Solaris Oilfield Infrastructure, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing identifies the registrant as Solaris Oilfield Infrastructure, Inc. (NYSE: SOI). Solaris designs and manufactures equipment and provides field, logistics, transloading, and software services used in oil and gas well completions.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $103.0 million | $241.7 million |
| Operating income (loss) | ($59.9) million | $107.9 million |
| Net income (loss) | ($51.1) million | $90.4 million |
| Net income (loss) attributable to Solaris | ($29.3) million | $52.0 million |
| Class A diluted EPS | ($1.03) | $1.69 |
| Adjusted EBITDA, non-GAAP | $25.6 million | $113.4 million |
| Operating cash flow | $43.9 million | $114.9 million |
| Capital expenditures | $4.7 million | $34.9 million |
- Revenue fell 57%; operating margin was approximately negative 58%, compared with positive 45% in 2019. Adjusted EBITDA margin declined to approximately 25% from 47%.
- Cash and cash equivalents were $60.4 million at year-end, down from $66.9 million. Current assets were $81.7 million and current liabilities $20.2 million.
- No borrowings were outstanding under the $50 million revolving credit facility; the full $50 million was available, and the company reported covenant compliance. The facility matures April 26, 2022.
- Total assets were $411.9 million, versus $505.1 million; total liabilities were $96.4 million, versus $95.4 million. Liabilities include a $68.7 million Tax Receivable Agreement obligation. Operating and finance lease liabilities were also reported.
- Operating cash flow declined $71.0 million, primarily due to lower revenue and working-capital changes. Financing cash outflow was $46.6 million, including $26.7 million of share and unit repurchases and $19.0 million of distributions and dividends.
Changes, outlook, and material items
- System rental revenue declined 63% to $52.2 million; system services revenue fell 24% to $48.6 million. Transloading revenue dropped 96% to $1.3 million, partly because 2019 included $27.1 million of deferred revenue from contract termination payments.
- Average fully utilized mobile proppant systems declined 59% year over year. Management linked the downturn to COVID-19, oil-market volatility, and sharply reduced customer completion activity. U.S. land rig count averaged 417 in 2020, down 55% from 2019.
- The company recorded $47.8 million in impairment losses and other charges, including $37.8 million on property, plant and equipment, $4.2 million on goodwill, $2.8 million on right-of-use assets, and $0.4 million on inventory and other assets. The Kingfisher Facility’s long-lived assets were fully impaired; Railtronix goodwill was also impaired.
- Management reported oil prices and rig activity had recovered by year-end and into early 2021, but said activity depends on economic recovery, vaccine rollout, regulation, and oil-and-gas supply and demand. It expected activity to generally track U.S. land drilling and completion trends.
- FY2021 capital spending was expected to be $5 million to $10 million, compared with less than $5 million in 2020. Management believed cash, operating cash flow, and available credit would fund operations for at least 12 months.
- The company paid quarterly Class A dividends of $0.105 per share and said it intended to continue them, subject to board discretion, financial conditions, and debt-agreement restrictions.
- Quarterly unaudited FY2020 revenue was $47.8 million, $9.3 million, $20.5 million, and $25.3 million, respectively. Each quarter reported a net loss.
Risks, contingencies, and governance
- Results remain highly exposed to oil and gas prices, customer capital spending, COVID-19 effects, competition, and the pace of industry recovery. Customer concentration is material: Devon Energy represented 14% of FY2020 revenue, and four customers represented 42% of year-end receivables.
- One trucking supplier accounted for 24% of 2020 spending; the company said it had no long-term agreements with third-party trucking suppliers. Disruption or price increases could affect service delivery and costs.
- Regulatory, environmental, worker-safety, silica, climate-policy, water-availability, and induced-seismicity developments could raise costs or reduce customer activity. The filing describes no environmental liability as probable at year-end and no legal matters then outstanding that management considered material to the financial statements.
- The Tax Receivable Agreement requires payment to holders of 85% of certain realized or deemed tax savings. The filing estimated an approximately $87.6 million aggregate early-termination payment under specified assumptions; the estimate is not a stated current cash payment.
- Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2020. The auditor did not attest to internal-control effectiveness because the company was an emerging growth company. The financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Whether recovery in rig counts and completion activity translates into improved system utilization, revenue, and cash generation.
- The assumptions underlying the $47.8 million impairment charges and whether additional impairments may be required.
- Customer receivable collectability, given the allowance for credit losses and year-end customer concentration.
- The timing and liquidity impact of the $68.7 million Tax Receivable Agreement liability, including potential change-of-control acceleration.
- Compliance with credit-facility covenants and the availability of revolving capacity as the facility approaches its 2022 maturity.
- Whether the planned $5 million to $10 million of 2021 capital spending and continued dividends are supported by operating performance and liquidity.