Mammoth Energy Services, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 28, 2018. Amounts are in U.S. dollars unless otherwise noted. Comparative figures have been recast to include Sturgeon as under common control, and the company changed its reportable segments in 2017, so comparisons are not fully like-for-like.
Business context
Mammoth provides oilfield services, frac sand and electric utility infrastructure construction, maintenance and storm-restoration services. In 2017 it added infrastructure operations and expanded pressure-pumping and sand capacity through acquisitions and new equipment. Hurricane Maria restoration work for Puerto Rico’s PREPA became a major source of revenue.
Key financial results
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $691.5 million | $230.6 million |
| Operating income (loss) | $62.8 million | $(34.6) million |
| Net income (loss) | $59.0 million | $(92.5) million |
| Diluted earnings (loss) per share | $1.42 | $(2.94) |
| Cash provided by operations | $57.6 million | $29.7 million |
| Cash used in investing activities | $172.3 million | $7.7 million |
| Capital expenditures | $133.9 million | $11.7 million |
| Cash and cash equivalents at year-end | $5.6 million | $29.2 million |
| Long-term debt at year-end | $99.9 million | None |
Revenue increased about 200%. Operating margin was approximately 9.1%, compared with a loss in 2016. Cost of revenue excluding depreciation, depletion, amortization and accretion was $482.6 million, about 70% of revenue, versus 75% in 2016. Operating cash flow was below net income; substantial growth in receivables and other working-capital requirements are important to the cash-conversion picture.
Results included a $31.0 million income-tax benefit from the 2017 Tax Act and a $4.0 million bargain-purchase gain from the Chieftain acquisition. The company also recorded $4.1 million of long-lived asset impairments and $16.2 million of bad-debt expense, including a $16.0 million specific reserve related to PREPA.
Revenue mix and material changes
- Infrastructure: $224.4 million of revenue and $78.1 million of operating income; this business was new in 2017. PREPA generated $203.1 million, or 90% of infrastructure revenue.
- Pressure pumping: Revenue rose to $279.4 million from $124.4 million, supported by three new fleets and higher utilization. Average fleet utilization rose to 72% from 50%.
- Natural sand proppant: Revenue increased to $117.0 million from $38.1 million. Tons sold rose 147% to approximately 1.69 million, and average selling price increased to $69 per ton from $49.
- Contract land and directional drilling: Revenue rose to $50.5 million from $32.0 million, but the segment recorded a $25.3 million operating loss. The company cited higher drilling day rates and more active rigs, partly offset by impairment and costs.
- Customer concentration: Gulfport contributed 30% of total revenue and PREPA 29%. The five largest customers represented 71% of revenue, down from 80% in 2016. Related-party revenue was $209.0 million, or 30% of the total.
- Acquisitions and expansion: The company acquired Chieftain sand assets for $36.3 million and acquired Sturgeon and the Stingray businesses for stock. It also acquired Higher Power and 5 Star to expand infrastructure services. Three pressure-pumping fleets were launched during the year.
Liquidity, debt and commitments
At December 31, 2017, working capital was $94.4 million. Mammoth had $99.9 million drawn under its $170.0 million revolving credit facility, with $62.8 million available after letters of credit, and was in compliance with its covenants. The facility matures in November 2019 and bears variable interest; the year-end weighted-average rate was 4.37%. A 1 percentage-point rate change would affect annual interest expense by approximately $1.0 million. The company reported net debt of approximately $86.0 million as of February 23, 2018.
Contractual obligations totaled $241.0 million, including $99.9 million of debt, $65.6 million of operating leases, $43.1 million of purchase commitments and $19.6 million of capital-purchase commitments. Operating cash flow less capital expenditures was approximately negative $76.2 million for 2017.
Outlook, risks and unusual items
- Management estimated 2018 capital expenditures of approximately $125 million, including $55.5 million for infrastructure assets intended to support 68 additional crews, sand-plant expansions, and oilfield equipment.
- Management expected oilfield demand to benefit from recovering commodity prices and greater drilling and proppant use, but emphasized commodity-price volatility and uncertainty. This is commentary, not formal earnings guidance.
- The PREPA emergency contract was amended after year-end to a maximum amount of $945.4 million. Management estimated the amended work would support activity through mid-2018 and cited approximately $745 million of 2018 revenue expected from services through mid-year. PREPA is in bankruptcy proceedings; payment depends substantially on FEMA or other funding. The company noted government scrutiny of PREPA contracting and recorded the specific receivable reserve.
- Gulfport’s pressure-pumping and sand contracts expire in September 2018. Dependence on Gulfport and PREPA, each responsible for a large share of revenue, creates customer, renewal and collection risks.
- Other material risks include variable-rate debt and covenant constraints; execution and funding needs for expansion; intense frac-sand competition and planned industry capacity additions; severe weather; labor and equipment availability; environmental, hydraulic-fracturing and safety regulation; and uninsured or underinsured losses.
- The Tax Act benefit materially affected reported tax expense, and some tax accounting remained provisional pending further analysis. Management reported effective disclosure controls and no identified material weaknesses in internal control over financial reporting; the external auditor did not provide an internal-control audit opinion.
- The company reported pending employment and motor-vehicle litigation and an Ohio tax appeal; management did not expect the tax matter to have a material effect. Several other lawsuits had been settled and paid during 2017.
Important facts for investors to verify
- PREPA receivable balances, subsequent collections, the $16.0 million reserve, and the status and availability of FEMA or other funding for the amended contract.
- Whether PREPA work continues at the expected level through mid-2018 and whether Mammoth secures follow-on utility work after restoration ends.
- Renewal or replacement of Gulfport contracts expiring in September 2018, and the effect of related-party concentration on revenue and receivables.
- Cash conversion, receivable aging and bad-debt trends as revenue scales; operating cash flow was $57.6 million against $133.9 million of capital expenditures.
- Revolver availability, borrowing-base capacity, covenant compliance, variable interest costs and the November 2019 maturity.
- Progress, costs and operating performance of planned 2018 capital projects, including sand-plant expansions and infrastructure crew additions.
- The final tax effects of the Tax Act and whether segment results and margins remain comparable under the company’s changed reporting presentation.