SOLARIS OILFIELD INFRASTRUCTURE, INC. Solaris Oilfield Infrastructure, Inc. (either individually or together with its subsidiaries, as the context requires, "we," "us," "our," "Solaris Inc. " or the "Company"). The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and related notes. The following discussion contains "forward-looking statements" that reflect our plans, estimates, beliefs and expected performance. Our actual results may differ materially from those anticipated as discussed in these forward-looking statements as a result of a variety of risks and uncertainties, including those described above in "Cautionary Statement Regarding Forward-Looking Statements" included elsewhere in this Quarterly Report and "Risk Factors" included in this Quarterly Report and the Annual Report on Form 10-K for the year endedDecember 31, 2020 as updated by our subsequent filings with theUnited States Securities and Exchange Commission (the "SEC"), all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements except as otherwise required by law. Overview We design and manufacture specialized equipment, which combined with field technician support, logistics services and our software solutions, enables us to provide a service offering that helps oil and natural gas operators and their suppliers to drive efficiencies and reduce costs during the completion phase of well development. The majority of our revenue is currently derived from rental and services related to our patented mobile proppant and patent-pending water and chemical management systems that unload, store and deliver proppant and chemicals used in the hydraulic fracturing of oil and natural gas wells, as well as coordinating the delivery of proppant to the well site. Our systems are deployed in most of the active oil and natural gas basins inthe United States .
Our service fleet currently consists of 158 mobile proppant management systems, 14 mobile chemical management systems and 17 mobile water management systems.
Recent Trends and Outlook
Demand for our products and services is predominantly influenced by the level of
oil and natural gas well drilling and completion activity, which, in turn, is
determined by the current and anticipated profitability of developing oil and
natural gas reserves.
The oil and natural gas industry continues to recover from the impacts of the
COVID-19 pandemic, which, beginning with the first quarter of 2020, drove
extreme volatility in oil and natural gas commodity prices and activity. During
this time period, WTI oil prices fell from $60 per barrel to under $20 per
barrel during the second quarter of 2020 and have recovered to over $80 per
barrel in October 2021 . The Baker Hughes US Land rig count decreased 55% to 417
average rigs in 2020 from 920 average rigs in 2019. Since the start of 2021, the
Baker Hughes US Land rig count has increased 50% to 515 rigs compared to a 41%
increase in our fully utilized systems since the fourth quarter of 2020. While
our fully utilized systems are highly correlated with US land rig count activity
over longer periods, timing differences between drilling and completion activity
can result in lags of one to two quarters or longer. Further stabilization in
oil and gas prices and activity will depend on multiple factors, including the
ultimate pace of economic recovery, the success of COVID-19 vaccine rollouts,
potential regulatory changes and the resulting supply-demand balance in oil and
gas.
Recent consolidation amongst some of our E&P and oil service customers combined
with financial discipline from publicly traded energy companies has reduced
industry-wide capital spending, resulting in activity levels that remain below
pre-pandemic levels despite the recovery in commodity prices. Additionally,
consolidation can drive procurement strategy changes, which has historically
resulted in both market share gains and losses for the Company. We expect both
consolidation and financial discipline will likely continue to be important
themes for the energy industry going forward.
The Company expects capital expenditures for the full year 2021 to be
approximately
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Results of Operations
Three and Nine Months Ended September 30, 2021 Compared to Three and Nine Months
Ended September 30, 2020
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 Change 2021 2020 Change
(in thousands) (in thousands)
Revenue
System rental $ 16,091 $ 9,197 $ 6,894 $ 44,063 $ 40,720 $ 3,343
System services 32,990 10,855 22,135 68,317 35,231 33,086
Transloading services 86 310 (224) 239 1,039 (800)Inventory software services 210 169 41 621 710 (89) Total revenue 49,377 20,531 28,846 113,240 77,700 35,540 Operating costs and expenses: Cost of system rental (excluding depreciation and amortization) 2,536 1,181 1,355
5,704 4,018 1,686 Cost of system services (excluding depreciation and amortization) 35,617 13,126 22,491 76,151 43,269 32,882 Cost of transloading services (excluding depreciation and amortization) 220 243 (23) 672 783 (111) Cost of inventory software services (excluding depreciation and amortization) 87 97 (10) 289 364 (75) Depreciation and amortization 6,842 6,594 248 20,288 20,378 (90) Selling, general and administrative (excluding depreciation and amortization) 4,760 3,840 920 14,326 12,212 2,114 Impairment losses - - - - 47,828 (47,828) Other operating (income) expense (2,690) 1,856 (4,546) (2,074) 5,329 (7,403) Total operating costs and expenses 47,372 26,937 20,435 115,356 134,181 (18,825) Operating income (loss) 2,005 (6,406) 8,411 (2,116) (56,481) 54,365 Interest income (expense), net (66) (40) (26) (170) 36 (206) Total other income (expense) (66) (40) (26) (170) 36 (206) Income (loss) before income tax expense 1,939 (6,446) 8,385 (2,286) (56,445) 54,159 (Expense) benefit for income taxes (507) 843 (1,350) (77) 8,193 (8,271) Net income (loss) 1,432 (5,603) 7,035 (2,363) (48,252) 45,888 Less: net (income) loss related to non-controlling interests (558) 2,320 (2,878) 857 20,347 (19,490) Net income (loss) attributable to Solaris$ 874 $ (3,283) $ 4,157 $ (1,506) $ (27,905) $ 26,399 System Rental
System rental revenue increased$6.9 million , or 75%, to$16.1 million for the three months endedSeptember 30, 2021 compared to$9.2 million for the three months endedSeptember 30, 2020 . System rental revenue increased$3.3 million , or 8%, to$44.1 million for the nine months endedSeptember 30, 2021 compared to$40.7 million for the nine months endedSeptember 30, 2020 . The changes in system rental revenue are primarily related to increases in mobile proppant systems on a fully utilized basis, from 34 systems for the three months endedSeptember 30, 2020 to 59 systems for the three months endedSeptember 30, 2021 , and from 46 systems for the nine months endedSeptember 30, 2020 to 55 for the nine months endedSeptember 30, 2021 , in response to global oil market
volatility.
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Cost of system rental increased$1.4 million , or 115%, to$2.5 million for the three months endedSeptember 30, 2021 compared to$1.2 million for the three months endedSeptember 30, 2020 , excluding depreciation and amortization expense. Cost of system rental increased$1.7 million , or 42%, to$5.7 million for the nine months endedSeptember 30, 2021 compared to$4.0 million for the nine months endedSeptember 30, 2020 , excluding depreciation and amortization expense. Cost of system rental increased primarily due to an increase in mobile proppant systems on a fully utilized basis. Cost of system rental as a percentage of system rental revenue was 16% and 13% for the three months endedSeptember 30, 2021 and 2020, respectively and was 13% and 10% for the nine months endedSeptember 30, 2021 and 2020, respectively.
System Services
System services revenue increased$22.1 million , or 204%, to$33.0 million for the three months endedSeptember 30, 2021 compared to$10.9 million for the three months endedSeptember 30, 2020 . System services revenue increased$33.1 million , or 94%, to$68.3 million for the nine months endedSeptember 30, 2021 compared to$35.2 million for the nine months endedSeptember 30, 2020 . System services revenue increased mainly due to an increase in last mile services provided to coordinate proppant delivered into our systems, as well as an increase in mobile proppant systems on a fully utilized basis. Cost of system services increased$22.5 million , or 171%, to$35.6 million for the three months endedSeptember 30, 2021 compared to$13.1 million for the three months endedSeptember 30, 2020 , excluding depreciation and amortization expense. Cost of system services increased$32.9 million , or 76%, to$76.2 million for the nine months endedSeptember 30, 2021 compared to$43.3 million for the nine months endedSeptember 30, 2020 , excluding depreciation and amortization expense. Cost of system services increased mainly due to an increase in last mile services provided to coordinate proppant delivered to systems as well as an increase in fully utilized systems. Cost of system services as a percentage of system services revenue was 108% and 121% for the three months endedSeptember 30, 2021 and 2020, respectively and was 111% and 123% for the nine months endedSeptember 30, 2021 and 2020, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased$1.0 million , or 24%, to$4.8 million for the three months endedSeptember 30, 2021 compared to$3.8 million for the three months endedSeptember 30, 2020 , excluding depreciation and amortization. Selling, general and administrative expenses increased$2.1 million , or 17%, to$14.3 million for the nine months endedSeptember 30, 2021 compared to$12.2 million for the nine months endedSeptember 30, 2020 , excluding depreciation and amortization expense. Selling, general and administrative expenses increased due primarily to increases in headcount and professional fees.
Other Operating (Income) Expense
The Company qualified for federal government assistance through employee retention credit provisions of the Consolidated Appropriations Act of 2021. During the three and nine months endedSeptember 30, 2021 , the Company recorded$3.1 million of employee retention credits in other income on its consolidated income statements. As ofSeptember 30, 2021 ,$1.2 million of the credits have been received and$1.9 million is included in prepaid expenses and other current assets on the consolidated balance sheet. The calculation of the credit is based on employees continued employment and represents a portion of the wages paid to them. For income tax purposes, the credit will result in decreased expense related to the wages it offsets in the period received.
Impairment Losses
As a result of risks and uncertainties associated with volatility in global oil markets driven by significant reductions in demand for oil due to COVID-19 and certain actions by oil producers globally and the expected impact on our businesses, operations, earnings and results, we recorded impairment losses and other charges of$37.8 million ,$4.2 million ,$2.8 million ,$2.6 million and$0.4 million in relation to property, plant and equipment, goodwill, ROU assets, inventories and other assets, respectively, in the nine months endedSeptember 30, 2020 . We did not record impairment losses in the three or nine months endedSeptember 30, 2021 , respectively, nor for the three months ended September
30,
2020.
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Provision for Income Taxes
During the three months endedSeptember 30, 2021 , we recognized a combinedUnited States federal and state expense for income taxes of$0.5 million , a decrease of$1.3 million as compared to the$0.8 million income tax benefit we recognized during the three months endedSeptember 30, 2020 . During the nine months endedSeptember 30, 2021 , we recognized a combinedUnited States federal and state expense for income taxes of$0.1 million , a decrease of$8.3 million as compared to the$8.2 million income tax benefit we recognized during the nine months endedSeptember 30, 2020 . This change was attributable to lower operating losses. The effective combinedUnited States federal and state income tax rates were 26.2% and 13.1% for the three months endedSeptember 30, 2021 and 2020, respectively. The effective combinedUnited States federal and state income tax rates were 3.4% and 14.5% for the nine months endedSeptember 30, 2021 and 2020, respectively. The effective tax rate differed from the statutory rate primarily due toSolaris LLC's treatment as a partnership forUnited States federal income tax purposes. Comparison of Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income, plus (i) depreciation and amortization expense, (ii) interest expense and (iii) income tax expense, including franchise taxes. We define Adjusted EBITDA as EBITDA plus (i) stock-based compensation expense and (ii) certain non-cash items and any extraordinary, unusual or non-recurring gains, losses or expenses. EBITDA and Adjusted EBITDA should not be considered in isolation or as substitutes for an analysis of our results of operation and financial condition as reported in accordance with accounting standards generally accepted inthe United States ("GAAP"). Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA should not be considered alternatives to net income presented in accordance with GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
The following table presents a reconciliation of Net income to EBITDA and Adjusted EBITDA for each of the periods indicated.
Three months ended Nine months ended
September 30, September 30,
2021 2020 Change 2021 2020 Change
(in thousands) (in thousands)Net loss$ 1,432 $ (5,603) $ 7,035 $ (2,363) $ (48,252) $ 45,889 Depreciation and amortization 6,842 6,594 248 20,288 20,378 (90) Interest (income) expense, net 66 40 26
170 (36) 206
Income taxes (1) 507 (843) 1,350 77 (8,193) 8,270
EBITDA $ 8,847 $ 188 $ 8,659 $ 18,172 $ (36,103) $ 54,275 Stock-based compensation expense (2) 1,355 1,077 278 3,907 3,732 175 Employee retention credit (3) (2,992) - (2,992)
(2,992) - (2,992)
Loss on disposal of assets (4) 38 (42) 113 1,451 (1,338)
Impairment loss - - - - 47,828 (47,828)
Severance expense 41 3 38 41 542 (501)
Credit losses 30 1,246 (1,216) 630 2,698 (2,068)
Other write-offs (4) - 586 (586) - 589 (589)
Transaction costs (5) 385 - 385 409 - 409
Adjusted EBITDA $ 7,662 $ 3,138 $ 4,524 $ 20,280 $ 20,737 $ (457) (1)
(2) Represents stock-based compensation expense related to restricted stock
awards.
(3) Employee retention credit as part of Consolidated Appropriations Act of 2021,
net of administrative fees.
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(4) Write-off of prepaid and cancelled purchase orders in the three and nine
months ended
(5) Costs related to the evaluation of potential acquisitions.
Three and Nine Months Ended
EBITDA increased$8.7 million to$8.8 million for the three months endedSeptember 30, 2021 compared to$0.2 million for the three months endedSeptember 30, 2020 . Adjusted EBITDA increased$4.5 million to$7.7 million for the three months endedSeptember 30, 2021 compared to$3.1 million for the three months endedSeptember 30, 2020 . EBITDA increased$54.3 million to$18.2 million for the nine months endedSeptember 30, 2021 compared to($36.1) million for the nine months endedSeptember 30, 2020 . Adjusted EBITDA decreased$0.4 million to$20.3 million for the nine months endedSeptember 30, 2021 compared to$20.7 million for the nine months endedSeptember 30, 2020 . The changes in EBITDA and Adjusted EBITDA were primarily due to the changes in revenues and expenses,
discussed above. SYSTEM GROSS MARGIN We view System Gross Margin as an important indicator of performance. We define System Gross Margin as system rental and system services revenues, less the costs of system rental and system services, excluding depreciation and amortization, and evaluate our performance on that combined basis. System Gross Margin should not be considered in isolation or as substitutes for an analysis of our results of operation and financial condition as reported in accordance with accounting standards generally accepted inthe United States ("GAAP"). The following table presents a calculation of System Gross Margin for each of the periods indicated.
Three and Nine Months Ended
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
System revenue:
System rental $ 16,091 $ 9,197 $ 44,063 $ 40,720
System services 32,990 10,855 68,317 35,231
Total system revenue $ 49,081 $ 20,052 $ 112,380 $ 75,951
System operating costs and expenses:
Cost of system rental, excluding depreciation 2,536 1,181 5,704 4,018
and amortization $ $ $ $
Cost of system services, excluding 35,617 13,126 76,151 43,269
depreciation and amortization
Total system costs and expenses $ 38,153 $ 14,307 $ 81,855 $ 47,287 System gross margin$ 10,928 $ 5,745 $ 30,525 $ 28,664
Average fully utilized systems 59 34
55 46
Liquidity and Capital Resources
Overview
Our primary sources of liquidity to date have been cash flows from operations,
borrowings under our credit agreements and proceeds from equity offerings. Our
primary uses of capital have been to fund ongoing operations, capital
expenditures to support organic growth, including our fleet development and
related maintenance and fleet upgrades, repurchase shares of Class A common
stock in the open market, and pay dividends. Although no assurance
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can be given, depending upon market conditions and other factors, we may also have the ability to issue additional equity and debt if needed.
As ofSeptember 30, 2021 , cash and cash equivalents totaled$42.8 million . We have no borrowings outstanding under our 2019 Credit Agreement and have$50.0 million of available borrowing capacity. We believe that our cash on hand, operating cash flow and available borrowings under our 2019 Credit Agreement will be sufficient to fund our operations for at least the next 12 months.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Nine Months Ended
September 30,
2021 2020 Change
(in thousands)
Net cash provided by operating activities $ 11,697 $ 38,010 $ (26,313)
Net cash used in investing activities (13,625) (2,124) (11,501)
Net cash used in financing activities (15,607) (41,824) 26,217 Net change in cash$ (17,535) $ (5,938) $ (11,597)
Significant Sources and Uses of Cash Flows
Operating Activities. Net cash provided by operating activities was
Investing Activities. Net cash used in investing activities was$13.6 million for the nine months endedSeptember 30, 2021 , compared to net cash used in investing activities of$2.1 million for the nine months endedSeptember 30, 2020 . The increase in investing activities of$11.5 million is primarily due to capital expenditures related to enhancements to our fleet and for new technologies. Financing Activities. Net cash used in financing activities of$15.6 million for the nine months endedSeptember 30, 2021 was primarily related to quarterly dividends of$14.4 million and$0.7 million of payments related to vesting of stock-based compensation. Net cash used in financing activities of$41.8 million for the nine months endedSeptember 30, 2020 was primarily related to$26.7 million of share repurchases and quarterly dividends of$14.3 million . Capital Sources
Senior Secured Credit Facility
See Note 4. "Debt" to our condensed consolidated financial statements as of
Contractual Obligations
We had no material changes in our contractual commitments and obligations during
the three months ended September 30, 2021 from the amounts listed under Part II,
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations-Contractual Obligations" in the Company's Annual Report on Form
10-K for the year ended December 31, 2020 , as filed with the SEC on February 23,
2021 . See Note 4 "Debt" and Note 8 "Commitments and Contingencies" to our
condensed consolidated financial statements for additional information.
Critical Accounting Policies and Estimates
We had no material changes in our critical accounting policies and estimates
during the three months ended September 30, 2021 from the amounts listed under
Part II, Item 7 "Management's Discussion and Analysis of Financial
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Condition and Results of Operations-Critical Accounting Policies and Estimates" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 for additional information. Recent Accounting Pronouncements
Recently Adopted Accounting Standards
None.
Recently Issued Accounting Standards
See Note 2. "Summary of Significant Accounting Policies - Recently Issued
Accounting Standards" to our condensed consolidated financial statements as of
Under the Jumpstart Our Business Startups Act (the "JOBS Act"), we meet the
definition of an "emerging growth company," which allows us to have an extended
transition period for complying with new or revised accounting standards
pursuant to Section 107(b) of the JOBS Act, however, we elected to opt out of
such exemption (this election is irrevocable).
Off Balance Sheet Arrangements
We have no material off balance sheet arrangements. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.
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