Ranger Energy Services, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The filing combines predecessor-company results before the August 16, 2017 IPO and reorganization with Ranger Energy Services, Inc. results afterward; acquisitions and the change in reporting structure make year-over-year comparisons less directly comparable.
Business context
Ranger provides high-spec well-service rigs and related services, including wireline, snubbing and fluid management, and modular natural-gas processing equipment. It reported two segments: Well Services and Processing Solutions. Following its IPO, the company acquired 49 rigs and related assets in the ESCO Acquisition; its fleet totaled 129 rigs, including those acquired.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2017 | $41.1 million | $103.8 million |
| Revenue, 2016 | $16.1 million | $26.5 million |
| Operating income (loss), 2017 | $(4.8) million | $(15.2) million |
| Operating income (loss), 2016 | $0.3 million | $(1.6) million |
| Consolidated net income (loss), 2017 | $(9.5) million | $(21.5) million |
| Adjusted EBITDA, 2017 | $3.0 million | $7.6 million |
Well Services generated $39.0 million of Q3 revenue and $97.9 million for the nine-month period; Processing Solutions generated $2.1 million and $5.9 million, respectively. Cost of services was 82% of revenue in Q3 and 80% for the nine months, compared with 73% and 71% in the respective 2016 periods. The resulting gross margins before depreciation and amortization were approximately 18% and 20%, versus 27% and 29%. Adjusted EBITDA is a non-GAAP measure.
Q3 basic and diluted loss per Class A share was $0.42. The consolidated net loss includes predecessor and non-controlling interests; the loss attributable to Ranger Energy Services, Inc. was $3.5 million for both the quarter and nine-month period.
Cash, debt and liquidity
- Cash and cash equivalents were $20.7 million at September 30, 2017, versus $1.6 million at year-end 2016. Working capital was $11.3 million.
- For the nine months, operating cash flow was negative $7.6 million; investing cash flow was negative $64.1 million, including $47.7 million for the ESCO Acquisition and $16.4 million in property and equipment purchases. Financing cash flow was positive $90.8 million, including IPO proceeds.
- Long-term debt was $7.0 million, consisting of ESCO seller notes bearing 5% interest; $1.2 million was current. Capital lease obligations totaled $9.0 million, of which $7.6 million was current.
- The company reported no borrowings under its new $50 million revolving credit facility and approximately $20 million of borrowing capacity under the borrowing-base formula. It said cash, expected operating cash flow and facility availability should cover liquidity needs for the next 12 months; it was in covenant compliance at quarter-end.
- Contractual commitments included $40.0 million remaining under agreements for new rigs, expected to be paid during the remainder of 2017 and 2018.
Changes, outlook and risks
- Revenue increased 155% in Q3 and 292% for the nine months, primarily reflecting a larger rig fleet and acquisitions. Q3 Well Services rig hours rose to approximately 59,000 from 13,000; nine-month hours rose to approximately 137,500 from 30,000.
- Operating results weakened despite revenue growth: higher service costs, G&A and depreciation contributed to operating losses. Interest expense rose, including the make-whole cost associated with settling related-party bridge loans, which were converted to equity in connection with the IPO.
- Management cited Hurricane Harvey-related lost revenue and delayed rig deliveries, six ESCO rigs temporarily taken out of service during integration, and startup costs for Permian and wireline operations. ESCO contributed $5.4 million of reported revenue after acquisition.
- No quantified financial guidance was provided. Management identified future performance as dependent on industry activity, oil and gas prices, customer demand, pricing, utilization, costs, capital spending and access to financing.
- Customer concentration is material: two customers accounted for 11.5% and 12.3% of Q3 revenue and 13.4% and 18.9% of nine-month revenue. Those customers represented 21.7% of receivables at September 30.
- Disclosure controls were reported ineffective at quarter-end due to a previously identified material weakness involving insufficient qualified accounting personnel, GAAP application, complex transactions and financial close/reporting. The company said it had recruited additional finance and accounting staff.
- The Tax Receivable Agreement generally provides certain existing owners 85% of specified realized or deemed tax savings. Early termination or specified transactions may accelerate payments, potentially beyond benefits actually realized. The company also noted commodity-price exposure, customer credit risk and restrictive credit-facility covenants.
Key facts for investors to verify
- How much of reported growth and utilization reflects organic demand versus acquisitions, fleet additions and changes in the reporting entity.
- Whether margins and cash generation improve after integration, Harvey-related disruption, startup costs and IPO-related expenses.
- The timing and funding of the $40.0 million remaining rig-purchase commitment, and actual borrowing-base availability under the revolver.
- Progress in remediating the material weakness and the effect of customer concentration on collections and liquidity.
- The eventual ESCO purchase-price allocation and the potential amount, timing and acceleration provisions of Tax Receivable Agreement payments.