Mammoth Energy Services, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Comparative results include Sturgeon on a recast, common-control basis, as if combined from the start of its operations; figures are unaudited.
Business context and material changes
Mammoth provides oilfield services across pressure pumping, well services, sand, drilling, and other energy services. Higher customer activity and pricing supported growth, while the company expanded through acquisitions and substantial equipment investment.
- Acquired Chieftain sand assets for $36.3 million cash in May. The purchase accounting generated a $4.0 million after-tax bargain purchase gain in Q2.
- In June, acquired Sturgeon and related sand businesses, Stingray Energy, and Stingray Cementing for 7.0 million shares. Sturgeon was accounted for as a common-control combination; the other acquired businesses contributed only for part of the quarter.
- Acquired Higher Power in April for $3.25 million cash plus up to $0.75 million contingent consideration.
- Shares outstanding increased from 37.5 million at year-end to 44.5 million at June 30. Mammoth also started its fourth pressure-pumping fleet in June.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $98.3 million | $69.2 million | $173.2 million | $101.7 million |
| Operating loss | $6.7 million | $7.2 million | $14.2 million | $28.4 million |
| Net loss | $1.2 million | $8.4 million | $6.2 million | $31.8 million |
| Adjusted EBITDA | $15.2 million | $13.5 million | $26.8 million | $10.0 million |
| Operating cash flow | $9.6 million | $(9.5) million | $24.0 million | $10.9 million |
- Q2 revenue rose 42%; six-month revenue rose 70%. Growth came mainly from pressure pumping, sand, and drilling, with well services also increasing. Other energy services declined as a major accommodation project wound down.
- Q2 gross profit was approximately $20.9 million, or 21% of revenue, versus $18.7 million, or 27%, a year earlier. Six-month gross profit was approximately $37.4 million, or 22%, versus $18.9 million, or 19%. Q2 cost of revenue grew faster than revenue, particularly in pressure pumping.
- Lower net losses reflected improved operating results and, for Q2 2017, the $4.0 million bargain purchase gain and a $2.8 million income tax benefit. Adjusted EBITDA is a non-GAAP measure and excludes specified items, including the bargain gain and acquisition costs.
- Six-month capital expenditures were $66.6 million; cash used in investing activities was $102.7 million, including acquisitions. Operating cash flow was $24.0 million and financing activities provided $57.9 million. Cash fell from $29.2 million at year-end to $8.5 million.
- At June 30, current assets were $99.0 million and current liabilities $64.2 million; working capital was $34.8 million. Long-term debt was $65.0 million, with $104.7 million of stated facility availability. By August 2, borrowings had risen to $92.2 million and availability had fallen to $77.5 million.
Outlook, risks, and contingencies
- Management said it expected liquidity from cash, operations, and facility availability to fund operations for at least 12 months, while noting cash flows and capital needs are uncertain and additional funding may not be available on acceptable terms.
- The 2017 capital budget included $64 million for pressure-pumping equipment, $8 million for tractors and pneumatic trailers, $25 million for sand-plant expansion, and $33 million for equipment and upgrades across other divisions. The filing does not provide a formal earnings or revenue forecast.
- Management expected sand capacity to reach approximately 4 million tons per year after Taylor facility expansion, anticipated in Q4 2017. The fifth pressure-pumping fleet was scheduled to start in August and the sixth in October. A three-year take-or-pay contract for about 0.7 million tons of sand annually was to begin October 1, 2017.
- Management linked demand to oil and gas prices and customer spending. A prolonged decline in commodity prices could reduce activity, utilization, pricing, results, and cash flows. Weather disruption, sand reserve and quality estimates, mining permits and property rights, interest rates, and Canadian-dollar movements are additional risks.
- Related-party concentration is significant: one related-party customer accounted for 59% of six-month revenue, and related parties represented 60% of trade and related-party receivables at June 30. Management reported no third-party customer exceeded 10% of six-month revenue.
- Commitments included $34.7 million of operating leases, $22.7 million of capital-spend commitments, and $28.4 million of minimum sand purchases. Several employment-related and other lawsuits remained unresolved; outcomes and potential impacts were not clear. The Ohio tax assessment appeal was not expected by management to have a material adverse effect.
- Subsequent to quarter-end, Mammoth acquired another energy service company for $2.3 million cash and assumed $1.8 million of debt; it also amended its credit facility in July to adjust acquisition, borrowing-base, and default provisions.
Key facts for investors to verify
- Whether revenue and utilization growth converts into improved operating margins as new fleets and acquired businesses ramp.
- Actual remaining capital spending, acquisition funding, facility availability, and compliance with credit covenants.
- Collection timing and credit exposure tied to Gulfport and other related parties, including the substantial receivable balances.
- Execution and economics of sand capacity expansion, take-or-pay contracts, and the planned fifth and sixth fleet launches.
- Final acquisition accounting and the sustainability of results excluding the bargain purchase gain, tax effects, acquisition costs, and other Adjusted EBITDA adjustments.