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Good morning, and welcome to the Keane Group Fourth Quarter and Full Year 2017 Conference Call. As a reminder, today's call is being recorded. [Operator Instructions]
For opening remarks and introductions, I would like to turn the call over to Kevin McDonald, Executive Vice President and General Counsel of Keane Group. Please go ahead.
Good morning, and welcome to Keane Group's Fourth Quarter and Full Year 2017 Conference Call. Joining me today are James Stewart, Chairman and Chief Executive Officer; and Greg Powell, President and Chief Financial Officer. As a reminder, some of our comments today will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, reflecting Keane's views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. The company's actual results could differ materially due to several important factors, including those risks and uncertainties described in the company's Form 10-K for the year ended December 31, 2016, for 10-Q in the quarter ended September 30, 2017, recent current reports on Form AK and other Securities and Exchange Commission filings, many of which are beyond the company's control. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Additionally, we may refer to non-GAAP measures, including adjusted EBITDA and adjusted gross profit, during the call. Please refer to our public filings and disclosures, including our earnings press release, for definitions of our non-GAAP measures and the reconciliation of these measures to the directly comparable GAAP measures. With that, I turn the call over to James.
Thank you, Kevin, and thanks, everyone, for joining us on the call this morning. Keane performed very well during the fourth quarter. We placed our 26th fleet into service at the beginning of the quarter, achieved full utilization through the period, progressed the size, margin and profitability of our completions fleet, and deepened our customer relationships. While we and the industry faced temporary headwinds during the quarter, including cold weather impacts late in December, our financial performance remained resilient, benefiting from reliable operational execution, diversity in customers and geographies, and improvements in our contractual arrangements. The fourth quarter capped off a very strong year for Keane, one in which we executed our plan and exceeded on the goals we set at the time of our IPO. With that in mind, I'd like to take a few minutes to briefly review our accomplishments for the year. For the year, we recommissioned 7 previously idle fleets at a recommission cost of approximately $2 million per fleet and reaching full utilization in the third quarter. We've significantly improved profitability per fleet, increasing from an average of $4.4 million in the fourth quarter of 2016 to more than $17 million in the fourth quarter of 2017. We successfully completed and integrated the strategic acquisition of RockPile, adding scale in key basins and increasing the size of our fleet by approximately 25%. Against the backdrop of significant demand for our services, we preemptively ordered 150,000 of new build horsepower at an attractive cost and favorable lead times. We've thoughtfully pruned our asset portfolio with the sale of workover and coil tubing assets, raising more than $25 million in cash and focusing on our other services segment of cementing, where we continue to see attractive customer demand and growth opportunities. We've further benefited from our technology capabilities, where our proprietary products drive enhanced customer engagement and improved efficiencies. Today, nearly all of our customers are engaged with our portfolio of engineered solutions. And throughout all this activity, we've maintained and improved our conservative balance sheet, characterized by low leverage, robust liquidity and improved flexibility, which was solidified through the successful amendment of our ABL facility in December. Our execution in 2017 provides a critical platform for continued growth in 2018 and has resulted in our leading position today. Including our new build horsepower, Keane will own nearly 1.4 million hydraulic horsepower, deployed in the key U.S. basins, including the Permian, Marcellus, Utica, Eagle Ford and the Bakken. This includes a leading position in the Permian, where approximately half of our horsepower is deployed, primarily in the Delaware. Our performance during the year, combined with our outlook and supportive market backdrop, have put us in a position to begin returning value to shareholders through the authorization of a stock repurchase program, which Greg will discuss in greater detail later in the call. Turning to the macro, supply and demand for U.S. completion services, including pressure pumping, remains highly constructive, as demand continues to be in excess of supply, driving further growth in pricing and margins for Keane. While many of our competitors work towards a path of full utilization, we continue to believe that a portion of announced and planned new builds reflect horsepower placement as the industry faces increasing completion intensity and higher wear and tear, while, at the same time, it faces the realities of aged and poorly maintained equipment. These factors support our view that not all named play industry horsepower will ultimately be dispatchable, adding to supported supply and demand dynamics for U.S. completion services. These supported fundamentals also result in ongoing growth opportunities, including our previously announced preemptive order for 150,000 of new build horsepower, reflecting 3 additional hydraulic fracturing fleets. We are pleased to report that we recently entered into a dedicated customer agreement for 1 of the 3 new build fleets. This agreement is with an existing customer, and the fleet will be deployed in the Marcellus/Utica upon delivery by the end of the second quarter of 2018. We are excited to expand our relationship with this longstanding customer, growing our partnership into an additional basin where Keane maintains a significant position. We remain in active discussions with multiple existing and new customers for the remaining 2 new build fleets on order, which we continue to expect to be signed under dedicated agreements by the end of the first quarter, with 1 fleet delivered and deployed by the end of the second quarter and 1 by the end of the third quarter of 2018. We continue to expect all 3 of our new build fleets to be deployed under dedicated agreements and annualized adjusted growth profit per fleet of greater than $20 million. Discussions with customers are progressing, and we look forward to providing you with further updates. The strong relationships that we have with our supply chain, including component manufacturers, played an integral role in the timing of our new build order and our ability to secure favorable cost and delivery times. Based on ongoing discussions and our knowledge of industry capacity at the time of our order, we believe that equipment costs have since increased and lead times have extended. We continue to expand the breadth and depth of our customer relationships. Here, too, it comes back to execution. Execution forms the foundation of our relationships and ultimately supports stronger and longer lasting relationships. To us, there's no bigger compliment than a customer expanding their partnership with Keane by adding additional fleets. Today, we have 2 or more fleets deployed with multiple customers. This is simply not possible without leading safety performance, quality equipment, execution and maintenance given the caliber of customers that we work with. Part of this formula relates to our consistent maintenance CapEx program and relationships with the suppliers that allow us to keep our fleets fresh. With that, I would now like to turn the call over to Greg.
Thanks, James. We maintained full utilization of our fleet throughout the fourth quarter, averaging 26 deployed hydraulic fracturing fleets, up from an average of 24.7 fleets during the third quarter. We placed our 26th fleet into service at the beginning of October and remain at full utilization today. Throughout the year, we significantly increased the size and scale of our fleet, doubling from 13 fleets operating at the end of 2016 to 26 today, driven by a combination of recommissioning of idle assets and M&A. Total revenue for the fourth quarter of 2017 totaled $501 million, an increase of 5% compared to $477 million reported in the third quarter. In our completion services segment, revenue totaled $496 million, an increase of 6% as compared to the third quarter. Sequential growth was driven by the addition of our 26th fleet and price increases from contract reopeners on a portion of our portfolio. Partially offsetting this were the impacts of colder than average weather and a slightly higher portion of our customers directly sourcing proppant. Much of the U.S. experienced a cold snap during the final month of 2017, in areas where there is a general lack of infrastructure to handle these conditions, including West Texas. We'll discuss these topics further in just a moment. In other services, revenue totaled $6 million, compared to $8.8 million in the prior quarter. The sequential decline reflects the sale of the remainder of our workover rig assets in November. Going forward, our other services segment will exclusively reflect our cementing operations. For the fourth quarter, adjusted EBITDA grew to $93.8 million, an increase of approximately 30% versus the $71.6 million reported during the third quarter of 2017. Adjusted gross profit was $113.1 million for the fourth quarter, an increase of 26% compared to the $89.7 million reported in the third quarter. We continued to improve profitability on a per-fleet basis. Annualized adjusted gross profit per fleet was $17.3 million for the fourth quarter, up from $14.2 million in the third quarter, driven by repricing on a portion of our portfolio. Adjusted EBITDA for the fourth quarter excludes approximately $5.7 million of one-time net gains, representing one-time gains of $12.7 million partially offset by one-time expenses of $7 million. Significant drivers to the gain was an adjustment in our CVR liability given an increase in Keane's common stock price, insurance gains related to our acquisition of Trican assets in 2016, and gains related to the sale of coil tubing assets during the fourth quarter of 2017. Significant drivers to the loss include non-stock cash (sic) [ non-cash stock ] compensation expense, costs associated with our secondary offering completed in January, and commissioning costs for cementing units. With this overview of our quarterly performance, I wanted to take a moment to discuss our dedicated fleet strategy and, specifically, our contract structure that we believe serves as a key differentiator for Keane today and will continue to differentiate us going forward. Throughout 2017, we underwent a process to improve the terms of our agreements, including the addition of standby charges and other mechanisms of margin protection. The EBITDA margin performance I just discussed serves as a testament to our success in providing resilient profitability in a highly dynamic market. With respect to self-sourcing, and as is evident in our fourth quarter results, we remain agnostic to the same procurement strategies of our customers. We allocate our fleets under dedicated agreements where 2 requirements are met. First, where same procurement decisions are economically neutral to Keane, and second, where we have validated a customer's ability to deliver at a high rate of efficiency. For the 26 fleets that operated in the fourth quarter, approximately one-third self-source sand. Importantly, these fleets are in the same gross profit economics as the fleets where we supplied sand. For the majority of our customers that rely on us for sand, or in areas without in-basin sand, our extensive supply chain remains extremely valuable and establishes our ability to optimize the delivered cost of sand. Turning to our bundling strategy, approximately 78% of our 26 average deployed fleets were bundled with wireline during the fourth quarter of 2017, mostly unchanged sequentially and up from 62% during the prior year quarter. Our bundling percentage will increase with the delivery and deployment of our 3 new build fleets in the second and third quarters, all of which will be bundled with new build wireline spreads. The bundling of frac and wireline remains an important aspect of our strategy and a driver of efficiency. Selling, general and administrative expenses totaled $24.6 million for the fourth quarter, compared to $28.6 million in the prior quarter. Excluding one-time items, SG&A totaled $18.4 million, compared to $17.5 million in the third quarter of '17. For the fourth quarter, one-time SG&A items are driven by non-cash stock compensation expense and costs associated with our secondary offering completed in January. Our focus on efficiency and cost management extends beyond the well site and includes how we operate at the corporate level. This is reflected in our leading SG&A efficiency. For the fourth quarter, SG&A represented just 3.7% of total company revenues. Turning to the balance sheet, we exited the fourth quarter with cash and cash equivalents of $96 million, up from $72 million at the end of the third quarter. This increase in our cash position was driven by improved free cash flow. We generated positive operating cash flow of approximately $80 million for the fourth quarter, partially offset by capital investment in working capital needs associated with our ongoing growth. Total debt at the end of the fourth quarter was approximately $275 million net of unamortized deferred charges and excluding capital lease obligations, unchanged from the prior quarter. On an annualized run rate basis, fourth quarter adjusted EBITDA was approximately $375 million, which, on an unchanged debt balance of approximately $275 million, further reduced our leverage ratio to approximately 0.7 times. Net debt at the end of the fourth quarter of 2017 was $179 million. Total available liquidity as of December 31, 2017, which includes availability under our asset-based credit facility, was approximately $296 million. Our strong balance sheet and liquidity position remains an important component of our strategy, providing us with flexibility. As we've said in the past, we consider flexibility from 2 perspectives. During periods of strong demand, financial flexibility provides us with the opportunity to efficiently fund our growth, including organic and M&A. And second, financial flexibility serves as a critical defense measure through more challenging market conditions. In December, we completed an amendment to our ABL facility, which improved our already strong balance sheet position and flexibility. Under the terms of the amendment, we increased our volume base by $150 million, to $300 million, and lowered our borrowing rates. Yesterday, we announced that our board of directors authorized a stock repurchase program of up to $100 million. We are excited to add a capital return program to our successful execution track record. Our ability to provide this return of value is a direct result of our execution and continued strength in the U.S. completions market. We employ a 3-pronged approach with respect to uses of capital. First is investment in growth. We've been successful in executing on this to date, including the redeployment of all previously idled fleets, the acquisition of RockPile, and our recent order of 150,000 new build horsepower. We continue to maintain the cash and liquidity needed to position ourselves for further growth as opportunities arise. The second component is maintaining and improving our balance sheet position. Liquidity remains a critical component to our flexibility, both during periods of industry strength and weakness. We further improved our liquidity profile with our ABL amendment in December and continue to maintain ample cash on hand to support our initiatives. The third component is capital return, and yesterday's stock repurchase program announcement marks the initiation of our capital return program. We also continue to evaluate the potential for other forms of capital return, including dividends. Looking ahead to the first quarter of 2018, demand remains robust. We expect normalized revenue to increase to approximately $530 million, driven by pricing increases on a portion of our fleet. Normalized annualized adjusted gross profit per fleet is forecasted to average approximately $18 million. Excluded from these normalized forecasts are the transitory impacts of colder than normal weather experienced early in the quarter across much of our operating footprint combined with frac sand supply challenges. These sand supply challenges are driven by 2 main factors, including class 1 rail congestion from cold weather early in the quarter and, more recently, from frac sand mine issues caused by rail-related output constraints, flooding, slippage in timeframes for certain in-basin mines, as well as continued growth in frac demand. We expect these factors to impact first quarter results by approximately $30 million of revenue and between $0.5 million and $2 million per average annualized adjusted gross profit per fleet. Further, based on normalized expectations in the first quarter plus additional price increases on a portion of our portfolio, we expect to achieve average annualized gross profit per fleet of approximately $20 million on an exit rate basis for the second quarter of 2018. For 2018, we expect maintenance CapEx per fleet of approximately $4 million, reflecting our proactive approach and ongoing commitment to maintenance. For cementing, we are excited about the prospects of ramping this business in the Bakken and the Permian. We completed our first job in the Permian in January and are seeing significant demand from existing and new customers for additional services. By the end of the year, we expect our cementing business to generate run rate revenues of between $70 million to $90 million on margins of between 20% and 25%. With that, we'd like to open up the lines for Q&A. Operator?
[Operator Instructions] And our first question comes from Tommy Moll with Stephens.
So for pressure pumping, it sounds like you still see an undersupplied market overall. I wondered if you could give us any insight at the basin level. Do you see any variation from one to the next in terms of the supply/demand balance? And then also, on pricing, it's good to see continued movement up and to the right into Q1 here. As we move across the quarters this year, are there any particular points in time where you could see a meaningful inflection there, or do you think it'll just be more ratable across the quarters?
Yes, I think we're seeing that, Tommy. Obviously, the bulk of the rig count increase so far this year has been in the Permian, so the demand there is going to increase. That's just starting, so I think in Q2 or by the end of Q2, we'll see one of these inflection points in terms of demand and the ability to move price. But definitely the Permian at the moment is seeing a demand over some of the other basins.
And then a follow-up, if I could, on capital allocation. It sounds like all options are on the table here with the repo announced yesterday, potential for dividends going forward. I just wanted to ask, on the repo, can you give us any sense of what the timing or strategy might be or how aggressive you may look to get with it?
Yes, thanks, Tommy. Look, I mean, we're on pace to deliver significant cash flow this year. We're excited to commence the capital return program. The timing of the execution is going to be somewhat market-driven, and that decision will be in context of other sources of capital deployment. We do expect to have the financial wherewithal to kind of execute on multiple of these capital allocation strategies, so I think it'll depend on those factors and, obviously, the performance of the stock, but our intention is to get the value out of the capital return program for our shareholders.
Our next question comes from Sean Meakim with JP Morgan.
So we've talked for a long time about the flexibility and the prudent mix of core capital and then returning cash to shareholders, and so I guess with the buyback in place, how should investors think about what this signals with respect to where you think we are in the cycle and, kind of looking beyond the next few quarters, what the implications are for Keane?
I mean, it feels to us that we're kind of early in this cycle. I mean, I think these choke points we're having in the first quarter kind of coil the spring for completions activity and probably built some docks, as well as if the commodity stays constructive at 55 to 60, I think we're going to see robust capital budgets. As far as pressure pumping, the thing that kind of keeps us balanced is the supply-demand, it seems very constructive right now. Even with the supply builds coming online, we think there's going to be an amount of attrition to balance that out, plus the growth in the rig count and capital spend is going to require more horsepower. So from our perspective, Sean, we're pretty early in the cycle here, and it all depends on if the commodity hangs in there, it'll remain constructive, and with what we see on the supply and demand side and the lead times pushing out, we see a really good balance well into 2019.
And I guess it'd be helpful to talk about any concerns you have about unintended consequences of road congestion in the Delaware. Given this ramp that we're expecting to see in local sand deliveries, I'm just curious how you think about potential impediments to being worked on given how quickly activity has ramped and just the lack of infrastructure in some parts of the play.
Yes, it's absolutely going to be a challenge. It's a challenge today. The safety on the roads is a challenge for the industry. What we're trying to do to mitigate that the best we can is to come up with last-mile solutions that we can put the most profit into and assets. So there are a lot of different last mile solutions out there, but the game for Keane is trying to figure out how to put the most profit we can into an asset, which has the effect of reducing the number of assets on the road. So I think it's going to take a lot of different ideas to both get this traffic around safely and efficiently, but we tend to have a pretty innovative industry, and as these mines come online, whether it's road infrastructure with T-DOT or different things, we're going to have work all levers to make that happen. But it's certainly a challenge for the industry.
Our next question comes from Michael LaMotte with Guggenheim.
If I look at 2017, obviously with the reactivations and the growth in the fleet, execution was very much on the upstream side, getting things deployed and the right contracting strategy, et cetera. As I think about 2018, I think field execution is obviously going to be really critical, so I was hoping you could address some of the things that you're looking at in terms of efficiency initiatives, cost management initiatives, perhaps fleet optimization geographically. How are you thinking about operations execution in 2018?
Yes, thanks, Michael. It's a good question. I mean, I think there are 2 tranches on how we look at that. Number 1, when the industry tightens, it's really important to focus on blocking and tackling, so how do we recruit, retain, promote and get our employees out there working safely, so that's a key focus every day. The supply chain is obviously very challenging and dynamic, so that's something we've got to focus on. So all those pieces, you have to -- the blocking and tackling, you have to execute on to deliver at the well site every day, and I think you're going to see differentiation among the competitive STACK given how challenging that's going to be in 2018. Beyond that, how you differentiate it comes down to technology. There's down-hole technology with fluid systems, and then we've got a lot of irons in the fire on surface technology, trying to reduce the total cost of ownership and improve the reliability of our equipment. So I'd say blocking and tackling is the #1 focus every day. It's getting tougher. And then there are differentiation things we're trying to do on the technology side to both improve our efficiency on the surface and down hole and help our customers improve the reservoir results.
Do you have hard metrics in place for your teams in terms of the staged per-day improvements, or how are the efficiencies going to be measured ultimately?
I mean, Michael, that's where kind of our partnerships come with our customers. All of our teams are laser-focused on all those metrics that you talked about to drive that efficiency, to be most efficient for us and most efficient for our customer. So our teams are laser-focused on that. We've got a robust maintenance program, so we keep our fleet fresh, as we discussed, with the maintenance CapEx amounts that we think it will be for '18.
And at the end of the day, the rubber meets the road when you look at nonproductive times, so we have a set of assets rigged up on a well site and you want them pumping, theoretically, 24 hours a day, and then when they pump 17 hours in a day, you look at the 7 hours in that opportunity block and you work with your partners to attack it, and the beauty of having dedicated customers and working with the same partnership for 3 to 4 years is the teams become integrated and you work on both sides of the ledger. Whether it's customer scope on things they own or the stuff on our side of the ledger, we all try to drive up the pump time and the efficiency.
If I could just ask a quick follow-up on the repurchase, is that intended to be all open market, or is there an opportunity perhaps to do a structured deal with some of the service remaining shares?
No, I think this will be focused on the open market, Michael.
[Operator Instructions] Our next question comes from Connor Lynagh with Morgan Stanley.
I was wondering if you could just give us a feel for where you are today relative to where you started the quarter. And you call out the $18 million play in GP perfectly as sort of like your normalized 1Q run rate. Are you above that right now, or how much would you have to assume to get back to that on the efficiency or pricing side?
I mean, I guess the way I would describe the quarter, Connor, is January had the weather, February was relatively stable as we got the sand disruption kind of started later in the month, and then March is fraught with the challenges in the sand from the rails and the mines and the things we talked about. So February was probably the most normal month in the quarter, and that '18 -- it's in the strike zone of that $18 million GP per fleet. So we've seen it. That's what you're asking. We've seen it. Yes, we've hit it. The pricing book and the dedicated agreements -- none of this is work we lost. None of this is work that's going away. It's just some of these transitory impacts have kept us and our customers from achieving it.
Maybe if we could turn to the cementing business, how do you see that ramp towards the $70 million to $90 million guide? Obviously, that's pretty substantial versus where you are today, so is that pretty back-end loaded? Just how do we think about that?
Yes, I think when you're going to start up something like that in earnest, there's going to be a kind of slow start, and then it'll get momentum. So I think it's going to be more back-end loaded, and as we get more line of sight to that, we'll provide you guys tighter guidance, but I'd assume for now it's going to be more back-end loaded.
Do you think you have sufficient scale in that business with what you have today, or do you need to build out some of your footprints in different basins and things like that?
We have ample infrastructure in the Bakken and the Permian to be real players. I think when you see us get to the majority of our equipment deployed, at that point, we'll probably make a decision based on the performance of the business and the demand from the customers, if it's something we want to grow either larger in those basins or in incremental basins.
The $70 million to $90 million, that is what you think the earnings power is fully deployed, correct?
Correct.
Our next question comes from Vaib Vaishnav with Cowen and Company.
I guess, Greg, you mentioned $4 million per fleet is still the CapEx to think about on a per fleet basis, but as I think about the new builds and also the cementing ramp up, can you talk about how should we think about the CapEx for 2018?
Yes, thanks for asking. I know that's fresh on people's minds. Our CapEx for '18 is going to be $230 million. That's the maintenance CapEx of $4 million on fleet. We've been consistent on that number. We've been very proactive in maintaining our fleet. We don't have a deferred glut of maintenance sitting out there. We do it proactively. We rotate our equipment. We have supply lines set up with key supply partners for all of our major components. We keep some in inventory and constantly rotate them, so we have a kind of well-oiled machine set up on maintenance CapEx, and that $4 million has been pretty stable now for the last 12 months. So maintenance CapEx will be kind of 40% or so of that $230 million, and then we've got the new fleets we ordered, the new wireline trucks, and then the delta is just a little bit of investment we're making in technology in both wireline and surface equipment for frac. So that makes up the $230 million, and we feel pretty good about that number, and that's going to allow us to generate significant cash flow to execute on our capital allocation strategy.
Thinking about the new builds, it sounds like you already have a contract for the first new build on order and you will have -- or you plan to have or at least trying to have 2 more done by the end of the first quarter. How do you think about the new builds besides that if all fleets are working or are contracted by then?
I'm not sure I follow the question.
So you have 3 new builds on order. 1 is already contracted, and 2 it sounds like you will have contracted by the end of the first quarter. So all fleets that you have currently working or on order should be contracted or working. How do you think about new builds beyond those fleets?
Oh, okay. Okay. Yes, I mean, at this point it just kind of goes into the capital allocation pool, and if we want to grow capacity, there are 2 ways to do it. We can do it through a new build, or we can do it through M&A. I think our track record shows that we're believers in consolidation and have the ability to execute on that, and the factors we'll have to evaluate between new build and M&A if we choose to grow capacity will be lead times, customer demand and compare those opportunities. And on the M&A side, we have to look at availability of transactions and valuation and then make a decision on if either of those make sense at the time.
Okay. On the cementing assets, it sounds like a pretty good [indiscernible], which is what I was thinking. What needs to happen to get to those levels? Do we need to invest more, or do we need to put in more cementing units? How should we think about it?
It's a good question. There's not a lot of capital required. It's just a matter of us kind of building out the team and lining up the customers on the ramp. We're seeing the customer demand, and we're in the process of building the team. The one thing we're adamant about, whether it's our frac business for a new fleet or it's a new ramp like the cement business, is doing it in a -- doing it the right way, which means we're not going to sacrifice speed for safety and service quality. So that's why I said that ramp will be more back-end loaded as we get the teams onboard and line up with customers. We work for blue chip customers, and they expect us to go out and perform at a safe and high level of service quality and efficiency. So we're lining up a pipeline of customers, and we're ramping our team, and as those 2 come together, you'll see us ramp up these fleets.
And one last question, if I may. The sand supply problems that you envision in March, how much that is because of the Canadian railways congestion versus the sand delays?
I mean, I think the sand issues are very broad. I think the CN is having -- obviously, they're publicly announced issues. There are inefficiencies across other rail lines, as well, due to weather and congestion and just trying to clear some of that congestion and get the unit trains rolling again, so we're not seeing it just isolated to the CN. The mine issues have been pretty widespread. I mean, when the rail line is clogged up and the silos are full, the mines have to throttle back their production. As early as last week, we saw several mines shut down for flooding, and every day a mine goes down because of flooding, it takes significant supply off the market. And then we specifically are impacted by local mine delays in the Permian. We expected some capacity to come on at the beginning of the year, and it's still struggling to come online, and I think we all knew there were going to be speed bumps in getting all these mines online at the same time with construction and labor and all the mine parts that these mines are kind of competing for with simultaneous construction, and we're seeing some of that. So it's almost like a perfect storm of all those factors coming together. The good news is the weather is going to dissipate. The flood waters, it seems like, have receded. And so we're optimistic that these are transitional in nature, but they've kind of all happened at the same time while frac demand is growing, and they're putting a lot of pressure on the full supply chain for the industry.
[Operator Instructions] Our next question comes from J.B. Lowe with Bank of America Merrill Lynch.
I just had a quick follow-up question on the maintenance CapEx per fleet number. That $4 million this year, it seems pretty attractive relative to what some other guys have been talking about. Is that a number that you can see kind of flex to the upside later in the year or into 2019?
I don't think so, J.B. I mean, we have a fairly sophisticated run your fleet model, and what that does is it takes the condition of the assets and runs them out for the type of work they're doing and tells you proactively when you need to replace key components, and that's how we line up our supply line. So we've been doing this now for -- between recommissioning and then normal maintenance CapEx, we've been doing it for a while, and it's a pretty linear model as long as your assets perform to their levels, and we use mostly -- we use all blue chip components, so the OEMs we're working with have pretty consistent component performance, so I feel pretty good about that number.
So that's a through cycle number that you think you can maintain.
Correct.
My other question was just on how your calendar is looking through the balance of 2018, maybe on a quarterly basis. How many days you have kind of filled up so far?
I mean, J.B., everything we have is pretty much under a dedicated agreement, and as far as we can see, they're solid.
Okay. Just one last one. I know you guys have been thinking about different sand storage logistics systems versus your pneumatic. Any progress on that? Have you guys made any decisions there?
I wouldn't say we've made any decisions. We've probably got 5 systems in use right now, so as new solutions come to market, we continue to pilot them, and we're both identifying the pros and cons on our side and working with the last mile partners to try to get them feedback on how to make it more fit for purpose for Keane's needs. I told you before we were in the second inning of that game. We might have progressed to the third inning. The good news is there are new players coming to market, and the existing players continue to refine their solutions, and we're participating in kind of that refinement, so it's ongoing.
Our next question comes from John Watson with Simmons & Company.
A quick one for me on Q2. What's your confidence that some of the transitory issues in March don't go into Q2 and affect your quarter there?
I mean, John, all we can rely on is kind of the feedback from our suppliers who have expertise in their domain, and rail congestion, since the CN put their announcement out and the weather -- that congestion takes a little bit of time to kind of break free, and what we're hearing is that should start to kind of loosen up and unit train service should commence with normal activity in Q2, so that's -- early Q2. So that's the feedback we're getting on the rail. And then the mine issues, the rail freeing up will dissipate some of that, and a lot of the other stuff was winter driven. And then with time, these local mines are kind of working through those bottlenecks I was mentioning in the Permian, and we'll hopefully get back on track and come on ratably. So everything we know leads us to believe that these are transitory in nature and should dissipate here in, hopefully, the beginning of the second quarter.
And Greg, you mentioned the possibility of a dividend in the future. Can you talk to us about the board's decision to authorize a buyback right now rather than to institute a dividend?
Yes, we just thought a buyback gave us probably more flexibility at this point in time. I think we want to continue to look at capital allocation, but we thought the buyback gave us the most flexibility on liquidity and had less rigidity around it.
Our next question comes from William Thompson with Barclays.
With about half your fleet in the Permian and primarily in the Delaware, can you maybe -- we talked about some of the trucking congestion, maybe what the other elements that are the nuances between operating in the Midland and the Delaware and some of the challenge that you see in the Delaware.
Yes, it's a good question. I mean, we've mostly been in the Delaware since we've been in the Permian. That's kind of how we bridge it there. And there are major differences between the basins on service intensity, pressure, and as a result, it's harder on your equipment. Sometimes you need more assets. You've got to have a nimble maintenance program. So the history of our company, kind of coming from the Marcellus and working in the Bakken, is we like to work in tough places, and we think that's where you can differentiate. And I think you're going to see some differentiation among the performance of competitors in that space, because it's a very challenging place to work, and you've got to have really good infrastructure for safety, efficiency, supply chain and maintenance.
Have you seen that in terms of pricing power given the higher barriers maybe to compete in that basin and then, obviously, the wear on the equipment?
Yes, absolutely. To be able to deliver efficiently there with the customers that are there, it's a big differentiating factor for us.
Okay. And then maybe help us understand maybe the delta between the $18 million of gross profit per fleet. With the pricing openers, where are we on the low end in terms of fleet, and then where are we on the top in terms of the high end of the fleet?
I mean, it's a pretty tight distribution. I think one data point that we've put there as leading-edge is what we're going to contract these new fleets for, over $20 million GP per fleet, and we're confident we can get the rest of our portfolio there by the end of 2Q. And then with the -- there's going to be coiled spring out there for docks, and if the demand continues to exceed the supply, which we think it will in the near to medium term -- that's why James was mentioning earlier we could see an inflection point in late 2Q on pricing, up from that leading edge level, so we're optimistic with the near to medium term outlook on supply and demand in frac pricing.
And then a last one from me, just the $4 million of maintenance CapEx per fleet. How much of that is consumable items versus general maintenance?
There's only, really, 3 things in there -- engines, transmissions and power ends. We expense 100% of our fluid ends. We have from the day we started, in 2011, with one frac spread, and it's only major components, and we put them on for their useful life, depreciate them, and then rebuild them or replace them.
Is there any tightness in terms of supply chain? Are you seeing pricing increases on those consumer items, at least on the power end and fluid end side?
We're not really seeing inflation, but there is a tightening in the supply chain. We've got contractual arrangements to ensure continuity of supply on those, that we've had in place for multiple years with key OEMs, but for the folks that don't have locked in supply arrangements, they're both seeing inflation and tightness on getting product.
Our next question comes from Vaib Vaishnav with Cowen and Company.
I just wanted to confirm that you -- Greg, I think you said the 2Q exit level would be about $20 million gross profit per fleet. Did you mention anything on the first quarter exit rate as well?
No. I mean, the first quarter has got all this choppiness in it, right, so we gave a normalized number for the first quarter of '18, which we think is indicative when you adjust for those numbers, and then you can book in that with exiting 2Q at $20 million, and the average for 2Q will be somewhere between those.
Thank you. Ladies and gentlemen, there are no more questions at this time. I will now turn it back to James Stewart for closing remarks.
Thank you, and thank you once again for joining us on our call this morning. I'm very proud of what our team accomplished during 2017 and the continued success we're seeing in '18, and I'm excited about the growth we have ahead of us. We appreciate the contributions from our world-class employees and our strong customer partners and look forward to updating you again soon. Thank you, and have a great day.
This concludes today's conference. All parties may disconnect. Have a good day.