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Good morning, and welcome to the NexTier Oilfield Solutions Second Quarter 2020 Conference Call. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.
For opening remarks and introductions, I'd like to turn the call over to Kevin McDonald, Chief Administrative Officer and General Counsel for NexTier. Please go ahead, sir.
Thank you, Operator. Good morning, everyone, and welcome to the NexTier Oilfield Solutions earnings conference call to discuss our second quarter 2020 results. With me today are Robert Drummond, President and Chief Executive Officer; and Kenny Pucheu, Chief Financial Officer.
Before we get started, I'd like to direct your attention to the forward-looking statements disclaimer contained in the news release that we issued yesterday afternoon, which is currently posted in the Investor Relations section of the company's Web site. Our call this morning includes statements that speak to the company's expectations, outlook or predictions of the future, which are considered forward-looking statements. These forward-looking statements are subject to risks and uncertainties, many of which are beyond the company's control that could cause our actual results to differ materially from those expressed in or implied by these statements. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
We refer you to NexTier's disclosures regarding risk factors and forward-looking statements in our annual report on Form 10-K, subsequently filed quarterly reports on Form 10-Q, and other Securities and Exchange Commission filings. Additionally, our comments today also include non-GAAP financial measures. Additional details and a reconciliation to the most directly comparable GAAP financial measures are included in our press release that is posted on our Web site.
With that, I'll turn the call over to Robert Drummond, Chief Executive Officer of NexTier.
Thank you. Kevin, and thanks everyone for joining on the call this morning. I would like to start the call by taking it back to our foundation. We acted last year to address the need for consolidation in our industry, and we announced a merger of equals establishing NexTier, a leader in U.S. well completion services. NexTier has clearly demonstrated its ability to complete and integrate transformational transactions, and I'm extremely proud that all aspects of the transaction strategic rational have been realized. We exceeded our targeted synergies and completed a very efficient integration process. We achieved these results more than six months ahead of schedule with our run rate synergies being fully realized in April. The integration and the enhancement of our ERP system was successfully completed during the second quarter as well.
We significantly improved our financial position and balance sheet, and further improved upon this strength with the divestiture of our well support services business in March in a transaction that accelerated approximately five years of free cash flow on to our balance sheet, while simplifying our operations. Our ability to respond to completion opportunities all over the U.S., and even in Saudi is evident in our safety performance, service quality, and ultimately, our market share. Lastly, integrating two equal-sized companies provided a platform to foster best practices, assets, and the people from both companies. Our operating capabilities are now stronger than ever, and we remain intensely committed to delivering long-term stakeholder value for our shareholders, customers, and employees.
As I'll get into more in a moment, we pivoted late in the first quarter and throughout the second quarter on restructuring the organization to be even more lean and nimble, while also preserving the balance sheet. This is the most challenging oilfield services market environment that I've experienced in my long career. Against this backdrop, we remain committed to preserving our balance sheet, while positioning ourselves to harvest strategic opportunities for medium and long-term value creation as the market rebounds. In sum, we are extremely focused on responsibly managing our business through these unprecedented market headwinds, and we will never lose sight of our objective to continue building the company for the long haul.
Turning our discussion back to the second quarter results, during the quarter, we extended our track record of meeting customer commitments despite a very tough environment. Activity declined in line with our expectations as E&P operators shut in production and temporarily halted a significant majority of their drilling and completion activity in response to the COVID-19 economic shutdowns.
And with that in mind, I'd like to share several highlights from the quarter. We achieved U.S. market share at the upper-end of our forecasted range, which we believe placed us with the second most hydraulic fracturing fleets working in the U.S. Our speed to assess and respond to the activity declines are evident in our reduced cost structure and continued risk management and service quality. The resulting strong adjusted EBITDA decremental performance was meaningfully ahead of our outlook. We accelerated synergy capture, and exceeded our full integration synergy run rate commitment in early April. We acted quickly and decisively to significantly reduce our cost structure in both operations and support, including a 35% sequential decrease in adjusted SG&A, and remain on pace to achieve further reductions by year-end. We successfully deployed a second completion fleet in Saudi under our collaboration with NESR, as we continue to grow through this differentiated international outlet. We continue to move forward with our innovation program, including the deployment of NexHub, providing 24/7 remote monitoring and management capabilities across all of our deployed U.S. fleet, and further enhancing the value added by our digital initiatives.
We achieved an incident-free month in June with no recordable incidences. This is an incredible achievement in any environment, but I am particularly proud of our team for not losing focus in a time of crisis. We increased our cash position by $23 million, driven by working capital release and the liquidation of excess assets, not satisfying our long-term return criteria. We fully repaid our $175 million of revolver borrowings, exiting the quarter with $337 million in cash, and a net debt position of zero.
Finally, we read the market correct, took responsive actions early, and executed our plan effectively. We did not resize the organization to best suit the trough of market activity, instead, we've been very thoughtful around managing the company in a way that ensures we remain good stewards of our resources, while positioning ourselves to be ready on demand to drive our business forward as the market rebounds. While I'm very proud of how our team has performed and delivered, [being] [ph] so many of our former colleagues, and everyone across the industry impacted by this market downturn has not been easy. We unfortunately had to reduce a significant portion of our operations in response to where we saw the market headed. I'm especially proud of how our team stayed focused as activity wound down, delivering some of our best safety and operational performance, while continuing to uphold our commitments to our customers. I'm thankful for all of our employees who continue to make so many sacrifices, while navigating a challenging environment at work and at home. Our focus remains on taking all appropriate actions and precautions to help protect the health and wellbeing of our employees, partners, and the communities in which we operate.
Turning into how we saw activity in the second quarter play out, the dual demand and supply shock that emerged in March had immediate negative impacts on commodity prices and market sentiment, which translated into significant reductions in completion activity. April activity remained relatively resilient, and we averaged 17 fully utilized deployed hydraulic fracturing fleets versus the first quarter average of 27 fleets. As producers work through their immediate plans and programs, many hit pause resulting in a precipitous decline in drilling and completion activity. We estimate the market trough did 50 or less fully utilized completion crews in late May or early June.
In response, we were quick to first execute on our defensive measures. Our actions protected our liquidity position, and adopted a cost structure that helped us navigate these unprecedented activity declines while at the same time preserving the ability to fund the working capital necessary to thrive when the market rebounds. Our decisive actions centered around four key focus areas customer alignment, balance sheet optimization, strategic staffing, and managing the warm stacking and preservation of our assets. We have now positioned NexTier to differentiate our service quality, value proposition and overall financial position in the current environment and more importantly into the future recovery, benefiting our customers, employees and shareholders. The already benefits of these actions are evident in our financials and well-managed decrementals, financial strength and sustainability remain critical factors in customer decisions when choosing service providers to partner with making our responsive actions essential to our success in navigating current headwinds, and best positioning us to win during the recovery. All these actions demonstrate our commitment to managing what we can control. Nevertheless, our results are very much impacted by government shutdowns across the global economy, and the overall macroeconomic impact on oil and gas supply and demand.
So, turning now to what we see going on today, there's no doubt that conditions have shown signs of improvement, albeit on a much smaller base. Shut-in production is being brought back online, while producers contemplate drilling and completion plans for the second-half of the year and beyond. Commodity prices have improved, but they remain below threshold levels necessary for driving significant rig activity growth. Against this backdrop, frac pricing remains highly competitive, as excess capacity continues to pursue limited new opportunities. Based on these market influences, and the associated pricing environment, we're intentionally balancing two critical factors. First, our commitment to servicing customers, and second, our foundational commitment of maintaining balance sheet stability needed to ensure long-term success. Current U.S. land market conditions are not sustainable long-term meaning activity and price improvements will be needed to meet future industry service requirements. We have visibility on activity in the third quarter, the fourth quarter remain extremely uncertain, as the market grapples with the ongoing impact of virus related disruptions, oil demand uncertainty, budget exhaustion dynamics, geopolitical pressures and other seasonal factors.
Regardless of the exact timing of a more fulsome recovery in activity, we believe several factors will be critical and optimizing our ability to capitalize on the rebound. We consider the following key elements of our overall rebound readiness strategy. First, people; the NexTier integration process gave us access to a great pool of talent. We have an extraordinary team in place today. We have taken many steps to best position ourselves to re-expand our operational capabilities when the market begins to pick up again. Second, lasting power; the protective measures to preserve our balance sheet helps us maintain financial flexibility to both play defense and offense. We have seen an increased emphasis by producers and assessing balance sheet strength for completion companies. This customer focus is very refreshing given our differentiated capital position and it reflects their priority on identifying the best long-term partner for supporting their completion programs.
Third, asset preservation; while we've only seen a slight recovery in activity thus far, the customer conversation has shifted to assessing market readiness as they inquire when and how quickly we could get back to work. While this is not yet translated to new activity on a large scale, it does reflect an improvement in overall conditions in the midst of these market challenges, and based on our assessment that a meaningful activity recovery is several quarters into the future, we implemented an asset readiness plan that centralizes, protects, and sustains readiness for our broad asset base. This investment ensures that NexTier has a strong base of market ready equipment that can be deployed quickly and at a minimal cost once conditions improved. And fourth, innovation; we continue to believe that innovation will drive the next leg of safety, efficiency, and sustainability. Our fully deployed, integrated digital program is already bearing fruit, and we will continue to use these capabilities to drive change from the wellsite to the boardroom. We continue to evolve our innovation platform, and we believe it will continue to serve us as a key differentiator.
With that in mind, I'd like to take a moment to expand on some of the advancements we are making with our innovation initiatives. In response to the downturn, we narrowed our innovation and technology investments to focus on projects with near-term returns. During the second quarter, we successfully completed deployment of NexHub on all operating U.S. fleet. NexHub is our remote, digitally enabled, operation support function, which includes 24/7 engineering, Equipment Health Monitoring, and intervention, as well as logistics and dispatching all centralized in one cost-effective environment, working in unison to continuously and consistently support operational efficiency and performance. That's better leveraging -- our field engineering support, this newly digital enabled platform is driving the next phase of our continuous improvement in operating efficiency.
An example of this is our real-time Equipment Health Monitoring, which predicts and prevents early major component failures and optimizes maintenance CapEx and OpEx cost. I cannot say enough about the positive impact the NexHub is having on service efficiency, and I expect this operational illusion to create even more NexTier differentiation, as we deploy more fleet. Another example of our ongoing differentiation is the continued impact of our dual-fuel frac fleets to dramatically reduce greenhouse gas emissions and fuel cost, through the consumption of natural gas as a primary fuel source. We continue to see long-term value in natural gas-powered equipment as a path for lowering overall cost and emissions, and we will continue to assess additional investments in expanding capacity in this area.
So, in summary, we're not waiting around for global market recovery, nor are we spending too much time forecasting commodity prices. It's a tough market, but we remain a company that can compete in any environment, built on a proven base of people, equipment, and customers, and further enabled by digital capabilities that lower operating costs, improve efficiencies. Global all-demand will recover. And we are preparing for an ultimate activity rebound. Achieving the right balance of these actions are setting the stage for our future performance. Further, our strong balance sheet provides us a differentiated position to when the time is right. Invest further in next generation fracking techniques and equipment, we like our position.
Before I turn the call over to Kenny, I wanted to share an update regarding NexTier's leadership team. Kenny has been off to a great start since assuming the CFO role at the end of last year. And over the last several quarters has further established himself as an essential leadership partner, and a member of our executive team. In recognition of his efforts and contributions, I'm proud to report that Kenny has been promoted from Senior Vice President to Executive Vice President, where he will continue to lead NexTier's finance and IT efforts. Please join me in congratulating Kenny, and wishing him continued success.
With that, I'll turn the call over to Kenny.
Thanks, Robert. Total second quarter revenue totaled $196 million compared to $628 million in the first quarter. Sequential decrease is primarily driven by sharp activity declines, and the divestiture of a Well Support Services business in late Q1. Total second quarter adjusted EBITDA was $2 million compared to $72 million in the first quarter. Despite the dramatic pace and magnitude of revenue decline, our quick and significant cost reduction actions resulted in adjusted EBITDA decrementals of approximately 16% ahead of our forecast of 25%, or better.
In our Completion Services segment, second quarter revenue totaled $179 million compared to $513 million in the first quarter. Completion Services segment adjusted gross profit totaled $32 million compared to $98 million in the first quarter. During the second quarter, we deployed an average of 13 completions fleets. And when factoring in activity gaps, we operated the equivalent of 11 fully utilized fleets. As Robert noted, activity remained resilient to start of the quarter, with 17 average fully-utilized frac fleets in the month of April. Activity fell dramatically beginning in May and we estimate a market trough, was driven achieved in late May early June. So we are covering somewhat into the end of June, where we exited with eight fully utilized frac fleets. On a fully utilized basis, annualized adjusted gross profit per fleet, which includes frac and bottled wireline totaled $11.4 million compared to $13.4 million per fleet in the first quarter, which continues to position NexTier as a leader and relative peer performance.
In our Well Construction and Intervention Services segment, revenue totaled $17 million compared to $57 million in the first quarter. Adjusted gross profit totaled $1 million compared to $9 million in the first quarter. In the fourth quarter, we reduced our footprint of our cementing and coal product line significantly focused on regions that support constructive near and long-term levels of activity. Adjusted EBITDA for the second quarter and close management adjustments of approximately $33 million, consisting primarily of $19 million, a market driven severance and restructuring costs, $5 million of non-cash stock compensation expense, $14 million of merger and integration costs, partially offset by gains of $5 million, which includes an accounting game, associate with the make-whole provision on the basic notes received as part of the Well Support Services divestiture completed in March; of the $33 million, in management adjustments during the second quarter, and approximately $8 million for non-cash. Second quarter selling, general, and administrative expense totaled $38 million compared to $57 million in the first quarter. Excluding management adjustments, adjusted SG&A expense totaled $31 million compared to adjusted SG&A of $48 million in the first quarter.
Prior to the merger between Keane and C&J, we operated a combined annualized adjusted SG&A of approximately $250 million. As part of our integration process, we identified a significant base of synergies. We accelerated and completed the capture of these synergies at the start of the downturn and quickly pivoted the business transformation. With these efforts, we achieved second quarter run rate adjusted SG&A of $124 million, less than half prior to the merger. We continue to become more efficient in our support structure and back office processes and continue to target run rate adjusted SG&A of approximately $80 million, reflecting a significant improvement in our cost structure while retaining muscle and growth capacity. We will continue to keep SG&A expenditures and our support structure lean, also support long term enhance financial performance as market conditions improve.
Turning to the balance sheet, we exited the second quarter with $337 million of cash compared to $340 million of cash at the end of the first quarter excluding our ABL borrowings. Total debt at the end of the second quarter was $337 million net of debt discounts and deferred the finance cost and excluding the finance lease obligations compared to $512 million in the first quarter. As Robert mentioned earlier, we fully repaid the $175 million that we had previously drawn on our ABL facility in the defensive move during the first quarter. We have confidence in our balance sheet and its lasting power. Net debt at the end of the second quarter was approximately zero, resulting in a leverage ratio on a trailing pro forma 12 month basis. We exited the second quarter with total available liquidity of approximately $430 million comprised of cash of $337 million and availability of approximately $93 million in over asset based credit facility.
Cash flow from operations was $62 million during the second quarter while cash flow used in investing activities totaled $36 million driven by maintenance CapEx in select investments and technology. This resulted in free cash flow of $26 million during the second quarter. Excluding $30 million in merger and integration cash cost and $15 million in market related severance and restructuring cash cost, adjusted free cash flow totaled $53 million in the second quarter.
Turning to our outlook, as noted earlier we averaged 11 fully utilized hydraulic fracturing fleets in the second quarter which is comprised of a strong April and significantly weaker May and June. We are entering the third quarter off of the slower base and expect to steadily increase activity as we progress throughout the third quarter, allowing us to maintain our historical market share average in the range of 8 to 12%. As Robert noted, we will continue to maintain certain level of fleet utilization and activity, but not at the expense of our balance sheet. From a revenue perspective due to strong contributions from April in our second quarter combined with the impacts of an increasingly competitive pricing environment, we expect third quarter revenue to decline versus the second quarter. As noted earlier, we continue to drive down support cost and expect to reduce third quarter SG&A by another 25% as compared to the second quarter. On this base, we expect to hold adjusted EBITDA decrementals to less than 25%.
With that, I will hand it back to Robert for closing comments.
Thanks, Kenny. Before we open up the lines for Q&A, I want to leave everyone with a few concluding comments. We believe that the U.S. oil and gas business is a key component of the global economy and will be an important source of supply for decades into the future as oil and gas inventory into the post COVID profile. We created a leading completions platform that while smaller is stronger than ever. Our strategic planning is focused on this and continuing to be a technically innovative U.S. land focused completion company that builds long-term customer relationship with likeminded partners. We remain focused on market readiness and continuing to deliver leading service quality and safety performance while balancing the market backdrop with our ongoing commitment of long term value creation. Lastly, I want to thank our employees for their continued perseverance and endless dedication. I am inspired by the way our team continues to lead innovation, challenge the status quo, and uphold our mission of making NexTier a leading completions company.
With that, we would now like to open up the line for Q&A. Operator?
Thank you. [Operator Instructions] Our first question today is from Sean Meakim of JP Morgan. Please go ahead.
Thank you. Hey, good morning.
Good morning, Sean.
Thanks for all the commentary. So, you noted there at the end, you expect revenue down quarter-over-quarter. It sounds like pricing is a factor there. Can you talk about maybe how many fleets you averaged in July, expectations from the balance of the quarter? I am tiring to get sense of the range of outcomes in terms of volume versus the impact of pricing.
Sure, Sean. Good question. Look, at the end of the day, the reason that we are guiding a little bit revenue down in Q3 is that pricing has certainly been a factor as we migrated from a really ramped up Q1, where we will really click in to where the market is at today, but also the mix of oil and gas basin is evolving as well. Activity in the oil basin is starting to pick up a little bit more. There is more whitespace we see in the calendars as operators begin to pick up fleets to maybe [attack the deck] [ph] count, or it's just not as routine as it was when we were all humming in '20 and 2019, or maybe early Q1 of this year. So, that's kind of the scenario, and the trajectory was when were ramping down at the end of Q1 and in the Q2, we were coming off of the reset of price that had rolled in from 2019 into 2020, and we saw the trajectory of Q2, you know, April being the highest month, and everybody can see that June, probably beginning of June was the low point, where frac fleet count in the U.S. probably got as low as 50, and then we see that market now beginning to work its way back up as the operators come in now with in most cases renegotiated pricing that occurred in the middle of the bottom of the worst downturn in history of U.S. land probably.
So, that's the dynamic that is present. As for as guiding about how many fleets we got working, we're going to stick with our guidance that no matter where the rig counts or fleet count is at, that we are going to be 8% to 12% market share range, and it doesn't behoove us really too much to talk exactly about our rig count or frac fleet count is from a competitive perspective when a market is small as it right now, but the thing that we would say is that we are getting to look at everything, and it would be very impatient about how we are going to price into that environment. It just doesn't make sense to price into a cash flow negative environment, and I would say the spot market in the U.S. could be said to be that in many cases.
Got it, I appreciate that, Robert. I think that's all fair. So, that leads to the follow-up then. So, thinking about that pathway to sustaining positive EBITDA, and ultimately positive cash flow, so we have got directionally better activity, but little pretty challenged. You are working towards that optimized G&A level. Now, the big step change in the third quarter, back of half of the year is primarily maintenance capital in terms of your spend. Can you just talk about your confidence and your ability to sustain not just positive EBITDA but positive free cash flow for the back-half of the year?
Sure. Look, as far as free cash flow we're still on that path of ending this year with more cash than we ended last year with. We're confident about that, but we knew that the working capital wind down is going to be front-end this year loaded, and as far as balancing pricing and market share and margins, you know, there's a lot of moving parts going on in the market right now, and one inside the company, we've got a huge focus on driving operating costs down, and you're going to see, we have been guiding towards a $3.5 million minus CapEx, for example, we are well in that track. This NexHub implementation that I've referred to, is allowing us to catch major equipment component failures before they occur. This is having a positive impact on our operating performance. So, it's a moving dynamic that we're continuously rolling into our modeling as we price into the market. So, all I would say is that there's probably going to be a period where cash or negative EBITDA is a real scenario, but we're factoring all of that into our pricing discipline, and versus our cash flow projections, and we're still committed to having more cash at the end of this year than we had at the end of last year, and things are playing out pretty much kind of as we had thought they would, as we were making these plans back in March. So, it's very dynamic is what I would say as far as if we're at the upper-end or the lower-end of that market share guide, we will have a lot to do with the strategic opportunities that present themselves and how we price into those. It's just to bring a crew online to go address a short set of [decks] [ph] and then go and then it goes back down. That's not something that would be the same as something that was going to be sustained for all the way into next year, for example. I hope that was what you were asking.
That is helpful. Thanks, Robert.
Thanks, Sean.
Our next question is from Tommy Moll with Stephens. Please go ahead.
Good morning and thanks for taking my questions.
Hi, Tommy.
Good morning, Tommy.
Robert, I want to talk about your Middle East footprint for a second. So, two crews over there currently; first off, how is the partnership going, and secondly, what kind of visibility do you have to how active those crews will be for the balance of the year, and potentially whether you might add more crews during that same timeframe?
Thank you for that question, and look, we're honored and lucky to be partnered with a company like NESR. It's just some company has got a very good handle on understanding the market in MENA. It's kind of the best of both worlds; their strengths and our strengths are bringing new efficiencies and expertise into the frac and wireline pumpdown arena. We, as you heard, added our second crew into the mix during the last quarter, and I would say that the upside of that arrangement is directly linked to NESR's business development process, and that they're good at that, and I think the customers in the region are very interested in seeing that growth. I would say that during the COVID period, we've been going through -- that operating costs are inflated, because of the challenges associated with moving people around, and that's something that we can continuously improve on, and we will do so, but I think as a team, we're getting better and better, and as far as -- just the best, I could say is that in the future, the growth is directly tied to NESR, but I don't anticipate a significant increase from where we're now, during this year.
That's helpful, Robert, thank you. I wanted to shift to a strategic question for you. Robert, if you could comment on how you see the competitive dynamic evolving in North America frac, specifically you've already started to see some restructuring, you're likely going to continue to see some underinvestment by some of the players that aren't as well-capitalized. So, in that environment, how do you see the marketplace evolving? There's been some talk of maybe a bifurcation in terms of horsepower, quality, or availability, and potentially if you see more opportunity for consolidation, how that might impact the dynamic?
Yes, I like that question, and I would just say that this is that, when you're going through a period like we're going through right now, it is one of those maybe most people's downside scenario, they've been planning in the past, this got beyond that, and then you see the scramble that has occurred related to pricing during the trough of the market, and when we say that, we don't believe that that pricing, current level of pricing is sustainable. That's because we believe that in many cases that pricing is cash flow negative, free cash flow negative, meaning that the gross profit levels that are being generated are not able to pay for the maintenance CapEx or to the corporate support necessary to kind of safely administer that fleet's activity. When that happens, cash is going to be consumed to maintain the equipment one way or the other and it's going to drain liquidity, or either the equipment deteriorates, and maybe an operator is challenged for cash has supported by cannibalizing stacked equipment, which has taken capacity off to market, or they have inadequate support and leads to some sort of catastrophic issue that accelerates both of the above.
So, what we believe, we said we are going to be patient, we believe that evolution has not put the pressure on that bifurcation as it exists, and we'll see maybe some capitulation in the market. Whether or not that drives consolidation, and I think is somewhat yet to be determined. I would say there's also kind of an evolution going on to movements to using natural gas is the power source, and you have to have investment capability to be able to do that. So, if you were going to try to consolidate a market with a conventional assets, you got to wonder, you know, is there a scenario that makes sense for everybody, but consolidation around some sort of next-generation of evolution that have helped you address this power conversion from diesel to natural gas, then, maybe there's some opportunity there. We kind of believe that increasing the scope of the activity or scope of the activity at the wellsite, where we can use our footprint and our support structure to leverage across a bigger piece of business that we can get more efficient for both of us and the operator more cost efficient, and you can utilize people differently and so forth. So, when we think about strategic consolidation and M&A in general, that's kind of logic we'll be doing ourselves. I hope that kind of addressed it, but bottom line is, for us, we believe that being patient now, let that market evolve a bit that way and then, we've got a lot of focus on having our assets ready, and then we'll be ready to hit the market when things change a little bit to the upside more, more materially.
Yes, all helpful. Thank you, Robert, and I'll turn it back.
Thanks, Tom.
Our next question today is from Stephen Gengaro of Stifel. Please go ahead.
Thanks, and good morning, gentlemen.
Good morning, Steve.
Two things, if you don't mind, can you start with your -- I mean I think you mentioned the market you thought bottomed at around 50 fleets in the quarter, do you have any color on kind of where you think we are right now?
Stephen, I wouldn't profess to be an expert, but we do spend a lot of time making sure that we understand competitive landscape, and when you say how many fleets are in the market, we always got to be careful to define what we're asking, are we talking about fully-utilized and many of us reports are just deployed, and I kind of believe that the market is in the number is around 85 or so deployed, meaning that somewhat less than that fully-utilized, and I'll go ahead and say that, I think that number will kind of continue to walk up slowly. We're on the right side of this recovery curve now, and more and more operators are getting their plans in place, and obviously going to be linked to oil price, but I would think it would be heading to somewhere around 110, something like that in the neighborhood of that in Q4.
Great, thank you. And then just -- you touched a little bit on this earlier, but as we think about the longer term and sort of coming out of this downturn into some level of normalized environment, maybe it's a lower environment as many are thinking, but if you thought about I'm using 2022 as an example, but just longer term. Do you think there is anything structural that impacts your ability to get back to the gross profit levels per fleet that we achieved in the past?
You know, to define the past, but I would say if you compare it to 2019, that I would say, that is very much -- very possible to get back to that, partially because of the discussion we just had about the evolution of the market. And I would also say very much linked obviously to the macro of oil price, and what does that look like, but you can make a case that it's going to take -- you get to the back-half of 2022, you kind of believe some of these, but the same kind of well count in the U.S. that it was taken in Q1 of 2019, and I think that's maybe a new market size, it's like 300 or so frac fleet in the U.S. and this is after there has been some reductions in the total frac market you know, capable of being deployed, while simultaneously taking into account the fact that the things that we're doing utilizing digital program to improve our operating costs, these are sustainable into the future, and I think that for those reasons absolutely believe that is true.
Great, thank you. That's helpful color.
Thank you.
Our next question will come from Chase Mulvehill from Bank of America. Please go ahead.
Hi, good morning everybody.
Hi, good morning.
Robert, I guess a quick kind of clarification maybe you talk about 8% to 12% market share, and I guess maybe does that include or exclude the two Middle East fleets. And then on the Middle East fleets, if you can just kind of quickly comment about the duration the contracts and maybe try to frame the P&L impact as far as those two things are related to?
Hi, good point, good question. When we're talking market share guide, we're talking U.S. only, our U.S. fleet deployment versus the U.S. total frac fleet, whether you're talking deployed or fully utilized, and as far as durations of the Saudi contract, man, I'd like to be able to say evergreen, I mean, I think [indiscernible], but as far as on paper, it does have a term that we hadn't went public with, but multi-year and kind of first refusal kind of thing for as they grow so, gives us both a chance to look at how things are going and to make decisions on as we expand whether or not we want to do it or not, but that's the - I think that's the answer.
And Chase, to address the profitability, I mean, we've always said it's a creative to our U.S. market and that was a hurdle to get it into the international arena, and still today that holds. Robert mentioned we did have some additional costs in this COVID environment that we're managing through that.
Okay, all right, helpful color. And then if we kind of think about your us practically how many would you consider to kind of be crude or staffed and then when we think about bringing cold stack equipment that's not staffed, what kind of free cash flow level would you need to actually reactivate kind of more throughout consider kind of cold stacks fleet.
So, we spend a lot of time to try to balance our pipeline of opportunity with what warm or hot assets we have and definition of [indiscernible] equipments ready to go not crude definition hot in both equipments ready to go and people are ready and try to keep one typically or two depending on the pipeline of hot equipment ready to go if we needed to be able to do so. That way our ability to respond to opportunities and one of those have occurred recently where we were able to jump out there and take advantage of it and we hit the ground running at the same efficiency levels that that we had in Q1 customer strength plays, but we like that strategy, but as far as what kind of free cash flow scenario drives or willingness to grow bigger. I think it's got a lot of components to that. First, we have visibility on the efficiency and the volume of work being committed is there whitespace in the schedule and so forth and all of that drives pricing. Is it worth bringing a fleet up if even if it's free cash flow neutral? I would argue no, unless it has a strategic component and some visibility to free cash flow positive, even in this environment. And that's what we mean by saying there will be patient. So that's about Chase probably, as much as I could probably say, can anything to add on that.
Yes, Chase like I think, we've talked about our GP level of cash flow breakeven in the past and this market is very competitive, because it's a very small market, but what I would say is we have our own internal hurdles that we work through, and the pricing levels go below that hurdle. We're going to take a disciplined approach especially in this environment of Q3 and likely in the Q4.
Okay, if you were to add those hot and warm stacks kind of crews together, how many fleets would that add to?
Chase, I mentioned it earlier that, when the markets are smaller than it is right now, if we give guidance like we've had historically, but how many we got deployed is starting to become a competitive negative. So, we hadn't said anything about it publicly.
Understood.
Thank you.
Yes. Okay, I'll turn it back over. Thanks, guys.
Thanks, Chase.
Our next question is from Ian Macpherson of Simmons. Please go ahead.
Thanks. Good morning, gentlemen. Congratulations on the free cash flow in the quarter.
Thank you.
Robert, you did talk about the continuing uptake for dual-fuel. Can you speak to what proportion of your fleet there is not only well on one hand dual-fuel ready, and on the other hand, can you speak to the usage of natural gas as a proportion of your total hours on the fleets that are engaged in that mode?
Ian, I'd first say that a fleet that can burn natural gas right now is got an advantage in the market in general, and having anticipated that and been participating in that for a while, we have in the past and are in present to kind of continually to invest in grow in that capacity among our fleet, and the best benefits are obvious from the sustainability for the emissions aspect is much lower and the conversion from diesel to gas phase baffle us a lot of money. When we went and had the acquisition with C&J and MDT Control Systems into our mix, we've been able to control the proprietary controls of the edges of bit to maximize the amount of conversion from diesel to natural gas. We think a little bit better than the market in general is dual-fuel systems, but I got to say we haven't for competitive reasons. Again, we haven't just come out and said, how many of our fleets or are dual-fuel, but I would just tell you that we've been just barely one step ahead of the demand for our fleet so far, and we're trying to stay that way.
I understand. My other questions have been answered. Thank you very much.
Thank you for the question.
Our next question today is from Chris Bell of Wells Fargo. Please go ahead.
Thanks. Good morning.
Good morning, Chris.
So curious, I know you're trying to be a little sensitive on fleet numbers, but is it fair to assume at least that you will be making some reactivations in the third quarter?
Yes, like I was saying in the beginning, we kind of saw that Q2 fleets going from high-to-low front to back of the quarter. We see the same thing occurring, where our fleet count will trickle up all the way in the October from a visibility perspective, off the bottom. So, yes, it's a little bit dynamic, our fleet can go up and down pretty easily, and well, I can't tell you how much time we spent on this readiness aspect, so that when we put these assets in the readiness program, they're going through a cycle where these the equipment is checked, and put on pressure test and continuously, the mechanics run into it for any kind of thing that might need to be fixed, so that we got the equipment ready to go straight away and can respond quickly. So you got what you can see clearly, and then you have these opportunities that popup that you might be able to make an arrangement that makes sense to get cash flow positive work, so we try to differentiate ourselves there with a customer base, so they can see that we can move quickly and hit the ground running, and we're going to continue to do that.
Okay. That's helpful. Thanks. And then, on CapEx, your guide for this year, I guess is unchanged 100, 120. If you think about NexTier, are there any benefits from harvesting equipment that remains idle, and I think you called that about $3 million expectations maintenance CapEx per fleet, but should we think about some kind of technology budget or cheer for DGB engine budget on top of those numbers as you -- new technologies are always coming to market, should we think about three times number of fleets plus $20 million or how should we think about CapEx in 2021?
So, I think Kenny and I will tag team this question, and I will just say that we really do have a lot of opportunity right now to invest in things that we believe have a good return profile many of those related to the evolution of the fleet, and over time, and we continue, we plan to continue to be disciplined until we get to the point where our visibility on the future is a little more clear, and because they have the balance sheet that we do when we say, we can be defensive or offensive, defensive we kind of have already showed that up by making sure that we're getting our maintenance CapEx as low as possible, stop most of the strategic investments, but when the time becomes right and we know that we will have the cash flow to support working capital perhaps in the 2022 ramp up we were going to start to come back and look at the strategic investments that are focused on update largely around gas burning and taking the fleet that exist to another level of efficiency to technological innovations that will require some investment. That's kind of the logic. Kenny, why don't you elaborate on what we are going to, we're already sort of at the top end of that, if we project our current fleet count, and our lower maintenance CapEx per fleet, we're kind at the top end of that; Ken…
Yes. So, on CapEx, but H1 spin was as anticipated those front-end loaded you know, mainly driven by strategic CapEx spend, and then, winding down our maintenance spend in line with our activity. In H2 on CapEx, it's going to come down significantly. We'll be spending money primarily on maintenance, and right now we see about 110, 120 still within our range, but then, 110 and 120 range. In terms of NexTier, look, we pull those levers that we talked about and we have been able to achieve maintenance CapEx per fleet of $3.5 million or less $3.5, we're really encouraged at the impact of the NexHub, specifically our equipment health monitoring program, which is going to help us to keep that maintenance CapEx per fleet to a lower level than what we've seen in the past, so that'll continue into 2021. Because we will continue to plug the fleets in as we continue to grow into our Equipment Health Monitoring program and into our NexHub.
So, in regarding the part of the questions you asked about would we sacrifice some portion of the fleet for cannibalization I think is what you're saying and that I think that is a card for us to consider, but we would do it in a manner that was controlled and planned, and it would ultimately mean, taking additional horsepower off the market permanently and using those components to consume and not lease trend capital, which is a card in our deck for sure, but it would be in a very controlled manner, if we need.
Okay. Thanks. So, to wrap it up altogether, it would probably be a starting point about $3.5 per fleet and 21 plus technology investments that obviously is not yet clear, but it's likely to occur.
That's a very good assessment.
Got it. All right, thanks a lot.
Thank you.
Our next question is from Marc Bianchi of Cowen. Please go ahead.
Thank you. I wanted to ask about G&A. I think the target to get to kind of an $80 million run rate is still out there. And the guidance here for third quarter down 25%, which sort of puts you at about 23 million bucks in the third quarter, so just getting some more room to go to get to that $80 million run rate, should we expect that run rate by the end of the year, and along with that, should we see some more adjustments called out in the third and the fourth quarter and either related to the G&A or other reasons and if you could put some brackets around that, that would be helpful?
Yes, sure. So look, as I mentioned we've kind of cut our G&A a half or adjusted SG&A in half from pre-merger levels. And with a 35% out last quarter, we're going to take another 25% out last next quarter, and I wanted to mention, we did finalize our ERP conversion. We actually closed our books, fully in one system in June, and having one ERP is going to going to give us additional and I would argue long-term improvement and our back-office efficiency, so that's what you're going to start to see some results from that marching towards the $80 million, as we exit Q4. In terms of adjustments, one of the things that I wanted to mention is on costs related to the merger and our market driven restructuring, we see less than about $8 million as we wrap up the year, so we are concluding both of those programs mainly in Q3. So you're going to start to see some of the management adjustments, both cash and book come down as we windup those programs.
Thanks, Kenny. Would you say that $8 million is a similar number for both the income statement, cash flow statement?
It's going to be $8 million cash.
Okay, great. And then, just at that $80 million kind of run rate. What would you say that size for in terms of a fleet count and if we get above that fleet count, maybe help us think about the sensitivity for G&A?
Well, the reason we came up with that target was because when we were team, we ran a 27, 28 fleet with that kind of number, so I mean, I think that we with NexHub and the new ERP and a few things like that we can probably get beyond that at the same level a support cause. So I project that and what the expectations are for total market size and our piece of that in 2022, 2023 it's probably sustainable at least through that kind of period.
And just to add, as I mentioned in my prepared remarks and we're going to keep that level tight as we grow. So that'll position us for better incrementals as the market rebounds.
Yes. Thanks for the answers, guys.
Thank you, Marc.
[Operator Instructions] And our next question will come from Connor Lynagh of Morgan Stanley. Please go ahead.
Yes, thanks. Just wanted to ask about capital allocation here, I don't want to be flipping up the magnitude of decisions that you guys had to make and adjustments you've had to make over the past months here, but as we sit here what looks to be a little bit pass to bottom, got your organizational structure in line, relatively speaking and you have a lot of cash in the balance sheet, what's your thinking around potential return of capital, maybe some buyback and support of shares given how strong your balance sheet is and you're relatively upbeat free cash outlook, just wondering if you can discuss the puts and takes on that?
Thanks for the question, Connor, and of course in our boardroom we would have a discussion all the time, but I would just say for right now, there is still significant amount of uncertainty in the market. We've been to great extremes to position ourself to give us a lot of flexibility. One on the runway, no matter what happens we can be okay with our liquidity, and then number two, a lot of opportunity we believe to invest that capital in a manner that would might be better than stock buybacks or dividends. So, I wouldn't think that you would see much of us talking about that in the foreseeable short runway, I mean mid-runway, and we got it, until the uncertainty -- or the clarity gets there we need to keep it on the balance sheet.
Okay, that's fair. I mean if we do get to a market where we're in slightly better shape from a visibility perspective, I mean, how much cash or what sort of level of net debt do you feel is appropriate to run this business at?
Look, I mean, if you look at how this is going to play out, what you always have to keep in mind is that you have to fund the growth cycle, you want to participate in that growth cycle. So, you have to have a minimum amount of cash to be able to fund working capital, and in the meantime, be able to invest, as Robert mentioned, the next-gen technologies are in dual-fuel gas burning technologies that allow you to compete and compete at the higher tier of the spectrum. So, you know, I'm not going to call out a number, but what I would say is that you need a substantial amount of cash to catch the rebound.
Right, appreciate it.
Thanks, Connor.
Our next question is from John Daniel of Daniel Energy Partners. Please go ahead.
Hi, Robert, thanks for putting me in. Just one question…
Good morning, John.
Good morning.
Just given your financial strength, any thoughts or plans to roll out new pump technology next year, given certainly as you guys know several OEMs are designing new pumps, just curious your thoughts.
So, John, that's a good question obviously. Next-generation frac as we like to call it is certainly on the horizon. The question is when? And we obviously consider ourselves to be maybe number two size frac company in U.S. land. We expect to participate in that, and we just got to time strategically deploying it when pricing can support the investment with what is the best technical solution and many of these in our view are not proven yet, and being a fast follower maybe is the best way to deploy capital. Our logic is been bridged into it with a lot of dual-fuel tier, diesel engines that burn natural gas as you will know.
Sure.
And how do you minimize stranded capital from the old conventional fleets? So, all that is a bit of a timing dance, and we are in the process of investigating at least two options that we believe could make the timeline that you project and essentially more about optimizing the power solution as part of that investment, and we get that right, and we got some customers who are talking about the timing, and we expect to be participating in that, but obviously with this capital discussions we just had, we got to make sure that we got sustainability and runway to deal with worst scenarios first, and then second -- really close second, is dealing with that evolution.
Okay. Do you get any sense from any of the -- let's just call them the more ESG sensitive customers that they're going to help underwrite those types of investments since it ultimately benefits them?
Yes, I do. I think that around the power solution, there is a lot of different scenarios that can evolve there, and some of those make the capital investment much more palatable for a service company, but -- and there is ways to participate in that in many different ways, I think, and the business model itself will be a bit different, I think, than what perhaps exists today, and that will be what probably enables it to take off at whatever speed it takes off, but the bottom line is the bridge with dual-fuel is really a very good bridge, needed to -- as a sector evolved our ability to burn natural gas because of all the good, the financial reasons, but also for the emission reasons, and dual-fuel is a significant step in the right direction in a borderline, right, it's as good as anything else in the next-gen arena. So, it's not a bad spot for us as an industry. They individually are between service company and the operator.
Got it. Thanks for putting us.
All the best.
Thanks, John.
Well, Allison, I think that's the end of the questions. We really appreciate everybody participating in the call today and your interest in NexTier. We hope you'll stay safe, and have a great day. Thank you.
Thank you, ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.