Solaris Oilfield Infrastructure, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The filing is for Solaris Oilfield Infrastructure, Inc. (not “Solaris Energy Infrastructure”). Financial statements are unaudited. Solaris completed its IPO on May 17, 2017; pre-IPO comparatives reflect its predecessor LLC, so post-IPO results also include non-controlling interests and are not fully comparable.
Business context
Solaris manufactures and rents mobile proppant management systems and provides related field and transportation services to oil and gas customers. Its fleet had grown to 49 systems. In July 2017, a subsidiary signed a seven-year proppant transloading contract for a planned facility in Kingfisher, Oklahoma.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $13.4 million | $3.0 million | $23.7 million | $6.1 million |
| Operating income (loss) | $1.6 million | $(0.8) million | $6.4 million | $(0.9) million |
| Consolidated net income (loss) | $1.1 million | $(0.8) million | $5.8 million | $(0.9) million |
| Net income attributable to Solaris | $0.2 million | $0 | $0.2 million | $0 |
| Adjusted EBITDA | $7.5 million | $0.2 million | $13.6 million | $0.9 million |
- Revenue increased 350% in Q2 and 287% for the six-month period year over year. Rental revenue drove most of the increase, supported by more revenue days and higher rental rates. Revenue days rose 240% in Q2 and 186% for the first half.
- Operating margin was approximately 11.8% in Q2 and 27.1% for the first half, versus losses in the comparable 2016 periods. These figures include $3.9 million of other operating expenses, primarily IPO-related bonuses and costs and an asset-disposal loss.
- Adjusted EBITDA includes significant add-backs, including IPO bonuses, unit-based compensation, disposal losses and organizational costs; it is a non-GAAP measure and not equivalent to cash flow.
- Six-month operating cash flow was $1.5 million, compared with cash use of $0.5 million in 2016. Investing cash use was $21.5 million, principally for system manufacturing. Financing provided $86.5 million, largely from IPO proceeds.
- Cash was $70.1 million at June 30, 2017. Total assets were $204.7 million and total liabilities $18.2 million. No borrowings were outstanding on the $20 million revolving credit facility; notes payable were also zero. Capital lease obligations were $0.2 million, excluding operating lease commitments.
- Working-capital metrics included $87.0 million of current assets and $6.3 million of current liabilities. Accounts receivable was $7.1 million and inventory $4.3 million.
Material changes, outlook and risks
- The May IPO raised approximately $113.9 million net of underwriting discounts and commissions and offering expenses. Proceeds repaid $5.5 million of credit-facility borrowings, funded approximately $3.1 million of cash bonuses and a $25.8 million distribution to existing owners, with the remainder intended for corporate purposes and capital spending.
- Management estimated 2017 capital expenditures of $80–$95 million, mainly for fleet growth and the Kingfisher project. The project’s first phase was estimated at approximately $40 million; construction was expected to be completed by August 2018. Management stated available cash, operating cash flow and borrowing capacity were expected to fund operations for at least 12 months.
- Management described improving industry activity and proppant demand, while emphasizing exposure to oil and gas activity and commodity prices. No formal earnings or revenue guidance was provided.
- Concentration is material: five customers generated 73% of Q2 revenue, and three customers represented 62% of receivables at quarter-end. The business also faces customer-credit, competition, transportation, execution and financing risks.
- Commitments included approximately $11.0 million of purchase obligations, $7.2 million of minimum operating lease payments (including $6.6 million related to a 30-year Oklahoma land lease), and a $2.8 million guarantee of a related party’s office lease. The Kingfisher silo-vendor agreement had $3.7 million remaining after a $1.2 million advance payment.
- A $11.6 million liability was recorded under the Tax Receivable Agreement, which generally entitles existing owners to 85% of specified realized tax savings. Payments and the estimate depend on future taxable income and could change.
- The company reported no material pending legal matters or probable environmental matters. Management concluded disclosure controls were effective as of June 30, 2017.
Key facts for investors to verify
- Whether fleet utilization, pricing and customer demand sustain the sharp revenue growth and improve service economics; service costs still exceeded service revenue in Q2.
- How much of reported Adjusted EBITDA reflects recurring operations versus add-backs, and how operating cash flow converts earnings into funds for investment.
- Actual 2017 capital spending, funding needs and construction progress against the Kingfisher budget, timeline and seven-year customer contract.
- Customer and receivables concentration, the credit-facility borrowing-base availability and compliance with its financial covenants.
- Potential cash payments under the Tax Receivable Agreement and the assumptions underlying the recorded liability and deferred tax assets.