Mammoth Energy Services, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Mammoth provides electric infrastructure services and oilfield services, including pressure pumping and sand. Amounts below are in U.S. dollars; financial statement figures are in millions unless indicated otherwise.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $181.8 | $533.6 | $444.0 | $1,027.8 |
| Operating income (loss) | $(25.8) | $97.7 | $1.4 | $200.4 |
| Net income (loss) | $(10.9) | $42.7 | $17.4 | $98.2 |
| Diluted EPS | $(0.24) | $0.95 | $0.39 | $2.18 |
| Adjusted EBITDA (non-GAAP) | $8.6 | $148.6 | $91.3 | $279.4 |
- Q2 revenue fell 66%; six-month revenue fell 57%. The main driver was the wind-down of Puerto Rico grid restoration work. Infrastructure revenue declined 88% in Q2 and 78% for the half year versus 2018.
- Q2 cost of revenue, excluding depreciation and related charges, was 92% of revenue versus 64% a year earlier; for the half year it was 80% versus 65%. Q2 operating margin was negative, and six-month operating income was close to break-even.
- Oilfield businesses also weakened. Q2 pressure-pumping revenue declined 16%, with an average 2.7 of six fleets active versus 4.3 a year earlier. Sand revenue fell 24%, principally as average selling price per ton decreased 30% to $30.09. Six-month sand production costs declined 31% year over year, but lower selling prices compressed segment economics.
- Six-month operating cash flow was a use of $101.9 million, compared with a source of $226.5 million in 2018. Management attributed the deterioration primarily to lower infrastructure activity and timing of tax payments and receivable collections. Investing cash outflow was $28.4 million; financing provided $69.8 million, mainly from net revolver borrowings.
- Cash was $7.2 million at June 30, down from $67.6 million at year-end. Working capital was $299 million. Revolver debt was $82.0 million, with $93.5 million of borrowing capacity after letters of credit; the company reported compliance with its financial covenants. At July 31, borrowings were $85.5 million and reported capacity was $90.0 million.
- Total assets were $1.109 billion and total liabilities $345.7 million at quarter-end. Lease adoption added operating lease right-of-use assets of $52.2 million and lease liabilities of $52.1 million to the June balance sheet.
Material changes, outlook, and key risks
- Puerto Rico work under the PREPA contracts ended March 31, 2019. PREPA owed approximately $227.4 million for services, excluding $29.0 million of accrued interest. The filing says payment depends substantially on FEMA or other funding and warns that nonpayment could materially harm results and cash flow.
- Reported six-month pre-tax income included $29.0 million of interest charged on delinquent PREPA receivables. This is a significant unusual earnings component; collection and recoverability remain important uncertainties.
- Management reported infrastructure backlog of about $595 million, all in the continental U.S., but approximately $576 million is under agreements without minimum purchase commitments and may be canceled or delayed. Backlog is not a GAAP measure and is not a firm revenue guarantee.
- Management described continued oilfield pricing pressure and lower utilization, expected these trends to persist in the second half of 2019, and did not anticipate near-term material pricing increases. Cementing, acidizing, and flowback operations were temporarily shut down after quarter-end because of market conditions; the financial impact was not yet estimable.
- The 2019 capital expenditure budget was cut 49%, from $80 million to $41 million. The board suspended the quarterly cash dividend in response to oilfield conditions, following $11.2 million of dividends paid in the first half.
- Sand markets were oversupplied, particularly in finer grades; the Muskie facility remained idled and Piranha and Taylor were operating at 60%–70% capacity. Management cited customer spending, commodity prices, pricing competition, and utilization as material sensitivities.
- Other material contingencies include a federal investigation concerning PREPA contract awards; a Puerto Rico business class action alleging at least $300 million in damages; municipal tax disputes; an overtime lawsuit; and two securities class actions. The company said outcomes and potential financial impacts could not be predicted.
- Customer and related-party concentration merits attention: related-party revenue was 26% of Q2 revenue and 24% for the first half, substantially from Gulfport. A significant portion of pressure-pumping revenue depends on a Gulfport contract expiring in December 2021.
Important facts for investors to verify
- PREPA receivable aging, funding arrangements, subsequent collections, accrued interest, and any effects of the investigation or litigation.
- Actual utilization, pricing, and profitability after the post-quarter shutdowns, especially in pressure pumping and other oilfield services.
- Whether the $595 million infrastructure backlog converts to revenue, given the large noncommitted portion, and whether continental U.S. work replaces Puerto Rico activity.
- Liquidity and covenant headroom under the revolver, operating cash flow trends, and the ability to fund operations while cash balances remain low.
- Progress on the disclosed lawsuits and investigation, potential liabilities, and the consequences of the dividend suspension.