’s a dividend or just increase their share of the company.
So there’s a lot to take in there, but could you just share kind of balance sheet debt? And then I mean, we’re 5 months away from when the debt goes current. So you’ve indicated you want to do something around that time. Have you thought anything about a return of capital plan that could kind of meaningfully provide a catalyst?
David Williams: Eric, yes, let me start with that and then maybe have Neal jump in. And I think you said a lot and talked a lot about our things that we’ve been focused a lot on. I think that the starting point here is a strong balance sheet post Variperm. We got a good amount of liquidity here, we get cash on the balance sheet and a really clear path forward to generating free cash flow. So put those 2 together, we know we’re in great shape and said on the call that we expect to be in a position to pay off the 9% notes at the end of the year. And you’re right, they would become current in August. So we see that as a possibility. Debt management, definitely something that we’re committing to do — committed to do and getting our balance sheet back towards that lever.
We ended the year with 1.4x before Variperm, getting our leverage back down. We think it’s prudent in our business. And so we’ll have some focus on that. But as you mentioned, with the amount of cash that we’re looking at here and the potential for go forward, these things aren’t all mutually exclusive. So focus areas would be managing down our debt, that can be actually debt payment or net debt reduction. Second, what can we do from a return to shareholders of cash. And third, there are a lot of opportunities for acquisitions and what can we do from a strategic investment that makes a lot of sense. So as you mentioned and as we said on the call, we will be focusing on what those options are and do things that we believe drive the most value for our shareholders.
And I think the key piece that we can see here is what the impact of Variperm has been to our forward look.
Neal Lux: I think we’re — we see ourselves in a show-me mode that we need to deliver on the promise that we’ve laid out. So our teams, ourselves here on this call, we are focused on generating the free cash flow that we’ve laid out. And ultimately, that’s what’s going to give us the flexibility to look at further debt management and return of capital to shareholders.
Operator: Our next question comes from the line of Jeff Robertson from Water Tower Research.
Jeffrey Robertson: Neal, can you talk about — you all, when you acquired — or announced the Variperm acquisition, highlighted margin expansion that you anticipate on a pro forma basis. Can you just talk a little bit about how you expect the margin expansion to progress in the context of your 2024 outlook?
Neal Lux: Yes, good question. So again, we don’t see a lot of cost in bringing Variperm on. So I think we talked about first synergies that there wouldn’t be a lot of cost synergies, but we don’t expect to add a lot of cost either. So putting the 2 businesses together, I think on average over the entire year, we should expect to see the 14% or so margin — EBITDA margin that we talked about. I think the softness, we do see to start the year. Margins could be below that as we begin Q1. But for the full year, we do expect our margins to be in the combination around that 14%.
Jeffrey Robertson: And Neal, you talked about the $300 million addressable market from the 3 products you highlighted. In the backdrop of a flat activity level, do those products, do you think drive incremental opportunities for FET to expand despite a flat backdrop?
Neal Lux: Absolutely. That’s a key focus for our teams. It’s part of our strategic objectives to develop new products that help us grow faster than the market. So we — for us, the question is timing. So anytime you have a new product, it can take — it sometimes takes longer than you expect to get into to be commercial. But that is absolutely the #1 way we’re going to outgrow the market is through new product development. I think we mentioned it in the call, FASTConnect was a product that we introduced last year. And we’ve had some really, really good success. And we’re going to do what we can to expand that product development and get that commercialized and growing as quickly as possible. But for us, it’s all about timing, and it is a key focus.
David Williams: And Jeff, this is Lyle. I may just chime in with just a little — one more example like that, that Neal talked about and how we see the opportunity to boost up revenue and that is with the FR120 and then our new smaller version. So we’ve had great success with the Iron Roughneck that’s the FR120, 120,000 foot pounds of torque tool that our customers are using to deal with larger diameter drill pipe. Those have higher torque loads and they need a bigger tool. Some of the rigs, whether it’s in the U.S. or internationally, have a smaller rig floor footprint and our FR120 just doesn’t fit in the space. And so we were kind of cut out of that as far as a market opportunity. So the focus of the team and introducing this new tool was get something that would fit in the space, but also allow those rigs to be able to upgrade to higher torque capacity and be able to do what the industry needs, which is deal with 5.5-inch drill pipe.
So that’s an opportunity. And from a capital spend perspective, even in a flat market, we do expect to see our customers make some of these small incremental adds of capital. It’s not a new rig or — in the case of pressure pumping, it may not be a new frac fleet, but it could be an addition that enhances the capability of their equipment and let them drill more. That’s why we think even in a flat market, there’s some opportunity there.
Jeffrey Robertson: So the flow-through, Lyle, as the customers get a higher — potentially can get a higher return on their investment, which drives demand for the product?
David Williams: That’s right. That’s right. It makes them more competitive, right? If a 5.5-inch drill pipe is a requirement of a rig and the rig can’t handle the torque load, that’s going to make that asset pretty uncompetitive. And so why not spend a few hundred thousand dollars and get your rig ready to go.
Jeffrey Robertson: And you mentioned — you highlighted the strength in the Middle East in 2023 or in the quarter. Do you think you will be able to leverage and pull through some of the Variperm products into those markets and get access to incremental business that you didn’t have before?
Neal Lux: That’s definitely a focus that we have. These international qualifications and getting set up and put into the catalog, they could take time. It’s something that Variperm was actually already working on both the addition of our kind of international footprint. I understand the logistics as well as some of our stocking locations. We’ve just increased the chances or probability of those going forward. So something we’re focused on, probably not a 2024 result, but it’s something we’re going to be working towards absolutely in the future.
Jeffrey Robertson: Lyle, just quickly, I don’t remember if Rob said. When do you expect the 10-K to be filed?
David Williams: I think that should come out relatively shortly here in the next week or so.
Rob Kukla: All right. Well, thank you, everyone, for your support and participating in today’s call. We look forward to talking to you again in early May to discuss our first quarter 2024 results.
Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.
