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Good morning and welcome to the NexTier Oilfield Solutions' Third 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 would 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 third 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 would 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 website.
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, which 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 earnings release for the third quarter of 2020 and with respect to 2019 related non-GAAP financial measures in our earnings release for the fourth quarter of 2019, each of which are posted on our website.
With that, I will turn the call over to Robert Drummond, President and Chief Executive Officer of NexTier.
Well, thank you, Kevin, and thanks, everyone, for joining us on this call this morning. NexTier achieved another quarter of delivering on our commitments despite the continued challenging market backdrop. I'm proud of our team as we continue to execute on our strategy of maximizing NexTier's value proposition for now and the future.
I'll start with a few highlights from the quarter. Activity steadily trended upwards in Q3, and the momentum is now carrying over into Q4. We entered the third quarter at a relatively low base of activity after reaching cyclical lows late in Q2. While activity levels improved, we continued to navigate a path towards sustainable pricing and improved calendar utilization.
Despite these challenging market headwinds combined with a relatively strong April including Q2 results, we delivered adjusted EBITDA decrementals of 13%, ahead of our outlook of up to 25%. We continue to structurally drive out cost, which have favorably impacted and will continue to impact our results.
Third quarter adjusted SG&A of $20 million marked a 36% sequential decrease, a nearly 60% reduction versus the first quarter. We fully integrated our digital platform across the value chain, which enables the success of our strategic plan to grow our business, generate new revenue and drive improved returns for NexTier. We averaged 11 fully utilized and 13 deployed fleets, maintaining our U.S. market share within the 8% to 12%.
As of today, we have successfully redeployed seven fleets since the end of June and with minimal start-up costs, evidencing the strength of our readiness and customer relationships. And while nearly doubling our deployed fleet count, we are delivering operational efficiencies and safety performance on par or better than where we left off before the downturn.
As we navigate the remainder of 2020 and begin looking ahead to next year, I'd like to highlight several key points and observations. First, global economies began getting back to work following the COVID-19 economic shutdowns. Late second quarter was the trough for next year, and we believe the worst is now behind us.
Activity has begun to improve, and at the same time, there has been a significant increase in U.S. diesel-powered frac fleet retirements, reducing future availability of supply. As service providers continue to rationalize their assets, we anticipate a more balanced playing field as the market continues to rebound.
Second, despite market challenges, and a fiercely competitive market, NexTier successfully gained share by providing our customers a superior integrated service offering. This digitally enabled integrated offering enables well site integration of the services involved in and around the frac well site location and is being utilized by our customers to reduce their overall cost as well as reduce the carbon footprint at the well site.
These new digital tools and our large completion services footprint are the foundation for our strategic efforts to increase our work scope. Thanks to these new tools, our logistics services are growing faster than our pure frac services and improving the overall value proposition for our customers.
Next, our fortified financial position ensures next year is here for the long-haul and allows us to invest in technology and innovation.
And finally, after having weathered what is likely the worst of this unprecedented storm driven by the COVID-19 pandemic, we've positioned the Company to win the eventual recovery and provide leading returns for our investors and customers.
We recently reached a milestone with the one-year anniversary of Keane's merger with C&J to form next tier. We have achieved and in most instances, outperformed all of the milestones and rationale for the deal. We completed a very efficient integration process while maintaining focus on delivering for our customers, ensuring continued safety and service quality.
We exceeded our targeted synergies, achieving these results more than six months ahead of schedule. We quickly divested of our noncore business with the sale of our Well Support Services business at a very opportunistic time in the first quarter, further bolstering our fortified balance sheet position, and we advanced investment in and deployment of innovation, including the rollout of NexHub on all deployed fleets in the second quarter.
The real win for NexTier has been our people. We have the most outstanding employees in the industry, including our best-in-class management team, and I appreciate their loyalty and passion to always challenge the status quo while striving to reach the next tier.
With that as an overview, let's discuss what we're seeing in the market today. The dramatic pace and magnitude of this year's downturn, combined with recent industry attrition, has played an important role in beginning to sort out the frac supply and demand imbalance. We believe the total
U.S. horsepower has been reduced by over 30% and is today approaching 13 million horsepower. At the same time, well completion activity levels are improving, resulting in a better utilization rate across the industry. The magnitude and cadence of recent activity growth, however, is uncertain and dependent on a range of factors influenced largely by the COVID-19 pandemic and associated oil demand.
The bifurcation amongst well completion players is more evident than ever, including a horsepower base that is becoming even more stratified by efficiency and sustainability. We estimate that 70% of today's horsepower base is 100% diesel-powered, which sit at the higher end of the emission spectrum given its inability to utilize natural gas as a power source and, thus, is subject to a lower price point.
While we continue to be a major player in this side of the frac market, we preferentially focus our capital allocation on the upper 30% comprised of natural gas-powered and other more sustainable solutions that attract higher pricing and returns. We've been investing in and growing our natural gas power capability for years, and today, NexTier is proud to have the largest natural gas power fleet deployed in the U.S. market.
In addition, we plan to allocate all future growth capital to equipment with enhanced returns and lower emissions. While this bifurcation becomes more apparent, we continue to harvest the investments made in our traditional base of diesel-powered horsepower while growing the portion with natural gas-powered capability via the conversion of existing equipment.
We are taking prudent and proactive actions that allow us to utilize our assets and capital in the most responsible way while maintaining flexibility and upside to meet our customers' demand in the future.
To accomplish this, we will reduce our marketed hydraulic fracturing fleet by an additional approximate 400,000 horsepower, and we'll utilize the major components over time to bolster our maintenance inventory. Once consumed, we will cut up the frames and permanently remove them from the marketed base of equipment.
This path forward allows us to partially fund our carbon reduction initiatives by reallocating capital from maintenance CapEx to the stratified top of the frac market, which offers better pricing fundamentals and a lower emission profile. We expect that, with these efforts, we will be able to further reduce our estimated annual frac maintenance CapEx spend per fleet from $3.5 million to $3 million.
Combined with the fleet's retirements announced at the closure of our merger between C&J and Keane, we'll have removed nearly 650,000 Tier 2 diesel-powered horsepower from the market since the merger one year ago. We continue to play our part in aligning frac supply with demand and applaud our industry colleagues who have taken similar recent measures.
Turning now to our market position. Our current base of deployed and working equipment demonstrates four key characteristics: one of the largest bases of horsepower in the U.S. today; number one in wireline pump down plug and perf; the largest natural gas-powered fleet in the market today; and a diversified footprint across all major U.S. basins with meaningful exposure to both oil and natural gas production.
We are pleased to report that the strong momentum gained in Q3 is carrying over into the fourth quarter. Today, we have a total of 15 fully utilized fleets in the market, 13 in the U.S. and two in the Middle East, operating in partnership with NESR. This increase in our position demonstrates the strong customer relationships we have and the superior service offerings that we are offering.
A critical component of our strategy during the latest market cycle is our ability to promptly respond to market growth opportunities, which we refer to as our market readiness strategy. Our strategy has been very effective, having nearly doubled our active fleet in the last 100 days. The foundation is built on three key factors: our equipment, people and balance sheet.
First, equipment. We've been investing approximately $1 million per month to ensure our idle assets from all product lines are well maintained and ready to work. Our digital capabilities enable us greater visibility on the location and status of our equipment and allow us to preserve and protect our assets most effectively.
As we have redeployed equipment in response to increased customer activity across all of our product lines, the amount of maintenance capital and OpEx allocated to fleet deployment has been minimal, evidencing that we have been proactive as we planned in maintaining our asset base during the depths of the market downturn. In fact, we successfully deployed seven fleets since the end of June with minimal additional start-up costs and which are all included in our adjusted EBITDA results.
Second, people. I am pleased to share that we no longer have any employees on furlough. We were successful in bringing back the people placed on furlough and many that have been released at the start of the downturn. I am incredibly proud of our team for remaining laser-focused on delivering solid operational performance. In this competitive environment, it remains absolutely critical to hit the ground running, and NexHub has empowered our people to relaunch our fleet with higher caliber execution immediately upon reactivation.
Third, balance sheet. With all that we've done, we still have ample liquidity to take advantage of opportunities that the market gradually recovers, exiting the third quarter with total liquidity of $371 million. Our fortified balance sheet allows us to invest in the ongoing integrity and readiness of our equipment while allocating capital to strategic investments that drive enhanced returns and lower emissions.
With our readiness strategy already delivering results, I would like to turn now to our long-term strategic direction that will support NexTier's ability to generate leading through-cycle returns. Despite macro volatility in the near term, we never lose focus on the long-term goal of maintaining our position as a differentiated leader in U.S. land completions.
Our strategic focus is centered around expanding the work scope at the well site while lowering our carbon footprint. These strategic focus areas are enabled by our fully deployed digital platform and digital operating model, which is now deeply ingrained in how we do business and how we continue to evolve the way we will do business in the future.
NexTier is committed to a sustainable energy future in which oil and gas continues to play a critical role. We firmly believe in the economic and sustainability benefits of natural gas-powered technologies. However, without reliable gas supply, the benefits and value of dual fuel or other lower emission technologies are not fully realized. Our customers frequently share how they have been seeking integrated solutions that align the incentives of operators and service providers.
Having heard the voice of our customers, we are excited to announce that, in 2021, we are launching NexTier Power Solutions, our natural gas treatment and delivery business that will power our fleet with field gas or CNG. Through NexTier Power Solutions, we will provide gas sourcing, compression, transport, decompression, treatment diesel and related services to become a fully integrated well completions provider.
We are proud to have the largest natural gas-powered fleet deployed in the U.S. today. Our investments in clean, natural gas-powered equipment are paying off and our tiered service offering for displacing diesel with natural gas is being met with strong demand as customers can select the package most suitable for achieving their specific objectives.
We've always said that our strong and flexible balance sheet position NexTier to play offense and defense. With this in mind, and due to strong demand for our carbon-reducing tiered offerings, we are investing in additional Tier 4 dual fuel capabilities via converting equipment currently in our fleet with the expectation of delivering beginning in the current quarter. We plan to maintain our leadership position as a provider of natural gas-powered technologies enabling NexTier to be a market responsible partner.
Executing our strategy of investing to expand our natural gas power capabilities will enable maximized gas substitution rates and carbon reduction benefits for NexTier and our customers. Our mission is to make it easier for our customers to reduce their carbon footprint while maintaining a leading efficiency and safety profile.
We are focused on developing solutions that are scalable over time into a range of rapidly evolving next-generation equipment and solutions. We are in discussions with customers about our capabilities and plan and look forward to announcing updates in the coming months.
In addition to our carbon reduction initiatives, our digital infrastructure enables the expansion of the work scope of our operations in multiple ways. With our evolving set of digital tools, advanced AI-driven logistics capabilities, combined with the scale impact of personnel, we have a unique opportunity to deliver value on both sides of the equation which did not exist previously.
First, our work scope expansion strategy enables NexTier to deliver the lowest landed cost of commodities like proppant and fuel. And second, it aligns incentives between operator and service provider in a way that leads to greater efficiency and overall savings. We're extremely focused on carrying out our strategic plans.
We've invested in and built out infrastructure over the past two years, and we plan to harvest that value now. We believe that an integrated completion well site is better for next tier and our customers and we have the capability to drive value, lower the overall cost per well while reducing emissions.
With that, I'll now turn things over to Kenny.
Thank you, Robert. Total third quarter revenue totaled $164 million compared to $196 million in the second quarter. The sequential decrease was primarily driven by reduced calendar utilization and lower pricing in our completions and well construction and intervention services segments, partially offset by efficiency gains. As noted earlier, when NexTier is at a well site, we are operating at a very high level of operational performance.
Total third quarter adjusted EBITDA was a loss of $2 million compared to $2 million of positive adjusted EBITDA in the second quarter. Despite significantly lower revenue and navigating through what we believe was the market trough, we remain focused on controlling what we could control. We maintain our relentless focus on continuing to reduce costs at the well site and at the corporate level, which resulted in decrementals of approximately 13%, ahead of our outlook of 25% or lower.
In our Completion Services segment, third quarter revenue totaled $154 million compared to $179 million in the second quarter. Completion service segment, adjusted gross profit totaled $15 million compared to $32 million in the second quarter. During the third 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, we exited the second quarter with eight fully utilized completions fleets. As market conditions started to improve, we successfully redeployed one or two fleets each month throughout the third quarter, resulting in 13 fully utilized and 14 deployed fleets when exiting September.
On a fully utilized basis, annualized adjusted gross profit per fleet, which includes frac and bundled wireline, totaled $6 million compared to $11 million per fleet in the second quarter as we were significantly impacted by utilization inefficiencies resulting from calendar white space in the quarter. We are already seeing utilization improvements across the fleet, and we believe that the worst for U.S. land activity is now behind us.
In our Well Construction and Intervention Services segment, revenue totaled $10 million compared to $17 million in the second quarter. Adjusted gross loss totaled $1 million compared to $1 million of adjusted gross profit in the second quarter. As discussed last quarter, we significantly reduced the footprint of our cementing and coil tubing service lines during the second quarter and then into the third quarter. We remain focused on regions that will support both near-term and long-term levels of activity, and we have positioned ourselves for strong operational and financial performance as market conditions improve.
Adjusted EBITDA for the third quarter includes management adjustments of approximately $20 million, consisting primarily of $7 million of merger and integration costs mainly from the implementation of our NexTier ERP platform and associated legacy software write-down, $5 million of noncash stock compensation expense, $4 million for an accounting loss associated with the make-whole provision.
On the basic notes received as part of the wealth support services divestiture in March, $3 million of inventory impairment and $1 million of market-driven severance and restructuring costs. Of the $20 million in management adjustments during the third quarter, approximately $12 million were noncash. Looking ahead, we do not anticipate material future merger and integration or restructuring expenses for the fourth quarter and going forward.
Third quarter selling, general and administrative expense totaled $26 million compared to $38 million in the second quarter. Excluding management adjustments, adjusted SG&A expense totaled $20 million compared to adjusted SG&A of $31 million in the second quarter.
Last quarter, I announced we successfully accelerated and completed the capture of our merger synergies. We reduced our annualized SG&A cost by more than half of the consolidated SG&A at the time of the merger. I'm happy to share that through our business transformation results and continued efforts to improve efficiencies. We have further reduced our SG&A costs in the third quarter.
Achieving this lower SG&A run rate positions us extremely well as the market continues to improve. We are committed to maintaining a lean support structure, and with the recent deployment of our ERP system, our support capabilities will be more robust than ever. These factors, combined with our smarter and more efficient way of working, empowered by our digital platform, will help to drive long-term financial performance and results.
Turning to the balance sheet. We exited the third quarter with $305 million of cash compared to $337 million of cash at the end of the second quarter. Total debt at the end of the third quarter was $336 million net of debt discounts and deferred finance costs and excluding finance lease obligations compared to $337 million in the second quarter.
Net debt at the end of the third quarter was approximately $31 million, resulting in a leverage ratio of 0.2x on a trailing pro forma 12-month basis. We exited the third quarter with total available liquidity of approximately $371 million comprised of cash of $305 million and availability of approximately $66 million under our asset-based credit facility.
Cash flow used in operations was $28 million during the third quarter, while cash flow used in investing activities totaled $3 million driven by maintenance CapEx and the finalization of our NexTier ERP deployment. This resulted in free cash flow use of $31 million in the third quarter. Excluding $7 million in merger and integration cash costs and $1 million in market-related severance and restructuring cash costs, adjusted free cash flow used totaled $23 million in the third quarter.
As Robert mentioned, we are increasing our investment in Tier 4 dual fuel capabilities that will be partially delivered in the fourth quarter of this year. Factoring in these strategic investments, we are slightly revising our 2020 CapEx outlook from the range of $100 million to $120 million to a new range of $120 million to $130 million. We are proud to have a flexible balance sheet that positions us to make these select investments, combined with ongoing cost control measures and digital investments that are directly contributing cash savings across our business.
Turning to our outlook. Since the trough experienced in late Q2, every month has been better than the month before, and we expect this pattern to continue through November. Visibility remains low in December, and at this point, we do anticipate a slowdown in activity due to normal seasonal factors. Based on our current visibility and assuming no improvement in pricing, we forecast sequential fourth quarter revenue growth of between 10% and 15% with a path to positive adjusted EBITDA for the quarter.
This is including an early assessment of December and continued efforts to optimize calendar utilization. Visibility into Q1 also shows a continued increase in revenue and overall activity for NexTier were similar to the third quarter, and now into the fourth quarter, we expect to continue to steadily increase our working asset base. Since the beginning of the year, hundreds of millions of dollars of costs have been taken out of our system.
That said, we did not cut to the trough nor did we size NexTier to operate at current deployed fleet counts. We adjusted our operations to where we saw the market headed while maintaining ample muscle to ensure we're positioned to participate in and lead the market recovery, and that's exactly where we are today. We're entering the fourth quarter with nearly double the base of deployed fleets we had operating roughly 100 days ago.
We're not letting this robust pace of redeployment take our eye off the ball as we remain intensely focused on operational excellence and safety performance. Even with the recent improvement in deployments and an outsized reduction in our marketed fleet, just 40% of our total fleet is in operation today. Additionally, calendar inefficiencies remain in place, impacting our ability to operate at the most profitable levels.
What this means is that we have tremendous operational leverage embedded in our organization. Frac supply remains in excess of demand, but dynamics continue to improve. As activity continues to ramp, additional horsepower have to be staffed and deployed in the market at more constructive pricing. At the same time, this improvement in activity is expected to result in greater scarcity of clean natural gas-powered equipment, where we maintain and are growing our market-leading position and are deploying more fleets into this upper tier portion of the market.
With that, I'll hand it back to Robert for closing comments.
Thanks, Kenny. 2020 has been a challenging year for every economy, company and community around the world. Despite the unprecedented impacts of the ongoing pandemic, NexTier continues to deliver on its commitments. We remain on pace to grow our cash balance year-over-year while generating close to quarterly breakeven EBITDA even during the very worst of the market conditions.
Even before considering our new low-cost NexHub-enabled operating structure, our company generated significant earnings. Pro forma 2019 adjusted EBITDA was approximately $450 million for the combined Keane and C&J on 32 fully utilized fleets. With the more than $125 million of fully realized cost synergies resulting from our merger, and accounting for the sale of our noncore businesses, this implies total earnings power in excess of $500 million of adjusted EBITDA per year. We have retained this level of earnings capabilities even after post merger, permanent frac fleet retirements, reflecting attractive valuation versus peers and upside potential.
Before we open up the lines for Q&A, I'd like to leave everyone with a few concluding comments. Our well-maintained equipment, world-class team and fortified balance sheet are positioning NexTier to emerge from the downturn in a leadership position. Our readiness strategy, combined with our investments and our strategic initiatives, means that we can best respond to the demand of today while setting up to outperform in the future.
We will continue to advance on our digital journey, which is enabling better performance, lower operating cost, work scope expansion and a lower carbon footprint at the well site. We are further streamlining our resources through additional horsepower retirements, allowing us to partially fund our carbon reduction initiatives by reallocating capital from maintenance CapEx into next-gen equipment with better pricing fundamentals and a lower emission profile.
We are building on our platform as the largest operator of natural gas-powered equipment conversions and are committed to making the carbon footprint reduction transition easier for our customers. In sum, through maintaining a sharp focus on executing our strategy, we are well positioned to deliver value to our stockholders through a fortified investment platform.
With that, operator, we'd now like to open up the lines for Q&A. Thank you.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Sean Meakim with JPMorgan.
So starting on the fourth quarter, given the guidance is pretty straightforward and consistent with what we've heard from your peers in terms of activity, I'd like to maybe dive a little more into your margin guidance. So it's pretty open-ended. So can we maybe just talk about the range of outcomes in terms of incrementals or gross profit per fleet and the factors that will drive that range from the low end to the high end?
Yes. So Sean, look, I would say, first of all, that we knew early on kind of that Q3 was going to be the bottom for us. With -- as soon as COVID hit, we started adapting to that, and we kind of knew we were going to go EBITDA negative in the worst part of Q3 and that we were establishing ourselves to work our way out with solid incrementals as we redeploy fleets. And we've been managing our cash to address that potential prolonged suppressed activity levels as necessary but while also positioning ourselves as the economy recovers. Kenny, you want to give a little more detail on Q4?
So look, as we mentioned, Sean, we see a path to positive adjusted EBITDA. Visibility on December is still very limited. It's not good enough to really call a range of outcomes yet on the incrementals. Well, look, what I will say is September margins were better than our Q3 margins. October, November is adjusted EBITDA positive based on the activity that we have today. So you can expect some incremental at the GP level, for sure.
And I would say the profitability mix, there's three kind of factors that are going on right now. You got -- obviously, you have price and you have the geographic mix of our activity, which is pretty volatile. And then you got the mix going on between proppant and logistics. And I called out that our logistics growth is happening at a pace even faster than our frac fleet re-adds. But all those are factors in the future profitability.
Understood. Appreciate that feedback. I think that naturally brings us to talk a little more about G&A and free cash flow in 4Q. So you noted 3Q is the last quarter of major charges associated with the CJ merger. You had the ERP conversion, lots of costs coming out, mix of cash and noncash. So as we look forward, can you give us a sense of where you see G&A exiting the year? Are we below the $80 million annualized target x adjustments? And just given the uncertainty, I know EBITDA is going to be part of that, the moving pieces but how you see moving pieces for free cash flow in the fourth quarter.
Sure. Thanks, Sean. So look, I'll start with SG&A. We've done a lot of work around the SG&A cost of the year. I mentioned that in my prepared remarks, especially in the last quarter on non-labor costs. We expect Q4 to be very similar to SG&A levels in Q3. On the cash flow, look, at the beginning of the year, we were just stepping into the downturn driven by COVID-19. At that stage, we committed to ending 2020 with a higher cash balance of where we started. The number was $255 million.
Today, we have line of sight to deliver meaningfully above that target of $255 million. In Q4, in terms of the elements of the cash flow, we will be funding some working capital on our revenue growth, but that will be partially offset by some collections that moved into Q4 from Q3. And other than that, we'll just be financing debt service, maintenance CapEx, and then we called out the additional Tier 4 dual fuel deliveries. So we're really seeing Q4 expectation of cash used to be slightly lower than in Q3.
Thank you. And the next question comes from Chase Mulvehill with Bank of America.
I guess I kind of want to talk about activity in the fourth quarter. I think you said that you exited at 13 fully utilized fleets. You said at 15 today. And so kind of overall for the fourth quarter, where do you think that you average for fully utilized fleets? And then if we think about first half activity, you said it continues to climb. You think it continues to climb versus kind of activity levels today or kind of whatever that average is for the fourth quarter?
So Chase, I'll start by just saying that ever since the bottom, we've been steadily leaking upward and as far as activity and fleet deployment go. One key thing that we had to deal with was that our three biggest customers laid down seven fleets during the worst part of that. So we've had to -- we've introduced new dedicated customers to our mix, and I'm very proud that, that is -- that gives us a bigger foundation to build upon as activity recovers, we still don't have excellent visibility in December.
I mean, we see October is solid, and we know that November is going to continue, as we said in our script, that it will be above October. When we get to December, we could have a lot of white space that takes total utilized fleets a bit lower, and we just can't really call it yet. But then as you go into Q1, we do have line of sight to new customer start-ups, particularly around our dual fuel offering. So Kenny, give a little more color on Q4?
Yes. Look, I mean, as Robert said, we exited September. As you mentioned, Chase, we've been building and adding customers. December, based on our client mix it will be down versus November, it's too early to call yet. But we do see additional fleets versus our base today in Q1. As we enter Q1, we think Q1 will restart a bit quicker than it did last year and then hopefully steadily increasing from there.
Okay. A quick follow-up on that, I mean, do you think that your frac revenues will keep up with the pace of your increase in fully utilized fleets? Or is there some mix in pricing and anything like that that might be weighing on the revenue side?
There's going to be a significant amount of mix changing going on, but I mean we do see it keeping up -- keeping pace going forward.
Okay. Right. And quickly here on fleet mix. Obviously, you're doing some investing to high-grade your fleet. Could you talk about where kind of Tier 4 dual fuel horsepower -- total horsepower is for you today and then kind of where you see that going over the next one to two years?
So Chase, we've tried to call out in our comments about the stratification that's occurring in the market where about 70% of it is pure diesel burning, and the other 30% is dual fuel. We're purposely not being too clear about how much capacity we have in dual fuel for competitive reasons, but we are focusing in that upper 30% because the demand there is significant. And we are growing our capabilities as we speak, and we'll probably have deployed as much as we'll deploy as we get into the middle of Q1.
And we created a pricing arrangement that is based upon diesel conversion. We have a pro and a platinum package that's linked to the amount of diesel displacement. And you create that via deployment of Tier 2 or Tier 4 duel fuel equipment associated with some of the other technologies like Hibernate and others that help you manage your diesel consumption down. And the customers are -- we're meeting a lot of interest in this offering because it gives them the opportunity to move in the direction they want to move.
And with this power solutions model that we talked about we're deploying, this is making it easier for them to do that. So it's leveraging our investment in dual fuel to deploy it quicker. Our objective is to stay a little bit ahead of the demand, but that's kind of the story overall, without being too competitively revealing.
Thank you. And the next question comes from Tommy Moll with Stephens.
Robert, I wanted to talk about the announcement on your power solutions business. How long has this idea been in the pipeline for you guys? From a competitive standpoint, what's the value you think you can bring to a customer where they can come to a single source for the service package and now some of the fuel consumed in the delivery of that service? And can you give us anything in terms of revenue opportunity, unit economics, how quickly you can scale it more on the financial impact side?
Look, I really appreciate this question because I'm excited about this because we have been thinking about it for a number of quarters, and we've been building up the expertise in the Company through hiring the talent to help us build it out. We thought about doing it inorganically but decided that doing it fit-for-purpose for fueling our own needs was a much better way to do it for us and our customers.
And the objective really is to build the capabilities to fuel our own demand, and when you think about the economics around that, a hard running diesel fleet, a burn in excess of $12 million a year in diesel. So converting that stream to natural gas or CNG is an opportunity to not only reduce emissions but to take advantage of the fuel arbitrage between natural gas and diesel, which, as oil price goes back up and diesel price goes back up, that's only going to make those economics even better.
But the key thing is our customers want to use field gas, and many of them are building our networks to be able to do that. So part of the service offering of power solutions is going to be able to help them make that connection and make that happen most cost effectively. And when you think about the fact that we, as a frac company, integrated frac company with a large number of personnel on location, it gives us the ability to think about integrating around the staffing as well so that the ability to do it for a better economics than currently being done in piecemeal arrangement is built around that bigger footprint.
And when we talk about the evolution that's occurred within our logistics capabilities around AI, I mean this is a real game-changing situation where we can do things much more effectively and cost effectively than we have in the past. So in the gas delivering process, there's a lot of logistics built into that. So those were -- why we have advantages of putting it together that way, and the customers can see that clearly, and we're in early days of that.
And we will -- we expect -- I mean it'll take a little while to build this out. We expect to be bringing us into the market in Q3 of 2021. And we may even accelerate that for a couple of cases earlier than that as we get into the opportunities in 2021. So this is a big deal for us. We think it's obviously enabling our already strong dual fuel fleet, and standalone has solid economics.
All very helpful context, Robert. And as a follow-up, I wanted to pivot to the theme of consolidation, which is one where Keane has been active really throughout its history. As you look forward and as we see a lot of the customer base consolidating, does it change at all the rationale from your standpoint, Robert? I mean post the C&J transaction, you had a scale that felt like it was sufficient to service the market in North America that you didn't need a whole lot more. Any change in the thinking there as the operator landscape has changed? And if -- maybe if not for next year, just for your competitor base, how do you see this unfolding on the service company side?
I think many of us in the service company side kind of anticipated E&P consolidation was going to be on the horizon. I think COVID, obviously, probably moved that up. You can see it everywhere. As far as our interest in M&A, we feel like we did it at a good time for us. We've got a solid balance sheet now. We've got some technology things that have really enabled us to strategically differentiate ourselves.
We don't want to seem like we don't have a lot of interest because we're open-minded. And I think that we've established that we're very good at integrating, and I think that we can do that very, very handily. And I think the integration needs to occur in the OFS space just as much as it does in the E&P space. But when we look at it, we wanted to be kind of in tune with our strategic drivers that we've put a lot of effort into establishing.
So I hope you take all that to say as that -- based on our history and our new ERP system, we can do it, but it's going to need to be something that makes a lot of good sense for our shareholders. And I think it, in general, is good for OFS when it happens, and I salute to people who've making it happen recently and getting some of that done. So it's kind of open-ended, but we do have an open mind.
Thank you. And the next question comes from Christopher Voie with Wells Fargo.
Curious if you could give us a little color on CapEx in 2021. I think you said about $3 million in maintenance CapEx per fleet. But how much will we budget for things like ESG, your technology investments like Tier 4 dual fuel the other business lines and NexTier Power Solutions?
Yes, like, let me kind of walk out the 2021 CapEx, and obviously, it's a bit early. But what I would say is we made a lot of progress in reducing our maintenance CapEx per fleet for frac this year with our NexHub. We've been able to get that down to about $3.5 million per fleet. We believe that this is a sustainable level of capital to allocate to conventional equipment. We talked about our fleet rationalization. So we'll be bringing that down to $3 million per fleet.
Non-frac service lines will be in the range of $8 million to $10 million depending on the activity. Well, look, for the strategic CapEx, it's probably still too early to comment. We will be funding some Tier 4 early in the Q, and we will be funding our power initiative. But until 2021 unfolds more, we're not ready to talk about that level of spending just yet.
And then just want to touch on NESR. So is there any upside to the number of fleets? I think you have two there now in 2021?
So I appreciate you asking the question. Our partnership with NESR is creating a lot of value in the Middle East for our customers there. Operational performance management continues to get better and better, and we've raised the bar a lot. I think it represents the excellent teamwork that we got between three parties, the customer and two service companies, which is -- makes it a bit unique.
The regional opportunities are very much dependent on the commercial potential for attractive ROI for us, and we've clearly increased the ROI for fracking dollars spent by the E&Ps in that region because of the amount of stages being delivered per fleet. NESR is a great partner, and they're very good at being able to do business development in the region. So we maintain some expectations and hope that there will be opportunities in 2021 but do not have a direct laser view of any on the near-term horizon.
Thank you. The next question comes from Ian MacPherson with Simmons.
Maybe following up on power solutions. I'm curious if this is envisioned to expand your dual fuel capacity overall, if it's more designed to allow you to customize a substitution rate a little more nimbly for your customers at their preference or just to raise substitution rates overall across your fleet, fleet by fleet. And maybe you could -- if you could indicate to us where you think substitution rates are on average on your dual fuel fleets today and where you see them heading in the future with the enabling of this new business line.
Yes, I appreciate that question. And a little bit all of the above. I would say that our control system that we are using now across our entire fleet, dual fuel and otherwise, has brought a lot of advantages. One of them is in this area. When we do have a dual fuel system, being able to tune the engines to maximize the conversion has been -- is obviously working, and we have a number of data points to prove that out from our customers and some of the suppliers.
So doing that is an advantage. Also levering our ability to make this process easy for our customers will move our utilization of our dual fuel capacity higher up in that tier that we've been trying to describe. So those are exciting things for us. But also, I think that the business itself has a lot of opportunity to grow.
As we start out, we're going to be focusing now on one region of the U.S. and then we will expand that over time. You asked that -- what are the conversion rates. With that pro package that we have, it's a package that will displace on average at 50%, and the platinum package will displace diesel at a rate of 65%. And you can do -- with a pure fleet of Tier 4 dual fuel, you can get it up into the 80s.
So we're tiering it so the operator can choose where he wants to enter at, and I think that meets the needs and the gas supply opportunities that vary across the regions in a way that allows them to have a menu. And so far, so good, people like that, and I think it's good for all involved. I hope that addressed it.
Yes, absolutely. I wanted to also just ask on the topic of total market attrition. You said you think the U.S. is at 13 million-horsepower today, 70%, basically pure diesel. When you drew the line on your latest 400,000 horsepower retirement, can you qualify for us what the threshold was for your fleet in terms of what didn't make the cut and what did make the cut? Was there any defining attribute? Or was it really just kind of the obvious factors of age and state of duty?
So that's a good question. You had to kind of have a view of the macro before you make a call like that. And we've been stating that we don't intend to invest further in the conventional fleets, meaning that everything we do in the future will be related to our strategy that we've been outlining. So that made it -- that was a defining factor. And then you look at the projections for 2021, 2022.
Our U.S. land projection is maybe smaller in rig count and fleet count activity. We wanted to be able to deploy a large number of fleets, and after this rationalization, we're still able to do 37 fleets. And if you remember in my prepared remarks, I made some comments around 30-something fleets generating $500 million in EBITDA.
So we're thinking that, that bottom part that we're using for maintenance CapEx support was not going to be deployed probably within the next year or two, and based upon that, it seemed more capital-efficient to harvest that and heading towards the future with the next generation. [Technical Difficulty]
We do believe there's a little bit more visibility on that total number. It's been flashed around a lot over the last years as all of us have been trying to determine what that number is. Some of the components were basically unknown, and there happened to be assumptions made. And I think there's been more clarity in the last three or four months than we've had before. So that's why we've kind of been willing to say that we think it's somewhere around $13 million in total.
Thank you. And the next question comes from Stephen Gengaro with Stifel.
Two things. First, I think you referenced about $5 million or $6 million of annualized EBITDA per fleet in the quarter. And when you talked about sort of the earnings power of the business, I think that implies sort of a $15 million to $16 million EBITDA per fleet number, if my math is right. What do you think the path is to get there? From an activity level perspective, fleet attrition, how do you think that plays out? I know this is probably a two- to three-year question, not a six-month question, but what do you think you need to get back to those levels of profitability?
Look, thanks for the question. I'm going to kind of step you through that. So I think it's too early to call what a mid-cycle EBITDA per fleet will be. Obviously, it has to be cash flow positive. And we're charting our path to that, and we're increasing our earnings potential through our strategy. We talked about our increased scope. We talked about our lower emissions. Today, we see a path to adjusted EBITDA in Q4.
We think our cost structure is largely sorted out, and at 15 fleets today, we're seeing much better GP per fleet, and that's translating into a positive adjusted EBITDA. But look, the path to free cash flow is going to be, in 2021, we're going to continue to get productivity on our fixed costs and SG&A with additional deployments.
We're starting to see better utilization from a calendar perspective. Assuming this continues, that will be part of that path. And then we continue to drive down our maintenance CapEx per fleet and overall cash cost of doing our business. So first, we had to see positive adjusted EBITDA, and now we're on a path towards positive free cash flow.
Okay. And then just the second question, when you look at the competitive landscape, and clearly, there's been consolidation on the E&P side, but a little bit on the frac side as well. You've got companies that are in bankruptcy or have weak cash positions. Have you seen any impact yet on the bidding process, preference for next year or other more stable providers? Has that shown up at all yet? And if not, do you expect to?
When you're going through a turmoil that we went through in Q2 and coming out of now, you see a lot of varying behavior among the competitive landscape, I would say. I think that when the outlook for 2021 becomes more clear, maybe people would be more consistent. But I think if the 2021 outlook is not a significant rebound, the part of the market that is struggling with liquidity, we'll do different things.
And we've seen some pricing that no matter what is extremely cash flow negative that we've -- in that bottom tier of the market that we've talked about, burning pure diesel with Tier 2 equipment, that you know is not sustainable. And maybe it's a playbook to try to prepare for M&A of some sort.
I'm not sure, but it's certainly one that you don't -- it's not sustainable. So I think we see -- we have seen some of that even now. And going forward, I think I don't know what that's going to look like in 2021, but it's very much linked to the macro view of each individual company.
Thank you. And the next question comes from Scott Gruber with Citigroup.
Most of my questions have been answered, but just a quick one. On the dual fuel fleet, how much of the economic benefit from diesel displacement are you capturing versus the customer? It sounds like there's a bit of a range based on your pricing strategy. But ballpark, what does that range look like?
That's an interesting way to look at it. I know it's the way it's been looked at a little bit in the past. But we're just establishing, as I was trying to point out a while ago that different pricing tiers associated with the amount of displacement. And then the customer can look at it if -- to see if it makes sense for him commercially or not. And we know what -- we're setting it up so it does make sense for us.
And as we get power solutions put in place, I think we'll be able to put together an overall package versus what they're doing no matter how they're doing it. That's going to demonstrate that the value of integration and all the things I explained earlier is -- will make our package better for them and us. So that is -- that's what it's going to look like. And we wouldn't be investing in it otherwise.
Thank you. For your next question, we have John Daniel with Daniel Energy Partners.
The first question just on Tier 4 dual fuel and how you see that versus you guys also looking at some of the turbine solutions that are forthcoming.
Yes, so good question. So when you look at the benefits of next-generation equipment that burn natural gas to lower emissions the customers have the options of the older generation Tier 2 or Tier 4, as you point out, or perhaps migrating towards fully electric. When you look at electric, you guys start thinking about what does the power solution look like, as you well know, whether that be a turbine-powered or some other source of power that can make it work. That is the most challenging part of the capital investment process.
I mean understanding how that would work and how you can get -- become capital-efficient with it. We're looking at it hard, and I expect that we'll be field testing our version of that in Q1 of this coming year. That would give us a chance to offer to our customers who want to go that route that option. At the same time, we do believe that from the complete package assessment that Tier 4 dual fuel, like our platinum package, is the answer that is best suited for both players. So I'll just say is there more to come on that.
Okay. So safe to say you could actually provide both down the road?
Yes.
Yes. The other one is when you look at the competitive landscape, a number of your peers have Tier 2 fleets or Tier 4 without dual fuel. Given your emphasis on the dual fuel solution and perhaps down-the-road turbines, should we then assume that those companies with, call it, the legacy fleets are effectively not M&A candidates for you guys?
We get asked that a number of times that I want to answer it carefully to say is that we got an open mind. But when we prioritize, we would certainly be prioritizing equipment that would fit to our strategy better. The benefits of -- the pure benefits of a macro consolidation weighed against that is what we'd have to look at, obviously. So we don't want to say no to anybody off from consideration because we do believe we're very good at integrating. But on the other hand, we also want to look at the best fit for us first.
And ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the call back to Mr. Robert Drummond for closing comments.
Thank you. I'd like to recognize the NexTier employees. Because of the magnitude of the downturn, our team has worked extremely hard to navigate all the challenges while delivering the leading safety performance and top service quality that our customers expect.
Every day, our employees collaborate and design solutions to maximize value for our customers, investors and the Company. It's been my honor to work alongside each of you, and I share your commitment to the long-term success of NexTier.
Thank you for participating in this call today. Thank you.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.