ProPetro Holding Corp. 2026 Q3 Earnings Call

Please go ahead. Thank you and good morning.

We appreciate your participation in today's call. With me are Chief Executive Officer, Sam Sledge, Chief Financial Officer, Caleb Weatherl, President and Chief Operating Officer, Adam Muñoz, and President of PROPWR, Travis Simmering. This morning, we released our earnings results for the third quarter of 2026. Please note that any comments we make on today's call regarding projections or our expectations for future events are forward-looking statements covered by the Private Securities Litigation Reform Act. Forward-looking statements are subject to several risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and risk factors discussed in our filings with the SEC. Also, during today's call, we will reference certain non-GAAP financial measures.

Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release. Finally, after our prepared remarks, we will hold a question and answer session. With that, I would like to turn the call over to Sam.

Thanks, Matt, and good morning, everyone. ProPetro delivered a solid third quarter, higher revenue, net income, and adjusted EBITDA in both our completions and PROPWR business. PROPWR posted a meaningful sequential step-up as we continue to advance its commercial and operational execution and activity across frac, cementing, and more. While the cost of rebuilding its completions capacity continued to weigh on margins, our fleet is now essentially sold out, positioned to recontract into a tighter, better-priced market in 2027. Let's start with PROPWR. Since our last update, we have made significant progress across the business. PROPWR generated approximately $8 million of adjusted EBITDA in the third quarter, a meaningful sequential increase. Results and margin performance at the project level continue to meet our already high expectations, which reinforces our confidence in the earnings and return profile of the outlet.

We expect to keep scaling deployments through year-end, reaching between approximately 250 to 275 megawatts deployed by the end of 2026 and stair-stepping to more than 500 megawatts by early 2028. We expect this growth to come from three sources: scaling our currently contracted capacity, deploying or preparing to deploy on the Targa award, which is scheduled to be fully deployed by early 2028, and beginning to scale one or more additional data center projects over time. Looking further ahead to 2027, much of our work will be preparing for larger infrastructure scale projects, including the Targa award and potential additional data center awards, which could begin deploying as early as late 2027.

As a result, we expect 2027 earnings to be weighted towards the latter part of the year, with growth following a stair-step pattern as projects come online rather than a straight line throughout the year. Projects of larger scale require significant lead time. We expect certain costs, including personnel, site preparation, mobilization to build ahead of these deployments for the corresponding revenue and earnings contributions. By emphasizing disciplined execution and actively de-risking these larger deployments, we are building on the strong operational foundation we established in 2026, and we remain confident in our PROPWR guidance and the long-term earnings and return profile of the business. On the commercial front, our recently announced agreement with Targa for approximately 230 megawatts brings our total capacity committed under contract to approximately 510 megawatts. This award represents meaningful progress in our commercial efforts.

It also shows how broad power demand is across end markets, including oil and gas, upstream and industrial, in addition to data center. Contract terms and economic factors are generally shorter than those in the data center arena. Pricing and expected annual return are very attractive. That said, given the larger load requirements and longer contract duration in the data center arena, along with the depth of our pipeline there, we continue to expect to deploy the majority of our assets to data center projects over time. Of the approximately 2.6 gigawatt power generation capacity we have secured, more than 1 gigawatt consists of Caterpillar's highly efficient 10-megawatt units that are part of our strategic framework agreement. With supply chains for power generation equipment remaining very tight, we believe this agreement and our early mover position provide a meaningful advantage.

Beyond just securing supply, the 10-megawatt units themselves are highly efficient, stationary natural gas engines, purpose-built for permanent high-density installations. They maximize efficiency for our customers while lowering our total cost of ownership. The vast majority of our fleet will be natural gas reciprocating engines ranging from 2 to 10 megawatts, which we believe are the ideal fit for every vertical we are currently pursuing. Of note, our smaller units are also proving to be very successful. Our first data center deployment, which is live and operating today in the Midwest United States, is largely built on 2.6-megawatt units. Reciprocating engines offer a number of advantages that we believe make them the right fit for our customers. They are a proven technology with a long track record in both mechanical drive and power generation applications.

They are continuous duty-rated machines trusted in high availability environments, including data centers, oil and gas, mining and industrial operations, and marine and heavy transport, where uptime and performance are all critical. They provide flexibility, scaling, and modular blocks alongside customer demand with built-in redundancy. They deliver high fuel efficiency, are cost-effective for both PROPWR and our customers, and are emissions-friendly, which supports an efficient permitting. These advantages apply across our entire fleet, with our 10-megawatt units adding even greater scale for our customers' largest power demands. In the data center arena, despite broader volatility and the noise in the AI market, we remain in advanced negotiations on several hundred megawatts and continue to progress a number of additional opportunities behind them. The pipeline also continues to grow, strengthening our conviction in our strategy and investments.

As we have noted previously, timelines have extended as we work through diligence with counterparties. These agreements involve long-term capital commitments on both sides, so getting the risk-sharing provisions right is critical. Strong demand for our assets can also lengthen rather than shorten the contracting process because we are being deliberate about choosing the right long-term partners. In addition, change in scope or timing on the project can make a previously unworkable opportunity viable or free up capacity for customers who otherwise could not have supported it. Because we are allocating capacity across multiple customers, individual deal timelines may shift as we determine how each opportunity fits within our broader portfolio. Accordingly, we remain very confident in the pipeline. Importantly, we are currently deployed and operating on a hyperscaler project and execution is exceptionally well.

We are one of the very few behind-the-meter power providers live on a data center site today, and we believe this operating track record validates our strategy and has helped accelerate our broader growth. Our PROPWR guidance also remains clear and unchanged. We continue to expect capital costs of approximately $1.4 million to $1.5 million per megawatt. That figure includes balance of plant and expected inflation over the life of the Caterpillar framework agreement, and it reflects the advantage of our early mover position. We continue to target payback periods of four to six years, with oil and gas and midstream projects closer to four years, given their generally shorter contract terms. From a financing perspective, we have raised approximately $1.5 billion to support PROPWR, including our highly successful $690 million convertible notes offering earlier in May, which largely addresses our near-term capital needs.

Going forward, we will approach future capital decisions opportunistically as we continue expanding our commercial footprint and executing against our strategy. Now turning to completions. I want to address the cost that weighed on margins this quarter. As activity declined during 2024 and 2025, with tariff-related uncertainty and OPEC+ production increases adding to the pressure, we took decisive action to reduce operating costs and capital spending during those years. That protected the free cash flow through a challenging market, but we have had to rebuild some of that capacity as demand has recovered this year. Improved pricing and better visibility into the duration of work supported the reactivation of two fleets this year, bringing us to 13 active fleets today. The latest addition deployed in the third quarter earlier than we originally anticipated. We are now essentially sold out of available frac capacity.

Supporting the increase in activity has required rehiring field personnel, restocking inventory and spare parts, and preparing additional pumps for deployment. Higher utilization has also put pressure on our field operations and maintenance shop. While the cost of ramping back up has been higher than we originally anticipated, we are proud of how responsive our operations team have been in meeting increased customer demand. We expect to maintain approximately 13 active fleets in the fourth quarter. That said, we expect meaningful seasonality in the fourth quarter from typical holiday slowdown, which will temporarily affect utilization and results, along with continued margin pressure from the rebuilding costs we experienced in the second and third quarters. As activity stabilizes as we move into 2027, we expect to begin optimizing those costs, although the full benefit may take time.