Business context and reporting period
Solaris Oilfield Infrastructure, Inc. (the registrant named in the filing) filed this unaudited Form 10-Q for the quarter ended September 30, 2019. It provides mobile proppant and chemical management systems, related field and logistics services, transloading at its Kingfisher, Oklahoma facility, and inventory software for the oil and gas industry. Figures below are in millions of dollars unless otherwise noted.
Financial performance and condition
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $59.6 | $56.7 | $178.8 | $139.9 |
| Operating income | $22.8 | $30.8 | $77.8 | $71.1 |
| Net income | $19.1 | $26.4 | $65.0 | $61.3 |
| Net income attributable to Solaris | $11.4 | $13.0 | $37.0 | $29.5 |
| Diluted EPS | $0.36 | $0.49 | $1.33 | $1.12 |
| Adjusted EBITDA (non-GAAP) | $31.2 | $36.5 | $101.5 | $88.5 |
- Q3 performance weakened: revenue rose 5%, but operating income fell 26%, net income fell 28%, and Adjusted EBITDA fell 15% year over year. Operating margin was about 38% versus 54%.
- Nine-month results improved: revenue increased 28%, operating income 9%, net income 6%, and Adjusted EBITDA 15%. Operating margin was about 44% versus 51%.
- Q3 system rental revenue declined 13% to $36.6 million, while system services rose 50% to $18.2 million and transloading revenue rose to $4.4 million from $2.0 million. System services costs were $21.1 million, exceeding that segment’s revenue.
- Nine-month revenue growth came from rentals (+9%), system services (+65%) and transloading (+297%); software services fell 30%. Transloading revenue included recognition of deferred revenue: $3.2 million in Q3 and $9.5 million year to date.
Cash, liquidity and debt: Cash was $51.7 million at September 30, up from $25.1 million at December 31, 2018. Current assets were $108.5 million and current liabilities $35.1 million (about 3.1x current ratio). Nine-month operating cash flow was $88.5 million; investing cash use was $32.2 million, including $32.9 million of property and equipment investment. The company had no credit-facility borrowings, with $50 million available under its revolving facility, and reported compliance with covenants. Total liabilities were $114.6 million, including a $68.0 million Tax Receivable Agreement liability and lease liabilities. The company paid $0.10 per Class A share per quarter during the period.
Material changes, outlook and risks
- Management attributed weaker Q3 rental activity to lower rig and completion activity, efficiency gains, and customers having spent a disproportionate share of budgets in the first half. The U.S. land rig count was down 13% year over year in Q3; management said it continued declining in Q4 and warned that lower spending could further reduce equipment demand. Solaris averaged 115 fully utilized mobile proppant systems in Q3, down 7% sequentially and 10% year over year.
- The fleet comprised 166 mobile proppant systems and 14 chemical systems. Management did not expect to add systems for the rest of 2019. It stated operating cash flow and available credit were expected to fund operations for at least 12 months; no specific earnings or revenue guidance was provided.
- Kingfisher contract: After quarter-end, the customer notified Solaris of its intent to terminate the sand storage and transloading agreement effective December 31, 2019. Solaris expected to recognize $17.6 million of deferred revenue over remaining performance obligations through year-end and anticipated a $1.7 million payment in 2020. The company was discussing capacity use with potential customers and warned that the facility’s assets could face impairment if recoverability worsens.
- Customer concentration is material: two customers represented 26% of Q3 revenue, and four customers represented 50% of receivables at quarter-end. One supplier represented 77% of accounts payable. The filing also identifies exposure to oil and gas activity, commodity-price-driven customer spending, customer defaults, competition and financing availability.
- Disclosure controls and procedures were reported ineffective as of September 30 because a previously identified material weakness had not yet been fully remediated and tested. Management said remediation measures had been implemented by the filing date, but further operating-effectiveness testing remained necessary.
- Other notable items include $528,000 of debt issuance costs written off in connection with the 2019 credit agreement and adoption of lease accounting, which added $8.0 million of operating lease right-of-use assets at quarter-end.
Important facts for investors to verify
- Whether the Kingfisher customer terminates as expected, whether replacement volumes or customers are secured, and whether an impairment charge results.
- How much reported transloading revenue and earnings depended on deferred-revenue recognition and whether future facility activity can replace that contribution.
- Whether management’s control-remediation actions pass testing and the previously reported material weakness is formally resolved.
- Whether system-service economics improve, given costs exceeded system-services revenue in Q3, and whether reduced rig activity further pressures utilization.
- Customer and supplier concentration, the $68.0 million Tax Receivable Agreement liability, and compliance with credit-facility terms as business conditions change.