Solaris Oilfield Infrastructure, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
The quarter ended March 31, 2017. Solaris Oilfield Infrastructure, Inc. was formed in February 2017 to complete an IPO; it had only $10 of assets and no material operating activity during the quarter. The operating results below are those of its predecessor, Solaris Oilfield Infrastructure, LLC and subsidiaries, which manufactures and rents mobile proppant-management systems and provides related field and transportation services. Solaris completed its IPO on May 17, 2017 and thereafter became the LLC’s managing member and consolidates its results.
Financial performance and position
Unless stated otherwise, amounts are in millions of dollars; operating results compare Q1 2017 with Q1 2016.
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $10.324 | $3.144; up 228% |
| Operating income (loss) | $4.851 | $(0.126) |
| Operating margin | 47.0% | Negative in Q1 2016 |
| Net income (loss) | $4.782 | $(0.127) |
| EBITDA / Adjusted EBITDA | $5.990 / $6.112 | $0.755 / $0.791 |
| Operating cash flow | $2.841 | $(1.199) |
| Capital expenditures and investing cash flow | $7.616 investing cash outflow | $2.318 investing cash outflow |
Rental revenue rose 236% to $8.401 million; service revenue rose 200% to $1.923 million. Revenue days increased 138% to 2,627, while average deployed systems rose to 29.2 from 12.1. Management attributed growth to greater deployment, improving demand and higher rental rates. Services remained loss-making before depreciation: service costs were $2.074 million against $1.923 million of service revenue.
At March 31, LLC cash was $1.778 million, current assets $12.028 million and current liabilities $5.077 million (current ratio approximately 2.4). Total assets were $87.088 million and members’ equity $79.212 million. Facility borrowings were approximately $2.5 million per the debt note; the balance sheet also reported vehicle notes and capital lease obligations. In April the company borrowed another $3.0 million under the facility. IPO proceeds subsequently repaid approximately $5.5 million of facility borrowings.
Material changes, outlook, risks and unusual items
- Operating performance improved sharply year over year, principally with higher fleet utilization and rental rates. Operating costs increased to $5.473 million from $3.270 million, but grew more slowly than revenue.
- Operating cash flow improved, but investment outflows increased as the company manufactured additional systems. Cash declined by $1.790 million during the quarter.
- Management estimated 2017 capital expenditures of $40–$55 million, primarily for additional systems, and said operating cash flow, IPO proceeds and available credit were expected to fund operations for at least 12 months. This is an estimate, not a guaranteed commitment.
- The May IPO raised $121.2 million gross and approximately $113.9 million net. Proceeds were used to repay the facility, pay approximately $3.1 million in employee and consultant bonuses, distribute approximately $25.8 million to existing owners, and fund general corporate purposes, including the capital program.
- Post-IPO revolving credit capacity was increased to $20 million, subject to a borrowing base, with a possible $10 million accordion. The amended facility has leverage and fixed-charge covenants, a $80 million annual capital-expenditure cap (with specified exceptions), and a May 2021 maturity. Borrowings bear LIBOR plus a 3.00%–4.00% margin.
- Demand is sensitive to oil and gas drilling and completion activity, commodity prices and customer spending. Two customers represented 48% of Q1 2017 revenue; three represented 48% of period-end receivables. Customer concentration and reliance on a limited supplier base are material risks.
- The company reported approximately $11 million of purchase commitments and a $2.7 million future guarantee of a related-party office lease. Management said no pending legal or environmental matters were expected to materially affect the financial statements.
- The IPO created a holding-company structure, non-controlling interests and additional public-company costs. Under the Tax Receivable Agreement, Solaris generally owes existing owners 85% of realized or deemed tax savings attributable to specified tax-basis increases.
- The filing identifies risks including industry cyclicality, customer defaults, competition, transportation constraints, growth-project execution, access to capital and regulatory or litigation developments. Management reported disclosure controls were effective as of March 31, 2017.
Important facts for investors to verify
- Whether increased revenue days, rental rates and customer demand continued after Q1, and whether deployment supports the planned fleet expansion.
- Actual 2017 capital spending versus the $40–$55 million estimate, cash generation, and remaining liquidity after IPO uses and distributions.
- Current borrowing-base availability, covenant headroom and interest-rate exposure under the amended credit facility.
- Customer concentration, receivable collections and the economics of services, whose direct costs exceeded service revenue in Q1.
- The effects of non-controlling ownership, equity awards and the Tax Receivable Agreement on future earnings and cash available to Class A stockholders.
The company noted it had not been subject to Exchange Act reporting requirements for the preceding 90 days because it completed its IPO in May 2017. Solaris LLC’s historical Q1 statements are the relevant operating basis; Solaris Inc. itself did not present quarterly statements of operations or cash flows because it had no material activity.