ProPetro Holding Corp. — Q1 2020 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2020; it was signed July 2, 2020. ProPetro provides hydraulic fracturing and related oilfield services, primarily in the Permian Basin. Its results were affected by the COVID-19 demand shock, falling oil prices, and the early-2020 oil supply dispute.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Service revenue | $395.1 million | $546.2 million |
| Operating income (loss) | $(7.4) million | $93.8 million |
| Net income (loss) | $(7.8) million | $69.8 million |
| Diluted EPS | $(0.08) | $0.67 |
| Adjusted EBITDA (non-GAAP) | $74.9 million | $150.3 million |
| Adjusted EBITDA margin (non-GAAP) | 19.0% | 27.5% |
| Net cash from operating activities | $61.7 million | $36.1 million |
| Cash capital expenditures | $47.3 million | $178.9 million |
Balance sheet and liquidity: At March 31, cash was $143.7 million, ABL debt was $110.0 million, and reported total liquidity was $194.1 million, including $50.4 million of facility availability. Current assets were $378.0 million versus current liabilities of $225.9 million. The ABL borrowing base was $161.9 million; the $300 million facility is subject to that borrowing-base limit and matures in December 2023. By June 29, the company reported repaying all borrowings, with $36.7 million cash and $13.1 million availability, or $49.8 million total liquidity.
Material changes and operating results
- Revenue fell 27.7% year over year. Management attributed the decline to lower demand, fewer active fracturing fleets (about 18.6 versus 27.0), and customer pricing discounts introduced in March.
- Pressure-pumping revenue declined 27.3%; its Adjusted EBITDA fell 47.9% to $78.7 million and its margin contracted to 20.3% from 28.4%.
- Cost of services declined less quickly than revenue, and pressure-pumping cost of services rose to 76.0% of segment revenue from 69.7%, reflecting discounts and costs absorbed on idled fleets.
- Q1 included $16.7 million of impairment expense, including $9.4 million to fully impair goodwill and approximately $7.2 million of property and equipment impairments. The company also wrote off a $6.1 million DuraStim equipment-option deposit.
- General and administrative expense increased 34.6% to $24.9 million, including $5.1 million of external consultant fees related to the expanded audit committee review and $4.3 million of credit-loss provision.
- Operating cash flow increased year over year, which management attributed primarily to the timing of customer collections and vendor payments. Investing cash outflow declined substantially with lower capital spending; financing cash outflow included $20.0 million of ABL repayments.
- Accounts receivable allowance for credit losses rose to $5.3 million. Pioneer, a related-party customer, accounted for $127.4 million of Q1 revenue and $77.7 million of receivables at March 31.
Outlook, risks, and unusual matters
- Management expected reduced completion activity and continued pricing pressure to materially adversely affect revenue, results, and cash flows. The Permian rig count cited declined from about 403 at the start of 2020 to 175 in May. Management warned that prolonged weak conditions could trigger further asset impairments.
- The company canceled substantially all planned 2020 growth capital projects, reduced maintenance and consumable spending, cut its workforce by more than 60%, reduced director and officer compensation by up to 20%, and pursued improved vendor terms and receivable collections.
- Management said it was not probable the company would exercise options to purchase an additional 108,000 HHP of DuraStim equipment under prevailing market conditions. It expected to receive 54,000 HHP of already-paid-for DuraStim equipment before year-end 2020.
- Three shareholder lawsuits (Logan, Boca Raton, and Chang) and an SEC investigation were pending. The company said the duration, scope, and outcomes could not be predicted and recorded no provision because outcomes could not be reasonably estimated.
- Management reported material weaknesses in internal controls, including control-environment, communication, control-activity, and related-party transaction deficiencies. Disclosure controls and procedures were deemed ineffective as of March 31; remediation was ongoing and not yet considered complete.
- The board adopted a short-term stockholder rights plan in April 2020, expiring March 31, 2021, with triggering ownership thresholds generally at 10% (20% for certain passive investors).
- The cover page marks “No” for having filed all required reports during the preceding 12 months and for submitting every required Interactive Data File. Investors should verify the filing history and related circumstances.
Important facts for investors to verify
- Whether the June 29 debt repayment and reduced liquidity leave adequate borrowing-base availability as receivables and customer activity decline.
- Customer credit exposure and collections, particularly the $77.7 million due from Pioneer and the basis for the credit-loss allowance.
- The pace of recovery in Permian completion activity, fleet utilization, pricing, and cash generation, and whether further impairments or cost reductions follow.
- Progress and independent validation of internal-control remediation, plus developments in the SEC investigation and shareholder litigation.
- The reason for the cover-page “No” responses regarding prior required filings and Interactive Data Files, and any implications for reporting compliance.