Business context and reporting period
Liberty Oilfield Services Inc. (the filing registrant; identified in the request as Liberty Energy Inc.) filed this unaudited Form 10-Q for the quarter ended March 31, 2019. It provides hydraulic fracturing services across North American basins, with 23 active fleets at quarter-end. The 2018 comparison is not fully like-for-like: the company completed its IPO and corporate reorganization in January 2018, and the prior-year period includes predecessor results and a shortened corporate tax period.
Financial and operating results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $535.1 million | $495.2 million | +8.1% |
| Operating income | $44.2 million | $68.6 million | -35.6% |
| Net income | $33.9 million | $54.0 million | -$20.1 million |
| Net income attributable to Liberty stockholders | $18.1 million; $0.27 basic and $0.26 diluted per share | $23.7 million; $0.34 per share | -$5.6 million |
| Adjusted EBITDA | $84.8 million | $100.2 million | -$15.4 million |
| Cash from operating activities | $49.5 million | $30.7 million | +$18.8 million |
| Capital expenditures | $66.3 million | $55.0 million | +$11.3 million |
Operating margin was approximately 8.3%, down from 13.8%. Adjusted EBITDA margin was approximately 15.8%, versus 20.2%. Operating cash flow less reported capital expenditures was negative $16.8 million; this is a simple calculation, not a company-reported non-GAAP measure.
- Revenue growth reflected 12.1% more average active fleets (22.3 versus 19.9), partly offset by a 3.6% decline in revenue per average active fleet, to approximately $24.0 million.
- Cost of services rose 13.9% to $429.3 million, outpacing revenue growth. Management cited higher material volumes and costs, personnel expenses, and repair and maintenance components. Depreciation and amortization increased 37.0%, partly reflecting additional fleets.
- Quarter-end cash was $58.7 million, down $44.6 million from year-end, primarily as receivables and unbilled revenue increased with the timing of customer payments and services. Trade receivables were $223.7 million and unbilled revenue $86.8 million.
- Debt outstanding under the term loan was $111.3 million, with a 10.1% rate; its carrying value net of discount and financing costs was $106.4 million. The ABL had no borrowings and $233.2 million of availability, after a $0.3 million letter of credit. The company reported compliance with applicable covenants.
- Total assets were $1.269 billion and total liabilities $513.4 million. Lease accounting adoption added right-of-use assets and lease liabilities; at March 31, reported finance and operating lease liabilities totaled approximately $112.9 million.
Changes, outlook, and notable items
Revenue increased, but profitability declined as operating costs grew faster than revenue. EBITDA was $82.5 million, compared with $96.6 million. Interest expense fell 35.6%, mainly because of prior-year term-loan repayments and lower debt issuance cost amortization. Cash used in investing was $66.2 million; financing used $27.9 million, including $18.4 million of share repurchases and $5.6 million of dividends and distributions.
Management expected demand for its fracturing services to remain stable for the rest of 2019, particularly for high-efficiency fleets, and said pricing could potentially improve later in the year as active fleet supply and demand balance. It noted continued oversupply of staffed fracturing fleets and referenced lower average WTI prices in Q1 2019 ($54.82) than in Q1 2018 ($62.91). The company stated that operating cash flow and available credit were expected to fund operations for at least the next 12 months. No specific earnings or revenue guidance was provided.
- Regulatory risk: Colorado Senate Bill 19-181, signed April 16, 2019, may increase regulation, delay permits, raise customer costs, and reduce demand in a state that contributes a significant portion of revenue.
- Commitments and contingencies: Proppant and chemical purchase commitments totaled $617.5 million through 2022. Some proppant agreements include shortfall fees; none were reported as of quarter-end. Ordinary-course litigation was not expected by management to have a material adverse effect.
- Customer and credit concentration: Two customers represented 22% of quarterly revenue and 23% of accounts receivable and unbilled revenue at quarter-end. Cash balances exceeded FDIC-insured limits.
- Tax receivable agreements: The company may owe holders 85% of certain realized tax savings; payments can be deferred in specified circumstances, and certain events may accelerate amounts that exceed realized benefits.
- Other items: The company adopted lease accounting on January 1, 2019 without significant impact to income, equity, or cash flows. It authorized an additional $100 million repurchase plan in January and had $98.7 million remaining authorized at quarter-end. A $0.05 per-share dividend was approved after quarter-end for payment in June.
Most important facts for investors to verify
- Whether revenue growth can translate into improved margins amid higher service, materials, and maintenance costs and industry fleet oversupply.
- Receivables collection and working-capital trends, given the quarter’s cash decline and customer concentration.
- Actual utilization, pricing, and fleet supply-demand conditions relative to management’s stable-demand and potential pricing-improvement outlook.
- The impact and implementation of Colorado SB 181 on customer activity, permitting, and Liberty’s regional revenue.
- Capacity to fund capital spending, dividends, repurchases, debt service, leases, and purchase commitments while maintaining covenant compliance and liquidity.