Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto presented in this Quarterly Report and the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in Item 1A. "Risk Factors” in this Quarterly Report and in our Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission, or the SEC, on February 28, 2018 and the section entitled “Forward-Looking Statements” appearing elsewhere in this Quarterly Report.
Overview
We are an integrated, growth-oriented company serving both the oil and gas and the electric utility industries in North America and US territories. Our primary business objective is to grow our operations and create value for stockholders through organic opportunities and accretive acquisitions. Our suite of services includes pressure pumping services, infrastructure services, natural sand proppant services, contract land and directional drilling services and other energy services, including coil tubing, flowback, cementing, acidizing, equipment rental, crude oil hauling, water transfer and remote accommodations. Our pressure pumping services division provides hydraulic fracturing services. Our infrastructure services division provides construction, upgrade, maintenance and repair services to the electrical infrastructure industry. Our natural sand proppant services division mines, processes and sells proppant used for hydraulic fracturing. Our contract land and directional drilling services division provides drilling rigs and crews for operators as well as rental equipment, such as mud motors and operational tools, for both vertical and horizontal drilling. In addition to these service divisions, we also provide coil tubing services, pressure control services, flowback services, cementing services, acidizing services, equipment rentals, crude oil hauling services, water transfer and remote accommodations. We believe that the services we offer play a critical role in increasing the ultimate recovery and present value of production streams from unconventional resources as well as maintaining and improving electrical infrastructure. Our complementary suite of services provides us with the opportunity to cross-sell our services and expand our customer base and geographic positioning. We are exploring several opportunities to expand our business lines including, but not limited to, full service transportation, telecommunications, impacts due to the pending rule changes implemented by the international maritime organization, or IMO, in 2020 and general industrial manufacturing as we shift to a broader industrial focus.
On June 5, 2017, we acquired Sturgeon Acquisitions LLC, or Sturgeon, and Sturgeon's wholly owned subsidiaries Taylor Frac, LLC, Taylor Real Estate Investments, LLC and South River Road, LLC. Prior to the acquisition, we and Sturgeon were under common control and, in accordance with generally accepted accounting principles in the United States, or GAAP, we have accounted for this acquisition in a manner similar to the pooling of interest method of accounting. Therefore, our historical financial information for all periods prior to and including the date of this acquisition included in this Quarterly Report on Form 10-Q has been recast to combine Sturgeon's financial results with our financial results as if the acquisition had been effective since Sturgeon commenced operations.
Third Quarter 2018 Highlights and Recent Developments
Extended Pressure Pumping Services and Sand Supply Agreements with Gulfport
On July 10, 2018, we amended our existing agreement with Gulfport pursuant to which we, through our subsidiary Pressure Pumping, provide hydraulic fracturing, stimulation and related completion and rework services to Gulfport with two dedicated frac spreads and related equipment. The amendment extended the term of the existing pressure pumping agreement until December 31, 2021, unless it is terminated earlier in accordance with its terms, and expanded the service area to include both Ohio and Oklahoma. The pressure pumping amendment also provides that Gulfport has the right to suspend pressure pumping services for up to one crew upon a minimum of 90 days prior written notice to Pressure Pumping, with no further payment or other obligation to Pressure Pumping for such suspended crew. Pressure Pumping will be obligated to resume any such suspended pressure pumping services upon 90 days prior written notice by Gulfport, unless such notice is waived by Pressure Pumping.
The pressure pumping amendment also provided for the initial suspension of pressure pumping services to Gulfport for a period July 1, 2018 through September 30, 2018, during which period Pressure Pumping could use the dedicated frac spreads for other customers. If during the initial suspension period Pressure Pumping’s use of the dedicated frac spreads for other customers does not reach a certain level, then Gulfport agreed to pay costs to Pressure Pumping and Pressure Pumping
agreed to perform services for Gulfport with respect to such amounts. In addition, if during such initial suspension period Pressure Pumping was unable to utilize the dedicated frac spreads for other customers, Gulfport agreed to pay recoupment costs to Pressure Pumping during the period of October 1, 2018 to December 31, 2018. No amounts were deferred to the period between October 1, 2018 and December 31, 2018.
On August 6, 2018, we amended our existing agreement with Gulfport pursuant to which we, through our subsidiary Muskie Proppant, sell and deliver specified amounts of sand to Gulfport. The amendment extends the term of the existing sand supply agreement until December 31, 2021.
Amended and Restated Credit Facility
On October 19, 2018, Mammoth entered into an amended and restated five-year asset backed revolving credit facility led by PNC Capital Markets with a maximum revolving advance amount at closing of $185 million and the potential to increase the facility by up to an additional $165 million. For additional information related to this amended and restated agreement, see "—Liquidity and Capital Resources—Our Revolving Credit Facility" below.
Industry Overview
Oil and Natural Gas Industry
The oil and natural gas industry has traditionally been volatile and is influenced by a combination of long-term, short-term and cyclical trends, including the domestic and international supply and demand for oil and natural gas, current and expected future prices for oil and natural gas and the perceived stability and sustainability of those prices, production depletion rates and the resultant levels of cash flows generated and allocated by exploration and production companies to their drilling, completion and related services and products budget. The oil and natural gas industry is also impacted by general domestic and international economic conditions, political instability in oil producing countries, government regulations (both in the United States and elsewhere), levels of customer demand, the availability of pipeline capacity and other conditions and factors that are beyond our control.
Demand for most of our oil and natural gas products and services depends substantially on the level of expenditures by companies in the oil and natural gas industry. The levels of capital expenditures of our customers are predominantly driven by the oil and natural gas prices. Over the past several years, commodity prices, particularly oil, has seen significant volatility with pricing ranging from a high of $110.53 per barrel on September 6, 2013 to a low of $26.19 per barrel on February 11, 2016. During early 2017, oil prices stabilized around the $50 per barrel level and started a gradual upward trend which continued into the third quarter of 2018, where oil prices averaged $69.60.
We anticipate demand for our oil and natural gas services and products will continue to be dependent on the level of expenditures by companies in the oil and natural gas industry and, ultimately, commodity prices. If commodity prices stabilize at current levels or continue to increase, we expect the capital expenditures of our customers to increase, which in turn should increase demand for our services and products, particularly in our completion and production, natural sand proppant and contract land and directional drilling businesses. Decreases in commodity prices, however, may result in a reduction in the capital expenditures of our customers and impact the demand for our drilling, completion and other products and services.
We expect the temporary challenges related to customer budget limitations to persist through the end of the year. Based on current feedback from customers, we expect exploration and production companies to take extended breaks in the fourth quarter of 2018 as a result of budget exhaustion. We anticipate that these extended breaks will reduce activity levels and pricing for our services in the fourth quarter of 2018. We will continue to adjust our cost structure to market conditions, but we do not believe it is necessary to significantly reduce costs or infrastructure for a temporary slowdown in activity levels and we are actively maintaining our equipment during this temporary slowdown in activity levels. In 2019, we expect a rebound in activity from second half of 2018 levels as customer budgets are refreshed.
Energy Infrastructure Industry
In 2017, we expanded into the electric infrastructure business, offering both commercial and storm restoration services to government-funded utilities, private utilities, public investor owned utilities and cooperatives. Since we commenced operations in this line of business, substantially all of our infrastructure revenues has been generated from storm restoration work, primarily from PREPA due to damage caused by Hurricane Maria. On October 19, 2017, Cobra and PREPA entered into an emergency master services agreement for repairs to PREPA’s electrical grid. The one-year contract, as amended, provides for payments of up to $945.4 million. On May 26, 2018, Cobra and PREPA entered into a new one-year, $900.0 million master
services agreement to provide additional repair services and begin the initial phase of reconstruction of the electrical power system in Puerto Rico. PREPA is currently subject to bankruptcy proceedings pending in the U.S. District Court for the District of Puerto Rico. As a result, PREPA's ability to meet its payment obligations under the contract will be largely dependent upon funding from the Federal Emergency Management Agency or other sources. In the event PREPA does not have or does not obtain the funds necessary to satisfy its obligations to Cobra under the contracts, terminates the contracts, curtails our services prior to the end of the contract terms or otherwise fails to pay amounts owed to us for services performed, our financial condition, results of operations and cash flows would be materially and adversely affected. In addition, government contracts are subject to various uncertainties, restrictions and regulations, including oversight audits by government representatives and profit and cost controls, which could result in withholding or delayed payments to us or efforts to recover payments already made.
The demand for our infrastructure services in the continental United States has increased since we expanded into the infrastructure business. Our infrastructure teams are working for multiple utilities primarily across the northeastern, midwestern and southwestern portions of the United States. We believe we will be able to continue to grow our customer base in the continental United States and increase the backlog of work over the coming years. In Puerto Rico, the reconstruction process is just beginning with significant front-end engineering required prior to the reconstruction of the electric grid. Staffing levels in Puerto Rico have fluctuated between 500 and 600 people over the past 60 days and we anticipate a ramp up in reconstruction projects throughout 2019.
Natural Sand Proppant Industry
In the natural sand proppant industry, demand growth for frac sand and other proppants is primarily driven by advancements in oil and natural gas drilling and well completion technology and techniques, such as horizontal drilling and hydraulic fracturing, as well as overall industry activity growth. Demand for proppant declined in 2015 and throughout most of 2016 with reduced well completion activity; however, we believe that demand for proppant will continue to grow over the long-term, as it did throughout 2017 and the first half of 2018. Over the past 18 months, several new and existing suppliers announced planned capacity additions of frac sand supply, particularly in the Permian Basin. We expect frac sand supply to exceed growth in demand over the coming months and quarters. While planned capacity may exceed the expectations for frac sand demand, the collectively available industry capacity is constrained due to (i) availability of the grades of sand that are currently in demand, (ii) general operating conditions and normal downtime and (iii) logistics constraints. The industry is expected to add significant capacity over the next 12 to 18 months, particularly in the Permian Basin. We believe that the coarseness, conductivity, sphericity, acid-solubility and crush-resistant properties of our Northern White sand reserves and our transportation infrastructure afford us an advantage over many of our competitors and make us one of a select group of sand producers capable of delivering high volumes of frac sand that is optimal for oil and natural gas production to all major unconventional resource basins currently producing throughout North America.
During the first half of 2018, constraints in the rail system adversely impacted frac sand deliveries from our Taylor sand facility in Jackson County, Wisconsin. As a result, we estimate production at our Taylor facility was 23% lower during the first half of 2018 than it would have been in the absence of these constraints. These rail system constraints were largely alleviated during the third quarter of 2018. Production at our Piranha facility was not impacted by these rail constraints, however, another railroad recently instituted a policy that shifts from utilizing unit trains (100 car dedicated trains specifically set up to move sand in large quantities) to manifest shipments (smaller number of sand cars coupled with other types of loads to make up a full train shipment). This shift to manifest shipments could impede the ability to move sand from our Piranha facility.
Results of Operations
Three Months Ended September 30, 2018
Compared to
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 30, 2018
|
|
September 30, 2017
|
|
(in thousands)
|
Revenue:
|
|
|
|
Pressure pumping services
|
$
|
92,410
|
|
|
$
|
76,655
|
|
Infrastructure services
|
237,052
|
|
|
13,486
|
|
Natural sand proppant services
|
37,010
|
|
|
32,733
|
|
Contract land and directional drilling services
|
15,939
|
|
|
13,644
|
|
Other services
|
21,525
|
|
|
17,425
|
|
Eliminations
|
(19,893
|
)
|
|
(4,638
|
)
|
Total revenue
|
384,043
|
|
|
149,305
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
Pressure pumping services (exclusive of depreciation and amortization of $12,657 and $13,009, respectively, for the three months ended September 30, 2018 and 2017)
|
72,920
|
|
|
56,649
|
|
Infrastructure services (exclusive of depreciation and amortization of $6,582 and $1,039, respectively, for the three months ended September 30, 2018 and 2017)
|
128,304
|
|
|
10,117
|
|
Natural sand proppant services (exclusive of depreciation, depletion and accretion of $4,183 and $3,033, respectively, for the three months ended September 30, 2018 and 2017)
|
30,016
|
|
|
26,083
|
|
Contract land and directional drilling services (exclusive of depreciation of $4,325 and $5,032, respectively, for the three months ended September 30, 2018 and 2017)
|
14,262
|
|
|
11,643
|
|
Other services (exclusive of depreciation and amortization of $4,246 and $5,073, respectively, for the three months ended September 30, 2018 and 2017)
|
21,946
|
|
|
14,679
|
|
Eliminations
|
(19,883
|
)
|
|
(4,638
|
)
|
Total cost of revenue
|
247,565
|
|
|
114,533
|
|
Selling, general and administrative expenses
|
(45,324
|
)
|
|
8,022
|
|
Depreciation, depletion, amortization and accretion
|
32,015
|
|
|
27,224
|
|
Impairment of long-lived assets
|
4,582
|
|
|
—
|
|
Operating income (loss)
|
145,205
|
|
|
(474
|
)
|
Interest expense, net
|
(458
|
)
|
|
(1,420
|
)
|
Other expense, net
|
(400
|
)
|
|
(320
|
)
|
Income (loss) before income taxes
|
144,347
|
|
|
(2,214
|
)
|
Provision (benefit) for income taxes
|
74,835
|
|
|
(1,413
|
)
|
Net income (loss)
|
$
|
69,512
|
|
|
$
|
(801
|
)
|
Revenue
. Revenue for the
three
months ended
September 30, 2018
increased
$235 million
, or
157%
, to
$384 million
from
$149 million
for the
three
months ended
September 30, 2017
. The increase in total revenue is primarily attributable to a
$224 million
increase in infrastructure services revenue during the three months ended
September 30, 2018
, representing 95% of the overall increase.
Revenue derived from related parties was
$23 million
, or
6%
of our total revenues, for the three months ended
September 30, 2018
and
$71 million
, or
47%
of our total revenue, for the three months ended
September 30, 2017
. Substantially all of our related party revenue is derived from Gulfport under pressure pumping and sand contracts. Revenue by operating division was as follows:
Pressure Pumping Services
. Pressure pumping services division revenue increased $15 million, or
21%
, to
$92 million
for the
three
months ended
September 30, 2018
from
$77 million
for the
three
months ended
September 30, 2017
. Revenue derived from related parties was
$16 million
, or
17%
of total pressure pumping revenue, for the three months ended
September 30, 2018
compared to
$47 million
, or
61%
of total pressure pumping revenue, for the three months ended
September 30, 2017
. Substantially all of our related party revenue is derived from Gulfport. Inter-segment revenue, consisting primarily of revenue derived from our sand segment, totaled
$1 million
for each of the three months ended
September 30, 2018
and 2017.
The increase in our pressure pumping services revenue was primarily driven by the startup of our fourth, fifth and sixth pressure pumping fleets in June, August and October 2017, respectively, in the SCOOP/STACK and Permian Basin, which contributed revenue of $34 million during the three months ended
September 30, 2018
compared to $25 million during the three months ended
September 30, 2017
. The number of stages completed decreased slightly to
1,594
for the
three
months ended
September 30, 2018
compared to
1,617
for the
three
months ended
September 30, 2017
primarily due to a decline in utilization.
Infrastructure Services.
Infrastructure services division revenue increased
$224 million
to
$237 million
for the
three
months ended
September 30, 2018
from
$13 million
for the
three
months ended
September 30, 2017
. We generated
$220 million
, or
93%
of total infrastructure services revenue, from our contract with PREPA for repairs to Puerto Rico's electrical grid as a result of Hurricane Maria. For additional information regarding our contracts with PREPA and our infrastructure services, see "Industry Overview - Electrical Infrastructure Industry" above.
Natural Sand Proppant Services.
Natural sand proppant services division revenue increased
$4 million
, or
13%
, to
$37 million
for the
three
months ended
September 30, 2018
, from
$33 million
for the
three
months ended
September 30, 2017
. Revenue derived from related parties was
$4 million
, or
10%
of total sand revenue, for the three months ended
September 30, 2018
and
$14 million
, or
43%
of total sand revenue, for the three months ended
September 30, 2017
. Inter-segment revenue, consisting primarily of revenue derived from our pressure pumping segment, totaled
$18 million
, or
49%
of total sand revenue, for the three months ended
September 30, 2018
and
$3 million
, or
10%
of total sand revenue, for the three months ended
September 30, 2017
.
The increase in our natural sand proppant services revenue was primarily attributable to a
26%
increase in tons of sand sold from approximately
474,933
tons for the three months ended
September 30, 2017
to
598,438
tons for the three months ended
September 30, 2018
, which was partially offset by a
10%
decline in price per ton.
Contract Land and Directional Drilling Services.
Contract land and directional drilling services division revenue increased
$2 million
, or
17%
, from
$14 million
for the
three
months ended
September 30, 2017
to
$16 million
for the
three
months ended
September 30, 2018
. Revenue derived from related parties, consisting of directional drilling revenue from Gulfport and El Toro Resources LLC, or El Toro, was
$1 million
, or
3%
of total drilling revenue, for the three months ended
September 30, 2018
and
$1 million
, or
8%
of total drilling revenue, for the three months ended
September 30, 2017
.
The increase in contract land and directional drilling revenue was primarily attributable to our directional drilling services, which accounted for
$2 million
, or
105%
of the total increase, as a result of increased utilization from 32% for the
three
months ended
September 30, 2017
to 45% for the
three
months ended
September 30, 2018
. Our rig moving services accounted for
$0.4 million
, or
17%
, of the operating division increase, primarily due to increased activity. These increases were partially offset by a
$1 million
decrease in our land drilling services revenue as a result of a decline in average active rigs from
five
for the
three
months ended
September 30, 2017
to
four
for the
three
months ended
September 30, 2018
, partially offset by an increase in average day rates from approximately
$14,800
for the
three
months ended
September 30, 2017
to approximately
$17,170
for the
three
months ended
September 30, 2018
.
Other Services
. Other revenue, consisting of revenue derived from our coil tubing, pressure control, flowback, cementing, acidizing, equipment rental, crude oil hauling, water transfer and remote accommodation businesses, increased $5 million, or
24%
, to
$22 million
for the
three
months ended
September 30, 2018
from
$17 million
for the
three
months ended
September 30, 2017
. Revenue derived from related parties, consisting primarily of equipment rental and cementing revenue from Gulfport, was
$3 million
, or
13%
of total other revenue, for the
three
months ended
September 30, 2018
and
$9 million
, or
52%
of total other revenue, for the
three
months ended
September 30, 2017
. Inter-segment revenue, consisting primarily of revenue derived from our infrastructure and
pressure pumping segments, totaled
$1 million
and
$0.3 million
, respectively, for the three months ended
September 30, 2018
and 2017.
During the second quarter of 2018, we acquired RTS Energy Services LLC, or RTS, a cementing and acidizing business, and WTL Oil LLC, or WTL, a crude oil hauling business. These businesses contributed revenue of $7 million during the
three
months ended
September 30, 2018
. During the
three
months ended
September 30, 2018
, we started a water transfer business in the mid-continent region, which generated $2 million in revenue. Revenue from our coil tubing, oilfield rental and other services decreased $4 million during
three
months ended
September 30, 2018
compared to
three
months ended
September 30, 2017
primarily due to declines in utilization.
Cost of Revenue (exclusive of depreciation, depletion, amortization and accretion expense)
. Cost of revenue, exclusive of depreciation, depletion, amortization and accretion expense, increased
$133 million
from
$115 million
, or
77%
of total revenue, for the
three
months ended
September 30, 2017
to
$248 million
, or
64%
of total revenue, for the
three
months ended
September 30, 2018
. The increase was primarily due to an expansion of our infrastructure services business, which represented a $118 million increase in cost of revenue, as well as an increase in pressure pumping division costs of
$16 million
, primarily related to the addition of three new fleets in 2017. Cost of revenue by operating division was as follows:
Pressure Pumping Services
. Pressure pumping services division cost of revenue, exclusive of depreciation and amortization expense, increased
$16 million
, or
29%
, to
$73 million
for the
three
months ended
September 30, 2018
from
$57 million
for the
three
months ended
September 30, 2017
. The increase was primarily due to the expansion of services into the SCOOP/STACK and the Permian Basin with the addition of three fleets in 2017. As a percentage of revenue, our pressure pumping services division cost of revenue, exclusive of depreciation and amortization expense of $13 million for each of the three months ended
September 30, 2018
and 2017, respectively, was
79%
and
74%
for the
three
months ended
September 30, 2018
and 2017, respectively. The increase in costs as a percentage of revenue was primarily due to an increase in cost of goods sold as a result of selling sand with our service package to customers in the mid-continent region.
Infrastructure Services.
Infrastructure services division cost of revenue, exclusive of depreciation and amortization expense, was
$128 million
and
$10 million
, respectively, for the
three
months ended
September 30, 2018
and 2017. The increase is due to the expansion of our infrastructure business in late 2017 and 2018. The largest components of our cost of revenue include labor-related costs, including contract labor, and travel, meals and lodging expense. As a percentage of revenue, cost of revenue, exclusive of depreciation and amortization expense of
$7 million
and
$1 million
for the three months ended
September 30, 2018
and 2017, respectively, was
54%
and
75%
for the
three
months ended
September 30, 2018
and 2017, respectively.
Natural Sand Proppant Services.
Natural sand proppant services division cost of revenue, exclusive of depreciation, depletion and accretion expense, increased
$4 million
, or
15%
, from
$26 million
for the
three
months ended
September 30, 2017
to
$30 million
for the
three
months ended
September 30, 2018
, primarily due to an increase in cost of goods sold as a result of a
26%
increase in tons of sand sold in the 2018 period. As a percentage of revenue, cost of revenue, exclusive of depreciation, depletion and accretion expense of $4 million and $3 million for the three months ended
September 30, 2018
and 2017, respectively, was
81%
and
80%
for the
three
months ended
September 30, 2018
and 2017, respectively.
Contract Land and Directional Drilling Services.
Contract land and directional drilling services division cost of revenue, exclusive of depreciation expense, increased $2 million, or
22%
, from
$12 million
for the
three
months ended
September 30, 2017
to
$14 million
for the
three
months ended
September 30, 2018
, primarily due to an increase in directional drilling utilization. As a percentage of revenue, our contract land and directional drilling services division cost of revenue, exclusive of depreciation expense of $4 million and $5 million for the three months ended
September 30, 2018
and 2017, respectively, was
89%
and
85%
for the
three
months ended
September 30, 2018
and
September 30, 2017
, respectively.
Other Services
. Other services division cost of revenue, exclusive of depreciation and amortization expense, increased
$7 million
, or
50%
, from
$15 million
for the
three
months ended
September 30, 2017
to
$22 million
for the
three
months ended
September 30, 2018
, primarily due to the acquisition of RTS and WTL in the second quarter of 2018. As a percentage of revenue, cost of revenue, exclusive of depreciation and amortization expense of $4 million and $5 million for the three months ended
September 30, 2018
and 2017, respectively, was
102%
and
84%
for the
three
months ended
September 30, 2018
and 2017, respectively. The increase is primarily the result of start-up costs related to RTS, WTL and water transfer business in the mid-continent region as well as an increase in labor-related costs as a percentage of revenue.
Selling, General and Administrative Expenses
. Selling, general and administrative expenses, or SG&A, represent the costs associated with managing and supporting our operations. During the
three
months ended
September 30, 2018
, we recognized a
$68 million
credit related to the provision for bad debt. Cash SG&A expense increased
$15 million
primarily related to costs incurred for the expansion of our infrastructure business. Following is a breakout of SG&A expenses for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 30, 2018
|
|
September 30, 2017
|
Cash expenses:
|
|
|
|
Compensation and benefits
|
$
|
14,864
|
|
|
$
|
3,577
|
|
Professional services
|
3,267
|
|
|
1,494
|
|
Other
(a)
|
3,701
|
|
|
1,820
|
|
Total cash SG&A expense
|
21,832
|
|
|
6,891
|
|
Non-cash expenses:
|
|
|
|
Bad debt provision
(b)
|
(68,333
|
)
|
|
103
|
|
Stock based compensation
|
1,177
|
|
|
1,028
|
|
Total non-cash SG&A expense
|
(67,156
|
)
|
|
1,131
|
|
Total SG&A expense
|
$
|
(45,324
|
)
|
|
$
|
8,022
|
|
|
|
a.
|
Includes travel-related costs, IT expenses, rent, utilities and other general and administrative-related costs.
|
|
|
b.
|
During the three months ended
September 30, 2018
, the Company received payment for amounts previously reserved in 2017. As a result, during the three months ended
September 30, 2018
, the Company reversed bad debt expense of
$16.0 million
recognized in 2017 and
$53.6 million
recognized in the first half of 2018. The Company expects to receive payment for the 2018 amounts once the Company files its 2018 Puerto Rico tax return and pays any taxes due as calculated by the return. The Company expects that the Puerto Rico 2018 tax return will be filed in mid-2019.
|
Depreciation, Depletion, Amortization and Accretion
. Depreciation, depletion, amortization and accretion increased
$5 million
, or
18%
, to
$32 million
for the
three
months ended
September 30, 2018
from
$27 million
for the
three
months ended
September 30, 2017
. The increase is primarily attributable to an increase in property and equipment as a result of purchases in the second half of 2017 and in 2018, resulting in increased depreciation expense.
Impairment of Long-Lived Assets
. We recorded an impairment of
$5 million
on various intangible assets during
three
months ended
September 30, 2018
related to the movement of certain cementing equipment from the Utica shale to the Permian basin.
Operating Income (Loss).
Operating income increased
$146 million
to
$145 million
for the three months ended
September 30, 2018
compared to an operating loss of
$0.5 million
for the
three
months ended
September 30, 2017
. The increase was the result of the expansion of our infrastructure services business, which recognized an increase in operating income of
$155 million
. This increase was partially offset by a
$7 million
decrease in operating income for our other services, which was primarily due to impairment expense recognized during the three months ended
September 30, 2018
.
Interest Expense, Net
. Interest expense, net decreased
$1 million
during the
three
months ended
September 30, 2018
compared to the
three
months ended
September 30, 2017
primarily due to a decline in average borrowings outstanding.
Other Expense, Net.
Non-operating charges, net resulted in expense of
$0.4 million
and
$0.3 million
for the
three
months ended
September 30, 2018
and 2017, respectively. Both periods were primarily comprised of loss recognition on assets disposed of during the periods.
Income Taxes
. We recorded income tax expense of
$75 million
on pre-tax income of
$144 million
for the three months ended
September 30, 2018
compared to an income tax benefit of
$1 million
on pre-tax loss of
$2 million
for the three months ended
September 30, 2017
. Our effective tax rate was 52% for the three months ended
September 30, 2018
compared to 40% for the three months ended
September 30, 2017
. The increase in effective tax rate is primarily due to a higher tax rate in Puerto Rico, where most of our income was generated during the three months ended
September 30, 2018
, compared to the United States federal income tax rate as well as the impact of discrete items, state income taxes and permanent differences. No income was generated in Puerto Rico during the three months ended
September 30, 2017
.
Results of Operations
Nine Months Ended September 30, 2018
Compared to
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30, 2018
|
|
September 30, 2017
|
|
(in thousands)
|
Revenue:
|
|
|
|
Pressure pumping services
|
$
|
294,954
|
|
|
$
|
167,491
|
|
Infrastructure services
|
922,761
|
|
|
15,195
|
|
Natural sand proppant services
|
140,870
|
|
|
73,092
|
|
Contract land and directional drilling services
|
48,379
|
|
|
36,867
|
|
Other services
|
64,587
|
|
|
36,517
|
|
Eliminations
|
(59,665
|
)
|
|
(6,629
|
)
|
Total revenue
|
1,411,886
|
|
|
322,533
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
Pressure pumping services (exclusive of depreciation and amortization of $40,474 and $31,734, respectively, for the nine months ended September 30, 2018 and 2017)
|
232,701
|
|
|
122,714
|
|
Infrastructure services (exclusive of depreciation and amortization of $13,071 and $1,379, respectively, for the nine months ended September 30, 2018 and 2017)
|
535,114
|
|
|
11,829
|
|
Natural sand proppant services (exclusive of depreciation, depletion and accretion of $10,376 and $6,599, respectively, for the nine months ended September 30, 2018 and 2017)
|
103,768
|
|
|
59,119
|
|
Contract land and directional drilling services (exclusive of depreciation of $14,028 and $14,966, respectively, for the nine months ended September 30, 2018 and 2017)
|
44,139
|
|
|
34,629
|
|
Other services (exclusive of depreciation and amortization of $11,710 and $9,563, respectively, for the nine months ended September 30, 2018 and 2017)
|
57,437
|
|
|
28,709
|
|
Eliminations
|
(59,665
|
)
|
|
(6,629
|
)
|
Total cost of revenue
|
913,494
|
|
|
250,371
|
|
Selling, general and administrative expenses
|
58,314
|
|
|
22,459
|
|
Depreciation, depletion, amortization and accretion
|
89,718
|
|
|
64,354
|
|
Impairment of long-lived assets
|
4,769
|
|
|
—
|
|
Operating income (loss)
|
345,591
|
|
|
(14,651
|
)
|
Interest expense, net
|
(2,654
|
)
|
|
(2,929
|
)
|
Bargain purchase gain
|
—
|
|
|
4,012
|
|
Other expense, net
|
(914
|
)
|
|
(707
|
)
|
Income (loss) before income taxes
|
342,023
|
|
|
(14,275
|
)
|
Provision (benefit) for income taxes
|
174,265
|
|
|
(7,323
|
)
|
Net income (loss)
|
$
|
167,758
|
|
|
$
|
(6,952
|
)
|
Revenue
. Revenue for the
nine
months ended
September 30, 2018
increased
$1.1 billion
, or
338%
, to
$1.4 billion
from
$323 million
for the
nine
months ended
September 30, 2017
. The increase in total revenue is primarily attributable to a
$908 million
increase in infrastructure services revenue, representing 83% of the overall increase. Additionally, pressure pumping services revenue increased $128 million, representing 12% of the overall increase.
Revenue derived from related parties was
$134 million
, or
9%
of our total revenue, for the
nine
months ended
September 30, 2018
and
$174 million
, or
54%
of our total revenue, for the
nine
months ended
September 30, 2017
.
Substantially all of our related party revenue is derived from Gulfport under pressure pumping and sand contracts. Revenue by operating division was as follows:
Pressure Pumping Services
. Pressure pumping services division revenue increased $128 million, or
76%
, to
$295 million
for the
nine
months ended
September 30, 2018
from
$167 million
for the
nine
months ended
September 30, 2017
. Revenue derived from related parties was
$88 million
, or
30%
of total pressure pumping revenue, for the
nine
months ended
September 30, 2018
compared to
$120 million
, or
71%
of total pressure pumping revenue, for the
nine
months ended
September 30, 2017
. Substantially all of our related party revenue is derived from Gulfport. Inter-segment revenues, consisting primarily of revenue derived from our sand segment, totaled
$6 million
and
$1 million
for the
nine
months ended
September 30, 2018
and 2017, respectively.
The increase in our pressure pumping services revenue was primarily driven by the startup of our fourth, fifth and sixth pressure pumping fleets in June, August and October 2017, respectively, in the SCOOP/STACK and the Permian Basin, which contributed revenue of $126 million during the
nine
months ended
September 30, 2018
compared to $29 million during the
nine
months ended
September 30, 2017
. Additionally, the number of stages completed increased to
5,081
for the
nine
months ended
September 30, 2018
from
3,764
for the
nine
months ended
September 30, 2017
.
Infrastructure Services.
Infrastructure services division revenue increased
$908 million
from
$15 million
for the
nine
months ended
September 30, 2017
to
$923 million
for the
nine
months ended
September 30, 2018
. We generated
$885 million
, or
96%
of total infrastructure services revenue, from our contract with PREPA for repairs to Puerto Rico's electrical grid as a result of Hurricane Maria. For additional information regarding our contracts with PREPA and our infrastructure services, see "Industry Overview - Electrical Infrastructure Industry" above.
Natural Sand Proppant Services.
Natural sand proppant services division revenue increased
$68 million
, or
93%
, to
$141 million
for the
nine
months ended
September 30, 2018
, from
$73 million
for the
nine
months ended
September 30, 2017
. Revenue derived from related parties was
$25 million
, or
18%
of total sand revenue, for the
nine
months ended
September 30, 2018
and
$39 million
, or
54%
of total sand revenue, for the
nine
months ended
September 30, 2017
. Inter-segment revenue, consisting primarily of revenue derived from our pressure pumping segment, totaled
$48 million
, or
34%
of total sand revenue, for the
nine
months ended
September 30, 2018
and
$5 million
, or
7%
of total sand revenue, for the
nine
months ended
September 30, 2017
.
The increase in our natural sand proppant services revenue was primarily attributable to a
94%
increase in tons of sand sold from approximately
1,089,851
tons for the
nine
months ended
September 30, 2017
to
2,111,872
tons for the
nine
months ended
September 30, 2018
. We completed the expansion of our Taylor and Piranha sand facilities in March and August 2018, respectively. In May 2017, we acquired a wet and dry plant and sand mine located on approximately 600 acres in New Auburn, Wisconsin through our purchase of the assets of Chieftain. These assets contributed revenue of $35 million to our natural sand proppant division for the
nine
months ended
September 30, 2018
compared to $4 million for the
nine
months ended
September 30, 2017
.
Contract Land and Directional Drilling Services.
Contract land and directional drilling services division revenue increased $11 million, or
31%
, from
$37 million
for the
nine
months ended
September 30, 2017
to
$48 million
for the
nine
months ended
September 30, 2018
. Revenue derived from related parties, consisting primarily of directional drilling revenue from Gulfport and El Toro, was
$1 million
, or
2%
of total drilling revenue, for the
nine
months ended
September 30, 2018
compared to
$3 million
, or
8%
of total drilling revenue, for the
nine
months ended
September 30, 2017
.
The increase in contract land and directional drilling revenue was primarily attributable to our directional drilling services, which accounted for
$8 million
, or
69%
of the total increase, as a result of increased utilization from 28% for the
nine
months ended
September 30, 2017
to 45% for the
nine
months ended
September 30, 2018
. Our rig moving services accounted for
$3 million
, or
22%
, of the operating division increase, primarily due to increased activity. Our land drilling services accounted for
$1 million
, or
7%
, of the operating division increase, as a result of an increase in average day rates from approximately
$14,433
for the
nine
months ended
September 30, 2017
to approximately
$16,980
for the
nine
months ended
September 30, 2018
, partially offset by a decrease in average active rigs from
five
for the
nine
months ended
September 30, 2017
to
four
rigs for the
nine
months ended
September 30, 2018
.
Other Services
. Other revenue, consisting of revenue derived from our coil tubing, pressure control, flowback, cementing, acidizing, equipment rental, crude oil hauling, water transfer and remote accommodation businesses, increased
$28 million
, or
77%
, to
$65 million
for the
nine
months ended
September 30, 2018
from
$37 million
for the
nine
months ended
September 30, 2017
. Revenue derived from related parties, consisting primarily of equipment rental and cementing revenue from Gulfport, was
$20 million
, or
31%
of total other revenue, for the
nine
months ended
September 30, 2018
and
$12 million
, or
32%
of total other revenue, for the
nine
months ended
September 30, 2017
. Inter-segment revenue, consisting primarily of revenue derived from our infrastructure and pressure pumping segments, totaled
$5 million
and
$0.4 million
for the
nine
months ended
September 30, 2018
and 2017, respectively.
Revenue for Stingray Cementing and Stingray Energy, which we acquired in June 2017, increased $16 million for the
nine
months ended
September 30, 2018
compared to the
nine
months ended
September 30, 2017
. During the second quarter of 2018, we acquired RTS, a cementing and acidizing business, and WTL, a crude oil hauling business. These business contributed revenue of $8 million during the
nine
months ended
September 30, 2018
. Revenue from our coil tubing, pressure control and flowback services increased
$7 million
for the
nine
months ended
September 30, 2018
compared to
nine
months ended
September 30, 2017
primarily due to increases in utilization. These increases were partially offset by a decrease in revenue from our remote accommodations business due to a decline in utilization.
Cost of Revenue (exclusive of depreciation, depletion, amortization and accretion expense)
. Cost of revenue, exclusive of depreciation, depletion, amortization and accretion expense, increased $663 million from
$250 million
, or
78%
of total revenue, for the
nine
months ended
September 30, 2017
to
$913 million
, or
65%
of total revenue, for the
nine
months ended
September 30, 2018
. The increase was primarily due to the expansion of our infrastructure services business, which represented a
$523 million
increase in cost of revenue, as well as an increase in pressure pumping division costs of
$110 million
, primarily related to the addition of three new fleets during 2017, and an increase in natural sand proppant division costs of
$45 million
, primarily due to an increase in tons of sand sold during the
nine
months ended
September 30, 2018
compared to the
nine
months ended
September 30, 2017
. Cost of revenue by operating division was as follows:
Pressure Pumping Services
. Pressure pumping services division cost of revenue, exclusive of depreciation and amortization expense, increased
$110 million
, or
90%
, to
$233 million
for the
nine
months ended
September 30, 2018
from
$123 million
for the
nine
months ended
September 30, 2017
. The increase was primarily due to the expansion of services into the SCOOP/STACK and the Permian Basin with the addition of three fleets during 2017, which accounted for $85 million, or 77%, of the increase. As a percentage of revenue, our pressure pumping services division cost of revenue, exclusive of depreciation and amortization expense of $40 million and $32 million for the
nine
months ended
September 30, 2018
and 2017, respectively, was
79%
and
73%
for the
nine
months ended
September 30, 2018
and
September 30, 2017
, respectively. The increase in costs as a percentage of revenue was primarily due to an increase in cost of goods sold as a result of selling sand with our service package to customers in the mid-continent region.
Infrastructure Services.
Infrastructure services division cost of revenue, exclusive of depreciation and amortization expense, was
$535 million
and
$12 million
for the
nine
months ended
September 30, 2018
and 2017, respectively. The increase is due to the expansion of our infrastructure business in late 2017 and 2018. The largest components of our cost of revenue include labor-related costs, including contract labor, and travel, meals and lodging expense. As a percentage of revenue, cost of revenue, exclusive of depreciation and amortization expense of
$13 million
and
$1 million
for the
nine
months ended
September 30, 2018
and 2017, respectively, was
58%
and
78%
for the
nine
months ended
September 30, 2018
and 2017, respectively.
Natural Sand Proppant Services.
Natural sand proppant services division cost of revenue, exclusive of depreciation, depletion and accretion expense, increased
$45 million
, or
76%
, from
$59 million
for the
nine
months ended
September 30, 2017
to
$104 million
for the
nine
months ended
September 30, 2018
, primarily due to an increase in cost of goods sold as a result of a
94%
increase in tons of sand sold in the 2018 period as compared to the same period in 2017. As a percentage of revenue, cost of revenue, exclusive of depreciation, depletion and accretion expense of $10 million and $7 million for the
nine
months ended
September 30, 2018
and 2017, respectively, was
74%
and
81%
for the
nine
months ended
September 30, 2018
and
September 30, 2017
, respectively. The decrease is primarily due to startup costs incurred for our Piranha plant, which we acquired in May 2017.
Contract Land and Directional Drilling Services.
Contract land and directional drilling services division cost of revenue, exclusive of depreciation expense, increased $9 million, or
27%
, from
$35 million
for the
nine
months ended
September 30, 2017
to
$44 million
for the
nine
months ended
September 30, 2018
, primarily due to increased
utilization. As a percentage of revenue, our contract land and directional drilling services division cost of revenue, exclusive of depreciation expense of $14 million and $15 million for the
nine
months ended
September 30, 2018
and 2017, respectively, was
91%
and
94%
for the
nine
months ended
September 30, 2018
and
September 30, 2017
, respectively. The decrease was primarily due to higher day rates.
Other Services
. Other services division cost of revenue, exclusive of depreciation and amortization expense, increased $28 million, or
100%
, from
$29 million
for the
nine
months ended
September 30, 2017
to
$57 million
for the
nine
months ended
September 30, 2018
, primarily due to the acquisition of Stingray Cementing and Stingray Energy in June 2017 and the acquisitions of RTS and WTL in the second quarter of 2018. As a percentage of revenue, cost of revenue, exclusive of depreciation and amortization expense of
$12 million
and
$10 million
for the
nine
months ended
September 30, 2018
and 2017, respectively, was
89%
and
79%
for the
nine
months ended
September 30, 2018
and 2017, respectively. The increase is primarily the result of start-up costs related to RTS, WTL and the water transfer business in the mid-continent region as well as an increase in equipment rental expense as a percentage of revenue.
Selling, General and Administrative Expenses
. Selling, general and administrative expenses represent the costs associated with managing and supporting our operations. These expenses increased
$36 million
to
$58 million
for the
nine
months ended
September 30, 2018
, from
$22 million
for the
nine
months ended
September 30, 2017
, primarily related to costs incurred for the expansion of our infrastructure business and the recognition of equity based compensation. The equity based compensation represents compensation expense for awards issued by certain Wexford affiliates and had no cash impact to the Company and no dilutive impact relative to the number of shares outstanding. Following is a breakout of SG&A expenses for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30, 2018
|
|
September 30, 2017
|
Cash expenses:
|
|
|
|
Compensation and benefits
|
$
|
33,541
|
|
|
$
|
8,958
|
|
Professional services
|
8,835
|
|
|
5,075
|
|
Other
(a)
|
9,243
|
|
|
5,700
|
|
Total cash SG&A expense
|
51,619
|
|
|
19,733
|
|
Non-cash expenses:
|
|
|
|
Bad debt provision
(b)
|
(14,543
|
)
|
|
78
|
|
Equity based compensation
(c)
|
17,487
|
|
|
—
|
|
Stock based compensation
|
3,751
|
|
|
2,648
|
|
Total non-cash SG&A expense
|
6,695
|
|
|
2,726
|
|
Total SG&A expense
|
$
|
58,314
|
|
|
$
|
22,459
|
|
|
|
a.
|
Includes travel-related costs, IT expenses, rent, utilities and other general and administrative-related costs.
|
|
|
b.
|
During the three months ended
September 30, 2018
, the Company received payment for amounts previously reserved in 2017. As a result, during the three months ended
September 30, 2018
, the Company reversed bad debt expense of
$16.0 million
recognized in 2017.
|
|
|
c.
|
Represents compensation expense for non-employee awards, which were issued and are payable by certain affiliates of Wexford (the sponsor level).
|
Depreciation, Depletion, Amortization and Accretion
. Depreciation, depletion, amortization and accretion increased $26 million, or
39%
, to
$90 million
for the
nine
months ended
September 30, 2018
from
$64 million
for the
nine
months ended
September 30, 2017
. The increase is primarily attributable to an increase in property and equipment purchases in the second half of 2017 and 2018, resulting in increased depreciation expense.
Impairment of Long-Lived Assets
. We recorded an impairment of
$5 million
on various intangible assets during the
nine
months ended
September 30, 2018
related to the movement of certain cementing equipment from the Utica shale to the Permian basin.
Operating Income (Loss).
Operating income increased $361 million to
$346 million
for the
nine
months ended
September 30, 2018
compared to an operating loss of
$15 million
for the
nine
months ended
September 30, 2017
. The increase was primarily the result of an expansion of our infrastructure services business, which accounted for
$356 million
of the increase in operating income and a
$21 million
increase in natural sand proppant operating income. These were partially offset
by a
$12 million
decrease in pressure pumping operating income due to an increase in non-cash equity compensation expense during the
nine
months ended
September 30, 2018
.
Interest Expense, Net
. Interest expense, net was
$3 million
for each of the
nine
months ended
September 30, 2018
and 2017. Average outstanding borrowings remained relatively flat for the
nine
months ended
September 30, 2018
compared to the
nine
months ended
September 30, 2017
.
Other Expense, Net.
Non-operating charges, net resulted in expense of
$1 million
for each of the
nine
months ended
September 30, 2018
and 2017. Both periods were primarily comprised of loss recognition on assets disposed of during the period.
Income Taxes
. We recorded income tax expense of
$174 million
on pre-tax income of
$342 million
for the
nine
months ended
September 30, 2018
compared to an income tax benefit of
$7 million
on pre-tax loss of
$14 million
for the
nine
months ended
September 30, 2017
. Our effective tax rate was 51% for the
nine
months ended
September 30, 2018
compared to 37% for the
nine
months ended
September 30, 2017
. The increase in effective tax rate is primarily due to the equity based compensation expense recognized during the
nine
months ended
September 30, 2018
as well as a higher tax rate in Puerto Rico, where most of our income was generated during the
nine
months ended
September 30, 2018
, compared to the United States federal income tax rate. No income was generated in Puerto Rico during the
nine
months ended
September 30, 2017
.
Non-GAAP Financial Measures
Adjusted EBITDA
Adjusted EBITDA is a supplemental non-GAAP financial measure that is used by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. We define Adjusted EBITDA as net income (loss) before depreciation, depletion, accretion and amortization, impairment of long-lived assets, acquisition related costs, public offering costs, equity based compensation, stock based compensation, bargain purchase gain, interest expense, net, other expense, net (which is comprised of the (gain) or loss on disposal of long-lived assets) and provision (benefit) for income taxes. We exclude the items listed above from net income (loss) in arriving at Adjusted EBITDA because these amounts can vary substantially from company to company within our industries depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (loss) or cash flows from operating activities as determined in accordance with GAAP or as an indicator of our operating performance or liquidity. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of Adjusted EBITDA. Our computations of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. We believe that Adjusted EBITDA is a widely followed measure of operating performance and may also be used by investors to measure our ability to meet debt service requirements.
The following tables provide a reconciliation of Adjusted EBITDA to the GAAP financial measure of net income or (loss) for each of our operating segments for the specified periods (in thousands).
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
Reconciliation of Adjusted EBITDA to net income (loss):
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income (loss)
|
$
|
69,512
|
|
|
$
|
(801
|
)
|
|
$
|
167,758
|
|
|
$
|
(6,952
|
)
|
Depreciation, depletion, accretion and amortization expense
|
32,015
|
|
|
27,224
|
|
|
89,718
|
|
|
64,354
|
|
Impairment of long-lived assets
|
4,582
|
|
|
—
|
|
|
4,769
|
|
|
—
|
|
Acquisition related costs
|
99
|
|
|
264
|
|
|
130
|
|
|
2,455
|
|
Public offering costs
|
260
|
|
|
—
|
|
|
991
|
|
|
—
|
|
Equity based compensation
|
—
|
|
|
—
|
|
|
17,487
|
|
|
—
|
|
Stock based compensation
|
1,415
|
|
|
1,028
|
|
|
4,331
|
|
|
2,648
|
|
Bargain purchase gain
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,012
|
)
|
Interest expense, net
|
458
|
|
|
1,420
|
|
|
2,654
|
|
|
2,929
|
|
Other expense, net
|
400
|
|
|
320
|
|
|
914
|
|
|
707
|
|
Provision (benefit) for income taxes
|
74,835
|
|
|
(1,413
|
)
|
|
174,265
|
|
|
(7,323
|
)
|
Adjusted EBITDA
|
$
|
183,576
|
|
|
$
|
28,042
|
|
|
$
|
463,017
|
|
|
$
|
54,806
|
|
Pressure Pumping Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
Reconciliation of Adjusted EBITDA to net income (loss):
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income (loss)
|
$
|
2,195
|
|
|
$
|
3,744
|
|
|
$
|
(7,279
|
)
|
|
$
|
5,113
|
|
Depreciation and amortization expense
|
12,665
|
|
|
13,039
|
|
|
40,480
|
|
|
31,823
|
|
Impairment of long-lived assets
|
143
|
|
|
—
|
|
|
143
|
|
|
—
|
|
Acquisition related costs
|
6
|
|
|
1
|
|
|
39
|
|
|
1
|
|
Public offering costs
|
61
|
|
|
—
|
|
|
263
|
|
|
—
|
|
Equity based compensation
|
—
|
|
|
—
|
|
|
17,487
|
|
|
—
|
|
Stock based compensation
|
400
|
|
|
428
|
|
|
1,271
|
|
|
1,202
|
|
Interest expense
|
150
|
|
|
592
|
|
|
995
|
|
|
1,023
|
|
Other expense, net
|
2
|
|
|
120
|
|
|
94
|
|
|
127
|
|
Adjusted EBITDA
|
$
|
15,622
|
|
|
$
|
17,924
|
|
|
$
|
53,493
|
|
|
$
|
39,289
|
|
Infrastructure Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
Reconciliation of Adjusted EBITDA to net income (loss):
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income
|
$
|
78,405
|
|
|
$
|
1,366
|
|
|
$
|
178,064
|
|
|
$
|
664
|
|
Depreciation and amortization expense
|
6,591
|
|
|
1,039
|
|
|
13,092
|
|
|
1,379
|
|
Acquisition related costs
|
—
|
|
|
48
|
|
|
(4
|
)
|
|
90
|
|
Public offering costs
|
123
|
|
|
—
|
|
|
483
|
|
|
—
|
|
Stock based compensation
|
555
|
|
|
29
|
|
|
1,618
|
|
|
29
|
|
Interest expense
|
159
|
|
|
68
|
|
|
341
|
|
|
72
|
|
Other expense, net
|
181
|
|
|
10
|
|
|
513
|
|
|
10
|
|
Provision for income taxes
|
77,612
|
|
|
—
|
|
|
178,200
|
|
|
—
|
|
Adjusted EBITDA
|
$
|
163,626
|
|
|
$
|
2,560
|
|
|
$
|
372,307
|
|
|
$
|
2,244
|
|
Natural Sand Proppant Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
Reconciliation of Adjusted EBITDA to net income (loss):
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income
|
$
|
956
|
|
|
$
|
1,566
|
|
|
$
|
21,257
|
|
|
$
|
4,209
|
|
Depreciation, depletion, accretion and amortization expense
|
4,184
|
|
|
3,034
|
|
|
10,381
|
|
|
6,603
|
|
Acquisition related costs
|
—
|
|
|
167
|
|
|
(38
|
)
|
|
2,121
|
|
Public offering costs
|
49
|
|
|
—
|
|
|
144
|
|
|
—
|
|
Stock based compensation
|
211
|
|
|
272
|
|
|
602
|
|
|
524
|
|
Bargain purchase gain
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,012
|
)
|
Interest expense
|
37
|
|
|
87
|
|
|
193
|
|
|
573
|
|
Other expense, net
|
199
|
|
|
98
|
|
|
222
|
|
|
252
|
|
Provision for income taxes
|
—
|
|
|
24
|
|
|
—
|
|
|
33
|
|
Adjusted EBITDA
|
$
|
5,636
|
|
|
$
|
5,248
|
|
|
$
|
32,761
|
|
|
$
|
10,303
|
|
Contract Land and Directional Drilling Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
Reconciliation of Adjusted EBITDA to net income (loss):
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net loss
|
$
|
(4,060
|
)
|
|
$
|
(5,018
|
)
|
|
$
|
(14,964
|
)
|
|
$
|
(18,332
|
)
|
Depreciation and amortization expense
|
4,327
|
|
|
5,036
|
|
|
14,031
|
|
|
14,978
|
|
Impairment of long-lived assets
|
—
|
|
|
—
|
|
|
187
|
|
|
—
|
|
Acquisition related costs
|
—
|
|
|
(16
|
)
|
|
—
|
|
|
9
|
|
Public offering costs
|
10
|
|
|
—
|
|
|
44
|
|
|
—
|
|
Stock based compensation
|
132
|
|
|
138
|
|
|
540
|
|
|
430
|
|
Interest expense, net
|
53
|
|
|
570
|
|
|
713
|
|
|
1,227
|
|
Other expense, net
|
(5
|
)
|
|
39
|
|
|
67
|
|
|
263
|
|
Adjusted EBITDA
|
$
|
457
|
|
|
$
|
749
|
|
|
$
|
618
|
|
|
$
|
(1,425
|
)
|
Other Services
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
Reconciliation of Adjusted EBITDA to net income (loss):
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net (loss) income
|
$
|
(7,974
|
)
|
|
$
|
(2,459
|
)
|
|
$
|
(9,320
|
)
|
|
$
|
1,394
|
|
Depreciation and amortization expense
|
4,248
|
|
|
5,076
|
|
|
11,734
|
|
|
9,571
|
|
Impairment of long-lived assets
|
4,439
|
|
|
—
|
|
|
4,439
|
|
|
—
|
|
Acquisition related costs
|
93
|
|
|
65
|
|
|
133
|
|
|
236
|
|
Public offering costs
|
17
|
|
|
—
|
|
|
57
|
|
|
—
|
|
Stock based compensation
|
117
|
|
|
162
|
|
|
300
|
|
|
463
|
|
Interest expense, net
|
59
|
|
|
103
|
|
|
412
|
|
|
34
|
|
Other expense, net
|
23
|
|
|
53
|
|
|
18
|
|
|
55
|
|
(Benefit) provision for income taxes
|
(2,777
|
)
|
|
(1,437
|
)
|
|
(3,935
|
)
|
|
(7,356
|
)
|
Adjusted EBITDA
|
$
|
(1,755
|
)
|
|
$
|
1,563
|
|
|
$
|
3,838
|
|
|
$
|
4,397
|
|
(a) Includes results for our coil tubing, pressure control, flowback, cementing, acidizing, equipment rentals, crude oil hauling, water transfer and remote accommodations services and corporate related activities. Our corporate related activities do not generate revenue.
Adjusted Net Income and Adjusted Earnings per Share
Adjusted net income and adjusted basic and diluted earnings per share are supplemental non-GAAP financial measures that are used by management to evaluate our operating and financial performance. Management believes these measures provide meaningful information about the Company's performance by excluding certain non-cash charges, such as equity based compensation, that may not be indicative of the Company's ongoing operating results. Adjusted net income and adjusted earnings per share should not be considered in isolation or as a substitute for net income and earnings per share prepared in accordance with GAAP and may not be comparable to other similarly titled measures of other companies. The following tables provide a reconciliation of adjusted net income and adjusted earnings per share to the GAAP financial measures of net income and earnings per share for the periods specified.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(in thousands, except per share amounts)
|
Net income (loss), as reported
|
$
|
69,512
|
|
|
$
|
(801
|
)
|
|
$
|
167,758
|
|
|
$
|
(6,952
|
)
|
Equity based compensation
|
—
|
|
|
—
|
|
|
17,487
|
|
|
—
|
|
Adjusted net income (loss)
|
$
|
69,512
|
|
|
$
|
(801
|
)
|
|
$
|
185,245
|
|
|
$
|
(6,952
|
)
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share, as reported
|
$
|
1.55
|
|
|
$
|
(0.02
|
)
|
|
$
|
3.75
|
|
|
$
|
(0.17
|
)
|
Equity based compensation
|
—
|
|
|
—
|
|
|
0.39
|
|
|
—
|
|
Adjusted basic earnings (loss) per share
|
$
|
1.55
|
|
|
$
|
(0.02
|
)
|
|
$
|
4.14
|
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share, as reported
|
$
|
1.54
|
|
|
$
|
(0.02
|
)
|
|
$
|
3.73
|
|
|
$
|
(0.17
|
)
|
Equity based compensation
|
—
|
|
|
—
|
|
|
0.39
|
|
|
—
|
|
Adjusted diluted earnings (loss) per share
|
$
|
1.54
|
|
|
$
|
(0.02
|
)
|
|
$
|
4.12
|
|
|
$
|
(0.17
|
)
|
Liquidity and Capital Resources
We require capital to fund ongoing operations, including maintenance expenditures on our existing fleet of equipment, organic growth initiatives, investments and acquisitions. Since November 2014, our primary sources of liquidity have been cash on hand, borrowings under our revolving credit facility, cash flows from operations and proceeds from our initial public offering. Our primary uses of capital have been for investing in property and equipment used to provide our services and to acquire complementary businesses. In addition, on July 16, 2018, we initiated a quarterly dividend policy and declared our first quarterly cash dividend, which was paid in August 2018. On October 29, 2018, our Board of Directors declared a quarterly cash dividend of $0.125 per common share payable on November 15, 2018 to stockholders of record on November 8, 2018. Future declaration of cash dividends are subject to approval by our Board of Directors and may be adjusted at its discretion based on market conditions and capital availability.
As of
September 30, 2018
, we had no borrowings outstanding under our revolving credit facility and
$162 million
of available borrowing capacity under this facility, after giving effect to
$7 million
of outstanding letters of credit.
The following table summarizes our liquidity for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2018
|
|
2017
|
Cash and cash equivalents
|
$
|
19,692
|
|
|
$
|
5,637
|
|
Revolving credit facility availability
|
169,233
|
|
|
169,233
|
|
Less long-term debt
|
—
|
|
|
(99,900
|
)
|
Less letter of credit facilities (environmental remediation)
|
(3,877
|
)
|
|
(3,582
|
)
|
Less letter of credit facilities (insurance programs)
|
(2,405
|
)
|
|
(2,486
|
)
|
Less letter of credit facilities (rail car commitments)
|
(455
|
)
|
|
(455
|
)
|
Net working capital (less cash)
(a)
|
91,584
|
|
|
88,798
|
|
Total
|
$
|
273,772
|
|
|
$
|
157,245
|
|
|
|
a.
|
Net working capital (less cash) is a non-GAAP measure and is calculated by subtracting total current liabilities of
$355 million
and cash and cash equivalents of
$20 million
from total current assets of
$467 million
as of
September 30, 2018
. As of December 31, 2017, net working capital (less cash) is calculated by subtracting total current liabilities of
$220 million
and cash and cash equivalents of
$6 million
from total current assets of
$314 million
.
|
At
October 30, 2018
, we had no borrowings outstanding under our amended and restated revolving credit facility, leaving an aggregate of
$177 million
of available borrowing capacity under this facility, which is net of letters of credit of
$7 million
.
Liquidity and Cash Flows
The following table sets forth our cash flows at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net cash provided by operating activities
|
$
|
56,141
|
|
|
$
|
16,632
|
|
|
$
|
282,592
|
|
|
$
|
40,636
|
|
Net cash used in investing activities
|
(41,530
|
)
|
|
(38,135
|
)
|
|
(162,773
|
)
|
|
(140,828
|
)
|
Net cash (used in) provided by financing activities
|
(5,668
|
)
|
|
27,223
|
|
|
(105,713
|
)
|
|
85,149
|
|
Effect of foreign exchange rate on cash
|
47
|
|
|
9
|
|
|
(51
|
)
|
|
82
|
|
Net change in cash
|
$
|
8,990
|
|
|
$
|
5,729
|
|
|
$
|
14,055
|
|
|
$
|
(14,961
|
)
|
Operating Activities
Net cash provided by operating activities was
$283 million
for the
nine
months ended
September 30, 2018
, compared to
$41 million
for the
nine
months ended
September 30, 2017
. Net cash provided by operating activities was
$56 million
for the
three
months ended
September 30, 2018
compared to
$17 million
for the
three
months ended
September 30, 2017
. The increase in operating cash flows was primarily attributable to the increase in net income as a result of the expansion of our infrastructure services business and improvements in our pressure pumping and sand businesses.
Investing Activities
Net cash used in investing activities was
$163 million
for the
nine
months ended
September 30, 2018
, compared to
$141 million
for the
nine
months ended
September 30, 2017
. Net cash used in investing activities was
$42 million
for the
three
months ended
September 30, 2018
, compared to
$38 million
for the
three
months ended
September 30, 2017
. Cash used in investing activities was used to purchase property and equipment that is utilized to provide our services and to acquire complementary businesses.
The following table summarizes our capital expenditures by operating division for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Pressure pumping services
(a)
|
$
|
5,630
|
|
|
$
|
19,581
|
|
|
$
|
21,729
|
|
|
$
|
72,983
|
|
Infrastructure services
(b)
|
21,737
|
|
|
8,055
|
|
|
78,293
|
|
|
12,013
|
|
Natural sand proppant services
(c)
|
3,145
|
|
|
4,928
|
|
|
15,803
|
|
|
7,898
|
|
Contract and directional drilling services
(d)
|
1,570
|
|
|
2,356
|
|
|
12,271
|
|
|
8,257
|
|
Other
(e)
|
8,663
|
|
|
777
|
|
|
21,434
|
|
|
1,122
|
|
Total capital expenditures
|
$
|
40,745
|
|
|
$
|
35,697
|
|
|
$
|
149,530
|
|
|
$
|
102,273
|
|
a. Capital expenditures primarily for pressure pumping equipment for the
nine
months ended
September 30, 2018
and
2017
.
b. Capital expenditures primarily for trucks and other equipment for the
nine
months ended
September 30, 2018
and
2017
.
c. Capital expenditures primarily for plant upgrades for the
nine
months ended
September 30, 2018
and
2017
.
|
|
d.
|
Capital expenditures primarily for upgrades to our rig fleet and real estate purchases for the
nine
months ended
September 30, 2018
and upgrades to our rig fleet for the
nine
months ended
September 30, 2017
.
|
|
|
e.
|
Capital expenditures primarily for equipment for our rental and crude oil hauling businesses for the
nine
months ended
September 30, 2018
.
|
Financing Activities
Net cash used in financing activities was
$106 million
for the
nine
months ended
September 30, 2018
, compared to net cash provided by financing activities of
$85 million
for the
nine
months ended
September 30, 2017
. Net cash used in financing activities was
$6 million
for the
three
months ended
September 30, 2018
, compared to net cash provided by financing activities of
$27 million
for the
three
months ended
September 30, 2017
. Net cash used in financing activities was primarily attributable to
$6 million
in dividends paid during the
three
and
nine
months ended
September 30, 2018
and net repayments under our revolving credit facility of $100 million for the
nine
months ended
September 30, 2018
. Net cash provided by financing activities was primarily attributable to net borrowings under our revolving credit facility of $29 million and $94 million for the
three
and
nine
months ended
September 30, 2017
, respectively.
Effect of Foreign Exchange Rate on Cash
The effect of foreign exchange rate on cash was
($0.1) million
and
$0.1 million
for the
nine
months ended
September 30, 2018
and 2017, respectively. The change was driven primarily by a favorable (unfavorable) shift in the weakness (strength) of the Canadian dollar relative to the U.S. dollar for the cash held in Canadian accounts.
Working Capital
Our working capital totaled
$111 million
and
$94 million
at
September 30, 2018
and
December 31, 2017
, respectively. Our cash balances were
$20 million
and
$6 million
at
September 30, 2018
and
December 31, 2017
, respectively.
Our Revolving Credit Facility
On October 19, 2018, we and certain of our direct and indirect subsidiaries, as borrowers, entered into an amended and restated revolving credit and security agreement with the lenders party thereto and PNC Bank, National Association, as a lender
and as administrative agent for the lenders, which amends and restates our prior revolving credit and security agreement dated as of July 9, 2018, as amended prior to October 19, 2018, to, among other things, (i) extend the maturity date to October 19, 2023, (ii) increase the maximum revolving advance amount to $185 million, with the ability to further increase the maximum revolving advance amount to $350 million under certain circumstances, (iii) increase the letter of credit sublimit to 20% of the maximum revolving advance amount and (iv) decrease the interest rates applicable to loans.
Outstanding borrowings under this amended and restated revolving credit facility bear interest at a per annum rate elected by us that is equal to an alternate base rate or LIBOR, in each case plus the applicable margin. The applicable margin ranges from 1.00% to 1.50% per annum in the case of the alternate base rate, and from 2.00% to 2.50% per annum in the case of LIBOR. The applicable margin depends on the amount of excess availability under this amended and restated revolving credit facility.
At
September 30, 2018
, we had no outstanding borrowings under our then existing revolving credit facility. At October 30, 2018, we had availability of $177 million under our amended and restated revolving credit facility, after giving effect to $7 million of outstanding letters of credit.
Our amended and restated revolving credit facility contains various customary affirmative and restrictive covenants. Among the covenants are two financial covenants, including a minimum interest coverage ratio (3.0 to 1.0), and a maximum leverage ratio (4.0 to 1.0), and minimum availability ($10.0 million). As of
September 30, 2018
and
December 31, 2017
, we were in compliance with the financial covenants under our then existing revolving credit facility.
Capital Requirements and Sources of Liquidity
During 2018, we currently estimate that our aggregate capital expenditures will be approximately $205 million. These capital expenditures include $98 million in our infrastructure services segment for assets for additional crews, $25 million in our natural sand proppant services segment primarily related to expansion projects, $21 million in our pressure pumping segment for various pressure pumping equipment, $14 million in our contract land and directional drilling services segment primarily for rig upgrades and real estate, $17 million for expansion of our rental equipment business in Ohio and into Oklahoma, $10 million for the expansion of our water transfer business, $8 million for the expansion of our crude hauling business, $6 million for coil tubing equipment and $6 million for other capital expenditures. During the nine months ended
September 30, 2018
, our capital expenditures totaled
$150 million
.
We believe that our cash on hand, operating cash flow and available borrowings under our revolving credit facility will be sufficient to fund our operations for at least the next twelve months. However, future cash flows are subject to a number of variables, and significant additional capital expenditures could be required to conduct our operations. There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. Further, we continue to pursue our previously announced acquisition strategy to enhance our portfolio of products and services, market positioning and/or geographic presence in both other existing and new industries. In doing so, we regularly evaluate acquisition opportunities. However, we do not have a specific acquisition budget for 2018 since the timing and size of acquisitions cannot be accurately forecasted. Our acquisitions may be undertaken with cash, our common stock or a combination of cash, common stock and/or other consideration. In the event we make one or more additional acquisitions and the amount of capital required is greater than the amount we have available for acquisitions at that time, we could be required to reduce the expected level of capital expenditures and/or seek additional capital. If we seek additional capital for that or other reasons, we may do so through borrowings under our revolving credit facility, joint venture partnerships, asset sales, offerings of debt or equity securities or other means. We cannot assure you that this additional capital will be available on acceptable terms or at all. If we are unable to obtain funds we need, we may not be able to complete acquisitions that may be favorable to us or finance the capital expenditures necessary to conduct our operations.
Off-Balance Sheet Arrangements
Lease Obligations
We lease real estate, rail cars and other equipment under long-term operating leases with varying terms and expiration dates through 2062.
Minimum Purchase Commitments
We have entered into agreements with suppliers that contain minimum purchase obligations. Our failure to purchase the minimum amounts may require us to pay shortfall fees. However, the minimum quantities set forth in the agreements are not in excess of our currently expected future requirements.
Capital Spend Commitments
We have entered into agreements with suppliers to acquire capital equipment.
Aggregate future minimum lease payments under these agreements in effect at
September 30, 2018
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31:
|
|
Operating Leases
|
|
Capital Spend Commitments
|
|
Minimum Purchase Commitments
(a)
|
Remainder of 2018
|
|
$
|
6,871
|
|
|
$
|
23,018
|
|
|
$
|
12,479
|
|
2019
|
|
19,726
|
|
|
—
|
|
|
29,273
|
|
2020
|
|
16,402
|
|
|
—
|
|
|
19,391
|
|
2021
|
|
12,634
|
|
|
—
|
|
|
265
|
|
2022
|
|
9,299
|
|
|
—
|
|
|
—
|
|
Thereafter
|
|
7,290
|
|
|
—
|
|
|
—
|
|
|
|
$
|
72,222
|
|
|
$
|
23,018
|
|
|
$
|
61,408
|
|
a. Included in these amounts are sand purchase commitments of $51.9 million. Pricing for certain sand purchase agreements is variable and, therefore, the total sand purchase commitments could be as much as $58.5 million. The minimum amount due in the form of shortfall fees under certain sand purchase agreements was $3.8 million as of
September 30, 2018
.
Other Commitments
Subsequent to
September 30, 2018
, a subsidiary in our infrastructure segment entered into an air charter agreement with aggregate commitments of
$1.6 million
and our pressure pumping subsidiary purchased additional equipment totaling
$1.4 million
.
Subsequent to
September 30, 2018
, we ordered additional capital equipment with aggregate commitments of
$8.1 million
.
New Accounting Pronouncements
In February 2016, the FASB issued ASU No, 2016-02 “Leases” amending the current accounting for leases. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less. All other leases will fall into one of two categories: (i) a financing lease or (ii) an operating lease. Lessor accounting remains substantially unchanged with the exception that no leases entered into after the effective date will be classified as leveraged leases. For sale leaseback transactions, a sale will only be recognized if the criteria in the new revenue recognition standard are met. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within that fiscal year. We plan to adopt this ASU effective January 1, 2019 utilizing the modified retrospective method of adoption. This new leasing guidance will impact us in situations where we are the lessee, and in certain circumstances we will have a right-of-use asset and lease liability on our consolidated financial statements. We are in the process of implementing a new lease accounting system in connection with the adoption of this ASU and are continuing to evaluate the impact this new guidance may have on our consolidated financial statements and results of operations.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Accounting,” which simplifies the accounting for share-based payments granted to non-employees by aligning the accounting with requirements for employee share-based compensation. Upon transition, this ASU requires non-employee awards to be measured at fair value as of the adoption date. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within that fiscal year. Early adoption is permitted. Currently, we have not elected to early adopt this ASU and are evaluating the impact it will have on our consolidated financial statements.