Mammoth Energy Services, Inc. — 2016 Form 10-K
Reporting period: Year ended December 31, 2016; filed February 23, 2017. The filing includes quarterly data, but this is an annual report, not a standalone fourth-quarter filing. Historical periods before October 12, 2016 relate to the predecessor partnership. Mammoth completed its IPO in October 2016 and became a taxable C corporation, limiting direct comparability.
Business context
Mammoth provides oilfield services for North American onshore unconventional reserves across pressure pumping, well services, natural sand proppant, contract and directional drilling, and remote accommodations. Operations are exposed to oil and gas activity and commodity-price swings. Gulfport Energy was its largest customer.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $231.0 million | $359.9 million |
| Operating loss | $31.1 million | $21.5 million |
| Net loss | $88.4 million | $27.2 million |
| Adjusted EBITDA (non-GAAP) | $42.4 million | $63.0 million |
| Cash from operations | $28.1 million | $68.4 million |
| Capital expenditures | $11.3 million | $26.3 million |
- Revenue fell 36%. Cost of revenue was $173.5 million, or 75% of revenue, versus $276.3 million, or 77%, in 2015. Gross profit before SG&A, depreciation and impairment was $57.4 million, approximately 25% of revenue, compared with $83.6 million, approximately 23%, in 2015.
- Operating margin weakened to approximately negative 13.4% from negative 6.0%. Depreciation and amortization was $69.9 million; long-lived asset impairment was $1.9 million.
- The $53.9 million income-tax provision included a $53.1 million one-time charge associated with conversion to a C corporation and taxes on historical earnings. The filing’s unaudited pro forma C-corporation net loss was $21.6 million in 2016, or $0.58 per share.
- At year-end, cash was $28.7 million, working capital was $57.0 million, and total debt was zero. The undrawn revolving facility had $146.2 million available, net of borrowing-base and letter-of-credit effects. Total liquidity was reported as $199.8 million.
- IPO proceeds to the company were approximately $103.1 million; approximately $78.1 million repaid revolving-credit borrowings. Year-end total assets were $420.6 million, total liabilities $79.5 million, and equity $341.0 million.
Material changes versus 2015
- Pressure-pumping revenue declined 27%; utilization fell from 63% across three active fleets to 50% across two active fleets.
- Well-services revenue fell 65%, with lower coiled-tubing day rates and weaker flowback activity. Contract and directional drilling revenue fell 56%, reflecting fewer active rigs and lower day rates.
- Proppant revenue decreased 36% as average sand selling price fell from $103 to $59 per ton, despite higher volumes. The Wisconsin plant was idle at year-end; it restarted, with first shipments in February 2017.
- Other energy services revenue declined 13%. Approximately 85% of this division’s 2016 revenue came from Oil Sands Limited; management anticipated its accommodation occupancy would decrease by at least 70% in 2017 as a customer project wound down.
- Gulfport accounted for 57% of 2016 revenue, up from 47% in 2015; the top five customers together represented 80%, versus 71%. Related-party revenue was $135.9 million.
- Fourth-quarter 2016 revenue was approximately $64.8 million, versus $53.8 million in fourth-quarter 2015; net loss was $56.5 million versus $20.4 million, with the 2016 quarter burdened by a $51.1 million income-tax provision.
Outlook, risks and unusual items
- Management said activity and demand had increased as commodity prices recovered, and expected further improvement if prices stabilized or rose. This outlook is conditional; the filing gives no formal revenue or earnings guidance.
- Management estimated 2017 capital expenditures of approximately $120 million, including $66 million for pressure-pumping equipment and $29 million for tractors, trailers and transload facilities. It said cash, operating cash flow and facility availability should fund operations for at least 12 months, while noting future cash flows and acquisition needs could require additional capital.
- Pressure pumping had two fleets under long-term contracts through September 2018; the third operated under a third-party pricing agreement. Customer concentration and reliance on Gulfport are significant risks. Oilfield activity, service pricing and utilization remain sensitive to commodity prices.
- Other key exposures include potential decline in Canadian accommodations, competition and pricing pressure, equipment and labor availability, severe weather, environmental and hydraulic-fracturing regulation, water access, uninsured operating incidents, and foreign-currency fluctuations. The company had $5.6 million of Canadian-dollar cash and did not hedge currency exposure.
- Year-end commitments included $18.6 million for equipment, a $2.2 million sand purchase commitment and $14.1 million of future operating-lease payments. Subsequent to year-end, the company ordered $35.2 million of fracturing equipment and $6.4 million of other equipment, and entered into $2.0 million of railcar lease commitments.
- The Ohio equipment-sales-tax assessment was appealed, with a hearing deferred to 2017; management did not expect a material adverse effect. Several employment-related lawsuits remained under evaluation; management could not predict outcomes. A wrongful-death case was settled without material financial impact.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls were effective; the report did not include management’s internal-control assessment or auditor attestation under the newly public-company transition provisions.
Important facts for investors to verify
- Whether Gulfport and other major customers sustain contracted volumes, pricing and timely payment, and whether customer concentration declines.
- Actual 2017 fleet utilization, day rates, sand pricing and volumes, and performance after the Wisconsin plant restart.
- Whether the anticipated accommodation-demand decline is offset by replacement customers, and the resulting effect on segment earnings and cash flow.
- Funding and returns on the approximately $120 million 2017 capital program, equipment delivery and startup timing, and any additional acquisition financing needs.
- The tax effects of the C-corporation conversion, cash-tax requirements, and any later revisions to the one-time tax charge or pro forma results.
- Updates on litigation, the Ohio tax appeal, credit-facility availability and covenant compliance, and internal-control reporting as the company matures as a public issuer.