Mammoth Energy Services, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Mammoth provides oilfield and energy infrastructure services. Comparisons include recast prior-period results for Sturgeon, acquired from an entity under common control; the company also completed several other acquisitions and issued 7.0 million shares in the Stingray/Sturgeon transactions.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $149.3 million | $63.3 million | $322.5 million | $165.1 million |
| Operating loss | $0.5 million | $0.6 million | $14.7 million | $29.0 million |
| Net loss | $0.8 million | $3.0 million | $7.0 million | $34.7 million |
| Adjusted EBITDA (non-GAAP) | $28.0 million | $17.3 million | $54.8 million | $27.3 million |
| Operating cash flow | $16.6 million | $14.1 million | $40.6 million | $23.1 million |
Q3 gross profit was approximately $34.8 million, or 23.3% of revenue, versus $20.5 million, or 32.3%, a year earlier. Nine-month gross profit was approximately $72.2 million, or 22.4% of revenue, versus $39.3 million, or 23.8%. Basic and diluted loss per share were $0.02 for Q3 and $0.17 for the nine months.
At September 30, cash was $14.3 million, working capital was $47.8 million, and long-term debt was $94.0 million. Revolver availability was $69.8 million, net of letters of credit; the facility carried a 3.99% rate and matures in 2019. The company was in compliance with its covenants. By November 7, borrowings had risen to $110.2 million and availability had fallen to $53.2 million. Nine-month capital expenditures were $102.3 million; net cash used in investing was $140.8 million, and cash declined $15.0 million to $14.3 million.
Changes and business drivers
- Revenue rose 136% in Q3 and 95% for the nine-month period. Growth reflected greater activity and pricing, expanded capacity, and acquisitions; comparisons are affected by acquired businesses and the Sturgeon recast.
- Pressure-pumping revenue increased with five average active fleets and 82% utilization in Q3, versus two fleets and 36% utilization a year earlier. The fifth fleet began work in August; the sixth started in October.
- Sand revenue increased as Q3 volume rose to about 438,800 tons from 188,018 and average price rose to $67 per ton from $44. Nine-month volume was about 1.04 million tons versus 448,000, with average price of $66 versus $50.
- Cost of revenue increased to 77% of Q3 revenue from 68%; nine-month cost of revenue increased to 78% from 76%. Higher activity, fleet start-up costs, and infrastructure-service costs contributed. Depreciation and amortization also rose, partly reflecting new equipment placed in service.
- Nine-month net loss improved year over year, but included a $4.0 million after-tax bargain-purchase gain from the Chieftain sand acquisition. The prior period included $1.9 million of asset impairments.
Outlook, risks and unusual items
- Management said stronger commodity prices and customer activity had supported demand and expected further improvement if prices remained at current levels or recovered. No specific earnings guidance was provided. The 2017 capital budget was approximately $143 million; management did not expect a material increase from that budget for the Puerto Rico work because most required equipment was expected to be leased.
- On October 19, Cobra signed a one-year contract with Puerto Rico’s electric utility, PREPA, for hurricane-related grid restoration, with payments of up to $200 million, including a $15 million initial payment. By November 7, Cobra had incurred $32.7 million of related commitments and made $12.6 million in prepayments and deposits. PREPA is in bankruptcy; payment depends substantially on FEMA or other funding. Contract termination or nonpayment could materially harm results and cash flows, and PREPA contracting practices were under governmental review.
- The business remains sensitive to oil and gas prices, customer spending, weather, and utilization. Management noted that severe weather can disrupt operations, particularly in regions that generated approximately 81% of nine-month revenue. Related-party customers generated 54% of nine-month revenue; related parties represented 41% of combined trade and related-party receivables at quarter-end.
- Commitments at September 30 included $47.0 million of operating lease payments, $26.8 million of capital-spend commitments, and $25.3 million of minimum sand purchases. The company also disclosed multiple employment and other legal matters; outcomes for several cases could not be predicted, while management did not expect the identified Ohio tax appeal or settled overtime case to have a material effect.
- Operating cash flow was positive, but receivables and related-party receivables grew substantially, and the company reported $44.8 million due from related parties at quarter-end. Management believed cash, operating cash flow, and revolver capacity would fund operations for at least 12 months, while cautioning that future cash flows and acquisition financing were uncertain.
Investor verification priorities
- Track collections, aging, and credit exposure for the large related-party receivable balance and customer concentration.
- Verify PREPA contract funding, payment terms, work progress, commitments, and whether the maximum contract value is realized.
- Monitor borrowing-base availability, debt growth, covenant headroom, interest costs, and the effect of continued capital spending and acquisitions on liquidity.
- Assess whether new fleets, sand capacity, and acquired businesses can sustain utilization and improve margins as revenue grows.
- Review the effects of acquisition accounting and the Chieftain bargain-purchase gain when comparing reported losses and non-GAAP Adjusted EBITDA.