Mammoth Energy Services, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Mammoth provides oilfield services, natural sand proppant and electric infrastructure services. Results were transformed by storm-recovery work in Puerto Rico, primarily for the Puerto Rico Electric Power Authority (PREPA).
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $384.0 million | $149.3 million | $1,411.9 million | $322.5 million |
| Operating income (loss) | $145.2 million | ($0.5 million) | $345.6 million | ($14.7 million) |
| Net income (loss) | $69.5 million | ($0.8 million) | $167.8 million | ($7.0 million) |
| Diluted EPS | $1.54 | ($0.02) | $3.73 | ($0.17) |
| Adjusted EBITDA (non-GAAP) | $183.6 million | $28.0 million | $463.0 million | $54.8 million |
Q3 operating and net margins were approximately 37.8% and 18.1%, respectively; nine-month margins were approximately 24.5% and 11.9%. The filing’s reported earnings include significant Puerto Rico infrastructure activity and a large reversal of previously recorded bad-debt provisions; they should not be viewed as purely recurring performance.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $282.6 million, versus $40.6 million a year earlier. Investing cash outflow was $162.8 million, including $149.5 million of capital expenditures; financing cash outflow was $105.7 million, including $99.9 million of net credit-line repayments and $5.6 million of dividends.
- Cash was $19.7 million at September 30, 2018. Working capital was $111 million. Current assets were $466.7 million and current liabilities $355.4 million, including $172.0 million of income taxes payable.
- No borrowings were outstanding under the credit facility at quarter-end; reported availability was approximately $162.5 million after letters of credit. On October 19, the company amended and extended the facility to October 2023, with a $185 million initial maximum and potential increases up to $350 million. It was undrawn at October 30.
- Total liabilities were $393.8 million. The balance sheet reported no long-term debt at September 30; other liabilities included capital lease and equipment-financing obligations.
- The company declared a $0.125-per-share quarterly dividend, payable November 15, 2018.
Material changes and operating drivers
- Q3 revenue increased 157% year over year, principally because infrastructure revenue rose to $237.1 million from $13.5 million. PREPA work contributed $220 million, or 93% of Q3 infrastructure revenue. For the first nine months, infrastructure revenue was $922.8 million, including $885 million from PREPA.
- Pressure-pumping revenue rose 21% in Q3 to $92.4 million, while completed stages edged down to 1,594 from 1,617. Sand revenue increased 13% to $37.0 million as volumes rose 26%, partly offset by a 10% decline in price per ton.
- For the nine months, pressure-pumping revenue increased 76% and sand revenue increased 93%. The company attributed growth to added fleets, higher sand volumes and expanded capacity.
- Q3 SG&A included a substantial credit from reversing PREPA-related bad-debt reserves after receiving payment for amounts reserved at year-end 2017. The company said it expected payment of 2018 reserved amounts after filing its Puerto Rico tax return, expected in mid-2019.
- The company recorded $4.8 million of nine-month long-lived-asset impairment, including $4.4 million associated with cementing operations after moving equipment from the Utica to the Permian.
- Related-party revenue declined to $22.7 million, or 6% of Q3 revenue, from $70.9 million, or 47%, a year earlier. Gulfport was a major related-party customer; the company extended its pressure-pumping and sand agreements with Gulfport through 2021, subject to contract terms.
Outlook, risks and contingencies
- Management expected customer budget exhaustion and extended pauses to reduce oilfield activity and pricing in Q4 2018, with a rebound in 2019 as budgets reset. It did not expect a significant cost or infrastructure reduction for what it viewed as a temporary slowdown.
- Management estimated 2018 capital expenditures of approximately $205 million; $149.5 million had been spent through September. It said cash, operating cash flow and available credit should fund operations for at least 12 months, while noting that future cash flow and capital needs are uncertain.
- PREPA is in bankruptcy proceedings, and payment depends substantially on FEMA or other funding. Contract termination, reduced work, delayed payment or failure to pay could materially affect results and cash flow. A Puerto Rico putative class action alleges electrical-grid failures caused at least $300 million in damages; Mammoth disputes the claim and could not predict the outcome.
- Other exposures include volatile oil and gas activity and pricing, expected frac-sand capacity growth that may exceed demand, rail-shipment constraints, weather disruption, customer and receivable concentration, and minimum purchase, lease and capital commitments. Disclosed commitments included $72.2 million of operating leases, $61.4 million of minimum purchases and $23.0 million of capital spending commitments.
- The nine-month effective tax rate was 51%, partly reflecting Puerto Rico income and equity-based compensation; the company recorded a $29.7 million valuation-allowance change related to foreign tax credits it did not expect to use. It also disclosed a $0.4 million reserve for uncertain state tax positions.
Important facts for investors to verify
- PREPA collections, funding and contract status; the timing and conditions for collecting the remaining reserved receivables; and the Puerto Rico lawsuit’s potential exposure.
- How much of reported earnings and Adjusted EBITDA is repeatable after the unusual bad-debt reversal, and the precise amount of the Q3 credit: the filing’s narrative describes reversals totaling $69.6 million, while its SG&A presentation reports a $68.3 million bad-debt credit and the statements/MD&A show slightly different total SG&A figures.
- Whether the $172.0 million income-tax-payable balance was paid as expected, and the effect of Puerto Rico taxes and foreign tax credits on future cash flow and effective tax rates.
- Customer and receivable concentration: one infrastructure customer represented 62% of accounts receivable at September 30, 2018; confirm collection performance and concentration after the reporting date.
- Execution and funding of the 2018 capital plan, the amended credit facility’s availability and covenants, and the company’s ability to sustain its dividend through the expected Q4 slowdown.