DNOW Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 7 speakers on the call.

Operator

Hello, good morning. My name is Jeremy, and I will be your conference operator today. At this time, I would like to welcome everyone to the DNOW Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you.

Operator

Mr. Brad Wise, Vice President of Digital Strategy and Investor Relations, you may begin your conference.

Speaker 1

Thank you, Jeremy. Good morning, And welcome to DNOW's Q3 2023 earnings conference call. We appreciate you joining us and thank you for your interest in DNOW. With me today is David Czericinski, President and Chief Executive Officer and Mark Johnson, Senior Vice President and Chief Financial Officer. We operate under the DNOW brand, which is also our New York Stock Exchange ticker symbol.

Speaker 1

Please note that some of the statements we make during this call, Including responses to your questions may contain forecasts, projections and estimates, including but not limited to 2 comments about our outlook for the company's business. These are forward looking statements within the meaning of the U. S. Federal securities laws based on limited information as of today, November 2, 2023, which is subject to change. They are subject to risks and uncertainties and actual results may differ materially.

Speaker 1

No one should assume these forward looking statements remain valid later in the quarter or later in the year. We do not undertake any obligation to publicly update or revise any forward looking statements for any reason. In addition, this conference call contains time sensitive information that reflects management's best judgment at the time of the live call. I refer you to the latest Forms 10 ks and 10 Q that DNOW has on file with the U. S.

Speaker 1

Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business. Further information as well as supplemental financial and operating information Maybe found within our earnings release or our website at ir.dinow.com or in our filings with the SEC. In an effort to provide investors with additional information relative to our results as determined by U. S. GAAP, You'll note that we also disclose various non GAAP financial measures, including EBITDA excluding other costs, sometimes referred to as EBITDA Net income attributable to NOW Inc.

Speaker 1

Excluding other costs and diluted earnings per share attributable to NOW Inc. Excluding other costs. Each excludes the impact of certain other costs and therefore have not been calculated in accordance with GAAP. Please refer to a reconciliation of each of these non GAAP financial measures to its most comparable GAAP financial measure and the supplemental information available at the end of the earnings release. As of this morning, the Investor Relations section of our website It contains a presentation covering our results and key takeaways for the Q3 of 2023.

Speaker 1

A replay of today's call will be available on the site for the next 30 days. We plan to file our 2023 Form 10 Q for the Q3 today and it will also be available on our website. Now, let me turn the call over to Dave.

Speaker 2

Thanks, Brad, and good morning, everyone. The 9 months ended September 30, 2023 represent our best earnings performance For the 1st 3 quarters in the year since being a public company. In a strong, but arguably smaller market this year versus last year In a period without the pricing propulsion due to product scarcity we enjoyed in 2022, our employees defied gravity again. Our teams produced a notable revenue resilience, giving me great comfort that the singular focus on our customers Continues to pay off and accrue to the long term benefit of our company and its shareholders. Despite North America rig counts being up just around 1% when compared to the 1st 3 quarters of 2022, our year to date revenues For the 1st 3 quarters of 2023 are up 11% in that comparative period.

Speaker 2

In a business where the most important defining feature is its People, these results exemplify, in fact, leave me no doubt that DNOW enjoys Having the best professional women and men in our industry and our customers and shareholders benefit from that distinction. While there are headwinds, we've adjusted our sales to harness the wind efficiently and productively as we navigate the 4th quarter, where we expect a seasonal slowdown as some customers have overspent their annual budget in the first half of the year With the impact showing up in the 3rd and 4th quarters. For the Q3 2023, we generated $588,000,000 in revenue, up 2% compared to the same period in 2022. Sequentially, revenue declined $6,000,000 or 1%. The U.

Speaker 2

S. Represents 75% of our revenue. For the Q3, sequential U. S. Revenues were resilient, down 2% Despite the U.

Speaker 2

S. Rig count decline of 10% during the quarter, many believe we are approaching the bottom Both in terms of market activity as reported by the level of operating drilling rigs and in terms of deflationary pricing on line pipe. For example, pricing on line pipe has declined for 17 consecutive months as reported in the November Pipe Logics report, But the rate of decline slowed significantly compared to September and its slowest rate since prices began to fall in May of 2022. Even with these dynamics, our sourcing team in combination with sales and operations has done an outstanding job Proactively managing the appropriate inflow and disposition of pipe inventory. 3rd quarter gross margins were up 20 basis points 22.8 percent as we proactively managed our pipe product lines and optimized product mix from growth in our U.

Speaker 2

S. Process Solutions business. And for the Q3, EBITDA remained strong at $46,000,000 or 7.8 percent of revenue. In the U. S, revenue was $448,000,000 a decrease of $8,000,000 or 2% sequentially Due to drilling and completions activity impacting pipe and valve project sales in the period.

Speaker 2

U. S. Energy Centers revenues Decreased 3% sequentially, better than the 10% decline in U. S. Operating rigs.

Speaker 2

Our increasing traction in the energy evolution space Provided further gains for DNOW as customers trust DNOW solutions and products to support their projects in growing both Renewables Natural Gas for RNG and Carbon Capture and Storage Markets. To name a few examples, we provided pipe valves and fittings or PVF For a plant expansion that increases the CO2 capture per year by an additional 1,500,000 metric tons. The CO2 was transported by the customer through a pipeline and is injected into an underground sandstone storage site 1 mile beneath the surface. We provided PVF to a long term oil and gas customer for their carbon capture plant expansion that will capture an additional 1.2 metric tons of CO2 per year upon completion. We continue to grow our carbon capture revenues with both new and legacy customers.

Speaker 2

As a third example, we continue to see incremental PBF revenues tied to a carbon capture project from a gas utility customer who we highlighted last quarter. We are seeing more investment in CCUS type projects in the U. S. And we've seen increased opportunities with our current customers Who trust DNOW's model of integrity and supply chain expertise to achieve their respective de carbonization goals. The burgeoning CCUS market is currently at the early stage of a multiyear growth cycle and our strategy Its focus has positioned DNOW as a leader in this space.

Speaker 2

We added revenue from the implementation of a new material management program within IOC's midstream operating gas plant. We expect revenue with this customer to grow as more sites are onboarded. Also, we expanded revenue and market share by securing a new 3 year MRO contract with an operator in the Rockies. Revenue from our workover rig programs remained steady in the quarter. Our customers tell us that Our Workover rig program not only provides them with efficiencies to get products to market, but it also helps lower Scope 2 emissions That would have otherwise been admitted using a more traditional logistics model to support well maintenance programs.

Speaker 2

And our Supercenter model provides us the ability to onboard new customers without increasing roofline expense. In the Northwest, our Williston, North Dakota and Casper, Wyoming Supercenters are growing and enabled DNOW to expand regional project revenues. We experienced revenue growth with several large operators on project wins tied to gathering projects, centralized tank battery builds And midstream compressor stations. We provided actuated valves to several E and Ps and midstream companies As well as centralized tank battery projects to operators in the Powder River and Uinta Basins. We continue our project And day to day success in the midstream sector providing a variety of PVF pumps and fabricated equipment to a number of operators.

Speaker 2

And we extended a 2 year line pipe agreement with a gas utility customer. Our U. S. Process Solutions business grew to a record 30% of our U. S.

Speaker 2

Segment in the Q3. Demand for delivery of LAC units, pressurized vessels, instrument air systems and pump packages Remained high as operators completed gathering systems, well site onshore facilities and midstream takeaway projects. Midstream inquiries and activity remained high as customers tie in upstream production and evaluate projects. In non oil and gas markets, we were successful in capturing revenue by providing several large pumps to a Rockies Brewing Company. We also provided several vertical turbine pumps to a wastewater treatment facility.

Speaker 2

In the mining industry, we provided pumps, compressors And specialty valves in mines where rare earth minerals like lithium, trona, copper and gold are extracted. Our industrial air compressor saw demand improve in the food and beverage market as we provided units to customers in several states. In our FlexFlow business, we are seeing increased activity for our trailer mounted H pumps for produced water disposal And for jet pump rentals, which provide primary artificial list solutions for initially completed wells. Demand increased for our EcoVapor 02 oxygen elimination equipment as we sold a number of units used in the purification of biogas from sources such as swine and dairy farms as well as gas collected from landfills to be sold as renewable natural gas. We also sold a number of sulfur sentinel's ecovapers H2S removal units to major producers at well site onshore tank battery facility.

Speaker 2

Our EcoVapor solutions are becoming a key component Towards advancing our customers' ability to reduce their emissions footprint from upstream oil and gas sites. Furthermore, our EcoVapor product line continues to expand into the renewable natural gas space using their natural gas upgrading technologies to help landfills As well as dairy and swine farm operators convert their bio waste emissions into sellable RNG. In Canada, we further enhanced our fulfillment model, thanks to the incredible hard work and planning from our teams as we hosted a successful grand opening event for our new Edmonton Nisku facility in September. It was well attended by our customers, suppliers, internal teams And dignitaries such as the local member of the legislative assembly. The supercenter infrastructure is designed to regionally grow revenues efficiently.

Speaker 2

Canada revenues were $68,000,000 for the quarter, a 3% sequential increase. The 3rd quarter revenue was lower than expected Due to disrupted market activity as crude production fell to the lowest level in several years amid maintenance at oil sands mines And continued takeaway capacity constraints. And as a result of wildfire outbreaks, several of our top Canadian oil sands Customers were forced to shut in production during the Q2, resulting in lower production and the delayed startup of drilling completion activities Post spring breakup impacting DNOW's revenue during the Q3. Despite that, our Central Canada Fiberglass business strengthened As we added new customers and saw shipments increase the way we would expect exiting the freeze thaw period. Free International revenue was $72,000,000 sequentially flat and up $16,000,000 or 29% on a year over year basis.

Speaker 2

Our most active regions continue to be the U. K, Middle East and Australia and all three remained essentially flat sequentially. Rig counts internationally declined 3 months in a row, but offsetting that reversal were specific project deliveries in the 3rd quarter. Activity in the CIS area saw demand for specialty alloy valves that will be delivered over the next several quarters. On the notable wins front, DNOW MacLean secured a multiyear contract with an IOC to provide light LED lighting Great in many of their existing operating facilities.

Speaker 2

In Australia, we provided electrical cable to an operator for a renewable project. In the Middle East, we provided coated steel for flow line projects tying in their newly drilled wells in the joint operations WAPRA zone And coiled line pipe for a gathering project in Abu Dhabi. Moving on to our digital initiatives. Our Digital Now revenue as a percent of total SAP revenue for the quarter was 46% versus 48% in 2Q 2023, a result of customer and project billing mix. We went live on an e commerce implementation with the U.

Speaker 2

S.-based E and P during the quarter With over 100 users complete with customized B2B approvals that use our shop. DNOW dotcom channel to procure PBF and MRO products. During the quarter, we invested in our day to day operations By modernizing the technology used at our supercenter and branches to improve the productivity of our people. By deploying a new warehouse mobility device, our employees are able to reduce the time and effort required to create sales orders, Perform picking, packing, shipping and receiving activities. In addition, the mobility device is used to improve inventory accuracy.

Speaker 2

The new devices are significantly faster, smaller, are more efficient and easier to use than the prior units. The new technology enables DNOW to enhance fulfillment processes by providing improved levels of digital security, while enabling higher levels of efficiency and combining state of the art digital technology with mobility. In terms of capital allocation, We continue to actively pursue M and A opportunities with focus on larger deals that will allow us to enter new markets and diversify our product offerings. We are steadfast in our commitment to seek margin accretive opportunities in diverse end markets and emerging technologies to enable us to capitalize on market trends and to enhance durability in our performance in a dynamic and Evolving Energy Landscape. During the Q3, we repurchased $5,000,000 worth of shares at an average price of 10.65 Through the end of the Q3, we purchased $56,000,000 worth of shares out of the $80,000,000 authorized through December 2024.

Speaker 2

With that, let me hand it

Speaker 3

over to Mark. Thank you, Dave, and good morning, everyone. Total Q3 2023 revenue It was $588,000,000 down $6,000,000 or 1% from the Q2 of 2023. On a year over year basis, Q3 2023 revenue was up $11,000,000 or 2%. EBITDA excluding other costs or EBITDA for the Q3 was $46,000,000 or 7.8 percent of revenue And year to date 2023 EBITDA was $140,000,000 or 7.9 percent of revenue.

Speaker 3

The U. S. Revenue for the Q3 2023 totaled $448,000,000 a decrease of $8,000,000 or 2% from the Q2 of 2023. In Canada, for the Q3, revenue totaled $68,000,000 an increase of $2,000,000 or 3% from the Q2 of 2023. International revenue for the Q3 of 2023 was $72,000,000 Flat sequentially and up $16,000,000 or 29% when compared to the Q3 of 2022.

Speaker 3

Gross margins for the Q3 were 22.8% or up 20 basis points sequentially. Warehousing, selling and administrative or WSA for the quarter was $97,000,000 or $1,000,000 lower sequentially. In the Q3, we reported $7,000,000 of depreciation and amortization expense. Moving to operating profit by geographic segments. In the Q3, the U.

Speaker 3

S. Delivered $29,000,000 in operating profit, while the Canadian and International segments operating profit of $6,000,000 $2,000,000 respectively. Moving to income taxes, the effective tax rate for the 3 months ended September 30, 2023 was 5.4 percent on a GAAP basis. I remind you this is the effective tax rate that is calculated on a GAAP basis from the face of the income statement and is below the typically expected tax rate at these earnings levels due to the income tax expense provision on the income statement, which includes a favorable tax benefit from the changes in the tax valuation allowance on our deferred tax assets. As such, this is why when imputing our non GAAP tax rate, we exclude such income tax benefits.

Speaker 3

For modeling purposes, the non GAAP effective tax rate was approximately 26% for 3Q 2023. And for estimating an effective tax rate for the go forward quarter year for modeling net income excluding other costs could approximate 28% Tax rate and excludes the favorable impact from changes in the valuation allowance. Given DNOW's level of profitability in the U. S. And abroad, it is In the future period, we could release portions of our valuation allowance as reported for GAAP.

Speaker 3

At that point, we expect that our go forward GAAP effective tax rate We'll be more closely aligned with our non GAAP effective tax rate. From a cash perspective, we don't expect to pay U. S. Federal cash income taxes for 2023 or 2024 due to available net operating loss carryforwards. Net income attributable to NOW Inc.

Speaker 3

For the 3rd quarter was $35,000,000 or $0.32 per fully diluted share. And on a non GAAP basis, Q3 2023 Net income attributable to NOW Inc. Excluding other costs was $28,000,000 or $0.25 per fully diluted share. Moving to the balance sheet. At the end of the quarter, we had 0 debt and a cash position of $194,000,000 Cash decreased by $9,000,000 in the 3rd quarter as we invested in the growth of our business and continue to repurchase common stock in the quarter to return value to shareholders.

Speaker 3

We ended the quarter with total liquidity of $547,000,000 which comprises of our net cash position of $194,000,000 And $353,000,000 in additional credit facility availability. Our existing $500,000,000 revolving credit facility Extends into December of 2026, providing DNOW with uninterrupted access to capital under the facility for the next 3 years. Accounts receivable was $396,000,000 a decrease of $21,000,000 from the 2nd quarter. Days sales outstanding, DSO, was 61 days at the end of the 3rd quarter, an improvement of 3 days sequentially. Inventory was $415,000,000 at the end of the 3rd quarter, a decrease of $9,000,000 from the 2nd quarter with an improved annual turn rate of 4.4 times.

Speaker 3

Accounts payable was $301,000,000 at the end of the 3rd quarter, a decrease of $63,000,000 from the Q2. The timing of inventory receipts impacted the ending payable balance this quarter compared to the elevated levels in June. And for the Q3 of 2023, working capital, excluding cash as a percentage of our 3rd quarter annualized revenue, was 17.7%. In the 3rd quarter, we generated $4,000,000 of cash from operating activities consisting of the Q3 earnings contribution and changes in net working capital. We achieved better than expected free cash With a breakeven free cash flow quarter, including capital expenditures in the Q3 of $4,000,000 As we invested in revenue generating rental assets for EcoVapor and FlexFlow.

Speaker 3

For the 9 months ended September 30, 2023, free cash flow accumulated to $68,000,000 Last quarter, we raised our 2023 to $120,000,000 in cash flows from operating activities and we'll work to deliver $100,000,000 in free cash flow in 2023. This demonstrates how our focus on the fundamentals and discipline managing the business has positioned DNOW to generate cash through the cycles, which bodes well for future growth and capital allocation plans. We continue to execute our share repurchase program that is authorized through December 31, 2024 with additional repurchases of $5,000,000 in the quarter. As of September 30, 2023, our cumulative repurchases Under our $80,000,000 authorized share repurchase program equaled $56,000,000 Our commitment to growing the company through accretive organic growth and acquisitions remains a key priority, while also having the ability to repurchase shares opportunistically As we use the tools in our broadened capital allocation framework to generate attractive shareholder returns without deviating from our disciplined approach to balance sheet management. We continue to be debt free, have no interest payments on debt and keep cash flow generation a priority.

Speaker 3

And with that, let me turn the call back to Dave. Thank you, Mark.

Speaker 2

Now switching to our outlook for the Q4 of 2023. In the U. S. And Canada, we expect revenue to be sequentially lower due to fewer business days, more holidays And customer budget exhaustion. In international, we expect activity to be relatively flat sequentially.

Speaker 2

Rounding now to full year 2023 versus 2022, we expect full year revenue growth of approximately 8%, at the low end Of our 8% to 12% guidance that we set on our February call, despite U. S. Rig counts declining every month this year, Driving the removal of more than 150 U. S. Rigs since year end Approximate 2022 absolute EBITDA dollar levels.

Speaker 2

But unlike 2022 where DNOW had breakeven cash flow from operations And free cash flow consumption of $9,000,000 in 2023, we could generate approximately $120,000,000 in cash from operations or $100,000,000 in full year 2023 free cash flow. I want to close with an important update regarding our brand. We will be transitioning away from the use of DistributionNOW, the DistributionNOW naming convention and we will be known as DNOW going forward. DNOW is already the most consistently referred to name for our company and the name we will align around going forward. The decision to amplify the DNOW brand is rooted in our commitment to distinguish our company as a valued solutions based product and service provider centered around our ethos, inspire one another, delight the customer and fuel the future.

Speaker 2

A refreshed brand will help communicate our vision more effectively, fostering a sense of unity and purpose. We will continue to support our valuable affiliated brands, For example, TS and M, Odessa Pumps, EcoVapor, McLean, Power Service, FlexFlow and Dura. I am confident that this branding change will support us for even greater success in the future. Finally, We are excited that our Q3 earnings proved resilient and produced our best year to date earnings since becoming a public company. Our gross margins remain strong as we optimize product mix and proactively manage our pipe product lines.

Speaker 2

We are realizing the benefits of our energy evolution and market adjacent strategies as U. S. Process solutions expanded, aided by demand for fluid handling equipment and increased eco vapor product sales used in renewable natural gas decarbonization projects. Maximizing shareholder value is our top priority. Our focus is on leveraging our debt free balance sheet With $547,000,000 of total liquidity, generating higher levels of free cash flow, pursuing margin accretive acquisitions and market share And executing our share repurchase program.

Speaker 2

Looking forward, we believe that DNOW will continue on a growth path next year As customers add rigs from a Q4 2023 rig bottoming, from customers resetting their budgets, From additional energy evolution projects, from gains in adjacencies in the midstream, from acquisition activity which we expect to continue, In an environment of strong oil prices, which are averaging near $80 over the last 12 months, coupled with our demonstrated ability To defy gravity so far in 2023, we did this through selective share expansion and M and A. Through our supercenter footprint, efficiencies and a laser focus on cost management and delighting our customers. As such, we see support for growth in 2024, which we'll provide an update for on our February call. With that, let's open the call for questions.

Operator

All right. Our first question comes from the line of Nathan Jones from Stifel. Nathan, please go ahead.

Speaker 4

Good morning, everyone.

Speaker 2

Good morning, Nathan. Good morning.

Speaker 4

I jumped on live, so I apologize if I asked A question that you've already answered. I just want to start with the expectation for regrowth in 2024. Can you talk about What intelligence you have for that outlook? What customers are saying to you in terms of their capital spending plans in 20 24. I know we should get some of those budgets here over the next month or 2, but just any information you have on early looks into that kind of thing that gives you confidence that you're going to see I didn't recast in 2024.

Speaker 2

So, well, I think my premise is we'll see growth from where we're at today. So, joint contractors, some of them are saying they're going to add rigs. There's a lot of speculation that we're at a low point in rig count And that rigs will be added back at some level. So there's that. So I expect some growth from where we're at.

Speaker 2

And then I'm Comforted by the fact that we've been able to retain revenues even though we've seen a pretty strident Decline in U. S. Rigs during the year, which is where we experienced about 75% of our revenue. So I believe we've been we have a strong market position That we've gained some share in this meantime that the market is bottoming, expected to grow from here. And then we're real focused on our what we call our energy evolution strategy, where we're focused on carbon capture And renewable natural gas, and adjacencies in our space where we could sell pumps into other markets like Some of which I talked about on the call.

Speaker 2

And then M and A. So growth from where we're at, Strength in retaining revenues even in a declining or shrinking market effectively in the United States, our bread basket, Pursuing adjacencies in carbon capture and new businesses, which is a big focus for us for the last couple of years. And then M and A, which To me, it's kind of a swing vote in achieving some meaningful growth going into the New Year.

Speaker 4

I guess my follow-up is on M and A. I mean, the stock price is trading at a pretty low multiple, pretty low multiple of EBITDA, pretty low multiple of free cash flow. How do you look at the balance between I know strategically you guys are looking to do M and A, With the stock trading at these multiples, it's pretty hard to find accretive deals that are accretive to the share price immediately versus Repurchasing your own stock, which doesn't have the same strategic value, but you're getting company very well at pretty low price.

Speaker 2

Yes. I think that's a great point. So 3 to 5 years ago, we had a much Heftier multiple and we could we had more currency in that multiple to make to do deals At better prices. The fact is the sellers recognize the kind of market we're in the energy space and we recognize that. We're going to try to do deals within that current Trading multiple, we may of course consider the revenue synergies that would come from the deal, any cost Synergies that might come, that will be factored in as well.

Speaker 2

But we do have a narrower trading range that does limit The M and A opportunities, but we've done some smaller, but really good deals in the last couple of years. Now we're looking at bigger deals and we're having some Mutual interest. So I agree with your sentiment. I think we understand that and I think sellers do as well And we're going to try to take advantage of that appreciation for where we're at in the market.

Speaker 4

Okay. It's good to know that you're considering that as we go forward. Thanks for taking my questions.

Speaker 2

Thank you, Nathan. Thanks.

Operator

All right. Our next question comes from the line of Cole Kuznets from Stephens. Cole, Please go ahead.

Speaker 5

Hey guys, thanks for taking my questions.

Speaker 2

You're welcome. Good morning, Cole. Good morning, Cole.

Speaker 5

Can you guys talk through the gross margin or OpEx dynamics as we enter into Q4? I think on my math, the implied 4Q is down pretty meaningfully sequentially. And then how are you guys thinking about margins as we approach 2024 and maybe some initiatives that DNOW is driving to support structurally higher gross margins longer term.

Speaker 2

Okay. I'll speak to the gross margin and maybe Mark will chime in about OpEx or WSA. So we said on our Last call that we expect a little improvement in gross margins suggesting that we're kind of at maybe a normalized run rate in the second and 3rd quarters of 2023. And we said we'd get about a 20 basis points increase in gross margins in the Q3 and we achieved that. So we feel like This is kind of a good normalized level for us right now and maybe a good starting point for 2024.

Speaker 2

Of course, we're always focused on high grading our businesses, focused on higher margin product lines, businesses, locations, M and A opportunities, etcetera, with the idea of growing those gross margins over time, which we've been very successful In doing over the last several years. So but that's kind of a starting point for gross margins. In terms of SG and A Mark, I don't know if you want to add any color, but we or as I'll be saying, but we consider it to be pretty flat, but you want to give some comments on that?

Speaker 3

Yes, absolutely. I think the our ability in the Q3 to hold WSA relatively flat, the expectation is that's probably a Good number for the Q4 in that 2Q, 3Q range. Nothing else to add on the margin side outside kind of defying that margin decline that we were having over the Past few quarters being able to arrest that and show growth in gross margin this quarter gives us confidence into that plateauing And being able to continue to optimize that margin going forward long term.

Speaker 5

Awesome. Thanks. And then higher level kind of on the energy evolution topic, Can you guys talk through what customer conversations look like? And kind of going forward, are these wins going to be More so with existing customers or potentially with new customers? And at this point in time, what percent of revenue mix comes from those Energy Evolution Projects.

Speaker 5

Thanks.

Speaker 2

I'll start on that Brad. So I think For more of our oil and gas opportunities, those are going to come from our existing customers, our biggest customers who are investing heavily In the energy transition or the new energy or energy evolution as we call it. So I think the oil and gas oriented Projects, opportunities will be with existing customers. And with the new some of our big growth in the second half This year is happening in the RNG space, primarily through our EcoVapor acquisition. Those are new customers or at least new customers to DNOW.

Speaker 2

And Some of that is new customers to Ecovaport as well. So outside of oil and gas, we'll see some of that activity happening or most of that activity happening with new Brad, is there anything you want to add to that to answer Cole's question?

Speaker 1

Yes. I'll just add that the projects that we've called out on our prepared remarks, both The last in 2Q and this quarter, I've been with existing customers And really existing product lines that we carry predominantly in our inventory. So it's a nice extension of a growing end market that we're able to service with our existing infrastructure and the current investment in working capital that we have today. And we're tracking a number of our projects, Cole, and they every month, every quarter that tracking matrix we have grows. So we're seeing market expansion here as our current customers invest more And the energy evolution, looking at decarbonization and whether it's through carbon capture or whether it's through just Reduction of current emissions that they have, we've been experiencing that for a number of quarters here where the kind of the low Hanging fruit is to remove the methane emissions and go to more aeronematic systems in the oil and gas operating field.

Speaker 1

But now we're starting to see much bigger projects that we're tracking, specifically around more infrastructure tied to Carbon capture, CO2 pipelines, sequestration. So we're excited about the future, certainly about The next few years of where that market is going and the growth opportunity, not only in the U. S, but also internationally as well.

Speaker 5

Awesome. Thanks. That's great color. I'll turn it back.

Speaker 3

Thanks, Paul.

Operator

All right. Thank you. Our next question comes from the line of Jeff Robertson from Water Tower Research. Jeff, please go ahead.

Speaker 6

Thank you. Good morning. Dave, can you talk you all have talked before about the line of sight I have on well pad construction type projects. When you look at RNG and CCS, do you have a longer line of sight From customers over what kind of business you might

Speaker 2

be able to

Speaker 6

generate in those areas in 2024 and even 2025 as Construction starts to pick up and people take a long term view of those opportunities?

Speaker 2

Brent?

Speaker 1

Yes, Jeff. Good morning. We talked a lot about the well site. That's certainly been DNOW's kind of bread and butter. We provide all the pipe valves and fittings for the gathering systems and also the fabricated equipment and pump packages To separate oil, gas and produced water and move those to the midstream sector, as part of Looking at carbon capture, we've been involved with a number of our customers on as they use Carbon dioxide, CO2 for enhanced oil recovery, we've been involved in some of those projects.

Speaker 1

Now we're starting to see Other technologies come to market like direct air capture, and we partaked in some of those projects. I think we're kind of early here in the cycle is really kind of looking at a standardized footprint going forward. I think our customers are still Doing a lot of engineering and FID work in this area, so I think that remains to be seen. But what we like about it is, It's our current customers that we currently have agreements with, terms with. We have the technical aptitude to support our customers As they go through this process, so we really like that aspect about the CCUS type market.

Speaker 1

And then the RNG market, we Previously, we have provided pipe valves and fittings as players move into that space Connect to different farm systems, whether it's dairy or swine farms to a gas processing facility to process I guess to be able to sell that product to the midstream. And then with our EcoVapor acquisition December 2022, it gave us a technical solution To sell into that end market. And so we feel like that's unlocking more opportunities for us Not only in the vast number of RNG sites that are currently being explored and developed, But also additional products that we might be able to sell into the RNG as we get more experience with that gas processing side as well as the standard pipe valves and fittings that go along with it. So we like those 2 sectors. It's a great Growth environment for us looking into the future and we're looking to expand where we can in both of those end markets.

Speaker 6

Are there acquisition opportunities that would support the Process Solutions business that would Give you more penetration into those types of opportunities?

Speaker 1

Jeff? Yes, I would say there are. We've looked at a few deals. They range in from technology to Equipment packages that are that could append or Be sold in connection with the current technical and engineering capability that we have. And then we also look for Certainly, one of our acquisition strategies is to look for more exclusivity of territory or manufacturer of products in a certain geography like we do On our pump package and our pump lines.

Speaker 1

So we're always looking for accretive margins on M and A. We're looking for Some exclusivity where we have dedicated opportunity to sell products into certain geographies or certain end markets. So The answer is yes.

Speaker 6

And last question, Mark, you talked about WSA, which has been running Just shy of $100,000,000 for the last couple of quarters. As you look at the 2024 business, is that Do you think that's a good number for as you look out into next year per quarter?

Speaker 3

Yes, I think a lot of it, Jeff, will be Pending on the trajectory of growth into 2024, I can tell you we're committed to Ensuring that we maximize the productivity of that WSA line. And so being able To hold it 97 this quarter down from 98. The 97, 98 looks good into the 4th quarter Really look at what it could be going forward depending on the trajectory of growth next year. Certainly willing to invest And people and facilities and things that grow that middle line if we're going to achieve the top line Accretion that we want. So a little early, but in February, I should have a better view with you there.

Speaker 3

Thanks, Jeff.

Speaker 5

Thank

Speaker 2

you.

Operator

All right. There are no further questions at this Mr. Brad Wise, I turn the call back over to you.

Speaker 1

Okay. Thank you, everyone, for your questions today and your interest in DNOW. We look forward to talking to everyone on the Q4 and full year 2023 earnings conference call in February of next year. Have a great day, and I'll turn it back to the operator to conclude the call.

Operator

Perfect. This concludes today's conference call. You may disconnect.

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Earnings Conference Call
DNOW Q3 2023
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