Ranger Energy Services, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2017. The statements are unaudited combined consolidated results of the predecessor businesses, not a full-period operating history of Ranger Energy Services, Inc. Ranger completed its IPO and related reorganization on August 16, 2017; the filing includes those events as subsequent events.
Business context
Ranger provides high-spec well service rigs and related services, including workover, completion support, wireline, snubbing, fluid management and equipment rentals. Its Processing Solutions segment rents and operates modular natural-gas processing equipment. Operations span major U.S. oil and gas basins. Results are affected by E&P activity, commodity prices, customer demand, service pricing and costs.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $33.7 million | $5.6 million | $62.8 million | $10.4 million |
| Operating loss | $(4.9) million | $(0.6) million | $(10.5) million | $(1.9) million |
| Net loss | $(6.0) million | $(0.7) million | $(12.1) million | $(2.1) million |
| Adjusted EBITDA (non-GAAP) | $3.4 million | $0.2 million | $4.5 million | $(0.2) million |
| Cash used in operating activities | Not stated for quarter | Not stated for quarter | $(8.6) million | $(3.4) million |
| Cash used in investing activities | Not stated for quarter | Not stated for quarter | $(10.5) million | $(2.3) million |
Revenue growth was driven mainly by Well Services, reflecting higher workover activity and rig hours, and acquisitions and fleet expansion. Well Services revenue rose to $31.7 million in Q2 and $59.0 million for the half-year; Processing Solutions generated $2.0 million and $3.8 million, respectively. Management reported Well Services rig hours increased 429% year over year in Q2 and 362% for the first half; average monthly hours per rig were approximately 213 in Q2 and 207 for the half-year.
Cost of services was 78% of revenue in Q2 2017 versus 66% in Q2 2016, and 80% for the first half versus 69%. Thus, service contribution before depreciation and amortization was approximately 22% of revenue in Q2 and 20% for the half-year, down from approximately 34% and 31%, respectively. Higher activity was accompanied by increased personnel, travel, repair, maintenance and supply costs. G&A was $8.4 million in Q2 and $15.6 million for the half-year, reflecting business expansion and, among other items, severance, equity compensation and IPO-related costs. Depreciation and amortization was $4.0 million and $7.6 million, respectively. Interest expense was $1.1 million and $1.6 million.
Balance sheet, debt and liquidity
- At June 30, 2017, cash and cash equivalents were $2.4 million, restricted cash was $1.6 million, current assets were $31.6 million and total assets were $165.3 million.
- Current liabilities were $58.4 million; working capital was a deficit of $26.8 million, compared with positive working capital of $10.4 million at December 31, 2016. The filing attributes the deterioration mainly to increased related-party borrowing and current debt maturities.
- June 30 balances included $10.5 million of current long-term debt, $17.6 million of related-party debt on the balance sheet, and $8.1 million of capital lease obligations. The related-party debt note separately reports $17.1 million outstanding, an inconsistency to verify.
- Operating cash outflow and capital spending exceeded cash on hand: first-half cash used in operations was $8.6 million and cash used in investing was $10.5 million. Financing provided $19.9 million, including $17.6 million of related-party borrowing and $4.0 million of parent contributions, partly offset by debt and lease payments.
- At June 30, the predecessor was out of compliance with certain financial covenants; lenders granted a waiver. Management said it did not expect compliance within the following 12 months, so debt was classified as current.
- The August IPO generated $85.0 million gross proceeds. The filing reports net proceeds of $80.6 million in one section and $80.2 million in another. It says proceeds funded debt repayment, the ESCO purchase, offering costs and employee bonuses. After the offering, the bridge loan was converted to equity and the prior borrowings were repaid. The company entered a $50 million asset-based revolver with approximately $20 million of borrowing capacity. Management expected cash on hand, operating cash flow and revolver availability to meet liquidity needs for 12 months.
Material changes, outlook and risks
- Acquisitions and capacity: After quarter-end, Ranger acquired 49 high-spec rigs and related assets from ESCO for estimated consideration of $59.7 million, including $47.7 million cash, $7.0 million seller notes and $5.0 million stock. The company also had agreements to acquire additional rigs: 14 had been acquired by June 30, with 23 more expected during the remainder of 2017, for approximately $43.5 million total; about $40.0 million remained payable in 2017 and 2018.
- Customer concentration: For the first half, two Well Services customers accounted for approximately 14.5% and 24.7% of total revenue. Together they represented approximately 21.2% of receivables at June 30.
- Market and financing exposure: Demand depends on oil and gas industry activity and commodity prices. The company did not hedge indirect commodity-price exposure or interest-rate exposure. At June 30, reported debt of $28.0 million carried a weighted average interest rate of 11.09%; a one-percentage-point rate change was estimated to affect annual interest expense by about $0.3 million.
- Controls: Disclosure controls were reported ineffective at June 30 because of a material weakness involving insufficient qualified accounting personnel, GAAP application, complex transactions and financial close and reporting. Additional finance and accounting staff had been recruited, and remediation remained under evaluation.
- Other matters: The filing reports $1.0 million of severance liability. It says there was no material litigation and management did not expect existing matters to materially affect results. The new tax receivable agreement generally requires payment to certain holders of 85% of realized or deemed tax savings and may accelerate payments in specified circumstances. The company gave no specific revenue, earnings or margin guidance; it cautioned that interim results may not indicate future results.
Important facts for investors to verify
- Reconcile the stated $80.6 million versus $80.2 million IPO net proceeds and the use-of-proceeds figures, including the reported residual cash.
- Reconcile June 30 related-party debt of $17.6 million on the balance sheet with the $17.1 million reported in the related-party note.
- Track post-IPO liquidity, actual availability under the borrowing-base revolver, covenant compliance and capital needs for planned rig purchases.
- Assess whether higher rig utilization and acquisition-driven revenue growth can support improved service margins and operating profitability.
- Monitor customer concentration, oilfield activity and pricing, ESCO integration and purchase-accounting estimates, and remediation of the material weakness.