ProPetro Holding Corp. — Q1 2023 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2023. ProPetro provides oilfield completion services, primarily in the Permian Basin. Its Completion Services segment includes hydraulic fracturing, cementing and wireline; hydraulic fracturing generated 79.0% of quarterly revenue. The 2022 Silvertip acquisition added wireline operations, while coiled tubing operations were discontinued in September 2022.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Service revenue | $423.6 million | $282.7 million |
| Operating income | $41.5 million | $5.7 million |
| Net income | $28.7 million | $11.8 million |
| Diluted earnings per share | $0.25 | $0.11 |
| Adjusted EBITDA (non-GAAP) | $119.2 million | $66.5 million |
| Adjusted EBITDA margin (non-GAAP) | 28.1% | 23.5% |
| Cash provided by operating activities | $73.1 million | $25.2 million |
| Cash used in investing activities | $113.8 million | $64.0 million |
Revenue increased 49.8%, while net income rose 143.1%. Operating margin was approximately 9.8%, compared with 2.0% a year earlier; net margin was approximately 6.8%, compared with 4.2%. Management attributed stronger results mainly to higher customer activity and demand, improved pricing and efficiencies, and the addition of wireline services.
Cash and cash equivalents plus restricted cash totaled $44.8 million at quarter-end, including $18.3 million of restricted customer advance funds. The company had $30.0 million drawn under its asset-based revolving credit facility. Reported total liquidity was approximately $149.2 million, including $104.4 million of facility availability. At May 1, 2023, borrowings had risen to $60.0 million and reported liquidity was approximately $166.1 million. Long-term debt on the balance sheet was $30.0 million at March 31.
Operating cash flow less cash capital expenditures was negative approximately $41.8 million ($73.1 million less $114.8 million). The MD&A separately reports $97.2 million of capital expenditures incurred; this differs from cash capital expenditures in the cash-flow statement.
Material changes and notable items
- Completion Services revenue increased 52.9%. Wireline contributed $62.6 million of the year-over-year revenue increase, and effectively utilized fracturing fleets averaged approximately 15.5 versus 13.7.
- Cost of services rose 42.2%, slower than revenue growth. As a percentage of Completion Services revenue, cost of services declined to 66.2% from 69.5% (or from 71.3% excluding prior-year reservation fees), which management attributed to efficiencies and greater fleet utilization.
- Depreciation and amortization increased 59.5% to $50.8 million, including $12.5 million of accelerated depreciation for power ends with premature failure and depreciation and amortization from acquired wireline assets.
- Loss on disposal of assets was $22.1 million, compared with $16.1 million. The current-quarter amount included equipment decommissioning, component replacement and a write-off associated with a wellsite fire.
- Other expense of $3.7 million included an unrealized loss on the STEP Energy Services investment. The prior-year period included $10.7 million of net tax-refund income, making the comparison less favorable.
- A prospective useful-life estimate change for certain equipment and components reduced Q1 2023 net income by $3.6 million, or $0.03 per share.
Outlook, commitments and risks
The filing does not provide formal numerical earnings or revenue guidance. Management said results depend on customer activity, commodity prices, pricing, labor availability, inflation and the company’s ability to meet demand for lower-emissions equipment. It expected to receive the remaining 112,500 HHP of Tier IV DGB equipment by Q2 2023 and planned for lower-emissions equipment to represent approximately 65% of its hydraulic-fracturing portfolio by year-end 2023, versus approximately 35% in 2022.
- Planned commitments include approximately $41.9 million for Tier IV DGB equipment for the remainder of 2023, a $24.4 million sand take-or-pay commitment for the remainder of 2023, and estimated commitments of $99.2 million for four electric fracturing fleets and $59.6 million for power-generation equipment. Lease payments were expected to begin after equipment delivery in the second half of 2023.
- Pioneer accounted for approximately $54.3 million of Q1 revenue, versus $123.5 million in Q1 2022. Pioneer’s Fleet Two arrangement was terminated effective May 12, 2023, following Pioneer’s release of that fleet; Fleet One was scheduled to run through August 31, 2023.
- Key stated risks include oil and gas price and activity volatility, cost inflation and supply-chain constraints, competition, customer concentration and credit risk, difficulty passing through cost increases, the capital intensity of emissions upgrades, regulatory change, weather and operating hazards, and financial-system liquidity disruptions.
- The company reported ongoing Texas tax audits whose outcomes could not be reasonably estimated, and a proposed settlement of the Logan shareholder class action awaiting final court approval at the filing date. The company is self-insured up to $10 million per occurrence for certain wellsite fire or explosion losses.
Important facts for investors to verify
- How much of revenue and margin growth is attributable to sustainable pricing and utilization gains versus the Silvertip acquisition and other period-specific effects.
- Whether operating cash generation can fund elevated capital spending, lease commitments and customer-related working-capital needs; monitor the increase in ABL borrowings after quarter-end.
- Actual delivery, deployment, utilization and returns from Tier IV, electric-fracturing and power-generation equipment, including related lease obligations.
- The effect of the Pioneer fleet release and any subsequent changes in customer concentration, activity and receivable collections.
- Equipment failure, accelerated depreciation and disposal costs, along with outcomes of the tax audits and shareholder litigation settlement.
- Adjusted EBITDA is a non-GAAP measure; compare it with GAAP income and cash flows and consider the company’s stated adjustments.