Mammoth Energy Services, Inc. — Q3 2016 Form 10-Q
Reporting context: The financial statements cover Mammoth Energy Partners LP for the quarter and nine months ended September 30, 2016. After quarter-end, the Partnership converted to an LLC and was contributed to Mammoth Energy Services, Inc. (Mammoth Inc.), which completed its IPO on October 19, 2016.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $62.8 million | $86.2 million | $166.2 million | $306.1 million |
| Operating loss | $0.1 million | $7.2 million | $26.5 million | $3.2 million |
| Net loss | $2.3 million | $4.5 million | $31.9 million | $6.9 million |
| Adjusted EBITDA (non-GAAP) | $17.0 million | $11.6 million | $28.1 million | $55.9 million |
| Operating cash flow | $14.3 million | $9.8 million | $25.6 million | $53.8 million |
- Q3 revenue fell 27%; nine-month revenue fell 46%. Lower customer activity, utilization and pricing affected all major service lines. The Q3 net loss narrowed year over year, while the nine-month loss widened substantially.
- Q3 cost of revenue was 68% of revenue, versus 82% a year earlier; nine-month cost of revenue was 76%, versus 77%. Approximate gross margin was 32% in Q3 and 24% for the nine-month period.
- Nine-month capital expenditures were $3.7 million, down from $24.5 million. Cash declined to $2.8 million from $3.1 million at year-end 2015.
Balance sheet and liquidity
- At September 30, total assets were $398.6 million, current assets $54.8 million, current liabilities $32.0 million, and working capital approximately $22.8 million.
- Debt was $72.0 million, down from $95.0 million at December 31, 2015. The revolver had $68.8 million of availability; the company reported covenant compliance. Debt carried a 3.28% rate at quarter-end.
- After the IPO, Mammoth Inc. received approximately $103.2 million in net proceeds and repaid the $72.0 million revolver balance. The company reported the facility undrawn, with approximately $141.2 million available on November 7, 2016.
Changes, outlook and risks
- Q3 completion and production revenue declined 21%; drilling services fell 53%, sand proppant 28%, and remote accommodation 6%. Drilling rig counts, pressure-pumping utilization and service rates remained under pressure.
- Management said activity had increased as commodity prices recovered, and expected demand to improve if prices stabilized and recovered further. It estimated 2016 capital spending of approximately $5.2 million and was negotiating for 75,000 horsepower of new fracturing equipment for expected 2017 delivery.
- Remote accommodation revenue could decrease in Q4 if the company cannot replace a customer representing approximately 83.7% of that segment’s nine-month revenue when the customer’s construction project was expected to finish in November 2016.
- Risks include oil and gas price and activity volatility, customer and related-party concentration, weather exposure, Canadian-dollar fluctuations, and execution and funding risks for acquisitions. Related parties accounted for approximately 58% of nine-month revenue and 59% of receivables from customers and related parties.
- Unusual items include an approximately $53.1 million income-tax charge recognized in connection with the corporate conversion. Following the IPO, executive compensation also included a $1.2 million one-time cash bonus and approximately 265,000 restricted stock units for two executives.
- Commitments include $14.2 million of future minimum operating-lease payments and $2.2 million of remaining 2016 sand-purchase commitments. The filing also describes employment-related class actions, a wrongful-death suit and an Ohio tax assessment appeal; outcomes of several matters were uncertain.
Investor facts to verify
- Whether post-IPO demand recovery translated into improved utilization, pricing and cash generation.
- Whether the remote accommodation customer was replaced and how the expected project completion affected Q4 revenue.
- Post-IPO liquidity, revolver availability, covenant headroom and the use of remaining IPO proceeds, including any acquisitions or equipment purchases.
- The effects of the $53.1 million conversion-related tax charge and executive awards on reported results and share dilution.
- Developments in the disclosed lawsuits, tax appeal, sand commitments and proposed fracturing-equipment acquisition.