Business context and reporting period
ProFrac Holding Corp. filed its Form 10-K for the fiscal year ended December 31, 2022. It provides hydraulic fracturing and related stimulation services, produces frac sand, and manufactures and refurbishes oilfield equipment. The company completed its IPO and became a public holding company in May 2022; legacy unit holders retained a majority economic interest in ProFrac LLC.
The 2022 results reflect substantial acquisitions, including FTS International, U.S. Well Services, sand mines and REV, as well as consolidation of Flotek from May 17. Accordingly, year-over-year comparisons are affected by changes in the company’s scope and structure.
Financial and operating highlights
| Metric | 2022 | 2021 |
|---|---|---|
| Revenue | $2,425.6 million | $768.4 million |
| Operating income (loss) | $412.4 million | $(18.0) million |
| Net income (loss), consolidated | $342.7 million | $(43.5) million |
| Net income attributable to ProFrac Holding Corp. | $91.5 million | Not applicable |
| Adjusted EBITDA, non-GAAP | $811.2 million | $134.7 million |
| Cash from operating activities | $415.2 million | $43.9 million |
| Capital expenditures | $356.2 million | $87.4 million |
| Gross debt at year-end | $959.4 million | $306.7 million |
| Cash and cash equivalents at year-end | $35.1 million | $5.4 million |
Revenue increased about 216% year over year, driven by greater activity, more active fleets, higher pumping hours and pricing, and acquired businesses. Operating margin was approximately 17.0% and Adjusted EBITDA margin approximately 33.4% (calculated using reported revenue). Adjusted EBITDA is a non-GAAP measure and should not be viewed as a substitute for GAAP earnings or cash flow.
Consolidated net income includes income attributable to noncontrolling and redeemable noncontrolling interests. Only $91.5 million was attributable to ProFrac Holding Corp.; the filing reports 2022 basic and diluted EPS of $2.06 for the period after the May IPO. Fourth-quarter revenue was $794.1 million, consolidated net income was $116.0 million, parent-attributable net income was $40.9 million, and EPS was $0.82.
Year-end working capital was $197.3 million. Management reported $924.3 million of net debt, calculated as gross debt less cash and equivalents. Excluding Flotek cash, the company reported $22.8 million of cash and $35.2 million of revolver availability, or $58.0 million of liquidity at year-end. Cash from operations less capital expenditures was $59.0 million, before acquisitions and other investing activity.
Material changes versus prior period
- Stimulation Services revenue rose to $2,348.7 million from $745.4 million; average active fleets increased to 38 from 14.
- Proppant Production revenue increased to $90.0 million from $27.2 million, while Manufacturing revenue increased to $166.7 million from $76.4 million. Reported segment revenues include intersegment activity and eliminations.
- Gross debt rose materially amid acquisitions and financing activity. Interest expense increased to $59.5 million from $25.8 million, and the company recorded a $17.6 million loss on debt extinguishment.
- Investing cash outflow reached $1,028.6 million, including $640.7 million of net cash paid for acquisitions and $356.2 million of capital expenditures. Financing cash inflow was $645.9 million, including IPO and debt proceeds, partly offset by repayments.
- Total assets increased to $2.9 billion from $664.6 million, reflecting acquisitions and investment in equipment and other assets. The 2022 balance sheet also reports $2,462.9 million of redeemable noncontrolling interest and a stockholders’ and members’ deficit of $1,112.2 million.
Outlook, risks and unusual items
- Management expects 2023 capital expenditures, excluding acquisitions, to be in line with 2022 and believes operating cash flow will fund the program. Planned spending includes completion of four electric fleets, engine upgrades and other growth projects, proppant and manufacturing initiatives, and maintenance. The filing does not provide a firm 2023 revenue or earnings forecast.
- Management cited rising drilling and completion activity, demand for lower-emission fleets, aging industry equipment and a tight in-basin frac-sand market as potential supports for utilization, pricing and growth. These are expectations, not guarantees.
- After year-end, the company acquired Producers for approximately $35 million and Performance Proppants for $475 million, funded in part with new borrowing. The term-loan balance reached $839.2 million after subsequent amendments and borrowings; the company also borrowed $317.0 million to help fund Performance Proppants. February 2023 liquidity was reported as $151.0 million, excluding Flotek cash.
- Key risks include oil and gas price and activity cyclicality, acquisition integration and financing needs, leverage and covenant compliance, supplier and labor constraints, environmental and hydraulic-fracturing regulation, and potential uninsured operating losses. A 1% increase in interest rates on year-end variable-rate debt was estimated to raise annual interest expense by about $5.2 million.
- Flotek’s separate 2022 filing raised substantial doubt about its ability to continue as a going concern. ProFrac said it does not guarantee Flotek liabilities and believes this does not materially adversely affect ProFrac, but it cannot use Flotek’s cash or liquidity for its own operations.
- The company recorded $11.3 million of accruals for legal contingencies. USWS-related patent litigation with Halliburton remains unresolved and could materially affect results when resolved. A sand-purchase dispute with Vista was settled in early 2023, with amounts recorded in the 2022 financial statements.
- In the fourth quarter, ProFrac corrected immaterial errors in previously issued first-, second- and third-quarter 2022 statements; the corrections reduced reported operating income by $4.2 million, $3.0 million and $4.3 million, respectively. The auditor issued an unqualified opinion on the financial statements, but did not attest to internal control over financial reporting under the new-public-company transition relief.
- Wilks Parties controlled approximately 81.1% of voting power at year-end. Unit-holder redemptions are expected to be settled in Class A shares in the near term, potentially increasing share supply and market overhang. The Tax Receivable Agreement requires 85% of specified tax savings to be paid to holders; a hypothetical year-end 2022 change-of-control or early-termination payment was estimated at up to more than $475 million.
- Two related-party arrangements were not approved in advance under company procedures. They were renegotiated and subsequently reviewed and ratified by the audit committee; fees incurred were approximately $1.2 million. The company does not anticipate cash dividends in the foreseeable future.
Important facts for investors to verify
- Reconcile consolidated net income of $342.7 million with the $91.5 million attributable to ProFrac Holding Corp., including the effects of noncontrolling interests and the post-IPO ownership structure.
- Review the debt maturity schedule, borrowing costs, covenant and minimum-liquidity requirements, and the financing impact of the Performance Proppants acquisition.
- Assess acquisition integration, acquired-asset valuations and the sustainability of 2022 margins and cash generation, given the major changes in the company’s business perimeter.
- Track Class A share issuance or redemptions, Wilks-related control and resale activity, and possible Tax Receivable Agreement obligations.
- Monitor the Halliburton patent proceedings, remaining legal contingencies, Flotek’s liquidity, and the status of internal-control reporting as transition relief ends.