Atlas Energy Solutions Inc. (NYSE:AESI) Q1 2024 Earnings Call Transcript May 6, 2024
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Operator: Greetings. Welcome to Atlas Energy Solutions Incorporated First Quarter 2024 Financial and Operational Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Kyle Turlington, Vice President, Investor Relations. Thank you. You may begin.
Kyle Turlington: Hello and welcome to the Atlas Energy Solutions conference call and webcast for the first quarter of 2024. With us today are Bud Brigham, Executive Chairman; and John Turner, CEO, President and Chief Financial Officer. Bud and John will be sharing their comments on the Company’s operational and financial performance for the first quarter of 2024, after which we will open the call for Q&A. Before we begin our prepared remarks, I would like to remind everyone that the 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 annual report on Form 10-K we filed with the SEC on February 27, 2024, 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 the morning’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 first quarter conference call. In addition to reviewing our first quarter results, we’ll spend some time this morning providing an update on the great progress we are making integrating Hi-Crush and Atlas since the closing of that acquisition in early March. Additionally, we also need to discuss the recent fire at our Kermit facility and perhaps, more importantly, the impressive response from our team to maintain both safety on-site and reliable supply of sand to our customers throughout the disruptive event. I will go ahead and state that no other proppant producer could have possibly continued delivering proppant to their customers the way Atlas has.
Our differentiated scale recently enhanced by our acquisition of Hi-Crush and their great people, our associated production redundancies, and our geographically distributed production assets uniquely position Atlas to continue reliably serving our customers even through rare, unexpected disruptions. And whether it’s a fire, severe weather, or traffic accidents, disruptions do occur. Atlas makes the Permian supply chain more reliable and sustainable. Briefly reviewing the events, around noon, on Sunday, April 14, a fire broke out at our Atlas Kermit facility damaging equipment involved in our feed system, which takes sand from the separation and drying process to our silos. Due to the quick actions of our employees and quick response from the West Odessa, Kermit, Monahans, and Andrews Fire Departments, the rest of the plant, including all production centers, was unscathed.
This incident was limited to affecting our ability to load trucks at Kermit and did not impact our ability to produce sand. Thankfully, and most importantly, we quickly ascertained that all of our employees and vendors were safe and accounted for. I want to, again, thank the first responders and our team of wonderful employees here at Atlas for keeping everyone safe and limiting the damage to the plant. Within hours of the incident, our sales and supply chain teams began notifying our customers of the event and also began taking the steps to ensure their supply needs would continue to be met, resulting in uninterrupted service and zero sand-related, non-productive time at customer well sites through the incident. Again, I think it’s obvious that no other company could have accomplished this.
In under 48 hours, mobile loadout equipment and mobile silos began showing up at our Kermit plant to lay the groundwork for a temporary loadout solution while we began conducting repairs. Within 11 days from the fire, we reopened the Kermit facility and began loading trucks with sand. Today, the Kermit facility is loading close to 6,000 tons of sand, which is about a third of our throughput prior to the incident. By the end of this month, we expect to receive all of the necessary equipment to completely rebuild the damaged feed system. And we expect the damaged portion of the Kermit plant to be fully restored by the end of June. This quick turnaround is another clear demonstration of Atlas’ unique culture. Our exceptional team collaborated across our entire platform of distributed assets almost instantaneously.
The pace at which they moved was almost shocking. To think that we reopened the Kermit facility within just 11 days of the fire still seems unbelievable. But knowing the quality of our people, I know at this point that I shouldn’t be surprised. When you partner with Atlas, you can count on quality and reliability, even under extreme circumstances. Again, thanks to our great people, our innovative culture, our unmatched scale, our relationships, and our diverse distributed assets that we are uniquely able to perform through these disruptions. I could not be prouder of how we have responded to this unexpected setback. With respect to the incident at Kermit, we wanted to provide more information about what happened and the improvements we are making to address the risk of a repeat event in the future.
We see these events as opportunities to make Atlas better. First, now that we have completed a root cause analysis, there are a number of contributing factors that combined to result in the fire starting in the feed system between the plant and the silos. These factors included mechanical and process failures. We are responding by taking a number of actions to improve our systems and processes to protect us from the risk of reoccurrence. For example, in the near term, we have enhanced and increased inspections and preventative maintenance procedures. In addition, some of the technological enhancements in the design and the construction of the Dune Express, specifically, the multilayered belt detection system and more advanced auto-lubricating systems will be installed in our feed systems at the plants.
This is important to spend a moment on. The five years of design and the significant investments in technology we’ve made in planning the Dune Express, particularly in automation around preventative maintenance events, addresses the risk of an incident like this occurring on the Dune Express. For example, in addition to the smart idlers we’ve been discussing previously, we will have dual monitors on the pulley bearings for two separate systems, one for preventative maintenance and the other for real-time monitoring and prevention of catastrophic failures, as well as dual monitors for belt detection and slippage with interlocks to stop the conveyor if the belt is loose or slipping. The system will be hardwired to shut down the conveyor if a fault is detected.
Further, all pulley bearings will be auto-lubricated, which will mitigate the risk of incidents. Lastly, on the Dune Express, monitors, sensors and cameras will provide real-time data and security along the 42-mile conveyor route. I believe the Dune Express is likely the most technologically advanced bulk material conveyor ever built. Wrapping up my section, subsequent to the closing of the Hi-Crush acquisition, the Board of Directors named John Turner as Chief Executive Officer effective March 6, 2024. As Executive Chairman, I will remain very active in the Company’s operations, continuing to provide leadership, ideas and vision to the Company’s management team, and I will continue to focus on identifying innovative strategic opportunities.
John and I were founders of Atlas back in 2017. And as a proven oil and gas entrepreneur, John has been and will continue to lead our outstanding management team to successfully manage day-to-day operations while building Atlas into the premier proppant and logistics company in our highly competitive industry. Atlas has a big future. And I believe John’s leadership and executive experience, working with the rest of our outstanding management team, will result in continued innovation and growth to continue creating shareholder value. In addition to the much-deserved promotion of John Turner, effective May 13, Atlas is pleased to announce the appointment of Blake McCarthy as Chief Financial Officer of Atlas. Blake, most recently, served as President of NOV Grant Prideco.
We welcome Blake aboard and are excited to have his leadership and expertise to help guide Atlas into the future. With that, I will now pass the call over to John.
John Turner: Thank you, Bud, for those kind words and I echo your comments regarding the addition of Blake. I look forward to working side by side with Blake as we navigate the road ahead for Atlas. Blake’s expertise in integration and acquisitions along with his deep understanding of financial markets and the oil service industry will be a welcome addition as we have just started our journey as a public company. The first quarter was an exciting period for Atlas with the closure of the Hi-Crush acquisition, the completion of the Kermit expansion and commissioning of the first of two new state-of-the-art dredges. The acquisition of Hi-Crush is already off to a great start. In March, Hi-Crush set a monthly volume record for their Kermit plants.
and Pronghorn, along with Atlas’ Last Mile, set a monthly record for total loads. We successfully floated our first new dredge in February and recently floated our second in late April. We expect the commissioning process for both dredges to be completed by the end of June. And we are well on our way to our fourth quarter 2024 commercial end service date for the Dune Express. Atlas continues to evolve into a more integrated provider of diverse solutions for our customers as emphasized by our addition of Pronghorn’s logistics footprint, which amplifies Atlas’ offerings of the Dune Express and expanded payload capacity logistics assets. It has been a remarkable first year as a public company. Our team has a lot to be proud of, and I’m sure proud of them.
Regarding the Hi-Crush acquisition, we are off to the races with our integration. And it is exciting to think about what the combination of these very talented and innovative workforces will be able to accomplish as we share resources and best practices. We are working through the identification of additional potential synergies beyond the 20 million that we initially announced at the time of the acquisition. The tie-in of Hi-Crush’s Kermit operation to the Dune Express, the potential for dredge mining to be brought to Hi-Crush Kermit and the combination of our utilities, infrastructure and procurement programs are among some of the potentially impactful initiatives that we are currently working through. We have received positive feedback from our customers on the acquisition and look forward to better serving our customers through the combined offering of the Dune Express, the OnCore mines and the Last Mile Solutions.
The addition of Hi-Crush truly provides Atlas with an unparalleled portfolio of profit and logistics assets. Regarding logistics, Atlas remains the market leader in Last Mile with 28 crews of which 24 are in the Permian. We now deliver over 50% of our total sand volumes using our Last Mile crews. Not only is Atlas leading with fully integrated solutions, we are also leading with technology, building on our digital platforms’ capability to monitor proppant inventory at our customers’ well sites, we released our automatic ordering feature, a seamless, technology-assisted, sand-offering feature based on live inventory and operational data feeds. Our Opti Order feature provides the foresight to keep our sand production optimized while also giving our customers confidence in meeting their operational targets.
On the heels of Opti Order, we also released Gen1 of our Opti Dispatch feature, a first-of-its-kind digital functionality to autonomously schedule, optimize and dispatch sand delivery without human intervention. Combined Opti Ordering and Opti Dispatch set the Atlas’ digital platform well ahead of the competition. Our automation, efficiency, scale and innovation continue to drive market differentiation while advancing the digital transformation of the Permian Basin. Operation of OnCore number eight is currently underway. And we expect that unit to commence sales later this month under a long-term contract with an existing customer in the Midland Basin. This is the third OnCore unit deployed with this customer, further validating the value proposition the OnCore Solution delivers to operators and the leadership position the OnCore team has established within the infield mobile mining market.
Of note, Number 8 is a larger unit with the production capacity roughly double that of our seven other units that are currently deployed in the Permian. Regarding future OnCore deployments beyond eight, we have placed orders with our vendors for the equipment that will compromise Unit 9. We expect to take delivery of this equipment in the third quarter and have multiple mine sites secured under option agreements. We are in advanced discussions with a number of potential customers about the deployment of this unit. The construction of the Dune Express remains on time and on budget and was not impacted by the events last month at our Kermit facility. We have more than 200 personnel on the ground daily working on construction, and we continue to make great strides and remain confident on our fourth-quarter delivery timeline.
Notable construction milestones include, as of the end of April, we have substantially completed both of our major highway crossings, 16 of our 20 lease road crossings, and 9 of our 19 cattle and wildlife crossings. The installation of the sand feed system for the Dune Express, which we have described as the pant-leg design commenced in April and will run through June. The installation of the concrete sleeper will be completed by the end of this month. At the end of April, more than 60% of the conveyor modules were completed and we expect to be 95% complete by the end of this month. And as of today, 95% of the belt has been flaked and is ready for installation. Thanks to our strong first quarter results, the heavily contracted and low-cost nature of our business, and the quick turnaround at the Kermit facility, we are going to increase our dividend 5% to $0.22 per share, up a penny when compared to our dividend last quarter.
Based on this dividend and our closing price on May 3, we now have a current annualized dividend yield of 4%. Pro forma maintenance CapEx beyond 2024 is expected to be around $60 million annually, providing Atlas with multiple avenues to further increase shareholder returns once the remaining growth CapEx associated with the Dune Express subsides. The overall sand market remains steady. Recent improvements in oil prices have not led to a pickup in activity yet. But it has changed the conversation from how low the rig count can go, which was the dialogue in the fall to today’s topic of when will the recovery occur. Frac efficiency remains a nice tailwind for Atlas and our peers. One of the main benefits of consolidation in the Permian is the increased mix of simul- and trimul-fracs, which today represents more than 20% of the Permian’s completions market.
Furthermore, we see continued year-over-year growth in drilling and completion efficiencies, which amplifies the effect of fleet additions, resulting in increased levels of proppant consumption. Atlas remains highly contracted for 2024, derisking much of the sand price volatility for this year. For the first quarter of 2024, which includes a 27-day contribution from Hi-Crush, we reported total sales of $193 million. Our revenue from profit sales was $113 million on volumes of 3.9 million tons. As expected, we saw the first quarter get off to a slow start in January from an activity standpoint, but return to a more normal cadence for February and March. Our average sales price for the first quarter was approximately $29 per ton. Moving to service sales, which is revenue generated by our logistics operation, we reported $79 million in revenues for the quarter.
In total, cost of sales excluding DD&A for the quarter was $107 million, which consists of plant operating cost of $40 million and logistics operating cost of $67 million. For the first quarter, our per ton plant operating cost was $10.88, which was negatively impacted by less dredge feed as we were commissioning the new dredge in March, and thus we were more dependent on traditional mining throughout the quarter. We expect the commencement of both of our new dredges to provide incremental improvements in operational performance and further reductions in our mining costs once the rebuild of the Kermit facility is complete. Royalty expense for the quarter was $3 million. SG&A expense for the quarter was $29 million, which includes $11 million of non-recurring transaction costs and $4 million of non-cash stock-based compensation.
Cash interest expense for the quarter was $6 million, which was offset by $2 million of interest income generated during the period. We expect our interest income to decline in future quarters as we draw on our cash reserves to fund our growth projects. DD&A for the quarter was $17 million and we generated net income of $27 million, representing a net income margin of 14% and an earnings per share of $0.26. Net cash provided by operating activities was $42 million. Adjusted EBITDA for the period was $76 million representing an adjusted EBITDA margin of 39%. We expect our adjusted EBITDA margins to decline in subsequent quarters as we ramp up revenue from our lower-margin logistics segment and incorporate the lower-margin profile from the Hi-Crush acquisition.
Adjusted EBITDA margins should improve in 2025 with the commencement of the Dune Express. Adjusted free cash flow, which we define as adjusted EBITDA less maintenance CapEx for the quarter was $71 million, yielding an adjusted free cash flow margin of 37%. Lastly, we spent a total of $88 million on growth projects in the first quarter. $75 million of this spend was for the Dune Express, with the majority of the remaining $13 million going towards the completion of the Kermit plant expansion in our new on-floor facilities. Cash and equivalents at the end of the quarter stood at $187 million with a total debt of $481 million. For the second quarter, we expect a $20 to $40 million EBITDA impact from the fire that occurred on April 14 and subsequent 11-day plant closure, which implies our second-quarter financial results will be in line with the results of our first quarter.
The EBITDA impact from having to source meaningful amounts of lower margin third-party volumes, the loss of some spot sand sales and higher OpEx costs associated with a more-manual, less-efficient, temporary loadout implementation which will be in place until the feed system is rebuilt, which is expected to occur in late June. As mentioned earlier, the fire had no impact on the plant production centers. And once the rebuild of the feed system is complete, we expect the plant to resume normal operations in the third quarter after a normal ramp-up. We expect the rebuild costs to be fully covered by our insurance policies, minus a $250,000 deductible. Once again, we do not expect the event to have any impact on the timing of the construction of the Dune Express or cause any NPT for our customers.
Although a modest financial impact, I could not be more proud of the quick collaboration, teamwork, and resourcefulness of our employees to limit the impact and quickly reopen our facility so we can reliably serve our great customers. To the extent the fire has any additional lingering impacts on our financials, we will update guidance when appropriate. That concludes our prepared remarks. And we will now let the operator open the line for questions. Thank you all for joining in on our first quarter call.
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