Atlas Energy Solutions Inc. — Q3 2023 Form 10-Q Summary
Business context and reporting period
Atlas Energy Solutions produces and distributes 100 mesh and 40/70 frac sand in the Permian Basin and provides sand logistics services. Its operations include facilities near Kermit and Monahans, Texas, with combined annual production capacity exceeding 10.0 million tons as of September 30, 2023. The Dune Express overland conveyor and a second Kermit facility were under construction.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared primarily with the corresponding 2022 periods. Comparability is affected by the March 2023 IPO and reorganization, the new public-company cost structure, and the October 2, 2023 Up-C Simplification.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total sales | $157.6 million | $141.7 million | $472.8 million | $332.9 million |
| Product sales | $114.8 million | $119.2 million | $368.1 million | $286.6 million |
| Service sales | $42.8 million | $22.5 million | $104.7 million | $46.3 million |
| Gross profit | $79.6 million | $74.4 million | $250.8 million | $181.5 million |
| Operating income | $65.3 million | $68.6 million | $215.8 million | $165.1 million |
| Net income | $56.3 million | $65.1 million | $190.4 million | $154.4 million |
| Net income attributable to Atlas | $29.4 million | Not presented | $69.7 million | Not presented |
| Basic/diluted EPS | $0.51/$0.51 | Not presented | $1.22/$1.21 | Not presented |
| Adjusted EBITDA | $84.1 million | $77.4 million | $261.0 million | $188.8 million |
| Net cash from operating activities | Not separately provided in primary statements | Not separately provided | $213.5 million | $156.0 million |
Calculated Q3 margins were approximately 50.5% gross, 41.4% operating, and 35.7% net. Nine-month margins were approximately 53.0%, 45.7%, and 40.3%, respectively. Adjusted EBITDA margin was 53.3% in Q3 and 55.2% for the first nine months, compared with 54.6% and 56.7% in the comparable periods.
- Proppant tons sold increased to 2.8 million in Q3 from 2.6 million and to 8.4 million for nine months from 7.5 million.
- Q3 product sales declined 3.7% because lower pricing more than offset higher volume. Nine-month product sales rose 28.5% from both higher prices and volume.
- Service sales increased 90.7% in Q3 and 126.2% for nine months, primarily due to higher logistics volumes.
- Q3 operating income declined 4.8% despite higher revenue, reflecting increased SG&A, depreciation, and transaction costs.
- Q3 net income declined 13.4%, primarily reflecting higher income taxes and increased operating expenses. Nine-month net income increased 23.3%.
- Adjusted free cash flow was $68.5 million in Q3 and $234.6 million for nine months, versus $69.6 million and $161.5 million, respectively.
Liquidity, capital spending, and debt
- Cash and cash equivalents were $264.5 million at September 30, 2023, up from $82.0 million at December 31, 2022. Approximately $119.4 million was placed through an insured cash sweep program and $112.3 million was held in U.S. Treasury bills.
- Working capital was $301.0 million. The company reported $73.9 million of availability under its $75.0 million ABL facility, with $1.1 million of outstanding letters of credit and no outstanding borrowings.
- Long-term debt, net of discount and deferred financing costs, was $172.5 million. The 2023 Term Loan Credit Facility has $180.0 million of principal, a fixed 9.50% interest rate, and a July 2030 maturity. Up to $100.0 million of delayed-draw term loans remained available.
- The term loan refinancing repaid $133.4 million of prior term-loan principal and accrued interest and terminated $42.8 million of finance lease liabilities. A $2.6 million prepayment fee was paid.
- The term loan includes a maximum 4.0-to-1.0 leverage-ratio covenant. Management reported compliance with debt covenants at September 30, 2023.
- Capital expenditures were $245.7 million for nine months, compared with $54.2 million in 2022. Cash used in investing activities exceeded operating cash flow by $32.2 million for the period.
- Management expected to use approximately $291.2 million of IPO proceeds and operating cash flow for commitments over the following 12 to 14 months, including the Dune Express and the second Kermit facility. The filing separately states that approximately $287.9 million of IPO proceeds was intended for Dune Express construction and approximately $3.3 million for general corporate purposes.
Material changes, outlook, risks, and unusual items
- The company completed its IPO on March 13, 2023, issuing 18.0 million shares at $18.00 per share and generating approximately $291.2 million of net proceeds.
- On October 2, 2023, after the reporting date, the Up-C Simplification reorganized the company under a new public holding company, exchanged non-company Operating Units for common stock, cancelled the former Class B shares, and made New Atlas the publicly held entity under the AESI ticker.
- Q3 SG&A included $3.3 million of non-recurring transaction costs related to the Up-C Simplification and debt refinancing. Nine-month non-recurring transaction costs were $4.4 million.
- Income tax expense rose to $7.6 million in Q3 and $20.4 million for nine months, partly because the corporate parent became subject to federal income taxes after the IPO and reorganization. The effective combined tax rate was 9.7%.
- Management stated that the Permian Basin proppant market remained healthy and balanced, with potential to tighten in 2024. Management expected increased fourth-quarter activity at prevailing commodity prices, while acknowledging a modest slowdown in current drilling and completions activity.
- WTI averaged $82.22 per barrel in Q3 versus $73.67 in Q2, but the Permian Basin rig count declined by 29 rigs to 312 at quarter-end.
- Key risks include oil and gas activity and commodity prices, proppant pricing and demand, customer concentration and collection risk, fuel and energy costs, construction and execution of the Dune Express, capital availability, debt covenants, operational and environmental incidents, permitting, reserve estimates, transportation availability, litigation, cybersecurity, and geopolitical or macroeconomic disruptions.
- The company reported no material pending legal proceedings and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- Whether Dune Express and the second Kermit facility remain on schedule and within the expected capital budget.
- Actual completion of the October 2, 2023 Up-C Simplification and its effect on share count, ownership, tax attributes, and future earnings per share.
- Future proppant pricing, volumes, logistics margins, and the effect of Permian Basin drilling and completion activity.
- Capital expenditure requirements, remaining IPO proceeds, and whether operating cash flow can fund growth spending and dividends.
- Compliance with the 4.0-to-1.0 leverage covenant and the availability and conditions of the delayed-draw term-loan commitments.
- The sustainability of the dividend policy given debt restrictions, minimum liquidity requirements, and substantial growth capital needs.
- Customer concentration, receivable collectability, and the company’s exposure to fuel, electricity, natural gas, transportation, environmental, and permitting costs.