Solaris Oilfield Infrastructure, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing entity is Solaris Oilfield Infrastructure, Inc. (NYSE: SOI); the request metadata uses a different company name. The filing reports full-year results, with selected quarterly data.
Business context
Solaris designs, manufactures and rents mobile proppant and chemical management systems and provides related field, logistics, transloading and inventory-software services for U.S. oil and gas completions. Most revenue comes from system rentals and related services. At year-end, its fleet included 166 proppant systems and 14 chemical systems; Solaris Inc. owned 66% of Solaris LLC.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $241.7 million | $197.2 million |
| Operating income | $107.9 million | $99.3 million |
| Net income | $90.4 million | $86.0 million |
| Net income attributable to Solaris Inc. | $52.0 million | $42.4 million |
| Class A diluted EPS | $1.69 | $1.59 |
| Adjusted EBITDA | $112.9 million | $122.8 million |
| Operating cash flow | $114.9 million | $116.4 million |
| Capital expenditures | $34.9 million | $161.1 million |
Revenue rose 22.6%. Operating margin was approximately 44.7%, down from 50.3%; net margin was approximately 37.4%, down from 43.6%. Adjusted EBITDA declined 8.1%, despite higher GAAP net income. Management reported $66.9 million cash at year-end, no borrowings under its $50 million revolving facility, and $50 million available to draw (plus an uncommitted $25 million accordion). Current assets were $117.6 million and current liabilities $20.4 million. The company said cash, operating flows and available credit should fund operations for at least 12 months.
Material changes and unusual items
- System rental revenue decreased 1% to $142.0 million; system services revenue increased 49% to $63.9 million; transloading revenue increased to $34.1 million from $8.1 million. Inventory software revenue fell to $1.7 million from $2.5 million.
- Transloading revenue included $27.1 million of deferred termination payments recognized after the Kingfisher customer contract was fully terminated. No deferred revenue remained at year-end. This item materially boosted reported revenue; Adjusted EBITDA excludes the termination revenue.
- Average fully utilized proppant systems were nearly flat at 110 versus 111. U.S. land rig count fell 9%; Solaris attributed its comparatively stable utilization partly to its prior fleet expansion.
- Operating costs and expenses rose 36.6% to $133.8 million, with higher service costs and depreciation. System-services costs excluding depreciation were $74.7 million, exceeding the $63.9 million system-services revenue line.
- Operating cash flow was broadly stable, while investing outflows fell substantially as system manufacturing slowed and Kingfisher construction had been completed. Financing cash outflows included $19.3 million in dividends, $13.0 million of debt repayment and $3.2 million of repurchases.
Outlook, risks and contingencies
Initial 2020 capital budgets announced by oil and gas operators indicated U.S. drilling and completion spending could decline 10%–15% versus 2019. Solaris expected its activity to generally track industry activity and said it did not expect to build additional proppant systems during the remainder of 2020. This is management’s outlook, not a quantified company revenue or earnings forecast.
Key risks include commodity-price and customer-spending volatility, customer and supplier concentration, competition, utilization and pricing pressure, transportation availability, environmental and hydraulic-fracturing regulation, and potential impairment of underutilized assets. Devon Energy and ProPetro represented approximately 19% and 10% of 2019 revenue, respectively. One supplier represented 19% of annual spending and 44% of accounts payable at year-end.
The Tax Receivable Agreement liability was $68.0 million. A change of control or early termination could trigger an estimated $101.7 million immediate payment, based on the filing’s assumptions; actual payment could differ materially. No material pending litigation or probable environmental liabilities were reported. A remaining $875,000 potential Railtronix performance award was not accrued because achievement was not considered probable.
Investor facts to verify
- How much of 2019 transloading revenue and cash generation depended on the one-time $27.1 million contract termination recognition, and what recurring Kingfisher volumes and commitments remain?
- Whether 2020 activity, utilization, pricing and margins matched the stated industry-spending outlook, particularly given the decision to pause proppant fleet additions.
- Customer and supplier exposure, receivable collectability, and the economics of system-services work, whose reported direct costs exceeded its revenue line.
- The assumptions and potential cash-payment timing for the $68.0 million Tax Receivable Agreement liability, including change-of-control acceleration.
- The status of the previously identified accounting material weakness: management said remediation was effective at December 31, 2019, but prior statements were restated and the auditor did not attest to internal-control effectiveness. The filing also notes an immaterial interim 2019 weighted-average-share and EPS error.