Notes to Consolidated Financial Statements
December 31, 2017, 2016, and
2015
1. Basis of Presentation and Nature of Operations
Basic Energy Services, Inc. (“Basic” or the “Company”) provides a wide range of well site services to oil and natural gas drilling and producing companies, including completion and remedial services, water logistics, well servicing and contract drilling. These services are primarily provided by Basic’s fleet of equipment. Basic’s operations are concentrated in major United States onshore oil and natural gas producing regions located in Texas, New Mexico, Oklahoma, Kansas, Arkansas, Louisiana, Pennsylvania, West Virginia, Ohio, Wyoming, North Dakota, Colorado, California, Utah, Montana, and Kentucky. Basic’s reportable business segments are Completion and Remedial Services, water logistics, Well Servicing, and Contract Drilling. These segments are based on management’s resource allocation and performance assessment in making decisions regarding the Company.
Voluntary Petitions Under Chapter 11 of the Bankruptcy Code
On October 25, 2016, Basic and certain of its subsidiaries (collectively with Basic, the “Debtors”) filed voluntary petitions (the cases commenced thereby, the “Chapter 11 Cases”) under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) on October 25, 2016 in the United States Bankruptcy Court for the District of Delaware (the “Court”). On December 9, 2016, the Court entered an order (the “Confirmation Order”) approving the First Amended Joint Prepackaged Chapter 11 Plan of Basic Energy Services, Inc. and its Affiliated Debtors (as confirmed, the “Prepackaged Plan”). On December 23, 2016 (the “Effective Date”), the Prepackaged Plan became effective pursuant to its terms and the Debtors emerged from their Chapter 11 Cases.
2. Emergence from Chapter 11 and Fresh Start Accounting in 2016
In connection with the Company’s emergence from Chapter 11, on the Effective Date, the Company applied the provisions of fresh start accounting, pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852, Reorganizations, (“ASC 852”), to its consolidated financial statements. We evaluated the events between December 23, 2016 and December 31, 2016 and concluded that the use of an accounting convenience date of December 31, 2016 (the “Convenience Date”) would not have a material impact on our results of operations or financial position. As such, the application of fresh start accounting was reflected in our Consolidated Balance Sheet as of December 31, 2016 and fresh start accounting adjustments related thereto were included in our Consolidated Statements of Operations for the year ended December 31, 2016.
The implementation of the Prepackaged Plan and the application of fresh start accounting materially changed the carrying amounts and classifications reported in our consolidated financial statements and resulted in the Company becoming a new entity for financial reporting purposes. Accordingly, our consolidated financial statements for periods prior to December 31, 2016 are not comparable to our consolidated financial statements as of December 31, 2016 or for periods subsequent to December 31, 2016. References to “Successor” or “Successor Company” refer to the Company on or after December 31, 2016, after giving effect to the implementation of the Prepackaged Plan and the application of fresh start accounting. References to “Predecessor” or “Predecessor Company” refer to the Company prior to December 31, 2016. Additionally, references to periods on or after December 31, 2016 refer to the Successor and references to periods prior to December 31, 2016 refer to the Predecessor.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Basic, our wholly-owned subsidiaries and our variable interest entity, for which we hold a majority voting interest. All intercompany transactions and balances have been eliminated.
Fresh start accounting
As discussed in Note 2, “Emergence from Chapter 11 and Fresh Start Accounting in 2016,” we applied fresh start accounting as of the Convenience Date. Under fresh start accounting, the reorganization value, as derived from the enterprise value established in the Prepackaged Plan, was allocated to our assets and liabilities based on their fair values in accordance with FASB ASC 805. The amount of deferred income taxes recorded was determined in accordance with FASB ASC 740, “Income Taxes” (“FASB ASC 740”). Therefore, all assets and liabilities reflected in the consolidated Balance Sheet of the
Successor Company were recorded at fair value or, for deferred income taxes, in accordance with the respective accounting policy described below.
Estimates, Risks and Uncertainties
Preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management uses historical and other pertinent information to determine these estimates. Actual results could differ from those estimates. Areas where critical accounting estimates are made by management include litigation and self-insured risk reserves.
Revenue Recognition
Completion and Remedial Services —
Completion and remedial services consists primarily of pumping services focused on cementing, acidizing and fracturing, nitrogen units, coiled tubing units, snubbing units, thru-tubing and rental and fishing tools. Basic recognizes revenue when services are performed, collection of the relevant receivables is probable, persuasive evidence of an arrangement exists and the price is fixed or determinable. Basic prices completion and remedial services by the hour, day or project depending on the type of service performed. When Basic provides multiple services to a customer, revenue is allocated to the services performed on a per service basis.
Well Servicing —
Well servicing consists primarily of maintenance services, workover services, completion services, plugging and abandonment services and rig manufacturing and servicing. Basic recognizes revenue when services are performed, collection of the relevant receivables is probable, persuasive evidence of an arrangement exists and the price is fixed or determinable. Basic prices well servicing by the hour or by the day of service performed. Rig manufacturing revenue is recognized when the rig is accepted by the customer, based on the completed contract method by individual rig.
Water Logistics —
Water logistics consists primarily of the sale, transportation, treatment, storage and disposal of fluids used in the drilling, production, pipelining and maintenance of oil and natural gas wells, and well site construction and maintenance services. Basic recognizes revenue when services are performed, collection of the relevant receivables is probable, persuasive evidence of an arrangement exists and the price is fixed or determinable. Basic prices water logistics by the job, by the hour or by the quantities sold, disposed of or hauled.
Contract Drilling —
Contract drilling consists primarily of drilling wells to a specified depth using drilling rigs. Basic recognizes revenues based on either a “daywork” contract, in which an agreed upon rate per day is charged to the customer, a “footage” contract, in which an agreed upon rate is charged per the number of feet drilled, or a “turnkey” contract, in which an agreed upon single rate is charged for a drilled well.
Taxes assessed on sales transactions are presented on a net basis and are not included in revenue.
Cash and Cash Equivalents
Basic considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. Basic maintains its excess cash in various financial institutions, where deposits may exceed federally insured amounts at times.
Fair Value of Financial Instruments
Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying amounts of cash and cash equivalents, trade accounts receivable, accounts receivable-related parties, accounts payable and accrued expenses approximate fair value because of the short maturities of these instruments. The carrying amount of our revolving credit facility recorded as long-term debt also approximates fair value due to its variable-rate characteristics. The following is a summary of the carrying amounts and estimated fair values of our financial instruments as of
December 31, 2017
and
2016
(in thousands):
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Fair Value
|
|
December 31, 2017
|
|
December 31, 2016
|
|
|
Hierarchy Level
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
|
Term Loan
|
3
|
|
153,338
|
|
|
162,052
|
|
|
152,838
|
|
|
152,838
|
|
The fair value of the Term Loan Agreement is based upon our discounted cash flows model using a third-party discount rate. The carrying amount of our Credit Facility approximates fair value due to its variable-rate characteristics.
The carrying amounts of cash and cash equivalents, trade accounts receivable, accounts receivable-related parties, capital leases, accounts payable and accrued expenses approximate fair value due to the short maturities of these instruments.
Inventories
For rental and fishing tools, inventories consisting mainly of grapples, controls and drill bits are stated at the lower of cost or market, with cost being determined on the average cost method. Other inventories, consisting mainly of manufacturing raw materials, rig components, repair parts, drilling and completion materials and gravel, are held for use in the operations of Basic and are stated at the lower of cost or net realizable value, with cost being determined on the first-in, first-out (“FIFO”) method.
Property and Equipment
Property and equipment are stated at cost or at estimated fair value at acquisition date if acquired in a business combination. Expenditures for repairs and maintenance are charged to expense as incurred and additions and improvements that significantly extend the lives of the assets are capitalized. Upon sale or other retirement of depreciable property, the cost and accumulated depreciation and amortization are removed from the related accounts and any gain or loss is reflected in operations. All property and equipment are depreciated or amortized (to the extent of estimated salvage values) on the straight-line method and the estimated useful lives of the assets are as follows:
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|
|
|
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Buildings and improvements
|
20-30 years
|
|
Well service units and equipment
|
3-15 years
|
|
Fluid services equipment
|
5-10 years
|
|
Brine and fresh water stations
|
15 years
|
|
Fracturing/test tanks
|
10 years
|
|
Pumping equipment
|
5-10 years
|
|
Construction equipment
|
3-10 years
|
|
Contract drilling equipment
|
3-10 years
|
|
Disposal facilities
|
10-15 years
|
|
Vehicles
|
3-7 years
|
|
Rental equipment
|
2-15 years
|
|
Software and computers
|
3 years
|
The components of a well servicing rig generally require replacement or refurbishment during the well servicing rig’s life and are depreciated over their estimated useful lives, which ranges from
3
to
15
years. The costs of the original components of a purchased or acquired well servicing rig are not maintained separately from the base rig.
Impairments
Long-lived assets, which include property, plant and equipment, and purchased intangibles subject to amortization with finite lives, are evaluated whenever events or changes in circumstances (“triggering events”) indicate that the carrying value of certain long-lived assets may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount of a long-lived asset is not recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets with such cash flows to be realized over the estimated remaining useful life of the primary asset within the asset group, excluding interest expense. The Company determined the lowest level of identifiable cash flows that are independent of other asset groups to be at the reporting unit level, which consists of the well servicing, fluid servicing, completion and remedial services and contract drilling. If the estimated undiscounted future net cash flows are less than the carrying amount of the related assets, an impairment loss is determined by comparing the fair value with the carrying value of the related assets.
Debt Issuance Costs
Basic capitalizes certain issuance costs associated with borrowing, such as lender’s and attorney’s fees. Debt issuance costs related to our Credit Facility are presented net of amortization as a non-current asset. Our Term Loan is presented net of the amortized debt issuance costs. These costs are amortized over the life of the related debt and included in interest expense using the effective interest method. Amortized debt issuance costs included in interest expense totaled
$0.3 million
,
$6.0 million
, and
$3.1 million
, in 2017, 2016, and 2015, respectively.
Intangible Assets
Basic’s intangible assets subject to amortization were as follows (in thousands):
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Successor
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Trade names
|
|
3,410
|
|
|
|
3,410
|
|
|
Other intangible assets
|
|
48
|
|
|
|
48
|
|
|
|
|
3,458
|
|
|
|
3,458
|
|
|
Less accumulated amortization
|
|
237
|
|
|
|
—
|
|
|
Intangible assets subject to amortization, net
|
|
$
|
3,221
|
|
|
|
$
|
3,458
|
|
Amortization expense for the years ended December 31, 2017, 2016 and 2015 was approximately
$0.2 million
,
$8.5 million
, and
$8.9 million
, respectively.
Amortization expense for the next five succeeding years is expected to be as follows (in thousands):
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Amortization
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Expense
|
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2018
|
$
|
237
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|
|
2019
|
237
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|
|
2020
|
237
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2021
|
237
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|
|
2022
|
227
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|
|
Thereafter
|
2,046
|
|
|
|
$
|
3,221
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|
Developed technology are amortized over a
5
-year life. Trade names are amortized over
15
-year life.
Stock-Based Compensation
Basic has historically compensated our directors, executives and employees through the awarding of stock options and restricted stock and restricted stock units. Basic accounted for stock option and restricted stock awards in
2017
,
2016
, and
2015
using a grant date fair-value based method, resulting in compensation expense for stock-based awards being recorded in our consolidated statements of operations. For performance based restricted stock awards, compensation expense is recognized in the Company's financial statements based on their grant date fair value. Basic utilizes (i) the closing stock price on the date of grant to determine the fair value of vesting restricted stock awards and (ii) a Monte Carlo simulation to determine the fair value of restricted stock awards with a combination of market and service vesting criteria. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. The expected volatility utilized in the model was estimated using the historical volatility of the Company and our peer companies. The risk-free interest rate was based on the U.S. treasury rate for a term commensurate with the expected life of the grant, and judgment is required in estimating the amount of stock-based awards that are expected to be forfeited. Stock options issued are valued on the grant date using the Black-Scholes-Merton option pricing model and restricted stock issued is valued based on the fair value of Basic’s common stock at the grant date. Because the determination of these various assumptions is subject to significant management judgment and different assumptions could result in material differences in amounts recorded in Basic’s consolidated financial statements, management believes that accounting estimates related to the valuation of stock options are critical.
Income Taxes
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
Accounts Receivable
Basic estimates its allowance for losses on accounts receivable based on past collections and expectations for future collections. Basic regularly reviews accounts for collectability. After all collection efforts are exhausted, if the balance is still determined to be uncollectable, the balance is written off. Expense related to the write off of uncollected accounts is recorded in general and administrative expense. Realized losses have been within management’s expectations.
Concentrations of Credit Risk
Financial instruments, which potentially subject Basic to concentration of credit risk, consist primarily of temporary cash investments and trade receivables. Basic restricts investment of temporary cash investments to financial institutions with high credit standing. Basic’s customer base consists primarily of multi-national and independent oil and natural gas producers. It performs ongoing credit evaluations of its customers but generally does not require collateral on its trade receivables. Credit risk is considered by management to be limited due to the large number of customers comprising its customer base. Basic maintains an allowance for potential credit losses on its trade receivables, and such losses have been within management’s expectations.
Basic did not have any one customer which represented 10% or more of consolidated revenue for
2017
,
2016
or
2015
.
Asset Retirement Obligations
Basic is required to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets and capitalize an equal amount as a cost of the asset depreciating it over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation is adjusted at the end of each quarter to reflect the passage of time, changes in the estimated future cash flows underlying the obligation, acquisition or construction of assets, and settlements of obligations.
Environmental
Basic is subject to extensive federal, state and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require Basic to remove or mitigate the adverse environmental effects of disposal or release of petroleum, chemical and other substances at various sites. Environmental expenditures are expensed or capitalized depending on the future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a non-capital nature are recorded when environmental assessment and/or remediation is probable and the costs can be reasonably estimated.
Litigation and Self-Insured Risk Reserves
Basic estimates its reserves related to litigation and self-insured risks based on the facts and circumstances specific to the litigation and self-insured claims and its past experience with similar claims. Basic maintains accruals in the consolidated balance sheets to cover self-insurance retentions. Please see Note 7. Commitments and Contingencies for further discussion.
Recent Accounting Pronouncements
ASU 2014-09 - “
Revenue from Contracts with Customers (Topic 606)"
represents a comprehensive revenue recognition standard to supersede existing revenue recognition guidance and align GAAP more closely with International Financial Reporting Standards (IFRS).
The core principle of the new guidance is that a company should recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. The new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of revenue and cash flows arising from contracts with customers.
The new standard requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfer to a customer. The substantial majority of our services are performed at over time, with revenue being recognized at the time of performance, and this is expected remain unchanged. As such, the effect of applying the new guidance to our existing book of contracts will not result in material modifications to our current revenue recognition, or effect earnings in 2018 (and comparative periods previously reported) and in the early years after adoption. We do not incur significant contract costs, which would be required to be amortized over the life of a contract under the new rules.
The standard allows for two transition methods: (a) a full retrospective adoption in which the standard is applied to all
of the periods presented subject to certain practical expedients, or (b) a modified retrospective adoption in which the standard is applied only to the most current period presented in the financial statements, and which includes additional disclosures regarding the change in accounting principle in the current period. We have adopted the standard effective January 1, 2018 using the modified retrospective method. Other than additional required disclosures, we do not expect the adoption of the new standard to have a significant impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02 - “
Leases (Topic 842).
” The purpose of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This update is effective for Basic in annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Basic expects to recognize additional right-of-use assets and liabilities related to operating leases with terms longer than one year. At December 31, 2017, Basic had operating leases with terms longer than one year of
$12.3 million
.
In August 2016, the FASB issued ASU 2016-15-
"Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments."
This standard is effective for Basic for fiscal years beginning after December 15, 2017. The amendments in this update are intended to clarify cash flow treatment of certain cash flows with the objective of reducing diversity in practice. Basic adopted this standard as of January 1, 2018, and did not have significant changes to the cash flow statement as a result.
In November 2016 the FASB issued ASU 2016-18- "
Statement of Cash Flows (Topic 230): Restricted Cash,"
which clarifies the treatment of cash inflows into and cash payments from restricted cash. Restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The amendments of this ASU should be applied using a retrospective transition method and are effective for reporting periods beginning after December 15, 2017. Basic adopted this standard as of January 1, 2018, and it did not have significant changes to the cash flow statement as a result.
4. Property and Equipment
The following table summarizes the components of property and equipment (in thousands):
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|
December 31,
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|
December 31,
|
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|
|
2017
|
|
|
2016
|
|
Land
|
|
$
|
21,217
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|
|
|
$
|
21,010
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|
Buildings and improvements
|
|
40,043
|
|
|
|
39,588
|
|
|
Well service units and equipment
|
|
113,657
|
|
|
|
96,365
|
|
|
Fracturing/test tanks
|
|
111,172
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|
|
|
75,506
|
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|
Pumping equipment
|
|
116,127
|
|
|
|
85,247
|
|
|
Fluid services equipment
|
|
79,711
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|
|
|
57,359
|
|
|
Disposal facilities
|
|
51,363
|
|
|
|
47,507
|
|
|
Contract drilling equipment
|
|
10,967
|
|
|
|
12,257
|
|
|
Rental equipment
|
|
34,643
|
|
|
|
32,582
|
|
|
Light vehicles
|
|
19,869
|
|
|
|
12,722
|
|
|
Software
|
|
817
|
|
|
|
641
|
|
|
Other
|
|
4,092
|
|
|
|
3,885
|
|
|
Construction equipment
|
|
2,338
|
|
|
|
1,485
|
|
|
Brine and fresh water stations
|
|
2,704
|
|
|
|
2,694
|
|
|
|
|
608,720
|
|
|
|
488,848
|
|
|
Less accumulated depreciation and amortization
|
|
(106,141
|
)
|
|
|
—
|
|
|
Property and equipment, net
|
|
$
|
502,579
|
|
|
|
$
|
488,848
|
|
Basic is obligated under various capital leases for certain vehicles and equipment that expire at various dates during the next
five
years. The table below summarizes the gross amount of property and equipment and related accumulated amortization recorded under capital leases and included above (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Fluid services equipment
|
|
$
|
40,097
|
|
|
|
$
|
29,372
|
|
|
Pumping equipment
|
|
56,225
|
|
|
|
12,806
|
|
|
Light vehicles
|
|
12,160
|
|
|
|
5,729
|
|
|
Contract drilling equipment
|
|
783
|
|
|
|
999
|
|
|
Well service units and equipment
|
|
262
|
|
|
|
—
|
|
|
Construction equipment
|
|
378
|
|
|
|
28
|
|
|
|
|
109,905
|
|
|
|
48,934
|
|
|
Less accumulated amortization
|
|
(18,445
|
)
|
|
|
—
|
|
|
|
|
$
|
91,460
|
|
|
|
$
|
48,934
|
|
Amortization of assets held under capital leases of approximately
$20.4 million
,
$35.5 million
and
$41.9 million
for the years ended December 31, 2017, 2016 and 2015, respectively, is included in depreciation and amortization expense in the consolidated statements of operations.
5. Long-Term Debt
Long-term debt consists of the following (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Credit Facilities:
|
|
|
|
|
|
|
Term Loan
|
|
$
|
162,525
|
|
|
|
$
|
164,175
|
|
|
Credit Facility
|
|
64,000
|
|
|
|
—
|
|
|
Capital leases and other notes
|
|
100,615
|
|
|
|
78,046
|
|
|
Unamortized discount and deferred debt costs
|
|
(11,901
|
)
|
|
|
(19,001
|
)
|
|
|
|
315,239
|
|
|
|
223,220
|
|
|
Less current portion
|
|
55,997
|
|
|
|
38,468
|
|
|
Long-term debt
|
|
$
|
259,242
|
|
|
|
$
|
184,752
|
|
Debt Discounts
The following discounts on debt represent the unamortized discount to fair value of our Amended and Restated Term Loan Credit Agreement and the short-term and long-term portions of the fair value discount of capital leases (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Unamortized discount on Term Loan
|
|
$
|
9,187
|
|
|
$
|
11,401
|
|
|
Unamortized discount on Capital Leases - short-term
|
|
1,657
|
|
|
1,600
|
|
|
Unamortized discount on Capital Leases - long-term
|
|
891
|
|
|
6,000
|
|
|
Unamortized term loan issuance costs
|
|
166
|
|
|
—
|
|
|
|
|
$
|
11,901
|
|
|
$
|
19,001
|
|
Credit Facility
On September 29, 2017, Basic entered into the Credit Facility pursuant to (i) a Receivables Transfer Agreement (the “Transfer Agreement”) entered into by and among Basic Energy Services, L.P. (“BES LP”), as the initial originator and Basic Energy Receivables, LLC (the “SPE”), as the transferee and (ii) the Credit Agreement.
Under the Transfer Agreement, BES LP will sell or contribute, on an ongoing basis, its accounts receivable and related security and interests in the proceeds thereof (the “Transferred Receivables”) to the SPE. The SPE will finance a portion of its purchase of the accounts receivable through borrowings, on a revolving basis, of up to
$100 million
(with the ability to request an increase in the size of the Credit Facility by
$50 million
) under the Credit Agreement, and such borrowings will be secured by the accounts receivable. The SPE will finance its purchase of the remaining portion of the accounts receivable by issuing
subordinated promissory notes to BES LP and/or by contributing the remaining portion of the accounts receivables in exchange for equity in the SPE in the amount of the purchase price of the receivable not paid in cash. BES LP will be responsible for the servicing, administration and collection of the accounts receivable, with all collections going into lockbox accounts. The Company has provided a customary guaranty of performance to the administrative agent with respect to certain obligations of BES LP and any successor servicer under the Credit Facility. In connection with entering into the Credit Facility, on September 29, 2017, the Company amended the Term Loan Agreement to permit, among other things, (i) the acquisition of the Transferred Receivables by the SPE pursuant to the Transfer Agreement, free and clear of the liens under the Term Loan Agreement and (ii) the transactions contemplated under each of the Transfer Agreement and Credit Agreement. The Company consolidates the SPE, which the Company determined to be a variable interest entity ("VIE"), and all intercompany activity is eliminated upon consolidation. In concluding the SPE is a VIE, the Company determined it is the primary beneficiary of the SPE, as all activities of SPE are for the benefit of the Company. The accounts receivable held at the SPE are used solely to settle the debt obligations of the SPE. The consolidated financial statements include approximately
$148.4 million
of SPE accounts receivable and
$64.0 million
of SPE debt.
Loans under our Credit Facility bear interest at a fluctuating rate that is (a) the Alternate Base Rate plus
2.25%
with respect to ABR Loans or (b) the Adjusted LIBO Rate plus
3.25%
with respect to Eurodollar Loans (each as defined in the Credit Agreement). A commitment fee equal to
0.375%
per annum will be payable on the unused commitments under the Credit Agreement. The loans made pursuant to the Credit Agreement will mature on September 29, 2021. The interest rate was
4.63%
at December 31, 2017.
On October 27, 2017, the Company entered into Amendment No. 1. Among other things, Amendment No. 1 (i) increased the aggregate commitments under the Credit Agreement from
$100 million
to
$120 million
, (ii) appointed CIT Bank, N.A. to serve as syndication agent and (iii) added new lenders and amended the commitment schedule to the Credit Agreement.
As of December 31, 2017, Basic had
$45.2 million
of letters of credit outstanding secured by restricted cash borrowed under the Credit Facility. Basic had borrowings under the Credit Facility of
$64.0 million
as of December 31, 2017, giving Basic
$11.5 million
of available borrowing capacity under the Credit Facility.
Second Amended and Restated Revolving Credit Facility
On December 23, 2016, the Company entered into a Second Amended and Restated ABL Credit Agreement (the "Second A&R Credit Agreement") with Bank of America, N.A., as administrative agent for the lenders (the “Credit Facility Administrative Agent”), a collateral management agent, the swing line lender and a letters of credit issuer, Wells Fargo Bank, National Association, as a collateral management agent and syndication agent, and the financial institutions party thereto, as lenders. Basic terminated this facility on September 29, 2017.
The Second A&R Credit Agreement provides for a
$75 million
revolving credit loan facility with a
$65 million
letter of credit sublimit and
$10 million
swing line sublimit. The obligations under the Second A&R Credit Agreement are guaranteed on a joint and several basis by each of our current subsidiaries, other than our immaterial subsidiaries, and are secured by substantially all of our and our guarantors' assets as collateral under the Third Amended and Restated Security Agreement dated as of the Effective Date (described below).
Loans under the Second A&R Credit Agreement bore interest, at the Company’s option, at a rate equal to either (i) the London interbank offered rate (the “Eurodollar Rate”) plus a rate of
2.5%
to
4.5%
depending on the consolidated leverage ratio at the time of the determination or (ii) a base rate equal to the highest of (a) the federal funds rate, plus
0.50%
, (b) the prime rate then in effect publicly announced by Bank of America and (c) the Eurodollar Rate plus
1.0%
, the highest is then is added to a rate ranging from
1.5%
to
3.5%
depending on the consolidated leverage ratio at the time of the determination.
Amended and Restated Term Loan Agreement
On the Effective Date, we entered into an Amended and Restated Term Loan Credit Agreement (the “Amended and Restated Term Loan Agreement) with a syndicate of lenders and U.S. Bank National Association, as administrative agent for the lenders (the “Term Loan Administrative Agent”). Under the Amended and Restated Term Loan Agreement, on the Effective Date, (i) the outstanding principal amount of pre-petition term loans of each pre-petition term lender were exchanged for loans under the Amended and Restated Term Loan Agreement in an amount equal to such pre-petition term lender’s aggregate outstanding principal amount of pre-petition term loans as of the Effective Date, as determined immediately prior to such exchange and (ii) all accrued and unpaid interest on such pre-petition term loans as of the Effective Date are deemed to be accrued and unpaid interest on the loans. Following such exchange, the aggregate outstanding principal amount of the loans under the Amended and Restated Term Loan Agreement was
$164.2 million
.
Borrowings under the Amended and Restated Term Loan Agreement will mature on February 26, 2021. We may voluntarily prepay the loans under the Amended and Restated Term Loan Agreement in whole or in part without premium or penalty, provided that certain conditions set forth therein are met. We are required to prepay the Amended and Restated Term Loan Agreement in the case of a change of control, certain sales of our assets, certain issuances of indebtedness and under certain other circumstances, in which case such prepayment may be subject to an applicable premium.
Each loan shall bear interest on the outstanding principal amount thereof from the applicable borrowing date at a rate per annum equal to
13.50%
. In addition, we will be responsible for the applicable lenders’ fees, including a closing payment equal to
7.00%
of the aggregate principal amount of commitments of each lender under the Amended and Restated Term Loan Agreement as of the effective date, and administrative agent fees.
Other Debt
Basic has a variety of other capital leases and notes payable outstanding, which are generally customary in Basic’s business. None of these debt instruments are material individually. There is a minimum liquidity covenant requiring unrestricted cash and cash equivalents balances to be at or above
$25.0 million
. At
December 31, 2017
, Basic was in compliance with this covenant.
As of
December 31, 2017
the aggregate maturities of debt, including capital leases, for the next five years and thereafter are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
Capital Leases
|
|
2018
|
|
1,650
|
|
|
56,004
|
|
|
2019
|
|
1,650
|
|
|
24,163
|
|
|
2020
|
|
1,650
|
|
|
14,275
|
|
|
2021
|
|
221,575
|
|
|
5,974
|
|
|
Thereafter
|
|
—
|
|
|
199
|
|
|
|
|
$
|
226,525
|
|
|
$
|
100,615
|
|
Basic’s interest expense consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Years ended December 31,
|
|
|
2017
|
|
|
2016
|
2015
|
|
Cash payments for interest
|
$
|
25,616
|
|
|
|
$
|
49,621
|
|
$
|
61,587
|
|
|
Commitment and other fees paid
|
442
|
|
|
|
2,898
|
|
2,484
|
|
|
Amortization of discount on term loan and capital leases, and debt issuance costs
|
7,527
|
|
|
|
9,295
|
|
3,362
|
|
|
Change in accrued interest
|
4,440
|
|
|
|
34,719
|
|
563
|
|
|
Capitalized interest
|
(660
|
)
|
|
|
—
|
|
(139
|
)
|
|
Other
|
107
|
|
|
|
92
|
|
107
|
|
|
Total interest expense
|
$
|
37,472
|
|
|
|
$
|
96,625
|
|
$
|
67,964
|
|
6. Fair Value Measurements
Recurring fair value measurements
Fair value is the price that would be received to sell an asset or the amount paid to transfer a liability in an orderly transaction between market participants (an exit price) at the measurement date. Fair value is a market based measurement considered from the perspective of a market participant. The Company uses market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation. These inputs can be readily observable, market corroborated, or unobservable. If observable prices or inputs are not available, unobservable prices or inputs are used to estimate the current fair value, often using an internal valuation model. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the item being valued. The Company primarily applies a market approach for recurring fair value measurements using the best available information while utilizing valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
The Company also follows the provisions of ASC Topic 820,
Fair Value Measurement
, for non-financial assets and liabilities measured at fair value on a non-recurring basis. As it relates to Basic, ASC Topic 820 applies to certain non-financial assets and liabilities as may be acquired in a business combination and thereby measured at fair value; measurements of the fair value of goodwill and measurements of property impairments.
There is a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The Company classifies fair value balances based on the observability of those inputs. The three levels of the fair value hierarchy are as follows:
Level 1 —
Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 —
Inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable. These inputs are either directly observable in the marketplace or indirectly observable through corroboration with market data for substantially the full contractual term of the asset or liability being measured.
Level 3 —
Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
Basic did not have any assets or liabilities that were measured at fair value on a recurring basis at December 31, 2017 and 2016.
7. Commitments and Contingencies
Environmental
Basic is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for protection of the environment. Basic cannot predict the future impact of such standards and requirements which are subject to change and can have retroactive effectiveness. Basic continues to monitor the status of these laws and regulations. Management believes the likelihood of new environmental regulations resulting in a material adverse impact to Basic’s financial position, liquidity, capital resources or future results of operations is unlikely.
Currently, Basic has not been fined, cited or notified of any environmental violations that would have a material adverse effect upon its financial position, liquidity or capital resources other than the situation noted below. However, management does recognize that by the very nature of its business, material costs could be incurred in the near term to maintain compliance. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions which may be required, the determination of Basic’s liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification.
Litigation
From time to time, Basic is a party to litigation or other legal proceedings that Basic considers to be a part of the ordinary course of business. Basic is not currently involved in any legal proceedings that it considers probable or reasonably possible, individually or in the aggregate, to result in a material adverse effect on its financial condition, results of operations or liquidity.
Operating Leases
Basic leases certain property and equipment under non-cancelable operating leases. The terms of the operating leases generally range from
12
to
60 months
with varying payment dates throughout each month.
As of December 31, 2017, the future minimum lease payments under non-cancelable operating leases are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
December 31, 2017
|
|
|
|
|
2018
|
4,969
|
|
|
2019
|
4,050
|
|
|
2020
|
3,345
|
|
|
2021
|
2,990
|
|
|
2022
|
1,762
|
|
|
Thereafter
|
135
|
|
|
Total
|
$
|
17,251
|
|
Rent expense approximated
$16.8 million
,
$11.7 million
and
$13.9 million
for 2017, 2016 and 2015, respectively.
Basic leases rights for the use of various brine and fresh water wells and disposal wells ranging in terms from month-to-month up to
99
years. The above table reflects the future minimum lease payments if the lease contains a periodic rental. However, the majority of these leases require payments based on a royalty percentage or a volume usage.
Employment Agreements
Under the Amended and Restated Employment Agreement with T. M. “Roe” Patterson, Chief Executive Officer and President of Basic, initially effective through December 31, 2017, Mr. Patterson was entitled to an annual salary of
$665,000
, to be adjusted subject to review by the Compensation Committee of the Board. Mr. Patterson's agreement was reconfirmed and extended through 2018. Under this employment agreement, Mr. Patterson is eligible from time to time to receive grants of stock options and other long-term equity incentive compensation under the terms of Basic’s equity compensation plans. In addition, upon a qualified termination of employment, Mr. Patterson would be entitled to three times his annual base salary plus his current annual incentive target bonus for the full year in which the termination of employment occurred. If employment is terminated for certain reasons within the six months preceding or the twelve months following the change of control of the Company, Mr. Patterson would be entitled to a lump sum severance payment equal to
three
times the sum of his annual base salary plus the higher of (i) his current incentive target bonus for the full year in which the termination of employment occurred or (ii) the highest annual incentive bonus received by him for any of the last three fiscal years.
Basic also has entered into employment agreements with various other executive officers. Under these agreements, if the officer’s employment is terminated for certain reasons, he would be entitled to a lump sum severance payment equal to either
0.75
times to
1.5
times the sum of his annual base salary plus his current annual incentive target bonus for the full year in which the termination occurred. If employment is terminated for certain reasons within the six months preceding or the twelve months following the change of control of the Company, he would be entitled to a lump sum severance payment equal to either
1.0
or
2.0
times the sum of his annual base salary plus the higher of (i) his current incentive target bonus for the full year in which the termination of employment occurred or (ii) the highest annual incentive bonus received by him for any of the last three fiscal years.
Self-Insured Risk Accruals
Basic is self-insured up to retention limits as it relates to workers’ compensation, general liability claims, and medical and dental coverage of its employees. Basic generally maintains no physical property damage coverage on its rig fleet, with the exception of certain of its 24-hour workover rigs, newly manufactured rigs and pumping services equipment. Basic has deductibles per occurrence for workers’ compensation, general liability claims, and medical and dental coverage of
$5.0 million
,
$1.0 million
and
$400,000
, respectively. Basic has a
$1.0 million
deductible per occurrence for automobile liability. Basic maintains accruals in the accompanying consolidated balance sheets related to self-insurance retentions by using third-party data and claims history. At December 31, 2017, short-term and long-term self-insured risk reserves were
$15.9 million
each, respectively. At December 31, 2016, short-term and long-term self-insured risk reserves were
$14.8 million
and
$15.6 million
, respectively.
At December 31, 2017 and December 31, 2016, self-insured risk accruals totaled approximately
$30.3 million
, net of
$1.5
million receivable for medical and dental coverage, and
$35.0 million
, net of
$19,000
receivable for medical and dental coverage, respectively.
8. Accrued Expenses
The accrued expenses are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Compensation related
|
|
$
|
20,479
|
|
|
|
$
|
18,744
|
|
|
Workers' compensation self-insured risk reserve
|
|
6,528
|
|
|
|
6,956
|
|
|
Health self-insured risk reserve
|
|
3,976
|
|
|
|
3,753
|
|
|
Accrual for receipts
|
|
2,391
|
|
|
|
4,178
|
|
|
Ad valorem taxes
|
|
2,081
|
|
|
|
2,626
|
|
|
Sales tax
|
|
1,873
|
|
|
|
1,652
|
|
|
Insurance obligations
|
|
5,695
|
|
|
|
9,576
|
|
|
Professional fee accrual
|
|
1,581
|
|
|
|
946
|
|
|
Fuel accrual
|
|
989
|
|
|
|
958
|
|
|
Accrued interest
|
|
6,380
|
|
|
|
1,940
|
|
|
|
|
$
|
51,973
|
|
|
|
$
|
51,329
|
|
9. Stockholders' Equity
Common Stock
Basic had
80,000,000
shares of Basic’s common stock, par value
$.01
per share, authorized,
26,371,572
shares issued and
26,219,129
shares outstanding at December 31, 2017.
In February 2017, Basic granted certain members of management
801,322
performance-based restricted stock units and
320,532
performance-based stock option awards, which each vest over a
three
-year period. In May 2017, Basic granted
26,700
shares of restricted stock to each of its Directors. In August 2017, Basic granted certain members of management
6,476
stock options,
16,190
restricted stock units,
6,476
performance-based stock options and 16,190 performance-based restricted stock units.
On December 23, 2016, Basic granted certain members of management
809,416
restricted common stock units, one third of which immediately vested on the Effective Date with the remainder vesting over a
two
-year period in equal installments.
Treasury Stock
Basic acquired treasury shares through net share settlements for payment of payroll taxes upon the vesting of restricted stock unit awards. Basic repurchased a total of
152,443
and
96,587
common shares through net share settlements for the years ended December 31, 2017 and 2016 respectively.
Preferred Stock
At December 31, 2017 Basic had
5,000,000
shares of preferred stock, par value
$.01
per share, authorized, of which none was designated, issued or outstanding.
10. Incentive Plan
Incentive Plan
On the Effective Date, the Basic Energy Services, Inc. Management Incentive Plan (the “MIP”) became effective pursuant to the Prepackaged Plan. The MIP provides for the issuance of incentive awards in the form of stock options, restricted stock, restricted stock units and performance awards denominated in our common stock. The MIP provides for the issuance of up to
3,237,671
shares of common stock. Of these authorized shares, approximately
1,326,156
shares were available for grant as of December 31, 2017. The board of directors of the Company (the “Board”) or the Compensation Committee of the Board (the “Compensation Committee”) administers the MIP. The number of shares of common stock authorized under the MIP and the number of shares subject to an award under the MIP, are subject to adjustment in the event of certain recapitalization, reclassification, stock dividend, extraordinary dividend, stock split, reverse stock split or other distribution with respect to our common stock or any merger, reorganization, consolidation, combination, spin-off or other similar corporate change or any other change affecting the common stock.
During the years ended December 31, 2017 and 2016, compensation expense related to share-based arrangements under the MIP, including restricted stock, restricted stock units and stock option awards, was approximately
$23.0 million
and
$10.1 million
respectively. For compensation expense recognized during the year ended December 31, 2017 and 2016, Basic did
no
t recognize a tax benefit.
As of December 31, 2017, there was
$39.7 million
unrecognized compensation related to non-vested share-based compensation arrangements granted under the MIP. That cost is expected to be recognized over a weighted average period of
1.89
years.
The total fair value of share-based awards vested during the years ended December 31, 2017 and 2016, was approximately
$7.3 million
and
$9.7 million
, respectively. During 2017 and 2016, there was
no
excess tax benefit.
Stock Option Awards
The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. Options granted under the MIP expire
10 years
from the date they are granted, and generally vest over a period of
three years
.
The following table reflects the summary of stock options outstanding at December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
Aggregate
|
|
|
|
Number of
|
|
Average
|
|
Remaining
|
|
Intrinsic
|
|
|
|
Options
|
|
Exercise
|
|
Contractual
|
|
Value
|
|
|
|
Granted
|
|
Price
|
|
Term (Years)
|
|
(000's)
|
|
Non-statutory stock options:
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of period
|
|
323,770
|
|
|
$
|
36.55
|
|
|
|
|
|
|
Options granted
|
|
333,484
|
|
|
41.80
|
|
|
|
|
|
|
Options forfeited
|
|
(2,158
|
)
|
|
$
|
36.55
|
|
|
|
|
|
|
Options exercised
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Options expired
|
|
(1,080
|
)
|
|
$
|
36.55
|
|
|
|
|
|
|
Outstanding, end of period
|
|
654,016
|
|
|
$
|
39.23
|
|
|
9.07
|
|
—
|
|
Exercisable, end of period
|
|
109,019
|
|
|
$
|
36.55
|
|
|
8.98
|
|
—
|
|
Vested or expected to vest, end of period
|
|
544,997
|
|
|
$
|
39.76
|
|
|
9.09
|
|
—
|
Restricted Stock Unit Awards
A summary of the status of Basic’s non-vested RSU grants at December 31, 2017 and changes during the year ended December 31, 2017 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
Grant Date Fair
|
|
|
|
Units
|
|
Value Per Unit
|
|
Nonvested at beginning of period
|
|
539,606
|
|
|
$
|
36.55
|
|
|
Granted during period
|
|
860,402
|
|
|
41.37
|
|
|
Vested during period
|
|
(300,300
|
)
|
|
35.93
|
|
|
Forfeited during period
|
|
(2,698
|
)
|
|
36.55
|
|
|
Nonvested at end of period
|
|
1,097,010
|
|
|
$
|
40.50
|
|
Warrant Agreement
On the Effective Date, the Company entered into a warrant agreement (the “Warrant Agreement”) with American Stock Transfer & Trust Company, LLC, as warrant agent. Pursuant to the terms of the Prepackaged Plan, the Company issued warrants (the “Warrants,” and holders thereof “Warrantholders”), which in the aggregate, are exercisable to purchase up to approximately
2,066,627
shares of common stock. In accordance with the Prepackaged Plan, the Company issued Warrants to
the holders of the Predecessor common stock, totaling approximately
2,066,627
Warrants outstanding, exercisable until December 23, 2023, to purchase up to an aggregate of approximately
2,066,627
shares of common stock at an initial exercise price of
$55.25
per share, subject to adjustment as provided in the Warrant Agreement. At issuance, the warrants were recorded at fair value, which was determined using the Black-Scholes option pricing model. The warrants are equity classified and, at issuance, were recorded as an increase to additional paid-in capital in the amount of
$8.4 million
. All unexercised Warrants will expire, and the rights of the Warrantholder to purchase common stock will terminate on December 23, 2023, which is the seventh anniversary of the Effective Date.
11. Deferred Compensation Plan
In April 2005, Basic established a deferred compensation plan for certain employees. Participants may defer up to
50%
of their salary and
100%
of any cash bonuses. Basic may make contributions of
100%
of the first
3%
of the participants’ deferred pay and
50%
of the next
2%
of the participants’ deferred pay to a maximum match of
$10,000
per year. Employer matching contributions and earnings thereon are subject to a
five
-year vesting schedule with full vesting occurring after
five years
of service. Basic elected to suspend matching for this plan during 2016. Increases in the market value of the deferred employee contributions represented an expense to Basic of
$1.1
million,
$0.5
million and
$0.2
million in 2017, 2016 and 2015, respectively.
12. Employee 401 (k) Plan
Basic has a 401(k) profit sharing plan that covers substantially all employees. Employees may contribute up to their base salary not to exceed the annual Federal maximum allowed for such plans. At management’s discretion, Basic may make a matching contribution proportional to each employee’s contribution. Employee contributions are fully vested at all times. Employer matching contributions vest incrementally, with full vesting occurring after
five years
of service. Employer contributions to the 401(k) plan approximated,
$0.4
million in 2015, and have been suspended since 2016.
13. Net Earnings (Loss)
Per Share
Basic loss per common share are determined by dividing net loss applicable to common stock by the weighted average number of common shares actually outstanding during the year. Diluted loss per common share is based on the increased number of shares that would be outstanding assuming conversion of dilutive outstanding securities using the “as if converted” method. The following table sets forth the computation of basic and diluted loss per share (in thousands, except share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
2015
|
|
Numerator (both basic and diluted):
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(96,674
|
)
|
|
|
$
|
(123,373
|
)
|
|
$
|
(241,745
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
|
|
26,005,870
|
|
|
|
41,998,669
|
|
|
40,505,429
|
|
|
Denominator for diluted earnings per share
|
|
26,005,870
|
|
|
|
41,998,669
|
|
|
40,505,429
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share:
|
|
$
|
(3.72
|
)
|
|
|
$
|
(2.94
|
)
|
|
$
|
(5.97
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share:
|
|
$
|
(3.72
|
)
|
|
|
$
|
(2.94
|
)
|
|
$
|
(5.97
|
)
|
The Company has issued potentially dilutive instruments such as unvested restricted stock and common stock options. However, the Company did not include these instruments in its calculation of diluted loss per share during the periods presented, because to include them would be anti-dilutive.
The following shows potentially dilutive instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
2015
|
|
Stock options
|
|
654,016
|
|
|
|
—
|
|
|
26,527
|
|
|
Warrants
|
|
2,066,624
|
|
|
|
—
|
|
|
—
|
|
|
Unvested restricted stock units
|
|
16,114
|
|
|
|
211,363
|
|
|
643,351
|
|
|
|
|
2,736,754
|
|
|
|
211,363
|
|
|
669,878
|
|
14. Supplemental Schedule of Cash Flow Information
The following table reflects non-cash activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Predecessor
|
|
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
2015
|
|
|
|
(In thousands)
|
|
Capital leases issued for equipment
|
|
$
|
67,510
|
|
|
|
$
|
5,652
|
|
|
$
|
24,768
|
|
|
Change in accrued property and equipment
|
|
7,011
|
|
|
|
—
|
|
|
—
|
|
During the years ended
December 31, 2017
and
December 31, 2016
, Basic did not pay any income taxes. Basic received federal and state tax refunds of
$1.1 million
during the year ended
December 31, 2017
, and
$0.5
million during the year ended
December 31, 2015
.
15. Business Segment Information
Basic’s reportable business segments are Completion and Remedial Services, Water Logistics, Well Servicing, and Contract Drilling. These segments have been selected based on changes in management’s resource allocation and performance assessment in making decisions regarding the Company. The following is a description of the segments:
Completion and Remedial Services:
This segment utilizes a fleet of pumping units, air compressor packages specially configured for underbalanced drilling operations, coiled tubing services, nitrogen services, cased-hole wireline units, an array of specialized rental equipment and fishing tools, thru-tubing and snubbing units. The largest portion of this business consists of pumping services focused on cementing, acidizing and fracturing services in niche markets.
Water Logistics:
This segment utilizes a fleet of trucks and related assets, including specialized tank trucks, storage tanks, water wells, disposal facilities water treatment and related equipment. Basic employs these assets to provide, transport, store and dispose of a variety of fluids. These services are required in most workover, completion and remedial projects as well as part of daily producing well operations. Also included in this segment are our construction services which provide services for the construction and maintenance of oil and natural gas production infrastructures.
Well Servicing:
This segment encompasses a full range of services performed with a mobile well servicing rig, including the installation and removal of downhole equipment and elimination of obstructions in the well bore to facilitate the flow of oil and natural gas. These services are performed to establish, maintain and improve production throughout the productive life of an oil and natural gas well and to plug and abandon a well at the end of its productive life. Basic’s well servicing equipment and capabilities also facilitate most other services performed on a well. This segment also includes the manufacture and servicing of mobile well servicing rigs.
Contract Drilling:
This segment utilizes shallow and medium depth rigs and associated equipment for drilling wells to a specified depth for customers on a contract basis.
Basic’s management evaluates the performance of its operating segments based on operating revenues and segment profits. Corporate expenses include general corporate expenses associated with managing all reportable operating segments. Corporate assets consist principally of working capital and debt financing costs.
The following table sets forth certain financial information with respect to Basic’s reportable segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completion and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remedial
|
|
Well
|
|
Water
|
|
Contract
|
|
Corporate
|
|
|
|
|
|
Services
|
|
Servicing
|
|
Logistics
|
|
Drilling
|
|
and Other
|
|
Total
|
|
Successor Year ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
433,450
|
|
|
$
|
210,811
|
|
|
$
|
208,784
|
|
|
$
|
10,996
|
|
|
$
|
—
|
|
|
$
|
864,041
|
|
|
Direct operating costs
|
|
(318,191
|
)
|
|
(169,905
|
)
|
|
(168,621
|
)
|
|
(9,733
|
)
|
|
—
|
|
|
(666,450
|
)
|
|
Segment profits
|
|
$
|
115,259
|
|
|
$
|
40,906
|
|
|
$
|
40,163
|
|
|
$
|
1,263
|
|
|
$
|
—
|
|
|
$
|
197,591
|
|
|
Depreciation and amortization
|
|
$
|
52,648
|
|
|
$
|
20,911
|
|
|
$
|
29,210
|
|
|
$
|
1,654
|
|
|
$
|
7,786
|
|
|
$
|
112,209
|
|
|
Capital expenditures
|
|
$
|
77,514
|
|
|
$
|
25,077
|
|
|
$
|
32,565
|
|
|
$
|
159
|
|
|
$
|
2,572
|
|
|
$
|
137,887
|
|
|
Successor identifiable assets
|
|
$
|
258,711
|
|
|
$
|
109,138
|
|
|
$
|
129,601
|
|
|
$
|
7,205
|
|
|
$
|
315,825
|
|
|
$
|
820,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
184,567
|
|
|
$
|
163,966
|
|
|
$
|
191,725
|
|
|
$
|
7,239
|
|
|
$
|
—
|
|
|
$
|
547,497
|
|
|
Direct operating costs
|
|
(158,762
|
)
|
|
(140,274
|
)
|
|
(161,535
|
)
|
|
(7,079
|
)
|
|
—
|
|
|
(467,650
|
)
|
|
Segment profits
|
|
$
|
25,805
|
|
|
$
|
23,692
|
|
|
$
|
30,190
|
|
|
$
|
160
|
|
|
$
|
—
|
|
|
$
|
79,847
|
|
|
Depreciation and amortization
|
|
$
|
87,736
|
|
|
$
|
48,703
|
|
|
$
|
57,119
|
|
|
$
|
6,304
|
|
|
$
|
18,343
|
|
|
$
|
218,205
|
|
|
Capital expenditures
|
|
$
|
8,315
|
|
|
$
|
8,727
|
|
|
$
|
17,324
|
|
|
$
|
276
|
|
|
$
|
3,698
|
|
|
$
|
38,340
|
|
|
Predecessor identifiable assets
|
|
$
|
215,034
|
|
|
$
|
125,474
|
|
|
$
|
128,725
|
|
|
$
|
14,121
|
|
|
$
|
284,806
|
|
|
$
|
768,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
307,550
|
|
|
$
|
217,245
|
|
|
$
|
258,597
|
|
|
$
|
22,207
|
|
|
$
|
—
|
|
|
$
|
805,599
|
|
|
Direct operating costs
|
|
(245,069
|
)
|
|
(184,952
|
)
|
|
(196,155
|
)
|
|
(16,680
|
)
|
|
—
|
|
|
(642,856
|
)
|
|
Segment profits
|
|
$
|
62,481
|
|
|
$
|
32,293
|
|
|
$
|
62,442
|
|
|
$
|
5,527
|
|
|
$
|
—
|
|
|
$
|
162,743
|
|
|
Depreciation and amortization
|
|
$
|
83,882
|
|
|
$
|
60,466
|
|
|
$
|
71,280
|
|
|
$
|
14,083
|
|
|
$
|
11,760
|
|
|
$
|
241,471
|
|
|
Capital expenditures, (excluding acquisitions)
|
|
$
|
22,384
|
|
|
$
|
18,732
|
|
|
$
|
19,950
|
|
|
$
|
2,431
|
|
|
$
|
6,323
|
|
|
$
|
69,820
|
|
|
Predecessor identifiable assets
|
|
$
|
365,574
|
|
|
$
|
233,293
|
|
|
$
|
257,036
|
|
|
$
|
51,930
|
|
|
$
|
230,348
|
|
|
$
|
1,138,181
|
|
The following table reconciles the segment profits reported above to the operating income as reported in the consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Predecessor
|
|
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
2015
|
|
Segment profits
|
|
$
|
197,591
|
|
|
|
$
|
79,847
|
|
|
$
|
162,743
|
|
|
General and administrative expenses
|
|
(146,458
|
)
|
|
|
(135,331
|
)
|
|
(143,458
|
)
|
|
Depreciation and amortization
|
|
(112,209
|
)
|
|
|
(218,205
|
)
|
|
(241,471
|
)
|
|
Loss on disposal of assets
|
|
(274
|
)
|
|
|
(1,014
|
)
|
|
(1,602
|
)
|
|
Restructuring costs
|
|
—
|
|
|
|
(20,743
|
)
|
|
—
|
|
|
Goodwill impairment
|
|
—
|
|
|
|
(646
|
)
|
|
(81,877
|
)
|
|
Operating loss
|
|
$
|
(61,350
|
)
|
|
|
$
|
(296,092
|
)
|
|
$
|
(305,665
|
)
|
16. Quarterly Financial Data (Unaudited)
The following table summarizes results for each of the four quarters in the years ended December 31, 2016 and 2015 (in thousands, except earnings per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Year
|
|
Year ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
182,019
|
|
|
$
|
213,296
|
|
|
$
|
233,460
|
|
|
$
|
235,266
|
|
|
$
|
864,041
|
|
|
Segment profits
|
|
$
|
29,905
|
|
|
$
|
46,858
|
|
|
$
|
61,932
|
|
|
$
|
58,896
|
|
|
$
|
197,591
|
|
|
Net loss
|
|
$
|
(38,626
|
)
|
|
$
|
(23,941
|
)
|
|
$
|
(13,845
|
)
|
|
$
|
(20,262
|
)
|
|
$
|
(96,674
|
)
|
|
Loss per share of common stock (a):
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.49
|
)
|
|
$
|
(0.92
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(0.78
|
)
|
|
$
|
(3.72
|
)
|
|
Diluted
|
|
$
|
(1.49
|
)
|
|
$
|
(0.92
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(0.78
|
)
|
|
$
|
(3.72
|
)
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
25,999
|
|
|
26,011
|
|
|
26,001
|
|
|
26,049
|
|
|
26,006
|
|
|
Diluted
|
|
25,999
|
|
|
26,011
|
|
|
26,001
|
|
|
26,049
|
|
|
26,006
|
|
|
Year ended December 31, 2016:
|
|
Predecessor
|
|
Total revenues
|
|
$
|
130,356
|
|
|
$
|
120,004
|
|
|
$
|
141,610
|
|
|
$
|
155,527
|
|
|
$
|
547,497
|
|
|
Segment profits
|
|
$
|
18,370
|
|
|
$
|
15,310
|
|
|
$
|
25,339
|
|
|
$
|
20,828
|
|
|
$
|
79,847
|
|
|
Net income (loss) (i)
|
|
$
|
(83,339
|
)
|
|
$
|
(89,883
|
)
|
|
$
|
(92,097
|
)
|
|
$
|
141,946
|
|
|
$
|
(123,373
|
)
|
|
Income (Loss) per share of common stock (a):
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(2.00
|
)
|
|
$
|
(2.11
|
)
|
|
$
|
(2.16
|
)
|
|
$
|
3.32
|
|
|
$
|
(2.94
|
)
|
|
Diluted
|
|
$
|
(2.00
|
)
|
|
$
|
(2.11
|
)
|
|
$
|
(2.16
|
)
|
|
$
|
3.32
|
|
|
$
|
(2.94
|
)
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
41,609
|
|
|
42,602
|
|
|
42,690
|
|
|
42,691
|
|
|
41,999
|
|
|
Diluted
|
|
41,609
|
|
|
42,602
|
|
|
42,690
|
|
|
42,691
|
|
|
41,999
|
|
|
|
|
(a) The sum of individual quarterly net income per share may not agree to the total for the year due to each period's computation being based on the weighted average number of common shares outstanding during each period.
|
|
(i) The third and fourth quarter 2016 loss included reorganization costs of $10.5 and $10.2 million respectively. The third quarter of 2016 loss included goodwill impairment of $0.6 million.
|
17. Income Taxes
On December 22, 2017, the Tax Reform Act was signed into law. The legislation significantly changes U.S. tax law by, among other things, lowering the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. As a result of the decrease in the corporate income tax rate, we revalued our ending net deferred tax assets at December 31, 2017, but did not recognize any incremental income tax expense in 2017 due to the revaluation of the valuation allowance.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. We have provisionally recognized the incremental tax impacts related to the revaluation of deferred tax assets and liabilities and our reassessment of uncertain tax positions and valuation allowances and included these amounts in our Consolidated Financial Statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional technical analysis including changes in interpretations and assumptions we have made with respect to the Tax Act. The accounting is expected to be complete by the fourth quarter of 2018.
Income tax expense (benefit) consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,740
|
)
|
|
|
$
|
—
|
|
|
$
|
(151
|
)
|
|
State
|
|
(16
|
)
|
|
|
521
|
|
|
(9
|
)
|
|
Total
|
|
(1,756
|
)
|
|
|
521
|
|
|
(160
|
)
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
74
|
|
|
|
(4,486
|
)
|
|
(127,482
|
)
|
|
State
|
|
4
|
|
|
|
82
|
|
|
(3,688
|
)
|
|
Total
|
|
78
|
|
|
|
(4,404
|
)
|
|
(131,170
|
)
|
|
Total income tax expense (benefit)
|
|
$
|
(1,678
|
)
|
|
|
$
|
(3,883
|
)
|
|
$
|
(131,330
|
)
|
Basic paid
no
federal income taxes during the years
2017
, 2016 and 2015. Basic received federal and state tax refunds of
$1.1 million
during the year ended
December 31, 2017
, as a result of electing to monetize alternative minimum tax credit carryforwards in lieu of accelerated tax depreciation.
Reconciliation between the amount determined by applying the federal statutory rate of
35%
to loss before income taxes to income (benefit) expense is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
2015
|
|
Statutory federal income tax
|
|
$
|
(34,423
|
)
|
|
|
$
|
(44,540
|
)
|
|
$
|
(130,576
|
)
|
|
Meals and entertainment
|
|
706
|
|
|
|
522
|
|
|
684
|
|
|
State taxes, net of federal benefit
|
|
(1,662
|
)
|
|
|
(6,778
|
)
|
|
(3,698
|
)
|
|
Valuation allowance
|
|
(54,418
|
)
|
|
|
188,970
|
|
—
|
|
—
|
|
|
Remeasurement of Federal Deferred Taxes
|
|
87,227
|
|
|
|
—
|
|
|
—
|
|
|
Cancellation of debt income
|
|
—
|
|
|
|
(178,017
|
)
|
—
|
|
—
|
|
|
Bankruptcy transaction costs
|
|
—
|
|
|
|
9,783
|
|
—
|
|
—
|
|
|
Tax basis adjustments
|
|
(862
|
)
|
|
|
17,981
|
|
—
|
|
—
|
|
|
Goodwill impairment
|
|
—
|
|
|
|
—
|
|
|
2,833
|
|
|
Changes in estimates and other
|
|
1,754
|
|
|
|
8,196
|
|
|
(573
|
)
|
|
|
|
$
|
(1,678
|
)
|
|
|
$
|
(3,883
|
)
|
|
$
|
(131,330
|
)
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Operating loss carryforward
|
|
$
|
151,468
|
|
|
|
$
|
208,973
|
|
|
Goodwill and intangibles
|
|
26,717
|
|
|
|
49,380
|
|
|
Accrued liabilities
|
|
9,418
|
|
|
|
12,351
|
|
|
Deferred debt costs
|
|
2,432
|
|
|
|
5,158
|
|
|
Deferred compensation
|
|
2,902
|
|
|
|
79
|
|
|
Receivables allowance
|
|
348
|
|
|
|
680
|
|
|
Asset retirement obligation
|
|
573
|
|
|
|
859
|
|
|
Inventory
|
|
105
|
|
|
|
167
|
|
|
Valuation Allowances
|
|
(146,330
|
)
|
|
|
(189,185
|
)
|
|
Total deferred tax assets
|
|
$
|
47,633
|
|
|
|
$
|
88,462
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Property and equipment
|
|
(46,881
|
)
|
|
|
(88,450
|
)
|
|
Prepaid expenses
|
|
(830
|
)
|
|
|
(12
|
)
|
|
Total deferred tax liabilities
|
|
$
|
(47,711
|
)
|
|
|
$
|
(88,462
|
)
|
|
Net deferred tax liability
|
|
$
|
(78
|
)
|
|
|
$
|
—
|
|
|
Recognized as:
|
|
|
|
|
|
|
Deferred tax liabilities - non-current
|
|
(78
|
)
|
|
|
—
|
|
|
Net deferred tax liabilities
|
|
$
|
(78
|
)
|
|
|
$
|
—
|
|
Under the Prepackaged Plan, a substantial portion of the Company’s pre-petition debt securities were extinguished. Absent an exception, a debtor recognizes cancellation of indebtedness income (“CODI”) upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. The Internal Revenue Code of 1986, as amended (“IRC”), provides that a debtor in a bankruptcy case may exclude CODI from taxable income but must reduce certain of its tax attributes by the amount of any CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is the adjusted issue price of any indebtedness discharged less the sum of (i) the amount of cash paid, (ii) the issue price of any new indebtedness issued and (iii) the fair market value of any other consideration, including equity, issued. As a result of the market value of equity upon emergence from Chapter 11 bankruptcy proceedings, the estimated amount of U.S. CODI was approximately
$31.7 million
, which reduced the value of the Company’s U.S. net operating losses.
IRC Sections 382 and 383 provide an annual limitation with respect to the ability of a corporation to utilize its tax attributes against future U.S. taxable income in the event of a change in ownership. We believe the Debtors’ emergence from Chapter 11 bankruptcy proceedings is considered a change in ownership for purposes of IRC Section 382. The limitation under the IRC is based on the value of the corporation as of the emergence date. The ownership changes, and resulting annual limitation, is not expected to result in the expiration of any net operating losses generated prior to the emergence date.
Basic provides a valuation allowance when it is more likely than not that some portion of the deferred tax assets will not be realized. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. Based on this evaluation, as of December 31, 2017, a valuation allowance of approximately
$146.3 million
has been recorded on the net deferred tax assets for all federal and state tax jurisdictions in order to measure only the portion of the deferred tax asset that more likely than not will be realized. As of December 31, 2016, a valuation allowance of
$189.2 million
was recorded against the net deferred tax assets not expected to be realized.
Interest is recorded in interest expense and penalties are recorded in income tax expense. Basic had
no
interest or penalties related to an uncertain tax positions during 2017. Basic files federal income tax returns and state income tax returns in Texas and other state tax jurisdictions.
As of December 31,
2017
, Basic had approximately
$664.8 million
of net operating loss carryforwards ("NOL"), for federal income tax purposes, which begin to expire in
2031
and
$246.8 million
of net operating loss carryforwards for state income tax purposes which begin to expire in
2018
.
18. Emergence from Chapter 11 and Fresh Start Accounting
In connection with the Company’s emergence from Chapter 11, the Company qualified for fresh start accounting because (i) the holders of existing voting shares of the Predecessor Company received less than 50% of the voting shares of the Successor Company and (ii) the reorganization value of the Company's assets immediately prior to confirmation was less than the post-petition liabilities and allowed claims. FASB ASC 852 requires that fresh start accounting be applied as of the date the Prepackaged Plan was approved, or as of a later date when all material conditions precedent to effectiveness of the Prepackaged Plan are resolved, which occurred on December 23, 2016. We elected to apply fresh start accounting effective December 31, 2016, to coincide with the timing of our normal December accounting period close. We evaluated the events between December 23, 2016 and December 31, 2016 and concluded that the use of an accounting convenience date of December 31, 2016 did not have a material impact on our results of operations or financial position. As such, the application of fresh start accounting was reflected in our Consolidated Balance Sheet as of December 31, 2016 and fresh start accounting adjustments related thereto were included in our Consolidated Statements of Operations for the year ended December 31, 2016.
Upon the application of fresh start accounting, the Company allocated the reorganization value to its individual assets and liabilities in conformity with ASC 805, Business Combinations (“ASC 805”). Reorganization value represents the fair value of the Successor Company’s assets before considering liabilities. The excess reorganization value over the fair value of identified tangible and intangible assets, if present, is reported as goodwill.
Under ASC 852, the Successor Company must determine a value to be assigned to the equity of the emerging company as of the date of adoption of fresh start accounting. To facilitate this calculation, the Company estimated the enterprise value of the Successor Company by using a discounted cash flow (“DCF”) analysis under the income approach. The Company also considered the guideline public company and guideline transactions methods under the market approach as reasonableness checks to the indications from the income approach.
Enterprise value represents the fair value of an entity’s interest-bearing debt and stockholders’ equity. In the disclosure statement associated with the Prepackaged Plan, which was confirmed by the Bankruptcy Court, the Company estimated a range of enterprise values between
$425 million
and
$625 million
, with a midpoint of
$525 million
. The Company deemed it appropriate to use the midpoint between the low end and high end of the range to determine the final enterprise value of
$525 million
utilized for fresh-start accounting.
To estimate enterprise value utilizing the DCF method, the Company established an estimate of future cash flows for the period ranging from 2017 to 2025 and discounted the estimated future cash flows to present value. The expected cash flows for the period 2017 to 2025 were based on the financial projections and assumptions utilized in the disclosure statement. The expected cash flows for the period 2017 to 2025 were derived from earnings forecasts and assumptions regarding growth and margin projections, as applicable, and an effective tax rate of
38.5%
. A terminal value was included, based on the cash flows of the final year of the forecast period.
The discount rate of
17.0%
was estimated based on an after-tax weighted average cost of capital (“WACC”) reflecting the rate of return that would be expected by a market participant. The WACC also takes into consideration a company specific risk premium reflecting the risk associated with the overall uncertainty of the financial projections used to estimate future cash flows.
The guideline public company and guideline transaction analysis identified a group of comparable companies and transactions that have operating and financial characteristics comparable in certain respects to the Company, including, for example, comparable lines of business, business risks and market presence. Under these methodologies, certain financial multiples and ratios that measure financial performance and value are calculated for each selected company or transactions and then compared to the implied multiples from the DCF analysis. The Company considered enterprise value as a multiple of each selected company and transactions publicly available earnings before interest, taxes, depreciation and amortization (“EBITDA”).
The estimated enterprise value and the equity value are highly dependent on the achievement of the future financial results contemplated in the projections that were set forth in the Prepackaged Plan. The estimates and assumptions made in the valuation are inherently subject to significant uncertainties. The primary assumptions for which there is a reasonable possibility of the occurrence of a variation that would have significantly affected the reorganization value include the assumptions regarding revenue growth, operating expenses, the amount and timing of capital expenditures and the discount rate utilized.
Fresh start accounting reflects the value of the Successor Company as determined in the confirmed Prepackaged Plan. Under fresh start accounting, asset values are remeasured and allocated based on their respective fair values in conformity with
the acquisition method of accounting for business combinations in ASC 805. Liabilities existing as of the Effective Date, other than deferred taxes were recorded at the present value of amounts expected to be paid using appropriate risk adjusted interest rates. Deferred taxes were determined in conformity with applicable accounting standards. Predecessor accumulated depreciation, accumulated amortization and retained deficit were eliminated.
Machinery and Equipment
To estimate the fair value of machinery and equipment, the Company considered the income approach, the cost approach, and the sales comparison (market) approach for each individual asset. The primary approaches that were relied upon to value these assets were the cost approach and the market approach. Although the income approach was not applied to value the machinery and equipment assets individually, the Company did consider the earnings of the enterprise of which these assets are a part. When more than one approach is used to develop a valuation, the various approaches are reconciled to determine a final value conclusion.
The typical starting point or basis of the valuation estimate is replacement cost new (RCN), reproduction cost new (CRN), or a combination of both. Once the RCN and CRN estimates are adjusted for physical and functional conditions, they are then compared to market data and other indications of value, where available, to confirm results obtained by the cost approach.
Where direct RCN estimates were not available or deemed inappropriate, the CRN for machinery and equipment was estimated using the indirect (trending) method, in which percentage changes in applicable price indices are applied to historical costs to convert them into indications of current costs. To estimate the CRN amounts, inflation indices from established external sources were then applied to historical costs to estimate the CRN for each asset.
The market approach measures the value of an asset through an analysis of recent sales or offerings of comparable property, and takes into account physical, functional and economic conditions. Where direct or comparable matches could not be reasonably obtained, the Company utilized the percent of cost technique of the market approach. This technique looks at general sales, sales listings, and auction data for each major asset category. This information is then used in conjunction with each asset’s effective age to develop ratios between the sales price and RCN or CRN of similar asset types. A market-based depreciation curve was developed and applied to asset categories where sufficient sales and auction information existed.
Where market information was not available or a market approach was deemed inappropriate, the Company developed a cost approach. In doing so, an indicated value is derived by deducting physical deterioration from the RCN or CRN of each identifiable asset or group of assets. Physical deterioration is the loss in value or usefulness of a property due to the using up or expiration of its useful life caused by wear and tear, deterioration, exposure to various elements, physical stresses, and similar factors.
Functional and economic obsolescence related to these was also considered. Functional obsolescence due to excess capital costs was eliminated through the direct method of the cost approach to estimate the RCN. Functional obsolescence was applied in the form of a cost-to-cure penalty to certain personal property assets needing significant capital repairs. Economic obsolescence was also applied to stacked and underutilized assets based on the status of the asset. Economic obsolescence was also considered in situations in which the earnings of the applicable business segment in which the assets are employed suggest economic obsolescence. When penalizing assets for economic obsolescence, an additional economic obsolescence penalty was levied, while considering scrap value to be the floor value for an asset.
Land and Buildings
In establishing the fair value of the real property assets, each of the three traditional approaches to value: the income approach, the market approach and the cost approach was considered. The Company primarily relied on the market and cost approaches.
Land - In valuing the fee simple interest in the land, the Company utilized the sales comparison approach (market approach). The sales comparison approach estimates value based on what other purchasers and sellers in the market have agreed to as the price for comparable properties. This approach is based on the principle of substitution, which states that the limits of prices, rents and rates tend to be set by the prevailing prices, rents and rates of equally desirable substitutes. In conducting the sales comparison approach, data was gathered on comparable properties and adjustments were made for factors including market conditions, size, access/frontage, zoning, location, and conditions of sale. Greatest weight was typically given to the comparable sales in proximity and similar in size to each of the owned sites. In some cases, market participants were contacted to augment the analysis and to confirm the conclusions of value.
Building & Site Improvements - In valuing the fee simple interest in the real property improvements, the Company utilized the direct and indirect methods of the cost approach. For the direct method cost approach analysis, the starting point or basis of the cost approach is the RCN. In order to estimate the RCN of the buildings and site improvements, various factors were considered including building size, year built, number of stories, and the breakout of the space, property history, and
maintenance history. The Company used the data collected to calculate the RCN of the buildings using recognized estimating sources for developing replacement, reproduction, and insurable value costs.
In the application of the indirect method cost approach, the first step is to estimate a CRN for each improvement via the indirect (trending) method of the cost approach. To estimate the CRN amounts, the Company applied published inflation indices obtained from third party sources to each asset’s historical cost to convert the known cost into an indication of current cost. As historical cost was used as the starting point for estimating RCN, we only considered this approach for assets with historical records.
Once the RCN and CRN of the improvements was computed, the Company estimated an allowance for physical depreciation for the buildings and land improvements based upon its respective age.
Intangible Assets
The financial information used to estimate the fair values of intangible assets was consistent with the information used in estimating the Company’s enterprise value. Tradenames were valued primarily utilizing the relief from royalty method of the income approach. Significant inputs and assumptions included remaining useful lives, the forecasted revenue streams, applicable royalty rates, tax rates, and applicable discount rates. Customer relationships were considered in the analysis, but based on the valuation under the excess earnings methodology, no value was attributed to customer relationships.
The following table reconciles the enterprise value to the estimated fair value of Successor common stock par value
$0.01
per share (“Successor Common Stock”), as of the Effective Date (in thousands, except share and per share value):
|
|
|
|
|
|
|
|
Enterprise value
|
$
|
525,000
|
|
|
Plus: Cash and cash equivalents and restricted cash
|
101,304
|
|
|
Plus: Non-operating assets
|
11,324
|
|
|
Fair value of invested capital
|
637,628
|
|
|
Less: Fair value of Term Loan
|
(152,838
|
)
|
|
Less: Fair value of Capital Leases
|
(70,382
|
)
|
|
Stockholders' equity at December 31, 2016
|
$
|
414,408
|
|
|
Shares outstanding at December 31, 2016
|
25,998,844
|
|
|
|
|
|
Per share value
|
$
|
15.94
|
|
In connection with fresh start accounting, the Company’s Term Loan and capital leases were recorded at fair value of
$223.2 million
as determined using a market approach. The difference between the
$242.2 million
principal amount and the fair value recorded in fresh start accounting is being amortized over the life of the debt using the effective interest rate method.
The fair values of the Warrants was estimated to be
$4.04
. The fair value of the Warrants was estimated using a Black-Scholes pricing model with the following assumptions:
|
|
|
|
|
|
|
Stock price
|
$14.66
|
|
Strike price
|
$55.25
|
|
Expected volatility
|
55.7
|
%
|
|
Expected dividend rate
|
—
|
|
|
Risk free interest rate
|
2.35
|
%
|
|
Expiration date
|
December 23, 2023
|
|
The fair value of these Warrants was estimated using Level 2 inputs.
The following table reconciles the enterprise value to the estimated reorganization value as of the Effective Date (in thousands):
|
|
|
|
|
|
|
|
Enterprise Value
|
$
|
525,000
|
|
|
Plus: Cash and cash equivalents and restricted cash
|
101,304
|
|
|
Plus: Other non-operating assets
|
11,324
|
|
|
Fair Value of Invested Capital
|
637,628
|
|
|
Plus: Current liabilities, excluding current portion of long-term debt
|
101,353
|
|
|
Plus: Non-current liabilities
|
29,179
|
|
|
Reorganization Value of Successor Assets
|
$
|
768,160
|
|
In determining reorganization value, the Company estimated fair value for property and equipment using significant unobservable inputs based on market and income approaches. Basic commissioned third-party appraisal services to estimate the fair value of its revenue-generating fixed assets and considered current market conditions and management’s judgment to estimate the fair value of non-revenue-generating assets.
Consolidated Balance Sheet
The adjustments set forth in the following consolidated balance sheet reflect the effect of the consummation of the transactions contemplated by the Plan (reflected in the column “Reorganization Adjustments”) as well as estimated fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column “Fresh Start Adjustments”). The explanatory notes highlight methods used to determine estimated fair values or other amounts of assets and liabilities, as well as significant assumptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
Predecessor Company
|
|
Reorganization Adjustments
|
|
|
Fresh Start Adjustments
|
|
|
Successor Company
|
|
|
|
(in thousands, except share amounts)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
27,308
|
|
|
$
|
71,567
|
|
A
|
|
$
|
—
|
|
|
|
$
|
98,875
|
|
|
Restricted cash
|
|
8,391
|
|
|
(5,962
|
)
|
B
|
|
—
|
|
|
|
2,429
|
|
|
Trade accounts receivable
|
|
108,655
|
|
|
—
|
|
|
|
—
|
|
|
|
108,655
|
|
|
Accounts receivable - related parties
|
|
31
|
|
|
—
|
|
|
|
—
|
|
|
|
31
|
|
|
Income tax receivable
|
|
1,271
|
|
|
—
|
|
|
|
—
|
|
|
|
1,271
|
|
|
Inventories
|
|
35,691
|
|
|
—
|
|
|
|
—
|
|
|
|
35,691
|
|
|
Prepaid expenses
|
|
15,575
|
|
|
—
|
|
|
|
—
|
|
|
|
15,575
|
|
|
Other current assets
|
|
8,506
|
|
|
—
|
|
|
|
(6,503
|
)
|
M
|
|
2,003
|
|
|
Total current assets
|
|
205,428
|
|
|
65,605
|
|
|
|
(6,503
|
)
|
|
|
264,530
|
|
|
Property and equipment, net
|
|
667,239
|
|
|
—
|
|
|
|
(178,391
|
)
|
N
|
|
488,848
|
|
|
Deferred debt costs, net of amortization
|
|
1,249
|
|
|
66
|
|
C
|
|
(1,315
|
)
|
O
|
|
—
|
|
|
Other intangible assets, net of amortization
|
|
57,227
|
|
|
—
|
|
|
|
(53,769
|
)
|
P
|
|
3,458
|
|
|
Other assets
|
|
11,324
|
|
|
—
|
|
|
|
—
|
|
|
|
11,324
|
|
|
Total assets
|
|
$
|
942,467
|
|
|
$
|
65,671
|
|
|
|
$
|
(239,978
|
)
|
|
|
$
|
768,160
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities not subject to compromise:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
47,932
|
|
|
$
|
27
|
|
D
|
|
$
|
—
|
|
|
|
$
|
47,959
|
|
|
Accrued expenses
|
|
65,056
|
|
|
(13,879
|
)
|
E
|
|
152
|
|
|
|
51,329
|
|
|
Current portion of long-term debt
|
|
76,865
|
|
|
(36,740
|
)
|
F
|
|
(1,657
|
)
|
Q
|
|
38,468
|
|
|
Other current liabilities
|
|
2,065
|
|
|
—
|
|
|
|
—
|
|
|
|
2,065
|
|
|
Total current liabilities
|
|
191,918
|
|
|
(50,592
|
)
|
|
|
(1,505
|
)
|
|
|
139,821
|
|
|
Long-term liabilities not subject to compromise:
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
39,570
|
|
|
162,525
|
|
G
|
|
(17,343
|
)
|
R
|
|
184,752
|
|
|
Deferred tax liabilities
|
|
663
|
|
|
—
|
|
|
|
(663
|
)
|
S
|
|
—
|
|
|
Other long-term liabilities
|
|
29,179
|
|
|
—
|
|
|
|
—
|
|
|
|
29,179
|
|
|
Total liabilities not subject to compromise
|
|
261,330
|
|
|
111,933
|
|
|
|
(19,511
|
)
|
|
|
353,752
|
|
|
Liabilities subject to compromise
|
|
979,437
|
|
|
(979,437
|
)
|
H
|
|
—
|
|
|
|
—
|
|
|
Total liabilities
|
|
1,240,767
|
|
|
(867,504
|
)
|
|
|
(19,511
|
)
|
|
|
353,752
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor common stock, $0.01 par value:
|
|
435
|
|
|
(435
|
)
|
I
|
|
—
|
|
|
|
—
|
|
|
Predecessor paid-in capital
|
|
387,269
|
|
|
—
|
|
|
|
(387,269
|
)
|
J
|
|
—
|
|
|
Predecessor treasury stock
|
|
(7,519
|
)
|
|
7,519
|
|
L
|
|
—
|
|
|
|
—
|
|
|
Successor preferred stock, $0.01 par value:
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Successor common stock; $0.01 par value;
|
|
—
|
|
|
261
|
|
I
|
|
—
|
|
|
|
261
|
|
|
Successor additional paid-in capital
|
|
—
|
|
|
410,540
|
|
J
|
|
7,084
|
|
J
|
|
417,624
|
|
|
Retained deficit
|
|
(678,485
|
)
|
|
518,767
|
|
K
|
|
159,718
|
|
T
|
|
—
|
|
|
Successor treasury stock
|
|
—
|
|
|
(3,477
|
)
|
L
|
|
—
|
|
|
|
(3,477
|
)
|
|
Total stockholders' equity
|
|
$
|
(298,300
|
)
|
|
$
|
933,175
|
|
|
|
$
|
(220,467
|
)
|
|
|
$
|
414,408
|
|
|
Total liabilities and stockholder's equity
|
|
$
|
942,467
|
|
|
$
|
65,671
|
|
|
|
$
|
(239,978
|
)
|
|
|
$
|
768,160
|
|
Reorganization Adjustments
A. Reflects the cash receipts (payments) from implementation of the Prepackaged Plan (in thousands):
|
|
|
|
|
|
|
|
Record receipt of $125 million under the Rights Offering for New Convertible Notes deemed to have been converted to Successor Common Stock
|
$
|
125,000
|
|
|
Capital Lease Fees & Expenses
|
(62
|
)
|
|
Creditors' professional fees transferred to Fee Escrow Account
|
(6,630
|
)
|
|
Debtors' professional fees transferred to Fee Escrow Account
|
(9,526
|
)
|
|
Fees for establishing the Fee Escrow Account
|
(5
|
)
|
|
Payment of ABL Facility Claims on account of fees, charges, or other amounts payable under the ABL Credit Agreement.
|
(66
|
)
|
|
Payment of ABL Facility Claims on account of interest payable under the ABL Credit Agreement.
|
(618
|
)
|
|
Payment of Allowed Term Loan Claim on account of fees, charges, or other amounts payable under the Term Loan Agreement
|
(41
|
)
|
|
Payment of closing fees & expenses for the Amended and Restated ABL Credit Agreement
|
(1,610
|
)
|
|
Payment of Debtor in Possession Facility Claims, Fees and Accrued Interest
|
(40,296
|
)
|
|
Payment of Fees and Expenses under Debtor in Possession Facility Order
|
(452
|
)
|
|
Payments to 2019 & 2022 Notes Indenture Trustees
|
(89
|
)
|
|
Release of restricted cash to unrestricted cash
|
5,962
|
|
|
Net Cash Receipts
|
$
|
71,567
|
|
B. Reflects the release of restricted cash to unrestricted cash.
C. Reflects the fees to reinstate the Asset Based Loan under the Prepackaged Plan.
D. Rights offering expense for filing with the SEC.
E. Reflects payment (receipts) of expenses incurred as part of the reorganization and paid in accordance with the Prepackaged Plan upon emergence (in thousands).
|
|
|
|
|
|
|
|
Debtors' professional fees transferred to Fee Escrow Account
|
$
|
9,526
|
|
|
Creditors' professional fees transferred to Fee Escrow Account
|
6,630
|
|
|
Payment of Debtor in Possession Facility Claims
|
1,907
|
|
|
Payment of ABL Facility Claims on account of interest payable under the ABL Credit Agreement.
|
618
|
|
|
Payment of Fees and Expenses under Debtor in Possession Facility Order
|
452
|
|
|
Payments to 2019 & 2022 Notes Indenture Trustees
|
89
|
|
|
Income tax withholding
|
(3,477
|
)
|
|
To reinstate claim deemed to be accrued and unpaid interest under the Amended and Restated Term Loan.
|
(1,866
|
)
|
|
Net Payment of Accrued Expenses
|
$
|
13,879
|
|
F. Repayment of the Debtor in Possession Financing of
$38.4 million
partially offset by the reinstatement of short-term portion of the Term Loan debt of
$1.6 million
in accordance with the Prepackaged Plan
G. Reinstatement of long-term debt in accordance with the Prepackaged Plan.
H. Liabilities subject to compromise were settled as follows in accordance with the Prepackaged Plan (in thousands):
|
|
|
|
|
|
|
|
Outstanding principal amount of Term Loan
|
$
|
164,175
|
|
|
Accrued interest on Term Loan
|
1,866
|
|
|
Outstanding Unsecured Notes
|
775,000
|
|
|
Accrued interest on Unsecured Notes
|
38,396
|
|
|
Balance of Liabilities Subject to Compromise
|
979,437
|
|
|
|
|
|
To reinstate the outstanding principal amount of Term Loan under the Amended and Restated Term Loan Facility.
|
$
|
(164,175
|
)
|
|
To reinstate claim deemed to be accrued and unpaid interest under the Amended and Restated Term Loan.
|
(1,866
|
)
|
|
Record issuance of equity to holders of Unsecured Notes
|
(273,103
|
)
|
|
Recoveries pursuant to the Prepackaged Plan
|
(439,144
|
)
|
|
|
|
|
Net Gain on Debt Discharge
|
$
|
540,293
|
|
I. Cancellation of Predecessor equity to additional paid-in capital and distribution of
26,095,431
shares of Successor Common Stock at par value of
$0.01
per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued
|
|
Rights Offering
|
|
|
|
10,825,620
|
|
|
Stock to Predecessor shareholders
|
|
|
|
75,001
|
|
|
Management Incentive Plan (MIP)
|
|
|
|
269,810
|
|
|
Stock to Senior Note claimants
|
|
|
|
14,925,000
|
|
|
Total Successor Shares Issued
|
|
|
|
26,095,431
|
|
J. Record additional paid-in capital adjustments on elimination of Predecessor equity and issuance of shares of Successor Common Stock.
K. Reflects the cumulative impact of the reorganization adjustments on retained deficits discussed above (in thousands):
|
|
|
|
|
|
|
|
|
Net Gain on Debt discharge
|
|
$
|
540,293
|
|
|
Capital lease fees and expenses
|
|
(62
|
)
|
|
Fees for establishing the fee escrow account
|
|
(5
|
)
|
|
Issuance of warrants per terms of the Plan and the Warrant Agreement
|
|
(8,358
|
)
|
|
Payment of Allowed Term Loan Claim on account of fees, charges, or other amounts payable under the Term Loan Agreement
|
|
(42
|
)
|
|
Payment of closing fees and expenses for the Amended and Restated ABL Credit Agreement
|
|
(1,610
|
)
|
|
Record distribution of 0.5% of the 15 million shares of Successor Common Stock
(subject to dilution) to holders of Existing Equity Interests.
|
|
(1,372
|
)
|
|
Restricted stock amortization expense
|
|
(216
|
)
|
|
Record issuance of shares for initially vested RSUs under MIP
|
|
(9,861
|
)
|
|
Net retained earnings impact resulting from implementation of the Prepackaged Plan
|
|
$
|
518,767
|
|
L. Elimination of Predecessor Treasury Stock and withholding on shares issued under MIP.
Fresh Start Adjustments
M. Impairment of assets held for sale.
N. Reflects a
$178.4 million
reduction in the net book value of property and equipment to estimated fair value.
The following table summarizes the components of property and equipment, net of the Predecessor Company and Successor Company (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
Predecessor
|
|
Land
|
$
|
21,010
|
|
$
|
22,135
|
|
|
Buildings and improvements
|
39,588
|
|
74,263
|
|
|
Well service units and equipment
|
96,365
|
|
349,001
|
|
|
Fracturing/test tanks
|
75,506
|
|
354,398
|
|
|
Pumping equipment
|
85,247
|
|
345,991
|
|
|
Fluid services equipment
|
57,359
|
|
265,599
|
|
|
Disposal facilities
|
47,507
|
|
161,220
|
|
|
Contract drilling equipment
|
12,257
|
|
112,289
|
|
|
Rental equipment
|
32,582
|
|
96,724
|
|
|
Light vehicles
|
12,722
|
|
65,434
|
|
|
Software
|
641
|
|
21,914
|
|
|
Other
|
3,885
|
|
13,533
|
|
|
Construction equipment
|
1,485
|
|
15,223
|
|
|
Brine and fresh water stations
|
2,694
|
|
16,035
|
|
|
|
488,848
|
|
1,913,759
|
|
|
Less accumulated depreciation and amortization
|
—
|
|
1,246,520
|
|
|
Total
|
$
|
488,848
|
|
$
|
667,239
|
|
O. Elimination of deferred debt costs.
P. Reflects a
$53.8 million
reduction of the net book value of intangible assets.
Q. Discount to fair market value of current portion of capital leases of
$1.7 million
, and increase in the fair market value of operating leases of
$0.2 million
.
R. Discount to fair market value of Term Loan of
$11.4 million
and long-term portion of capital leases of
$6 million
.
S. Elimination of deferred tax liabilities.
T. Reflects the cumulative impact of fresh start adjustments as discussed above (in thousands):
|
|
|
|
|
|
|
|
|
Retained Deficit Adjustments
|
|
|
|
Eliminate historical loss from Predecessor
|
|
$
|
(678,485
|
)
|
|
Eliminate retained deficit due to Prepackaged Plan Effects upon emergence
|
|
518,767
|
|
|
Net retained deficit impact of fresh start accounting
|
|
$
|
(159,718
|
)
|