Liberty Oilfield Services Inc. (LBRT) — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The filing identifies the registrant as Liberty Oilfield Services Inc. It provides hydraulic fracturing services across several U.S. basins and reported one operating segment.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $515.1 million | $558.8 million | $1,592.4 million | $1,682.0 million |
| Operating income | $26.6 million | $82.2 million | $121.9 million | $265.0 million |
| Net income | $18.8 million | $66.4 million | $93.3 million | $215.1 million |
| Net income attributable to company stockholders | $11.0 million | $34.1 million | $51.2 million | $107.4 million |
| Diluted EPS | $0.15 | $0.49 | $0.71 | $1.53 |
| Adjusted EBITDA | $70.0 million | $117.5 million | $247.0 million | $366.3 million |
- Q3 operating margin was approximately 5.2%, versus 14.7% a year earlier; net margin was approximately 3.7%, versus 11.9%. Q3 Adjusted EBITDA margin was approximately 13.6%, versus 21.0%.
- For the nine months, operating margin was approximately 7.7%, versus 15.8%; Adjusted EBITDA margin was approximately 15.5%, versus 21.8%.
- Q3 revenue declined 7.8% as revenue per average active fleet fell 11.8%, partly offset by 4.5% more average active fleets. Nine-month revenue fell 5.3%, with revenue per average fleet down 12.4% and average fleet count up 8.1%.
- Management attributed lower revenue per fleet to industry oversupply of staffed fracturing equipment, weaker activity and pricing pressure. Cost of services rose slightly in Q3 despite lower revenue; nine-month costs increased 2.0%. Higher personnel, repairs and maintenance, and depreciation contributed, partly offset by lower materials costs.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $245.1 million, compared with $223.6 million in 2018. Investing cash outflow was $157.7 million, mainly capital spending; financing cash outflow was $50.7 million. Cash increased $36.7 million to $140.0 million.
- Capital expenditures were $158.2 million for the nine months. The company deployed one fleet in the period, compared with three in the prior-year period.
- At September 30, 2019, term-loan principal was $110.4 million, with a stated borrowing rate of 9.7%. The $250 million asset-based revolver had no borrowings and $203.8 million of availability, subject to borrowing-base limits. The facilities mature in 2022. The company reported covenant compliance.
- Balance-sheet current assets were $496.3 million and current liabilities $254.0 million. These include current finance and operating lease liabilities; lease liabilities totaled $52.2 million finance and $56.9 million operating, net of imputed interest.
- During the nine months, the company paid $0.15 per share in Class A dividends and repurchased $18.4 million of shares. In October, the board approved another $0.05-per-share quarterly dividend, payable in December 2019.
Outlook, risks and unusual items
- Management anticipated a potentially sharper Q4 2019 completion slowdown than in Q4 2018, citing operator capital constraints and fixed spending budgets. It expected gaps in schedules and lower fleet utilization. Management saw strong initial customer demand indications for Liberty fleets at the start of 2020, but said excess fleet supply continued to constrain pricing and did not expect pricing improvement until staffed supply better matched demand.
- Industry activity is exposed to oil and gas prices, customer spending, capital availability, basin takeaway capacity, competition and equipment supply. Q3 WTI averaged $56.34 per barrel; North American horizontal rig count averaged 802, both below Q3 2018 levels cited in the filing.
- Supply agreements committed the company to approximately $531.7 million of future proppant, transport and chemical purchases, with commitments extending through and beyond 2023. Shortfall fees accrued were $0.5 million.
- The company reported $42.1 million of tax receivable agreement liabilities. Such payments generally entitle holders to 85% of specified realized or deemed tax savings; payments may accelerate or exceed actual benefits in certain circumstances and could pressure liquidity, particularly in a change of control.
- A related-party affiliate owed $13.3 million under amended payment terms, including $11.1 million classified as long-term, bearing 13% interest and due by October 31, 2020. Legal matters were described as ordinary-course matters not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- The company adopted lease accounting rules effective January 1, 2019, recognizing right-of-use assets and lease liabilities; management reported no significant impact on income, equity or cash flows. No numeric full-year earnings or revenue guidance was provided.
Key facts for investors to verify
- Whether utilization and pricing stabilize after the expected Q4 slowdown, and whether the stated 2020 demand outlook translates into deployed fleets and revenue.
- How margins and Adjusted EBITDA trend as service pricing, repairs and maintenance, personnel costs and depreciation evolve.
- Whether operating cash flow remains sufficient to fund capital spending, lease payments, dividends, repurchases and debt service.
- The borrowing-base availability and covenant triggers under the credit facilities, alongside the 2022 term-loan maturity and 9.7% stated rate.
- Collection timing and recoverability of the affiliate receivable, and the eventual cash cost and timing of tax receivable agreement obligations.
- The company’s exposure to long-term supply commitments if customer activity or fleet utilization weakens further.