Business context and reporting period
Liberty Oilfield Services Inc. (ticker LBRT; the filing identifies the registrant by this name) filed this Form 10-K for the fiscal year ended December 31, 2019. It provides hydraulic fracturing services and related goods to onshore oil and gas producers, operating primarily in U.S. shale basins. The company reported 23 fleets at year-end and 24 active fleets in February 2020.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $1,990.3 | $2,155.1 |
| Operating income | $103.6 | $306.6 |
| Operating margin | 5.2% | 14.2% |
| Net income | $74.9 | $249.0 |
| Net income attributable to Liberty Inc. stockholders | $39.0 | $126.3 |
| Basic / diluted EPS attributable to Liberty Inc. stockholders | $0.54 / $0.53 | $1.84 / $1.81 |
| Operating cash flow | $261.1 | $351.3 |
| Capital expenditures | $195.2 | $258.8 |
| Adjusted EBITDA (non-GAAP) | $277.1 | $438.2 |
Revenue fell 7.6% year over year: a 13.7% decline in revenue per average active fleet was partly offset by 7.0% growth in average active fleets. Adjusted EBITDA per average active fleet decreased to $12.2 million from $20.6 million. Operating income and net income also declined sharply as service pricing and demand weakened and depreciation increased.
Fourth-quarter 2019 revenue was $398.0 million, down from $515.1 million in the third quarter. The company recorded an operating loss of $18.3 million and net loss of $18.4 million; net loss attributable to Liberty Inc. stockholders was $12.1 million, or $0.15 per basic and diluted share.
Cash, debt and liquidity
Cash and cash equivalents were $112.7 million at December 31, 2019. Operating cash flow less capital expenditures was approximately $65.9 million, calculated from reported figures, compared with $92.4 million in 2018. The company said operating cash flow and available credit were expected to fund operations for at least the next 12 months.
Term-loan principal was approximately $110.0 million ($106.1 million net of financing costs and discount on the balance sheet); the weighted-average interest rate was 9.4%. The asset-based revolver had no borrowings, a $171.1 million borrowing base and $170.8 million available, net of a letter of credit. The company reported compliance with applicable debt covenants at year-end. Contractual obligations included $51.2 million of finance-lease payments, $63.2 million of operating-lease payments, and $525.5 million of purchase commitments, primarily for proppant and related transportation.
Material changes, outlook and risks
- Management attributed the 2019 downturn to customer capital discipline, weaker service pricing and an industry oversupply of fracturing fleets. It reported progressively lower demand and pricing pressure in the second half of 2019.
- Management expected 2020 E&P capital expenditures to be below 2019 levels and did not expect service pricing to improve until actively staffed fleet supply better matched demand. It expected demand for Liberty’s high-efficiency fleets to remain strong based on customer plans and its operating footprint, and deployed its 24th fleet in January 2020.
- Management said future profitability would depend more on technology, efficiency and improved processes while pricing remained weak. The filing does not provide numerical 2020 revenue or earnings guidance.
- Customer concentration declined: the top five customers contributed approximately 35% of 2019 revenue versus 42% in 2018; no customer exceeded 10% of 2019 revenue. A $1.1 million bad-debt provision was recorded for a customer in bankruptcy. One customer represented 12% of year-end accounts receivable and unbilled revenue.
- Risks include commodity-price and activity volatility, continued fleet oversupply, customer credit losses, significant capital and maintenance needs, and environmental, safety and hydraulic-fracturing regulation. Colorado SB 181 and potential local restrictions could affect customer activity and demand in a key operating state.
- Tax receivable agreement liabilities were $50.3 million at year-end; payments generally give designated holders 85% of specified realized tax savings. The filing estimated that a hypothetical termination at December 31, 2019 could have required approximately $79 million in aggregate immediate payments. Ordinary-course legal matters were not expected by management to have a material adverse effect.
- The company paid $0.20 per Class A share in 2019 and announced a $0.05-per-share dividend for March 2020. Future dividends are discretionary. The 2018 accidental fleet fire resulted in an $11.5 million net gain from insurance proceeds and equipment losses; there was no impairment recognized in 2019.
Important facts for investors to verify
- Whether pricing, staffed-fleet supply, utilization and revenue per fleet improved or deteriorated after year-end, against management’s 2020 outlook.
- The collectibility and timing of customer receivables, particularly the bankrupt customer exposure and related-party receivable payment terms.
- Actual cash requirements under proppant and other purchase commitments, leases, debt repayments and tax receivable agreements.
- The financial impact of Colorado and other regulatory changes on customer activity, permitting and demand for Liberty’s services.
- Comparability of reported results: the company’s post-IPO structure includes non-controlling interests, and Adjusted EBITDA is a non-GAAP measure.