Liberty Oilfield Services Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 28, 2019. The filing presents full-year results and unaudited quarterly data. The company provides hydraulic fracturing services to U.S. onshore E&P customers, principally in the Permian, Eagle Ford, DJ, Williston and Powder River basins. It operated 22 fleets at year-end, up from 19.
Financial results and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $2,155.1 million | $1,489.9 million |
| Operating income | $306.6 million | $181.1 million |
| Operating margin | 14.2% | 12.2% |
| Net income | $249.0 million | $168.5 million |
| Net income attributable to Liberty Inc. stockholders | $126.3 million | Not presented; predecessor results before the IPO |
| Operating cash flow | $351.3 million | $195.1 million |
| Capital expenditures | $258.8 million | $311.8 million |
| Cash and cash equivalents at year-end | $103.3 million | $16.3 million |
| Long-term debt, including current portion | $106.5 million net of financing costs | $196.4 million net of financing costs |
Revenue increased 44.7%, reflecting a 41.1% increase in average active fleets and a 2.5% increase in revenue per average active fleet, to approximately $101.2 million. Adjusted EBITDA, a non-GAAP measure, was $438.2 million, compared with $280.7 million. Operating cash flow less capital expenditures was approximately $92.4 million.
At December 31, the term loan had $111.7 million of principal outstanding, with a 10.1% weighted-average interest rate. The ABL had no borrowings; its borrowing base was $224.6 million and remaining availability was $224.3 million after a $0.3 million letter of credit. The company reported compliance with its debt covenants. It believed operating cash flow and available credit would fund operations for at least the next 12 months.
Changes and fourth-quarter performance
- Annual operating income and net income rose with expanded fleet capacity and activity. Operating costs also increased as service volumes grew; cost of services rose 42.0% and depreciation and amortization rose 53.6%.
- Industry conditions weakened in the second half of 2018: WTI fell from a July average of $70.98 per barrel to $49.52 in December. Management said reduced customer activity and excess staffed fracturing capacity pressured service pricing late in the year.
- Fourth-quarter revenue was $473.1 million, versus $558.8 million in Q3 2018 and $448.9 million in Q4 2017. Q4 operating income was $41.5 million, versus $82.2 million in Q3 and $63.0 million in Q4 2017; net income attributable to Liberty Inc. stockholders was $19.0 million.
- Q4 included a $5.6 million gain on asset disposals, primarily reflecting an $11.5 million gain from insurance proceeds exceeding losses on equipment damaged in a November fire.
Period comparisons require care: Liberty Inc. completed its IPO and corporate reorganization on January 17, 2018. Pre-IPO results are those of the predecessor, and only the post-reorganization portion of 2018 is subject to corporate income tax and attributable to Liberty Inc. stockholders. The filing reports 2018 basic and diluted earnings per share of $1.84 and $1.81, respectively.
Outlook, capital allocation and risks
- Management expected demand for its high-efficiency fleets to remain strong in 2019, citing its basin diversity and customer discussions, but noted uncertainty around customer activity and could not predict when service pricing would improve. No quantitative financial guidance was provided.
- Additional equipment was expected in 2019; deployment would depend on customer demand, long-term returns and market conditions. Management pointed to longer laterals, more fracturing stages and higher proppant use as industry trends supporting service intensity.
- The board approved a further share repurchase authorization of up to $100 million through January 31, 2021, in addition to the prior $100 million program, which was substantially completed. It also approved a $0.05-per-share quarterly dividend for March 2019. Future repurchases and dividends remain discretionary.
- Key risks include oil and gas price volatility, cyclical customer spending, excess fracturing capacity and pricing pressure, customer concentration and credit exposure, supply and equipment dependencies, weather and water constraints, and environmental, safety, regulatory and induced-seismicity risks. The top five customers generated 42% of 2018 revenue; Extraction Oil & Gas exceeded 10%.
- Contractual obligations included $690.9 million of purchase commitments, principally proppant and transportation, and $153.9 million of operating lease obligations. These commitments may constrain flexibility; certain supply agreements include minimum purchase or shortfall provisions.
- Tax receivable agreements generally require payment to holders of 85% of realized tax savings. The filing estimated that a change-of-control termination at December 31, 2018 would have required approximately $67.3 million in aggregate, based on an estimated undiscounted liability of $110.0 million; actual amounts may differ materially.
- The SandBox patent and contract claims against the company were dismissed with prejudice in December 2018. Management did not expect other ordinary-course proceedings, individually or in aggregate, to have a material adverse effect.
Important facts for investors to verify
- Whether post-2018 demand, fleet utilization and pricing supported management’s 2019 expectation, given the late-2018 commodity-price decline and reported oversupply of staffed fleets.
- How much of operating cash flow remains after fleet growth, maintenance spending, debt service, repurchases and dividends; confirm the effect of the term loan’s excess-cash-flow prepayment provisions.
- The timing and amount of proppant and other purchase commitments, including any shortfall exposure, and the operating-lease liabilities recognized after adoption of the lease accounting standard in 2019.
- Actual debt balances, borrowing-base availability and covenant headroom, as well as the tax receivable agreement liability and potential change-of-control payment.
- Customer concentration, related-party receivables and transactions, and the extent to which fire-insurance proceeds and other unusual items affect comparisons of underlying results.
- Management reported effective disclosure controls and internal control over financial reporting at year-end and remediation of a prior material weakness; the independent auditor did not attest to internal-control effectiveness for 2018.