ProFrac Holding Corp

NASDAQ:ACDC

Earnings Call Transcript 2022-Q1

[Operator]

Greetings, and welcome to the ProFrac Holding Corp. First Quarter 202 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Rick Black. Thank you. You may begin.

[Rick Black, executive]

Thank you, operator, and good morning, everyone. We appreciate you joining us for ProFrac Holding Corp.'s conference call and webcast review first quarter 2022 results. With me today is Ladd Wilks, ProFrac's Chief Executive Officer; Lance Turner, Chief Financial Officer; and Matt Wilks, Executive Chairman; and Coy Randle, Chief Operating Officer.

Following my remarks, management will provide a high-level commentary on the company, the financial details of the first quarter and outlook for 2022 before opening the call up for your questions. There will be a replay of today's call that will be available by webcast on the company's website at pfholdingscorp.com. There will also be a telephonic and recording replay available until June 24, 2022. More information on how to access these replay features was included in yesterday's earnings press release.

Please note, information recorded on this call speaks only as of today, June 17, 2022, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.

Also, comments on this call may contain forward-looking statements within the meaning of the United States Federal Securities Laws, including management's expectation of future financial and business performance and current guidance about Q2 and 2022 annual results.

These forward-looking statements reflect the current views of ProFrac management and are not guarantees of performance. Various risks and uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in management's forward-looking statements. The listener or reader is encouraged to read ProFrac's prospectus which can be found at sec.gov or on the company's Investor Relations section in the SEC Filings tab to understand certain of those risks, uncertainties and contingencies.

The comments today also include certain non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP measures are included in the quarterly press release issued yesterday, which can be found on the company's website.

And now I would like to turn the call over to ProFrac Holding Corp.'s CEO, Mr. Ladd Wilks. Ladd?

[Ladd Wilks, executive]

Thanks, Rick. I'd like to welcome everyone to our inaugural quarterly earnings call since the completion of our IPO on May 13. Our mission at ProFrac is to, one, be the best and safest company to work for in the pressure pumping industry. Two, to provide our customers with elite products and services, utilizing the most cost-effective and environmentally friendly solutions, and three, to achieve superior returns for our shareholders.

Before we dive into our financial results and outlook for 2022, I'd like to provide a quick summary of our history in the pressure pumping industry since we might be new to a lot of you listening on the call today.

Back in the year 2000, the Wilks family founded Frac Tech services with a few million dollar investment and an extreme focus on the wellsite. We grew that business until 2006 when we brought on and partnered with outside investors to take the company to the next level. From there, we continued to grow until we sold Frac Tech for an enterprise value of $5.5 billion. A few years later, we found a ProFrac with that same extreme focus on the wellsite, while also implementing innovative technologies for the next generation of pumping needs.

We view our recent IPO as similar to our strategy in 2006 as a time to partner with outside investors and to take the company to the next level.

With this approach, and our growth strategies that Matt will highlight in his comments, we've been one of the fastest-growing Frac companies in America and are now one of the largest in the industry.

So let me give you a high-level overview of ProFrac and where we are today. Today, we have 34 total fleets and 31 that are currently active. Our fleets are made up of some of the youngest, most emission-friendly and most technologically advanced equipment in the industry. Our team is made up of some of the best in the industry, and they are never satisfied. We are always striving to do ourselves every day.

During our IPO road show, we had a lot of questions about how we get leading-edge profitability. We believe in optimizing every aspect of the business. We believe we have the lowest cost structure due to our vertically integrated business model and our never-ending search to become better.

The following takeaways are that support our growth strategy and help us outperform the industry. Number one, we believe we have the highest performing fleets in the field. What consumes us is being laser-focused on pumping more hours per day. And with our in-house refurb facilities, we can turn equipment faster and get it back out into the field. We also benefit massively from our uniform equipment, parts and standardized controls.

Number two, is our ability to bundle and offer a suite of services, which includes Frac design, related services, Frac sand, sand trucking, chemical supply, logistics coordination and real-time data reporting. We strongly believe in bundling these services, which support our lower cost structure and supports increased efficiencies. Bottom line, these incremental margins add up fast.

Number three, we have a diversified customer base. Only 3 of our customers have more than one fleet and 50% of those customers are large independent operators, which we think is a good mix. We're also diversified across commodities about 50-50 in oil and natural gas. This structure protects us from becoming vulnerable with too much concentration. Our track record of consistently providing high-quality, safe and reliable service has enabled us to develop long-term partnerships with our customers. And we believe that our customers will continue to support our growth.

And number four, our vertical integration reduces our overall cost of service and cost of maintenance to a level that's unmatched in the industry. From designing and manufacturing fluid ends, power ends, high-pressure iron to our sand, chemicals, logistics, refurbishment and new fleet construction. We see the impacts on margins, our cost structure and CapEx savings. We think everyone in the industry should embrace this approach, which we believe not only provides economic benefits but also improves the strategic positioning of our company and the industry as a whole.

These 4 approaches are how we outperformed through the down cycle. It's how we generated positive EBITDA through every quarter of 2020. And it's how we're going to continue to outperform through this up cycle that we're in today.

At our company, we have always been focused on net income and generating material free cash flow, not just EBITDA. We seek to earn an attractive return on capital and return that capital to investors. I welcome our new partners with the IPO, and we'll continue to redefine what investor -- what an investor should expect from a service company. This starts with our industry-leading profitability, unmatched cost structure through vertical integration and our superior cash generation.

We've seen operators shift their business model from one of growing production at all costs, one of operating within cash flow and returning capital to investors. We seek to join them in this responsible stewardship of capital and hope to explore changing our business model over time from one of growth and market share to one of returning capital to investors.

In the past 8 years, the oil and gas industry has been incredibly tempestuous with an onslaught of economic downturns and geopolitical headwinds and I believe the best people on the planet work in this industry, and I couldn't have more respect for what our peers and our customers do to create a thriving human experience.

As energy costs rise and they come to the forefront of the conversation today, I hope our industry will be celebrated and encouraged for doing everything in our power to produce more oil and gas and continuing to seek and find ways to lower the cost of energy for everyone.

Now I'm going to hand the call over to Matt to talk a little bit more about our strategies and operations.

[Matthew Wilks, executive]

Thank you, Ladd. We recognize the current environment is advantageous for our sector, and we want to use this opportunity to improve our through-cycle positioning. We don't want to become complacent.

Our view of the macro environment in oilfield services and how we are extremely well positioned for the current U.S. Frac market is not complicated. The supply of pressure pumping horsepower is limited. Many of our competitors are completely sold out and have legacy footprints that need to be upgraded. This means that the strained supply chain in our industry is focused on maintaining and upgrading the existing fleet with little capacity left to build new capacity.

In addition, capital is more expensive than it has ever been over the last decade and reluctance to deploy it into the OFS is still high. These dynamics are one of the reasons that we believe there is a great deal of length left in this cycle and that we will continue to see margins improve. Most importantly, we believe that it will continue to run for quite some time. This is the best backdrop that we've seen since we've started in the shale industry.

We have a high-performing pressure pumping fleet that has consistently outperformed our peers. Our operating philosophy is underpinned by ESG-focused initiatives that prioritize profitability. And when you prioritize profitability, it means you don't waste what you don't need. That's not only great for our bottom line, but it's also great for the environment.

We also plan to grow the company's footprint in the coming years and throughout the entire cycle. To enable this continued growth, we have a 2-pronged strategy, acquire retire replace combined with scaling our vertical integration. The FTSI transaction is a perfect example of how acquire/retire/replace strategy can work. We saw FTSI as a great company, but a company that could do better and benefit from our visionary leadership approach to take it to the next level. We acquired FTSI for approximately $400 million and expect to earn that amount back in approximately 12 short months.

Our track record demonstrates that we can operate equipment safer, cheaper, more efficiently and longer. And we think we can create value along the way, just like we did with FTSI.

More importantly, we do this by replacing existing equipment in the market and not expanding the total horsepower in the market. In addition to that, our vertical integration uniquely situates us to capitalize on this environment. It provides us with a cost advantage that is unmatched but also gives us more control over the timing and amount of critical inputs into our business.

Specifically in this environment, where supply chain interruption is a challenge for pretty much everyone. We're in a better position than our pressure pumping peers to capitalize because we have our own sand mines. We have our own steel, our own machine shops, and we design, engineer and assemble our own equipment from Frac pumps to blenders to e-fleets.

One of the quickest value additions we have done is the Flotek investment and partnership. We have secured green downhole chemicals and logistics through our long-term partnership with Flotek. This partnership concentrates our significant chemical spend, gives us more control over our supply chain and most importantly, creates a structure that we believe provides financial participation in the value we create. We're very excited about the partnership that we have with Flotek.

In Q2, we expanded that partnership to provide for a larger financial interest in exchange for chemicals that we plan on procuring for our customers. It also allows for us to an enhanced offering of green chemistries as well as a secure supply of chemistries that we think are going to be instrumental in the months and quarters ahead.

Our previous acquisition of EKU and iO-TEQ have been instrumental in building, improving and optimizing our electric fleet that we plan to deploy in the third quarter. While these were not significant in terms of dollars, their contribution has been multiples of our invested capital. And these are exactly the things that we believe makes us stronger, better, more stable company throughout the cycle so that we can deliver on what this space has missed for quite some time. The ability to earn money in the old-fashioned way, net income and even more importantly, material free cash flow generation, and we hope to turn that back to investors.

So as you look at our path forward, and as we continue to execute on our acquired retire play strategy as well as our vertical integration strategy, we look forward to being able to execute and further consolidate within the supply chain and amongst our peer class.

I will now hand the call over to Lance to run through our financials and our outlook for 2022.

[Lance Turner, executive]

Thank you, Matt. Good morning, everyone. We're pleased to announce our first quarter 2022 results. These results include the full quarter for the ProFrac predecessor and 1 month of the FTSI results from the time of closing at the beginning of March. My comments today will primarily be focused on selected financial metrics, some context behind the trends we experienced and our outlook for the second quarter this year.

The pressure pumping industry has moved quickly over the last 5 months. So each month has different characteristics. We're in a much better position than where we thought we would be just a few months ago, largely due to the increased market demand, our successful acquisition of FTSI and our vertical integration, which has really shown its value in this environment.

On a consolidated basis, revenue for the first quarter totaled $345 million, net income was $24.1 million and adjusted EBITDA was $91.5 million. Excluded from adjusted EBITDA are a few onetime items related to the FTSI transaction and the Flotek market value adjustment. We incurred $8.3 million of charges related to prepayment penalties and unamortized debt issuance costs when we refinanced our debt as part of the acquisition.

In addition, we incurred $13 million of transaction-related expenses related to the FTSI acquisition.

Lastly, we recognized a gain of $8 million related to the fair value adjustment on our $20 million convertible debt investment in Flotek.

We estimate the FTSI generated approximately $8 million of adjusted EBITDA in January through February of the current year, which is the time before the acquisition date. Therefore, we estimate that our first quarter pro forma adjusted EBITDA, which is as if we had acquired it on January 1, 2022, would have been $99.4 million.

We operated 21.7 average fleets in the first quarter. The fleet count was 31 fleets for the month of March after the FTSI acquisition, but 17 fleets in January and February prior to the acquisition.

We saw considerable improvement to pricing and efficiency as the first quarter progressed. This momentum continued into the second quarter and actually accelerated primarily due to the repricing of the 14 FTSI fleets that went into effect the first week of April. When ProFrac set out to acquire FTSI, there was one thing that was apparent. The efficiencies of both fleets were top-notch, yet the earnings power of the fleet have a variance.

FTSI's fleets generally had lower pricing in what amounted to an estimated $6.5 million of adjusted EBITDA lower than that of ProFrac. When we closed the transaction, we expected to bring FTSI fleets up in profitability to the levels of the ProFrac fleets, and we thought it would take up to 3 to 6 months with our customers.

Given ProFrac's commercial approach, combined with today's market, we were able to reach out to all of our customers and effectively complete that process in a matter of 3 weeks.

By the time we started the month of April, which was about 1 month after the acquisition, we had both fleets earning similar levels of profitability. We estimate that this will add more than $84 million of EBITDA uplift just from the FTSI fleets, and that was at the time of announcing the acquisition.

Since then, the market has moved in our favor and both fleets profitability have improved materially above and beyond that level.

In our minds, this was the #1 value proposition of the [ FTS ] acquisition. We also have traditional cost synergies and CapEx synergies that we're obviously very proud of. Both companies were vertically integrated and they ran very lean teams -- while we didn't expect synergies to be the biggest value driver, we are confident that we are on track to achieve a meaningful amount of cost reductions between CapEx and nonlabor operating expenses.

Looking at the second quarter of this year, the company expects continued pricing improvements and increased market activity leading to incremental contributions from the FTSI acquisition as well as pre-acquisition fleets. For the second quarter, we will be running 31 fleets for the entire quarter and expect that to remain unchanged until we activate our first electric fleet in the third quarter.

More importantly, we expect approximately $23 million to $25 million of annualized adjusted EBITDA per fleet during the second quarter.

Turning to our business segments. The Simulation Services segment generated revenues of $336 million in the first quarter. The increase was driven by pricing improvement, increased activity levels and the addition of the 14 FTS fleets for a full month. FTSI represented a $48.6 million increase in revenue during the quarter for 1 month of activity, which was prior to the price increases I discussed.

Adjusted EBITDA for Stimulation Services was $73.6 million. The Manufacturing segment generated revenues of $32 million in the first quarter. As a reminder, this segment primarily fabricates fluid ends, power ends and big bore manifolds amongst other valuable activities. Approximately 84% of this segment was intercompany revenue for products and services provided to the Simulation Services segment.

Adjusted EBITDA for manufacturing was $10 million in the first quarter. This segment experienced improved operating results, primarily driven by increased demand for our products due to the underlying activity increases in the Stimulation Services segment and improved operating lives of their fluid ends.

The profit production segment generated revenues of $12.4 million in the first quarter. Approximately 69% of this segment was intercompany revenue for profit provided to the Simulation Services segment. Adjusted EBITDA for the Profit Production segment was $7.9 million. The improved operating results were due to higher production levels with a higher average selling price, slightly offset by increased production costs.

Moving on to capital expenditures. We expect full year 2022 CapEx to be between $240 million and $290 million. The biggest piece of that is our maintenance CapEx. We want to take care of our equipment. It's pumping more now than ever. It is the reason we can be the best pressure pumper on our customers' pad site, and we want to make sure that continues. We estimate maintenance CapEx to be between $2.75 million and $3 million per fleet per year.

We're also constructing 3 electric fleets. We expect the cost of those to be between $65 million and $70 million for all 3 fleets, which excludes the cost of license fees paid in 2021. The first electric fleet should be operational in Q3 of this year. The other 2 e-fleets are under construction and will be deployed in the fourth quarter.

We like how this gives us access to all segments of the market. We're going to have scale of every type of equipment, Tier 2, Tier 2 Dual Fuel, Tier 4, Tier 4 Dual Fuel and now electric fleets.

As Matt mentioned, we're excited to be adding to our sand manufacturing capacity, which we estimate will take $25 million to $30 million of CapEx this year. We're currently sold out for sand internally and our new West Munger mine will give us access to be within about 50 to 60 miles of almost all wells in the Midland Basin. We have very little competition there, so we're really excited to have additional volume of sand that we can place with our customers and really drive performance with our fleets with the additional production of sand, which is a commodity right now in West Texas.

The last piece of CapEx is equipment upgrades and other growth initiatives. We were upgrading 5 to 10 engines per month, and this is where we take a Tier 2 Diesel engine and upgrade it to a Tier 4 Dual Fuel engine. We and our customers like the performance of the Tier 4 Dual Fuel engine, and we'll continue to upgrade so that we follow the market and our customer preferences. The expectation is that we want to take care of our equipment and keep it in the best shape possible to provide the best service for our customers.

Moving to the benefits of our IPO and our balance sheet. After issue was exercised, -- this month, we had approximately $304 million in IPO proceeds net of actual and estimated expenses. We used approximately $225 million of proceeds to reduce the principal amount of our debt. After these proceeds and as of last week, we had less than $450 million of gross debt outstanding. The [ equify ] note, the closing date note and the backstop note were all paid in full. We had $306 million outstanding under the term loan.

I highlight all this to point out the simplicity of the capital structure after the IPO and the fact that we expect our debt-to-EBITDA ratio to be less than 3/4 of a turn.

With that, I'll hand the call back to Matt for closing remarks.

[Matthew Wilks, executive]

Thanks, Lance. As you all can see, we could talk about our company for hours on it. We've been building exceptional companies in the oilfield services industry for over 2 decades. Our mission at ProFrac is to; one, be the best and safest company to work for in the pressure pumping industry; and two, to provide our customers with elite products and services, utilizing the most cost-effective and environmentally friendly solutions; and three, to achieve superior returns for our shareholders.

We believe ProFrac redefines what is possible in the oilfield services industry and redefine what is possible for our investors. I am extremely grateful to have this opportunity to partner with you -- as we look forward and we develop a larger moat around this business to generate real returns for our investors.

And with that, I will now turn the call to the operator to take your questions. Operator?

[Operator]

We will now be conducting a questions-and-answer session. [Operator Instructions] Our first question comes from the line of Stephen Gengaro with Stifel.

[Stephen Gengaro, analyst]

Congrats on a good start out of the gate. I think 2 things for me. I think the first is you mentioned the e-fleets and the e-fleet deliveries -- beyond the addition of those fleets over the next couple of quarters, -- how do we think about other potential activations of assets?

[Coy Randle, executive]

Yes, sir. Steve, this is Coy Randle. Great question. As we see the market as we move forward, we have the ability of 3 additional activations. We'll use those to see whether or not the demand for our services increases. Today with the e-fleets, the first couple of fleets that have gone out will be additions to what they are. So we expect our count to grow by 1 or 2 there.

We also expect that maybe by the time we get to 3 this year or even next year that -- those might be what we would call part of the retire program is whereas we bring those out, we retire an older legacy Tier 2 fleet as we move forward.

[Stephen Gengaro, analyst]

Okay. Great. And then just the follow-up question was when you're thinking about the pricing trends in the market right now, -- can you just kind of give us your take on what -- how pricing is developing? And maybe also some commentary around the relative price difference between older and some of the newer, lower emission assets, if that even exists right now as things are tight.

[Coy Randle, executive]

We've seen a real shift towards utilization. And I think that the rate of return that our customers are seeing on bringing production on is pretty compelling. So I think it's has provided a good backdrop for us to get in and align our interests and bring -- help them bring these wells on quicker. And so commercially, it's been really beneficial to us.

As far as our performance relative to our peer class, I think it really, from our perspective, -- we believe we're in line on many of the services that we provide, but we get the added benefit of the contribution margin from our supply chain and the additional services that we provide.

[Operator]

Our next question comes from the line of Arun Jayaram with JPMorgan.

[Arun Jayaram, analyst]

I was wondering if you could give us some thoughts on how you see the supply-demand balance for Frac today? And maybe thoughts on potential industry supply response, given how margins have now moved into the -- for industry in the upper teens to the low 20s? And perhaps you could just maybe comment on the state of the supply chain, which we understand is very tough today.

[Coy Randle, executive]

That's really where we see the tightness coming from. We believe that the market is virtually sold out. However, I think that A lot of the things restricting supply of horsepower is associated with exactly that, the supply chain replacement parts, replacement engines. When you look at the maintenance shops, they're backed up, the availability of parts so that you can get your equipment repaired and put back out to the field has become a limiting factor for the industry.

And that's one reason we're really excited about our business with the vertical integration. It gives us a quick response time that provides us with the certainty of supply so that we can be responsive and provide an incredible service for our customers.

[Arun Jayaram, analyst]

Matt or Ladd, I also want to see if you could just talk about the vertical integration. Historically, in the Frac space, some operators who've done vertical integration have not been able to call it maximize profitability because you ended up maybe giving a service away for free. As -- or for a low margin to sell your Frac services.

But talk about today your strategy in terms of how you're trying to maximize the profitability for all the different services that you're providing between proppant, et cetera.

[Ladd Wilks, executive]

Yes. Arun, that's a great question. The way we think about it is really just breaking down all the different components of a Frac job. And if it's fluid ends or power ends, we're trying to extend the life of those and designing -- putting our engineers to work on designing better power ends and fluid ends. And if it's high-pressure iron, we're designing things that are -- we're designing our high-pressure iron in a way that works better with our pumps.

And -- but really when we think about just lowering the cost of all those different components of a Frac job, that's how we think about it, whether it's building the sand mine or purchasing our chemical company that we have now. It's really just picking up the nickels, pennies and dimes and it all adds up to great margins for our fleet and yes.

[Matthew Wilks, executive]

Matt, that's exactly right. Having custody of the supply chain allows us to go in and utilize our engineers to build better products, extend the life and reduce the overall cost of ownership of each of these parts, and that's something that brings value throughout the cycle.

And we believe our vertical integration makes us stronger in downturns and extremely profitable in upturns. And so we can't really speak to what others have done wrong with vertical integration in the past. But what we know for us that this is the right way, it's always served us well. And a great example of that is why we were able to generate positive EBITDA all the way through 2020. And that's without take-or-pays, that's without onetime cash payments from anything. This is through operations, through execution and from having the benefits that are provided by vertical integration.

[Arun Jayaram, analyst]

Okay. If I can sneak more -- one more in, perhaps with Lance. Lance I just wanted to go over the 2Q guide. You guided to 31 active fleets an EBITDA per fleet of a range of 23% to 25%. I assume that, that is all in contribution. So that includes the anticipated contribution from manufacturing and profit -- is that fair?

[Lance Turner, executive]

That's correct.

[Arun Jayaram, analyst]

It's not just service? Okay.

[Operator]

Our next question comes from the line of Ian MacPherson with Piper Sandler.

[Ian MacPherson, analyst]

Thanks. Congratulations. I was wondering if we could take a peak forward with your consolidation strategy. FTSI was clearly an exquisite deal for you to do in every sense and the timing was fortuitous. It seems like every week makes a difference now in terms of the fundamentals in the market. So asset values will be richer going forward than they have been in the past. And I imagine you have a lever to pull in elevating your own currency strength with dividends, et cetera, in the future. But just wondering how you're thinking about the opportunity set and the strategy for expanding your consolidation strategy from here forward?

[Matthew Wilks, executive]

Definitely. I think that this is an environment where -- this is not an environment where you see a rising tide lifting all boats. There's capital restraints that are put all across this industry. And some have access to capital and some don't. We're really, really proud of the simplified capital structure that we have and the access to working capital. But many of our -- many of our smaller peers don't have access to the same types of working capital, and I think it provides a very interesting outlay as it's too challenging to their outlook on working capital to bundle services and provide consumables with their equipment.

And so when you look at opportunities that still exist in the market. I think that what you see is a great opportunity to by right seek out to further exquisite deals and then take our bundled approach with our robust supply chain where we can get the additional contribution margin on those fleets as well.

And of course, this is core to our growth strategy of not adding to the overall supply of the market, but using the acquire/retire/replace to grow our base and deploy newer, better, more efficient and higher margin equipment to replace legacy fleets that are due for upgrades.

[Ian MacPherson, analyst]

That makes a lot of sense. Thanks, Matt. For my second question, not really asking for guidance beyond Q2, but could you talk just in generality about how much sensitivity your 31 fleets today have to spot price beyond Q2 into the summer. Have you already repriced substantially so there's going to be relatively less pricing uplift sequentially from Q2 to Q3? Or would that be too conservative a statement?

[Matthew Wilks, executive]

When we look at the path forward, we think that there's been significant step-ups, but the #1 priority for our customers is to seek out the rates of return that they would see from additional production, so important for our customers to get these wells online and on time. And one thing I would point out with the industry having such a legacy and vintage fleet -- there's a lot of flat radiators.

And in the summer heat, there are overheating issues that I think is quite rampant in the industry today that is impacting the utilization and the scheduling of when they're expecting to see these wells. And that's why we've put such a high focus on having cube radiators, making sure that we're able to keep our equipment cool and operating in tip top condition.

And so we see our platform as being exactly what our customers are looking for and have started seeing tightness, more tightness than you would have otherwise because of the temperatures and the overheating issues associated with running vintage equipment.

[Ladd Wilks, executive]

Yes. And I would just add to that. Our -- we're obviously pricing has moved up from the lows of 2020 for obvious reasons. But -- when you think about just our cost per pumping hour and kind of where we are just from a historic perspective, we are much lower today well below what we were charging just in 2017 and 2018. And so we believe that we still have room to run. And -- and yes. And what we're excited about is we're seeing that, and we're able to do that for our customers while they're getting paid more than they've been able to -- and they've gotten paid for their barrels or the MC -- or an MCF of natural gas in the past 14 years.

So it's pretty exciting that by partnering with our customers and giving them just efficient service that we can lower their cost and still make a great margin.

[Operator]

Our next question comes from the line of Chase Mulvehill with Bank of America.

[Unknown Analyst]

Ladd, Matt and Lance this is [indiscernible] on for Chase.

[Ladd Wilks, executive]

Good morning.

[Matthew Wilks, executive]

Good morning.

[Lance Turner, executive]

Good morning.

[Unknown Analyst]

So definitely a strong second quarter guidance. But as I think forward, I'm pretty sure customers are already coming to you for 2023 discussions, right? So if you can maybe talk to that a little bit, what are they asking for? What are their expectations? And what kind of commitment are they willing to give you for 2023 at this stage? Or maybe it's too early, right? If it's too early, if you tell me that?

And then related to that, just for the back half of the year, we used to see typical year-end seasonality this year activity is running strong, right? So any likelihood of any year-end seasonality in the fourth quarter. But again, oil price, gas price, both are very strong, right? So these guys are incentivized to pull forward the 2023 by that right. So if you think that's what happens and seasonality would not be that big of an issue this year?

[Coy Randle, executive]

So this is Coy. I'll start off on the first question. Yes, we have seen an early cycle questions and request for '23 fleets. And as we see -- normally, that's in the third quarter kind of activity that starts -- people start trying to look and secure fleets for '23. We have already started those conversations early now. Most of those have been kind of around the e-fleet and the Dual Fuel side of our business and everything else. But Yes, we have seen an increase in the very early activity level about what we're trying to do to secure for '23.

The second part of your question about the seasonality, we always know the Northeast has some kind of seasonality either with it being weather or, to your point, running out of CapEx money early in the cycle. I think this year, I think you'll see more folks try to continue through the end of the year. I think if our activity levels stay the way they are, if demand for our services continue to stay where they are I think we'll see probably a holiday dip as more folks today seem to be wanting to go home for the holidays. But I don't know that we'll see a lot of drop in activity just due because people don't have any money anymore.

[Matthew Wilks, executive]

And just along those lines, there's always weather seasonality and we always plan for that, and we start that plan early to make sure that we have everything we need to address anything associated with freezing conditions, freezing lines, and we like to plan ahead and we've seen things break, and we've gotten really, really focused on how to respond quickly and address those issues. So we're looking at -- there's most likely going to be weather just like there is every year.

But one thing I'd point out is that the customers looking at their 2023 programs, they have put a very high priority on the Dual Fuel and the e-fleets, a conventional fleet will use anywhere from 7 million to 10 million gallons of diesel per year. And with diesel rates where they are, these platforms provide incredible value proposition for these customers. And they get credit for being good stewards of the environment at the same time.

So we like these platforms, and we believe that there have been very high demand. And as you look across the peer class, I think that you'll see a very, very common theme associated with performance across companies with top-tier fleets.

[Unknown Analyst]

Right, right. Now that makes a lot of sense. And just on the Dual Fuel fleet front, right, when we think about the value addition those brands just in terms of the fuel cost savings, right? There's always been a debate about how much of that is being captured by the service company or all of that is being given away to the E&P, right?

So as the market tightens, you would think more of that should come to the service company, right? And I know 40% of your fleet even after the FTSI acquisition is Dual Fuel, right? So how should we think about how much of that fuel cost savings do you get to keep -- and how do you think that is trending? Are you getting to keep more of that now that the market is tighter, and there's a bigger premium on natural gas capability?

[Matthew Wilks, executive]

That's why I touched on it. I was hoping you'd ask me.

[Unknown Analyst]

Yes.

[Matthew Wilks, executive]

So the way that we look at it is we go in and we try to get as much of that benefit as possible -- and as you get more penetration into the market with these platforms, you end up with a benchmarking effect. So if as an industry, if we're not able to capture the majority of those benefits from the operator, you end up with so much of the overall fleet in the industry being represented by emission-friendly fleets that it becomes a benchmark.

And so if you get a 50% substitution with a Dual Fuel fleet and a conventional fleet for the same work would consume 40 million gallons -- or $40 million worth of diesel. You're eliminating $20 million from it. And so if you're not able to capture all of that, then when you compare a Dual Fuel fleet to a conventional non-Dual Fuel fleet, you have to adjust for the diesel, and it has this incredible benchmarking effect that puts pressure on your peers that don't have the right setup with the right capability, and it pushes their profitability now.

This benchmarking is something that happens naturally in the market. And we try to get everything we can. But as this segment and this category continues to grow, and it will. And you're seeing that with the upgrades from our peers that they -- most of them have announced that this will be a continuing story and a growing impact on whether my peers or whether we're able to get those savings they will show up in the market one way or the other. And that's the beauty of capitalist and that's the beauty of free enterprise. That benchmarking effect will show up in the market.

[Unknown Analyst]

Now that makes a ton of sense. And just one last quick one. On the 3 electric fleets that you are deploying later this year, can you update us on where you stand on contracting on that front? And just conceptually, how are you approaching contracting from a returns payback and obviously, the market is tight rate so you need to think about all of that? How are you approaching contracted on the e-fleet side at this stage?

[Matthew Wilks, executive]

In our experience, there are certain situations where we'll enter contracts. Typically, we don't like to just because we felt in most situations, they create a ceiling. They don't provide the floor that you would expect. And so what we end up with is we don't necessarily call them contracts. We call them pricing arrangements because it doesn't have the same type of teeth that you would normally see in a contract. But in our experience, the teeth that you think is protecting you in a contract ends up being toothless compared to the commercial leverage that one side or the other has throughout the cycle.

So our preference is to move into these relationships with our customers -- with mutual motivation and maintaining a partnership focused on the quality of service.

[Operator]

Our next question comes from the line of Dan Kutz with Morgan Stanley.

[Daniel Kutz, analyst]

So I just wanted to ask on shareholder returns. You guys had kind of flagged that you hope to explore options here in the press release. I was wondering if there's anything you can do to help us think through what you would need to see to get comfortable with instituting a shareholder returns program. Is it a leverage target. I think Lance, you had already flagged that in the near term here, you're expected to be less than, I think, 3/4 of a turn in times debt to EBITDA. So is there a certain level of leverage? Is there a level of free cash flow generation or cash on the balance sheet? Is there anything you could do to help us think through what you guys would need to see to get tends to the program here?

[Matthew Wilks, executive]

Dan, I'll take this one. Really, the way that we look at it is this is a great opportunity for -- for us to have aligned interests with all of our stakeholders. Our priority is on returning capital to stakeholders. We prioritize profitability over growth. And that's the exciting thing about that is that we think that all of our competitors should prioritize profitability over growth because when you do that, shareholders hold you accountable to it.

We want to be held accountable. We want to be held to that, and we want our competitors to be as well. You can't offer a return of capital program if you're not profitable. And we look forward to this industry returning to that. And it's our hope and believe that we'll be able to do that in the near future. And that we'll have the opportunity to set the pace and really lead off.

But there's -- I don't believe that there's necessarily specific financial metrics that are driving that as much as incorporating it into our operational philosophy of pushing for a very stable and profitable industry, setting that example for everyone. And making sure that this is the top priority and that we look for it, look for returns to stakeholders at a much higher priority than we put growth.

[Daniel Kutz, analyst]

That's really helpful. And I just wanted to ask on the CapEx side and just in terms of what you're envisioning in terms of equipment priorities. So -- is there anything you can share on kind of the pace of upgrades to Tier 4 Dual Fuel that you guys are targeting or expecting?

And then from a new build perspective, is it still the 3 e-Frac fleets that are under construction going out in the back half of this year? Is that all that's been ordered so far? Or has there been any incremental orders that are -- that have been put in? And I guess, would you at any point contemplate any new build capacity that was not electric Frac fleets?

[Coy Randle, executive]

Yes, sir. So this is Coy again. I'll start off with the 3 e-fleets. Those are well on their way. Parts have been ordered, all that stuff is all in the queue. So as of this point, we have started looking at what fleet for might look like, what we might do different, but no parts, no CapEx yet whatsoever on it.

Our current pace of dual fuel upgrades, we're doing approximately around 10 of those a month right now. that number can move up a little bit, depending on how the supply chain comes in for rebuild engines and parts so that we can upgrade from Tier 2 to Tier 4. So we'll continue on that through the rest of this year, trying to get closer to a higher level of Dual Fuel pumps that are on location.

Outside of that, as far as operations, of course, we have our maintenance CapEx that we spend each and every month to just maintain the current active fleet counts where we're at. And then we've got West Munger Ranch which is again, in our CapEx budget, which is our additional sand mine that we'll hopefully have online here in the third quarter also.

[Lance Turner, executive]

Yes. The one thing I would clarify is that the e-fleets and the West Munger Ranch are going to be kind of concentrated to the middle Q3 part of the year since they're both going to be largely completed by Q4. So just a quick note on the timing.

[Daniel Kutz, analyst]

Got it. That's helpful. And Lance, I guess, real quick, is the $240 million to $290 million full year '22 CapEx guide, does that not that's not like a full year pro forma number, right? That does not include the FTSI CapEx in January and February?

[Lance Turner, executive]

That is correct. It does not include it. And that was, call it, somewhere $8 million or $9 million.

[Daniel Kutz, analyst]

Awesome. All right. Appreciate the color. I'll turn it back.

[Operator]

Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to management for any final comments.

[Unknown Executive]

We want to thank everybody for joining the call. We especially want to thank our shareholders for joining us and becoming a part of our story. We're very excited about the days ahead, the years ahead, and we see this as a privilege to be able to work for you and to create value and to set the tone for what you should expect from an oilfield services company. Thank you.

[Ladd Wilks, executive]

Thanks, everyone.

[Operator]

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