Business context and reporting period
ProPetro Holding Corp. provides hydraulic fracturing and complementary oilfield services, primarily in the Permian Basin. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019; it was signed June 19, 2020 and includes material subsequent developments through that date. Results benefited from the December 2018 Pioneer pressure-pumping acquisition and an expanded active fleet.
Financial performance
Amounts below are in millions except per-share data. Comparisons are with the corresponding 2018 periods.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Service revenue | $529.5 | $459.9 | $1,075.7 | $845.1 |
| Operating income | $48.7 | $53.6 | $142.5 | $102.1 |
| Net income | $36.1 | $39.1 | $105.9 | $75.8 |
| Diluted EPS | $0.35 | $0.45 | $1.02 | $0.87 |
| Adjusted EBITDA (non-GAAP) | $126.6 | $96.0 | $276.8 | $172.7 |
| Adjusted EBITDA margin (non-GAAP) | 23.9% | 20.9% | 25.7% | 20.4% |
Q2 revenue grew 15.1%, but net income fell 7.6%; higher general and administrative expense, depreciation and asset-disposal losses offset revenue growth. First-half revenue rose 27.3% and net income 39.8%. Management attributed improved pressure-pumping margins to cost controls, lower consumable costs and customers sourcing more sand and other consumables. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP results.
Cash flow, debt and liquidity
- First-half operating cash flow was $150.9 million, versus $124.4 million in 2018. Investing cash outflow was $324.3 million, including $325.9 million of capital expenditures; financing cash inflow was $77.1 million.
- Cash fell to $36.3 million at June 30, 2019 from $132.7 million at year-end 2018. Long-term debt under the ABL facility increased to $150.0 million from $70.0 million. Management reported total liquidity of $146.5 million, including $110.2 million of facility availability.
- Current assets were $418.0 million and current liabilities $325.0 million. Accounts receivable increased to $371.5 million from $203.0 million at year-end; the filing reports $32.4 million of accrued, unbilled revenue.
- As subsequent context, the filing reports that by June 19, 2020 the company had repaid its ABL borrowings, but liquidity had fallen to approximately $57.4 million and the borrowing base to approximately $16.8 million.
Material changes versus the prior comparable period
- Q2 active hydraulic-fracturing fleets increased to 25.6 from 18.8; first-half average active fleets were approximately 26 versus 18. The Pioneer acquisition added substantial capacity and revenue, including $127.0 million of Q2 and $287.1 million of first-half revenue from Pioneer.
- Q2 general and administrative expense nearly doubled to $27.9 million, including $6.5 million of outside professional fees related to the Expanded Audit Committee Review and advisory work. First-half G&A rose 77.7% to $46.4 million.
- Losses on asset disposals rose to $31.2 million in Q2 and $50.4 million for the first half, attributed to fleet growth, service intensity and equipment maintenance.
- Capital spending accelerated substantially, while cash declined and ABL debt rose. The filing reports no off-balance-sheet arrangements at June 30, 2019.
Outlook, risks and unusual matters
- The filing provides no specific quantitative operating guidance for 2019. It describes the business as highly dependent on oil and gas prices, customer completion activity, utilization and pricing; fourth-quarter seasonality can also weigh on results.
- Subsequent developments discussed in the filing point to a severe industry downturn in 2020: COVID-19, oil-market disruption and falling activity were expected to pressure demand, service prices, revenue and cash flow. The company reported canceling substantially all planned 2020 growth capital, reducing maintenance and other costs, cutting its workforce by more than 60%, reducing director and officer compensation by up to 20%, and seeking improved vendor terms.
- At June 30, 2019, remaining contracted capital commitments were approximately $48.9 million, including $45.2 million under the DuraStim equipment purchase agreement. Sand-supply contracts include minimum-volume obligations and potential shortfall fees; none had been recorded for the first half of 2019.
- An Audit Committee review identified approximately $370,000 of improperly reimbursed executive expenses, subsequently repaid; an undisclosed related-party transaction; and significant control deficiencies. The review found no material accounting errors requiring restatement of the cited prior financial statements. Management concluded disclosure controls were ineffective as of December 31, 2018 and March 31 and June 30, 2019, and internal control over financial reporting remained ineffective. Remediation was ongoing and not yet established as effective.
- The company disclosed former-CEO share pledges that were not appropriately disclosed, and failures to disclose certain executive perquisites in prior proxy statements. It also reported an SEC investigation and securities class-action and derivative lawsuits; outcomes and potential costs could not be estimated, and no provision was recorded for these matters.
- The filing notes delayed periodic reports and an NYSE extension to July 15, 2020 to file delinquent reports, with delisting identified as a risk. Subsequent impairment charges were expected for 2019 and Q1 2020, including approximately $9.4 million of goodwill impairment and a $6.1 million write-off of DuraStim option deposits.
Most important facts for investors to verify
- Progress and independent validation of remediation for the material weaknesses, including whether controls have operated effectively for a sufficient period.
- Status and potential financial or governance consequences of the SEC investigation and shareholder lawsuits; confirm whether estimates or reserves have changed.
- Current liquidity, borrowing-base availability, covenant compliance and customer collections, particularly given the sharp increase in receivables and later deterioration in activity.
- Actual utilization, pricing, and contribution from Pioneer and other major customers, alongside concentration and receivable exposure.
- Final capital commitments, DuraStim deployment or cancellation costs, impairment outcomes, and any sand-contract shortfall fees.