Liberty Oilfield Services Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The filing is by Liberty Oilfield Services Inc. (now identified in the request as Liberty Energy Inc.). The company provides hydraulic fracturing services across several North American basins. It completed its IPO and corporate reorganization on January 17, 2018; 2017 comparisons reflect the predecessor before reorganization, so ownership, tax, and per-share comparisons are not fully comparable.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $628.1 million | $346.7 million | $1,123.2 million | $599.1 million |
| Operating income | $114.2 million | $41.5 million | $182.8 million | $51.1 million |
| Net income | $94.7 million | $39.0 million | $148.7 million | $47.2 million |
| Net income attributable to company stockholders | $49.6 million | Not applicable | $73.3 million | Not applicable |
| Adjusted EBITDA (non-GAAP) | $148.6 million | $64.8 million | $248.8 million | $95.2 million |
- Q2 revenue rose 81.1%; six-month revenue rose 87.5%. Management attributed growth to more active fleets and higher revenue per fleet, reflecting improved pricing, throughput, and demand.
- Operating margin was approximately 18.2% in Q2 2018 versus 12.0% in Q2 2017. The increase in activity also drove higher service costs, materials, personnel, repairs, and depreciation.
- Q2 basic and diluted earnings per share were $0.72 and $0.71; six-month amounts were $1.06 and $1.05. No comparable 2017 per-share figures are presented.
- Q2 income tax expense was $15.9 million; six-month expense was $24.0 million. The company became subject to corporate income taxes after the IPO; the stated effective combined rate was 13.9%.
Cash flow, liquidity, and debt
- Six-month operating cash flow was $109.2 million, versus $45.6 million a year earlier. Cash used in investing was $137.8 million, including $140.9 million of cash capital expenditures. Cash provided by financing was $95.7 million, including IPO proceeds and debt repayments.
- Cash increased to $83.3 million at June 30 from $16.3 million at year-end. Current assets were $518.8 million and current liabilities $205.7 million; the current ratio was approximately 2.5.
- Debt totaled $113.0 million gross ($107.2 million net of financing costs and discounts), down from $204.6 million gross at year-end. The term loan carried a 9.7% weighted-average rate. The $250 million asset-based revolver had no borrowings and $235.1 million of availability.
- The company reported compliance with applicable credit-facility covenants. Management said operating cash flow and available borrowing capacity should fund operations for at least the next 12 months.
Outlook, material matters, and risks
- Management reported demand exceeding current capacity. It expected one additional fleet and added horsepower in Q4 2018, followed by another fleet in Q1 2019, targeting 24 active fleets and approximately 1.17 million hydraulic horsepower. These are expectations, not guarantees.
- Management expected strong 2018 demand, particularly for high-efficiency fleets. It noted uncertainty from Permian Basin takeaway constraints, but said the constraint had not yet affected Liberty’s Permian operations and markets outside the Permian remained constructive.
- Oilfield activity and results remain exposed to commodity-price volatility, customer spending, service pricing and utilization, competition, regulation, environmental matters, financing access, and credit-facility covenants. The company reported no material change to previously disclosed risk factors.
- Material commitments included $727.4 million of future proppant, chemical, and rail-car commitments and $122.8 million of future minimum operating lease payments. No proppant shortfalls were reported at quarter-end.
- SandBox Logistics and Oren Technologies sued the company and related entities, alleging patent infringement and contract breaches; SandBox sought monetary and injunctive relief and requested permission in July 2018 to add contract claims. Liberty said it would vigorously defend itself; the outcome was uncertain. Management did not expect litigation matters in aggregate to materially affect results or financial condition.
- Q2 included a $3.4 million inventory write-down. IPO-related term-loan repayment also resulted in a $1.7 million write-off of financing costs and a $0.9 million prepayment penalty, affecting interest expense.
- On August 1, 2018, the company announced a first quarterly dividend of $0.05 per Class A share, with payment scheduled for September 20, 2018; Liberty LLC also announced a $0.05-per-unit distribution.
Important facts for investors to verify
- Whether planned fleet additions were completed on schedule and translated into sustained utilization, pricing, and per-fleet returns.
- Whether operating cash flow can support growth capital spending and the substantial supply and lease commitments without renewed borrowing.
- Debt repayment, interest costs, revolver availability, and covenant headroom as activity and liquidity change.
- The financial exposure and potential business impact of the SandBox litigation and the tax receivable agreements, which generally entitle holders to 85% of specified realized tax savings and may accelerate in certain circumstances.
- Comparability of reported earnings and per-share measures across the IPO and reorganization, including the effects of noncontrolling interests and corporate taxes.