Ranger Energy Services, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are to Q1 2018 unless stated otherwise. Ranger provides U.S. well-service rigs, completion and other services, and natural-gas processing solutions.
Financial performance
- Revenue: $88.3 million, up 41% from $62.6 million. Completion and Other Services rose 121% to $51.6 million, primarily from wireline expansion; Processing Solutions increased 72% to $5.0 million. High Specification Rig revenue fell 13% to $31.7 million.
- Profitability: Operating income was $5.2 million versus an operating loss of $10.8 million. Net income was $3.6 million versus a net loss of $10.3 million; income attributable to Ranger was $2.0 million, or $0.24 basic and $0.21 diluted per share. Adjusted EBITDA, a non-GAAP measure, was $14.2 million versus $5.2 million.
- Margins: Cost of services was 76% of revenue versus 82% a year earlier. Operating margin was approximately 5.9% versus negative 17.3%; net margin was approximately 4.1% versus negative 16.5%. The prior-year results included a $9.0 million goodwill impairment charge.
- Cash flow and investment: Operating cash flow was $9.9 million, compared with $1.1 million used in Q1 2018. Investing activities used $10.5 million, including $10.8 million of property and equipment purchases; financing activities provided $3.7 million. Cash increased $3.1 million to $5.7 million.
- Liquidity and balance sheet: Working capital was $8.3 million, up from $2.2 million at December 31, 2018. Current assets were $74.7 million and current liabilities $66.4 million. Credit-facility availability was $17.7 million.
- Debt and interest: Reported debt carrying value, net of issuance costs, was $65.2 million at March 31, versus $60.5 million at year-end; finance lease obligations were additional liabilities. Interest expense was $1.3 million versus $0.4 million. The Encina financing carried a 10.4% weighted average rate; the credit facility rate was 4.5%.
Changes versus the prior comparable period
- Rig activity weakened: utilization averaged approximately 142 hours per rig versus 184 hours, and total rig hours fell about 18% to 60,100. Average revenue per rig hour increased to approximately $522 from $487.
- Management attributed lower rig revenue partly to a roughly 13% decline in commodity prices. Wireline activity expanded substantially, supporting the increase in Completion and Other Services revenue.
- Interest expense rose with borrowings under the Encina financing agreement and increased credit-facility borrowings. Depreciation and amortization increased to $8.4 million from $6.1 million.
- Ranger adopted the new lease accounting standard on January 1, 2019, recognizing an $8.3 million operating-lease right-of-use asset and corresponding liability at adoption.
Outlook, risks and unusual items
- Management said it expected sufficient funds to meet liquidity requirements for at least the next 12 months. The filing provides no numerical revenue or earnings guidance.
- Management believed it could achieve three-year cumulative profitability within the next 12 months, possibly as early as Q2 2019. That outcome could support releasing some or substantially all of the deferred-tax valuation allowance, producing a tax benefit; timing and amount remained uncertain.
- Credit-facility and Encina covenants were met at quarter-end. The credit facility requires a fixed-charge coverage ratio under specified low-liquidity conditions; Encina requires leverage-ratio compliance. A hypothetical 1 percentage-point rate change was estimated to affect annual interest expense by approximately $0.7 million.
- Customer and receivable concentration is material: three customers represented 40% of Q1 revenue and approximately 49% of accounts receivable. Demand is exposed indirectly to oil and gas prices and customer activity; Ranger said it did not intend to hedge this commodity exposure.
- The $5.8 million ESCO seller note was due in February 2019, but Ranger had withheld principal and unpaid interest while pursuing contractual indemnification claims. The filing does not describe the dispute’s resolution. Management said ordinary-course legal matters were not expected to have a material adverse effect and reported no currently material litigation.
- Management identified risks including commodity-price and industry-activity changes, pricing and competition, access to capital, regulation, and the ability to sustain utilization and margins. It also cautioned that interim results may not indicate full-year results.
Key facts for investors to verify
- Whether lower rig hours and commodity-price pressure persist, and whether revenue growth in wireline and other services translates into durable margins and cash generation.
- Current borrowing-base availability, covenant headroom, debt maturities, interest costs, and the distinction between reported carrying debt and principal outstanding.
- Status and potential cash impact of the ESCO note indemnification dispute.
- Customer concentration and collection trends, particularly given the share of receivables attributable to major customers.
- Whether profitability supports any deferred-tax valuation-allowance release, and the resulting timing and amount of any tax benefit.