Business Context and Reporting Period
Company: Liberty Oilfield Services Inc. (Predecessor: Liberty Oilfield Services LLC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2017
Business Overview: Liberty is an independent provider of hydraulic fracturing services to onshore oil and natural gas exploration and production (E&P) companies in North America. Operations are concentrated in the Permian Basin, Eagle Ford Shale, Denver-Julesburg Basin, Williston Basin, and Powder River Basin. As of December 31, 2017, the company operated 19 active fleets, growing to 21 active fleets by March 2018.
Corporate Structure: The registrant is a holding company with no direct operations. The operating assets are held by Liberty Oilfield Services New HoldCo LLC ("Liberty LLC"). The company completed its Initial Public Offering (IPO) on January 17, 2018, shortly after the reporting period.
Key Financial Metrics
| Metric | 2017 | 2016 | 2015 |
|---|---|---|---|
| Revenue | $1,489.9 million | $374.8 million | $455.4 million |
| Net Income (Loss) | $168.5 million | $(60.6) million | $(9.1) million |
| Operating Income (Loss) | $181.1 million | $(54.4) million | $(3.6) million |
| EBITDA | $262.6 million | $(13.1) million | $32.9 million |
| Adjusted EBITDA | $280.7 million | $(5.6) million | $41.2 million |
| Operating Cash Flow | $195.1 million | $(40.7) million | $6.1 million |
| Capital Expenditures | $300.8 million | $102.4 million | $38.5 million |
| Total Debt (Long-term + Current) | $196.4 million | $103.8 million | $110.2 million |
| Total Assets | $852.1 million | $451.8 million | $297.0 million |
| Average Active Fleets | 15.1 | 7.4 | 5.9 |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 297.5% to $1.49 billion in 2017 compared to 2016. This was driven by a 104% increase in average active fleets and a 94.8% increase in revenue per average active fleet due to improved pricing and throughput.
- Profitability Turnaround: The company shifted from a net loss of $60.6 million in 2016 to a net income of $168.5 million in 2017. Operating income improved by $235.6 million, turning from a loss to a profit.
- Cost Structure: Cost of services increased 223.3% to $1.15 billion, primarily due to a 235.7% increase in material volumes and higher personnel costs to support fleet expansion. General and administrative expenses rose 123.8% to $80.1 million.
- Debt Position: Total debt increased to $196.4 million in 2017 from $103.8 million in 2016, reflecting new credit facilities entered into in September 2017 to fund growth and acquisitions.
- Acquisitions: In 2017, the company acquired Titan Frac Services LLC for $65.0 million and real estate assets in Texas for $18.5 million.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Management Commentary
Management expects demand for hydraulic fracturing services to continue increasing as E&P companies expand drilling and completion activities. The company plans to deploy three additional fleets by the end of 2018, reaching a total of 24 active fleets. The company anticipates funding operations and growth through IPO proceeds and operating cash flows.
Unusual Items and Transactions
- IPO Proceeds: In January 2018, the company completed an IPO raising approximately $220.4 million in net proceeds. These funds were used to repay $30.1 million of the ABL Credit Facility and $62.5 million of the Term Loan Facility.
- Tax Receivable Agreements (TRA): The company entered into agreements to pay 85% of net cash tax savings to legacy owners. In the event of a change of control or early termination, the company may be required to make a substantial lump-sum payment (estimated at $113.8 million if terminated immediately post-IPO).
Risks and Contingencies
- Commodity Price Volatility: Business is highly dependent on oil and natural gas prices. A decline in prices could reduce customer capital spending and demand for services.
- Customer Concentration: The top five customers accounted for 53.0% of revenue in 2017. Extraction Oil & Gas, Inc. and SM Energy Company each accounted for more than 10% of revenue.
- Internal Control Weakness: The company identified a material weakness in internal control over financial reporting as of December 31, 2017, related to segregation of duties and controls over journal entries.
- Legal Proceedings: The company is a defendant in a patent infringement lawsuit filed by SandBox Logistics, LLC, alleging willful infringement of multiple U.S. patents.
- Environmental and Regulatory: Operations are subject to stringent environmental regulations regarding water usage, waste disposal, and emissions. Changes in regulations could increase costs or restrict operations.
Investor Verification Checklist
- Internal Controls: Verify the status of remediation efforts for the material weakness in internal controls identified in 2017.
- Debt Covenants: Review the specific financial covenants in the ABL and Term Loan facilities, particularly the liquidity thresholds that trigger fixed charge coverage ratios.
- Tax Receivable Agreements: Assess the potential cash outflow impact of the Tax Receivable Agreements, especially in the event of a change of control.
- Customer Concentration: Monitor the financial health of the top five customers, which represent over half of total revenue.
- Legal Litigation: Track the progress of the SandBox patent infringement lawsuit and potential liability exposure.
- Capital Expenditures: Confirm the funding sources and deployment timeline for the planned expansion to 24 active fleets.