NEXTIER OILFIELD SOLUTIONS INC.
The following discussion and analysis of the financial condition and results of
operations should be read in conjunction with the unaudited condensed
consolidated financial statements and the related condensed footnotes included
within Part I, "Item 1. Financial Statements" in this Quarterly Report on Form
10-Q, as well as our Annual Report on Form 10-K for the year ended December
31, 2021. For additional information related to forward looking statements,
please see "Cautionary Statement Regarding Forward-Looking Statements and
Information," which immediately follows the table of contents of this Quarterly
Report on Form 10-Q.
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--------------------------------------------------------------------------------ORGANIZATIONAL OVERVIEW
NexTier Oilfield Solutions Inc. is a predominatelyU.S. land oilfield service company, with a diverse set of well completion and production services across a variety of active and demanding basins. The Company is organized into two reportable segments:
•Completion Services, which consists of the following businesses and services lines: (i) hydraulic fracturing; (ii) wireline and pumpdown services; (iii) Power Solutions natural gas fueling business; and (iv) completion support services, which includes the Company's research and technology department.
•WC&I, which, following the sale of its coiled tubing assets during the third quarter of 2022, consists of the cementing services service line.
OPERATIONAL OVERVIEW
Market Trends and Influences
We provide our services in several of the most active basins inthe United States , including the Permian, theMarcellus Shale /Utica, the Eagle Ford, Mid-Continental, Haynseville, and the Bakken/Rockies. 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. Activity within our business segments is significantly influenced by spending on upstream exploration, development and production programs by our customers. Thus, our financial performance is affected by rig and well counts inNorth America , as well as oil and natural gas prices, which are discussed in more detail below. Also driving our activity is the status of the global economy, which is a major factor on 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 and demand, supply chain disruptions, the world economy, rising interest rates, the availability of credit, government regulation and global stability, which together drive worldwide drilling activity. According to the weeklyBaker Hughes Incorporated rig count information, totalNorth America rig count during the third quarter of 2022 averaged 761 rigs, reflecting an increase of approximately 7% as compared to the second quarter 2022 average of 713 rigs, but is still approximately 3% below the pre-COVID first quarter 2020 average of 785 rigs.North America rig count exited the third quarter of 2022 at 765 rigs. The increase as compared to the second quarter 2022 average was driven by supportive commodity prices given global undersupply. WTI prices entered the third quarter of 2022 at$105.76 and exited the quarter 25% lower at$79.49 . Henry Hub Natural gas prices were up 25% from$5.42 onJune 30, 2022 to$6.77 onSeptember 30, 2022 . In the second quarter of 2022, we continued to see disciplined increases in oil supply from OPEC+ andU.S. shale operators, however, inOctober 2022 OPEC+ indicated it would reduce oil production. The Russian invasion ofUkraine continues to increase uncertainty of global supply given the supply of crude oil and natural gas that is exported fromRussia .U.S. onshore completion activity growth slowed during the quarter, a function of very high utilization of equipment. We deployed one additional frac fleet at the end of Q1 and have not deployed any additional horsepower since then. Demand for our services was strong throughout the quarter, and efficiency improved. We expect fourth quarter activity will be impacted by typical holiday related slowdowns. Continued strength in customer activity and utilization remains dependent on macro conditions, including commodity prices, changing political climate, response to the COVID-19 pandemic (including any resurgences in theU.S. and abroad), continued focus on capital discipline, seasonality and potential lasting changes that a prolonged or resurging pandemic may have on supply and demand worldwide.
In addition, we have started to see improvement in pricing across almost all of our services. Overall economic conditions in the market have continued to improve the profitability of the fleet.
Furthermore, as operators are looking for opportunities to improve well
performance and lower costs through innovative techniques, we are seeing a rise
in operator initiatives such as simulfrac techniques (we generally refer to
these types of initiatives as increasing "frac intensity"). Simulfrac is a
process of fracking two or more wells at the same time instead of a single well,
for the purpose of increasing operational efficiencies and contributing to well
cost savings. These techniques require multi-well pads and advanced complex
completion designs, resulting in, among other things, adaption costs, an
increase in the amount of equipment related to a particular job, an increase in
commodities (such as proppant, logistics, and chemicals), and enhanced
maintenance practices and procedures. The increasing complexity and resources
required by evolving frac intensity, such as simulfrac, results in the need to
fine-tune our approach in the related commercial agreements, especially around
sharing the value created and the commercial risks of these enhanced operations.
We're continuing to work with our customers to utilize experiences on these
operations, including Simulfrac, to hone our commercial agreements going
forward.
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We are constantly assessing our approach to ensure that our team and our
equipment meets the evolving demands of our customers. Customers are
increasingly looking for ways to lower their carbon footprint by lower emissions
associated with their drilling and completion activity. We have invested to
upgrade more than half of our fleet to be able to operate using natural gas as a
primary fuel source. These dual fuel fleets can be powered using both diesel and
natural gas as a fuel source. In addition to lowering emissions, at current
diesel and natural gas prices, using natural gas can lower the cost to operate a
dual fuel fleet relative to a conventional diesel fleet. In addition, we plan to
deploy our first electric fleet in 2023.
As indicated previously, macro-economic factors are resulting in inflation of
materials and other costs, such as employee compensation, contract services,
commodity prices and communications expenses. While inflation increases our
operating costs, the impact of commodity inflation on the Company to date has
been significantly mitigated by the Company's ability to adjust pricing to pass
the impact of inflation through to its customers. Additionally, we, our
suppliers and contractors are facing a highly competitive domestic labor market.
These labor market dynamics create wage inflation, increase recruiting costs due
to elevated employee attrition and, with respect to driver shortages, may
negatively impact or increase the cost of our logistics service for our
customers. The rate and scope of these various aspects of inflation may continue
to impact our costs, which may not be readily recoverable in the prices of our
services. At this time, we expect this trend to continue through the remainder
of 2022. As such, its full financial impact on our business is impractical to
quantify at this time.
Global market supply chain and logistics constraints have also impacted our
suppliers. We have begun to see a more pronounced delay in lead times for
certain components used in equipment, parts and supplies. Additionally, some
shipments from overseas suppliers are experiencing transportation delays due to
a lack of available containers and a backlog at incoming ports of entry. These
delays in shipments could impact our availability to secure parts and inventory,
although the ultimate impact is impractical to quantify at this time.
Utilization Tendencies
Historically, our utilization levels have been highly correlated toU.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). Given the volatile and cyclical nature of activity drivers in theU.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. Additionally, during periods of decreased spending by our customers and/or high competition, 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. Some smaller operators may not have sufficient programs to support continuous operations or dedicated fleets. To the extent we have a significant percentage of our operations servicing such smaller operators, we may experience lower utilization.
Strategic Direction
We believe that there is competitive value in providing integrated solutions
that align the incentives of operators and service providers. We are pursuing
opportunities to leverage our investment in our digital program as well as
diesel substitution reduction technologies (such as dual fuel and electric fleet
capabilities and the sand haul trailers acquired from CIG), to provide a service
strategy targeted at achieving emissions reductions, both for us and our
customers. Our acquisition of Alamo added 9 hydraulic fracturing fleets,
approximately 92% of which are Tier IV dual fuel capable. NexTier's
best-in-class digital platform has been applied to the NexTier operating fleets.
We have launched our natural gas treatment and delivery (Power Solutions),
including natural gas sourcing, compression, transport, decompression, and
treatment services, that will power NexTier's fleet with field gas or compressed
natural gas. This service solution seeks to address wellsites where there is not
a reliable nearby gas supply, and thus, the full benefit and value of dual fuel
or other lower emissions technologies may not otherwise be fully realized. Our
integrated natural gas treatment and delivery solution became operational in the
second half of 2021. This integrated strategy is designed to provide our
customers with a streamlined approach to driving more sustainable, cost
effective operations at the wellsite. Given the positive market response, we
have continued to invest and grow the Power Solutions footprint. Our acquisition
of assets from CIG is in line with our commitment to significantly expand our
last mile logistics capabilities.
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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 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. For example, utilizing a lateral science
technique resulting in simulfrac stage pairing can reduce the operator's cost
per barrel by taking existing drilling data, analyzing the downhole rock
properties, and matching the four or six wells across a simulfrac pad to create
an optimized pair for every simulfrac stage. We believe utilization of this
technique will ultimately improve injectivity of the frac treatments, improve
the long-term production of the treated wells, and lower the equipment costs for
each operation. Simulfrac stage pairing can help connect our simulfrac
operational experience to real reservoir properties, thereby providing
opportunity to deploy a more cost-effective solution that delivers higher
production to the operator.
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.
Operating Effectively Through the COVID-19 Pandemic
We have continued our measures focused on the safety of our partners, employees, and the communities in which we operate, while at the same time seeking to mitigate the impact on our financial position and operations. For additional information regarding the actions we've taken since the onset of the COVID-19 pandemic and the increased risks to our business related to the COVID-19 pandemic can be found in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . While we saw continued recovery from the impacts of the COVID-19 pandemic through the first three quarters of 2022, contingency plans remain in place to address the impact of resurgences of the virus (including as a result of the emergence of new variants and strains of the virus, such as Delta and Omicron). 33 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS IN 2022 COMPARED TO 2021
Three Months Ended
The following is a comparison of our results of operations for the three months
ended
Three Months Ended September 30,
(Thousands of Dollars) As a % of Revenue Variance
Description 2022 2021 2022 2021 $ %
Completion Services $ 857,751 $ 366,067 96 % 93 % $ 491,684 134 %
WC&I 38,259 27,097 4 % 7 % 11,162 41 %
Revenue 896,010 393,164 100 % 100 % 502,846 128 %
Completion Services 652,021 320,297 73 % 81 % 331,724 104 %
WC&I 30,662 24,340 3 % 6 % 6,322 26 %
Costs of services 682,683 344,637 76 % 88 % 338,046 98 %
Depreciation and
amortization 56,542 44,861 6 % 11 % 11,681 26 %
Selling, general and
administrative expenses 37,415 37,453 4 % 10 % (38) 0 %
Merger and integration 27,521 4,752 3 % 1 % 22,769 479 %
Gain on disposal of assets (10,471) (1,133) (1 %) 0 % (9,338) 824 %
Operating income (loss) 102,320 (37,406) 11 % (10 %) 139,726 (374 %)
Other income, net 11,124 585 1 % 0 % 10,539 1,802 %
Interest expense (7,150) (6,701) (1 %) (2 %) (449) 7 %
Total other income
(expense) 3,974 (6,116) 0 % (2 %) 10,090 (165 %)
Income tax expense (1,560) (472) 0 % 0 % (1,088) 231 %
Net income (loss) $ 104,734 $ (43,994) 12 % (11 %) $ 148,728 (338 %)
Revenue: Total revenue is comprised of revenue from our Completion Services and
WC&I segments. Revenue during the three months ended
Completion Services: Revenue for Completion Services during the three months endedSeptember 30, 2022 increased by$491.7 million , or 134%, to$857.8 million from$366.1 million during the three months endedSeptember 30, 2021 . The segment revenue increase is primarily attributable to a strong increase in the number of deployed hydraulic fracturing fleets, additional well-site integration and commodities, including our Power Solutions natural gas fueling services, increases in wireline and pump down services, and the Alamo Acquisition onAugust 31, 2021 . Improved market conditions and higher global commodity prices drove increased customer activity across all basins, and we realized strong pricing recovery in all services lines.Well Construction and Intervention Services: WC&I segment revenue increased$11.2 million , or 41%, to$38.3 million during the three months endedSeptember 30, 2022 from$27.1 million during the three months endedSeptember 30, 2021 . The increase in revenue is primarily due to higher customer activity, improved pricing, and increased utilization in our cementing and coil tubing services (prior to the sale of the coiled tubing assets to Gladiator) resulting from improved market conditions and higher global oil and gas commodity prices, offset by the reduction due to the sale of the coil tubing service line in the third quarter of 2022. Cost of Services: Cost of services during the three months endedSeptember 30, 2022 increased by$338.0 million , or 98%, to$682.7 million from$344.6 million during the three months endedSeptember 30, 2021 . The increase is primarily due to significantly increased activity, utilization, and commodity capture, as explained under the "Revenue" caption and its related segment sub-captions above. Pricing improvements coupled with operational efficiencies and process improvements to permanently drive costs out of the organization more than offset the impact of cost inflation, and led to overall costs increasing at a lower rate than revenue increased. 34 -------------------------------------------------------------------------------- Equipment Utilization: Depreciation and amortization expense increased$11.7 million , or 26%, to$56.5 million during the three months endedSeptember 30, 2022 from$44.9 million during the three months endedSeptember 30, 2021 . The increase in depreciation and amortization is primarily due to additional equipment received in the Alamo Acquisition. Gain on disposal of assets increased by$9.3 million , or 824%, to a gain of$10.5 million during the three months endedSeptember 30, 2022 from$1.1 million during three months endedSeptember 30, 2021 . Selling, general and administrative expense: Selling, general and administrative expense, which represents costs associated with managing and supporting our operations, remained relatively flat at$37.4 million during three months endedSeptember 30, 2022 compared to$37.5 million during the three months endedSeptember 30, 2021 . Merger and integration expense: Merger and integration expense increased by$22.8 million during the three months endedSeptember 30, 2022 to$27.5 million from$4.8 million during the three months endedSeptember 30, 2021 . The increase in merger and integration expense is primarily related to the Alamo Acquisition earnout, which was triggered by Alamo achieving certain EBITDA targets pursuant to the Purchase Agreement. The earnout performance period, which goes throughDecember 31, 2022 , is still ongoing and changes in the fair value of the earnout are based on actual and projected performance within the performance period, in accordance with the Purchase Agreement. Effective tax rate: Our effective tax rate on continuing operations for the three months endedSeptember 30, 2022 was 1.5% for$1.6 million of recorded income tax expense. The difference between the effective tax rate and theU.S. federal statutory rate is due to state income taxes and change in valuation allowance. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. We continue to rigorously evaluate all available evidence to determine the likelihood of utilizing our net deferred tax assets. 35 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS IN 2022 COMPARED TO 2021
Nine Months Ended
The following is a comparison of our results of operations for the nine months
ended
Nine Months Ended September 30,
(Thousands of Dollars) As a % of Revenue Variance
Description 2022 2021 2022 2021 $ %
Completion Services $ 2,261,420 $ 843,887 95 % 92 % $ 1,417,533 168 %
WC&I 112,545 69,824 5 % 8 % 42,721 61 %
Revenue 2,373,965 913,711 100 % 100 % 1,460,254 160 %
Completion Services 1,764,626 768,562 74 % 84 % 996,064 130 %
WC&I 92,579 63,112 4 % 7 % 29,467 47 %
Costs of services 1,857,205 831,674 78 % 91 % 1,025,531 123 %
Depreciation and
amortization 170,499 131,400 7 % 14 % 39,099 30 %
Selling, general and
administrative expenses 109,129 74,256 5 % 8 % 34,873 47 %
Merger and integration 60,435 4,930 3 % 1 % 55,505 1,126 %
Gain on disposal of assets (12,160) (7,742) (1 %) (1 %) (4,418) 57 %
Operating income (loss) 188,857 (120,807) 8 % (13 %) 309,664 (256 %)
Other income, net 17,955 9,113 1 % 1 % 8,842 97 %
Interest expense (21,868) (16,633) (1 %) (2 %) (5,235) 31 %
Total other income
(expense) (3,913) (7,520) 0 % (1 %) 3,607 (48 %)
Income tax expense (2,960) (1,950) 0 % 0 % (1,010) 52 %
Net income (loss) $ 181,984 $ (130,277) 8 % (14 %) $ 312,261 (240 %)
Revenue: Total revenue is comprised of revenue from our Completion Services and
WC&I segments. Revenue during the nine months ended September 30, 2022 increased
by $1.5 billion , or 160%, to $2.4 billion from $913.7 million during the nine
months ended September 30, 2021 . This change in revenue by reportable segment is
discussed below.
Completion Services: Revenue for Completion Services during the nine months
ended September 30, 2022 increased by $1.4 billion , or 168%, to $2.3 billion
from $843.9 million during the nine months ended September 30, 2021 . The segment
revenue increase is primarily attributable to a strong increase in the number of
deployed hydraulic fracturing fleets, additional well-site integration and
commodities, including our Power Solutions natural gas fueling services,
increases in wireline and pump down services, and the Alamo Acquisition on
August 31, 2021 . Improved market conditions and higher global commodity prices
drove increased customer activity across all basins, and we realized strong
pricing recovery in all services lines.
Well Construction and Intervention Services: WC&I segment revenue increased
$42.7 million , or 61%, to $112.5 million during the nine months ended September
30, 2022 from $69.8 million during the nine months ended September 30, 2021 . The
increase in revenue is primarily due to higher customer activity, improved
pricing, and increased utilization in our cementing and coil tubing services
(prior to the sale of the coiled tubing assets to Gladiator) resulting from
improved market conditions and higher global oil and gas commodity prices,
offset by the reduction due to the sale of the coil tubing service line in the
third quarter of 2022.
Cost of Services: Cost of services during the nine months ended September 30,
2022 increased by $1.0 billion , or 123%, to $1.9 billion from $831.7
million during the nine months ended September 30, 2021 . The increase is
primarily due to significantly increased activity and utilization, as explained
under the "Revenue" caption and its related segment sub-captions above. Pricing
improvements coupled with operational efficiencies and process improvements to
permanently drive costs out of the organization more than offset the impact of
cost inflation, and led to overall costs increasing at a lower rate than revenue
increased.
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-------------------------------------------------------------------------------- Equipment Utilization: Depreciation and amortization expense increased$39.1 million , or 30%, to$170.5 million during the nine months endedSeptember 30, 2022 from$131.4 million , during the nine months endedSeptember 30, 2021 . The increase in depreciation and amortization is primarily due to additional equipment received in the Alamo Acquisition. Gain on disposal of assets increased by$4.4 million , or 57%, to a gain of$12.2 million during the three months endedSeptember 30, 2022 from$7.7 million during the three months endedSeptember 30, 2021 . Selling, general and administrative expense: Selling, general and administrative expense, which represents costs associated with managing and supporting our operations, increased by$34.9 million , or 47%, to$109.1 million during the nine months endedSeptember 30, 2022 from$74.3 million during the nine months endedSeptember 30, 2021 . This increase is primarily related to non-recurring$22.1 million accrual reduction for our regulatory audit estimate in the six months endedJune 30, 2021 , which was ultimately settled in the third quarter of 2021, combined with increased stock compensation in first quarter of 2022 and increased activity as a result of the Alamo Acquisition in the third quarter of 2021. Merger and integration expense: Merger and integration expense increased by$55.5 million during the nine months endedSeptember 30, 2022 to$60.4 million from$4.9 million during the nine months endedSeptember 30, 2021 . The increase in merger and integration expense is primarily related to the Alamo Acquisition earnout, which was triggered by Alamo achieving certain EBITDA targets pursuant to the Purchase Agreement. The earnout performance period, which goes throughDecember 31, 2022 , is still ongoing and changes in the fair value of the earnout are based on actual and projected performance within the performance period, in accordance with the Purchase Agreement. Effective tax rate: Our effective tax rate on continuing operations for the nine months endedSeptember 30, 2022 was 1.6% for$3.0 million of recorded income tax expense. The difference between the effective tax rate and theU.S. federal statutory rate is due to state income taxes and change in valuation allowance. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. We continue to rigorously evaluate all available evidence to determine the likelihood of utilizing our net deferred tax assets. 37
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