ProPetro Holding Corp. — Q2 2020 Form 10-Q
Business context and period. This unaudited report covers the three and six months ended June 30, 2020. ProPetro provides pressure-pumping and related oilfield services, primarily in the Permian Basin. Results were sharply affected by COVID-19, reduced energy demand, depressed oil prices, and lower customer drilling and completion activity.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Service revenue | $106.1 million | $529.5 million | $501.2 million | $1,075.7 million |
| Operating income (loss) | $(31.3) million | $48.7 million | $(38.8) million | $142.5 million |
| Net income (loss) | $(25.9) million | $36.1 million | $(33.7) million | $105.9 million |
| Diluted EPS | $(0.26) | $0.35 | $(0.33) | $1.02 |
| Adjusted EBITDA (non-GAAP) | $25.4 million | $126.6 million | $100.3 million | $276.8 million |
| Adjusted EBITDA margin (non-GAAP) | 23.9% | 23.9% | 20.0% | 25.7% |
Cash flow and balance sheet. For the first six months, operating cash flow was $96.9 million, investing cash outflow was $78.0 million, and financing cash outflow was $130.6 million. Cash fell by $111.7 million to $37.3 million. The company repaid $130.0 million of ABL borrowings and reported no debt at June 30. Total assets were $1.094 billion and shareholders’ equity was $938.4 million.
June 30 liquidity was approximately $50.4 million: $37.3 million cash and $13.1 million ABL availability. The $300 million revolving facility is subject to a borrowing base, which was approximately $16.8 million at June 30. At July 31, reported liquidity was $43.1 million, comprising $22.6 million cash and $20.5 million availability.
Material changes and operating developments
- Q2 revenue declined 80.0% year over year; first-half revenue declined 53.4%. Management attributed the reductions mainly to lower fleet utilization and customer pricing discounts amid the downturn.
- Average active fracturing fleets fell to approximately 4.0 in Q2 from 25.6 a year earlier, and to 11.1 for the first half from 26.3.
- Q2 pressure-pumping adjusted EBITDA margin was 32.8% versus 25.4% a year earlier, but management said idle-fee revenue materially supported the comparison. Excluding Q2 idle fees of $32.6 million, pressure-pumping service costs were approximately 92.7% of related revenue.
- First-half impairment expense was $16.7 million, including $9.4 million of goodwill impairment and $7.2 million of property and equipment impairment. The $6.1 million fee for an option to purchase additional DuraStim equipment was written off; the company said exercise of the option was not probable.
- First-half capital expenditures were $80.7 million, down substantially from $325.9 million in 2019. The company cancelled substantially all planned growth capital projects for the remainder of 2020.
Outlook, risks, contingencies, and unusual items
- Outlook. No specific financial guidance was provided. Management expected reduced completions and pricing pressure to continue weighing on revenue, results, and cash flow; prolonged weak conditions could lead to further impairments. Management cited the Permian’s potential if markets recover but emphasized uncertainty about the recovery.
- Cost and liquidity measures. The company reported workforce reductions of more than 60% between April and May, lower maintenance and consumable spending, compensation reductions of up to 20% for directors and officers, and efforts to improve vendor terms and receivable collections.
- Customer and receivable exposure. Pioneer accounted for approximately $64.3 million of Q2 revenue and $191.6 million of first-half revenue. At June 30, approximately $47.2 million was due from Pioneer. Idle fees included in Q2 revenue were $32.6 million; the filing said this amount was included in receivables and expected to be collected in the near term.
- Legal and regulatory matters. The company disclosed a securities class action, a consolidated shareholder derivative action, and an SEC investigation. It could not predict their duration or outcome and recorded no provision because the outcomes could not be reasonably estimated.
- Controls and reporting. Management concluded disclosure controls were ineffective at June 30, and internal control over financial reporting remained ineffective due to material weaknesses involving the control environment, information and communication, control activities, and related-party transaction controls. Remediation was ongoing; management nevertheless stated the financial statements fairly presented results in all material respects. The company became current with SEC filings and regained NYSE listing compliance on July 2, 2020.
- Other risks. The borrowing base depends on eligible receivables and may contract as customer activity declines. ABL borrowings are secured by substantially all company assets. The filing also noted sand purchase commitments and the planned phaseout of LIBOR, for which a contractual alternative had not yet been pursued.
Important facts for investors to verify
- Whether Pioneer pays the approximately $47.2 million receivable, including idle-fee amounts, on the expected timetable.
- Current cash, ABL availability, borrowing-base capacity, and compliance with facility covenants as activity and eligible receivables change.
- Customer demand, active fleet utilization, pricing, and the extent to which reported adjusted EBITDA depends on idle fees.
- Progress and independent evidence of effective remediation of the disclosed material weaknesses.
- Developments in the SEC investigation and shareholder litigation, and any resulting costs or liabilities.
- Whether further asset impairments, capital spending changes, or liquidity actions become necessary if market conditions remain weak.