Solaris Oilfield Infrastructure, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; filed August 1, 2018. The filing identifies the registrant as Solaris Oilfield Infrastructure, Inc. (the request metadata names Solaris Energy Infrastructure, Inc.). Unless otherwise noted, dollar figures below are in millions; the filing reports financial statements in thousands.
Business context
Solaris provides mobile proppant-management systems and related field services, operates the Kingfisher transload facility in Oklahoma, and offers proppant inventory software. Its results are tied to oil and gas drilling and completion activity. The company reported a fleet of 131 systems and an average of 108.2 systems deployed during Q2.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $47.2 | $13.4 | $83.2 | $23.7 |
| Operating income | $24.8 | $1.6 | $40.3 | $6.4 |
| Net income | $21.4 | $1.1 | $34.9 | $5.8 |
| Net income attributable to Solaris | $10.6 | $0.2 | $16.5 | $0.2 |
| Adjusted EBITDA (non-GAAP) | $30.0 | $7.5 | $52.0 | $13.6 |
Q2 operating margin was approximately 52.6%, versus 11.8% a year earlier; six-month operating margin was 48.5%, versus 27.1%. Q2 basic and diluted EPS were $0.40; six-month EPS was $0.64 basic and $0.63 diluted. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results.
- Revenue mix: Q2 rental revenue was $35.1 million, system services $9.9 million, transloading $1.4 million, and software services $0.7 million. The latter two businesses were not represented in the prior-year quarter.
- Cash flow: First-half operating cash flow was $28.6 million. Investing cash use was $86.1 million, including $86.2 million of reported PP&E investment; financing cash use was $0.5 million. Cash declined $58.0 million to $5.4 million.
- Liquidity: Current assets were $49.4 million and current liabilities $21.9 million at June 30, giving a current ratio of about 2.3. Cash was down from $63.4 million at year-end 2017.
- Debt and obligations: No borrowings were outstanding under the credit facility. Capital lease obligations totaled $0.2 million. The company had $70 million of stated borrowing availability—$50 million under an advancing term loan and $20 million under a revolver—subject to facility terms and borrowing-base limits. A $52.3 million Tax Receivable Agreement payable was recorded; this is a tax-related liability, not credit-facility borrowing.
Changes versus the prior period
Q2 revenue rose 252% year over year, driven mainly by a 192% increase in system revenue days and higher rental rates. Six-month revenue rose 251%. Management attributed improved earnings primarily to fleet deployment, utilization, and pricing. Costs also increased: Q2 system-service costs exceeded the related service revenue, and management cited higher third-party trucking prices, field labor, travel, and transportation. Depreciation increased as the fleet expanded. Prior-year Q2 operating expenses included substantial one-time IPO-related costs, making comparisons less like-for-like.
PP&E, net, rose to $234.9 million from $151.2 million at year-end, reflecting fleet investment and the Kingfisher buildout. First-half capital spending was substantially higher than in 2017.
Outlook, risks, and unusual items
- Management expected drilling and completion demand to continue increasing if oil and gas prices stabilized or rose; it warned that lower prices could reduce customer activity and demand. No quantified revenue or earnings guidance was provided.
- The seven-year Kingfisher customer contract began in January 2018. Initial transloading operations commenced that month; the filing expected phase-one high-efficiency silo storage and transloading construction to be completed by August 2018. The filing also says rail and storage construction was completed in July.
- The company said operating cash flow and available credit were expected to fund operations for at least the next 12 months. The credit agreement permits 2018 capital expenditures up to $225 million; first-half PP&E investment was $86.2 million. The company reported compliance with all credit covenants at June 30.
- Railtronix acquisition-related performance awards resulted in $1.625 million of expense recognized and paid in Q1; a further $0.875 million was not recognized because achievement was not considered probable. Other Kingfisher construction-related performance awards and commitments were also recorded.
- Customer concentration remains relevant: three customers represented 39% of Q2 revenue, and three customers represented 40% of accounts receivable at June 30. Suppliers were also concentrated. The company cited commodity-driven activity, customer defaults, transportation availability and cost, competition, capital access, construction execution, and customer retention among its risks.
- The Tax Act accounting remained provisional, with possible revisions during the permitted measurement period. The company reported no material pending legal matters, no material change to previously disclosed risk factors except potential director conflicts, and effective disclosure controls.
Most important facts for investors to verify
- Whether system utilization, rental pricing, and service-line economics remain strong as fleet and activity levels grow.
- Whether the Kingfisher phase-one buildout was completed as expected and whether throughput volumes support the facility’s costs and commitments.
- How capital spending, working-capital needs, and the sharp decline in cash evolve; confirm actual borrowing availability and covenant headroom.
- Whether customer and supplier concentration, receivable collection, and oilfield activity trends create heightened operating or credit risk.
- How the $52.3 million Tax Receivable Agreement liability and any subsequent exchanges affect future cash obligations and tax benefits.
- How much of reported earnings growth is supported by recurring operations versus non-GAAP adjustments and unusual acquisition or public-company costs.