PROPETRO HOLDING CORP. The financial information, discussion and analysis that follow should be read in conjunction with our consolidated financial statements and the related notes included in the Form 10-K as well as the financial and other information included therein.
Unless otherwise indicated, references in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" to the "Company,"
"we," "our," "us" or like terms refer to
Overview
We are aMidland, Texas -based oilfield services company providing hydraulic fracturing and other complementary services to leading upstream oil and gas companies engaged in the exploration and production ("E&P") of North American oil and natural gas resources. Our operations are primarily focused in thePermian Basin , where we have cultivated longstanding customer relationships with some of the region's most active and well-capitalized E&P companies.The Permian Basin is widely regarded as one of the most prolific oil-producing areas inthe United States , and we believe we are one of the largest providers of hydraulic fracturing services in the region by hydraulic horsepower ("HHP"). Our total available HHP as ofSeptember 30, 2022 , was 1,315,000 HHP, which was comprised of 215,000 HHP of our Tier IV Dynamic Gas Blending ("DGB") equipment and 1,100,000 HHP of conventional Tier II equipment. Our fleet could range from approximately 50,000 to 80,000 HHP depending on the job design and customer demand at the wellsite. With the industry transition to lower emissions equipment and simultaneous hydraulic fracturing ("Simul-Frac"), in addition to several other changes to our customers' job designs, we believe that our available capacity could decline if we decide to reconfigure our fleets to increase active HHP and backup HHP at the wellsites. In addition, inSeptember 2021 andAugust 2022 , we committed to additional conversions of our Tier II equipment to Tier IV DGB, and purchase of new Tier IV DGB equipment. As such, we entered into a conversion and purchase arrangements with our equipment manufacturers for a total of 187,500 HHP of Tier IV DGB equipment and as ofSeptember 30, 2022 , we have received 125,000 HHP of the converted Tier IV DGB equipment and expect to receive the remaining 62,500 HHP at different times through the second half of 2022. InAugust 2022 , we entered into a three year ElectricFleet Lease for two fleets with 60,000 HHP per fleet. This lease has not yet commenced. In 2019, we entered into a purchase commitment for DuraStim® electric powered hydraulic fracturing equipment. During the second quarter 2022, we determined that certain DuraStim® equipment was impaired and recorded approximately$57.5 million of impairment expense in our pressure pumping reportable segment. OnDecember 31, 2018 , we consummated the purchase of certain pressure pumping assets and real property fromPioneer Natural Resources USA, Inc. ("Pioneer") and Pioneer Pumping Services (the "Pioneer Pressure Pumping Acquisition"). In connection with the Pioneer Pressure Pumping Acquisition, Pioneer received 16.6 million shares of our common stock and approximately$110.0 million in cash. OnMarch 31, 2022 , we entered into an amended and restated pressure pumping services agreement (the "A&R Pressure Pumping Services Agreement"), which was initially entered into in connection with the Pioneer Pressure Pumping Acquisition. The A&R Pressure Pumping Services Agreement was effectiveJanuary 1, 2022 and continues throughDecember 31, 2022 . The A&R Pressure Pumping Services Agreement reduced the number of contracted fleets to six fleets from eight fleets, modified the pressure pumping scope of work and pricing mechanism for contracted fleets, and replaced the idle fees arrangement with equipment reservation fees (the "Reservation fees"). As part of the Reservation fees arrangement, the Company will be entitled to receive compensation for all eligible contracted fleets that are made available to Pioneer at the beginning of every quarter in 2022 through the term of the A&R Pressure Pumping Services Agreement. Our competitors include many large and small oilfield services companies, including Halliburton Company, Liberty Energy Inc., ProFrac Holding Corp., Nextier Oilfield Solutions Inc., Patterson-UTI Energy Inc., RPC, Inc., and a number of private and locally-oriented businesses. The markets in which we operate are highly competitive. To be successful, an oilfield services company must provide services that meet the specific needs of oil and natural gas E&P companies at competitive prices. Competitive factors impacting sales of our services are price, reputation, technical expertise, emissions profile, service and equipment design and quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in an E&P company's criteria in choosing a service provider. However, we have recently observed the energy industry and our customers shift to lower emissions equipment, which we believe will be an increasingly important factor in an E&P company's selection of a service provider. The transition to lower emissions equipment has been challenging for companies in the service industry because of the significant capital investment required for next generation equipment and the current pricing environment with the service industry, which remains in recovery phase. While we seek to price our services competitively, we believe many of our customers elect to work with us based on our operational efficiencies, productivity, equipment quality, reliability, ability to manage multifaceted logistics challenges, commitment to safety and the ability of our people to handle the most complexPermian Basin well completions. Our substantial market presence in thePermian Basin positions us well to capitalize on drilling and completion activity in the region. Primarily, our operational focus has been in thePermian Basin's Midland sub-basin, where our customers have -20-
-------------------------------------------------------------------------------- operated. However, we have recently increased our operations in theDelaware sub-basin and are well-positioned to support further increases to our activity in this area in response to demand from our customers. Over time, we expect thePermian Basin's Midland andDelaware sub-basins to continue to command a disproportionate share of future North American E&P spending. Through our pressure pumping segment (which also includes our cementing operations), we primarily provide hydraulic fracturing services to E&P companies in thePermian Basin . Our hydraulic fracturing fleet has been designed to handle the operating conditions commonly experienced in thePermian Basin and the region's increasingly high-intensity well completions (including Simul-Frac, which involves fracturing multiple wellbores at the same time), which are characterized by longer horizontal wellbores, more stages per lateral and increasing amounts of proppant per well. EffectiveSeptember 1, 2022 , we disposed of our coiled tubing assets to a subsidiary of STEP and shut down our coiled tubing operations. We received cash of approximately$2.8 million and 2,616,460 common shares of STEP valued at$11.9 million as consideration. Upon the sale of our coiled tubing assets, we recorded a loss on sale of$13.8 million .
Commodity Price and Other Economic Conditions
The oil and gas industry has traditionally been volatile and is influenced by a combination of long-term, short-term and cyclical trends, including domestic and international supply and demand for oil and gas, current and expected future prices for oil and gas and the perceived stability and sustainability of those prices, and capital investments of E&P companies toward their development and production of oil and gas reserves. The oil and gas industry is also impacted by general domestic and international economic conditions such as global supply chain disruptions and inflation, war and political instability in oil producing countries, government regulations (both inthe United States and internationally), levels of consumer demand, adverse weather conditions, and other factors that are beyond our control. InFebruary 2022 ,Russia launched a large-scale invasion ofUkraine that has led to significant armed hostilities. As a result,the United States , theUnited Kingdom , the member states of theEuropean Union and other public and private actors have levied severe sanctions on Russian financial institutions, businesses and individuals. This conflict, and the resulting sanctions, has contributed to significant increases and volatility in the prices for oil and natural gas. The geopolitical and macroeconomic consequences of this invasion and associated sanctions remain uncertain, and such events, or any further hostilities inUkraine or elsewhere, could severely impact the world economy and the oil and gas industry and may adversely affect our financial condition. The global public health crisis associated with the COVID-19 pandemic also has had an adverse effect on global economic activity and the oil and gas industry. Some of the challenges resulting from the COVID-19 pandemic that have impacted our business include restrictions on movement of personnel and associated gatherings, shortage of skilled labor, cost inflation and supply chain disruptions. In light of the COVID-19 pandemic, most companies, including our customers in thePermian Basin , reacted by closely managing their operating budget and exercising capital discipline. In addition, OPEC+ has indicated that they will continue with their plans to manage production levels, including a recent announcement to reduce production levels by 2 million barrels per day. TheRussia -Ukraine war, and the adverse impacts of the COVID-19 pandemic in recent years, including inflation, have resulted in volatility in supply and demand dynamics for crude oil and associated volatility in crude oil pricing. In 2022, global average crude oil prices have exceeded$98 per barrel, which is the highest prices have been in the last ten years. We believe that the recent surge in global crude oil prices is partly due to the lack of reinvestment in the oil and gas industry in the last two years, and increased demand for oil and gas products, coupled with adverse impact of theRussia -Ukraine war, which has led to various sanctions in Russian crude oil supply and businesses. With the significant increase in global crude oil prices, including WTI crude oil prices, there has been an increase in thePermian Basin rig count from approximately 179 at the beginning of 2021 to approximately 344 at the end ofSeptember 2022 , according toBaker Hughes . Following the increase in rig count and WTI crude oil price, the oilfield service industry has experienced increased demand for its pressure pumping services, and improved pricing. As a result of the growing demand for pressure pumping services and significant cost inflation across the industry, we negotiated pricing increases with certain of our customers for our pressure pumping services, depending on job design. Although we are currently operating in an improved pricing environment, the rapid increase in cost inflation and supply chain tightness could adversely impact our future profitability, if we are unable to timely pass-through the cost increases to our customers. Government regulations and investors are demanding the oil and gas industry transition to a lower emissions operating environment, including the upstream and oilfield service companies. As a result, we are working with our customers and equipment manufacturers to transition to a lower emissions profile. Currently, a number of lower emission solutions for pumping equipment, including Tier IV DGB, electric, direct drive gas turbine and other technologies have been developed, and we expect additional lower emission solutions will be developed in the future. We are continually evaluating these technologies -21- -------------------------------------------------------------------------------- and other investment and acquisition opportunities that would support our existing and new customer relationships. The transition to lower emissions equipment is quickly evolving and will be capital intensive. Over time, we may be required to convert substantially all of our conventional Tier II equipment to lower emissions equipment. If we are unable to quickly transition to lower emissions equipment and meet our and our customers' emissions goals, the demand for our services could be adversely impacted.The Permian Basin rig count increase, demand for oil and gas products, WTI crude oil price increase and costs inflation could be indicative of an energy market recovery. If the rig count and market conditions continue to improve, including improved customers' pricing and labor availability, and we are able to meet our customers' lower emissions equipment demands, we believe our operational and financial results will also continue to improve. However, if market conditions do not improve or decline in the future, and we are unable to increase our pricing or pass-through future cost increases to our customers, there could be a material adverse impact on our business, results of operations and cash flows. Our results of operations have historically reflected seasonal tendencies, typically in the fourth quarter, relating to the holiday season, inclement winter weather and exhaustion of our customers' annual budgets. As a result, we typically experience declines in our operating and financial results in November and December, even in a stable commodity price and operations environment.
How We Evaluate Our Operations
Our management uses Adjusted EBITDA or Adjusted EBITDA margin to evaluate and analyze the performance of our various operating segments.
Adjusted EBITDA and Adjusted EBITDA Margin
We view Adjusted EBITDA and Adjusted EBITDA margin as important indicators of performance. We define EBITDA as our earnings, before (i) interest expense, (ii) income taxes and (iii) depreciation and amortization. We define Adjusted EBITDA as EBITDA, plus (i) loss/(gain) on disposal of assets, (ii) stock-based compensation, and (iii) other unusual or nonrecurring (income)/expenses, such as impairment charges, severance, costs related to asset acquisitions, insurance recoveries, one-time professional fees and legal settlements. Adjusted EBITDA margin reflects our Adjusted EBITDA as a percentage of our revenues. Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures utilized by our management and other users of our financial statements such as investors, commercial banks, and research analysts, to assess our financial performance because it allows us and other users to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization), nonrecurring (income)/expenses and items outside the control of our management team (such as income taxes). Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools and should not be considered as an alternative to net income/(loss), operating income/(loss), cash flow from operating activities or any other measure of financial performance presented in accordance with GAAP.
Note Regarding Non-GAAP Financial Measures
Adjusted EBITDA and Adjusted EBITDA margin are not financial measures presented
in accordance with GAAP ("non-GAAP"), except when specifically required to be
disclosed by GAAP in the financial statements. We believe that the presentation
of Adjusted EBITDA and Adjusted EBITDA margin provide useful information to
investors in assessing our financial condition and results of operations because
it allows them to compare our operating performance on a consistent basis across
periods by removing the effects of our capital structure, asset base,
nonrecurring expenses (income) and items outside the control of the Company. Net
income (loss) is the GAAP measure most directly comparable to Adjusted EBITDA.
Adjusted EBITDA and Adjusted EBITDA margin should not be considered as
alternatives to the most directly comparable GAAP financial measure. Each of
these non-GAAP financial measures has important limitations as analytical tools
because they exclude some, but not all, items that affect the most directly
comparable GAAP financial measures. You should not consider Adjusted EBITDA or
Adjusted EBITDA margin in isolation or as a substitute for an analysis of our
results as reported under GAAP. Because Adjusted EBITDA and Adjusted EBITDA
margin may be defined differently by other companies in our industry, our
definitions of these non-GAAP financial measures may not be comparable to
similarly titled measures of other companies, thereby diminishing their utility.
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Reconciliation of net income (loss) to Adjusted EBITDA (in thousands):
Three
Months Ended
Pressure Pumping All Other Total
Net income (loss) $ 46,805 $ (36,773) $ 10,032
Depreciation and amortization 29,736 681 30,417
Interest expense - 237 237
Income tax expense - 2,768 2,768
Loss (gain) on disposal of assets 22,850 13,786 36,636
Stock-based compensation - 3,306 3,306
Other (income) expense (3) (2,668) 3,284 616
Other general and administrative expense (1) 4,775 145 4,920
Severance expense 1,052 16 1,068
Adjusted EBITDA $ 102,550 $ (12,550) $ 90,000
Three
Months Ended
Pressure Pumping All Other Total
Net income (loss) $ 9,058 $ (14,125) $ (5,067)
Depreciation and amortization 32,536 995 33,531
Interest expense - 143 143
Income tax benefit - (1,279) (1,279)
Loss on disposal of assets 12,381 43 12,424
Stock-based compensation - 3,009 3,009
Other expense - 309 309
Other general and administrative expense, (net) (1) - (972) (972)
Adjusted EBITDA $ 53,975 $ (11,877) $ 42,098
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Nine
Months Ended
Pressure Pumping All Other Total
Net income (loss) $ 51,782 $ (62,794) $ (11,012)
Depreciation and amortization 91,194 2,540 93,734
Impairment expense 57,454 - 57,454
Interest expense - 1,040 1,040
Income tax benefit - (1,164) (1,164)
Loss (gain) on disposal of assets 61,952 13,288 75,240
Stock-based compensation - 18,128 18,128
Other income (2) (3) (2,668) (7,081) (9,749)
Other general and administrative expense (1) 5,060 2,651 7,711
Severance expense 1,061 37 1,098
Adjusted EBITDA $ 265,835 $ (33,355) $ 232,480
Nine
Months Ended
Pressure Pumping All Other Total
Net income (loss) $ (5,426) $ (28,527) $ (33,953)
Depreciation and amortization 97,307 2,946 100,253
Interest expense - 477 477
Income tax benefit - (11,639) (11,639)
Loss (gain) on disposal of assets 40,792 (292) 40,500
Stock-based compensation - 8,405 8,405
Other income - (1,178) (1,178)
Other general and administrative expense, (net) (1) - (5,670) (5,670)
Severance expense - 612 612
Adjusted EBITDA $ 132,673 $ (34,866) $ 97,807
(1)Other general and administrative expense, (net of reimbursement from
insurance carriers) primarily relates to nonrecurring professional fees paid to
external consultants in connection with our audit committee review, SEC
investigation, shareholder litigation, legal settlement to a vendor and other
legal matters, net of insurance recoveries. During the three and nine months
ended September 30, 2022 , we received reimbursement of approximately $3.4
million and $6.9 million , respectively, from our insurance carriers in
connection with the SEC investigation and shareholder litigation. During the
three and nine months ended September 30, 2021 , we received reimbursement of
approximately $1.4 million and $8.1 million , respectively.
(2)Includes
(3)Includes$2.7 million non cash income from fixed asset inventory received as part of a settlement of warranty claims with an equipment manufacturer and a$3.3 million unrealized loss on short-term investment. -24- --------------------------------------------------------------------------------
Results of Operations
We conducted our business through three operating segments: hydraulic fracturing, cementing and coiled tubing. For reporting purposes, the hydraulic fracturing and cementing operating segments are aggregated into our one reportable segment-pressure pumping. However, we disposed of our coiled tubing assets and shut down our coiled tubing operating segment effectiveSeptember 1, 2022 . The coiled tubing operating segment and corporate administrative expenses (inclusive of our total income tax expense (benefit), other (income) and expense and interest expense) are included in the "all other" category. Total corporate administrative expense for the three and nine months endedSeptember 30, 2022 was$20.4 million and$45.4 million , respectively. Total corporate administrative expense for the three and nine months endedSeptember 30, 2021 was$13.5 million and$25.1 million , respectively.
Our hydraulic fracturing operating segment revenue approximated 91.7% and 92.7%
of our pressure pumping revenue during the three and nine months ended
The following table sets forth the results of operations for the periods presented:
(in thousands, except for percentages) Change
Three Months Ended September 30, Increase (Decrease)
2022 2021 $ %
Revenue $ 333,014 $ 250,099 $ 82,915 33.2 %
Less (Add):
Cost of services (1) 224,118 188,690 35,428 18.8 %
General and administrative expense (2) 28,190 21,348 6,842 32.0 %
Depreciation and amortization 30,417 33,531 (3,114) (9.3) %
Loss on disposal of assets 36,636 12,424 24,212 194.9 %
Interest expense 237 143 94 65.7 %
Other expense 616 309 307 99.4 %
Income tax expense (benefit) 2,768 (1,279) 4,047 316.4 %
Net income (loss) $ 10,032 $ (5,067) $ 15,099 298.0 %
Adjusted EBITDA (3) $ 90,000 $ 42,098 $ 47,902 113.8 %
Adjusted EBITDA Margin (3) 27.0 % 16.8 % 10.2 % 60.7 %
Pressure pumping segment results of
operations:
Revenue $ 330,780 $ 245,641 $ 85,139 34.7 %
Cost of services $ 220,299 $ 184,972 $ 35,327 19.1 %
Adjusted EBITDA (3) $ 102,550 $ 53,975 $ 48,575 90.0 %
Adjusted EBITDA Margin (4) 31.0 % 22.0 % 9.0 % 40.9 %
(1)Exclusive of depreciation and amortization.
(2)Inclusive of stock-based compensation.
(3)For definitions of the non-GAAP financial measures of Adjusted EBITDA and
Adjusted EBITDA margin and reconciliation of Adjusted EBITDA to our most
directly comparable financial measures calculated in accordance with GAAP,
please read "How We Evaluate Our Operations". Included in our Adjusted EBITDA is
reservation and idle fees of $6.8 million and $0 for the three months ended
September 30, 2022 and 2021, respectively.
(4)The non-GAAP financial measure of Adjusted EBITDA margin for the pressure
pumping segment is calculated by taking Adjusted EBITDA for the pressure pumping
segment as a percentage of our revenue for the pressure pumping segment.
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Three Months Ended
Revenues. Revenues increased 33.2%, or$82.9 million , to$333.0 million during the three months endedSeptember 30, 2022 , as compared to$250.1 million during the three months endedSeptember 30, 2021 . Our pressure pumping segment revenues increased 34.7%, or$85.1 million , for the three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 . The increases were primarily attributable to the significant increase in our existing and new customers' activity levels, resulting in higher demand for pressure pumping services and improved pricing. As a result of our customers' increased activity levels, our effectively utilized fleet count rose to approximately 14.8 active fleets during the three months endedSeptember 30, 2022 , from approximately 13.8 active fleets for the three months endedSeptember 30, 2021 . Included in our revenue for the three months endedSeptember 30, 2022 and 2021 was revenue generated from reservation and idle fees charged to our customer of approximately$6.8 million and$0 , respectively.
Revenues from services other than pressure pumping decreased 49.9%, or
Cost of Services. Cost of services increased 18.8%, or$35.4 million , to$224.1 million for the three months endedSeptember 30, 2022 , as compared to$188.7 million during the three months endedSeptember 30, 2021 . Cost of services in our pressure pumping segment increased$35.3 million for the three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 . These increases were primarily attributable to the significantly increased activity levels resulting from the increased demand for our services and the impact of general cost inflation. As a percentage of pressure pumping segment revenues (including reservation and idle fees), pressure pumping cost of services was 66.6% for the three months endedSeptember 30, 2022 , as compared to 75.3% for the three months endedSeptember 30, 2021 . Excluding reservation and idle fees revenue of$6.8 million and$0 recorded during the three months endedSeptember 30, 2022 and 2021, respectively, our pressure pumping cost of services as a percentage of pressure pumping revenues decreased to 68.0% during the three months endedSeptember 30, 2022 , as compared to 75.3% for the three months endedSeptember 30, 2021 . The decrease in the percentages was a result of increased operational efficiencies and improved pricing across our customer base. General and Administrative Expenses. General and administrative expenses increased 32.0%, or$6.8 million , to$28.2 million for the three months endedSeptember 30, 2022 , as compared to$21.3 million for the three months endedSeptember 30, 2021 . The net increase was primarily attributable to an increase during 2022 in (i) non-recurring legal fees and settlement expenses, incurred in connection with a settlement with a vendor, of approximately$5.3 million , (ii) consulting and professional fees of approximately$2.2 million , (iii) non-recurring severance expense incurred in connection with the terms of the separation agreement of a former employee of approximately$1.1 million and (iv) property taxes of approximately$0.8 million , which was partially offset by (v) a decrease in payroll expenses of$2.5 million and (vi) a net decrease of approximately$0.1 million in other general administrative expenses. Depreciation and Amortization. Depreciation and amortization decreased 9.3%, or$3.1 million , to$30.4 million for the three months endedSeptember 30, 2022 , as compared to$33.5 million for the three months endedSeptember 30, 2021 . The decrease was primarily attributable to the decrease in our fixed asset base, partly attributable to the disposal of certain fixed assets during the period. Loss on Disposal of Assets. Loss on the disposal of assets increased 194.9%, or$24.2 million , to$36.6 million for the three months endedSeptember 30, 2022 , as compared to$12.4 million for the three months endedSeptember 30, 2021 . The increase was primarily attributable to the divestiture of our coiled tubing operations and the significant increase in our utilization levels, resulting in an increase in the operational intensity on our pressure pumping equipment. Upon sale or retirement of property and equipment, including replaced fluid and power ends, the cost and related accumulated depreciation of such assets or components are removed from the balance sheet and the net amount is recognized as loss on disposal of assets. Interest Expense. There was no significant change in interest expense. Interest expense slightly increased to approximately$0.2 million for the three months endedSeptember 30, 2022 , as compared to$0.1 million for the three months endedSeptember 30, 2021 . Other Expense (Income). There was no significant change in other expense (income). Other expense was approximately$0.6 million for the three months endedSeptember 30, 2022 , as compared to other expense of$0.3 million for the three months endedSeptember 30, 2021 . However, included in our other expense (income) during the three months endedSeptember 30, 2022 are$2.7 million of non-cash income from equipment parts inventory received from our equipment manufacturer as settlement of our warranty claims, partially offset by a$3.3 million unrealized loss on short-term investment and other expense relating to our lender's commitment fees. -26-
-------------------------------------------------------------------------------- Income Taxes. For the three months endedSeptember 30, 2022 , the Company has utilized the discrete effective tax rate method as allowed by Accounting Standards Codification ("ASC") 740-270-30-18, Income Taxes - Interim Reporting to calculate its interim tax provision. The discrete method treats the year-to-date period as if it was the annual period and determines the income tax expense or benefit on that basis. The Company believes that, at this time, the use of this discrete method is more appropriate than the annual effective tax rate method as the annual effective tax rate is not reliable because small changes in estimated "ordinary" income would result in significant changes in the estimated annual effective tax rate. Total income tax benefit was$2.8 million resulting in an effective tax rate of 21.6% for the three months endedSeptember 30, 2022 , as compared to income tax benefit of$1.3 million or an effective tax rate of 20.1% for the three months endedSeptember 30, 2021 . The change in income tax benefit recorded during the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 , is primarily attributable to the difference in the estimated pre-tax loss in 2022, as compared to 2021.
The following table sets forth the results of operations for the periods presented:
(in thousands, except for percentages) Change
Nine Months Ended September 30, Increase (Decrease)
2022 2021 $ %
Revenue $ 930,776 $ 628,444 $ 302,332 48.1 %
Less (Add):
Cost of services (1) 640,202 474,905 165,297 34.8 %
General and administrative expense (2) 85,031 59,079 25,952 43.9 %
Depreciation and amortization 93,734 100,253 (6,519) (6.5) %
Impairment expense 57,454 - 57,454 100.0 %
Loss on disposal of assets 75,240 40,500 34,740 85.8 %
Interest expense 1,040 477 563 118.0 %
Other income (9,749) (1,178) 8,571 727.6 %
Income tax benefit (1,164) (11,639) (10,475) (90.0) %
Net loss $ (11,012) $ (33,953) $ (22,941) (67.6) %
Adjusted EBITDA (3) $ 232,480 $ 97,807 $ 134,673 137.7 %
Adjusted EBITDA Margin (3) 25.0 % 15.6 % 9.4 % 60.3 %
Pressure pumping segment results of
operations:
Revenue $ 917,336 $ 617,293 $ 300,043 48.6 %
Cost of services $ 626,554 $ 464,230 $ 162,324 35.0 %
Adjusted EBITDA (3) $ 265,835 $ 132,673 $ 133,162 100.4 %
Adjusted EBITDA Margin (4) 29.0 % 21.5 % 7.5 % 34.9 %
(1)Exclusive of depreciation and amortization.
(2)Inclusive of stock-based compensation.
(3)For definitions of the non-GAAP financial measures of Adjusted EBITDA and
Adjusted EBITDA margin and reconciliation of Adjusted EBITDA to our most
directly comparable financial measures calculated in accordance with GAAP,
please read "How We Evaluate Our Operations". Included in our Adjusted EBITDA is
reservation and idle fees of $20.3 million and $5.3 million for the nine months
ended September 30, 2022 and 2021, respectively.
(4)The non-GAAP financial measure of Adjusted EBITDA margin for the pressure
pumping segment is calculated by taking Adjusted EBITDA for the pressure pumping
segment as a percentage of our revenue for the pressure pumping segment.
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Nine Months Ended
Revenues. Revenues increased 48.1%, or$302.3 million , to$930.8 million during the nine months endedSeptember 30, 2022 , as compared to$628.4 million during the nine months endedSeptember 30, 2021 . Our pressure pumping segment revenues increased 48.6%, or$300.0 million , for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 . The increases were primarily attributable to the significant increase in our existing and new customers' activity levels, resulting in higher demand for pressure pumping services and improved pricing. As a result of our customers' increased activity levels, our effectively utilized fleet count rose to approximately 14.4 active fleets during the nine months endedSeptember 30, 2022 , from approximately 12.4 active fleets for the nine months endedSeptember 30, 2021 . Included in our revenue for the nine months endedSeptember 30, 2022 and 2021 was revenue generated from reservation and idle fees charged to our customer of approximately$20.3 million and$5.3 million , respectively.
Revenues from services other than pressure pumping increased 20.5%, or
Cost of Services. Cost of services increased 34.8%, or$165.3 million , to$640.2 million for the nine months endedSeptember 30, 2022 , as compared to$474.9 million during the nine months endedSeptember 30, 2021 . Cost of services in our pressure pumping segment increased$162.3 million for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 . These increases were primarily attributable to the significantly increased activity levels and general cost inflation. As a percentage of pressure pumping segment revenues (including reservation and idle fees), pressure pumping cost of services was 68.3% for the nine months endedSeptember 30, 2022 , as compared to 75.2% for the nine months endedSeptember 30, 2021 . Excluding reservation and idle fees revenue of$20.3 million and$5.3 million recorded during the nine months endedSeptember 30, 2022 and 2021, respectively, our pressure pumping cost of services as a percentage of pressure pumping revenues decreased to 69.8% during the nine months endedSeptember 30, 2022 , as compared to 75.9% for the nine months endedSeptember 30, 2021 . The decrease in the percentages was a result of increased operational efficiencies, reduction in operational downtime and improved pricing across our customer base. General and Administrative Expenses. General and administrative expenses increased 43.9%, or$26.0 million , to$85.0 million for the nine months endedSeptember 30, 2022 , as compared to$59.1 million for the nine months endedSeptember 30, 2021 . The net increase was primarily attributable to an increase during 2022 in (i) non-recurring legal expenses (net of insurance recoveries) increased by$12.8 million , which were primarily in connection with shareholder litigation and settlement with a vendor, (ii) stock-based compensation expense of$9.7 million , which was primarily attributable to the non-recurring incremental stock-based compensation associated with the acceleration of stock awards upon resignation of a former executive, and (iii) consulting and professional fees of approximately$4.5 million , which was partially offset by a net decrease of approximately$1.0 million in other general administrative expenses. Depreciation and Amortization. Depreciation and amortization decreased 6.5%, or$6.5 million , to$93.7 million for the nine months endedSeptember 30, 2022 , as compared to$100.3 million for the nine months endedSeptember 30, 2021 . The decrease was primarily attributable to the decrease in our fixed asset base, partly attributable to the disposal of certain fixed assets during the period.
Impairment Expense. During the nine months ended
Loss on Disposal of Assets. Loss on the disposal of assets increased 85.8%, or$34.7 million , to$75.2 million for the nine months endedSeptember 30, 2022 , as compared to$40.5 million for the nine months endedSeptember 30, 2021 . The increase was primarily attributable to the divestiture of our coiled tubing operations and the significant increase in our utilization levels, resulting in an increase in the operational intensity on our pressure pumping equipment. Upon sale or retirement of property and equipment, including replaced fluid and power ends, the cost and related accumulated depreciation of such assets or components are removed from the balance sheet and the net amount is recognized as loss on disposal of assets. Interest Expense. There was no significant change in interest expense. Interest expense slightly increased to$1.0 million for the nine months endedSeptember 30, 2022 , as compared to$0.5 million for the nine months endedSeptember 30, 2021 . The increase was primarily attributable to the partial write down of unamortized capitalized loan origination cost in connection with the modification to our credit facility. Other Income. Other income increased 727.6%, or$8.6 million , to$9.7 million for the nine months endedSeptember 30, 2022 , as compared to$1.2 million for the nine months endedSeptember 30, 2021 . The increase was primarily attributable to the net -28-
-------------------------------------------------------------------------------- refund to the Company of$10.7 million from sales, excise and use taxes,$2.7 million of non-cash income from equipment parts inventory received from our equipment manufacturer as settlement of our warranty claims, partially offset by a$3.3 million unrealized loss on short-term investment and other expense relating to our lender's commitment fees. Income Taxes. For the nine months endedSeptember 30, 2022 , the Company has utilized the discrete effective tax rate method as allowed by ASC 740-270-30-18, Income Taxes - Interim Reporting to calculate its interim tax provision. The discrete method treats the year-to-date period as if it was the annual period and determines the income tax expense or benefit on that basis. The Company believes that, at this time, the use of this discrete method is more appropriate than the annual effective tax rate method as the annual effective tax rate is not reliable because small changes in estimated "ordinary" income would result in significant changes in the estimated annual effective tax rate. Total income tax benefit was approximately$1.2 million resulting in an effective tax rate of 9.6% for the nine months endedSeptember 30, 2022 , as compared to income tax benefit of$11.6 million or an effective tax rate of 25.5% for the nine months endedSeptember 30, 2021 . The change in income tax benefit recorded during the nine months endedSeptember 30, 2022 , compared to that during the nine months endedSeptember 30, 2021 , is primarily attributable to the difference in the estimated pre-tax loss in 2022, as compared to 2021. Furthermore, the change in the effective tax rate of 9.6% from 25.5% was due to nondeductible expenses and discrete items such as stock compensation expense recorded during the nine months endedSeptember 30, 2021 .
Liquidity and Capital Resources
Our liquidity is currently provided by (i) existing cash balances, (ii) operating cash flows and (iii) borrowings under our ABL Credit Facility (as defined below). Our cash is primarily used to fund our operations, support growth opportunities and satisfy future debt payments, if any. Our Borrowing Base (as defined below), as redetermined monthly, is tied to 85.0% to 90% of eligible accounts receivable. Changes to our operational activity levels and our customers' credit ratings have an impact on our total eligible accounts receivable, which could result in significant changes to our Borrowing Base and therefore our availability under our ABL Credit Facility. As ofSeptember 30, 2022 , we had no borrowings under our ABL Credit Facility, and our total liquidity was approximately$154.5 million , consisting of cash and cash equivalents of$43.2 million and$111.3 million of availability under our ABL Credit Facility. As ofOctober 31, 2022 , our borrowing under our ABL Credit Facility was$30.0 million and our total liquidity was approximately$185.6 million , consisting of cash and cash equivalents of$88.3 million and$97.3 million of remaining availability under our ABL Credit Facility. In 2020, when demand for our services was significantly depressed following the rapidly rising health crisis associated with the COVID-19 pandemic and the energy industry disruptions, the Company experienced a significant decrease in its liquidity. However, with the gradual recovery in the energy industry and the reduced impact of the COVID-19 pandemic, we have seen improvements in the demand for our services and pricing, and our liquidity position gradually improved. However, we expect our overall liquidity to decline if we make additional or accelerate our capital investments. Moreover, the current market conditions may be impacted by increasing interest rates and potential economic slowdown or a new outbreak of a COVID-19 variant or other health crisis, which could negatively impact our future operations, revenue, profitability and cash flows. The industry transition to lower emissions pressure pumping equipment could require us to make additional investment in DGB or electric solutions in order to continue to meet our current and future customers' equipment demand. If we are unable to timely reinvest in lower emissions equipment, the future demand for our pressure pumping services may be adversely impacted, which could negatively impact our future operations, revenue, profitability and cash flows. There can be no assurance that our operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. Future cash flows are subject to a number of variables, and are highly dependent on the drilling, completion, and production activity by our customers, which in turn is highly dependent on oil and natural gas prices. Depending upon market conditions and other factors, we may issue equity and debt securities or take other actions necessary to fund our business or meet our future long-term liquidity requirements. Our revolving credit facility, as amended in 2018, had a total borrowing capacity of$300.0 million (subject to the borrowing base limit), with a maturity date ofDecember 19, 2023 . The revolving credit facility had a borrowing base of 85% of monthly eligible accounts receivable less customary reserves, as redetermined monthly. The revolving credit facility included a springing fixed charge coverage ratio to apply when excess availability was less than the greater of (i) 10% of the lesser of the facility size or the borrowing base or (ii)$22.5 million . Borrowings under the revolving credit facility accrued interest based on a three-tier pricing grid tied to availability, and we had the option to elect for loans to be based on either LIBOR or base rate, -29- --------------------------------------------------------------------------------
plus the applicable margin, which ranged from 1.75% to 2.25% for LIBOR loans and 0.75% to 1.25% for base rate loans, with a LIBOR floor of zero.
EffectiveApril 13, 2022 , the Company entered into an amendment and restatement of its revolving credit facility (as amended and restated, "ABL Credit Facility"). The ABL Credit Facility decreased the borrowing capacity to$150.0 million (subject to the Borrowing Base limit), with a maturity date extended toApril 13, 2027 . The ABL Credit Facility has a borrowing base of 85% to 90%, depending on the credit ratings of our accounts receivable counterparties, of monthly eligible accounts receivable less customary reserves (the "Borrowing Base"), as redetermined monthly. The Borrowing Base as ofSeptember 30, 2022 , was approximately$116.4 million . The ABL Credit Facility includes a springing fixed charge coverage ratio to apply when excess availability is less than the greater of (i) 10% of the lesser of the facility size or the Borrowing Base or (ii)$10.0 million . Under this facility we are required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens, indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. Borrowings under the ABL Credit Facility are secured by a first priority lien and security interest in substantially all assets of the Company. Borrowings under the ABL Credit Facility accrue interest based on a three-tier pricing grid tied to availability, and we may elect for loans to be based on either the Secured Overnight Financing Rate ("SOFR") or the base rate, plus the applicable margin, which ranges from 1.50% to 2.00% for SOFR loans and 0.50% to 1.00% for base rate loans.
The loan origination costs relating to the ABL Credit Facility are classified as
an asset in our balance sheet. There were no borrowings under the revolving
credit facility as of
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--------------------------------------------------------------------------------Future Sources and Use of Cash and Contractual Obligations
Capital expenditures incurred were$115.1 million during the three months endedSeptember 30, 2022 , as compared to$53.2 million during the three months endedSeptember 30, 2021 . The significant portion of our total capital expenditures incurred were comprised of primarily maintenance and DGB conversion capital expenditures. Our future material use of cash will be to fund our capital expenditures. Capital expenditures for 2022 are projected to be primarily related to maintenance capital expenditures to support our existing pressure pumping assets, costs to convert some existing equipment to lower emissions pressure pumping equipment, strategic purchases and other ancillary equipment purchases, subject to market conditions and customer demand. Our future capital expenditures depend on our projected operational activity, emission requirements and planned conversions to lower emissions equipment, among other factors, which could vary significantly throughout the year. We could incur significant additional capital expenditures if our projected activity levels increase during the course of the year, inflation and supply chain tightness continue to adversely impact our operations or we invest in new or different lower emissions equipment. The Company will continue to evaluate the emissions profile of its fleet over the coming years and may, depending on market conditions, convert or retire additional conventional Tier II equipment in favor of lower emissions equipment. The Company's decisions regarding the retirement or conversion of equipment or the addition of lower emissions equipment will be subject to a number of factors, including (among other factors) the availability of equipment, including parts and major components, supply chain disruptions, prevailing and expected commodity prices, customer demand and requirements and the Company's evaluation of projected returns on conversion or other capital expenditures. Depending on the impacts of these factors, the Company may decide to retain conventional equipment for a longer period of time or accelerate the retirement, replacement or conversion of that equipment. We anticipate our capital expenditures will be funded by existing cash, cash flows from operations, and if needed, borrowings under our ABL Credit Facility. Our cash flows from operations will be generated from services we provide to our customers. In addition, our cash flows could be improved by prepayments received from certain customers in connection with our pressure pumping services contractual arrangements, as applicable. InAugust 2022 , we entered into a contractual arrangement with our equipment manufacturer to purchase and convert additional Tier IV DGB equipment, with total cost of approximately$43.0 million . InAugust 2022 , we entered into the ElectricFleet Lease to lease electric hydraulic fracturing pumps with capacity of 60,000 HHP per fleet, which contains options to extend the lease or purchase the equipment at the end of the lease. The lease payments are expected to commence when the Company takes possession of the electric hydraulic fracturing pumps during the second half of 2023. The total estimated contractual commitment in connection with the ElectricFleet Lease is approximately$49.3 million , which includes the cost associated with the option to purchase the equipment at the end of the lease. OnNovember 1, 2022 , we entered into a purchase and sale agreement withNew Silvertip Holdco, LLC , to purchase 100% of equity interest ofSilvertip Completion Services Operating, LLC (the "Silvertip Acquisition"). Under the terms of the purchase agreement, we acquired, subject to exceptions in the Silvertip Acquisition, 100% ofSilvertip Completion Services Operating, LLC equity interest for a consideration of both cash and shares of our Company. The total consideration paid consisted of 10.1 million shares of our Company, cash of$30.0 million , and certain other closing and transaction costs. In the normal course of business, we enter into various contractual obligations and incur expenses in connection with routine growth, conversion and maintenance capital expenditures that impact our future liquidity. There were no other known future material contractual obligations as ofSeptember 30, 2022 .
Cash and Cash Flows
The following table sets forth the historical cash flows for the nine months
ended
Nine Months Ended September 30,
(in thousands) 2022 2021
Net cash provided by operating activities $ 174,951 $ 109,259
Net cash used in investing activities $ (239,957) $ (85,549)
Net cash used in financing activities $ (3,704) $ (7,881)
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Cash Flows From Operating Activities
Net cash provided by operating activities was$175.0 million for the nine months endedSeptember 30, 2022 , compared to$109.3 million for the nine months endedSeptember 30, 2021 . The net increase of approximately$65.7 million was primarily due to the increase in our activity levels and improved pricing resulting from the increase in the demand for our services, driven by higher crude oil prices, net sales tax refund received, and partially offset with the timing of collections of our receivables from customers and payments to vendors.
Cash Flows From Investing Activities
Net cash used in investing activities increased to$240.0 million for the nine months endedSeptember 30, 2022 , from$85.5 million for the nine months endedSeptember 30, 2021 . The increase was primarily attributable to our investment in lower emissions Tier IV DGB equipment and increased cost to rebuild a portion of our Tier II equipment.
Cash Flows From Financing Activities
Net cash used in financing activities decreased to$3.7 million for the nine months endedSeptember 30, 2022 , from$7.9 million for the nine months endedSeptember 30, 2021 . The net decrease in cash used in financing activities during the nine months endedSeptember 30, 2022 , was primarily a result of the reduction in the amount of net settlement of equity awards and no repayments of insurance financing in 2022, compared to the nine months endedSeptember 30, 2021 .
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of
Critical Accounting Policies and Estimates
There have been no material changes during the nine months endedSeptember 30, 2022 to the methodology applied by our management for critical accounting policies previously disclosed in our Form 10-K. Please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in our Form 10-K for a discussion of our critical accounting policies and estimates.
Recently Issued Accounting Standards
Disclosure concerning recently issued accounting standards is incorporated by reference to Note 2 of our Condensed Consolidated Financial Statements (Unaudited) contained in this Form 10-Q.
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