Liberty Oilfield Services Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The filing is unaudited. The company provides hydraulic fracturing services and related goods across North American basins. Results were heavily affected by COVID-19, lower oil prices, and reduced customer activity.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $147.5 million | $515.1 million | $708.2 million | $1,592.4 million |
| Operating income (loss) | $(55.4) million | $26.6 million | $(122.7) million | $121.9 million |
| Net income (loss) | $(49.0) million | $18.8 million | $(112.4) million | $93.3 million |
| Net income (loss) attributable to company stockholders | $(34.5) million | $11.0 million | $(78.6) million | $51.2 million |
| Adjusted EBITDA, non-GAAP | $(3.1) million | $70.0 million | $37.9 million | $247.0 million |
- Q3 operating margin was approximately -37.6%, versus 5.2% a year earlier; net margin was approximately -33.2%, versus 3.7%. Nine-month operating margin was approximately -17.3%, versus 7.7%.
- Q3 average active fleets fell 59.1% to 9.4, and revenue per average active fleet declined 29.9% to $15.7 million. For the nine-month period, average active fleets decreased 46.1% to 12.3 and revenue per average active fleet fell 17.6% to $57.6 million.
- Cash flow: Nine-month operating cash flow was $70.0 million, compared with $245.1 million in 2019. Investing cash outflow was $81.3 million, including $82.8 million of property and equipment purchases; financing cash outflow was $16.6 million. Cash declined $27.9 million to $84.8 million.
- Liquidity and debt: Current assets were $337.6 million and current liabilities $166.0 million. Term-loan principal outstanding was $108.7 million ($105.9 million net of discounts and costs); the weighted-average interest rate was 8.6%. There were no ABL borrowings, a $0.8 million letter of credit, and $69.4 million of remaining availability against a $70.2 million borrowing base. The company reported compliance with covenants and no financial covenant testing requirement at quarter-end.
- Total assets were $1.06 billion and total equity was $676.3 million. Finance and operating lease liabilities were also substantial, with current and noncurrent portions reported separately on the balance sheet.
Material changes versus prior period
- Revenue dropped 71.4% in Q3 and 55.5% for the nine months year over year. Lower activity and weaker revenue per fleet drove the change; cost reductions only partly offset the decline.
- Q3 operating results shifted from profit to loss. Nine-month results likewise moved from operating and net income to losses. Depreciation and amortization increased, while interest expense was broadly stable.
- The company recorded $10.2 million of severance and related costs for the nine months, including costs associated with workforce reductions and furloughs. It also recorded a $4.7 million provision for credit losses.
- Operating cash flow and capital spending were both lower year over year. The company suspended its quarterly dividend in April and made no share repurchases during the first nine months of 2020.
Outlook, transactions, and risks
- Management said it anticipated Q4 2020 activity to improve over Q3, but expected demand to remain below pre-pandemic levels at least through early 2021. It could not predict when demand or pricing would meaningfully increase. Management cited persistent uncertainty around COVID-19, oil demand, supply, commodity prices, and customer capital budgets.
- WTI averaged $40.89 per barrel in Q3 2020, compared with $27.96 in Q2 2020 and $56.34 in Q3 2019. Management reported an average of $40.01 through October 23, 2020. Domestic onshore rig count was 274 as of October 23, versus a Q3 average of 241.
- Cost actions included reducing staffed fleets and headcount by approximately 50%, cutting compensation and operating costs, suspending the 401(k) match and dividend, and reducing the 2020 capital expenditure budget by approximately 50% to $70–$90 million. No employees remained on furlough at September 30.
- Management believed available liquidity and operating cash flow would fund operations for at least the next 12 months. Schlumberger had agreed to deliver at least $60 million of defined working capital, or cure a shortfall, upon closing of the proposed OneStim acquisition.
- The proposed OneStim acquisition, announced August 31, was expected to close in Q4 2020, subject to stockholder approval and other conditions. Consideration included up to 66,326,134 Class A shares and a Canadian buyer note; Schlumberger was expected to own approximately 37% of outstanding common stock after closing if the note were settled in shares. Risks include closing conditions, integration and synergy execution, dilution, and possible change-of-control issues under credit facilities.
- Supply agreements carried forecast future commitments of $143.1 million. Potential shortfall fees could be significant if minimum purchases are missed and suppliers do not amend terms; management did not expect significant fees based on forecast activity.
- Two securities class actions relating to the IPO sought unspecified damages; the company said it intended to defend them. Management did not believe other proceedings in aggregate would materially affect its financial position or results, but could not predict litigation outcomes.
- Other risks include customer concentration and collection exposure, ongoing pandemic effects, hydraulic-fracturing regulation and financing access, potential future asset impairment, and a 2020 cybersecurity attack that disrupted certain internal systems briefly but was not judged to have materially affected operations.
Most important facts for investors to verify
- Whether fleet utilization, pricing, and revenue improve as management anticipated, and whether recovery persists beyond Q4 2020.
- Cash generation, capital spending, and borrowing-base availability as customer receivables and activity levels change.
- OneStim closing terms, share issuance and dilution, working-capital delivery, lender consent, and post-close integration results.
- Customer concentration, credit-loss exposure, and the company’s ability to meet supply commitments without shortfall fees.
- Developments in the securities lawsuits, regulatory environment, and any impairment indicators affecting equipment.