ProFrac Holding Corp. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial statement amounts are generally in millions. ProFrac provides hydraulic fracturing, proppant, manufacturing and related services to North American oil and gas producers.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $574.2 | $696.7 | $2,140.9 | $1,631.5 |
| Operating income | $20.5 | $164.7 | $180.9 | $287.2 |
| Net income (loss), consolidated | $(17.9) | $139.3 | $37.3 | $226.7 |
| Net income (loss) attributable to ProFrac Holding Corp. | $(24.5) | $44.0 | $(5.4) | $50.6 |
| Class A EPS, basic and diluted | $(0.21) | $1.07 | $(0.12) | $1.24 |
| Adjusted EBITDA | $149.3 | $252.1 | $578.9 | $547.8 |
- Q3 operating margin was approximately 3.6%, compared with 23.6% a year earlier; Q3 Adjusted EBITDA margin was approximately 26.0%, compared with 36.2%. These percentages are calculated from reported figures.
- For the nine months, operating cash flow was $510.8, investing cash outflow $692.7 and financing cash inflow $169.8. Cash, cash equivalents and restricted cash declined $12.1 to $25.8.
- At September 30, total debt principal was $1,080.9, including $122.8 due within 12 months. ABL availability was approximately $116.0 after outstanding borrowings and letters of credit; the company reported compliance with debt covenants.
- Liquidity excluding Flotek was reported as $136.6: $20.6 cash and cash equivalents plus $116.0 of ABL availability. The filing says management expects available cash, operating cash flow and ABL capacity to cover obligations and capital expenditures for at least 12 months, while noting covenant-compliance efforts are ongoing and not assured.
Material changes versus comparable periods
- Q3 revenue fell $122.5 year over year and $135.0 sequentially. Management attributed the annual decline mainly to fewer average active stimulation fleets and lower utilization.
- Q3 operating income and Adjusted EBITDA declined substantially year over year. Higher interest expense ($40.2 versus $16.3), depreciation and legal costs weighed on results; interest expense also reflected higher average debt and interest rates.
- Nine-month revenue rose $509.4 year over year, while consolidated net income declined $189.4. Stimulation services revenue increased over the nine-month period, reflecting higher average fleet levels and pricing early in 2023; proppant revenue growth primarily reflected acquisitions.
- Q3 stimulation services revenue was $489.5 versus $668.6 a year earlier. Proppant production revenue was $98.4 versus $24.7, including the effect of acquisitions; manufacturing revenue was $43.8 versus $48.7.
- Performance Proppants, acquired in February for stated total consideration of $462.5, contributed $142.2 revenue and $60.9 pretax income during the first nine months after acquisition. Producers Service Holdings was also acquired in January.
Outlook, risks and unusual items
- Management said it reduced active fleet count in June and again in August in response to lower demand. It believes fleet count may increase at the beginning of 2024 and said it is preparing deployments; no quantified fleet or earnings guidance was provided.
- 2023 capital expenditure guidance was reduced to $280–$290. Nine-month capital expenditures were $233.9. Spending included maintenance, four electric-powered fracturing fleets and engine upgrades.
- In September, the company issued $50.0 of Series A preferred stock to entities controlled by its founders’ family; net proceeds were $48.9. The preferred stock carries cumulative 8% paid-in-kind dividends, senior rights to common stock and redemption/conversion provisions. Its reported temporary-equity carrying value was $57.5 at quarter-end.
- USWS received a jury verdict in its patent case against Halliburton in August 2023; Halliburton indicated it would appeal. Separate Halliburton patent cases against USWS are set for trial in June 2024, and the filing says outcomes could materially affect results. Litigation expenses and accruals were $23.5 for the nine months.
- The filing reports substantial doubt about Flotek, a consolidated variable interest entity, continuing as a going concern. ProFrac says it does not guarantee Flotek’s liabilities and excludes Flotek’s cash and other liquidity from its own liquidity discussion; Flotek creditors have no recourse to ProFrac assets.
- Related-party transactions include $167.5 of expenditures and $35.5 of revenue in the first nine months. A $36.3 equipment and inventory sale to related party Flying A was recorded as a related-party deposit pending delivery of the remaining components, expected in Q4.
- Other unusual items include non-cash investment fair-value losses of $24.1 for the nine months and a $74.4 deferred tax liability associated with the Class B-to-Class A share conversion. Comparisons with 2022 are also affected by the May 2022 IPO and corporate reorganization.
Important facts for investors to verify
- Whether lower stimulation fleet utilization and the planned early-2024 deployments translate into improved revenue and margins.
- Debt-service capacity, borrowing-base availability, interest costs and continued covenant compliance, particularly with $122.8 of principal due within 12 months.
- Capital spending versus the $280–$290 full-year estimate and the returns expected from new fleets and equipment upgrades.
- Potential financial exposure, appeal status and timing of the USWS–Halliburton patent disputes.
- Flotek’s liquidity and going-concern position, and the practical separation of its assets and obligations from ProFrac.
- Preferred-stock dividend accruals, redemption or conversion outcomes, and governance and related-party transaction terms.