Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated and combined financial statements and related notes included within Part II, “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. For additional information related to forward looking statements or information related to the basis of presentation and comparability of financial information, please see “Cautionary Statement Regarding Forward-Looking Statements and Information” and “Basis of Presentation in this Annual Report on Form 10-K”, both of which immediately follow the table of contents of this Form 10-K.
Business Overview
NexTier Oilfield Solutions Inc. is an industry-leading U.S. land oilfield focused service company, with a diverse set of well completion and production services across a variety of active and demanding basins. We have a history of growth through acquisition, including (i) our 2017 acquisition of RockPile, a multi-basin provider of integrated well completion services in the U.S. whose primary service offerings included hydraulic fracturing, wireline perforation and workover rigs, and (ii) our 2018 asset acquisition from RSI to acquire approximately 90,000 hydraulic horsepower and related support equipment. Our most recent strategic transaction was the October 31, 2019, merger transaction with C&J Energy Services, Inc. (“C&J Merger”), a publicly traded Delaware corporation. This history impacts the comparability of our operational results from year to year. See Part I, “Item 1. Business” of this Annual Report for an overview of our history, including additional information on the acquisitions noted above, including the C&J Merger, our 2017 IPO, predecessor, and business environment. Additional information on these transactions can be found in Note (3) Mergers and Acquisitions of Part II, “Item 8. Financial Statements and Supplemental Data.”
Industry Overview
We provide our services in several of the most active basins in the United States, including the Permian, the Marcellus Shale/Utica, the Eagle Ford and the Bakken/Rockies. These regions are expected to account for approximately 73% of all new horizontal wells anticipated to be drilled through 2021. In addition, the high density of our operations in the basins in which we are most active provides us the opportunity to leverage our fixed costs and to quickly respond with what we believe are highly efficient, integrated solutions that are best suited to address customer requirements.
In particular, we are one of the largest providers of completion services in the Permian Basin, the most prolific and cost-competitive oil and natural gas basin in the United States. The Permian and the Marcellus Shale/Utica Basins are expected to account for 56% of total active rigs in the United States through 2022. These basins have experienced a recovery in activity since the spring of 2016, with an 156% increase in rig count from their combined second quarter of 2016 low of 185 to 475 as of December 31, 2019. Our financial performance is significantly affected by rig and well count in North America, as well as oil and natural gas prices, which are summarized in the tables below.
Activity within our business segments is significantly impacted by spending on upstream exploration, development and production programs by our customers. Also impacting our activity is the status of the global economy, which impacts oil and natural gas demand. Some of the more significant determinants of current and future spending levels of our customers are oil and natural gas prices, global oil supply, the world economy, the availability of credit, government regulation and global stability, which together drive worldwide drilling activity.
While it is too early to determine the impact, the recent actions taken by OPEC are expected to have a material negative impact on crude oil prices. Our customers’ cash flows, in most instances, depend upon the revenue they generate from the sale of oil and natural gas. Lower oil and natural gas prices usually translate into lower exploration and production budgets. We are closely monitoring the situation including potential activity responses by our E&P customers.
The following table shows the average historical oil and natural gas prices for WTI and Henry Hub natural gas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Oil price - WTI(1)
|
|
$
|
56.98
|
|
|
$
|
64.94
|
|
|
$
|
50.88
|
|
Natural gas price - Henry Hub(2)
|
|
$
|
2.57
|
|
|
$
|
3.17
|
|
|
$
|
2.99
|
|
(1) Oil price measured in dollars per barrel
(2) Natural gas price measured in dollars per million British thermal units (Btu), or MMBtu
|
|
|
|
|
|
|
|
The historical average U.S. rig counts based on the weekly Baker Hughes Incorporated rig count information were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Product Type
|
|
2019
|
|
2018
|
|
2017
|
Oil
|
|
773
|
|
|
841
|
|
|
703
|
|
Natural Gas
|
|
169
|
|
|
190
|
|
|
172
|
|
Other
|
|
1
|
|
|
1
|
|
|
1
|
|
Total
|
|
943
|
|
|
1,032
|
|
|
876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Drilling Type
|
|
2019
|
|
2018
|
|
2017
|
Horizontal
|
|
826
|
|
|
900
|
|
|
736
|
|
Vertical
|
|
54
|
|
|
63
|
|
|
70
|
|
Directional
|
|
63
|
|
|
69
|
|
|
70
|
|
Total
|
|
943
|
|
|
1,032
|
|
|
876
|
|
|
|
|
|
|
|
|
As of February 2020, global liquids demand is expected to average 101.7 million barrels per day in 2020. The EIA anticipates continued growth in the long-term U.S. domestic demand for natural gas, supported by various factors, including (i) increased likelihood of favorable regulatory and legislative initiatives, (ii) increased acceptance of natural gas as a clean and abundant domestic fuel source and (iii) the emergence of low-cost natural gas shale developments. As of February 2020, natural gas demand in the United States is expected to average 86.24 billion cubic feet per day in 2020.
Operating Approach & Strategy
We believe our integrated approach and proven capabilities enable us to deliver cost-effective solutions for increasingly complex and technically demanding well completion requirements, which include longer lateral segments, higher pressure rates and proppant intensity and multiple fracturing stages in challenging high-pressure formations. In addition, our technical team and our three innovation centers, provide us with the ability to supplement our service offerings with engineered solutions specifically tailored to address customers’ completion requirements and unique challenges.
Our revenues and profits are generated by providing services and equipment to customers who operate oil and gas properties and invest capital to drill new wells and enhance production or perform maintenance on existing wells. Our results of operations in our core service lines are driven primarily by five interrelated, fluctuating variables: (1) the drilling, completion and production activities of our customers, which is primarily driven by oil and natural gas prices and directly affects the demand for our services; (2) the price we are able to charge for our services and equipment, which is primarily driven by the level of demand for our services and the supply of equipment capacity in the market; (3) the cost of materials, supplies and labor involved in providing our services, and our ability to pass those costs on to our customers; (4) our activity, or deployed equipment “utilization” levels; and (5) the quality, safety and efficiency of our service execution.
Our operating strategy is focused on maintaining high utilization levels of deployed equipment to maximize revenue generation while controlling costs to gain a competitive advantage and drive returns. We believe that the quality and efficiency of our service execution and aligning with customers who recognize the value that we provide through service quality and efficiency gains are central to our efforts to support equipment utilization and grow our business.
However, equipment utilization cannot be relied on as wholly indicative of our financial or operating performance due to variations in revenue and profitability from job to job, the type of service to be performed and the equipment, personnel and consumables required for the job, as well as competitive factors and market conditions in the region in which the services are performed. Given the volatile and cyclical nature of activity drivers in the U.S. onshore oilfield services industry, coupled with the varying prices we are able to charge for our services and the cost of providing those services, among other factors, operating margins can fluctuate widely depending on supply and demand at a given point in the cycle.
Historically, our utilization levels have been highly correlated to U.S. onshore spending by our customers, which is heavily driven by the price of oil and natural gas. Generally, as capital spending by our customers increases, drilling, completion and production activity also increases, resulting in increased demand for our services, and therefore more days or hours worked (as the case may be). Conversely, when drilling, completion and production activity levels decline due to lower spending by our customers, we generally provide fewer services, which results in fewer days or hours worked (as the case may be). Additionally, during periods of decreased spending by our customers, we may be required to discount our rates or provide other pricing concessions to remain competitive and support deployed equipment utilization, which negatively impacts our revenue and operating margins. During periods of pricing weakness for our services, we may not be able to reduce our costs accordingly, and our ability to achieve any cost reductions from our suppliers typically lags behind the decline in pricing for our services, which could further adversely affect our results. Furthermore, when demand for our services increases following a period of low demand, our ability to capitalize on such increased demand may be delayed while we reengage and redeploy equipment and crews that have been idled during a downturn. The mix of customers that we are working for, as well as limited periods of exposure to the spot market, also impacts our deployed equipment utilization.
Our Reportable Segments
As of December 31, 2019, we were organized into three reportable segments:
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•
|
Completion Services, which consists of the following businesses and services lines: (1) hydraulic fracturing; (2) wireline and pumpdown services; and (3) completion support services, which includes our innovation centers and activities.
|
|
|
•
|
Well Construction and Intervention Services, which consists of the following businesses and service lines: (1) cementing services and (2) coiled tubing services.
|
|
|
•
|
Well Support Services, which consists of the following businesses and service lines: (1) rig services; (2) fluids management; and (3) other special well site services.
|
Completion Services
The core services provided through our Completion Services segment are hydraulic fracturing, wireline and pumpdown services. As of December 31, 2019, we had approximately 45 hydraulic fracturing fleets, 118 wireline trucks and 80 pumpdown units capable of being deployed. Our completion support services are focused on supporting the efficiency, reliability and quality of our operations. Our Innovation Centers provide in-house manufacturing capabilities that help to reduce operating cost and enable us to offer more technologically advanced and efficiency focused completion services, which we believe is a competitive differentiator. For example, through our Innovation Centers we manufacture the data control instruments used in our fracturing operations and the perforating guns and addressable switches used in our wireline operations; these products are also available for sale to third-parties. The majority of revenue for this segment is generated by our fracturing business.
Well Construction and Intervention Services
The core services provided through our Well Construction and Intervention Services segment are cementing and coiled tubing services. The majority of revenue for this segment is generated by our cementing business. As of December 31, 2019, we had approximately 25 coiled tubing units and 101 cementing units capable of being deployed.
Well Support Services
Our Well Support Services segment was divested in a transaction that closed on March 9, 2020. It focused on post-completion activities at the well site, including rig services, such as workover and plug and abandonment, fluids management services, and other specialty well site services. Since early 2017, in response to the highly competitive landscape and reflecting our returns-focused strategy, we had focused on operational rightsizing measures to better align these businesses with current market conditions. This strategy resulted in closing facilities and idling unproductive equipment. For example, we either sold or shut down numerous businesses or asset packages, which included the divestiture of the majority of our fluids management assets in both West and South Texas in the third quarter of 2019. As of December 31, 2019, we had approximately 276 workover rigs and 348 fluids management trucks capable of being deployed. The majority of revenue for this segment is generated by our rig services business, and we consider rig services and fluids management to be the primary businesses within this segment.
How we calculate utilization for each segment
Our management team monitors asset utilization, among other factors, for purposes of assessing our overall activity levels and customer demand. For our Completion Services segment, asset utilization levels for our own fleets is defined as the ratio of the average number of deployed fleets to the number of total fleets for a given time period. We define active fleets as fleets available for deployment; we consider one of our fleets deployed if the fleet has been put in service at least one day during the period for which we calculate utilization; and we define fully-
utilized fleets per month as fleets that were deployed and working with our customers for a significant portion of a given month. As a result, as additional fleets are incrementally deployed, our utilization rate increases. We define industry utilization of fracturing assets as the ratio of the total industry demand of hydraulic horsepower to the total available capacity of hydraulic horsepower, in each case as reported by an independent industry source. Our method for calculating the utilization rate for our own fracturing fleets or the industry may differ from the method used by other companies or industry sources which could, for example, be based off a ratio of the total number of days a fleet is put in service to the total number of days in the relevant period. We believe that our measures of utilization, based on the number of deployed fleets, provide an accurate representation of existing, available capacity for additional revenue generating activity.
In our Well Construction and Intervention Services segment, we measure our asset utilization levels for our cementing business primarily by the total number of days that our asset base works on a monthly basis, based on the available working days per month. In our coiled tubing business, we measure certain asset utilization levels by the hour to better understand measures between daylight and 24-hour operations. Both the financial and operating performance of our coiled tubing and cement units can vary in revenue and profitability from job to job depending on the type of service to be performed and the equipment, personnel and consumables required for the job, as well as competitive factors and market conditions in the region in which the services are performed.
In our Well Support Services segment, we measured asset utilization levels primarily by the number of hours our assets work on a monthly basis, based on the available working days per month.
Our operating strategy is focused on maintaining high asset utilization levels to maximize revenue generation while controlling costs to gain a competitive advantage and drive returns. We believe that the safety, quality and efficiency of our service execution and our alignment with customers who recognize the value that we provide are central to our efforts to support utilization and grow our business. Given the volatile and cyclical nature of activity drivers in the U.S. onshore oilfield services industry, coupled with the varying prices we are able to charge for our services and the cost of providing those services, among other factors, operating margins can fluctuate widely depending on supply and demand at a given point in the cycle. For additional information about factors impacting our business and results of operations, please see “Industry Trends and Outlook” in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report.
RESULTS OF OPERATIONS
The following table sets forth our financial results for the year ended December 31, 2019 as compared to the year ended the year ended December 31, 2018. Our financial results for 2019 include the financial and operating results of the businesses acquired in the C&J Merger for the partial period beginning November 1, 2019 through December 31, 2019.
A comparison of our financial results for the year ended December 31, 2018 and for the year ended December 31, 2017 can be found in the "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed on February 27, 2019.
Year Ended December 31, 2019 Compared with Year Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Thousands of Dollars)
|
|
|
|
|
|
As a % of Revenue
|
|
Variance
|
Description
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
$
|
|
%
|
Completion Services
|
|
$
|
1,709,934
|
|
|
$
|
2,100,956
|
|
|
94
|
%
|
|
98
|
%
|
|
$
|
(391,022
|
)
|
|
(19
|
%)
|
Well Construction and Intervention Services
|
|
63,039
|
|
|
36,050
|
|
|
3
|
%
|
|
2
|
%
|
|
26,989
|
|
|
75
|
%
|
Well Support Services
|
|
48,583
|
|
|
—
|
|
|
3
|
%
|
|
0
|
%
|
|
48,583
|
|
|
0
|
%
|
Revenue
|
|
1,821,556
|
|
|
2,137,006
|
|
|
100
|
%
|
|
100
|
%
|
|
(315,450
|
)
|
|
(15
|
%)
|
Completion Services
|
|
1,308,089
|
|
|
1,622,106
|
|
|
72
|
%
|
|
76
|
%
|
|
(314,017
|
)
|
|
(19
|
%)
|
Well Construction and Intervention Services
|
|
55,227
|
|
|
38,440
|
|
|
3
|
%
|
|
2
|
%
|
|
16,787
|
|
|
44
|
%
|
Well Support Services
|
|
40,616
|
|
|
—
|
|
|
2
|
%
|
|
0
|
%
|
|
40,616
|
|
|
0
|
%
|
Costs of services
|
|
1,403,932
|
|
|
1,660,546
|
|
|
77
|
%
|
|
78
|
%
|
|
(256,614
|
)
|
|
(15
|
%)
|
Depreciation and amortization
|
|
292,150
|
|
|
259,145
|
|
|
16
|
%
|
|
12
|
%
|
|
33,005
|
|
|
13
|
%
|
Selling, general and administrative expenses
|
|
123,676
|
|
|
113,810
|
|
|
7
|
%
|
|
5
|
%
|
|
9,866
|
|
|
9
|
%
|
Merger and integration
|
|
68,731
|
|
|
448
|
|
|
4
|
%
|
|
0
|
%
|
|
68,283
|
|
|
15,242
|
%
|
(Gain) loss on disposal of assets
|
|
4,470
|
|
|
5,047
|
|
|
0
|
%
|
|
0
|
%
|
|
(577
|
)
|
|
(11
|
%)
|
Impairment
|
|
12,346
|
|
|
—
|
|
|
1
|
%
|
|
0
|
%
|
|
12,346
|
|
|
0
|
%
|
Operating income
|
|
(83,749
|
)
|
|
98,010
|
|
|
(5
|
%)
|
|
5
|
%
|
|
(181,759
|
)
|
|
(185
|
%)
|
Other income (expense), net
|
|
453
|
|
|
(905
|
)
|
|
0
|
%
|
|
0
|
%
|
|
1,358
|
|
|
(150
|
%)
|
Interest expense
|
|
(21,856
|
)
|
|
(33,504
|
)
|
|
(1
|
%)
|
|
(2
|
%)
|
|
11,648
|
|
|
(35
|
%)
|
Total other expenses
|
|
(21,403
|
)
|
|
(34,409
|
)
|
|
(1
|
%)
|
|
(2
|
%)
|
|
13,006
|
|
|
(38
|
%)
|
Income tax expense
|
|
(1,005
|
)
|
|
(4,270
|
)
|
|
0
|
%
|
|
0
|
%
|
|
3,265
|
|
|
(76
|
%)
|
Net income (loss)
|
|
$
|
(106,157
|
)
|
|
$
|
59,331
|
|
|
(6
|
%)
|
|
3
|
%
|
|
$
|
(165,488
|
)
|
|
(279
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Total revenue is comprised of revenue from our Completion Services, Well Construction and Intervention Services and Well Support Services segments. Revenue in 2019 decreased by $315.5 million, or 15%, to $1.8 billion from $2.1 billion in 2018. The net decline was driven primarily by a decrease in rig count and fleet utilization, combined with pricing pressures from macroeconomic market conditions. This decrease in utilization was primarily from our customers shifting their focus to capital discipline through reduced activity levels and pricing. Despite pricing pressures, we retained our core customer base by aligning with high quality and efficient customers under dedicated agreements. This change in revenue by reportable segment is discussed below.
Completion Services: Completion Services segment revenue decreased by $391.0 million, or 19%, to $1.7 billion in 2019 from $2.1 billion in 2018. The segment revenue decline was driven by lower fleet utilization and decreased activity levels year over year, in addition to continued pricing pressures from market conditions. This was offset by an increase in revenue attributable to the C&J Merger.
Well Construction and Intervention: Well Construction and Intervention Services segment revenue increased by $27.0 million, or 75%, to $63.0 million in 2019 from $36.1 million in 2018. This increase in revenue was primarily attributable to the C&J Merger.
Well Support Services: Well Support Services segment revenue was $48.6 million in 2019 with no comparison period in 2018. This increase in revenue was solely attributable to the acquisition of the segment through the C&J Merger.
Cost of services. Cost of services in 2019 decreased by $256.6 million, or 15%, to $1.4 billion from $1.7 billion in 2018. This change was driven by several factors including lower overall activity and fleet utilization, as discussed above under Revenue, in addition to the impact of cost optimization from cost management efforts and input cost deflation.
Equipment Utilization. Depreciation and amortization expense increased by $33.0 million, or 13%, to $292.2 million in 2019 from $259.1 million in 2018. The change in depreciation and amortization was primarily related to additional equipment purchases from the RSI Acquisition in late 2018, maintenance spend for fleet readiness, and other equipment used for continuing to enhance safety and efficiency through our multi-faceted approach of surface, digital and downhole technologies. Loss on disposal of assets in 2019 decreased by $0.6 million, to a loss of $4.5 million in 2019 from a loss of $5.0 million in 2018. The decrease in loss on disposal of assets is primarily related to a larger number of early failures of major components in 2018 compared to 2019, primarily due to higher activity and use of equipment in 2018.
Selling, general and administrative expense. Selling, general and administrative (“SG&A”) expense, which represents costs associated with managing and supporting our operations, increased by $9.9 million, or 9%, to $123.7 million in 2019 from $113.8 million in 2018. This change in SG&A was primarily related to non-cash compensation expense of $19.4 million and litigation contingencies of $3.8 million.
Merger and integration expense. Merger and integration expense increased by $68.3 million to $68.7 million in 2019 from $0.4 million in 2018. The $68.7 million in merger and integration expense in 2019 was due to the C&J Merger, which consisted primarily of professional services, severance costs, and facility consolidation. The $0.4 million in 2018 is related to transaction cost associated with the RSI Acquisition.
Other income (expense), net. Other income (expense), net, in 2019 increased by $1.4 million, or 150%, to income of $0.5 million in 2019 from expense of $0.9 million in 2018. In 2018, other expense, net was primarily due to a $13.2 million adjustment to our Rockpile CVR liability, $2.7 million loss on foreign currency related to the wind-down of the Canadian entity, offset by a $14.9 million gain on the insurance proceeds received for losses resulting from the July 1, 2018 accidental fire.
Interest expense, net. Interest expense, net of interest income, decreased by $11.6 million, or 35%, to $21.9 million in 2019 from $33.5 million in 2018. This change was primarily attributable to the $7.6 million write-offs of deferred financing costs in 2018, in connection with the debt extinguishment of our 2017 Term Loan Facility.
Effective tax rate. Upon consummation of the IPO, the Company became a corporation subject to federal income taxes. Our effective tax rate on continuing operations in 2019 was (0.96)%, as compared to 6.71% in 2018. For 2019, the effective rate is primarily made up of state taxes and a tax benefit derived from the current period operating loss offset by a valuation allowance. For 2018, the effective rate was primarily made up of state taxes and tax benefits derived from the current period operating income offset by a valuation allowance. As a result of market conditions and their corresponding impact on our business outlook, we determined that a valuation allowance was appropriate as it is not more likely than not that we will utilize our net deferred tax assets. The remaining tax impact not offset by a valuation allowance is related to indefinite-lived assets.
Industry Drivers of 2019 Operations
Between January and April 2019, the increase in oil prices incentivized many of our customers to significantly increase activity levels early in 2019. This resulted in E&P capital budget exhaustion and early
achievement of E&P production targets, and in combination with normal year-end seasonality, resulted in softening demand for completions services by the fourth quarter of 2019. In addition, lackluster oil and gas prices in 2019 resulted in the E&P budgeting process to be more muted, causing many E&P companies to delay activity start-up into early 2020. Furthermore, the current market oversupply of fracturing equipment created a competitive pricing environment at year-end 2019 during E&P budgeting season, which resulted in pricing pressure in order win new work or extend existing dedicated agreements that were up for renewal. With that said, most of our customers see value in a long-term partnership with us, and as a result, traded some price concessions by us for extended terms or additional work scope.
We are committed to continuing to manage our business in line with demand for our services and make adjustments as necessary to effectively respond to changes in market conditions, customer activity levels, pricing for our services and equipment, and utilization of our deployed equipment and personnel. Our response to the industry's persistent uncertainty is to maintain sufficient liquidity, preserve our conservative capital structure and closely monitor our discretionary spending. We take a measured approach to asset deployment, balancing our view of current and expected customer activity levels with a focus on generating positive returns for our shareholders. Our priorities remain to drive revenue by maximizing deployed equipment utilization, to improve margins through cost controls, to protect and grow our market share by focusing on the quality, safety and efficiency of our service execution, and to ensure that we are strategically positioned to capitalize on constructive market dynamics.
Looking Ahead to 2020
We face many challenges and risks in the industry in which we operate. Although many factors contributing to these risks are beyond our ability to control, we continuously monitor these risks and have taken steps to mitigate them to the extent practicable. In addition, while we believe that we are well positioned to capitalize on available growth opportunities, we may not be able to achieve our business objectives and, consequently, our results of operations may be adversely affected. Please read the factors described in the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in Part I, Item 1A of this Annual Report for additional information about the known material risks that we face.
Fiscal 2020 Objectives
With recent commodity price volatility, we intend to closely monitor the market and will adjust our approach as the situation develops. At this time, in 2020, our principal business objective continues to be growing our business and safely providing best-in-class services in all of our operating segments, while delivering shareholder value and maintaining a disciplined capital deployment strategy. We expect to achieve our objective through:
|
|
•
|
partnering and growing with well-capitalized customers under dedicated agreements who focus their efforts on safety, high-efficiency completions, continuous improvement and innovation;
|
|
|
•
|
allocating our assets to maximize utilization and returns, including diversification of geographies and commodities;
|
|
|
•
|
maximizing profitability of fully-utilized fleets through leading-edge pricing and efficiencies;
|
|
|
•
|
investing in technology to further drive efficiencies, enable differentiation of service offerings, and reduce our overall cost structure;
|
|
|
•
|
leveraging our flexible and scalable logistics infrastructure to provide assurance of supply at lowest landed cost;
|
|
|
•
|
leveraging our platform to identify, retain and promote talent to sustain growth and support operational and commercial excellence; maintaining agreements with our existing strategic suppliers and identify and develop relationships with additional strategic suppliers to ensure continuity of supply and optimize efficiency;
|
|
|
•
|
maintaining our conservative and flexible capital position, supporting continued growth and maintenance of active equipment;
|
|
|
•
|
gaining scale, enhancing our service offering, and capturing targeted cost synergies from the C&J Merger; and
|
|
|
•
|
returning capital to shareholders in a disciplined fashion.
|
Completion Services
In our Completion Services segment, our strategy remains focused on deploying our market-ready fracturing fleets and bundling more of our wireline and pumpdown units with our deployed fracturing fleets and on a stand-alone basis. We are focused on increasing our dedicated fracturing fleet count with efficient customers that allow us to achieve high equipment utilization, which should result in improved financial performance. Additionally, we are focused on bundling more of our wireline and pumpdown units with our fracturing fleets to increase operational efficiencies and profitability. With that said, current market conditions remain challenging, and our primary focus remains to lower our overall cost structure by aligning with efficient, dedicated customers with deep inventories of work and proven track records of efficient operations, many of which we have created long-term relationships with over the past several years.
Well Construction and Intervention Services
In our Well Construction and Intervention Services segment, our strategy remains focused on deploying our market-ready cementing equipment and two newbuild coiled tubing units that we will take delivery of in the first quarter of 2020. In our cementing business, even though market conditions remain challenged due to customers releasing drilling rigs and declining E&P capital spending in 2020, we remain focused on providing high-quality, timely service and deploying more of our stacked units with efficient customers with deep inventories of work in our core operating basins. We will stay focused on controlling costs, improving market share with an efficient customer base that plan to maintain stable drilling rig counts in 2020. In our coiled tubing business, we are focused on deploying two newbuild, large-diameter units into our core operating basins and increasing market share with large, efficient customers with deep inventories of completion-oriented work that will keep our new units highly utilized.
Well Support Services
We divested our Well Support Services segment on March 9, 2020, for total consideration of $93.7 million.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity represents a company’s ability to adjust its future cash flows to meet needs and opportunities, both expected and unexpected.
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
Cash
|
|
$
|
255,015
|
|
|
$
|
80,206
|
|
Debt, net of deferred financing costs and debt discount
|
|
$
|
337,623
|
|
|
$
|
340,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Net cash provided by operating activities
|
|
$
|
305,463
|
|
|
$
|
350,311
|
|
|
$
|
79,691
|
|
Net cash used in investing activities
|
|
$
|
(114,100
|
)
|
|
$
|
(297,506
|
)
|
|
$
|
(250,776
|
)
|
Net cash provided by (used in) financing activities
|
|
$
|
(16,746
|
)
|
|
$
|
(68,554
|
)
|
|
$
|
218,122
|
|
|
|
|
|
|
|
|
Significant sources and uses of cash during the year ended December 31, 2019
Sources of cash:
|
|
–
|
Net cash generated by operating activities during the year ended December 31, 2019 of $305.5 million was a result of our thoroughness in receiving collections from our customers and controlling costs. We continue to focus on maintaining operational and spend efficiencies, resulting in positive working capital and net operating cash to support our capital expenditures and other investing activities.
|
Uses of cash:
|
|
–
|
Net cash used in operating activities for the year ended December 31, 2019, included $61.9 million of merger and integration costs in connection with the C&J Merger.
|
|
|
–
|
Net cash used in investing activities for the year ended December 31, 2019 consisted primarily of capital expenditures. This activity primarily related to our Completion Services segment.
|
|
|
–
|
Cash used to repay our debt facilities, excluding leases and interest, during the year ended December 31, 2019 was $3.5 million.
|
|
|
–
|
Cash used to repay our finance leases during the year ended December 31, 2019 was $6.0 million.
|
|
|
–
|
Shares withheld and retired related to stock-based compensation during the year ended December 31, 2019 totaled $6.0 million.
|
Significant sources and uses of cash during the year ended December 31, 2018
Sources of cash:
|
|
–
|
Net cash generated by operating activities in 2018 of $350.3 million was primarily driven by higher utilization of our combined asset base and increased gross profit in our Completion Services segment.
|
|
|
–
|
Cash provided by the insurance proceeds received for losses resulting from the July 1, 2018 accidental fire was $18.1 million. For further details see Note (7) Property and Equipment, net of Part II, “Item 8. Financial Statements and Supplementary Data.”
|
|
|
–
|
$4.7 million in proceeds from sales of various assets, including our idle field operations facility in Mathis, Texas, within the Corporate segment, and hydraulic tractors and light general-purpose vehicles within the Completion Services segment.
|
|
|
–
|
Cash provided by the 2018 Term Loan Facility, net of debt discount, was $348.2 million.
|
Uses of cash:
|
|
–
|
$13.0 million of transaction costs, including underwriting discounts paid by the Company, primarily incurred to consummate the secondary stock offering completed in January 2018.
|
|
|
–
|
$7.9 million related to the portion of the cash settlement of our RockPile CVR liability that exceeded its acquisition-date fair value, with the remaining $12.0 million of the cash settlement cost reflected in the use of cash in financing activities as described below.
|
Investing activities:
|
|
–
|
Net cash used in investing activities of $297.5 million was primarily associated with our asset acquisition from RSI and our newbuild and maintenance capital spend on active fleets, offset by insurance proceeds and proceeds from various asset sales, as discussed above under “Sources of cash.” This activity primarily related to our Completion Services segment.
|
|
|
–
|
Cash used to repay our debt facilities, including capital leases but excluding interest, was $289.1 million.
|
|
|
–
|
Cash used to pay debt issuance costs associated with our debt facilities was $7.3 million.
|
|
|
–
|
Shares repurchased and retired related to our stock repurchase program totaled $104.9 million.
|
|
|
–
|
Shares repurchased and retired related to payroll tax withholdings on our share-based compensation totaled $3.6 million.
|
|
|
–
|
$12.0 million related to the portion of the cash settlement of our RockPile CVR liability that was reflective of its acquisition-date fair value.
|
Significant sources and uses of cash during the year ended December 31, 2017
Sources of cash:
|
|
–
|
Net cash generated by operating activities in 2017 of $79.7 million was primarily driven by higher utilization of our combined asset base and increased gross profit in our Completion Services segment. We also had proceeds of $2.1 million and $4.2 million from the indemnification settlement with Trican and our insurance company related to the acquisition of
|
the Acquired Trican Operations. See Note (18) Commitments and Contingencies of Part II, “Item 8. Financial Statements and Supplementary Data.”
|
|
–
|
Total proceeds of $30.6 million from the sale of assets relating to our facilities in Woodward, Oklahoma and Searcy, Arkansas, certain air compressor units, coiled tubing assets and the twelve workover rigs acquired in the acquisition of RockPile. See Note (7) Property and Equipment, net of Part II, “Item 8. Financial Statements and Supplementary Data.”
|
|
|
–
|
Cash provided from IPO proceeds, $255.5 million. See Note (1)(a) Initial Public Offering of Part II, “Item 8. Financial Statements and Supplementary Data.”
|
|
|
–
|
The 2017 Term Loan Facility, entered into on March 15, 2017, provided for $145.0 million, net of associated origination and other transactions fees. Proceeds received were primarily used to fully repay our Senior Secured Notes. statements.
|
|
|
–
|
An incremental term loan facility, entered into on July 3, 2017, provided for $131.1 million, net of associated origination and other transaction fees. Proceeds received were primarily used to fund the acquisition of RockPile.
|
Uses of cash:
|
|
–
|
Cash consideration of $116.6 million associated with the acquisition of RockPile, inclusive of a $7.8 million net working capital settlement.
|
|
|
–
|
Cash used for capital expenditures of $164.4 million, associated with maintenance capital spend on active fleets, commissioning costs associated with the deployment of our idle fleets, the newbuild acquired as part of the acquisition of RockPile and deposits on new equipment. This activity primarily related to our Completion Services segment.
|
|
|
•
|
Financing activities: Cash used to repay our debt facilities, including capital leases but excluding interest, in 2017 was $310.8 million. We used a portion of our IPO proceeds and the proceeds of the 2017 Term Loan Facility to repay our 2016 Term Loan Facility and Senior Secured Notes.
|
Future sources and use of cash
Our primary sources of liquidity have historically included, and we have funded our capital expenditures with, cash flows from operations, proceeds from public offerings of our common stock and borrowings under debt facilities. Our ability to generate future cash flows is subject to a number of variables, many of which are outside of our control, including the drilling, completion and production activity by our customers, which is highly dependent on oil and gas prices. See Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview” for additional discussion of certain factors that impact our results and the market challenges within our industry.
Our primary uses of cash are for operating costs, capital expenditures, debt service and our stock repurchase program.
Capital expenditures for 2020 are projected to be primarily related to maintenance capital spend to support our existing active fleets, wireline trucks, coil units, and cementing units.
Debt service for the year ended December 31, 2020 is projected to be $30.9 million, of which $3.5 million is related to capital leases. We anticipate our debt service will be funded by cash flows from operations.
On December 11, 2019, the Company announced the board of directors approved a new $100 million capital return program, which includes a $50 million stock repurchase program through December 2020. No share repurchases were made under the share repurchase program in 2019. Although our board of directors has approved a share repurchase program, the share repurchase program does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares. The timing and amount of repurchases, if any, will depend upon several factors, including market and business conditions, the trading price of our common stock and the nature of other investment opportunities. The repurchase program may be limited, suspended or discontinued at any time without prior notice. We anticipate any share repurchases will be funded by cash flows from operations.
Other factors affecting liquidity
Financial position in current market. As of December 31, 2019, we had $255.0 million of cash and a total of $303.8 million available under our revolving credit facility. We currently believe that our cash on hand, cash flow generated from operations and availability under our revolving credit facility will provide sufficient liquidity for at least the next 12 months, including for capital expenditures, debt service, working capital investments and stock repurchases.
Guarantee agreements. Under the 2019 ABL Facility $31.8 million of letters of credit were outstanding as of December 31, 2019.
Customer receivables. In line with industry practice, we bill our customers for our services in arrears and are, therefore, subject to our customers delaying or failing to pay our invoices. The majority of our trade receivables have payment terms of 30 days or less. In weak economic environments, we may experience increased delays and failures to pay our invoices due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to the credit markets. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations and consolidated financial condition.
Contractual Obligations
In the normal course of business, we enter into various contractual obligations that impact or could impact our liquidity. The table below contains our known contractual commitments as of December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
Contractual obligations
|
|
Total
|
|
2020
|
|
2021-2022
|
|
2023-2024
|
|
2025+
|
Long-term debt, including current portion(1)
|
|
$
|
344,750
|
|
|
$
|
3,500
|
|
|
$
|
7,000
|
|
|
$
|
7,000
|
|
|
$
|
327,250
|
|
Estimated interest payments(2)
|
|
115,729
|
|
|
22,262
|
|
|
43,572
|
|
|
42,031
|
|
|
7,864
|
|
Finance lease obligations(3)
|
|
10,061
|
|
|
4,977
|
|
|
4,811
|
|
|
273
|
|
|
—
|
|
Operating lease obligations(4)
|
|
68,344
|
|
|
26,068
|
|
|
22,096
|
|
|
9,259
|
|
|
10,921
|
|
Purchase commitments(5)
|
|
119,710
|
|
|
93,985
|
|
|
24,225
|
|
|
1,500
|
|
|
—
|
|
Equity-method investment(6)
|
|
1,302
|
|
|
1,302
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Legal contingency
|
|
10,059
|
|
|
10,059
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
669,955
|
|
|
$
|
162,153
|
|
|
$
|
101,704
|
|
|
$
|
60,063
|
|
|
$
|
346,035
|
|
|
|
(1)
|
Long-term debt represents our obligations under our 2018 Term Loan Facility, exclusive of interest payments. In addition, these amounts exclude $7.1 million of unamortized debt discount and debt issuance costs associated with our 2018 Term Loan Facility.
|
|
|
(2)
|
Estimated interest payments are based on debt balances outstanding as of December 31, 2019 and include interest related to the 2018 Term Loan Facility. Interest rates used for variable rate debt are based on the prevailing current London Interbank Offer Rate (“LIBOR”).
|
|
|
(3)
|
Finance lease obligations primarily consist of obligations on our finance leases of light weight vehicles with ARI Financial Services Inc. and Enterprise FM Trust and includes interest payments.
|
|
|
(4)
|
Operating lease obligations are related to our real estate, rail cars, and light duty vehicles.
|
|
|
(5)
|
Purchase commitments primarily relate to our agreements with vendors for sand purchases and deposits on equipment. The purchase commitments to sand suppliers represent our annual obligations to purchase a minimum amount of sand from vendors. If the minimum purchase requirement is not met, the shortfall at the end of the year is settled in cash or, in some cases, carried forward to the next year.
|
|
|
(6)
|
Equity-method investment is related to our research and development commitments with our equity-method investee. See Notes (18) Commitments and Contingencies and (19) Related Party Transactions of Part II, “Item 8. Financial Statements and Supplementary Data” for further details.
|
.
Principal Debt Agreements
2019 ABL Facility
Origination. On the October 31, 2019, we, and certain of our other subsidiaries as additional borrowers and guarantors, entered into a Second Amended and Restated Asset-Based Revolving Credit Agreement (the “2019 ABL Facility”) to the original Asset-Based Revolving Credit Agreement, dated as of February 17, 2017, as amended December 22, 2017 (the “2017 ABL Facility”).
Structure. Our 2019 ABL Facility provides for a $450.0 million revolving credit facility (with a $100.0 million subfacility for letters of credit), subject to a borrowing base in accordance with the terms agreed between us and the lenders. In addition, subject to approval by the applicable lenders and other customary conditions, the 2019 ABL Facility allows for an additional increase in commitments of up to $200.0 million. The 2019 ABL Facility is subject to customary fees, guarantees of subsidiaries, restrictions and covenants, including certain restricted payments.
Maturity. The loans arising under the initial commitments under the 2019 ABL Facility mature on October 31, 2024. The loans arising under any tranche of extended loans or additional commitments mature as specified in the applicable extension amendment or increase joinder, respectively.
Interest. Pursuant to the terms of the 2019 ABL Facility, amounts outstanding under the 2019 ABL Facility bear interest at a rate per annum equal to, at Keane Group Holdings, LLC’s option, (a) the base rate, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 1.00%, (y) if the
average excess availability is greater than or equal to 33% but less than 66%, 0.75% or (z) if the average excess availability is greater than or equal to 66%, 0.50%, or (b) the adjusted LIBOR rate for such interest period, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 2.00%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 1.75% or (z) if the average excess availability is greater than or equal to 66%, 1.50%, to a rate per annum equal to, at Keane Group Holdings, LLC’s option, (a) the base rate, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 0.75%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 0.50% or (z) if the average excess availability is greater than or equal to 66%, 0.25%, or (b) the adjusted LIBOR rate for such interest period, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 1.75%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 1.50% or (z) if the average excess availability is greater than or equal to 66%, 1.25%.
Financial Covenants. The 2019 ABL Facility requires that, under certain circumstances, the consolidated fixed charge coverage ratio not be lower than 1.0:1.0 as of the last day of the most recently completed four consecutive fiscal quarters for which financial statements were required to have been delivered, including if excess availability (or liquidity if no loan or letter of credit, other than any letter of credit that has been cash collateralized, is outstanding) is less than the greater of (i) 10% of the loan cap and (ii) $30.0 million at any time. As of December 31, 2019, the Company was in compliance with all covenants.
2018 Term Loan Facility
On May 25, 2018, Keane Group and the 2018 Term Loan Guarantors (as defined below) entered into the 2018 Term Loan Facility with each lender from time to time party thereto and Barclays Bank PLC, as administrative agent and collateral agent. The proceeds of the 2018 Term Loan Facility were used to refinance Keane Group’s then-existing term loan facility and to repay related fees and expenses, with the excess proceeds to fund general corporate purposes.
Structure. The 2018 Term Loan Facility provides for a term loan facility in an initial aggregate principal amount of $350.0 million (the loans incurred under the 2018 Term Loan Facility, the “2018 Term Loans”). As of December 31, 2019, there was $337.6 million principal amount of 2018 Term Loans outstanding. In addition, subject to certain customary conditions, the 2018 Term Loan Facility allows for additional incremental term loans to be incurred thereunder in an amount equal to the sum of (a) $200.0 million plus the aggregate principal amount of voluntary prepayments of 2018 Term Loans made on or prior to the date of determination (less amounts incurred in reliance on the capacity described in this subclause (a)), plus (b) an unlimited amount, subject to, (x) in the case of debt secured on a pari passu basis with the 2018 Term Loans, immediately after giving effect to the incurrence thereof, a first lien net leverage ratio being less than or equal to 2.00:1.00, (y) in the case of debt secured on a junior basis with the 2018 Term Loans, immediately after giving effect to the incurrence thereof, a secured net leverage ratio being less than or equal to 3.00:1.00 and (z) in the case of unsecured debt, immediately after giving effect to the incurrence thereof, a total net leverage ratio being less than or equal to 3.50:1.00.
Maturity. May 25, 2025 or, if earlier, the stated maturity date of any other term loans or term commitments.
Amortization. The 2018 Term Loans amortize in quarterly installments equal to 1.00% per annum of the aggregate principal amount of all initial term loans outstanding.
Interest. The 2018 Term Loans bear interest at a rate per annum equal to, at Keane Group’s option, (a) the base rate plus 2.75%, or (b) the adjusted LIBOR for such interest period (subject to a 1.00% floor) plus 3.75%, subject to, on and after the fiscal quarter ending September 30, 2018, a pricing grid with three 0.25% per annum step-ups and one 0.25% per annum step-down determined based on total net leverage for the relevant period. Following a payment event of default, the 2018 Term Loans bear interest at the rate otherwise applicable to such 2018 Term Loans at such time plus an additional 2.00% per annum during the continuance of such event of default.
Prepayments. The 2018 Term Loan Facility is required to be prepaid with: (a) 100% of the net cash proceeds of certain asset sales, casualty events and other dispositions, subject to the terms of an intercreditor
agreement between the agent for the 2018 Term Loan Facility and the agent for the 2019 ABL Facility and certain exceptions; (b) 100% of the net cash proceeds of debt incurrences or issuances (other than debt incurrences permitted under the 2018 Term Loan Facility, which exclusion is not applicable to permitted refinancing debt) and (c) 50% (subject to step-downs to 25% and 0%, upon and during achievement of certain total net leverage ratios) of excess cash flow in excess of a certain amount, minus certain voluntary prepayments made under the 2018 Term Loan Facility or other debt secured on a pari passu basis with the 2018 Term Loans and voluntary prepayments of loans under the 2019 ABL Facility to the extent the commitments under the 2019 ABL Facility are permanently reduced by such prepayments.
Guarantees. Subject to certain exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility, the amounts outstanding under the 2018 Term Loan Facility are guaranteed by the Company, Keane Frac, LP, KS Drilling, LLC, KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, and Keane Frac GP, LLC, and each subsidiary of the Company that will be required to execute and deliver a facility guaranty in the future pursuant to the terms of the 2018 Term Loan Facility (collectively, the “2018 Term Loan Guarantors”).
Security. Subject to certain exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility, the obligations under the 2018 Term Loan Facility are secured by (a) a first-priority security interest in and lien on substantially all of the assets of Keane Group and the 2018 Term Loan Guarantors to the extent not constituting ABL Facility Priority Collateral (as defined below) and (b) a second-priority security interest in and lien on substantially all of the accounts receivable, inventory, and frac iron equipment, and certain other assets and property related to the foregoing including certain chattel paper, investment property, documents, letter of credit rights, payment intangibles, general intangibles, commercial tort claims, books and records and supporting obligations of the borrowers and guarantors under the 2019 ABL Facility (the “ABL Facility Priority Collateral”).
Fees. Certain customary fees are payable to the lenders and the agents under the 2018 Term Loan Facility.
Restricted Payment Covenant. The 2018 Term Loan Facility includes a covenant restricting the ability of the Company and its restricted subsidiaries to pay dividends and make certain other restricted payments, subject to certain exceptions. The 2018 Term Loan Facility provides that the Company and its restricted subsidiaries may, among things, make cash dividends and other restricted payments in an aggregate amount during the life of the facility not to exceed (a) $100.0 million, plus (b) the amount of net proceeds received by Keane Group from the funding of the 2018 Term Loans in excess of the of such net proceeds required to finance the refinancing of the pre-existing term loan facility and pay fees and expenses related thereto and to the entry into the 2018 Term Loan Facility, plus (c) an unlimited amount so long as, after giving effect to such restricted payment, the total net leverage ratio would not exceed 2.00:1.00. In addition, the Company and its restricted subsidiaries may make restricted payments utilizing the Cumulative Credit (as defined below), subject to certain conditions including, if any portion of the Cumulative Credit utilized is comprised of amounts under clause (b) of the definition thereof below, the pro forma total net leverage ratio being no greater than 2.50:1.00.
“Cumulative Credit”, generally, is defined as an amount equal to (a) $25.0 million, (b) 50% of consolidated net income of the Company and its restricted subsidiaries on a cumulative basis from April 1, 2018 (which cumulative amount shall not be less than zero), plus (c) other customary additions, and reduced by the amount of Cumulative Credit used prior to such time (whether for restricted payments, junior debt payments or investments).
Affirmative and Negative Covenants. The 2018 Term Loan Facility contains various affirmative and negative covenants (in each case, subject to customary exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility). The 2018 Term Loan Facility does not contain any financial maintenance covenants. As of December 31, 2019, the Company was in compliance with all covenants.
Events of Default. The 2018 Term Loan Facility contains customary events of default (subject to exceptions, thresholds and grace periods as set forth in the definitive documentation for the 2018 Term Loan Facility).
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet financing arrangements, transactions or special purpose entities.
Related Party Transactions
Our board of directors has adopted a written policy and procedures (the “Related Party Policy”) for the review, approval and ratification of the related party transactions by the independent members of the audit and risk committee of our board of directors. For purposes of the Related Party Policy, a “Related Party Transaction” is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the company or any of its subsidiaries is a participant, and (3) any Related Party (as defined herein) has or will have a direct or indirect material interest. All Related Party Transactions will be reviewed in accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party’s interests in the transaction.
The Related Party Policy defines “Related Party” as any person who is, or, at any time since the beginning of the Company’s last fiscal year, was (1) an executive officer, director or nominee for election as a director of the Company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest in the Company, (3) an immediate family member of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest. Immediate family members includes a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s home, other than a tenant or employee.
Transaction prices with our related parties are commensurate with transaction prices in arms-length transactions. For further details about our transactions with Related Parties, see Note (19) Related Party Transactions of Part II, “Item 8. Financial Statements and Supplementary Data.”
Recently Issued Accounting Standards
For discussion on the impact of accounting standards issued but not yet adopted to our consolidated and combined financial statements, see Note (23) New Accounting Pronouncements of Part II, “Item 8. Financial Statements and Supplementary Data.”
Critical Accounting Policies and Estimates
The preparation of our consolidated and combined financial statements and related notes included within Part II, “Item 8. Financial Statements and Supplementary Data” requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.
A critical accounting estimate is one that requires a high level of subjective judgment by management and has a material impact to our financial condition or results of operations. We believe the following are the critical accounting policies used in the preparation of our consolidated and combined financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated and combined financial statements and related notes included within Part II, “Item 8. Financial Statements and Supplementary Data.”
Business combinations
We allocate the purchase price of businesses we acquire to the identifiable assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill. We use all available information to estimate fair values, including quoted market prices, the carrying value of acquired assets and assumed liabilities and valuation techniques such as discounted cash flows, multi-period excess earning or income-based-relief-from-royalty methods. We engage third-party appraisal firms to assist in the fair value determination of inventories, identifiable long-lived assets, identifiable intangible assets, as well as any contingent consideration or earn-out provisions that provide for additional consideration to be paid to the seller if certain future conditions are met. These estimates are reviewed during the 12-month measurement period and adjusted based on actual results. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our financial condition or results of operations. See Note (3) Mergers and Acquisitions of Part II, “Item 8. Financial Statements and Supplementary Data” for further discussion of our recently completed merger and acquisition during 2019 and 2017, respectively.
Asset acquisitions
Asset acquisitions are measured based on their cost to us, including transaction costs incurred by us. An asset acquisition’s cost or the consideration transferred by us is assumed to be equal to the fair value of the net assets acquired. If the consideration transferred is cash, measurement is based on the amount of cash we paid to the seller, as well as transaction costs incurred by us. Consideration given in the form of nonmonetary assets, liabilities incurred or equity interests issued is measured based on either the cost to us or the fair value of the assets or net assets acquired, whichever is more clearly evident. The cost of an asset acquisition is allocated to the assets acquired based on their estimated relative fair values. We engage third-party appraisal firms to assist in the fair value determination of inventories, identifiable long-lived assets and identifiable intangible assets. Goodwill is not recognized in an asset acquisition. See Note (3) Mergers and Acquisitions of Part II, “Item 8. Financial Statements and Supplementary Data” for our asset acquisition from RSI in 2018.
Legal and environmental contingencies
From time to time, we are subject to legal and administrative proceedings, settlements, investigations, claims and actions, as is typical of the industry. These claims include, but are not limited to, contract claims, environmental claims, employment related claims, claims alleging injury or claims related to operational issues. Our assessment of the likely outcome of litigation matters is based on our judgment of a number of factors, including experience with similar matters, past history, precedents, relevant financial information and other evidence and facts specific to the matter. We accrue for contingencies when the occurrence of a material loss is probable and can be reasonably estimated, based on our best estimate of the expected liability. The estimate of probable costs related to a contingency is developed in consultation with internal and outside legal counsel representing us. The accuracy of these estimates is impacted by, among other things, the complexity of the issues and the amount of due diligence we have been able to perform. Differences between the actual settlement costs, final judgments or fines from our estimates could have a material adverse effect on our financial position or results of operations. See Note (18) Commitments and Contingencies of Part II, “Item 8. Financial Statements and Supplementary Data” for further discussion of our legal, environmental and other regulatory contingencies.
Valuation of long-lived assets, indefinite-lived assets and goodwill
We assess our long-lived assets, such as definite-lived intangible assets and property and equipment, for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. We assess our goodwill and indefinite-lived assets for impairment annually, as of October 31, or whenever events or circumstances indicate that the carrying amount of goodwill or the indefinite-lived assets may not be recoverable. If the carrying value of an asset exceeds its fair value, we record an impairment charge that reduces our earnings.
We perform our qualitative assessments of the likelihood of impairment by considering qualitative factors relevant to each of our reporting segments, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. The expected future cash flows used for impairment reviews and related fair value
calculations are based on subjective, judgmental assessments of projected revenue growth, fleet count, utilization, gross margin rates, SG&A rates, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. Many of these judgments are driven by crude oil prices. If the crude oil market declines and remains at low levels for a sustained period of time, we would expect to perform our impairment assessments more frequently and could record impairment charges.
See Note (2)(h) Goodwill and Indefinite-Lived Intangible Assets and (2)(i) Long-Lived Assets with Definite Lives of Part II, “Item 8. Financial Statements and Supplementary Data” for further discussion on our impairment assessments of our long-lived assets, indefinite-lived assets and goodwill for the years ended December 31, 2019, 2018 and 2017.
Income Taxes
We account for income taxes in accordance with Accounting Standards Codification (“ASC”) 740, “Income Taxes,” which requires an asset and liability approach for financial accounting and reporting of income taxes. Under ASC 740, income taxes are accounted for based upon the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss carry-forwards using enacted tax rates in effect in the year the differences are expected to reverse. We estimate our annual effective tax rate at each interim period based on the facts and circumstances available at that time, while the actual effective tax rate is calculated at year-end. Our effective tax rates will vary due to changes in estimates of our future taxable income or losses, fluctuations in the tax jurisdictions in which we operate and favorable or unfavorable adjustments to our estimated tax liabilities related to proposed or probable assessments. As a result, our effective tax rate may fluctuate significantly on a quarterly or annual basis.
In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In addition to our historical financial results, we consider forecasted market growth, earnings and taxable income, the mix of earnings in the jurisdictions in which we operate and the implementation of prudent and feasible tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage our underlying businesses. We establish a valuation allowance against the carrying value of deferred tax assets when we determine that it is more likely than not that the asset will not be realized through future taxable income. Such amounts are charged to earnings in the period in which we make such determination. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance.
We calculate our income tax liability based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Significant judgment is required in assessing, among other things, the timing and amounts of deductible and taxable items. Due to the complexity of some of these uncertainties, the ultimate resolution may result in payment that is materially different from our current estimate of our tax liabilities. These differences are reflected as increases or decreases to income tax expense in the period in which they are determined.
The amount of income tax we pay is subject to ongoing audits by federal and state tax authorities, which may result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current estimates. We recognize interest and penalties, if any, related to uncertain tax positions in income tax expense.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including but not limited to, (1) the requirement to pay a one-time transition tax on all undistributed earnings of
foreign subsidiaries; (2) reducing the U.S. federal corporate income tax rate from 35% to 21%; (3) eliminating the alternative minimum tax; (4) creating a new limitation on deductible interest expense; and (5) changing rules related to use and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. We evaluated the provisions of the Tax Act and determined only the reduced corporate tax rate from 35% to 21% would have an impact on our consolidated and combined financial statements as of December 31, 2017. Accordingly, we recorded a provision to income taxes for our assessment of the tax impact of the Tax Act on ending deferred tax assets and liabilities and the corresponding valuation allowance. The effects of other provisions of the Tax Act are not expected to have an adverse impact on our consolidated and combined financial statements. We will continue to assess the impact of other aspects of U.S. tax reform on our tax positions and our consolidated and combined financial statements.
See Note (17) Income Taxes of Part II, “Item 8. Financial Statements and Supplementary Data” for further discussion on income taxes for the years ended December 31, 2019, 2018 and 2017.
Leases
Per ASU 2016-02, "Leases (Topic 842)," lessees can classify leases as finance leases or operating leases, while lessors can classify leases as sales-type, direct financing or operating leases. All leases, with the exception of short-term leases, are capitalized on the balance sheet by recording a lease liability, which represents our obligation to make lease payments arising from the lease, along with a corresponding right-of-use asset, which represents our right to use the underlying asset being leased. For leases in which we are the lessee, we use a collateralized incremental borrowing rate to calculate the lease liability, as in most cases we do not know the lessor's implicit rate in the lease. Establishing our lease obligations on our unaudited condensed consolidated balance sheets require judgmental assessments of the term lengths of each and the interest rate yield curve that best represents the collateralized incremental borrowing rate to apply to each lease. We engage third-party specialists to assist us in determining the collateralized incremental borrowing rate yield curve. Errors in determining the lease term lengths and/or selecting the best representative collateralized incremental borrowing rate can have a material adverse effect on our unaudited condensed consolidated financial statements. For further details about our leases, see Note (16) Leases of Part II, "Item 8. Financial Statements and Supplementary Data".
New Accounting Pronouncements
For discussion on the potential impact of new accounting pronouncements issued but not yet adopted, see Note (23) New Accounting Pronouncements of Part II, “Item 8. Financial Statements and Supplementary Data.”
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
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NexTier Oilfield Solutions Inc.
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Audited Consolidated and Combined Financial Statements
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Reports of Independent Registered Public Accounting Firm
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Consolidated Balance Sheets
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Consolidated and Combined Statements of Operations and Comprehensive Income (Loss)
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Consolidated and Combined Statements of Changes in Stockholders’ Equity
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Consolidated and Combined Statements of Cash Flows
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Notes to Consolidated and Combined Financial Statements
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
NexTier Oilfield Solutions Inc.:
Opinion on the Consolidated and Combined Financial Statements
We have audited the accompanying consolidated balance sheets of NexTier Oilfield Solutions Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated and combined statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated and combined financial statements). In our opinion, the consolidated and combined financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 12, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 and 16 to the consolidated and combined financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Update 2016-02, Leases (Topic 842), and related amendments.
Basis for Opinion
These consolidated and combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated and combined financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated and combined financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated and combined financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated and combined financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated and combined financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2011.
Houston, Texas
March 12, 2020
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
NexTier Oilfield Solutions Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited NexTier Oilfield Solutions Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, and the related consolidated and combined statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and related notes (collectively, the consolidated and combined financial statements), and our report dated March 12, 2020 expressed an unqualified opinion on those consolidated and combined financial statements.
The Company acquired C&J Energy Services, Inc. during 2019, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, C&J Energy Services, Inc.’s internal control over financial reporting associated with total assets of $708.5 million and total revenues of $196.7 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2019. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of C&J Energy Services, Inc.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Houston, Texas
March 12, 2020
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands)
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December 31,
2019
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December 31,
2018
|
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Assets
|
|
|
|
|
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Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
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$
|
255,015
|
|
|
$
|
80,206
|
|
|
Trade and other accounts receivable, net
|
|
350,765
|
|
|
210,428
|
|
|
Inventories, net
|
|
61,641
|
|
|
35,669
|
|
|
Assets held for sale
|
|
141
|
|
|
176
|
|
|
Prepaid and other current assets
|
|
20,492
|
|
|
5,784
|
|
|
Total current assets
|
|
688,054
|
|
|
332,263
|
|
|
Operating lease right-of-use assets
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54,503
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|
|
—
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|
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Finance lease right-of-use assets
|
|
9,511
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|
|
—
|
|
|
Property and equipment, net
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709,404
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|
|
531,319
|
|
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Goodwill
|
|
137,458
|
|
|
132,524
|
|
|
Intangible assets
|
|
55,021
|
|
|
51,904
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|
|
Other noncurrent assets
|
|
10,956
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|
|
6,569
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|
|
Total assets
|
|
$
|
1,664,907
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|
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$
|
1,054,579
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Liabilities and Stockholders’ Equity
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Liabilities
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Current liabilities:
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Accounts payable
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$
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115,251
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|
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$
|
106,702
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|
|
Accrued expenses
|
|
234,895
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|
|
101,539
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|
|
Current maturities of long-term operating lease liabilities
|
|
23,473
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|
|
—
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|
|
Current maturities of long-term finance lease liabilities
|
|
4,594
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|
|
4,928
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|
|
Current maturities of long-term debt
|
|
2,311
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|
|
2,776
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|
|
Stock-based compensation
|
|
—
|
|
|
4,281
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|
|
Other current liabilities
|
|
5,670
|
|
|
354
|
|
|
Total current liabilities
|
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386,194
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|
|
220,580
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|
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Long-term operating lease liabilities, less current maturities
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35,123
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|
|
—
|
|
|
Long-term finance lease liabilities, less current maturities
|
|
4,844
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|
|
5,581
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|
|
Long-term debt, net of deferred financing costs and debt discount, less current maturities
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335,312
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|
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337,954
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|
|
Other noncurrent liabilities
|
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16,662
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|
|
3,283
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|
|
Total noncurrent liabilities
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|
391,941
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|
|
346,818
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|
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Total liabilities
|
|
778,135
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|
|
567,398
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|
|
Stockholders’ equity
|
|
|
|
|
|
Common stock, par value $0.01 per share (authorized 500,000 shares, issued and outstanding 212,410 and 104,188 shares, respectively)
|
|
2,124
|
|
|
1,038
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|
|
Paid-in capital in excess of par value
|
|
966,762
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|
|
455,447
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|
|
Retained earnings (deficit)
|
|
(73,333
|
)
|
|
31,494
|
|
|
Accumulated other comprehensive loss
|
|
(8,781
|
)
|
|
(798
|
)
|
|
Total stockholders’ equity
|
|
886,772
|
|
|
487,181
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,664,907
|
|
|
$
|
1,054,579
|
|
|
See accompanying notes to the consolidated and combined financial statements.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Consolidated and Combined Statements of Operations and Comprehensive (Loss) Income
(Amounts in thousands, except for per share amounts)
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Year Ended
December 31,
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2019
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|
2018
|
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2017
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Revenue
|
|
$
|
1,821,556
|
|
|
$
|
2,137,006
|
|
|
$
|
1,542,081
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
Cost of services (1)
|
|
1,403,932
|
|
|
1,660,546
|
|
|
1,282,561
|
|
Depreciation and amortization
|
|
292,150
|
|
|
259,145
|
|
|
159,280
|
|
Selling, general and administrative expenses
|
|
123,676
|
|
|
113,810
|
|
|
84,853
|
|
Merger and integration
|
|
68,731
|
|
|
448
|
|
|
8,673
|
|
(Gain) loss on disposal of assets
|
|
4,470
|
|
|
5,047
|
|
|
(2,555
|
)
|
Impairment expense
|
|
12,346
|
|
|
—
|
|
|
—
|
|
Total operating costs and expenses
|
|
1,905,305
|
|
|
2,038,996
|
|
|
1,532,812
|
|
Operating income (loss)
|
|
(83,749
|
)
|
|
98,010
|
|
|
9,269
|
|
Other income (expense):
|
|
|
|
|
|
|
Other income (expense), net
|
|
453
|
|
|
(905
|
)
|
|
13,963
|
|
Interest expense
|
|
(21,856
|
)
|
|
(33,504
|
)
|
|
(59,223
|
)
|
Total other expenses
|
|
(21,403
|
)
|
|
(34,409
|
)
|
|
(45,260
|
)
|
Income (loss) before income taxes
|
|
(105,152
|
)
|
|
63,601
|
|
|
(35,991
|
)
|
Income tax expense
|
|
(1,005
|
)
|
|
(4,270
|
)
|
|
(150
|
)
|
Net income (loss)
|
|
(106,157
|
)
|
|
59,331
|
|
|
(36,141
|
)
|
Net loss attributable to predecessor
|
|
—
|
|
|
—
|
|
|
(7,918
|
)
|
Net income (loss) attributable to NexTier
|
|
(106,157
|
)
|
|
59,331
|
|
|
(28,223
|
)
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
(116
|
)
|
|
(114
|
)
|
|
96
|
|
Hedging activities
|
|
(7,628
|
)
|
|
(880
|
)
|
|
791
|
|
Total comprehensive income (loss)
|
|
$
|
(113,901
|
)
|
|
$
|
58,337
|
|
|
$
|
(35,254
|
)
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
(0.86
|
)
|
|
$
|
0.54
|
|
|
$
|
(0.34
|
)
|
Diluted net income (loss) per share
|
|
$
|
(0.86
|
)
|
|
$
|
0.54
|
|
|
$
|
(0.34
|
)
|
|
|
|
|
|
|
|
Weighted-average shares outstanding: basic
|
|
122,977
|
|
|
109,335
|
|
|
106,321
|
|
Weighted-average shares outstanding: diluted
|
|
122,977
|
|
|
109,660
|
|
|
106,321
|
|
|
|
(1)
|
Cost of services during the years ended December 31, 2019, 2018, and 2017 excludes depreciation of $276.8 million, $245.6 million, and $150.6 million, respectively. Depreciation related to cost of services is presented within depreciation and amortization separately.
|
See accompanying notes to the consolidated and combined financial statements.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Consolidated and Combined Statements of Changes in Stockholders’ Equity
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members’ equity
|
|
Common Stock
|
|
Paid-in Capital in Excess of Par Value
|
|
Retained Earnings (deficit)
|
|
Accumulated other comprehensive income (loss)
|
|
Total
|
Balance as of December 31, 2016
|
|
$
|
453,810
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(288,771
|
)
|
|
$
|
(2,787
|
)
|
|
$
|
162,252
|
|
Net loss prior to the Organizational Transactions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,918
|
)
|
|
—
|
|
|
(7,918
|
)
|
Effect of the Organizational Transactions
|
|
(453,810
|
)
|
|
—
|
|
|
156,270
|
|
|
297,540
|
|
|
—
|
|
|
—
|
|
Issuance of common stock sold in initial public offering, net of offering costs and deferred stock awards for executives
|
|
—
|
|
|
1,031
|
|
|
245,902
|
|
|
—
|
|
|
—
|
|
|
246,933
|
|
Stock-based compensation recognized subsequent to the Organizational Transactions
|
|
—
|
|
|
—
|
|
|
10,578
|
|
|
—
|
|
|
—
|
|
|
10,578
|
|
Effect of RockPile acquisition
|
|
—
|
|
|
87
|
|
|
130,203
|
|
|
—
|
|
|
—
|
|
|
130,290
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,059
|
|
|
1,059
|
|
Deferred tax adjustment
|
|
—
|
|
|
—
|
|
|
(1,879
|
)
|
|
—
|
|
|
—
|
|
|
(1,879
|
)
|
Net loss subsequent to Organizational Transactions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(28,223
|
)
|
|
—
|
|
|
(28,223
|
)
|
Balance as of December 31, 2017
|
|
$
|
—
|
|
|
$
|
1,118
|
|
|
$
|
541,074
|
|
|
$
|
(27,372
|
)
|
|
$
|
(1,728
|
)
|
|
$
|
513,092
|
|
Stock-based compensation(1)
|
|
—
|
|
|
2
|
|
|
21,458
|
|
|
—
|
|
|
—
|
|
|
21,460
|
|
Shares repurchased and retired related to stock-based compensation
|
|
—
|
|
|
(1
|
)
|
|
(3,578
|
)
|
|
—
|
|
|
—
|
|
|
(3,579
|
)
|
Shares repurchased and retired related to stock repurchase program
|
|
—
|
|
|
(81
|
)
|
|
(103,507
|
)
|
|
(1,273
|
)
|
|
—
|
|
|
(104,861
|
)
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
808
|
|
|
930
|
|
|
1,738
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
59,331
|
|
|
—
|
|
|
59,331
|
|
Balance as of December 31, 2018
|
|
$
|
—
|
|
|
$
|
1,038
|
|
|
$
|
455,447
|
|
|
$
|
31,494
|
|
|
$
|
(798
|
)
|
|
$
|
487,181
|
|
New lease standard implementation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,330
|
|
|
—
|
|
|
1,330
|
|
Stock-based compensation(1)
|
|
—
|
|
|
33
|
|
|
33,226
|
|
|
—
|
|
|
—
|
|
|
33,259
|
|
Shares repurchased and retired related to stock-based compensation
|
|
—
|
|
|
(6
|
)
|
|
(5,976
|
)
|
|
—
|
|
|
—
|
|
|
(5,982
|
)
|
Other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,983
|
)
|
|
(7,983
|
)
|
Equity issued in connection with the C&J Merger
|
|
—
|
|
|
1,059
|
|
|
484,065
|
|
|
—
|
|
|
—
|
|
|
485,124
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(106,157
|
)
|
|
—
|
|
|
(106,157
|
)
|
Balance as of December 31, 2019
|
|
$
|
—
|
|
|
$
|
2,124
|
|
|
$
|
966,762
|
|
|
$
|
(73,333
|
)
|
|
$
|
(8,781
|
)
|
|
$
|
886,772
|
|
|
|
(1)
|
Stock-based compensation during 2019 and 2018 includes stock-based compensation expense recognized during the period of $29.0 million and $17.2 million and the vested deferred stock awards of $4.3 million and $4.3 million, respectively. Refer to Note (12) Stock-Based Compensation for further discussion of the Company’s stock-based compensation.
|
See accompanying notes to the consolidated and combined financial statements.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Consolidated and Combined Statements of Cash Flows
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(106,157
|
)
|
|
$
|
59,331
|
|
|
$
|
(36,141
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities
|
|
|
|
|
|
|
Depreciation and amortization
|
|
292,150
|
|
|
259,145
|
|
|
159,280
|
|
Amortization of deferred financing fees
|
|
1,360
|
|
|
3,147
|
|
|
5,241
|
|
(Gain) loss on disposal of assets
|
|
4,470
|
|
|
5,047
|
|
|
(2,555
|
)
|
Stock-based compensation
|
|
28,977
|
|
|
17,166
|
|
|
10,578
|
|
Loss on debt extinguishment/modification, including prepayment premiums
|
|
526
|
|
|
7,563
|
|
|
31,084
|
|
Loss on contingent consideration liability
|
|
—
|
|
|
13,254
|
|
|
—
|
|
Loss on foreign currency translation
|
|
—
|
|
|
2,621
|
|
|
—
|
|
Unrealized gain (loss) on derivatives
|
|
(7,628
|
)
|
|
(880
|
)
|
|
791
|
|
Realized (gain) loss on derivatives
|
|
(239
|
)
|
|
(697
|
)
|
|
172
|
|
Gain on insurance proceeds recognized in other income
|
|
—
|
|
|
(14,892
|
)
|
|
—
|
|
Loss on impairment of assets
|
|
12,346
|
|
|
—
|
|
|
—
|
|
Other non-cash expenses
|
|
—
|
|
|
—
|
|
|
(322
|
)
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
Decrease (increase) in trade and other accounts receivable, net
|
|
172,566
|
|
|
27,485
|
|
|
(113,047
|
)
|
Decrease (increase) in inventories
|
|
17,181
|
|
|
(2,725
|
)
|
|
(15,475
|
)
|
Decrease in prepaid and other current assets
|
|
3,703
|
|
|
2,734
|
|
|
20,294
|
|
Decrease (increase) in other assets
|
|
(242
|
)
|
|
362
|
|
|
(336
|
)
|
Increase (decrease) in accounts payable
|
|
(17,799
|
)
|
|
11,304
|
|
|
(141
|
)
|
Decrease in customer contract liabilities
|
|
—
|
|
|
(4,940
|
)
|
|
—
|
|
Increase (decrease) in accrued expenses
|
|
(103,609
|
)
|
|
(32,318
|
)
|
|
41,446
|
|
Increase (decrease) in other liabilities
|
|
7,858
|
|
|
(2,396
|
)
|
|
(21,178
|
)
|
Net cash provided by operating activities
|
|
305,463
|
|
|
350,311
|
|
|
79,691
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Asset and business acquisitions, including cash acquired
|
|
68,807
|
|
|
(35,003
|
)
|
|
(116,576
|
)
|
Purchase of property and equipment
|
|
(200,385
|
)
|
|
(277,569
|
)
|
|
(141,340
|
)
|
Advances of deposit on equipment
|
|
(7,451
|
)
|
|
(4,153
|
)
|
|
(23,096
|
)
|
Payments for leasehold improvements
|
|
—
|
|
|
(1,651
|
)
|
|
(157
|
)
|
Implementation of software
|
|
(4,408
|
)
|
|
(883
|
)
|
|
(687
|
)
|
Proceeds from sale of assets
|
|
29,114
|
|
|
4,652
|
|
|
30,565
|
|
Proceeds from insurance recoveries
|
|
223
|
|
|
18,247
|
|
|
515
|
|
Equity-method investment
|
|
—
|
|
|
(1,146
|
)
|
|
—
|
|
Net cash used in investing activities
|
|
(114,100
|
)
|
|
(297,506
|
)
|
|
(250,776
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
—
|
|
|
—
|
|
|
255,494
|
|
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Consolidated and Combined Statements of Cash Flows
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the secured notes and term loan facilities
|
|
—
|
|
|
348,250
|
|
|
285,000
|
|
Payments on the secured notes and term loan facilities
|
|
(3,500
|
)
|
|
(284,952
|
)
|
|
(289,902
|
)
|
Payments on finance leases
|
|
(6,035
|
)
|
|
(4,119
|
)
|
|
(2,861
|
)
|
Prepayment premiums on early debt extinguishment
|
|
—
|
|
|
—
|
|
|
(15,817
|
)
|
Payment of debt issuance costs
|
|
(1,229
|
)
|
|
(7,331
|
)
|
|
(13,792
|
)
|
Payment of contingent consideration liability
|
|
—
|
|
|
(11,962
|
)
|
|
—
|
|
Shares repurchased and retired related to share repurchase program
|
|
—
|
|
|
(104,861
|
)
|
|
—
|
|
Shares repurchased and retired related to stock-based compensation
|
|
(5,982
|
)
|
|
(3,579
|
)
|
|
—
|
|
Net cash provided by (used in) financing activities
|
|
(16,746
|
)
|
|
(68,554
|
)
|
|
218,122
|
|
Non-cash effect of foreign translation adjustments
|
|
192
|
|
|
(165
|
)
|
|
163
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
|
174,809
|
|
|
(15,914
|
)
|
|
47,200
|
|
Cash, cash equivalents and restricted cash, beginning
|
|
80,206
|
|
|
96,120
|
|
|
48,920
|
|
Cash, cash equivalents and restricted cash, ending
|
|
$
|
255,015
|
|
|
$
|
80,206
|
|
|
$
|
96,120
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
20,836
|
|
|
$
|
24,528
|
|
|
$
|
30,104
|
|
CVR settlement
|
|
—
|
|
|
19,918
|
|
|
—
|
|
Income taxes
|
|
1,726
|
|
|
5,529
|
|
|
—
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
Change in accrued capital expenditures
|
|
$
|
(17,274
|
)
|
|
$
|
2,930
|
|
|
$
|
21,549
|
|
Non-cash additions to finance right-of use assets
|
|
6,269
|
|
|
—
|
|
|
—
|
|
Non-cash additions to finance lease liabilities, including current maturities
|
|
(6,286
|
)
|
|
—
|
|
|
—
|
|
Non-cash additions to operating right-of-use assets
|
|
65,551
|
|
|
—
|
|
|
—
|
|
Non-cash additions to operating lease liabilities, including current maturities
|
|
(65,297
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
Fair value of C&J assets acquired
|
|
806,218
|
|
|
—
|
|
|
—
|
|
106,627 shares of NexTier common stock issued in exchange for C&J capital stock and replacement awards
|
|
(485,124
|
)
|
|
—
|
|
|
—
|
|
C&J liabilities assumed
|
|
(321,094
|
)
|
|
—
|
|
|
—
|
|
See accompanying notes to the consolidated and combined financial statements.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(1) Basis of Presentation and Nature of Operations
On October 13, 2016, NexTier Oilfield Solutions Inc. (the “Company” or “NexTier”) was formed as Keane Group, Inc. ("Keane"), a Delaware corporation to be a holding corporation for Keane Group Holdings, LLC and its subsidiaries (collectively referred to as “Keane Group”), for the purpose of facilitating the initial public offering (the “IPO”) of shares of common stock of the Company.
On October 31, 2019, the Company completed its merger (the “C&J Merger”) with C&J Energy Services, Inc. (“C&J”) and changed its name to "NexTier Oilfield Solutions Inc." For more details regarding the C&J Merger, refer to Note (3) Mergers and Acquisitions.
The accompanying consolidated and combined financial statements were prepared using United States Generally Accepted Accounting Principles (“GAAP”) and the instructions to Form 10-K and Regulation S-X and include all of the accounts of NexTier and its consolidated subsidiaries. All intercompany transactions and balances have been eliminated.
The Company’s accounting policies are in accordance with GAAP. The preparation of financial statements in conformity with these accounting principles requires the Company to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and (2) the reported amounts of revenue and expenses during the reporting period. Ultimate results could differ from the Company’s estimates. Significant items subject to such estimates and assumptions include the useful lives of property and equipment and intangible assets; allowances for doubtful accounts; inventory reserves; acquisition accounting; contingent liabilities; and the valuation of property and equipment, intangible assets, equity issued as consideration in an acquisition, income taxes, stock-based incentive plan awards and derivatives.
Management believes the consolidated and combined financial statements included herein contain all adjustments necessary to present fairly the Company’s financial position as of December 31, 2019 and 2018 and the results of its operations and cash flows for the years ended December 31, 2019, 2018 and 2017. Such adjustments are of a normal recurring nature.
The consolidated and combined financial statements for the period from January 1, 2017 to July 2, 2017 reflect only the historical results of the Company prior to the completion of the Company’s acquisition of RockPile (as defined herein). The consolidated and combined financial statements for the period from January 1, 2019 to October 31, 2019 reflect only the historical results of the Company prior to the completion of the C&J Merger. The financial statements have been prepared using the acquisition method of accounting under existing U.S. GAAP, which requires that one of the two companies in the C&J Merger be designated as the acquirer for accounting purposes. C&J and Keane determined that Keane was the accounting acquirer. Accordingly, consideration given by Keane to complete the C&J Merger was allocated to the underlying tangible and intangible assets and liabilities acquired based on their estimated fair values as of the date of completion of the C&J Merger, with any excess purchase price allocated to goodwill.
Earnings per share and weighted-average shares outstanding for the year ended December 31, 2017 have been presented giving pro forma effect to the Organizational Transactions (as defined herein) as if they had occurred on January 1, 2016. Financial results for the years ended December 31, 2017 are the financial results of Keane and Keane Group, the Company’s predecessor for accounting purposes, as there was no activity under Keane prior to 2017.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(a) Initial Public Offering
On January 25, 2017, the Company completed the IPO of 30,774,000 shares of its common stock at the public offering price of $19.00 per share, which included 15,700,000 shares offered by the Company and 15,074,000 shares offered by the selling stockholder, including 4,014,000 shares sold as a result of the underwriters’ exercise of their overallotment option. The IPO proceeds to the Company, net of underwriters’ fees and capitalized cash payments of $4.8 million for professional services and other direct IPO related activities, was $255.5 million. The net proceeds were used to fully repay KGH Intermediate Holdco II, LLC’s (“Holdco II”) term loan balance of $99.0 million and the associated prepayment premium of $13.8 million, and to repay $50.0 million of its 12% secured notes due 2019 (“Senior Secured Notes”) and the associated prepayment premium of approximately $0.5 million. The remaining proceeds were used for general corporate purposes, including capital expenditures, working capital and potential acquisitions and strategic transactions. Upon completion of the IPO and the reorganization, the Company had 103,128,019 shares of common stock outstanding.
All underwriting discounts and commissions and other specific costs directly attributable to the IPO were deferred and netted against the gross proceeds of the offering through paid-in capital in excess of par value.
(b) Organizational Transactions
In connection with the IPO, the Company completed a series of organizational transactions (the “Organizational Transactions”), including the following:
|
|
•
|
Certain entities affiliated with Cerberus Capital Management, L.P., certain members of the Keane family, Trican Well Service Ltd. (“Trican”) and certain members of the Company’s management team (collectively, the “Existing Owners”) contributed all of their direct and indirect equity interests in Keane Group to Keane Investor Holdings LLC (“Keane Investor”);
|
|
|
•
|
Keane Investor contributed all of its equity interests in Keane Group to the Company in exchange for common stock of the Company; and
|
|
|
•
|
The Company’s independent directors received grants of restricted stock of the Company in substitution for their interests in Keane Group.
|
The Organizational Transactions represented a transaction between entities under common control and were accounted for similarly to pooling of interests in a business combination. The common stock of the Company issued to Keane Investor in exchange for its equity interests in Keane Group was recognized by the Company at the carrying value of the equity interests in Keane Group. In addition, the Company became the successor and Keane Group the predecessor for the purposes of financial reporting. The financial statements for the periods prior to the IPO and Organizational Transactions have been adjusted to combine and consolidate the previously separate entities for presentation purposes.
As a result of the Organizational Transactions and the IPO, (i) the Company became a holding company with no material assets other than its ownership of Keane Group, (ii) an aggregate of 72,354,019 shares of the Company’s common stock were owned by Keane Investor and certain of the Company’s independent directors, and Keane Investor entered into a Stockholders’ Agreement with the Company, (iii) the Existing Owners became holders of equity interests in the Company’s controlling stockholder, Keane Investor (and holders of Keane Group’s Class B and Class C Units became holders of Class B and Class C Units in Keane Investor) and (iv) the capital stock of the Company consists of (x) common stock, entitled to one vote per share on all matters submitted to a vote of stockholders and (y) undesignated and unissued preferred stock.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(2) Summary of Significant Accounting Policies
(a) Business Combinations and Asset Acquisitions
Business combinations are accounted for using the acquisition method of accounting in accordance with the Accounting Standards Codification (“ASC”) 805, “Business Combinations”, as amended by Accounting Standards Update (“ASU”) 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business.” The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Fair value of the acquired assets and liabilities is measured in accordance with the guidance of ASC 820, using discounted cash flows and other applicable valuation techniques. Any acquisition related costs incurred by the Company are expensed as incurred. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill if the definition of a business is met. Operating results of an acquired business are included in the Company’s results of operations from the date of acquisition.
Asset acquisitions are measured based on their cost to the Company, including transaction costs. Asset acquisition costs, or the consideration transferred by the Company, are assumed to be equal to the fair value of the net assets acquired. If the consideration transferred is cash, measurement is based on the amount of cash the Company paid to the seller as well as transaction costs incurred. Consideration given in the form of nonmonetary assets, liabilities incurred or equity interests issued is measured based on either the cost to the Company or the fair value of the assets or net assets acquired, whichever is more clearly evident. The cost of an asset acquisition is allocated to the assets acquired based on their estimated relative fair values. Goodwill is not recognized in an asset acquisition.
Refer to Note (3) Mergers and Acquisitions for discussion of the mergers and acquisitions completed in 2019, 2018, and 2017.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company’s cash is invested in overnight repurchase agreements and certificates of deposit with an initial term of less than three months.
Net cash received from certain dispositions or casualty events of more than $25.0 million per single transaction or $50.0 million per series of related transactions, under the 2018 Term Loan Facility (as defined herein), and of more than $50.0 million, under the 2019 ABL Facility (as defined herein), is not considered to be restricted as long as the Company, at management’s discretion, reinvests any part of such proceeds in assets (other than current assets) to be used for its business (in the case of the 2018 Term Loan Facility) and for replacing or repairing the assets in respect of which such proceeds were received (in the case of the 2019 ABL Facility), in each case within 12 months from the receipt date of such proceeds. Otherwise, the proceeds are required to be applied as a prepayment of the 2018 Term Loan Facility or any outstanding commitments under the 2019 ABL Facility. The Company did not have any qualifying asset sale proceeds or insurance proceeds that exceeded the dollar thresholds described above for the year ended December 31, 2019 and 2018.
Cash balances related to the Company's captive insurance subsidiary, which totaled 20.1 million at December 31, 2019, are included in cash and cash equivalents in the consolidated balance sheets, and the Company expects to use these cash balances to fund the operations of the captive insurance subsidiaries and to settle future anticipated claims.
The Company did not have any restricted cash as of December 31, 2019 and 2018.
(c) Trade Accounts Receivable
Trade accounts receivable are generally recorded at the invoiced amount. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated and combined statements of cash flows. The Company analyzes the need for an allowance for doubtful accounts for estimated losses related to potentially uncollectible accounts receivable on a case by case basis throughout the year. In establishing the required allowance, management considers historical losses, adjusted to take into account current
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
market conditions as well as the financial condition of the Company’s customers, the balance of receivables in dispute, the current receivables aging and current payment patterns. Trade accounts receivable were $350.6 million and $210.1 million at December 31, 2019 and 2018, respectively. As of December 31, 2019, and 2018, the Company had an allowance for doubtful accounts of $0.7 million and $0.5 million, respectively.
(d) Inventories
Inventories are stated at the lower of cost or net realizable value. Costs of inventories include purchase, conversion and condition. As inventory is consumed, the expense is recorded in cost of services in the consolidated and combined statements of operations and comprehensive income (loss) using the weighted average cost method for all inventories.
The Company periodically reviews the nature and quantities of inventory on hand and evaluates the net realizable value of items based on historical usage patterns, known changes to equipment or processes and customer demand for specific products. Significant or unanticipated changes in business conditions could impact the magnitude and timing of impairment recognized. Provision for excess or obsolete inventories is determined based on historical usage of inventory on-hand, volume on-hand versus anticipated usage, technological advances and consideration of current market conditions. Inventories that have not turned over for more than a year are subject to a slow-moving reserve provision. In addition, inventories that have become obsolete due to technological advances, excess volume on-hand or no longer configured to operate with the Company’s equipment are written-off.
(e) Revenue Recognition
The Company adopted ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, effective January 1, 2018, using the modified retrospective method. Changes were made to the relevant business processes and the related control activities, including information systems, in order to monitor and maintain appropriate controls over financial reporting. There were no significant changes to the Company’s internal control over financial reporting due to the Company’s adoption of ASU 2014-09.
The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. To achieve this core principle, ASC 606 requires the Company to apply the following five steps: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to performance obligations in the contract, and (5) recognize revenue when or as the Company satisfies a performance obligation. The five-step model requires management to exercise judgment when evaluating contracts and recognizing revenue.
Identify the Contract and Determine Transaction Price
The Company typically provides its services (i) under term pricing agreements; (ii) under contracts that include dedicated fleet or unit arrangements; (iii) on a spot market basis; and (iv) under term contracts that include “take-or-pay” provisions.
Under term pricing agreements, the Company and customer agree to set pricing for a specified period of time. The agreed-upon pricing is subject to periodic review, as specifically defined in the agreement, and may be adjusted upon the agreement of both parties. These agreements typically do not feature provisions obligating either party to commit to a certain utilization level. Additionally, these agreements typically allow either party to terminate the agreement for its convenience without incurring a termination penalty.
Under dedicated unit arrangements, customers typically commit to targeted utilization levels based on a specified number of fracturing stages per calendar month or fulfilling the customer's requirements, in either instance at agreed-upon pricing. These agreements typically do not feature obligations to pay for services not used by the customer. In addition, the agreed-upon pricing is typically subject to periodic review, as specifically defined in the agreement, and may be adjusted upon the agreement of both parties. These contracts also typically allow for termination for either party's convenience with a brief notice period and may feature a termination penalty in the event the customer terminates the contract for its convenience.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Rates for services performed on a spot market basis are based on an agreed-upon spot market rate unique to each service line.
Under term contracts with “take-or-pay” provisions, the Company’s customers are typically obligated to pay on a monthly basis for a specified quantity of services, whether or not those services are actually utilized. To the extent customers use more than the specified contracted minimums, the Company will charge a pre-agreed amount for the provision of such additional services, which amounts are typically subject to periodic review. In addition, these contracts typically feature a termination penalty in the event the customer terminates the contract for its convenience.
"Take-or-pay" provisions are considered stand ready performance obligations. The Company recognizes "take-or-pay" revenues using a time-based measure of progress, as the Company cannot reasonably estimate if and when the customer will require the Company to provide the services; likewise, the customer benefits as the Company is standing by to provide such services.
Identify and Satisfy the Performance Obligations
The majority of the Company’s performance obligations are satisfied over time. The Company has determined this best represents the transfer of value from its services to the customer as performance by the Company helps to enhance a customer controlled asset (e.g., unplugging a well, enabling a well to produce oil or natural gas). Measurement of the satisfaction of the performance obligation is measured using the output method, which is typically evidenced by a field ticket. A field ticket includes items such as services performed, consumables used, and man hours incurred to complete the job for the customer. Each field ticket is used to invoice customers. Payment terms for invoices issued are in accordance with a master services agreement with each customer, which typically require payment within 30 days of the invoice issuance.
A portion of the Company’s contracts contain variable consideration; however, this variable consideration is typically unknown at the time of contract inception, and is not known until the job is complete, at which time the variability is resolved. Examples of variable consideration include the number of hours that will be incurred and the amount of consumables (such as chemicals and proppants) that will be used to complete a job.
In the course of providing services to its customers, the Company may use consumables; for example, in the Company’s fracturing business, chemicals and proppants are used in the fracturing service for the customer. ASC 606 requires that goods or services promised to a customer be identified separately when they are distinct within the contract. However, the consumables are used to complete the service for the customer and are not beneficial to the customer on their own. As such, the consumables are not a separate performance obligation, but instead are combined with the other services within the context of the contract and accounted for as a single performance obligation.
Remaining Performance Obligations
The Company invoices its customers for the services provided at contractual rates multiplied by the applicable unit of measurement, including volume of consumables used and hours incurred. In accordance with ASC 606, the Company has elected the “Right to Invoice” practical expedient for all contracts, which allows the Company to invoice its customers in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date. With this election, the Company is not required to disclose information about the variable consideration related to its remaining performance obligations. The Company has also elected the practical expedient to expense immediately mobilization costs, as the amortization period would always be less than one year. As a result of electing these practical expedients, there was no material impact on the Company’s current revenue recognition processes and no retrospective adjustments were necessary. For those contracts with a term of more than one year, the Company had approximately $31.0 million of unsatisfied performance obligations as of December 31, 2019, which will be recognized as services are performed over the remaining contractual terms.
The Company’s obligations for refunds as well as the warranties and related obligations stated in its contracts with its customers are standard to the industry and are related to the correction of any defectiveness in the execution of its performance obligations.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Contract Balances
In line with industry practice, the Company bills its customers for its services in arrears, typically when the stage or well is completed or at month-end. The majority of the Company’s jobs are completed in less than 30 days. Furthermore, it is currently not standard practice for the Company to execute contracts with prepayment features. As such, the Company’s contract liabilities are immaterial to its consolidated balance sheets. Payment terms after invoicing are typically 30 days or less.
The Company does not have any significant contract costs to obtain or fulfill contracts with customers; as such, no amounts are recognized on the consolidated balance sheet. Taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from revenues in the consolidated and combined statements of operations and comprehensive income (loss) and net cash provided by operating activities in the consolidated and combined statements of cash flows.
The following is a description of the Company’s core service lines separated by reportable segments from which the Company generates its revenue. For additional detailed information regarding reportable segments, see (21) Business Segments.
Revenue from the Company’s Completion Services, Well Construction and Intervention (“WC&I”), and Well Support Services segments are recognized as follows:
Completion Services
The Company provides hydraulic fracturing, wireline and pumpdown services pursuant to contractual arrangements, such as term contracts and pricing agreements. Revenue from these services are earned as services are rendered, which is generally on a per stage or fixed monthly rate. All revenue is recognized when a contract with a customer exists, the performance obligations under the contract have been satisfied over time, the amount to which the Company has the right to invoice has been determined and collectability of amounts subject to invoice is probable. Contract fulfillment costs, such as mobilization costs and shipping and handling costs, are expensed as incurred and are recorded in cost of services in the consolidated and combined statements of operations and comprehensive income (loss). To the extent fulfillment costs are considered separate performance obligations that are billable to the customer, the amounts billed are recorded as revenue in the consolidated and combined statements of operations and comprehensive income (loss).
Once a stage has been completed, a field ticket is created that includes charges for the service performed and the chemicals and proppant consumed during the course of the service. The field ticket may also include charges for the mobilization of the equipment to the location, any additional equipment used on the job and other miscellaneous items. The field ticket represents the amounts to which the Company has the right to invoice and to recognize as revenue.
Well Construction and Intervention
The Company provides cementing services pursuant to contractual arrangements, such as term contracts, or on a spot market basis. Revenue is recognized upon the completion of each performance obligation, which for cementing services, represents the portion of the well cemented: surface casing, intermediate casing or production liner. The performance obligations are satisfied over time. Jobs for these services are typically short term in nature, with most jobs completed in a day. Once the well has been cemented, a field ticket is created that includes charges for the services performed and the consumables used during the course of service. The field ticket represents the amounts to which the Company has the right to invoice and to recognize as revenue.
The Company provides a range of coiled tubing services primarily used for fracturing plug drill-out during completion operations and for well workover and maintenance, primarily on a spot market basis. Jobs for these services are typically short-term in nature, lasting anywhere from a few hours to multiple days. Revenue is recognized upon completion of each day’s work based upon a completed field ticket. The field ticket includes charges for the services performed and the consumables used during the course of service. The field ticket may also include charges for the mobilization and set-up of equipment, the personnel on the job, any additional equipment
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
used on the job, and other miscellaneous consumables. The Company typically charges the customer for the services performed and resources provided on an hourly basis at agreed-upon spot market rates, at times, or pursuant to pricing agreements.
Well Support Services Segment
Through its rig services line, the Company provides workover and well servicing rigs that are primarily used for routine repair and maintenance of oil and gas wells, re-drilling operations and plug and abandonment operations. These services are provided on an hourly basis at prices that approximate spot market rates. A field ticket is generated and revenue is recognized upon the earliest of the completion of a job or at the end of each day. A rig services job can last anywhere from a few hours to multiple days depending on the type of work being performed. The field ticket includes the base hourly rate charge and, if applicable, charges for additional personnel or equipment not contemplated in the base hourly rate. The field ticket may also include charges for the mobilization and set-up of equipment.
Through its fluids management service line, the Company primarily provides storage, transportation and disposal services for fluids used in the drilling, completion and workover of oil and gas wells. Rates for these services vary and can be on a per job, per hour, or per load basis, or on the basis of quantities sold or disposed. Revenue is recognized upon the completion of each job or load, or delivered product, based on a completed field ticket.
Through its other special well site service line, the Company primarily provides fishing, contract labor and tool rental services for completion and workover of oil and gas wells. Rates for these services vary and can be on a per job, per hour or on the basis of rental days per month. Revenue is recognized based on a field ticket issued upon the completion of each job or on a monthly billing for rental services provided.
Disaggregation of Revenue
Revenue activities during the years ended December 31, 2019, 2018 and 2017 were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
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|
|
Completion Services
|
|
WC&I
|
|
Well Support Services
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|
Total
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|
|
(In thousands)
|
Geography
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|
|
|
|
|
|
|
|
Northeast
|
|
$
|
479,685
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|
|
$
|
5,193
|
|
|
$
|
—
|
|
|
$
|
484,878
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|
Central
|
|
104,225
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|
|
5,741
|
|
|
—
|
|
|
109,966
|
|
West Texas
|
|
839,652
|
|
|
24,575
|
|
|
9,336
|
|
|
873,563
|
|
West
|
|
273,364
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|
|
27,530
|
|
|
39,247
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|
|
340,141
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|
International
|
|
13,008
|
|
|
—
|
|
|
—
|
|
|
13,008
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|
|
|
$
|
1,709,934
|
|
|
$
|
63,039
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|
|
$
|
48,583
|
|
|
$
|
1,821,556
|
|
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
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|
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|
|
|
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|
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Year Ended December 31, 2018
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Completion Services
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WC&I
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Well Support Services
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Total
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|
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(In thousands)
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Geography
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|
|
|
|
|
|
|
|
Northeast
|
|
$
|
790,026
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|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
790,026
|
|
Central
|
|
61,083
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|
|
—
|
|
|
—
|
|
|
61,083
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|
West Texas
|
|
1,005,630
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|
|
12,256
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|
|
—
|
|
|
1,017,886
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|
West
|
|
244,217
|
|
|
23,794
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|
|
—
|
|
|
268,011
|
|
|
|
$
|
2,100,956
|
|
|
$
|
36,050
|
|
|
$
|
—
|
|
|
$
|
2,137,006
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Year Ended December 31, 2017
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|
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Completion Services
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WC&I
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|
Well Support Services
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Total
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|
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(In thousands)
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Geography
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|
|
|
|
|
|
|
|
Northeast
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|
$
|
566,931
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
566,931
|
|
Central
|
|
103,857
|
|
|
—
|
|
|
—
|
|
|
103,857
|
|
West Texas
|
|
635,877
|
|
|
—
|
|
|
—
|
|
|
635,877
|
|
West
|
|
220,623
|
|
|
7,526
|
|
|
7,267
|
|
|
235,416
|
|
|
|
$
|
1,527,288
|
|
|
$
|
7,526
|
|
|
$
|
7,267
|
|
|
$
|
1,542,081
|
|
(f) Property and Equipment
Property and equipment, inclusive of equipment under capital lease, are generally stated at cost.
Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from 13 months to 40 years. Management bases the estimate of the useful lives and salvage values of property and equipment on expected utilization, technological change and effectiveness of its maintenance programs. When components of an item of property and equipment are identifiable and have different useful lives, they are accounted for separately as major components of property and equipment. Equipment held under capital leases are generally amortized on a straight-line basis over the shorter of the estimated useful life of the underlying asset or the term of the lease.
Gains and losses on disposal of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognized net within operating costs and expenses in the consolidated and combined statements of operations and comprehensive income (loss).
Major classifications of property and equipment and their respective useful lives are as follows:
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Land
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Indefinite life
|
Building and leasehold improvements
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13 months – 40 years
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Machinery and equipment
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13 months – 10 years
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Office furniture, fixtures and equipment
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3 years – 5 years
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Leasehold improvements are assigned a useful life equal to the term of the related lease, or its expected period of use.
In the first quarter of 2018, the Company reassessed the estimated useful lives of select machinery and equipment. The Company concluded that due to an increase in service intensity driven by a shift to more 24-hour
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
work, higher stage volumes, larger stages and more proppant usage per stage, the estimated useful lives of these select machinery and equipment should be reduced by approximately 50%.
In accordance with ASC 250, “Accounting Changes and Error Corrections,” the change in the estimated useful lives of the Company’s property and equipment was accounted for as a change in accounting estimate, on a prospective basis, effective January 1, 2018. This change resulted in an increase in depreciation expense and decrease in net income during the year ended December 31, 2018 of $15.0 million in the consolidated and combined statement of operations and comprehensive income (loss).
The Company uses the days straight-line depreciation method. Depreciation methods, useful lives and residual values are reviewed annually or as needed based on activities related to specific assets.
(g) Major Maintenance Activities
The Company incurs maintenance costs on its major equipment. The determination of whether an expenditure should be capitalized or expensed requires management judgment in the application of how the costs benefit future periods, relative to the Company’s capitalization policy. Costs that either establish or increase the efficiency, productivity, functionality or life of a fixed asset by greater than 12 months are capitalized.
(h) Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of the purchase price of an acquired business over the estimated fair value of the identifiable assets acquired and liabilities assumed by the Company. For the purposes of goodwill impairment assessment, the Company evaluates goodwill for impairment annually, as of October 31, or more often as facts and circumstances warrant. When performing the impairment assessment, the Company evaluates factors, such as unexpected adverse economic conditions, competition and market changes. Goodwill is allocated across the Company’s Completions Services, Well Construction and Intervention and Well Support Services reporting units.
Before employing detailed impairment testing methodologies, the Company may first evaluate the likelihood of impairment by considering qualitative factors relevant to each reporting unit, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. If the Company first utilizes a qualitative approach and determines that it is more likely than not that goodwill is impaired, detailed testing methodologies are then applied. Otherwise, the Company concludes that no impairment has occurred. The Company may also choose to bypass a qualitative approach and opt instead to employ detailed testing methodologies, regardless of a possible more likely than not outcome. The first step in the goodwill impairment test is to compare the fair value of each reporting unit to which goodwill has been assigned to the carrying amount of net assets, including goodwill, of the respective reporting unit. The Company’s goodwill is allocated across its Completion Services, Well Construction and Intervention, and Well Support Services segments. If the carrying amount of the reporting unit exceeds its fair value, step two in the goodwill impairment test requires goodwill to be written down to its implied fair value through a charge to operating expense based on a hypothetical purchase price allocation method.
In 2019, the Company performed the qualitative analysis (step zero) of the goodwill impairment assessment by reviewing relevant qualitative factors. The Company determined there were no events that would indicate the carrying amount of its goodwill may not be recoverable, and as such, no impairment charge was recognized.
No goodwill impairment has been recognized in 2019, 2018 or 2017.
The Company’s indefinite-lived assets consist of the Company’s trade name. The Company assesses its indefinite-lived intangible assets for impairment annually, as of October 31, or whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable.
The Company impaired its Keane trade name in 2019. For additional detailed information regarding the impairment of the Keane trade name, see Note (4) Intangible Assets. There was no indefinite-lived asset impairment recognized during 2018 or 2017.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(i) Long-Lived Assets with Definite Lives
The Company assesses its long-lived assets, such as definite-lived intangible assets and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is assessed using 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. For the Company’s property and equipment, the Company determined the lowest level of identifiable cash flows that are independent of other asset groups are: fracturing, wireline and pumpdown, cementing, coiled tubing, and well support services, except for an entity level asset group for assets that do not have identifiable independent cash flows. For the Company’s definite-lived intangible assets, the Company determined each intangible asset generates identifiable cash flows independent of one another and independent of the other assets in the operating segment with which they are associated. As such, the Company concluded that each intangible asset should be individually assessed for impairment.
Impairments exist when the carrying amount of an asset group exceeds estimates of the undiscounted cash flows expected to result from the use and eventual disposition of the asset group. When alternative courses of action to recover the carrying amount of the asset are under consideration, estimates of future undiscounted cash flows take into account possible outcomes and probabilities of their occurrence. If the carrying amount of the asset is not recoverable based on the estimated future undiscounted cash flows, the impairment loss is measured as the excess of the asset group’s carrying amount over its estimated fair value, such that the asset group’s carrying amount is adjusted to its estimated fair value, with an offsetting charge to operating expense.
The Company measures the fair value of its property and equipment using the discounted cash flow method or the market approach, the fair value of its customer contracts using the multi-period excess earning method and income based “with and without” method, the fair value of its acquired fracking fluid software technology using the “income based relief-from-royalty” method and the fair value of its non-compete agreement using “lost income” approach. The expected future cash flows used for impairment reviews and related fair value calculations are based on judgmental assessments of projected revenue growth, fleet count, utilization, gross margin rates, SG&A rates, working capital fluctuations, capital expenditures, discount rates and terminal growth rates.
In 2019 and 2018, for the Company’s property and equipment and definite-lived intangible assets, the Company determined there were no events that would indicate the carrying amount of these assets may not be recoverable, and as such, no impairment charge was recognized.
Amortization on definite-lived intangible assets is calculated on the straight-line method over the estimated useful lives of the assets.
(j) Derivative Instruments and Hedging Activities
The Company utilizes interest rate derivatives to manage interest rate risk associated with its floating-rate borrowings. The Company recognizes all derivative instruments as either assets or liabilities on the consolidated balance sheets at their respective fair values. For derivatives designated in hedging relationships, changes in the fair value are either offset through earnings against the change in fair value of the hedged item attributable to the risk being hedged or recognized in accumulated other comprehensive income (loss) until the hedged item affects earnings.
The Company only enters into derivative contracts that it intends to designate as hedges for the variability of cash flows to be received or paid related to a recognized asset or liability (i.e. cash flow hedge). For all hedging relationships, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged and how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the gain or loss on the derivative is reported as a component of other comprehensive
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
The Company discontinues hedge accounting prospectively, when it determines that the derivative is no longer highly effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the originally forecasted transaction is no longer probable of occurring or if management decides to remove the designation of the cash flow hedge. The net derivative instrument gain or loss related to a discontinued cash flow hedge shall continue to be reported in accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the originally hedged transaction affects earnings, unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period. When it is probable that the originally forecasted transaction will not occur by the end of the originally specified time period, the Company recognizes immediately, in earnings, any gains and losses related to the hedging relationship that were recognized in accumulated other comprehensive income (loss). In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the consolidated balance sheets and recognizes any subsequent changes in the derivative’s fair value in earnings.
(k) Fair Value Measurement
Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date. The Company’s assets and liabilities that are measured at fair value at each reporting date are classified according to a hierarchy that prioritizes inputs and assumptions underlying the valuation techniques. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
|
|
•
|
Level 1 Inputs: Quoted prices (unadjusted) in an active market for identical assets or liabilities.
|
|
|
•
|
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
|
|
|
•
|
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
|
Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(l) Stock-based compensation
The Company recognizes compensation expense for restricted stock awards, restricted stock units to be settled in common stock (“RSUs”), performance based RSU award (“PSUs”), and non-qualified stock options (“stock options”) based on the fair value of the awards at the date of grant. The fair value of restricted stock awards and RSUs is determined based on the number of shares or RSUs granted and the closing price of the Company’s common stock on the date of grant. The fair value of stock options is determined by applying the Black-Scholes model to the grant-date market value of the underlying common shares of the Company. The fair value of PSUs with market conditions is determined using a Monte Carlo simulation method. The Company has elected to recognize forfeiture credits for these awards as they are incurred, as this method best reflects actual stock-based compensation expense.
Compensation expense from time-based restricted stock awards, RSUs, PSUs, and stock options is amortized on a straight-line basis over the requisite service period, which is generally the vesting period.
Deferred compensation expense associated with liability-based awards, such as deferred stock awards that are expected to settle with the issuance of a variable number of shares based on a fixed monetary amount at inception, is recognized at the fixed monetary amount at inception and is amortized on a straight-line basis over the requisite service period, which is generally the vesting period. Upon settlement, the holders receive an amount of common stock equal to the fixed monetary amount at inception, based on the closing price of the Company’s stock on the date of settlement.
Tax deductions on the stock-based compensation awards are not realized until the awards are vested or exercised. The Company recognizes deferred tax assets for stock-based compensation awards that will result in future deductions on its income tax returns, based on the amount of tax deduction for stock-based compensation recognized at the statutory tax rate in the jurisdiction in which the Company will receive a tax deduction. If the tax deduction for a stock-based award is greater than the cumulative GAAP compensation expense for that award upon realization of a tax deduction, an excess tax benefit will be recognized and recorded as a favorable impact on the effective tax rate. If the tax deduction for an award is less than the cumulative GAAP compensation expense for that award upon realization of the tax deduction, a tax shortfall will be recognized and recorded as an unfavorable impact on the effective tax rate. Any excess tax benefits or shortfalls will be recorded as discrete, adjustments in the period in which they occur. The cash flows resulting from any excess tax benefit will be classified as financing cash flows in the consolidated and combined statements of cash flows.
The Company provides its employees with the option to settle income tax obligations arising from the vesting of their restricted or deferred stock-based compensation awards by withholding shares equal to such income tax obligations. Shares acquired from employees in connection with the settlement of the employees’ income tax obligations are accounted for as treasury shares that are subsequently retired. Restricted stock awards, RSUs, and PSUs are not considered issued and outstanding for purposes of earnings per share calculations until vested.
For additional information, see Note (12) Stock-Based Compensation.
(m) Taxes
Upon consummation of the Organizational Transactions and the IPO, the Company became subject to U.S. federal income taxes. A provision for U.S. federal income tax has been provided in the consolidated and combined financial statements for the years ended December 31, 2019, 2018 and 2017.
Prior to 2019, the Company had a Canadian subsidiary, which was treated as a corporation for Canadian federal and provincial tax purposes. For Canadian tax purposes, the Company was subject to foreign income tax. As a result of the C&J Merger, the Company had foreign subsidiaries at December 2019 in Canada, Netherlands, Luxembourg and Ecuador.
The Company is responsible for certain state income and franchise taxes in the states in which it operates, which include, but not limited to California, Colorado, Louisiana, Montana, New Mexico, North Dakota, Oklahoma, Pennsylvania, Texas, Utah and West Virginia. Deferred tax assets and liabilities are recognized for the future tax
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforwards, if applicable.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.
The Company recognizes interest accrued related to unrecognized tax benefits, if any, in income tax expense.
See Note (17) Income Taxes for a detailed discussion of the Company’s taxes and activities thereof during the years ended December 31, 2019, 2018 and 2017.
(n) Commitments and Contingencies
The Company accrues for contingent liabilities when such contingencies are probable and reasonably estimable. The Company generally records losses related to these types of contingencies as direct operating expenses or general and administrative expenses in the consolidated and combined statements of operations and comprehensive income (loss).
Legal costs associated with the Company’s loss contingencies are recognized immediately when incurred as general and administrative expenses in the Company’s consolidated and combined statements of operations and comprehensive income (loss).
(o) Equity-method investments
Investments in non-controlled entities over which the Company has the ability to exercise significant influence over the noncontrolled entities’ operating and financial policies are accounted for under the equity-method. Under the equity-method, the investment in the non-controlled entity is initially recognized at cost and subsequently adjusted to reflect the Company’s share of the entity’s income (losses), any dividends received by the Company and any other-than-temporary impairments. Investments accounted for under the equity-method are presented within other noncurrent assets in the consolidated balance sheets and totaled $3.6 million and $1.7 million as of December 31, 2019 and 2018, respectively.
(p) Employee Benefits and Postemployment Benefits
Contractual termination benefits are payable when employment is terminated due to an event specified in the provisions of a social/labor plan, state or federal law. Accordingly, in situations where minimum statutory termination benefits must be paid to the affected employees, the Company records employee severance costs associated with these activities in accordance with ASC 712, “Compensation—Nonretirement Post-Employment Benefits.” In all other situations where the Company pays termination benefits, including supplemental benefits paid in excess of statutory minimum amounts and benefits offered to affected employees based on management’s discretion, the Company records these termination costs in accordance with ASC 420, “Exit or Disposal Cost Obligations.” A liability is recognized for one-time termination benefits when the Company is committed to 1) making payments and the number of affected employees and the benefits received are known to both parties and 2) terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal for which such amount can be reasonably estimated.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(q) Leases
Effective January 1, 2019, the Company adopted ASU 2016-02, "Leases (Topic 842)," and related amendments, which set out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors, using the modified retrospective method. In connection with the adoption of these standards, the Company implemented internal controls to ensure that the Company's contracts are properly evaluated to determine applicability under ASU 2016-02 and that the Company properly applies ASU 2016-02 in accounting for and reporting on all its qualifying leases.
In accordance with ASU 2016-02, the Company considers any contract that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration to be a lease. The Company determines whether the contract into which it has entered is a lease at the lease commencement date. Rental arrangements with term lengths of one month or less are expensed as incurred, but not recognized as qualifying leases.
For lessees, leases can be classified as finance leases or operating leases, while for lessors, leases can be classified as sales-type leases, direct financing leases or operating leases. As lessee, all leases, with the exception of short-term leases, are capitalized on the balance sheet by recording a lease liability, which represents the Company's obligation to make lease payments arising from the lease and a right-of-use asset, which represents the Company's right to use the underlying asset being leased.
For leases in which the Company is the lessee, the Company uses a collateralized incremental borrowing rate to calculate the lease liability, as for most leases, the implicit rate in the lease is unknown. The collateralized incremental borrowing rate is based on a yield curve over various term lengths that approximates the borrowing rate the Company would receive if it collateralized its lease arrangements with all of its assets. For leases in which the Company is the lessor, the Company uses the rate implicit in the lease.
For finance leases, the Company amortizes the right-of-use asset on a straight-line basis over the earlier of the useful life of the right-of-use asset or the end of the lease term and records this amortization in rent expense on the consolidated and combined statements of operations and comprehensive loss. The Company adjusts the lease liability to reflect lease payments made during the period and interest incurred on the lease liability using the effective interest method. The incurred interest expense is recorded in interest expense on the consolidated and combined statements of operations and comprehensive loss. For operating leases, the Company recognizes one single lease cost, comprised of the lease payments and amortization of any associated initial direct costs, within rent expense on the consolidated and combined statements of operations and comprehensive loss. Variable lease costs not included in the determination of the lease liability at the commencement of a lease are recognized in the period when the specified target that triggers the variable lease payments becomes probable.
In accordance with ASC 842, the Company has made the following elections for its lease accounting:
|
|
•
|
all short-term leases with term lengths of 12 months or less will not be capitalized; the underlying class of assets to which the Company has applied this expedient is primarily its apartment leases;
|
|
|
•
|
for non-revenue contracts containing both lease and non-lease components, both components will be combined and accounted for as one lease component and accounted for under ASC 842; and
|
|
|
•
|
for revenue contracts containing both lease and non-lease components, both components will be combined and accounted for as one component and accounted for under ASC 606.
|
As part of the Company's adoption of ASU 2016-02, the Company elected to adopt the standard using the modified retrospective transition method and elected the practical expedient transition method package whereby the Company did not:
|
|
•
|
reassess whether any expired or existing contracts contained leases;
|
|
|
•
|
reassess the lease classification for any expired or existing leases; and
|
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
|
|
•
|
reassess initial direct costs for any existing leases.
|
For additional information, see Note (16) Leases.
(r) Research and development costs
Research and development costs are expensed as incurred as general and administrative expenses in the Company’s consolidated and combined statements of operations and comprehensive income (loss). Research and development costs incurred directly by the Company were $7.1 million, $7.1 million and $3.7 million for the years ended December 31, 2019, 2018 and 2017, respectively.
(s) Pro-forma earnings per share
The earnings per share amounts for the year ended December 31, 2017 have been computed to give effect to the Organizational Transactions, as if it had occurred on January 1, 2016, including the limited liability company agreement of Keane Investor to, among other things, exchange all of the pre-existing membership interests of the Company for the newly-created ownership interests for common stock of KGI. The computations of earnings per share do not consider the 15,700,000 shares of common stock newly-issued by KGI to investors in the IPO.
(t) Reclassifications
Certain reclassifications have been made to prior period amounts to conform to current period financial statement presentation. These reclassifications did not affect previously reported results of operations, stockholders' equity, comprehensive income or cash flows.
(3) Mergers and Acquisitions
(a) C&J Energy Services, Inc.
On October 31, 2019 (the “C&J Acquisition Date”), the Company completed the C&J Merger in accordance with the terms of the Agreement and Plan of Merger, dated as of June 16, 2019 (the "Merger Agreement"), by and among NexTier, C&J and King Merger Sub Corp., a wholly owned subsidiary of NexTier ("Merger Sub"), pursuant to which Merger Sub merged with and into C&J, with C&J surviving the merger as a wholly owned subsidiary of NexTier, and immediately following the C&J Merger, C&J was merged with and into King Merger Sub II LLC ("LLC Sub"), with LLC Sub continuing as the surviving entity as a wholly-owned subsidiary of NexTier and the successor in interest to C&J.
The C&J Merger was completed for total consideration of approximately $485.1 million, consisting of (i) equity consideration in the form of 105.9 million shares of Keane common stock issued to C&J stockholders with a value of $481.9 million and (ii) replacement share based compensation awards attributable to pre-merger services with a value of $3.2 million.
The Company accounted for the C&J Merger using the acquisition method of accounting. The aggregate purchase price noted above was allocated to the major categories of assets acquired and liabilities assumed based upon their estimated fair values at the date of the acquisition. The majority of the measurements of assets acquired and liabilities assumed, are based on inputs that are not observable in the market and thus represent Level 3 inputs. The fair value of acquired inventory and property and equipment is based on both available market data and a cost approach. The fair value of the financial assets acquired includes trade receivables with a fair value of $312.6 million. The gross amount due under the contracts is $322.8 million, of which $10.2 million is expected to be uncollectible. A liability of $40.2 million has been recognized for legal reserves and sales and use tax assessments. As of December 31, 2019, there has been no change in the amount recognized for the liability or any change in the range of outcomes or assumptions used to develop the estimates on October 31, 2019.
The preliminary purchase price has been allocated to the net assets acquired and liabilities assumed based upon their estimated fair values. The estimated fair values of certain assets and liabilities, including accounts receivable, taxes (including uncertain tax positions), and contingencies require significant judgments and estimates. C&J is subject to the legal and regulatory requirements, including but not limited to those related to environmental
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
matters and taxation. The Company has conducted a preliminary assessment of liabilities arising from these matters and has recognized provisional amounts in its initial accounting for the C&J Merger for all identified liabilities in accordance with the requirements of ASC Topic 805. Certain data necessary to complete the purchase price allocation is not yet available, including, but not limited to, valuation of pre-acquisition contingencies and final tax returns that provide underlying tax basis of assets acquired and liabilities assumed. However, the Company is continuing its review of these matters during the measurement period, and if new information obtained about facts and circumstances that existed at the acquisition date identifies adjustments to the liabilities initially recognized, as well as any additional liabilities that existed at the acquisition date, the acquisition accounting will be revised to reflect the resulting adjustments to the provisional amounts initially recognized. As a result, the provisional measurements below are preliminary and subject to change during the measurement period and such changes could be material. The Company will finalize the purchase price allocation during the 12-month period following the acquisition date, during which time the value of the assets and liabilities may be revised as appropriate. The Company continues to assess the fair values of the assets acquired and liabilities assumed.
The following table summarizes the fair value of the consideration transferred in the C&J Merger and the preliminary allocation of the purchase price to the fair values of the assets acquired and liabilities assumed at the C&J Merger Date:
|
|
|
|
|
|
Total Purchase Consideration:
|
|
(Thousands of Dollars)
|
Equity consideration
|
|
$
|
481,912
|
|
Replacement awards attributable to pre-combination services
|
|
3,212
|
|
Less: Cash acquired
|
|
$
|
(68,807
|
)
|
Total purchase consideration
|
|
$
|
416,317
|
|
|
|
|
Trade and accounts receivable
|
|
$
|
312,620
|
|
Inventories
|
|
43,142
|
|
Prepaid and other current assets
|
|
18,512
|
|
Property and equipment
|
|
311,886
|
|
Intangible assets
|
|
17,590
|
|
Right of use assets
|
|
24,318
|
|
Other noncurrent assets
|
|
4,409
|
|
Total identifiable assets acquired
|
|
732,477
|
|
Accounts payable
|
|
43,620
|
|
Accrued expenses
|
|
236,959
|
|
Short term lease liability
|
|
7,842
|
|
Long term lease liability
|
|
15,517
|
|
Non-current liabilities
|
|
17,156
|
|
Total liabilities assumed
|
|
321,094
|
|
Goodwill
|
|
4,934
|
|
Total purchase consideration
|
|
$
|
416,317
|
|
|
|
|
The goodwill in this acquisition was primarily attributable to expected synergies and was allocated across the Company’s Completion Services, Well Construction and Intervention and Well Support Services reporting units.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Intangible assets related to the C&J Merger consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Weighted average remaining
amortization period
(Years)
|
|
Gross
Carrying
Amounts
|
Technology
|
|
3
|
|
17,590
|
|
Total
|
|
|
|
$
|
17,590
|
|
Merger and integration related costs were recognized separately from the acquisition of assets and assumptions of liabilities in the C&J Merger. Merger costs consist of legal and professional fees and pre-merger notification fees. Integration costs consist of expenses incurred to integrate C&J’s operations, aligning accounting processes and procedures, and integrating its enterprise resource planning system with those of the Company. The expenses for all these transactions were expensed as incurred.
Merger and integration costs totaled $68.7 million for the year ended December 31, 2019 and are recorded within merger and integration costs on the Company’s Consolidated and Combined Statements of Operations and Comprehensive Income (Loss). The following table summarizes merger and integration costs for the year ended December 31, 2019.
|
|
|
|
|
|
|
|
(amounts in thousands)
|
Transaction Type
|
|
Year Ended
December 31, 2019
|
Merger
|
|
$
|
23,775
|
|
Integration
|
|
44,956
|
|
Total merger and integration costs
|
|
$
|
68,731
|
|
The following combined pro forma information assumes the C&J Merger occurred on January 1, 2018. The pro forma information presented below is for illustrative purposes only and does not reflect future events that occurred after December 31, 2019 or any operating efficiencies or inefficiencies that resulted from the C&J Merger. The information is not necessarily indicative of results that would have been achieved had the Company controlled C&J during the period presented.
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited, amounts in thousands)
|
|
|
Year Ended December 31, 2019
|
|
Year Ended December 31, 2018
|
Revenue
|
|
$
|
3,406,288
|
|
|
$
|
4,359,095
|
|
Net income (loss)
|
|
(196,577
|
)
|
|
66,746
|
|
|
|
|
|
|
Net income (loss) per share (basic)
|
|
$
|
(0.93
|
)
|
|
$
|
0.32
|
|
Net income (loss) per share (diluted)
|
|
$
|
(0.93
|
)
|
|
$
|
0.31
|
|
|
|
|
|
|
Weighted-average shares outstanding (basic)
|
|
211,376
|
|
|
210,945
|
|
Weighted-average shares outstanding (diluted)
|
|
211,376
|
|
|
212,964
|
|
The Company’s consolidated statement of operations and comprehensive income (loss) for 2019 includes revenue of $196.7 million and net loss of $21.4 million, from the C&J operations, from November 1, 2019 to December 31, 2019.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(b) Asset Acquisition from Refinery Specialties, Incorporated
On July 24, 2018, the Company executed a purchase agreement with Refinery Specialties, Incorporated (“RSI”) to acquire approximately 90,000 hydraulic horsepower and related support equipment for approximately $35.4 million, inclusive of an $0.8 million deposit reimbursement related to future equipment deliveries. This acquisition was partially funded by the insurance proceeds the Company received in connection with a fire that resulted in damage to a portion of one of the Company’s fleets (for further details see Note (7) Property and Equipment, net). The Company also assumed operating leases for light duty vehicles in connection with the RSI transaction and RSI entered into a non-compete arrangement in turn with the Company. In September 2018, the Company, and RSI reached an agreement to refund the Company $0.8 million of the purchase price due to repair costs required for certain acquired equipment. The resulting purchase price after the refund was $34.6 million, and the Company incurred $0.4 million of transaction costs related to the acquisition, bringing total cash consideration related to the acquisition to $35.0 million.
The Company accounted for this acquisition as an asset acquisition pursuant to ASU 2017-01 and allocated the purchase price of the acquisition plus the transactions costs amongst the acquired hydraulic horsepower and related support equipment, as the fair value of the acquired hydraulic horsepower and related support equipment represented substantially all of the fair value of the gross assets acquired in the asset acquisition with RSI.
(c) RockPile
On July 3, 2017 (the “RockPile Acquisition Date”), the Company acquired 100% of the outstanding equity interests of RockPile Energy Services, LLC and its subsidiaries (“RockPile”) from RockPile Energy Holdings, LLC (the “Principal Seller”). RockPile was a multi-basin provider of integrated well completion services in the U.S., whose primary service offerings included hydraulic fracturing, wireline perforation and workover rigs. Through this acquisition, the Company deepened its existing presence in the Permian Basin and Bakken Formation and further solidified its position as one of the largest pure-play providers of integrated well completion services in the U.S. This acquisition also enabled the Company to expand certain service offerings and capabilities within its Other Services segment.
The acquisition of RockPile was completed for cash consideration of $116.6 million, subject to post-closing adjustments, 8,684,210 shares of the Company’s common stock (the “Acquisition Shares”) and contingent value rights, as described below. The fair value of the Acquisition Shares, which is recorded in stockholders’ equity in the consolidated balance sheet, was calculated using the closing price of the Company’s common stock on July 3, 2017, of $16.29, discounted by 7.9% to reflect the lack of marketability resulting from the 180-day lock-up period during which resale of the Acquisition Shares is restricted.
Subject to the terms and conditions of the Contingent Value Rights Agreement (the “CVR Agreement”) by and among the Company, the Principal Seller and Permitted Holders (as defined in the CVR Agreement and, together with the Principal Seller, the “RockPile Holders”), the Company agreed to pay contingent consideration (the “Aggregate CVR Payment Amount”), which would equal the product of the Acquisition Shares held by RockPile on April 10, 2018 and the CVR Payment Amount, provided that the CVR Payment Amount did not exceed $2.30. The “CVR Payment Amount” was the difference between (a) $19.00 and (b) the arithmetic average of the dollar volume weighted average price of the Company’s common stock on each trading day for twenty (20) trading days randomly selected by the Company during the thirty (30) trading day period immediately preceding the last business day prior to April 3, 2018 (the “Twenty-Day VWAP”). The Aggregate CVR Payment Amount was agreed to be reduced on a dollar for dollar basis if the sum of the following exceeds $165.0 million:
|
|
•
|
(i) the aggregate gross proceeds received in connection with the resale of any Acquisition Shares, plus
|
|
|
•
|
(ii) the product of the number of Acquisition Shares held by the RockPile Holders on April 10, 2018 and the Twenty-Day VWAP, plus
|
|
|
•
|
(iii) the Aggregate CVR Payment Amount.
|
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
In early April 2018, in accordance with the terms and conditions of the CVR Agreement, the Company calculated and paid the final Aggregate CVR Payment Amount, due to the RockPile Holders, of $19.9 million and recognized a loss of $13.2 million during the year ended December 31, 2018 in other income (expense), net in the consolidated statement of operations and comprehensive income (loss).
The Company accounted for the acquisition of RockPile using the acquisition method of accounting. Assets acquired, liabilities assumed and equity issued in connection with the acquisition were recorded based on their fair values. The Company finalized the purchase price allocation in June 2018. Of the measurement period adjustments noted in the following table, $11.3 million were recorded in 2017 and $2.4 million were recorded in 2018.
The following table summarizes the fair value of the consideration transferred for the acquisition of RockPile and the final allocation of the purchase price to the fair values of the assets acquired and liabilities assumed at the RockPile Acquisition Date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Purchase Consideration:
|
|
Preliminary Purchase Price Allocation
|
|
Adjustments
|
|
Final Purchase Price Allocation
|
(Thousands of Dollars)
|
|
|
|
|
|
|
Cash consideration
|
|
$
|
123,293
|
|
|
$
|
(6,717
|
)
|
|
$
|
116,576
|
|
Equity consideration
|
|
130,290
|
|
|
—
|
|
|
130,290
|
|
Contingent consideration
|
|
11,962
|
|
|
—
|
|
|
11,962
|
|
Less: Cash acquired
|
|
(20,379
|
)
|
|
20,379
|
|
|
—
|
|
Total purchase consideration, less cash acquired
|
|
$
|
245,166
|
|
|
$
|
13,662
|
|
|
$
|
258,828
|
|
|
|
|
|
|
|
|
Trade and other accounts receivable
|
|
$
|
57,117
|
|
|
$
|
1,484
|
|
|
$
|
58,601
|
|
Inventories, net
|
|
2,853
|
|
|
138
|
|
|
2,991
|
|
Prepaid and other current assets
|
|
13,630
|
|
|
(717
|
)
|
|
12,913
|
|
Property and equipment, net
|
|
157,654
|
|
|
8,653
|
|
|
166,307
|
|
Intangible assets
|
|
20,967
|
|
|
(1,267
|
)
|
|
19,700
|
|
Notes receivable
|
|
250
|
|
|
(250
|
)
|
|
—
|
|
Other noncurrent assets
|
|
363
|
|
|
(57
|
)
|
|
306
|
|
Total identifiable assets acquired
|
|
252,834
|
|
|
7,984
|
|
|
260,818
|
|
Accounts payable
|
|
(38,999
|
)
|
|
16,180
|
|
|
(22,819
|
)
|
Accrued expenses
|
|
(22,161
|
)
|
|
(13,315
|
)
|
|
(35,476
|
)
|
Deferred revenue
|
|
(23,053
|
)
|
|
698
|
|
|
(22,355
|
)
|
Other non-current liabilities
|
|
(827
|
)
|
|
(2,412
|
)
|
|
(3,239
|
)
|
Total liabilities assumed
|
|
(85,040
|
)
|
|
1,151
|
|
|
(83,889
|
)
|
Goodwill
|
|
77,372
|
|
|
4,527
|
|
|
81,899
|
|
Total purchase price consideration
|
|
$
|
245,166
|
|
|
$
|
13,662
|
|
|
$
|
258,828
|
|
|
|
|
|
|
|
|
The goodwill in this acquisition was primarily attributable to expected synergies and new customer relationships and was allocated in its entirety to the Completions segment. All the goodwill recognized for the acquisition of RockPile is tax deductible with an amortization period of 15 years.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Intangible assets related to the acquisition of RockPile consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Weighted average remaining
amortization period
(Years)
|
|
Gross
Carrying
Amounts
|
Customer contracts
|
|
10.8
|
|
$
|
19,700
|
|
Total
|
|
|
|
$
|
19,700
|
|
For the valuation of the customer relationship intangible asset within the Completions Services segment, management used the income based multi-period excess earning method, which utilized contributory asset charges. Under this method, the Company calculated cash flows derived from the customer relationships and then deducted portions of the cash flow that could be attributed to supporting assets that contribute to the generation of said cash flows. Estimated cash flows were discounted at the weighted average cost of capital, adjusted for an intangible asset risk component. This premium reflects increased risk related to the specific intangible asset as compared to the Company as a whole.
For the valuation of the customer relationship intangible asset within the Other Services segment, management used the income based “with and without” method, which is a specific application of the discounted cash flow method. Under this method, the Company calculated the present value of the after-tax cash flows expected to be generated by the business with and without the customer relationships. The forecasted cash flows in the “without” scenario included the cost of reestablishing customer relationships and were discounted at the Company’s weighted average cost of capital, adjusted for an intangible asset risk component.
The following transactions were recognized separately from the acquisition of assets and assumptions of liabilities in the acquisition of RockPile. Deal costs consist of legal and professional fees and pre-merger notification fees. Integration costs consist of expenses incurred to integrate RockPile’s operations with that of the Company, including retention bonuses and severance payments and expenses incurred in connection with aligning RockPile’s accounting processes and procedures and integrating its enterprise resource planning system with those of the Company. The expenses for all these transactions were expensed as incurred.
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
Transaction Type
|
|
Year Ended
December 31, 2017
|
Deal costs
|
|
$
|
6,679
|
|
Integration
|
|
1,994
|
|
|
|
$
|
8,673
|
|
The following combined pro forma information assumes the acquisition of RockPile occurred on January 1, 2016. The pro forma information presented below is for illustrative purposes only and does not reflect future events that occurred after July 2, 2017 or any operating efficiencies or inefficiencies that resulted from the acquisition of RockPile. The information is not necessarily indicative of results that would have been achieved had the Company controlled RockPile during the periods presented. Pro forma net loss for the year ended December 31, 2017 includes $0.8 million of non-recurring retention bonuses associated with the acquisition, which were incurred after the closing and $1.8 million of compensation costs associated with the RockPile executives retained by the Company. In addition, the Company incurred $2.2 million of transaction costs that were not reflected in this pro forma financial information, since they were incurred prior to the closing.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Unaudited
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
Revenue
|
|
$
|
1,732,279
|
|
|
$
|
543,966
|
|
Net loss
|
|
(49,348
|
)
|
|
(203,383
|
)
|
|
|
|
|
|
Net loss per share (basic and diluted)
|
|
$
|
(0.44
|
)
|
|
$
|
(2.12
|
)
|
Weighted-average shares outstanding (basic and diluted)
|
|
111,939
|
|
|
96,112
|
|
|
|
|
|
|
The Company’s consolidated and combined statement of operations and comprehensive income (loss) for 2017 includes revenue (unaudited) of $192.2 million from the RockPile operations, from the date of acquisition on July 3, 2017 to December 31, 2017.
(4) Intangible Assets
The definite-lived intangible assets balance in the Company’s consolidated balance sheets represents the fair value measurement upon initial recognition, net of amortization, as applicable, related to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
December 31, 2019
|
|
|
Gross
Carrying
Amounts
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Customer contracts
|
|
$
|
67,600
|
|
|
$
|
(32,681
|
)
|
|
$
|
34,919
|
|
Non-compete agreements
|
|
700
|
|
|
(408
|
)
|
|
292
|
|
Technology
|
|
22,054
|
|
|
(2,244
|
)
|
|
19,810
|
|
Total
|
|
$
|
90,354
|
|
|
$
|
(35,333
|
)
|
|
$
|
55,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
December 31, 2018
|
|
|
Gross
Carrying
Amounts
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Customer contracts
|
|
$
|
67,600
|
|
|
$
|
(27,755
|
)
|
|
$
|
39,845
|
|
Non-compete agreements
|
|
700
|
|
|
(362
|
)
|
|
338
|
|
Trade name
|
|
10,200
|
|
|
—
|
|
|
10,200
|
|
Technology
|
|
2,262
|
|
|
(741
|
)
|
|
1,521
|
|
Total
|
|
$
|
80,762
|
|
|
$
|
(28,858
|
)
|
|
$
|
51,904
|
|
|
|
|
|
|
|
|
Amortization expense related to the intangible assets for the years ended December 31, 2019, 2018 and 2017 was $6.5 million, $6.3 million and $7.1 million, respectively.
In connection with the C&J Merger, the Company was re-branded as NexTier and does not expect to obtain any further benefits or receive any cash flows associated with the Keane indefinite-lived trade name. As a result, the Company impaired $10.2 million related to the Keane trade name as of December 31, 2019. The impairment is recorded in impairment expense in the consolidated and combined statements of operations and comprehensive income (loss).
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Amortization for the Company’s definite-lived intangible assets, excluding in-process software, over the next five years, is as follows:
|
|
|
|
|
|
Year-end December 31,
|
|
(Thousands of Dollars)
|
2020
|
|
$
|
(11,239
|
)
|
2021
|
|
(10,953
|
)
|
2022
|
|
(9,867
|
)
|
2023
|
|
(4,973
|
)
|
2024
|
|
(4,973
|
)
|
(5) Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2019, 2018 and 2017 were as follows:
|
|
|
|
|
|
(Thousands of Dollars)
|
Goodwill as of December 31, 2017
|
$
|
134,967
|
|
Purchase price adjustment
|
(2,443
|
)
|
Goodwill as of December 31, 2018
|
132,524
|
|
C&J Merger
|
4,934
|
|
Goodwill as of December 31, 2019
|
$
|
137,458
|
|
The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018 consisted of amounts related to the C&J Merger and purchase price adjustments related to the acquisition of RockPile, respectively. For additional information, see Note (3) (Mergers and Acquisitions). There were no triggering events identified and no impairment recorded since inception and for the years ended December 31, 2019, 2018 and 2017.
(6) Inventories, net
Inventories, net, consisted of the following at December 31, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
December 31,
2019
|
|
December 31,
2018
|
Sand, including freight
|
|
$
|
4,405
|
|
|
$
|
14,697
|
|
Chemicals and consumables
|
|
11,408
|
|
|
6,250
|
|
Materials and supplies
|
|
45,828
|
|
|
14,722
|
|
Total inventory, net
|
|
$
|
61,641
|
|
|
$
|
35,669
|
|
Inventories are reported net of obsolescence reserves of $1.8 million and $1.0 million as of December 31, 2019 and 2018, respectively. The Company recognized $0.8 million, $0.7 million and $0.3 million of obsolescence expense during the years ended December 31, 2019, 2018 and 2017.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(7) Property and Equipment, net
Property and Equipment, net consisted of the following at December 31, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
December 31,
2019
|
|
December 31,
2018
|
Land
|
|
$
|
35,178
|
|
|
$
|
4,771
|
|
Building and leasehold improvements
|
|
90,950
|
|
|
32,134
|
|
Office furniture, fixtures and equipment
|
|
10,678
|
|
|
7,691
|
|
Machinery and equipment
|
|
1,259,697
|
|
|
1,041,212
|
|
|
|
1,396,503
|
|
|
1,085,808
|
|
Less accumulated depreciation
|
|
(723,060
|
)
|
|
(562,813
|
)
|
Construction in progress
|
|
35,961
|
|
|
8,324
|
|
Total property and equipment, net
|
|
$
|
709,404
|
|
|
$
|
531,319
|
|
|
|
|
|
|
All (gains) and losses are presented within (gain) loss on disposal of assets in the consolidated and combined statements of operations and comprehensive income (loss). The following describes the total (gains) losses recognized on the disposal of certain assets of $4.5 million, $5.0 million and $(2.6) million for the years ended December 31, 2019, 2018 and 2017:
For the year ended December 31, 2019, the Company disposed of certain hydraulic fracturing components and iron for a net loss of $15.4 million, net of salvage value on failed transmissions. The Company also recognized a gain of $7.4 million related to the sale of certain hydraulic fracturing related equipment and a net gain of $3.5 million on various other immaterial asset disposals throughout the year.
For the year ended December 31, 2018, the Company disposed of certain hydraulic fracturing components for a net loss of $3.5 million, net of salvage value on failed transmissions. The Company also divested of an idle field operations facility for a net loss of $2.7 million and recorded a net gain of $1.2 million on various other immaterial asset disposals throughout the year.
For the year ended December 31, 2017, the Company disposed of idle coiled tubing assets for a net gain of $3.5 million and recorded a net loss of $0.9 million on various other immaterial asset disposals throughout the year.
Casualty Loss
On July 1, 2018, one of the Company’s hydraulic frac fleets operating in the Permian Basin was involved in an accidental fire, which resulted in damage to a portion of the equipment in that fleet. In 2018, the Company received $18.1 million of insurance proceeds for replacement cost of the damaged equipment, which offset the $3.2 million impairment loss recognized on the damaged equipment. The resulting gain of $14.9 million was recognized in other income (expense), net in the consolidated and combined statements of operations and comprehensive income (loss) for the year ended December 31, 2018.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(8) Long-Term Debt
Long-term debt at December 31, 2019 and December 31, 2018 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
December 31,
2019
|
|
December 31,
2018
|
2018 Term Loan Facility
|
|
344,750
|
|
|
348,250
|
|
Less: Unamortized debt discount and debt issuance costs
|
|
(7,127
|
)
|
|
(7,520
|
)
|
Total debt, net of unamortized debt discount and debt issuance costs
|
|
337,623
|
|
|
340,730
|
|
Less: Current portion
|
|
(2,311
|
)
|
|
(2,776
|
)
|
Long-term debt, net of unamortized debt discount and debt issuance costs
|
|
$
|
335,312
|
|
|
$
|
337,954
|
|
Below is a summary of the Company’s credit facilities outstanding as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
2019 ABL Facility
|
|
2018 Term Loan Facility
|
Original facility size
|
|
$
|
450,000
|
|
|
$
|
350,000
|
|
Outstanding balance
|
|
$
|
—
|
|
|
$
|
344,750
|
|
Letters of credit issued
|
|
$
|
31,840
|
|
|
$
|
—
|
|
Available borrowing base commitment
|
|
$
|
303,837
|
|
|
n/a
|
|
Interest Rate(1)
|
|
LIBOR or base rate plus applicable margin
|
|
|
LIBOR or base rate plus applicable margin
|
|
Maturity Date
|
|
October 31, 2024
|
|
|
May 25, 2025
|
|
(1) London Interbank Offer Rate (“LIBOR”) is subject to a 1.00% floor
Maturities of the 2018 Term Loan Facility for the next five years are presented below:
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Year-end December 31,
|
|
|
2020
|
|
$
|
3,500
|
|
2021
|
|
3,500
|
|
2022
|
|
3,500
|
|
2023
|
|
3,500
|
|
2024
|
|
3,500
|
|
|
|
$
|
17,500
|
|
Deferred Charges and Other Costs
Deferred charges include deferred financing costs and debt discounts or debt premiums. Deferred charges related to the 2019 ABL Facility are capitalized. Deferred charges related to the 2018 Term Loan Facility are netted against the carrying amount of term debt. Deferred charges are amortized to interest expense using the effective interest method. Interest expense related to the deferred financing costs for the years ended December 31, 2019, 2018 and 2017 was $1.4 million, $3.1 million, and $5.2 million, respectively.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
On October 31, 2019, the Company entered into the Second Amended and Restated Asset-Based Revolving Credit Agreement (“2019 ABL Facility”), modifying the Company’s pre-existing asset-based revolving credit facility (“2017 ABL Facility”). Deferred charges associated with the 2019 ABL Facility were capitalized and totaled $1.2 million. In connection with the modification of the 2017 ABL Facility, the Company wrote off $0.5 million of deferred financing costs. The remaining deferred financing costs related to the 2017 ABL Facility will be amortized over the life of the 2019 ABL Facility. Unamortized deferred charges associated with the 2019 and 2017 ABL Facilities were $3.7 million and $4.0 million as of December 31, 2019 and 2018, respectively, and are recorded in other noncurrent assets on the consolidated balance sheets.
Term Loan Facility
On May 25, 2018, the Company entered into a term loan facility (the “2018 Term Loan Facility”), the proceeds of which were used to repay the Company’s pre-existing term loan facility (the “2017 Term Loan Facility”). No prepayment penalties were incurred in connection with the Company’s early debt extinguishment of its 2017 Term Loan Facility. Deferred charges associated with the 2017 Term Loan Facility that were expensed upon repayment of the 2017 Term Loan Facility totaled $7.6 million. Deferred charges associated with the 2018 Term Loan Facility that were netted against the carrying amount of the term debt totaled $9.0 million. Unamortized deferred charges associated with the 2018 Term Loan Facility were $7.1 million and $7.5 million as of December 31, 2019 and 2018, respectively, and are recorded in long-term debt, net of deferred financing costs and debt discount, less current maturities on the consolidated balance sheets.
ABL Revolving Credit Facility
Interest expense during the year ended December 31, 2019 includes $0.5 million in write-offs in connection with the modification of the 2017 ABL Facility. Interest expense during the year ended December 31, 2017 included $15.8 million of prepayment penalties and $15.3 million in write-offs of deferred charges, incurred in connection with the Company’s refinancing of an older asset-based revolving credit facility (“2016 ABL Facility”) and the Company’s early debt extinguishment of an older term loan facility (“2016 Term Loan Facility”) and the Senior Secured Notes in 2017.
(9) Significant Risks and Uncertainties
The Company operates in three reportable segments: Completion Services, Well Construction and Intervention, and Well Support Services, with significant concentration in the Completion Services segment. During the years ended December 31, 2019, 2018 and 2017, sales to Completion Services customers represented 94%, 98% and 99% of the Company’s consolidated revenue, respectively.
The Company depends on its customers' willingness to make operating and capital expenditures to explore for, develop and produce oil and natural gas onshore in the U.S. This activity is driven by many factors, including current and expected crude oil and natural gas prices. The U.S. energy industry experienced a significant downturn in the second half of 2014 through early 2016, driven primarily by global oversupply and a decline in commodity prices. From early 2016 through late 2018, the U.S. generally experienced some recovery in commodity prices and drilling and completion activity. Over this time frame, the U.S. active rig count increased from a trough of 404 rigs in May 2016 to a peak of 1,083 rigs in December 2018, driving significant demand for the Company's completion services. From December 28, 2018 through December 31, 2019, U.S. active rig count decreased by approximately 26% to 805 rigs.
While U.S. active rig count increased from its low in 2016, macro conditions remain range bound, and supply and demand for completion services remains challenged, resulting in adverse pricing, utilization impacts and ongoing commodity price volatility. In late 2019 and early 2020, and in response to the oversupply of hydraulic fracturing equipment, an increasing number of horsepower retirements were announced, removing a significant base of equipment from the market. Despite the continued challenging market conditions, the Company has been able to perform well, driven by a high level of efficiency achieved at the wellsite, a customer partnership model and investments in innovation. In response to these ongoing pressures, the Company's continued success is attributable
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
primarily to the Company's high level of efficiency achieved at the wellsite, as well as its high-quality customer base and dedicated contract model.
For the year ended December 31, 2019, revenue from four customers individually represented more than 10% and collectively represented 55% of the Company’s consolidated revenue. For the year ended December 31, 2018, three customers individually represented more than 10% and collectively represented 39% of the Company’s consolidated revenue. For the year ended December 31, 2017, no customer individually represented more than 10% of the Company’s consolidated revenue.
For the year ended December 31, 2019, purchases from one supplier represented 5% of the Company’s overall purchases. For the year ended December 31, 2018, purchases from two suppliers represented approximately 5% to 10% of the Company’s overall purchases. The costs for each of these suppliers were primarily incurred within the Completion Services segment.
(10) Derivatives
The Company uses interest-rate-related derivative instruments to manage its variability of cash flows associated with changes in interest rates on its variable-rate debt.
On May 25, 2018, the Company entered into the 2018 Term Loan Facility, which has an initial aggregate principal amount of $350 million, and repaid its pre-existing 2017 Term Loan Facility. The 2018 Term Loan Facility has a variable interest rate based on LIBOR, subject to a 1.0% floor. As a result of this transaction, the Company desired to hedge additional notional amounts to continue to hedge approximately 50% of its expected LIBOR exposure and to extend the terms of its swaps to align with the 2018 Term Loan Facility.
On June 22, 2018, the Company unwound its existing interest rate swaps and received $3.2 million in proceeds. The Company used the $3.2 million of proceeds to execute a new off-market interest rate swap. Under the terms of the new interest rate swap, the Company receives 1-month LIBOR, subject to a 1% floor, and makes payments based on a fixed rate of 2.625%. The new interest rate swap is effective through March 31, 2025 and has a notional amount of $175.0 million. The new interest rate swap was designated in a new cash flow hedge relationship.
The Company discontinued hedge accounting on the pre-existing interest rate swaps upon termination. At the time hedge accounting was discontinued, the exiting interest rate swaps had $3.5 million of deferred gains in accumulated other comprehensive loss. This amount was not reclassified from accumulated other comprehensive loss into earnings, as it remained probable that the originally forecasted transaction will occur. This amount will be recognized into earnings through August 18, 2022, the termination date of the pre-existing interest rate swap.
The following tables present the fair value of the Company’s derivative instruments on a gross and net basis as of the periods shown below:
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
Derivatives
designated as
hedging
instruments
|
|
Derivatives
not
designated as
hedging
instruments
|
|
Gross Amounts
of Recognized
Assets and
Liabilities
|
|
Gross
Amounts
Offset in the
Balance
Sheet(1)
|
|
Net Amounts
Presented in
the Balance
Sheet(2)
|
As of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
Other current asset
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other noncurrent asset
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other current liability
|
(1,729
|
)
|
|
—
|
|
|
(1,729
|
)
|
|
—
|
|
|
(1,729
|
)
|
Other noncurrent liability
|
(5,559
|
)
|
|
—
|
|
|
(5,559
|
)
|
|
—
|
|
|
(5,559
|
)
|
As of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
Other current asset
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other noncurrent asset
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other current liability
|
(129
|
)
|
|
—
|
|
|
(129
|
)
|
|
—
|
|
|
(129
|
)
|
Other noncurrent liability
|
(169
|
)
|
|
—
|
|
|
(169
|
)
|
|
—
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Agreements are in place that allow for the financial right of offset for derivative assets and derivative liabilities at settlement or in the event of a default under the agreements.
|
|
|
(2)
|
There are no amounts subject to an enforceable master netting arrangement that are not netted in these amounts. There are no amounts of related financial collateral received or pledged.
|
The following table presents gains and losses for the Company’s interest rate derivatives designated as cash flow hedges (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Location
|
Amount of gain (loss) recognized in other comprehensive income on derivative
|
|
$
|
(7,628
|
)
|
|
$
|
(880
|
)
|
|
$
|
791
|
|
|
OCI
|
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) (“AOCI”) into earnings
|
|
239
|
|
|
697
|
|
|
(72
|
)
|
|
Interest Expense
|
Amount of loss reclassified from AOCI into earnings as a result of originally forecasted transaction becoming probable of not occurring
|
|
—
|
|
|
—
|
|
|
(100
|
)
|
|
Interest Expense
|
The gain (loss) recognized in other comprehensive income for the derivative instrument is presented within the hedging activities line item in the consolidated and combined statements of operations and comprehensive income (loss).
There were no gains or losses recognized in income as a result of excluding amounts from the assessment of hedge effectiveness. Based on recorded values at December 31, 2019, $1.5 million of net losses will be reclassified from accumulated other comprehensive income (loss) into earnings within the next 12 months.
The following table presents gains and losses for the Company’s interest rate derivatives not designated in a hedge relationship under ASC 815, “Derivative Financial Instruments,” (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Description
|
|
Location
|
|
2019
|
|
2018
|
|
2017
|
Gains (loss) on interest contracts
|
|
Interest expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(367
|
)
|
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
See Note (11) (Fair Value Measurements and Financial Information) for further information related to the Company’s derivative instruments.
(11) Fair Value Measurements and Financial Information
The Company discloses the required fair values of financial instruments in its assets and liabilities under the hierarchy guidelines, in accordance with GAAP. The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, derivative instruments, long-term debt and finance lease obligations. As of December 31, 2019, and 2018, the carrying values of the Company’s financial instruments, included in its consolidated balance sheets, approximated or equaled their fair values. There were no transfers into or out of Levels 1, 2 and 3 as of December 31, 2019 and 2018.
Recurring Fair Value Measurement
At December 31, 2019, the financial instrument measured by the Company at fair value on a recurring bases was its interest rate derivative.
The fair market value of the derivative financial instrument reflected on the consolidated balance sheets as of December 31, 2019, and 2018 was determined using industry-standard models that consider various assumptions, including current market and contractual rates for the underlying instruments, time value, implied volatilities, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace through the full term of the instrument and can be supported by observable data.
The following tables present the placement in the fair value hierarchy of assets and liabilities that were measured at fair value on a recurring basis at December 31, 2019, and 2018 (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at reporting date using
|
|
|
December 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate derivatives
|
|
$
|
(7,288
|
)
|
|
$
|
—
|
|
|
$
|
(7,288
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at reporting date using
|
|
|
December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate derivatives
|
|
(298
|
)
|
|
—
|
|
|
(298
|
)
|
|
—
|
|
Non-Routine Fair Value Measurement
The fair values of indefinite-lived assets and long-lived assets are determined with internal cash flow models based on significant unobservable inputs. The Company measures the fair value of its property, plant and equipment using the discounted cash flow method, the fair value of its customer contracts using the multi-period excess earning method and income based “with and without” method, the fair value of its trade names and acquired technology using the “income-based relief-from-royalty” method and the fair value of its non-compete agreement using the “lost income” approach. Assets acquired as a result of the acquisition of the RockPile, RSI, and C&J transactions were recorded at their fair values on the date of acquisition. See Note (3) Mergers and Acquisitions for further details.
Given the unobservable nature of the inputs used in the Company’s internal cash flow models, the cash flows models are deemed to use Level 3 inputs.
Credit Risk
The Company’s financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents, derivative contracts and trade receivables.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The Company’s cash balances on deposit with financial institutions totaled $255.0 million and $80.2 million as of December 31, 2019 and 2018, respectively, which exceeded Federal Deposit Insurance Corporation insured limits. The Company regularly monitors these institutions’ financial condition.
The credit risk from the derivative contract derives from the potential failure of the counterparty to perform under the terms of the derivative contracts. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties, whose Standard & Poor’s credit rating is higher than BBB. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features.
The majority of the Company’s trade receivables have payment terms of 30 days or less. Significant customers are those that individually account for 10% or more of the Company’s consolidated revenue or total accounts receivable. As of December 31, 2019, trade receivables from one customer individually represented 10% more of the Company’s total accounts receivable. As of December 31, 2018, trade receivables from three customers individually represented more than 10% and collectively represented 49% of the Company’s total accounts receivable. The Company mitigates the associated credit risk by performing credit evaluations and monitoring the payment patterns of its customers. The Company has a process in place to collect all receivables within 30 to 60 days of aging. As of December 31, 2019 and 2018, the Company had $0.7 million and $0.5 million in allowance for doubtful accounts, respectively, based on specific identification. The Company wrote-off $0.7 million of bad debts during the year ended 2019. In 2018, the Company wrote-off $0.6 million of bad debt in 2018, in connection with its litigation with Halcon Operating Co., Inc. and Halcon Energy Properties. The Company did not write-off any bad debts during 2017. For further detail, see Note (18) Commitments and Contingencies.
(12) Stock-Based Compensation
Effective as of October 31, 2019, the Company (i) amended and restated the Keane Group, Inc. Equity and Incentive Award Plan under the name NexTier Oilfield Solutions Inc. Equity and Incentive Award Plan (“Equity and Incentive Award Plan”), and (ii) assumed and amended and restated the C&J Energy Services, Inc. 2017 Management Incentive Plan under the name NexTier Oilfield Solutions Inc. (Former C&J Energy) Management Incentive Plan ( “Management Incentive Plan”, and collectively with the Equity and Incentive Award Plan, the “Equity Award Plans”). As part of the C&J Merger, the Company assumed the award agreements outstanding under the Management Incentive Plan on the terms set forth in the Merger agreement.
As of December 31, 2019, the Company had four types of stock-based compensation under its Equity Award Plans: (i) deferred stock awards for three executive officers, (ii) restricted stock awards issued to independent directors and certain executives and employees, (iii) restricted stock units issued to executive officers and key management employees and (iv) non-qualified stock options issued to executive officers. The Company has approximately 5,899,928 shares of its common stock reserved and available for grant under the Equity and Incentive Award Plan and approximately 8,155,054 shares of its common stock reserved and available for grant under the Management Incentive Plan.
For details on the Company’s accounting policies for determining stock-based compensation expense, see Note (2) Summary of Significant Accounting Policies: (l) Stock-based compensation. Non-cash stock compensation expense is generally presented within selling, general and administrative expense in the consolidated and combined statements of operations and comprehensive income (loss) however, for the year ended December 31, 2019, the Company presented $9.6 million within merger and integration. These amounts primarily relate to the accelerated vesting of certain awards that contained pre-existing change in control provisions.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The following table summarizes stock-based compensation expense for the years ended December 31, 2019, 2018 and 2017 (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Deferred stock awards
|
|
—
|
|
|
4,280
|
|
|
4,280
|
|
Restricted stock awards
|
|
1,486
|
|
|
611
|
|
|
399
|
|
Restricted stock units
|
|
20,426
|
|
|
9,822
|
|
|
4,766
|
|
Non-qualified stock options
|
|
3,498
|
|
|
2,453
|
|
|
1,133
|
|
Restricted stock performance-based stock unit awards
|
|
3,567
|
|
|
—
|
|
|
—
|
|
Stock-based compensation
|
|
$
|
28,977
|
|
|
$
|
17,166
|
|
|
$
|
10,578
|
|
Tax benefit
|
|
$
|
(6,954
|
)
|
|
(4,134
|
)
|
|
(2,532
|
)
|
Stock-based compensation, net of tax
|
|
22,023
|
|
|
$
|
13,032
|
|
|
$
|
8,046
|
|
(a) Deferred stock awards
Upon consummation of the IPO, the executive officers of the Company identified in the table below became eligible for retention payments, the first on January 1, 2018 and the second on January 1, 2019, in the bonus amounts set forth in the table below. On March 16, 2017, the compensation committee (the “Compensation Committee”) of the Board of Directors approved, and each executive officer agreed, that in lieu of the executive officer’s cash retention payments, the executive officer was granted a deferred stock award under the Equity and Incentive Award Plan. Each executive officer’s deferred stock award provides that, subject to the executive officer remaining employed through the applicable vesting date and complying with the restrictive covenants imposed on him under his employment agreement with the Company, the executive officer will be entitled to receive payment of a stock bonus equal to the variable number of shares of the Company’s common stock having a fair market value on the payment date equal to the bonus amount set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
Bonus Amounts (In thousands)
|
|
|
First
|
|
Second
|
James C. Stewart
|
|
$
|
1,976
|
|
|
$
|
1,976
|
|
Gregory L. Powell
|
|
$
|
1,646
|
|
|
$
|
1,646
|
|
M. Paul DeBonis Jr.
|
|
$
|
659
|
|
|
$
|
659
|
|
The Company accounted for these deferred stock awards as liability classified awards and recorded them at fair value based on the fixed monetary value on the date of grant. The Company recognized $8.6 million as a deferred compensation expense liability and contra-equity during the first quarter of 2017.
The first stock bonuses vested on January 1, 2018 and were paid on February 15, 2018. The second stock bonus vested January 1, 2019, with an original payout date of February 15, 2019, that was amended in February 2019 to a payout date of March 4, 2019. For the years ended December 31, 2019, 2018 and 2017 the Company recognized nil, $4.3 million and $4.3 million respectively of non-cash stock compensation expense into earnings. As of December 31, 2019, there was no remaining unamortized compensation cost related to unvested deferred stock awards.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(b) Restricted stock awards
During 2019, in connection with the C&J Merger, restricted stock awards granted to the independent members of the Company’s Board of Directors prior to the C&J Merger in 2018, and 2017, vested in accordance with existing change in control provisions. Additionally, the Company granted approximately 0.6 million replacement restricted stock awards to C&J employees in connection with the C&J Merger. Restricted stock awards are not considered issued and outstanding for purposes of earnings per share calculations until vested.
For the years ended December 31, 2019, 2018, and 2017 the Company recognized $1.5 million, $0.6 million, and $0.4 million respectively, of non-cash stock compensation expense. As of December 31, 2019, total unamortized compensation cost related to unvested restricted stock awards was $0.7 million, which the Company expects to recognize over the remaining weighted-average period of 0.94 years.
Rollforward of restricted stock awards as of December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Restricted Stock Awards
(In thousands)
|
|
Weighted average grant date fair value
|
Total non-vested at December 31, 2018
|
|
94
|
|
|
$
|
17.40
|
|
Shares issued
|
|
678
|
|
|
4.99
|
|
Shares vested
|
|
(478
|
)
|
|
7.70
|
|
Shares forfeited
|
|
(2
|
)
|
|
4.55
|
|
Non-vested balance at December 31, 2019
|
|
292
|
|
|
$
|
4.55
|
|
|
|
|
|
|
(c) Restricted stock units
During 2019, the Company granted approximately 1.6 million restricted stock units to executive officers and key management employees. Additionally, the Company granted approximately $0.9 million replacement restricted stock units in connection with the C&J Merger. Restricted stock units are stock awards that vest over a one to three year service period.
For the years ended December 31, 2019, 2018 and 2017, the Company recognized $20.4 million, $9.8 million and $4.8 million, respectively, of non-cash stock compensation expense. As of December 31, 2019, total unamortized compensation cost related to unvested restricted stock units was $19.1 million, which the Company expects to recognize over the remaining weighted-average period of 1.84 years.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Rollforward of restricted stock units as of December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Restricted Stock Units
(In thousands)
|
|
Weighted average grant date fair value
|
Total non-vested at December 31, 2018
|
|
1,947
|
|
|
$
|
14.83
|
|
Units issued
|
|
2,679
|
|
|
8.57
|
|
Units vested
|
|
(1,700
|
)
|
|
11.58
|
|
Units forfeited
|
|
(166
|
)
|
|
13.89
|
|
Non-vested balance at December 31, 2019
|
|
2,760
|
|
|
$
|
10.82
|
|
|
|
|
|
|
(d) Non-qualified stock options
During 2019, the Company granted approximately 0.5 million replacement stock options in connection with the C&J merger. When granted the stock options had a remaining vesting term of approximately one year or less. Stock options granted in 2018 and 2017 have a three-year vesting period, provided that the participant does not incur a termination before the applicable vesting date. As the stock options vest, the award recipients can thereafter exercise their stock options up to the expiration date of the options, which is the date of the six-year anniversary from the grant date.
For the years ended December 31, 2019, 2018 and 2017, the Company recognized $3.5 million, 2.5 million and $1.1 million, respectively, of non-cash stock compensation expense. As of December 31, 2019, total unamortized compensation cost related to unvested stock options was $1.0 million, which the Company expects to recognize over the remaining weighted-average period of 1.15 years.
Rollforward of stock options as of December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Stock Options
(In thousands)
|
|
Weighted average grant date fair value
|
Total outstanding at December 31, 2018
|
|
1,219
|
|
|
$
|
6.75
|
|
Options granted
|
|
549
|
|
|
0.74
|
|
Options exercised
|
|
—
|
|
|
—
|
|
Actual options forfeited
|
|
(25
|
)
|
|
6.77
|
|
Options expired
|
|
—
|
|
|
—
|
|
Total outstanding at December 31, 2019
|
|
1,743
|
|
|
$
|
4.86
|
|
|
|
|
|
|
There were 1.4 million stock options exercisable or vested at December 31, 2019.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Assumptions used in calculating the fair value of the stock options granted during the year are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Options Granted
|
|
2018 Options Granted
|
|
2017 Options Granted
|
Valuation assumptions:
|
|
|
|
|
|
Expected dividend yield
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Expected equity volatility
|
49.6
|
%
|
|
46.3
|
%
|
|
51.5
|
%
|
Expected term (years)
|
7.3 - 8.1
|
|
|
6
|
|
|
6
|
|
Risk-free interest rate
|
1.7
|
%
|
|
2.7
|
%
|
|
1.6
|
%
|
Weighted average:
|
|
|
|
|
|
Exercise price per stock option
|
$19.09 - $26.41
|
|
|
$
|
15.31
|
|
|
$
|
19.00
|
|
Market price per share
|
$
|
4.55
|
|
|
$
|
15.31
|
|
|
$
|
14.49
|
|
Weighted average fair value per stock option
|
$
|
0.74
|
|
|
$
|
7.28
|
|
|
$
|
6.16
|
|
|
|
|
|
|
|
(e) Performance-based RSU awards
On March 25, 2019, the Company issued 0.3 million performance-based RSUs to executive officers under the Equity Plan, which had a grant date fair valued at $3.6 million. One half of performance-based RSUs were scheduled to vest at December 31, 2020 (the "two-year performance-based RSUs"), while the remaining half were scheduled to vest at December 31, 2021 (the "three-year performance-based RSUs"). Each vesting was subject to a payout percentage based on the Company's annualized total stockholder return ranking relative to its total stockholder return peer group achieved during the performance period, which extends from January 1, 2019 to December 31, 2020 for the two-year performance-based RSUs and January 1, 2019 to December 31, 2021 for the three-year performance-based RSUs. The number of shares that could have been earned at the end of the vesting period ranged from 25% to 200% of the target award amount, if the threshold performance criteria was met. These performance-based RSUs were settled in the Company's common stock and are classified as equity awards. In connection with the Merger, the performance-based RSU’s immediately vested on the C&J Acquisition Date. The remaining compensation expense associated with these performance-based RSUs was amortized into earnings on the date of close. As of December 31, 2019, there was no remaining compensation cost related to performance-based RSUs.
|
|
|
|
|
|
|
|
|
|
|
Number of Performance-based RSU’s
(In thousands)
|
|
Weighted average grant date fair value
|
Total outstanding at December 31, 2018
|
|
—
|
|
|
$
|
—
|
|
Performance-based RSU’s issued
|
|
327
|
|
|
11.00
|
|
Performance-based RSU’s vested
|
|
(327
|
)
|
|
—
|
|
Performance-based RSU’s forfeited
|
|
—
|
|
|
—
|
|
Total outstanding at December 31, 2019
|
|
—
|
|
|
$
|
—
|
|
Assumptions used in calculating the fair value of the performance-based RSU’s granted during the year are summarized below:
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
|
|
|
|
|
|
|
2019 Performance-based RSU’s Granted
|
Valuation assumptions:
|
|
|
Expected dividend yield
|
|
0
|
%
|
Expected equity volatility, including peers
|
|
40.2 % - 73.2%
|
|
Expected term (years)
|
|
1.8 - 2.8
|
|
Risk-free interest rate
|
|
2.2% - 2.3%
|
|
(13) Stockholders’ Equity
(a) Certificate of Incorporation
The Company was formed as a Delaware corporation on October 13, 2016. The Company’s certificate of incorporation provides for (i) the authorization of 500,000,000 shares of common stock with a par value of $0.01 per share and (ii) the authorization of 50,000,000 shares of undesignated preferred stock with a par value of $0.01 per share that may be issued from time to time by the Company’s Board of Directors in one or more series.
Each holder of the Company’s common stock is entitled to one vote per share and is entitled to receive dividends and any distributions upon the liquidation, dissolution or winding-up of the Company. The Company’s common stock has no preemptive rights, no cumulative voting rights and no redemption, sinking fund or conversion provisions.
(b) Keane Group Holdings Recapitalization
As described in Note (1) Basis of Presentation and Nature of Operations, the Company completed Organizational Transactions to effect the IPO that resulted in all equity interests in Keane Group, which consisted of 1,000,000 class A units, 176,471 class B units and 294,118 class C units, being converted to an aggregate of 87,428,019 shares of the Company’s common stock on January 20, 2017. The Organizational Transactions represented a transaction between entities under common control and was accounted for similar to pooling of interests. In accordance with the requirements of ASC 805, the Company recognized the aggregate 87,428,019 shares of common stock at the carrying amount of the equity interests in Keane Group on January 20, 2017, which totaled $453.8 million. The Company recorded $0.9 million of par value common stock and the remaining $452.9 million as paid-in capital in excess of par value. Furthermore, as the Organizational Transactions resulted in a change in the reporting entity from Keane Group Holdings, LLC to Keane Group, Inc., paid-in capital in excess of par value for Keane Group, Inc. was reduced by Keane Group’s retained deficit as of January 20, 2017 of $296.7 million.
(c) Initial Public Offering
As described in Note (1) Basis of Presentation and Nature of Operations, on January 25, 2017, the Company completed the IPO of 30,774,000 shares of its common stock at the public offering price of $19.00 per share, which included 15,700,000 shares offered by the Company and 15,074,000 shares offered by the selling stockholder, including 4,014,000 shares sold as a result of the underwriters’ exercise of their overallotment option. The net proceeds of the IPO to the Company was $255.5 million, which were used to fully repay Holdco II’s term loan balance of $99.0 million and the associated prepayment penalty of $13.8 million, and repay $50.0 million of its 12% secured notes due 2019 and the associated prepayment penalty of approximately $0.5 million. The remaining net proceeds were used for general corporate purposes, including capital expenditures, working capital and potential acquisitions and strategic transactions. Upon completion of the IPO and the reorganization, the Company had 103,128,019 shares of common stock outstanding.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
All underwriting discounts and commissions and other specific costs directly attributable to the IPO were deferred and applied to the gross proceeds of the offering through paid-in capital in excess of par value.
(d) RockPile Acquisition
As described in Note (3) Mergers and Acquisitions, the Company completed its acquisition of RockPile on July 3, 2017 for cash consideration of $116.6 million, subject to post-closing adjustments, 8,684,210 shares of the Company’s common stock and contingent value rights, as described in Note (3) Mergers and Acquisitions. The fair value of the Acquisition Shares was calculated using the closing price of the Company’s common stock on July 3, 2017, of $16.29, discounted to reflect the lack of marketability resulting from the 180-day lock-up period during which resale of the Acquisition Shares is restricted. Upon completion of the acquisition of RockPile, the Company had 111,831,176 shares of common stock outstanding.
(e) Vesting of Stock Awards
During the year ended December 31, 2019, 1,962,809 shares were issued, net of share settlements for payment of payroll taxes, upon the vesting of stock-based compensation awards. Shares withheld during the period were immediately retired by the Company.
(f) Secondary Offerings
On January 17, 2018, the Company’s Registration Statement on Form S-1 (File No. 333-222500) was declared effective by the SEC for an offering on behalf of Keane Investor, pursuant to which 15,320,015 shares were sold by the selling stockholder (including 1,998,262 shares sold pursuant to the exercise of the underwriters’ over-allotment option) at a price to the public of $18.25 per share. The Company did not sell any common stock in, and did not receive any of the proceeds from, the offering. Upon completion of the offering, Keane Investor controlled 50.8% of the Company’s outstanding common stock. During the December 31, 2018, the Company incurred $13.0 million of transaction costs on behalf of the selling stockholder, which were included within selling, general and administrative expenses in the consolidated and combined statement of operations and comprehensive income (loss).
In February 2018, the Company filed a Registration Statement on Form S-3 (File No. 333-222831) that was effective upon its filing. In December 2018, a selling stockholder sold 5,251,249 of the Company’s common stock at a price to the public of $11.02 per share. In conjunction with this offering, the Company repurchased 520,000 shares. The Company did not sell any common stock in, and did not receive any of the proceeds from, this offering. As a result of this offering, Keane Investor owned approximately 49.6% of the Company’s outstanding common stock, and the Company ceased being a “controlled company” within the meaning of the NYSE rules.
(g) C&J Merger
As described in Note (3) Mergers and Acquisitions, the Company completed the C&J Merger on October 31, 2019 for total consideration of approximately $485.1 million, consisting of (i) equity consideration in the form of 105.9 million shares of Keane common stock issued to C&J stockholders with a value of $481.9 million and (ii) replacement share based compensation awards attributable to pre-Merger services with a value of $3.2 million.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(h) Stock Repurchase
During the year ended December 31, 2018, the Company settled $105.0 million of total share repurchases of its common stock at an average price of $12.93 per share, representing a total of 8,111,764 common shares of the Company. As of December 31, 2018, the Company had approximately $150.0 million remaining for future share repurchases under its existing stock repurchase program. Of the total amount of shares repurchased in 2018, 1,248,440 shares and 520,000 shares were repurchased from White Deer Energy (as defined herein) and Keane Investor, respectively. The shares repurchased from Keane Investor were not repurchased under the Company’s existing stock repurchase program. For further details of these related-party transactions, see Note (19) Related Party Transactions.
On December 11, 2019, the Company announced the board of directors approved a new share repurchase program for up to $50.0 million through December 2020. No share repurchases were made under the share repurchase program in 2019.
(14) Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss in the equity section of the consolidated balance sheets includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
Foreign currency
items
|
|
Interest rate
contract
|
|
AOCI
|
December 31, 2018
|
$
|
—
|
|
|
$
|
(798
|
)
|
|
$
|
(798
|
)
|
Net income (loss)
|
—
|
|
|
(239
|
)
|
|
(239
|
)
|
Other comprehensive loss
|
(116
|
)
|
|
(7,628
|
)
|
|
(7,744
|
)
|
December 31, 2019
|
$
|
(116
|
)
|
|
$
|
(8,665
|
)
|
|
$
|
(8,781
|
)
|
|
|
|
|
|
|
The following table summarizes reclassifications out of accumulated other comprehensive loss into earnings during years ended December 31, 2019, 2018 and 2017 (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affected line item
in the consolidated and combined
statements of
operations and
comprehensive income (loss)
|
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Interest rate derivatives, hedging
|
|
$
|
239
|
|
|
$
|
697
|
|
|
$
|
(172
|
)
|
|
Interest expense
|
Foreign currency items(1)
|
|
—
|
|
|
(2,621
|
)
|
|
—
|
|
|
Other income
|
Total reclassifications
|
|
$
|
239
|
|
|
$
|
(1,924
|
)
|
|
$
|
(172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1) During the fourth quarter of 2018, the Company liquidated its Canadian subsidiary, upon which it recognized a loss of $2.6 million from AOCI into earnings in the consolidated and combined statement of operations and comprehensive income for the year ended December 31, 2018.
(15) Earnings per Share
Basic income or (loss) per share is based on the weighted average number of common shares outstanding during the period. Restricted stock awards and RSUs are not considered issued and outstanding for purposes of earnings per share calculations until vested.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Diluted income or (loss) per share includes additional common shares that would have been outstanding if potential common shares with a dilutive effect, such as stock awards from the Company’s Equity and Incentive Award Plan, had been issued. Anti-dilutive securities represent potentially dilutive securities that are excluded from the computation of diluted income or (loss) per share as their impact would be anti-dilutive.
A reconciliation of the numerators and denominators used for the basic and diluted net loss per share computations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(106,157
|
)
|
|
$
|
59,331
|
|
|
$
|
(36,141
|
)
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding(1)
|
|
122,977
|
|
|
109,335
|
|
|
106,321
|
|
Dilutive effect of restricted stock awards
|
|
43
|
|
|
17
|
|
|
36
|
|
Dilutive effect of deferred stock award granted to NEOs
|
|
—
|
|
|
214
|
|
|
—
|
|
Dilutive effect of RSUs granted under stock incentive plans
|
|
81
|
|
|
94
|
|
|
135
|
|
Diluted weighted-average common shares outstanding(2)
|
|
123,101
|
|
|
109,660
|
|
|
106,492
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The basic weighted-average common shares outstanding for the year ended December 31, 2017 have been computed to give effect to the Organizational Transactions, including the limited liability company agreement of Keane Investor to, among other things, exchange all of the Company’s Existing Owners’ membership interests for the newly-created ownership interests.
|
|
|
(2)
|
As a result of the net loss incurred by the Company for the years ended December 31, 2019 and 2017, the calculation of diluted net loss per share gives no consideration to the potentially anti-dilutive securities shown in the above reconciliation, and as such is the same as basic net loss per share.
|
(16) Leases
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a purchase financed by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months, regardless of their classification. Leases with a term of 12 months or less may be accounted for similarly to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. In December 2018, the FASB issued ASU 2019-20, "Leases (Topic 842): Narrow-Scope Improvements for Lessors," which allows lessors to make a policy election to exclude sales taxes and other similar taxes from determining the consideration in the contract and variable payments not included in the consideration in the contract, requires lessors to exclude from variable payments lessor costs paid by lessees directly to third parties and clarified the accounting for variable payments for contracts with lease and nonlease components. The Company adopted these standards effective January 1, 2019, using the modified retrospective transition method. The Company recognized a lease right-of-use asset and lease liability of approximately $61.0 million on its consolidated balance sheet on January 1, 2019, for its operating leases that existed upon the effective date, with no additional impact to its consolidated and combined statements of operations and comprehensive loss or statements of cash flows. The Company also determined that while its hydraulic fracturing fleets represent lease components in its customer contracts, these lease components do not represent the predominant components in its customer contracts.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
As such the Company has elected to account for the combined components of its customer contracts under ASC 606. In connection with the adoption of these standards, the Company implemented internal controls to ensure that the Company's contracts are properly evaluated to determine applicability under ASU 2016-02 and that the Company properly applies ASU 2016-02 in accounting for and reporting on all its qualifying leases.
The effect of the lease standards adoption on the unaudited condensed consolidated balance sheet as of January 1, 2019 is as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
January 1, 2019
|
Balance sheet line item
|
|
As Previously Reported
|
|
ASU 2016-02 Adoption
|
|
As Adjusted
|
Operating lease right-of-use assets
|
|
$
|
—
|
|
|
$
|
60,946
|
|
|
$
|
60,946
|
|
Finance lease right-of-use assets
|
|
—
|
|
|
7,864
|
|
|
7,864
|
|
Property and equipment, net
|
|
531,319
|
|
|
(7,864
|
)
|
|
523,455
|
|
Other noncurrent assets
|
|
6,569
|
|
|
(9
|
)
|
|
6,560
|
|
Accrued expenses and other current liabilities
|
|
(101,833
|
)
|
|
1,066
|
|
|
(100,767
|
)
|
Current maturities of operating lease liabilities
|
|
—
|
|
|
(25,211
|
)
|
|
(25,211
|
)
|
Current maturities of finance lease liabilities
|
|
—
|
|
|
(4,928
|
)
|
|
(4,928
|
)
|
Current maturities of capital lease obligations
|
|
(4,928
|
)
|
|
4,928
|
|
|
—
|
|
Long-term operating lease liabilities, less current maturities
|
|
—
|
|
|
(35,512
|
)
|
|
(35,512
|
)
|
Long-term finance lease liabilities, less current maturities
|
|
—
|
|
|
(5,581
|
)
|
|
(5,581
|
)
|
Capital lease obligations, less current maturities
|
|
(5,581
|
)
|
|
5,581
|
|
|
—
|
|
Other noncurrent liabilities
|
|
(3,283
|
)
|
|
50
|
|
|
(3,233
|
)
|
Retained earnings
|
|
31,494
|
|
|
(1,330
|
)
|
|
30,164
|
|
|
|
|
|
|
|
|
The Company has operating leases for certain of its corporate offices, field shops, apartments, warehouses, rail cars, frac pumps, trailers, tractors and certain other equipment. The Company also has both operating and finance leases for its light duty vehicles.
The Company's leases have variable payments with annual escalations that are based on the proportion by which the consumer price index ("CPI") for all urban consumers increased over the CPI index for the prior comparative year. The Company's leases have remaining lease terms of less than 1 year to 15 years, some of which include extension and termination option. None of these extension and termination options were used to determine the Company's right-of-use assets and lease liabilities, as the Company has not determined it is probable that it will exercise any of these options. None of the Company's leases have residual value guarantees.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The components of the Company's lease costs are as follows:
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Year ended
December 31, 2019
|
Operating lease cost
|
|
$
|
26,948
|
|
Finance lease cost:
|
|
|
Amortization of right-of-use assets
|
|
3,356
|
|
Interest on lease liabilities
|
|
625
|
|
Total finance lease cost
|
|
3,981
|
|
Short-term lease cost
|
|
1,184
|
|
Variable lease cost(1)
|
|
15,654
|
|
Sublease income
|
|
(116
|
)
|
Total lease cost
|
|
$
|
47,651
|
|
(1)Cost from variable amounts excluded from determination of lease liability.
Supplemental cash flows related to leases are as follows:
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Year ended
December 31, 2019
|
Cash paid for amounts included in the measurements of lease liabilities
|
|
|
Operating cash flows from operating leases
|
|
$
|
25,318
|
|
Operating cash flows from finance leases
|
|
565
|
|
Financing cash flows from finance leases
|
|
6,035
|
|
Weighted average remaining lease terms are as follows:
|
|
|
|
Year ended
December 31, 2019
|
Operating leases
|
4.74 years
|
Finance leases
|
2.28 years
|
Weighted average discount rate on the Company's lease liabilities are as follows:
|
|
|
|
Year ended
December 31, 2019
|
Operating leases
|
5.73%
|
Finance leases
|
5.53%
|
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Maturities of the Company's lease liabilities as of December 31, 2019, per ASU 2016-02, were as follows:
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
Year ending December 31,
|
Operating leases
|
|
Finance leases
|
2020
|
$
|
26,068
|
|
|
$
|
4,977
|
|
2021
|
12,084
|
|
|
3,168
|
|
2022
|
10,012
|
|
|
1,643
|
|
2023
|
7,088
|
|
|
273
|
|
2024
|
2,171
|
|
|
—
|
|
Thereafter
|
10,921
|
|
|
—
|
|
Total undiscounted remaining minimum lease payments
|
68,344
|
|
|
10,061
|
|
Less imputed interest
|
(9,748
|
)
|
|
(623
|
)
|
Total discounted remaining minimum lease payments
|
$
|
58,596
|
|
|
$
|
9,438
|
|
|
|
|
|
Prior to the adoption of the new lease accounting standard, minimum lease commitments, excluding early termination buyouts, remaining under the Company's operating leases and capital leases, for the next five years as of December 31, 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
Year ending December 31,
|
Operating leases
|
|
Capital leases
|
2019
|
$
|
26,327
|
|
|
$
|
5,484
|
|
2020
|
18,017
|
|
|
2,652
|
|
2021
|
5,688
|
|
|
2,430
|
|
2022
|
4,795
|
|
|
883
|
|
2023
|
3,172
|
|
|
—
|
|
Total
|
$
|
57,999
|
|
|
$
|
11,449
|
|
|
|
|
|
The Company did not make any lease reassessments or modifications nor did it recognize any gains or losses on sale-leaseback transactions during the year ended December 31, 2019.
As of December 31, 2019, the Company does not have additional operating and finance leases that have not yet commenced, nor did the Company have any lease transactions with any of its related parties.
(17) Income Taxes
NexTier Oilfield Solutions Inc. (formerly Keane Group, Inc.) was formed as a corporation as a result of the IPO and related Organizational Transactions on January 20, 2017. The Company established a provision for income taxes for operations beginning January 20, 2017. NexTier was formed to hold all of the operational assets of Keane Group Holdings, LLC, which was originally organized as a limited liability company and treated as a flow-through entity for federal and most state income tax purposes. As such, taxable income and any related tax credits were passed through to its members and included in their tax returns for periods prior to January 20, 2017.
The following table summarizes the income (loss) from continuing operations before income taxes in the following jurisdictions:
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Domestic
|
|
$
|
(106,879
|
)
|
|
$
|
66,260
|
|
|
$
|
(35,904
|
)
|
Foreign
|
|
1,727
|
|
|
(2,659
|
)
|
|
(87
|
)
|
|
|
$
|
(105,152
|
)
|
|
$
|
63,601
|
|
|
$
|
(35,991
|
)
|
The components of the Company’s income tax provision are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
|
State
|
|
$
|
709
|
|
|
$
|
5,387
|
|
|
$
|
614
|
|
Foreign
|
|
627
|
|
|
31
|
|
|
—
|
|
Total current income tax provision
|
|
$
|
1,336
|
|
|
$
|
5,418
|
|
|
$
|
614
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
$
|
(239
|
)
|
|
$
|
(1,031
|
)
|
|
$
|
(536
|
)
|
State
|
|
(92
|
)
|
|
(117
|
)
|
|
72
|
|
Total deferred income tax provision
|
|
(331
|
)
|
|
(1,148
|
)
|
|
(464
|
)
|
|
|
$
|
1,005
|
|
|
$
|
4,270
|
|
|
$
|
150
|
|
|
|
|
|
|
|
|
The following table presents the reconciliation of the Company’s income taxes calculated at the statutory federal tax rate, currently 21%, to the income tax provision in its consolidated and combined statements of operations and comprehensive (loss). The statutory federal tax rate for 2017 was 35% prior to the enactment of the Tax Cuts and Jobs Act in December 2017, which reduced the federal corporation rate from 35% to 21%, effective January 1, 2018. The Company’s effective tax rate for 2019 of (0.96)% differs from the statutory rate, primarily due to state taxes, and the change in the valuation allowance. The Company’s effective tax rate for 2018 was 6.71%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
December 31,
2017
|
Income tax provision computed at the statutory federal rate
|
|
$
|
(22,082
|
)
|
|
$
|
13,356
|
|
|
$
|
(9,795
|
)
|
Reconciling items:
|
|
|
|
|
|
|
State income taxes, net of federal tax benefit
|
|
(1,463
|
)
|
|
1,408
|
|
|
(334
|
)
|
Deferred tax asset valuation adjustment
|
|
14,987
|
|
|
(22,639
|
)
|
|
(32,593
|
)
|
Tax rate change
|
|
—
|
|
|
—
|
|
|
41,591
|
|
Permanent differences
|
|
9,962
|
|
|
5,237
|
|
|
630
|
|
Foreign withholding taxes
|
|
627
|
|
|
—
|
|
|
—
|
|
Other
|
|
(1,026
|
)
|
|
6,908
|
|
|
651
|
|
Income tax provision
|
|
$
|
1,005
|
|
|
$
|
4,270
|
|
|
$
|
150
|
|
|
|
|
|
|
|
|
Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates. The Company adopted ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, during 2017, and thus has classified all deferred tax assets and liabilities as noncurrent.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
|
|
|
Stock-based compensation
|
|
$
|
4,124
|
|
|
$
|
3,979
|
|
|
$
|
2,467
|
|
Net operating loss carry-forwards
|
|
196,949
|
|
|
90,565
|
|
|
70,745
|
|
Accruals and other
|
|
21,411
|
|
|
4,524
|
|
|
3,994
|
|
PPE & Intangibles
|
|
1,474
|
|
|
—
|
|
|
—
|
|
Gross deferred tax assets
|
|
223,958
|
|
|
99,068
|
|
|
77,206
|
|
Valuation allowance
|
|
(223,419
|
)
|
|
(41,779
|
)
|
|
(65,347
|
)
|
Total deferred tax assets
|
|
$
|
539
|
|
|
$
|
57,289
|
|
|
$
|
11,859
|
|
Deferred tax liability:
|
|
|
|
|
|
|
PP&E and intangibles
|
|
$
|
—
|
|
|
$
|
(56,799
|
)
|
|
$
|
(11,319
|
)
|
Prepaids and other
|
|
(645
|
)
|
|
(756
|
)
|
|
(1,954
|
)
|
Total deferred tax liability
|
|
(645
|
)
|
|
(57,555
|
)
|
|
(13,273
|
)
|
Net deferred tax liability
|
|
$
|
(106
|
)
|
|
$
|
(266
|
)
|
|
$
|
(1,414
|
)
|
|
|
|
|
|
|
|
As of December 31, 2019, NexTier had total U.S. federal tax net operating loss (“NOL”) carryforwards of $787.6 million, of which, $380.2 million, if not utilized, will begin to expire in the year 2031. The remaining $407.3 million of federal NOLS can be carried forward indefinitely. Of this amount, $71.6 million related to the Company’s current year federal tax loss. The Company has state NOLS of $306.4 million, which if not utilized, will expire in various years between 2025 and 2038. Additionally, the Company has $20.1 million of NOLs in foreign jurisdictions that, if not utilized, will begin to expire in the year 2035.
As a result of the C&J Merger on October 31, 2019, NexTier had a change in ownership for purposes of Section 382 of the Internal Revenue Code (“IRC”). As a result, the amount of pre-change NOLs and other tax attributes that are available to offset future taxable income are subject to an annual limitation. The annual limitation is based on the value of the Company as of the effective date of the C&J Merger. The Company’s Section 382 annual limitation is $8.5 million. In addition, this annual limitation is subject to adjustments from the realization of net unrealized built-in gain (“NUBIG”) during a five-year recognition period ending October 31, 2024. As of December 31, 2019, it is expected that all of the Company’s pre-change NOLs of $398.7 million incurred prior to the C&J Merger will be available for use during the applicable carryforward period without becoming permanently lost by the Company due to expiration. The Company’s pre-change NOLs subject to expiration comprise $275.8 million out of the total $398.7 million.
C&J Energy Services, Inc. had Pre-change NOLs carry forward prior to the C&J Merger. As a result of the C&J Merger, such NOLs were carried over to the Company. These NOLs are also subject to an annual limitation under IRC Section 382. The Company’s annual limitation with respect to the C&J Energy NOLs is $8.6 million and is subject to adjustments from the realization of net unrealized built-in loss (“NUBIL”) during a five-year recognition period ending October 31, 2024. Due to this IRC Section 382 annual limitation, some of the NOLs carried over to the Company from C&J Energy Services, Inc. are expected to become permanently lost by the Company due to the expiration and will not be available for use by the Company during the applicable carryforward period. The Company has not reflected the NOLs expected to expire as a result of this limitation in its summary of deferred tax assets or in the NOLs disclosed within this paragraph. The pre-change NOLs carried over from C&J Energy Services, Inc. total $322.6 million of which $104.4 million are subject to expiration, but not expected to expire as a result of the IRC Section 382 limitation.
ASC 740, “Income Taxes,” requires the Company to reduce its deferred tax assets by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. As a result of the Company’s
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
evaluation of both the positive and negative evidence, the Company determined it does not believe it is more likely than not that its deferred tax assets will be utilized in the foreseeable future and has recorded a valuation allowance. The valuation allowance as of December 31, 2019 fully offsets the net deferred tax assets, excluding deferred tax liabilities related to certain indefinite-lived assets. The valuation allowance as of December 31, 2017 fully offsets the impact of the initial benefit recorded related to the formation of NexTier Oilfield Solutions Inc., excluding deferred tax liabilities related to certain indefinite lived assets. This initial deferred impact was recorded as an adjustment to equity due to a transaction between entities under common control. The valuation allowances as of December 31, 2019, 2018, and 2017 were $223.4 million, $41.8 million and $65.3 million, respectively.
Changes in the valuation allowance for deferred tax assets were as follows:
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
Valuation allowance as of the beginning of January 1, 2019
|
|
$
|
41,779
|
|
Acquisition accounting
|
|
164,950
|
|
Charge as (benefit) expense to income tax provision for current activities
|
|
14,987
|
|
Changes to other comprehensive income (loss)
|
|
1,703
|
|
Valuation allowance as of December 31, 2019
|
|
$
|
223,419
|
|
|
|
|
On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code, including but not limited to, (1) the requirement to pay a one-time transition tax on all undistributed earnings of foreign subsidiaries; (2) reducing the U.S. federal corporate income tax rate from 35% to 21%; (3) eliminating the alternative minimum tax; (4) creating a new limitation on deductible interest expense; and (5) changing rules related to use and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
The Company evaluated the provisions of the Tax Act and determined only the reduced corporate tax rate from 35% to 21% would have an impact on its consolidated and combined financial statements as of December 31, 2017. Accordingly, the Company recorded a provision to income taxes for the Company’s assessment of the tax impact of the Tax Act on ending deferred tax assets and liabilities and the corresponding valuation allowance. The effects of other provisions of the Tax Act are not expected to have an adverse impact on the Company’s consolidated and combined financial statements. The Company finalized its analysis of the Tax Act in 2018 and will continue to monitor guidance on provisions of the Tax Act to be issued by taxing authorities to assess the impact on the Company’s consolidated and combined financial statements.
There were no unrecognized tax benefits nor any accrued interest or penalties associated with unrecognized tax benefits during the years ended December 31, 2019, 2018 and 2017. The Company believes it has appropriate support for the income tax positions taken and to be taken on the Company’s tax returns, and its accruals for tax liabilities are adequate for all open years based on our assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. The Company classifies interest and penalties within the provision for income taxes. The Company’s tax returns are open to audit under the statute of limitations for the years ended December 31, 2016 through December 31, 2018 for federal tax purposes and for the years ended December 31, 2015 through December 31, 2018 for state tax purposes.
(18) Commitments and Contingencies
As of December 31, 2019, and 2018, the Company had $9.0 million, including deposits acquired through the C&J Merger, and $4.2 million of deposits on equipment, respectively. Outstanding purchase commitments on equipment were $64.0 million and $43.6 million, as of December 31, 2019, and 2018, respectively.
As of December 31, 2019, the Company had committed $1.3 million to research and development with its equity-method investee. For additional information, see Note (2) Summary of Significant Accounting Policies.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
As of December 31, 2019, the Company has a letter of credit of $31.8 million under the 2019 ABL Facility.
In the normal course of operations, the Company enters into certain long-term raw material supply agreements for the supply of proppant to be used in hydraulic fracturing. As part of some of these agreements, the Company is subject to minimum tonnage purchase requirements and may pay penalties in the event of any shortfall. The Company purchased $160.0 million, $107.4 million and $150.0 million amounts of proppant under its take-or-pay agreements during the years ended December 31, 2019, 2018 and 2017.
Aggregate minimum commitments under long-term raw material supply agreements with payment penalties for minimum tonnage purchases for the next five years as of December 31, 2019 are listed below:
|
|
|
|
|
|
(Thousands of Dollars)
|
Year-end December 31,
|
|
2020
|
$
|
30,007
|
|
2021
|
14,925
|
|
2022
|
9,300
|
|
2023
|
1,500
|
|
2024
|
—
|
|
|
$
|
55,732
|
|
|
|
Litigation
From time to time, the Company is subject to legal and administrative proceedings, settlements, investigations, claims and actions, as is typical of the industry. These claims include, but are not limited to, contract claims, environmental claims, employment related claims, claims alleging injury or claims related to operational issues and motor vehicle accidents. The Company’s assessment of the likely outcome of litigation matters is based on its judgment of a number of factors, including experience with similar matters, past history, precedents, relevant financial information and other evidence and facts specific to the matter. The Company may increase or decrease its legal accruals in the future, on a matter-by-matter basis, to account for developments in such matters. Notwithstanding the uncertainty as to the final outcome and based upon the information currently available to it, the Company does not currently believe these matters in aggregate will have a material adverse effect on its consolidated financial position, results of operations or liquidity.
Environmental
The Company is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for protection of the environment. The Company cannot predict the future impact of such standards and requirements, which are subject to change and can have retroactive effectiveness. The Company continues to monitor the status of these laws and regulations. Currently, the Company 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. However, management does recognize that by the very nature of the Company’s 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 the Company’s liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Regulatory Audits
In 2017, the Company was notified by the Texas Comptroller of Public Accounts that it would conduct a routine audit of Keane Frac TX, LLC's direct payment sales tax for the periods of January 2014 through May 2017. The Company initially anticipated and recorded an estimate for a potential assessment of approximately $3.2 million during the first quarter of 2019. Subsequently, the Company made a $2.1 million prepayment in June 2019. The Company made an additional payment of $0.3 million in the third quarter of 2019 after receiving the notification of the audit result, concluding the audit. These amounts are recorded in selling, general and administrative expenses in the Company's consolidated statements of operations and comprehensive income (loss).
Prior to the consummation of the C&J Merger, the Company and C&J had been notified by certain state taxing authorities that these taxing authorities would be conducting routine sales and use tax audits of certain wholly owned operating subsidiaries of the Company for tax periods ranging from January 2011 through December 2019. The Company has recorded estimates of potential assessments for each audit totaling in the aggregate approximately $32.6 million. For one audit, in particular, the Company disagrees with many aspects of the state’s preliminary report and intends to contest the state’s position through litigation, if necessary. In addition, this reserve does not take into account the potential for refund claims in which the Company has not recorded.
(19) Related Party Transactions
Cerberus Operations and Advisory Company and Cerberus Capital Management, L.P., affiliates of the Company’s principal equity holder, provide certain consulting services to the Company. The Company paid $4.1 million, $0.3 million and $0.3 million during the years ended December 31, 2019, 2018 and 2017, respectively.
In connection with the Organization Transaction, the Company engaged in transactions with affiliates. See Note (1) (Basis of Presentation and Nature of Operations) and Note (13) (Stockholders’ Equity) for a description of these transactions.
In connection with the Company’s research and development initiatives, the Company has engaged in transactions with its equity-method investee. For additional information, see Note (2) Summary of Significant Accounting Policies. As of December 31, 2019, the Company has purchased $1.7 million of shares in its equity-method investee.
On May 29, 2018, the Company repurchased 1,248,440 shares of its common stock from WDE RockPile Aggregate, LLC (“White Deer Energy”) for $16.02 per share or $20.0 million. At the time of the RockPile acquisition, the shares of the Company’s common stock that White Deer Energy acquired was valued at $15.00 per share. The Company recognized the entire transaction as treasury stock that was subsequently retired, whereby the RockPile acquisition value of the shares of $18.7 million was recorded against paid-in capital in excess of par value and the remaining $1.3 million was recorded against retained earnings on the consolidated balance sheet as of December 31, 2018.
During 2018, the Company completed two secondary offerings on behalf of Keane Investor Holdings LLC. For further details, see Note (13) Stockholders’ Equity: (f) Secondary Offerings.
(20) Retirement Benefits and Nonretirement Postemployment Benefits
Defined Contribution Plan
The Company sponsors two different 401(k) defined contribution retirement plans covering eligible employees. Through the first plan, the Company makes matching contributions of up to 3.5% of compensation. Through the second plan, Eligible employees can make annual contributions to the plan up to the maximum amount allowed by current federal regulations, but no more than 80.0% of compensation as noted in the plan document. Contributions made by the Company related to the years ended December 31, 2019, 2018, and 2017 were $8.1 million, $6.7 million and $4.0 million, respectively.
Severance
The Company provides severance benefits to certain of its employees in connection with the termination of their employment. Severance benefits offered by the Company were $16.7 million, $0.6 million and $2.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.
(21) Business Segments
In accordance with Accounting Standard Codification (“ASC”) No. 280, Segment Reporting (“ASC 280”), the Company routinely evaluates whether its separate segments have changed. This determination is made based on the following factors: (1) the Company’s chief operating decision maker (“CODM”) is currently managing each operating segment as a separate business and evaluating the performance of each segment and making resource allocation decisions distinctly and expects to do so for the foreseeable future, and (2) discrete financial information for each operating segment is available.
Due to the transformative nature of the C&J Merger, the CODM changed the way in which the Company is managed, including the level at which to make performance evaluation and resource allocation decisions. Discrete financial information was created to provide the segment information necessary for the CODM to manage the Company under the revised operating segment structure. As a result of this change in operating segments, the Company revised its reportable segments subsequent to the completion of the C&J Merger. The Company’s revised reportable segments are: (i) Completion Services, (ii) Well Construction and Intervention (“WC&I”) and (iii) Well Support Services. This segment structure reflects the financial information and reports used by the Company’s management, specifically including its CODM, to make decisions regarding the Company’s business, including performance evaluation and resource allocation decisions. As a result of the revised reportable segment structure, the Company has restated the corresponding items of segment information for all periods presented.
The following is a description of each reportable segment:
Completion Services
The Company’s Completion Services segment consists of the following businesses and service lines: (1) fracturing services; (2) wireline and pumpdown services; and (3) completion support services, which includes the Company's research and technology department.
Well Construction and Intervention Services
The Company’s WC&I Services segment consists of the following businesses and service lines: (1) cementing services and (2) coiled tubing services.
Well Support Services
The Company’s Well Support Services segment consists of the following businesses and service lines: (1) rig services; (2) fluids management services; and (3) other specialty well site services.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The following tables present financial information with respect to the Company’s segments. Corporate and Other represents costs not directly associated with a segment, such as interest expense, income taxes and corporate overhead. Corporate assets include cash, deferred financing costs, derivatives and entity-level machinery equipment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Operations by reportable segment
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
Completion Services
|
|
$
|
1,709,934
|
|
|
$
|
2,100,956
|
|
|
$
|
1,527,287
|
|
WC&I
|
|
63,039
|
|
|
36,050
|
|
|
14,794
|
|
Well Support Services
|
|
48,583
|
|
|
—
|
|
|
—
|
|
Total revenue
|
|
$
|
1,821,556
|
|
|
$
|
2,137,006
|
|
|
$
|
1,542,081
|
|
Adjusted gross profit (loss):
|
|
|
|
|
|
|
Completion Services(1)
|
|
$
|
401,845
|
|
|
$
|
478,850
|
|
|
$
|
258,024
|
|
WC&I(1)
|
|
7,812
|
|
|
(2,390
|
)
|
|
1,496
|
|
Well Support Services(1)
|
|
7,967
|
|
|
—
|
|
|
—
|
|
Total adjusted gross profit
|
|
$
|
417,624
|
|
|
$
|
476,460
|
|
|
$
|
259,520
|
|
Operating income (loss):
|
|
|
|
|
|
|
Completion Services
|
|
$
|
126,698
|
|
|
$
|
234,756
|
|
|
$
|
115,691
|
|
WC&I
|
|
3,855
|
|
|
(6,818
|
)
|
|
(197
|
)
|
Well Support Services
|
|
6,959
|
|
|
—
|
|
|
—
|
|
Corporate and Other
|
|
(221,261
|
)
|
|
(129,928
|
)
|
|
(106,225
|
)
|
Total operating income (loss)
|
|
$
|
(83,749
|
)
|
|
$
|
98,010
|
|
|
$
|
9,269
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
Completion Services
|
|
$
|
270,918
|
|
|
$
|
241,169
|
|
|
$
|
141,385
|
|
WC&I
|
|
3,822
|
|
|
4,428
|
|
|
5,757
|
|
Well Support Services
|
|
1,415
|
|
|
—
|
|
|
—
|
|
Corporate and Other
|
|
15,995
|
|
|
13,548
|
|
|
12,138
|
|
Total depreciation and amortization
|
|
$
|
292,150
|
|
|
$
|
259,145
|
|
|
$
|
159,280
|
|
Net income (loss):
|
|
|
|
|
|
|
Completion Services
|
|
$
|
126,698
|
|
|
$
|
234,756
|
|
|
$
|
115,691
|
|
WC&I
|
|
3,855
|
|
|
(6,818
|
)
|
|
(197
|
)
|
Well Support Services
|
|
6,959
|
|
|
—
|
|
|
—
|
|
Corporate and Other
|
|
(243,669
|
)
|
|
(168,607
|
)
|
|
(151,635
|
)
|
Total net income (loss)
|
|
$
|
(106,157
|
)
|
|
$
|
59,331
|
|
|
$
|
(36,141
|
)
|
Capital expenditures(2):
|
|
|
|
|
|
|
Completion Services
|
|
$
|
179,044
|
|
|
$
|
281,081
|
|
|
$
|
185,329
|
|
WC&I
|
|
3,514
|
|
|
9,510
|
|
|
1,718
|
|
Well Support Services
|
|
6,980
|
|
|
—
|
|
|
—
|
|
Corporate and Other
|
|
3,649
|
|
|
952
|
|
|
2,582
|
|
Total capital expenditures
|
|
$
|
193,187
|
|
|
$
|
291,543
|
|
|
$
|
189,629
|
|
|
|
|
|
|
|
|
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
|
|
(1)
|
Adjusted gross profit at the segment level is not considered to be a non-GAAP financial measure as it is the Company's segment measure of profitability and is required to be disclosed under GAAP pursuant to ASC 280.
|
|
|
(2)
|
Capital expenditures do not include the asset acquisition of RSI on July 24, 2018 of $35.0 million, the business acquisition of RockPile on July 3, 2017 of $116.6 million
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
|
|
December 31,
2019
|
|
December 31,
2018
|
Total assets by segment:
|
|
|
|
|
Completion Services
|
|
$
|
1,091,965
|
|
|
$
|
894,467
|
|
WC&I
|
|
106,493
|
|
|
20,974
|
|
Well Support Services
|
|
109,792
|
|
|
—
|
|
Corporate and Other
|
|
356,657
|
|
|
139,138
|
|
Total assets
|
|
$
|
1,664,907
|
|
|
$
|
1,054,579
|
|
|
|
|
|
|
Goodwill by segment:
|
|
|
|
|
Completion Services
|
|
$
|
136,425
|
|
|
$
|
132,524
|
|
WC&I
|
|
372
|
|
|
—
|
|
Well Support Services
|
|
661
|
|
|
—
|
|
Corporate and Other
|
|
—
|
|
|
—
|
|
Total goodwill
|
|
$
|
137,458
|
|
|
$
|
132,524
|
|
|
|
|
|
|
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(22) Selected Quarterly Financial Data
The following table sets forth certain unaudited financial and operating information for each quarter of the years ended December 31, 2019 and 2018. The unaudited quarterly information includes all adjustments that, in the opinion of management, are necessary for the fair presentation of the information presented. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
(Unaudited)
|
Selected Financial Data:
|
|
First
Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Revenue
|
|
$
|
421,654
|
|
|
$
|
427,733
|
|
|
$
|
443,953
|
|
|
$
|
528,216
|
|
Costs of services (excluding depreciation and amortization, shown separately)
|
|
337,646
|
|
|
324,503
|
|
|
333,438
|
|
|
408,345
|
|
Depreciation and amortization
|
|
71,476
|
|
|
69,886
|
|
|
68,708
|
|
|
82,080
|
|
Selling, general and administrative expenses
|
|
27,936
|
|
|
26,463
|
|
|
26,579
|
|
|
42,698
|
|
Merger and integration
|
|
—
|
|
|
6,108
|
|
|
6,651
|
|
|
55,972
|
|
(Gain) loss on disposal of assets
|
|
481
|
|
|
(330
|
)
|
|
679
|
|
|
3,640
|
|
Impairment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,346
|
|
Total operating costs and expenses
|
|
437,539
|
|
|
426,630
|
|
|
436,055
|
|
|
605,081
|
|
Operating income (loss)
|
|
(15,885
|
)
|
|
1,103
|
|
|
7,898
|
|
|
(76,865
|
)
|
Other income (expense), net
|
|
448
|
|
|
(43
|
)
|
|
55
|
|
|
(7
|
)
|
Interest expense
|
|
(5,395
|
)
|
|
(5,477
|
)
|
|
(5,215
|
)
|
|
(5,769
|
)
|
Total other expenses
|
|
(4,947
|
)
|
|
(5,520
|
)
|
|
(5,160
|
)
|
|
(5,776
|
)
|
Income tax income (expense)
|
|
(974
|
)
|
|
(564
|
)
|
|
820
|
|
|
(287
|
)
|
Net income (loss)
|
|
$
|
(21,806
|
)
|
|
$
|
(4,981
|
)
|
|
$
|
3,558
|
|
|
$
|
(82,928
|
)
|
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
(Unaudited)
|
Selected Financial Data:
|
|
First
Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Revenue
|
|
$
|
513,016
|
|
|
$
|
578,533
|
|
|
$
|
558,908
|
|
|
$
|
486,549
|
|
Costs of services (excluding depreciation and amortization, shown separately)
|
|
403,408
|
|
|
447,685
|
|
|
436,799
|
|
|
372,654
|
|
Depreciation and amortization
|
|
60,051
|
|
|
59,404
|
|
|
68,287
|
|
|
71,403
|
|
Selling, general and administrative expenses
|
|
33,884
|
|
|
23,978
|
|
|
27,482
|
|
|
28,466
|
|
Merger and integration
|
|
—
|
|
|
147
|
|
|
301
|
|
|
—
|
|
(Gain) loss on disposal of assets
|
|
769
|
|
|
3,287
|
|
|
1,113
|
|
|
(122
|
)
|
Total operating costs and expenses
|
|
498,112
|
|
|
534,501
|
|
|
533,982
|
|
|
472,401
|
|
Operating income
|
|
14,904
|
|
|
44,032
|
|
|
24,926
|
|
|
14,148
|
|
Other expense (income), net
|
|
(12,989
|
)
|
|
16
|
|
|
14,454
|
|
|
(2,386
|
)
|
Interest expense
|
|
(6,990
|
)
|
|
(14,317
|
)
|
|
(5,978
|
)
|
|
(6,219
|
)
|
Total other income (expenses)
|
|
(19,979
|
)
|
|
(14,301
|
)
|
|
8,476
|
|
|
(8,605
|
)
|
Income tax income (expense)
|
|
(3,168
|
)
|
|
936
|
|
|
(2,623
|
)
|
|
585
|
|
Net income (loss)
|
|
$
|
(8,243
|
)
|
|
$
|
30,667
|
|
|
$
|
30,779
|
|
|
$
|
6,128
|
|
(23) New Accounting Pronouncements
(a) Recently Adopted Accounting Standards
In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which allows companies to reclassify from accumulated other comprehensive income to retained earnings, any stranded tax effects resulting from complying with the Tax Cuts and Jobs Act legislation passed in December 2017. ASU 2018-02 is effective for annual periods beginning after December 15, 2018. The Company implemented the provisions of this ASU effective January 1, 2019, with no impact to its unaudited condensed consolidated financial statements, as due to the Company's valuation allowance, there is no net tax effect stranded within accumulated other comprehensive loss.
In July 2018, the FASB issued ASU 2018-09, "Codification Improvements," which made clarifications, correction of errors and minor improvements to ASC 220, "Income Statement - Reporting Comprehensive Income - Overall," ASC 470-50, "Debt Modifications and Extinguishments," ASC 480-10, "Distinguishing Liabilities from Equity -Overall," ASC 718-740, "Compensation - Stock Compensation - Income Taxes," ASC 805-740, "Business Combinations - Income Taxes," ASC 815-10, "Derivatives and Hedging - Overall," ASC 820-10, "Fair Value Measurement - Overall," ASC 940-405, "Financial Services - Brokers and Dealers - Liabilities," and ASC 962-325, "Plan Accounting - Defined Contribution to Pension Plans - Investments - Other." The Company adopted this standard effective January 1, 2019, with no significant impact to its unaudited condensed consolidated financial statements, as the transactions it conducts that qualify under ASU 2018-09 are only impacted by the amendments to ASC 718-740.
In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes." The amendments in this standard permit use of the Overnight Index Swap rate based on Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge accounting purposes under ASC
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
815. ASU 2018-16 is effective for annual periods beginning after December 15, 2018. The Company adopted this standard effective January 1, 2019, with no impact to its unaudited condensed consolidated financial statements, as the benchmark interest rate on its existing debt facility and interest rate swap is LIBOR.
In January 2019, the FASB issued ASU 2019-01, "Leases (Topic 842) - Codification Improvements." The amendments in this standard provide implementation guidance with regards to determining the fair value of an underlying leased asset by lessors that are not manufacturers or dealers, presentation of cash received from leases by lessors in sales-type or direct financing leases on the statement of cash flows and transition disclosures related to ASC 250, "Accounting Changes and Error Corrections." The amendments in this standard are effective January 1, 2020, except for those related to transition disclosures that are effective immediately on January 1, 2019. Early adoption was permitted. The Company adopted this standard effective January 1, 2019 with no impact to its unaudited condensed consolidated financial statements, as the Company does not have any leases for which lessor accounting is applied under ASC 842.
(b) Recently Issued Accounting Standards
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which introduces a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable and lease receivables. In November 2018, the FASB issued ASU No. 2018-19, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses," which clarified that receivables arising from operating leases are not within the scope of ASC 326-20, "Financial Instruments-Credit Losses-Measured at Amortized Cost," and should be accounted for in accordance with ASC 842. In April 2019, the FASB issued ASU No. 2019-04, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments," which clarified certain amendments related to ASU 2016-13. In May 2019, the FASB issued ASU No. 2019-05, "Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief," which clarifies certain aspects of the amendments in ASU 2016-13. In November 2019, the FASB issued ASU No. 2019-10, "Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815, and Leases (Topic 842) and ASU 2019-11 Codification Improvements to Topic 326, Financial Instruments—Credit Losses.
The Company adopted these new standards effective January 1, 2020. The Company is finalizing its assessment related to its trade accounts receivable based on a risk assessed portfolio approach, incorporating current and forecasted economic conditions as of January 1, 2020. The Company continues to finalize its estimated credit losses and establish processes and internal controls that may be required to comply with the new credit loss standard and related disclosure requirements. The Company does not expect the adoption of these standards to have a significant impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." This standard removed, modified and added disclosure requirements from ASC 820. ASU 2018-13 is effective for annual periods beginning after December 15, 2019. The Company does not expect the adoption of this standard to have a significant impact on its consolidated financial statements, as this standard primarily addresses disclosure requirements for Level 3 fair value measurements. The Company does not currently have or anticipate having Level 3 fair value instruments.
In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract." The amendments in this standard aligned the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for annual periods beginning after December 15, 2019. The Company does not expect the adoption of this standard to have a significant impact on its consolidated financial statements.
In November 2018, the FASB issued ASU 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606." The amendments in this standard clarified that certain
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
transactions should be accounted for under ASC 606 if one of the collaborative arrangement participants meets the definition of a customer and that transactions between collaborative participants not directly related to sales to third parties should not be recognized as revenue under Topic 606, if one of the collaborative arrangement participants is not a customer. ASU 2018-18 is effective for annual periods beginning after December 15, 2019. The Company is currently in the process of evaluating the impact the adoption of this standard will have on its consolidated financial statements.
In July 2019, the FASB issued ASU 2019-07, "Codification Updates to SEC Sections—Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates (SEC Update)". The Company does not expect the adoption of this standard to have a significant impact on its consolidated financial statements.
In August 2019, the FASB issued ASU 2019-08, "Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements - Share-Based Consideration Payable to a Customer". ASU 2019-08 expands the scope of ASC Topic 718 to provide guidance for share-based payment awards granted to a customer in conjunction with selling goods or services accounted for under Topic 606. For entities that have adopted the amendments in ASU 2018-07, the amendments in ASU 2019-08 are effective in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. An entity may early adopt the amendments in ASU 2019-08, but not before it adopts the amendments in ASU 2018-07. The Company does not expect the adoption of this standard to have an impact on its consolidated and combined financial statements, as the Company has only issued shares to employees or nonemployee directors and has previously recognized its nonemployee directors share-based payments in line with its recognition of share-based payments to employees, using the grant-date fair value of the equity instruments issued, amortized over the requisite service period.
In December 2019, the Financial Accounting Standards Board issued ASU No 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 removes certain exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company does not expect ASU 2019-12 to have a material effect on the Company’s current financial position, results of operations or financial statement disclosures.
(24) Subsequent Events
On March 9, 2020, the Company announced it had completed the divestiture of its Well Support Services segment for approximately $93.7 million of total consideration to Basic Energy Services, Inc. (“Basic”). The consideration consisted of (i) $59.4 million of cash consideration before transaction costs, escrowed amounts and subject to customary working capital adjustments and (ii) and $34.3 million of par value senior secured notes (“Notes”) previously issued by Basic. Under the terms of the agreement, the Notes are accompanied by a make-whole guarantee at par value, which guarantees the payment of $34.3 million to NexTier after the Notes are held to the one year anniversary of March 9, 2021.
The Company is monitoring the recent reductions in commodity prices driven by the potential impact of the novel coronavirus and global supply and demand dynamics as potential triggering events that may indicate that the carrying value of certain assets may not be recoverable. The extent to which these events may impact the Company’s business will depend on future developments, which are highly uncertain and cannot be predicted at this time. The duration and intensity of these impacts and resulting disruption to the Company’s operations is uncertain and the Company will continue to assess the financial impact.