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Good morning, and welcome to the NexTier Oilfield Solutions' Fourth Quarter 2021 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 Mike Sabella, Vice President of Investor Relations for NexTier.
Thank you, operator. Good morning, everyone, and welcome to the NexTier Oilfield Solutions earnings conference call to discuss our fourth quarter 2021 results. With me today are Robert Drummond, President and Chief Executive Officer; Kenny Pucheu, Chief Financial Officer; and Kevin McDonald, Chief Administration Officer and General Counsel. 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, except as may be required under applicable securities laws. We refer you to NexTier 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's 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 fourth quarter of 2021, which is posted on our website. With that, I will turn the call over to Robert Drummond, Chief Executive Officer of NexTier.
Well, thank you, Mike, and thanks to everyone for joining this call. The fourth quarter in NexTier saw the coming together of our strategic repositioning of the past two years. The completion of our counter-cyclical investment strategy appears to be coinciding perfectly with an acceleration in market recovery. Natural gas-powered frac fleets are in high demand in the U.S. land market and remain completely sold out. The pricing differential on natural gas-powered fleet continues to widen versus conventional diesel-powered frac equipment and prices improving across all tiers. Demand for our services continued to gain momentum with growing urgency driven by what we believe is an undersupplied market. Materially correcting the supply and demand imbalance in frac is going to take some time with lengthening supply chain lead times and capital constraints slowing the U.S. frac industry's ability to respond. At NexTier, the investments we made to integrate and automate the completion process, provide us a competitive advantage as we navigate growing challenges caused by lengthening supply chain lead times and labor shortages. Our strategy to both lower completion cost and emissions aligns us with our customers as shale enters the next phase of development. As we gain confidence in the outlook, we decided to provide an operational update in early January. Our Q4 results demonstrate delivering on those commitments, and we see continued momentum as we enter 2022. Before getting into more detail on our view of the market, let's discuss our fourth quarter and full year results. Industry-wide, absent typical holiday seasonality, well completion activity continued to trend upwards in the fourth quarter relative to the third and we saw solid growth across all business lines. Our U.S. frac revenue grew faster than the overall market growth rate for the third consecutive quarter, even after adjusting for our full quarter of Alamo versus just one month in the prior quarter. We saw modest sequential pricing improvements with the bulk of the gains coming from less calendar white space across the entire enterprise. We operated an average of 30 frac fleets during the quarter, consistent with our plan. Towards the end of the quarter, we activated another Tier 4 dual fuel fleet, exiting the fourth quarter with 31 deployed fleets. We extended our position of strength in the Permian Basin. And importantly, we continue to believe that we are the largest provider of natural gas-powered frac services in U.S. land. With the benefit of a full quarter of Alamo, total revenue grew 30% sequentially to $510 million. In addition to expansion across our entire frac business, our Power Solutions, Wireline, Cementing and Coil Tubing product lines continue to see improved activity and revenue growth. Adjusted EBITDA was $80 million, including $21 million in gains on asset sales as our margins caught up with the strong top-line growth we achieved throughout 2021. I'm proud of the way the team managed the impact of the holiday slowdown and navigated the growing supply chain, labor market and COVID-related challenges. For the full year 2021, our total revenue of $1.4 billion increased 18% from the prior year, while our full year 2021 adjusted EBITDA at $114 million, grew from $79 million in 2020. Note, our revenue and adjusted EBITDA margin run rate exiting the year were significantly higher than the 2021 average. With that as an overview, let's discuss why we're still excited with what we see in the market. As we first pointed out in our investor presentation published in early January, we believe the U.S. frac market has tightened significantly with utilization today at or near 90%. On the supply side, we are now dealing with the fallout caused by severe underinvestment in frac equipment. Pricing concessions given over the past few years and through COVID impacted the frac industry's ability to generate capital, forcing the acceleration of attrition and major component cannibalization. At NexTier, current low prices are still forcing equipment rationalization even today. Through the sale of the fleet in the Middle East as well as additions to our donor program, we are further reducing our nameplate capacity by 200,000 diesel horsepower, leaving us with a total of 2.1 million horsepower. Just a very small portion of our fleet is currently cold stacked. On the demand side, our customers are requiring even more horsepower per job, and we believe the average fleet size has significantly increased. To date, when the E&Ps look to add demand, the fleets that are still available to recommission have not worked in several years, and we will require capital investment as high as $20 million to return to work. And the return hurdle rate on this stacked equipment is high, considering it is diesel-powered. This equipment has an uncertain remaining useful life against the demand trend that is moving towards natural gas power. This is increasing customer urgency as they look to hit their own production targets. Like others, we monitor the new build schedule at our competition and efforts to understand how this supply and demand dynamic could change over time. And while we see headlines for new additional horsepower from some of our peers, our assessment today is that the new capacity coming into the market is insufficient to cover incremental demand. In short, we just believe this supply and demand tightness could exist for several years. We believe our premium fleet, more than half of which can be powered by natural gas, is positioned to outperform. Our Tier 4 dual fuel equipment remains sold out, and we are seeing a growing premium for this equipment. The cost to fuel a frac fleet with diesel has increased along with oil prices, making the prospect of natural gas substitution even more attractive. And tightness in the broader market is allowing us to capture a growing portion of the fuel cost arbitrage. We see a limited supply of equipment available in the market that can be used to replicate our strategy. And like the rest of the world, supply chain issues have crept into the oilfield service capital equipment industry, meaning it will take time for supply to catch up with demand. We're going to showcase our leadership position in this transition to cleaner natural gas power at our Investor Day conference scheduled for March the 3rd. Now commentary on our counter-cyclical investment strategy typically focuses on this conversion to natural gas-powered frac equipment. But equally as important to the NexTier story are the investments we've made to integrate critical processes along the well completion value chain. And the value of our integrated completion services offering has never been greater than it is today. The increasingly challenging operating environment has raised the complexity of competing in today's digital oilfield. E&P capital discipline has permanently changed the relationships between the oilfield services industry and our customers, elevating the value of our partnership model as our customers focus on optimizing their own capital efficiency. The tools have changed, and this dynamic aligns perfectly with our integrated strategy where we have proven we can consistently lower NPT and cost, creating value for both our customers and NexTier. For example, consider the well-known shortage of tractor trailers and truck drivers across the U.S. today. This creates unique challenges in the oilfield where more than 2,000 truckloads of sand and commodities are needed for the completion of a typical shale well pad. At NexTier, the investments we've made in our digitally integrated trucking business have been critical to maintain the efficiency of our operation where our scale and technology allow us to use less drivers relative to competing options for the same job, while maintaining flexibility where it matters most. Our size allows us to have priority relationships with many sand suppliers across the entire Permian Basin as optimizing sand mines and truck routes for each pad is critical to asset turns and lowest landing cost. This is particularly important considering the current shortage of truck drivers. Our own large internal driver pool gives us guaranteed access to drivers, while our company-owned and operated next mile tractor trailer maintenance facility, minimizes asset downtime. We use a variety of last mile solutions to fit each customer's specific requirements, increasing our product offering, while at the same time, lowering our own capital deployed. Beyond what is seen on the ground, our Houston headquarter-based 24/7 NexHub Logistics Control Tower is the critical brain behind the operation. The optimized system results in almost 1/3 less NPT when our customers use our logistics operation versus third-party solutions. Again, we're going to show you more about this on March the 3rd during our Investor Day virtual show. And further on the topic, we continue to be pleased with the rollout of our Power Solutions natural gas fueling business. Our proprietary technology is the first of its kind with the capability to blend field gas and CNG to fuel frac fleets. We went live in Q3, and by Q4, we were already fully utilized with great feedback from our customers. Power Solutions has managed to improve the diesel displacement by more than 40% versus prior results, translating to meaningful incremental fuel cost savings for our customers. Standalone, the business is already contributing accretive margins for NexTier in its first full quarter of operations. Additionally, the implications for what the integrated frac plus fueling model means for the return profile across our broader frac fleet is very exciting. As we roll into 2022, the tightness in the market is allowing us to align with customers and partners that have similar core values, share the appreciation of our next-generation equipment and the value added from full integration of completion services like frac, wireline, last mile logistics and power solutions. Overall, we're pleased with the results we achieved in the fourth quarter, which demonstrated significant growth and profitability improvements. There are several factors that helped us maintain momentum. First, the top-line growth was the direct result of targeted investments we made to integrate and enhance our business during the downturn, allowing us to both fill calendar white space and start recouping prices during the quarter. And the first full quarter results with our latest acquisition, Alamo, has proven to be more impactful on earnings than we were anticipating. Building on our strong fourth quarter and the loaded Q1 frac schedule, we are excited about what we see for 2022 and beyond. But first quarter seasonality should not be underestimated. Restarting our operations after the holidays always carries unique challenges. During January this year, we managed through our highest monthly COVID case load, while supply chain irregularities impacted service efficiency somewhat. Further, winter weather, as always, is impacting our operation during the quarter, where in early February, we had a multi-day shutdown across our southern operations, including the Permian, Eagle Ford and Haynesville. But we're also confident that our integrated operating model will hold up better than most in these challenging times. Our current frac schedule for the year is evidence that these seasonal factors will give away to a very strong market. Consistent with what we've said previously, from existing horsepower, we are deploying another converted Tier 4 dual fuel fleet in the first quarter, our 32nd deployed fleet. The fleet deployment was delayed to the end of the quarter due to continued supply chain constraints, especially on Tier 4 DGB components. Demand and pricing continued to show signs of further improvement. And customer conversations remain constructive as they are recognizing that frac fleets are becoming more difficult to find. As we've said previously, our current scale puts us in an enviable position where we do not feel that we need to chase suboptimal profitability work. We continue to instead focus on aligning ourselves with customers looking for dedicated integrated completion programs in 2022 and beyond. The outlook on pricing continues to improve as we look to recover concessions made during COVID. The net pricing impact was only modest in Q4, but the agreements we made so far should result in improved net pricing and profitability throughout 2022. We continue to see a scenario where our integration strategy and expanding scope at the well site as well as our structurally lower cost base will allow us to achieve prior cycle margins, while still allowing our customers to maintain a deflated completion cost profile. Cost inflation is impacting our business just as it's impacting almost every corner of the broader economy. We continue to work with our customers to pass along these increases as they come through. Currently, low pricing simply does not afford us room to absorb any cost inflation. Prudently, in most cases, the latest generation of agreements give us the ability to address cost inflation as it occurs. We are confident that tightening supply and demand dynamics in the frac market should support double-digit net pricing gains by Q4 of 2022 relative to Q4 of 2021. Our team continues to focus on deploying technologies that execute on our long-term strategy and vision. In Q4, we launched [indiscernible] which provides our customers a product rating to further ESG goals by selecting downhole products that balance cost, performance and sustainability. Additionally, we saw heightened interest in our IntelliStim frac optimization system, where we have secured work on multiple projects to provide feedback from the reservoir that allows us to optimize completion design in real time. We'll dive into these technologies at next week's Investor Day also. NexTier remains committed to generating strong free cash flow in 2022, and we plan to stay disciplined throughout the cycle. We entered 2022 with a high quality fleet of natural gas-powered equipment and our conversion program should largely be completed by the first half of this year. We will grow our Power Solutions business, but nonetheless, harvesting free cash flow is the priority. Our maintenance CapEx will increase year-over-year in support of activity gains and our commitment to service quality. Still, in sum, we expect total CapEx will be lower in 2022 than it was in 2021. Coinciding with rising cash flow from our operations, we see a path towards generating more than $100 million of free cash flow in 2022 with an acceleration in free cash flow as we move through the year. For 2022, we intend to use this free cash flow to bolster our liquidity and reduce net leverage. We will remain flexible with our capital allocation strategy thereafter. The improving oil and gas markets have us excited about our outlook and our customers are increasingly acknowledging the value of a partnership with NexTier. Our strategic transition is nearly complete just as the cycle accelerates, setting us up to realize strong returns over the next several years. I'm going to now pass the call over to Kenny to discuss the quarter results.
Thank you, Robert. Fourth quarter revenue totaled $510 million compared to $393 million in the third quarter. The sequential revenue increase of 30% included a full quarter of Alamo versus just one month in the third quarter. In the U.S. land market, our revenue once again outpaced rising market activity even before including the contribution from Alamo. Activity improved in both our Completions and Well Construction and Intervention Services segments. For the full year, total revenue of $1.4 billion increased 18% year-over-year with 2021 including four months of Alamo. Total fourth quarter adjusted EBITDA was $80 million, including a $21 million gain on the sale of assets. The gain on the sale of assets includes the sale of a frac fleet to international markets, continued sales of excess real estate and facilities as well as further rationalization of spare equipment to fund fleet upgrades. This adjusted EBITDA result compares to $28 million in the third quarter and $6 million in the first half of 2021. The improvement in our core business can be attributed to the following. First, the fourth quarter holiday slowdown was slightly less impactful than expected and demand throughout the rest of the quarter was strong, resulting in improved calendar efficiency across the deployed fleet. Second, the inclusion of Alamo for a full quarter benefited our results and improved our overall fixed cost absorption. And finally, our job to recapture COVID pricing concessions started to show on our results, albeit only modestly in the fourth quarter. In our Completion Services segment, fourth quarter revenue totaled $481 million compared to $366 million in the third quarter, a sequential increase of approximately 31%. Completion Services segment adjusted gross profit totaled $84 million compared to $46 million in the third quarter. During the fourth quarter, we deployed an average of 30 completions fleets. We exited the fourth quarter with 31 deployed fleets. In our Well Construction and Intervention Services segment, fourth quarter revenue totaled $29 million, an increase of 6% compared to $27 million in the third quarter. Adjusted gross profit totaled $3 million. EBITDA for the fourth quarter was $71 million. When excluding management net adjustments of $9 million, adjusted EBITDA for the fourth quarter was $80 million. Management adjustments include $7 million in stock comp with other items totaling $2 million. Approximately $4 million of total net management adjustments were cash related. EBITDA for the full year 2021 was $91 million. When excluding management net adjustments of $23 million, adjusted EBITDA for 2021 was $114 million. This is higher than the $79 million of adjusted EBITDA we reported in 2020. Our adjusted EBITDA margin improved from 6.6% in the prior year to 8% this year with an acceleration in the back half of 2021. Fourth quarter selling, general and administrative expense totaled $35 million compared to $37 million in the third quarter. Excluding management net adjustments of $8 million, adjusted SG&A expense totaled $28 million compared to $23 million in the prior quarter. This increase reflects the inclusion of Alamo for the full quarter as well as additional legal fees. Turning to the balance sheet. We exited the fourth quarter with $111 million in cash, down from $136 million at the end of the third quarter. Total debt at the end of the fourth quarter was $375 million, net of debt discounts and deferred financing costs and excluding finance lease obligations. Net debt at the end of the fourth quarter was approximately $264 million, an increase from $237 million at the end of the third quarter as we continue to deploy CapEx to convert our fleet of Tier 4 frac equipment to dual fuel and grow our Power Solutions business. Further, we saw headwinds from working capital during the quarter, driven by continued funding of our strong growth trajectory. We exited the fourth quarter with total available liquidity of approximately $317 million, an improvement from $290 million in the prior quarter. Our liquidity was comprised of cash of 111 and $206 million available under our asset-based credit facility, which remains undrawn. Cash flow used by operating activity was $31 million for the quarter where improved profitability was offset by the need to fund working capital. As we have in the past, we expect to aggressively manage our working capital during the recovery, although given the magnitude of the growth we have experienced with further growth expected in Q1 as well as normal Q1 payments, working capital is likely to remain a headwind through Q1 of this year. Our cash used in investing activities was $7 million during the fourth quarter. In line with our fourth quarter guide, capital expenditures were $52 million, mostly driven by Tier 4 dual fuel upgrades, maintenance CapEx and investments in our Power Solutions business. This was mostly offset by proceeds from asset sales as we continue to execute on our strategy to divest diesel-powered horsepower to international markets and by other means to fund our fleet transformation to natural gas-powered horsepower. This resulted in overall free cash flow use of $39 million for the fourth quarter. Now on the outlook. Post-holiday start-up inefficiencies as well as supply chain challenges were evident in the frac activity early in January, while winter weather slowed or even halted operations in early February, impacting our Q1 results. In addition, our high-grading efforts created some white space as we upgraded and moved fleets between basins and customers to capture better fleet level economics. As Robert mentioned, input cost inflation continues to drive cost up, which is another dynamic that will impact our incremental margins in Q1. However, despite these headwinds, we continue to see a very healthy demand backdrop and high count on utilization with the market now almost fully utilized. In Q1, we expect to see further evidence of the net pricing gains we have negotiated with customers entering the year and pricing increases that we continue to pursue. With mid-to-late quarter activity improvements, the recapture of pricing concessions through Q1 along with fleet high-grading we continue to believe we will exit the first quarter with an adjusted EBITDA per deployed fleet run rate of double-digits on an annualized basis. This exit run rate plus the additional fleet deployment at the end of Q1 should demonstrate a baseline for earnings potential for next year as we move forward throughout the year. This outlook assumes total revenue will increase in the low-to-mid-teens on a percentage basis sequentially, which should mark our fourth quarter of market-leading top-line growth. This foundation of activity and solid revenue base gives us optionality to place our fleet to customers that value our integration and partnership model to lower costs and emissions. We currently expect first half CapEx of between 90 and $100 million comprised of maintenance CapEx of around $2.5 million per fleet per year for frac and approximately $4 million to $5 million in H1 for non-frac product and service lines. We will also continue to fund strategic investments in additional Tier 4 diesel to Tier 4 dual fuel conversions in our new Power Solutions business. Our base case then sees a step down in CapEx in the second half upon completion of the Tier 4 dual fuel conversion program. We continue to invest in our service quality and prioritize a well-maintained fleet and maintenance CapEx will increase year-over-year. But in total, we expect to spend less on CapEx in 2022 than we spent in 2021. We will prioritize free cash flow through the coming cycle. We expect to generate in excess of $100 million in free cash flow in 2022 with free cash flow accelerating as we progress throughout the year. This acceleration is driven by profitability improvements, the conclusion of our dual fuel conversion program and as current working capital headwinds subside. Our integration of Alamo continues to go very well and is largely complete with Alamo fully transitioned on NexTier's ERP, HR and business systems. We are constantly sharing best practices across the company, and we have already learned a significant amount from our new teammates. Alamo's management team remains in place, continue to provide our customers the high standard of service that they are used to. We remain on target to achieve $15 million in annualized cost and CapEx synergies for the second quarter of 2022. We are thrilled to have the Alamo team on board and are excited about the future of the combined company. In this tight market, operational excellence has never been more important. And our integrated service platform should give us a sustainable competitive advantage given our ability to lower costs and emissions for our customers. We are excited by the company we have built during the downturn. We sold off non-core assets and used the proceeds to almost entirely fund our strategic investments in technologies that we believe will be in high demand once the cycle turned. From what we can see today, those investments are set to earn strong returns for several years. We now plan to go into free cash flow harvest mode. With that, I'll turn it back to Robert for closing remarks.
Thanks, Kenny. In closing, I want to leave you with a few key takeaways. First, the strengthening supply demand in U.S. onshore completion services couldn't come at a better time for next year. We're finishing up our conversion program just as utilization moves past 90% for the industry as a whole. This puts us in an advantageous position to benefit from the developing cycle. Second, the recovery in commodity prices has accelerated over the past quarter, and the markets are acknowledging that the world would need more than just growth in renewables to fill growing global energy demand. U.S. shale is in a great position to help satisfy this growth, creating a strong long-term outlook for our services. And finally, our integrated service platform is elevating the role of NexTier to our customers and closely aligning our goals with theirs. We're excited to showcase the value created by our integrated suite of completion products at our Investor Day on March the 3rd. With that, we'd now like to open up the lines for Q&A.
[Operator Instructions] Our first question comes from Chase Mulvehill with Bank of America. Please go ahead.
I guess, the first question is just kind of, obviously, oil prices are pretty elevated here and really nice natural gas price as well. So if commodity prices hold here, we actually think that the horizontal rig count could approach 700 horizontal rigs by the end of this year. So that's basically about 100 rig increase, and that probably drops something in the range of, I don't know, call it, 40 frac crews, incremental frac crew demand. So I guess if you see - I guess a few questions on that. I guess, number one, if you were to see 40 incremental frac crews added into the market, what would that actually mean for pricing? And then number two is, could you actually add, do you think you could add 40 frac crews into the market, given the supply chain friction, tightness in frac sand, just all the things that you kind of talked about during the earnings call?
Chase, look, I'll start in the back end of that question and say that we've been trying to point out with our most recent release in January and again today and again probably on March the 3rd is that we don't believe that there are many frac fleets to be deployed. I mean, I think the fact that the drilling rig count is increasing is very good for creating well inventory that we can use to keep the white space out of our calendars, which is important to profitability as much so as price. But we believe that there's about 250 fleets say deployed in U.S. land today and that the amount of horsepower per fleet has been on a pretty steady increase, a little bit in tune with the way simul-frac has grown and also was just the fact that supporting these high-efficiency fleets, you're approaching 24 pumps on a typical frac job. So when you think what the total horsepower available is in the market, we kind of think it kind of maxes out at around 265 deployed fleets. How you measure those fleets varies a bit. John Daniels talks about it a lot. But when we say there's 235, we mean 235 fully utilized, like a fleet that only operates two weeks in a month won't be counted as a half, for example. So when we look at it and we take that into account, we're not perfect on it, but we spent a lot of time at it. Even the new builds that we see coming into market, both in the electric arena and in the Tier 4 arena, we don't see that it can get much above 265 fleets deployed, so call it another 15 or so. So that's - to your original question about the pricing, that's a very healthy pricing environment. It's also very healthy for filling new frac schedule. And when you fill your frac schedule, your efficiency can get better. So when you see us talking about repositioning our fleet around the U.S. and with customers that are focused on the same things we are around efficiency and having an inventory. I mean, I think that's the macro situation that the bottleneck for the response on U.S. land production is going to be frac fleets. Not a lot of people appreciate that yet, but that's our strong opinion.
And when you say the bottleneck, I mean, do you think that you could put, or not you, the industry could put more kind of Tier 2 traditional fleets out there if they had to. I know that the demand is obviously higher for Tier 4 DGB and you'd prefer to have one if you have a choice. But do you think that there's an ability to kind of push outside of that 265 if you were to look and say, okay, well, let me just - I'll just take a Tier 2 fleet that's on the sidelines and somebody will have to spend a little bit extra money to kind of bring it online or do you think that 265 takes that into account?
Chase, I'm trying to say that it takes that into account that even if we go into the depths of the remnant cold-stacked fleet that exists and you got the CapEx to spend as much as $20 million to activate the fleet, we can't get no more than 265. I mean, that's a little bit - I mean, plus or minus, just a little bit. That's what I really believe.
One quick follow-up question is just kind of looking at 1Q, and I don't know if Kenny wants to answer this, but I'm going to try. But if we look at - I don't know if you want to comment on margins or incrementals, I mean, obviously, you gave some top-line low-to-mid-teens. But when we think about all the things, we can talk about weather, supply chain, higher pricing. And I don't know, Kenny, if you would want to kind of comment on margin progression or incrementals, just something in a plausible range when we look at 1Q versus kind of 4Q?
So maybe let me just go back to Q1. So excluding our asset gain, adjusted EBITDA margins were nearly 12%. So we made about a 480 basis point move from Q3 to Q4. We believe Q1 margins will be flattish. We're seeing an increase in pricing. We're expecting a strong exit performance. But as Robert mentioned in his prepared remarks, January restart issues and February weather are impacting kind of the start of the quarter. But again, I want to reiterate that quarter exit, it's going to be strong. The margins will be higher. And we expect to get double-digit EBITDA per fleet. And we see margin expansion again going into Q3 and then again going into Q4. So I think that Q1 margins would have been higher except for the start-up issues and the weather. But overall, we see margin expansion as we go through the year.
And Chase, I'd add one point just to say is that even though we are deploying our last fleet kind of at the end of this quarter, we think for this year, we expect to grow every quarter, except perhaps in Q4 depending on what kind of holiday impact you have. So I just wanted to emphasize the fact that that sort of supports the previous question a bit. We're going to grow via improved efficiency, pricing and calendar management post this 32nd fleet deployment.
The next question is from Ian MacPherson with Piper Sandler. Please go ahead.
Robert, the bullish setup that you described would typically imply that customers are now beginning to scramble the lock-in pricing over longer term arrangements and service contractors might be inclined to resist term a little bit longer. Can you speak to sort of the true or false of this and how...
Ian, you cut out just a little bit there, but I think you're asking about is it true or false around the customers' ability and want to extend contract terms or lock-in pricing. Look, I would just say is that, yes, it is a tight market, and I'm not talking just about the gas-powered portion either. We always needed the diesel market to tighten up a bit because even gas-powered fleets are anchored a bit pricing-wise to what's happening in the diesel market. So we're resisting ourselves from any kind of long-term price agreement right now because we first - I think as a sector need to recoup the concessions made during COVID. Oil prices are in the negatives for a little while and many of us had to yield some price there. And I think that once we've kind of recovered that, we can kind of get on some sort of inflation indexed, kind of pricing scheme, I think our customers understand that and we're moving in that direction. So I would say that the reality of the cap on frac fleets is just now sort of really becoming absorbed in the market. But it is a market that we feel pretty good about being able to do just that. We recoup pricing that occurred decline-wise during COVID. But from our customers' perspective, I still want to point out that they're still in a deflationary environment over a number of years where we've had the flat fleet or the flat pricing has been able to be reduced unit-wise and then offset previously by improving efficiencies. So I think it's a win-win. It's good for us and our customers. But it is a good market for deciding where and who you want to work for right now from a frac perspective.
Robert, another question I want to ask was just how it's going with your trialing on the ideal fleet and whether that's something that's being pulled forward given the surge and tightness that we might expect next year to pull the trigger on electric new build some time at this point this year?
Look, we're comfortable with the whole derisking of the technology when it comes to eFrac in general. That eFrac pump that we've been field testing is a workhorse for us. We're using it now. It's beyond field test and we've just kind of been using it. But we're not in a hurry really to deploy an electric fleet just for the sake of doing it. We have - we feel like the biggest driver for it is really the fuel arbitrage that you get. And I think that our Tier 4 conversion process is more capital efficient and delivers a large portion of that gas savings that's associated with switching from diesel to gas. So we are - we anticipate that we will be in the - and we expect to be in the eFrac market deployed full fleet in 2023. But in 2022, we're focused on free cash flow and getting our balance sheet back to where it was pre-Alamo acquisition. And we feel like we've got arrangements with some of our customers who are in tune with that. And while we wait, the power solution for electric will be more resolved. I mean, we think that the market is kind of moving away from turbine-powered electric fleets and moving in a direction where they would like to be on the grid, which allows to be much more capital efficient with the deployment of electric fleet. So we - in between there, there's other genset type power solutions that we would prefer. So having said all that is that we're still moving at a measured pace. We like where we stand in the market. I think our customer, partners understand that we're there for them in this arena. But the supply chain challenge is going to limit even the deployments of eFleets in 2022 for the whole market. I mean, some people who are ahead of it a bit have already guided where they are with it. But I think you should consider us a 2023 deploying early in 2023.
The next question is from Scott Gruber with Citigroup. Please go ahead.
So I was just think about the macro backdrop here. And I'm just struggling to understand, the market's tight, it's getting tighter, crude is over 90, your customers are making a ton of money right now. Why does it take all year to get 10% net pricing? What's the kind of disconnect in terms of the economics kind of slowing down you guys faster?
I like that question. Look, I would just say is that there's a couple of things going on. You've got pricing reopeners that were set previously during COVID that were at best quarterly. That's evolving now that we're kind of getting in a pass-through mode as it happens. That's one thing. And we're also fighting against an inflation trend that's been unpredictable, both on the labor side as well as on the equipment side. So as you're moving up, you have to capture that inflation as well as whatever market net gains you're going to get. So I think that's - those are all the moving parts around making that kind of capture. But - and at the same time, I think that we could probably be more aggressive. But we have long-term relationships with our customers. We don't want to break those. And we want to do right like they do with us, but those are the dynamics. And I think that that process we get a better handle on inflation as you get through 2022. But I think the same thing for us, we've got a huge upside in growth in '23 when it comes to just pure net pricing capture. But we've been back to numerous customers now as many as 3x in the last three or four months just because of that inflation versus net pricing capture dynamic. So that gives you a little bit of color, I hope.
It does. I'd point out to your customers, their cash margins as we look at them today are like 65%. And as we look at the service companies, the cash margins are kind of sub-15%. So I think I'd have to look, but I think that disconnect maybe as wide as we've ever seen. So maybe a point to make to the customer base. What's the kind of rough kind of gross pricing increase that you're pushing through versus the second half of last year? Just to give us a sense of the underlying inflation trend that you have in the past through as well?
Ian, look, I - that's probably not something to comment on from a competitive perspective, but you know what inflation looks like. I would just say is that for us, I think what we're probably pressing on our customers may be less than maybe some others when it comes to recapturing the amount of inflation because we started preparing for inflation in the rebound back in early '21. We made some strategic buys for major components. We did - we acquired a company, all power logistics, trucking resource that gives us - we've got 1,800 trucks internally today. So we got a little bit less inflation perhaps than the general market does. Next, we've got a facility called next mile where we do maintenance in the Permian region for all of our fleets. We don't have to get mixed up with third-parties doing that kind of work. And our NexHub Control Tower is kind of getting a lot more efficiency where we need less drivers to do maybe what the normal competitive scenario looks like for moving the volumes of sand around. So I don't think our customers had to take as much of a move for us to get a net price as maybe the general market does, if that helps any.
[Operator Instructions] The next question is from Dan Kutz with Morgan Stanley. Please go ahead.
So I just wanted to see if we could get a little bit more color on the Power Solutions business. Obviously, some of the comments would kind of indicate that reception has been strong and progress has been strong there. But just wondering if you could expand a little bit on how the deployment of those assets and services has been going recently?
Look, I would point out that we're going to go into some depth on that at our Investor Day on the 3rd, but we are really excited about Power Solutions. When we look at the balance of our free cash flow and free cash flow conversion objectives we have, the biggest balance that we have to weigh that against is the opportunities we got to invest further in this business. We mentioned that we went profitable very quick and we're in the process of evaluating a further expansion. But I would just say it's quickly becoming our second largest segment. The margins are very accretive to the overall company. And that we have essentially the market to put it into with our own gas-powered fleets. So our ability to double, triple, maybe approach quadruple that business and still be only operating with our own fleets is a clear path. But we're going to be measured with it and trying to be real smart if the returns on this invested capital very good, we don't want to be coming off this downturn. We're going to demonstrate that going into this year, and the opportunities for increasing it is enormous. The demand from our customers is very low. So we're just trying to be smart about it and move as prudently as we can while sticking to our plan to be less CapEx in '22 versus '21, while it's still growing hugely.
And maybe just sticking with the kind of capital allocation topic, but expanding a little bit more broadly. So I appreciate that kind of the near-term priorities harvesting free cash flow. And then maybe thinking beyond that, I realize that you guys telegraphed the deployment of the eFrac fleet might be a capital priority next year. But just wanted to ask how you kind of think about shareholder returns versus organic growth investments versus inorganic growth investments as we look more to like the medium to longer term, presuming that it might be a little bit early to ask that question, but just any color there would be great?
I can appreciate your comment. It maybe perhaps is a little bit early, but we have been - began discussing with our board about that because we've got - and it's going to be a real high-class one problem to deal with, particularly as we get into '23. But we do like to get our leverage turn below 1. We're aiming to get that done by the end of the year. And then we kind of got a liquidity position and a leverage position that's very healthy all the way back to kind of pre-Alamo acquisition. And then we'll spend more time about how we do that. I think this Power Solutions business is real. I don't think '23 is going to be a potential to spend as much money as people would want to even if they wanted to convert to electric. I think the supply chain there is still pretty tight. And it would be leaking in maybe at roughly the same pace as that capacity is leaking into the general market in 2022. Kenny, would you like to provide some further color around that?
Dan, I'd just add. With the balance sheet position where we needed to be, which is our focus this year, we'll be weighing other means of allocation. Like Robert said, it's probably a little bit too early. But just know that we understand that we can't let the cycle go by without some return to our shareholders, and that's our commitment. It's just 2022, we have our priorities on free cash flow and strengthen the balance sheet.
The next question is from Derek Podhaizer with Barclays. Please go ahead.
I just want to piggyback off of Scott's question earlier. Can you expand on maybe the pricing levers or the mechanisms and the inflation pass-throughs throughout the year to drive that profitability that you're talking about? And I ask just in the context of some of the E&Ps out there talking about locking in service costs in their budget. It just seems a bit contrary to each other. Just maybe hoping you could expand on that as we work through the year?
Look, I think that any comments made by anybody is a little bit specific to the companies perhaps. It depends on what your particular objectives are. Once you understand the supply and demand from the frac side position, I think it's premature to even consider locking in anything that's kind of long-term. And when you weigh the profitability metrics around what drives profitability for a frac company, calendar management, lining up with customers who have an inventory and a history of being able to deliver the supply chain around supporting a frac fleet are allowing us to do it, which is what we prefer. It's a huge profit driver. And then pumping hours per day or frac stages per day, another huge lever. And then pricing. And then when you can go back like we can in this sector and point back for a number of years where pricing has been declining, we need to as an industry recoup that because the fact that I pointed out that I think frac is the bottleneck for U.S. land production response, that's a problem for our customers I think. And part of the reason we're in that position is because the frac P&Ls have not been that healthy. The whole financial scenario has just not been that healthy for a number of years. So this is good for all of us for us to be able to regain EPS. We come back to earnings, positive earnings in Q4. It's been a few quarters since that's been the case, and we expect that to continue. So I think that that's a driver for saying that locking it in may not be such a great idea. But I could also see a case where if I got a strategic customer who's excellent at efficiency and calendar management and protects the frac companies downside in the case of weather then I might lock-in price for a period of time if the profitability road and the terms for passing through inflation existed. So I think that's kind of the dynamic. But we feel like there's a long ways away from heating up on pricing.
Just my next question. Would you be willing to put out a target on reaching that mid-teens EBITDA per fleet level? Obviously, one of your peers pushed that out to 2023. Just curious where you are on the path towards that? You talked about the double-digit net pricing increases year-over-year. Just wondering how that translates into the profitability metric?
So Derek, we're going to give you guys a taste of that on our March 3rd Investor Day. But look, what I would say is, assuming everything goes as planned, as I mentioned earlier, margin expansion on EBITDA margins and EBITDA per fleet, we see that we could see this leaking up to about $13 million or even $14 million of annualized adjusted EBITDA per fleet as we exit the year, obviously, absent any Q4 budget exhaustion or Q4 downtime. So maybe not getting that hurdle just yet. But again, expansion upon profitability per fleet as we go through the year.
This concludes our question and answer session. I would like to turn the conference back over to Robert Drummond for any closing remarks.
So thank you. In conclusion, I just want to thank all of the NexTier employees for their continued dedication and hard work. We're very excited about our position in the market right now, and we're looking forward to this coming cycle. Thank all of you very much for participating in today's call. And we're looking forward to seeing you on March the 3rd, we hope.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.