SOLARIS OILFIELD INFRASTRUCTURE, INC. Unless the context requires otherwise, references in this Annual Report to the
"Company," "Solaris," "we," "us" and "our" refer to (i)
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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 drive efficiencies that reduce operational footprint and costs during
the completion phase of well development. Our equipment and services are
deployed across active oil and natural gas basins in
Recent Trends and Outlook
Supply and demand dynamics in the oil and natural gas industry remained tight
throughout 2022. Continued supply chain tightness, gradual reopening of certain
global economies and geopolitical conflicts, among other factors, drove WTI oil
prices to fluctuate between
North American land activity improved throughout 2022 as the Baker Hughes Land rig count increased 52% on average compared to a 52% increase in our fully utilized systems during 2022. Overall, demand for our offerings is predominantly influenced by the level of oil and natural gas well drilling and completion activity. 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.
In 2022, our system count growth outpaced general activity due to new technology introductions. In 2023, we expect slower general market growth in North American land activity due to continued capital discipline among oil and gas operators and supply chain and labor constraints limiting the addition of additional drilling rig and completion crews. We expect our activity, as measured by fully utilized systems, will continue to outpace the market in 2023 as we enhance our offering and gain additional market share through additional deployments of our new technology.
The sustainability of favorable supply-demand dynamics and a strong commodity environment will depend on multiple factors, including the health of the global economy, any further supply chain disruptions or potential regulatory changes. Continued industry 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.
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Results of Operations
Year Ended
Year Ended
December 31,
2022 2021 Change
(in thousands)
Revenue $ 320,005 $ 159,189 $ 160,816
Operating costs and expenses:
Cost of services (exclusive of depreciation) 219,775 115,459 104,316
Depreciation and amortization 30,433 27,210 3,223
Property tax contingency 3,072 - 3,072
Selling, general and administrative 23,074 19,264 3,810
Other operating expense (income) 1,847 (2,357) 4,204
Total operating costs and expenses 278,201 159,576 118,625
Operating income (loss) 41,804 (387) 42,191
Interest expense, net (489) (247) (242)
Total other expense (489) (247) (242)
Income (loss) before income tax expense 41,315 (634) 41,949
Provision for income taxes (7,803) (626) (7,177)
Net income (loss) 33,512 (1,260) 34,772
Less: net (income) loss related to non-controlling interests
(12,354) 392 (12,746)
Net income (loss) attributable to Solaris $ 21,158 $ (868) $ 22,026 Revenue
Revenue increased
Cost of Services
Cost of services, excluding depreciation and amortization expense, increased
Property Tax Contingency
We are subject to a number of state and local taxes that are not income-based.
As many of these taxes are subject to assessment and audit by the taxing
authorities, it is possible that an assessment or audit could result in
additional taxes due. We accrue for additional taxes when we determine that it
is probable that we will have incurred a liability and we can reasonably
estimate the amount of the liability. On
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Selling, General and Administrative Expenses
Selling, general and administrative expenses, excluding depreciation and
amortization, increased
Other Operating Expense (Income)
Other operating expense (income) decreased
Provision for Income Taxes
During the year ended
Comparison of Non-GAAP Financial Measures
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.
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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 in
The following table presents a reconciliation of Net income to EBITDA and Adjusted EBITDA for each of the periods indicated.
Year ended
December 31,
2022 2021 Change
(in thousands)
Net income (loss) $ 33,512 $ (1,260) $ 34,772
Depreciation and amortization 30,433 27,210 3,223
Interest expense, net 489 247 242
Income taxes (1) 7,803 626 7,177
EBITDA $ 72,237 $ 26,823 $ 45,414
Property tax contingency (2) 3,072 - 3,072
Stock-based compensation expense (3) 6,092 5,210 882
Employee retention credit (4) - (2,957) 2,957
Change in payables related to Tax Receivable
Agreement (5) (663) - (663)
Credit losses (420) 365 (785)
Other (6) 3,464 625 2,839
Adjusted EBITDA $ 83,782 $ 30,066 $ 53,716 (1) Federal and state income taxes.
Property tax contingency represents a reserve related to an unfavorable
currently under appeal.
(3) Represents stock-based compensation expense related to restricted stock.
(4) Employee retention credit as part of the Consolidated Appropriations Act of
2021, net of administrative fees.
(5) Reduction in liability due to state tax rate change.
(6) Other includes loss on disposal of assets, gain on insurance claims and other
settlements, and costs related to the evaluation of potential acquisitions.
Year Ended
EBITDA increased
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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 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 of
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Year Ended
December 31, Change
2022 2021 2022 vs. 2021
(in thousands)
Net cash provided by operating activities
4,699
Net change in cash $ (27,662) $ (23,869) $ (3,793) Analysis of Cash Flow Changes for Year Ended
Operating Activities. Net cash provided by operating activities was
Investing Activities. Net cash used in investing activities was
Financing Activities. Net cash used in financing activities of
Future sources and uses of cash
Our material cash commitments consist primarily of obligations under our Credit
Agreement, Tax Receivable Agreement, finance and operating leases for property
and equipment, and purchase obligations as a part of normal operations. We have
no material off balance sheet arrangements as of
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In 2023, we expect to pay approximately
We made payments of
See Note 7. "Leases" under Item 8. "Financial Statements and Supplementary Data" for additional information regarding scheduled maturities of finance and operating leases.
As of
Critical Accounting Policies and Estimates
The preparation of financial statements requires the use of judgments and estimates. Our critical accounting policies are described below to provide a better understanding of how we develop our assumptions and judgments about future events and related estimates and how they can impact our financial statements. A critical accounting estimate is one that requires our most difficult, subjective or complex estimates and assessments and is fundamental to our results of operations.
We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe the following are the critical accounting policies used in the preparation of our combined financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in this report.
Revenue Recognition
Our revenue is primarily derived from short-term contracts and consists of fees charged to customers for the use of our equipment and labor services, mobilization and transportation of our equipment, services coordinating the transportation of proppant delivery to our equipment, transloading services and for inventory software services, each of which are considered to be separate performance obligations.
The majority of our contracts contain multiple performance obligations, such as work orders containing a combination of equipment, transportation, and labor services. We allocate the transaction price to each performance obligation identified in the contract based on relative stand-alone selling prices, or estimates of such prices, and recognize the related revenue as control of each individual product or service is transferred to the customer, in satisfaction of the corresponding performance obligations. We measure progress using an input method based on resources consumed or expended relative to the total resources expected to be consumed or expended. We assess our customers' ability and intention to pay, which is based on a variety of factors including historical payment experience and financial condition and we typically charge our customers on a weekly or monthly basis.
Variable consideration typically may relate to discounts, price concessions and incentives. The Company estimates variable consideration based on the amount of consideration we expect to receive. The Company accrues revenue on an ongoing basis to reflect updated information for variable consideration as performance obligations are met.
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Value of Long-Lived Assets, Definite-Lived Intangible Assets and
We carry a variety of long-lived assets on our balance sheet including property,
plant and equipment, goodwill and other intangibles. Impairment is the condition
that exists when the carrying amount of a long-lived asset exceeds its fair
value, and any impairment charge that we record reduces our operating income.
Key estimates relate to the fair value and recoverability of carrying values of long-lived assets, definite-lived intangible assets and goodwill. These estimates include management's short-term and long-term forecast of operating performance, including revenue growth rates and expected profitability margins, estimates of the remaining useful life and service potential of the assets, a discount rate based on our weighted average cost of capital, forecasted capital expenditures and the timing of expected future cash flows based on market conditions. Impairment assessments also incorporate inherent uncertainties, including projected commodity pricing, supply and demand for our services and future market conditions, which are difficult to predict in volatile economic and actual results could materially differ from the estimated assumptions utilized in our forecasts.
If market conditions deteriorate, including crude oil prices significantly declining and remaining at low levels for a sustained period of time, we could be required to record impairments of the carrying value of our long-lived assets, definite-lived intangible assets or goodwill in the future which could have a material adverse impact on our operating results.
Income Taxes
We determine deferred tax assets and liabilities on the basis of the differences between the book value and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period in which the enactment date occurs.
We routinely evaluate the realizability of our deferred tax assets by assessing
the likelihood that our deferred tax assets will be recovered based on all
available positive and negative evidence, including scheduled reversals of
deferred tax liabilities, estimates of future taxable income, tax planning
strategies and results of operations. Estimating future taxable income is
inherently uncertain and requires judgment. In projecting future taxable income,
we consider our historical results and incorporate certain assumptions,
including revenue growth and operating margins, among others. As of
See Note 10. "Income Taxes" under Part II, Item 8. "Financial Statements and Supplementary Data." for additional information.
Tax Receivable Agreement
As described in Note 10. "Income Taxes" under Part II, Item 8. "Financial
Statements and Supplementary Data",
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Inc.'s acquisition (or deemed acquisition for
The projection of future taxable income involves estimates which require significant judgment. Actual taxable income may differ from our estimates, which could significantly impact the liability relating to the Tax Receivable Agreement. The Company accounts for amounts payable under the Tax Receivable Agreement in accordance with Accounting Standard Codification ("ASC") Topic 450, Contingencies.
Recent Accounting Pronouncements
See Note 2. "Summary of Significant Accounting Policies - Recently Issued Accounting Standards" under Item 8. "Financial Statements and Supplementary Data" for a discussion of recent accounting pronouncements.
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