Mammoth Energy Services, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unless noted, financial amounts are in millions of dollars. Comparisons are with the corresponding 2021 periods.
Business context
Mammoth provides electric infrastructure services and oilfield services, including well completion, natural sand proppant and directional drilling. It also operates aviation, equipment rental, accommodations and manufacturing businesses. Infrastructure and well completion were the largest revenue segments in the quarter.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $107.2 | $57.5 | $259.2 | $171.7 |
| Operating income (loss) | $3.8 | $(54.2) | $(15.9) | $(106.1) |
| Net income (loss) | $7.7 | $(40.9) | $(5.4) | $(88.1) |
| Diluted earnings (loss) per share | $0.16 | $(0.88) | $(0.11) | $(1.90) |
| Adjusted EBITDA, non-GAAP | $29.8 | $(29.3) | $62.1 | $(23.4) |
| Operating cash flow | $(5.4) | $(20.2) | $(6.1) | $(15.8) |
Q3 gross profit before depreciation and related charges was $28.7 million, or 26.8% of revenue, versus $3.9 million, or 6.8%, a year earlier. Operating margin was 3.6% in Q3 2022. For the nine-month periods, that gross profit measure was $57.5 million (22.2% of revenue), compared with $19.7 million (11.5%). Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
At September 30, cash was $10.6 million; current assets were $487.8 million and current liabilities $142.5 million. Long-term debt was $92.8 million, all under the revolving credit facility. Usable borrowing capacity was $6.9 million at quarter-end and $13.0 million on October 26, after letters of credit and the required reserve. The facility matures October 19, 2023. The company reported compliance with its applicable financial covenants at September 30.
Net cash used in investing activities was $0.4 million for the first nine months, including $9.1 million of capital expenditures. Financing activities provided $7.4 million, primarily from net debt borrowings. The company’s 2022 capital expenditure estimate was approximately $20.0 million, subject to industry conditions and results.
Changes versus prior periods
- Q3 revenue rose 86%, with growth across all operating divisions. Well completion revenue more than doubled to $51.5 million, supported by higher utilization, pricing and materials sales; infrastructure revenue increased 33% to $33.3 million.
- Sand revenue rose 54% in Q3 as average price per ton increased 81% and volume increased 8%. Drilling revenue rose 158% from a low base as utilization improved.
- Q3 operating results improved substantially, in part because Q3 2021 included $31.2 million of Gulfport-related bad debt expense. The nine-month comparison also reflects much lower bad debt expense and the absence of the prior-year legal settlement expense.
- Interest expense increased to $3.3 million in Q3 and $8.3 million for the first nine months, principally due to higher borrowing levels and interest rates.
- Despite nine-month pretax income of $6.1 million, the company recorded $11.4 million of income tax expense, resulting in a net loss. Its reported nine-month effective tax rate was 189%, reflecting earnings mix between the U.S. and Puerto Rico and valuation allowance changes.
Outlook, risks and unusual items
- Management expected oilfield services pricing and utilization to improve through Q4 2022 and into 2023. Four of six pressure-pumping fleets were operating; management planned to activate another in Q4 and the sixth in the first half of 2023, subject to liquidity. Infrastructure management cited improved execution, a larger crew base and expected opportunities from federal infrastructure spending, with spending expected to begin supporting the sector in 2023.
- Collection of PREPA receivables is a major liquidity and credit risk. PREPA owed approximately $368.3 million at September 30, including $141.3 million of accrued interest; the underlying services receivable was approximately $227.0 million. PREPA is in bankruptcy, payment depends substantially on FEMA or other funding, and the court extended a stay on Cobra’s recovery motion to January 2023. FEMA had found $24.4 million of disputed staffing costs eligible for funding, while other contract-compliance issues remained.
- The company’s earnings include substantial accrued interest on delinquent PREPA receivables: $10.5 million in Q3 and $30.5 million for the first nine months. These amounts contributed materially to other income and do not represent cash collections in the period.
- Refinancing or repaying the revolving facility before its October 2023 maturity is uncertain. Management said it was pursuing alternatives but gave no assurance of obtaining an extension or refinancing on acceptable terms. Limited cash and borrowing availability, covenant compliance, and PREPA collections are central liquidity considerations.
- Legal matters include an ongoing DOJ investigation related to Puerto Rico contracts and claims by Foreman and MLI. The company and its subsidiaries were not charged in the disclosed criminal indictment; two individuals pleaded guilty to gratuities. The SEC informed the company in July 2022 that it had concluded its investigation and did not intend to recommend enforcement action against the company.
- The company settled a MasTec matter without admitting wrongdoing. It paid the second installment in August and final principal on October 24, 2022; approximately $1.0 million of final interest was expected by December 1. A separate post-quarter sand-customer agreement settled approximately $13.6 million of receivables for $10.1 million; the $3.5 million impact was not recorded at September 30.
- Capital-equipment purchase commitments were approximately $22.7 million at September 30, primarily for pressure pumping equipment and expected to be paid over the next six months. Other risks cited include inflation, higher rates, labor and supply constraints, commodity-price volatility, customer concentration and adverse weather.
Investor verification priorities
- Track actual PREPA cash collections, funding decisions, FEMA determinations and the bankruptcy court process; distinguish accrued interest from cash received.
- Verify the company’s refinancing plan and available liquidity ahead of the October 2023 revolver maturity, including covenant headroom and borrowing-base availability.
- Assess whether operating cash flow improves as utilization and pricing rise, and whether planned fleet activations and capital spending fit available liquidity.
- Monitor the DOJ investigation, Foreman/MLI claims, and completion of the remaining MasTec settlement interest payment.
- Evaluate the quality and concentration of receivables: Customer A represented 79% of accounts receivable at September 30, primarily reflecting infrastructure receivables and PREPA-related amounts.