Atlas Energy Solutions Inc. annual report, FY2023

Business Context and Reporting Period

Atlas Energy Solutions Inc. filed its Form 10-K for the fiscal year ended December 31, 2023. The filing does not provide a clear standalone fourth-quarter income statement or cash flow statement; the reported results are primarily for the full year. Atlas produces 40/70 and 100-mesh frac sand and provides transportation, storage and contract labor services, principally in the Permian Basin.

Operations are concentrated at two Kermit, Texas facilities and one Monahans, Texas facility.
Combined annual production capacity increased to 16.5 million tons following completion of the second Kermit facility.
The company had 490 employees at December 31, 2023.
The October 2, 2023 Up-C Simplification replaced Old Atlas as the public company, eliminated the dual-class structure and resulted in a single class of Atlas common stock.

Financial Performance and Position

Metric	2023	2022	Change
Total sales	$614.0 million	$482.7 million	27.2% increase
Product sales	$468.1 million	$408.4 million	14.6% increase
Service sales	$145.8 million	$74.3 million	96.3% increase
Gross profit	$313.8 million	$256.3 million	22.4% increase
Operating income	$265.1 million	$232.0 million	14.3% increase
Net income	$226.5 million	$217.0 million	4.4% increase
Adjusted EBITDA	$329.7 million	$264.0 million	24.9% increase
Adjusted EBITDA margin	53.7%	54.7%	Down 1.0 percentage point
Net cash provided by operating activities	$299.0 million	$206.0 million	45.1% increase
Capital expenditures	$365.5 million	$89.6 million	Increase of $275.9 million
Adjusted EBITDA less capital expenditures	$(35.8) million	$174.4 million	Declined by $210.3 million
Adjusted free cash flow	$291.1 million	$228.6 million	27.4% increase

Gross margin was approximately 51.1% in 2023 versus 53.1% in 2022. The filing attributes the sales increase to higher proppant prices and volumes, and the increase in service sales primarily to higher last-mile logistics volumes. Service-related cost of sales rose substantially with the higher logistics activity.

Cash and cash equivalents were $210.2 million at year-end, compared with $82.0 million in 2022.
Working capital was $226.1 million.
Property, plant and equipment, net, increased to $934.7 million from $541.5 million, primarily reflecting growth projects.
Total debt was $180.0 million of principal, presented at $172.8 million net of discount and deferred financing costs.
Net debt, as defined by the company, was negative $29.8 million, reflecting cash in excess of debt and finance lease liabilities.
The $75.0 million ABL facility had no borrowings and $1.1 million of outstanding letters of credit, leaving $73.9 million of availability at December 31, 2023.
The 2023 term loan bears interest at 9.50% and matures August 1, 2030.
Basic and diluted EPS attributable to Atlas common stockholders were $1.50 and $1.48, respectively; these figures reflect only the post-IPO period.

Material Changes Versus the Prior Comparable Period

Sales increased 27.2%, driven by a 96.3% increase in service sales and a 14.6% increase in product sales.
Average product price increased to approximately $42.63 per ton from $40.10 per ton.
Aggregate production increased to approximately 11.0 million tons from 10.2 million tons.
SG&A increased to $48.6 million from $24.3 million, reflecting public-company costs, higher employee and stock-based compensation expense, expanded business development activity and $5.3 million of non-recurring transaction costs.
Income tax expense increased to $31.4 million from $1.9 million because Atlas Inc. became subject to corporate income taxes following the IPO-related reorganization. The effective tax rate was 12.2% versus 0.8%.
Operating cash flow increased by $93.0 million, while investing cash outflows increased by $275.9 million because of the Dune Express, the second Kermit facility and logistics assets.
Production capacity increased by 5.5 million tons annually. Proven and probable reserves increased to approximately 488.0 million tons from approximately 357.4 million tons, primarily from converting Kermit resources to reserves to support expanded capacity.
Net debt improved from $87.1 million to negative $29.8 million, notwithstanding significant growth capital spending.

Guidance, Outlook, Risks and Unusual Items

Outlook and Management Commentary

WTI averaged $77.61 per barrel in 2023 versus $94.33 in 2022, and the Permian rig count ended the year at 307, down 45 rigs year over year.
Management described current Permian proppant markets as healthy and broadly balanced, with potential for tighter supply-demand conditions in 2024.
Longer lateral wells and improving frac-crew efficiency are identified as potential long-term drivers of proppant demand.
The Dune Express is expected to enter service in the fourth quarter of 2024. It is planned as a 42-mile electric conveyor with annual capacity of approximately 13 million tons and approximately 85,000 tons of dry storage.
At December 31, 2023, approximately 90% of Dune Express equipment and materials and 80% of installation services had been ordered or contracted.

Hi-Crush Transaction

On February 26, 2024, Atlas agreed to acquire substantially all of Hi-Crush’s Permian Basin proppant production and North American logistics businesses.
Consideration is described as $150 million of cash, approximately 9.7 million Atlas shares and a secured PIK-toggle seller note initially targeted at $125 million, subject to closing adjustments.
The seller note matures January 31, 2026 and bears interest at 5.00% if paid in cash or 7.00% if paid in kind.
Hi-Crush stockholders are expected to own approximately 8.8% of Atlas after closing. Completion was subject to customary conditions, including approval by holders of at least 95% of Hi-Crush voting power; the filing expected closing in the first quarter of 2024.
Subsequent amendments contemplated increasing ABL commitments to $125 million, adding a $150 million delayed-draw term-loan facility at an expected rate of approximately 10.5%, and extending the ABL maturity to February 26, 2029.

Key Risks and Contingencies

Demand, pricing and margins depend heavily on oil and natural gas activity, Permian Basin completion volumes and proppant market supply.
Customer concentration is significant: the ten largest customers generated approximately 86.5% of 2023 sales, and two customers individually represented 25% and 10% of sales.
All production is concentrated in the Permian Basin and at three facilities, creating exposure to weather, operational outages, transportation constraints, water availability and regional permitting issues.
The Dune Express could cost more, take longer or fail to achieve expected capacity, cost savings and safety benefits.
Silica exposure, MSHA and OSHA requirements, environmental rules, endangered-species protections, water restrictions and changes affecting hydraulic fracturing could increase costs or restrict operations.
The company faces leverage, refinancing, interest-rate, covenant and liquidity risks. The term loan is secured by substantially all operating assets and includes a maximum 4.0-to-1.0 leverage covenant.
The Board has not adopted a binding dividend policy and may reduce or suspend dividends. The fourth-quarter 2023 dividend was $0.21 per share, and a $0.21 per-share dividend was declared for payment in February 2024.
The Up-C Simplification eliminated anticipated future tax basis step-ups and related cash tax savings, which may increase future tax liabilities.
The company disclosed no cybersecurity incident that had materially affected, or was reasonably likely to materially affect, its business, financial condition or results of operations.
Management reported no material legal, environmental or other contingencies, although ordinary-course proceedings could produce significant charges in a single period.

Investor Verification Checklist

Verify the final terms, closing status, financing and integration results of the Hi-Crush transaction, including the seller note and equity dilution.
Verify fourth-quarter and first-quarter operating trends separately, because this Form 10-K does not provide a clear standalone Q4 financial statement.
Track Dune Express construction progress, total capital cost, remaining funding needs and expected fourth-quarter 2024 service date.
Assess customer concentration, contract minimum-volume obligations, pricing resets and exposure to customer credit deterioration.
Reconcile GAAP cash flow with Adjusted EBITDA, Adjusted Free Cash Flow and capital expenditures, particularly the large 2023 growth-investment outlay.
Review debt covenant headroom, mandatory amortization, refinancing requirements and the effect of post-year-end financing amendments.
Evaluate the sustainability of dividends after considering capital spending, acquisition financing, taxes and debt restrictions.
Monitor regulatory developments involving respirable silica, the dunes sagebrush lizard, water rights, climate policy and Permian Basin oil and gas activity.