Mammoth Energy Services, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Mammoth provides oilfield services, natural sand proppant, and electric utility infrastructure services, alongside aviation, equipment rental, and other services.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $75.4 million | $89.7 million | $191.8 million | $152.0 million |
| Operating loss | $7.4 million | $1.8 million | $1.0 million | $19.7 million |
| Net income (loss) | $(4.5) million | $1.7 million | $3.9 million | $(13.1) million |
| Diluted earnings (loss) per share | $(0.09) | $0.04 | $0.08 | $(0.28) |
| Adjusted EBITDA | $16.4 million | $23.0 million | $47.1 million | $32.3 million |
Q2 cost of revenue, excluding depreciation, depletion, amortization and accretion, was 80% of revenue versus 77% a year earlier. The resulting gross margin on that basis was approximately 20% versus 23%. For the first half, the cost ratio improved to 78% from 81%. Adjusted EBITDA is a non-GAAP measure; the company’s calculation adds back interest on trade receivables, among other adjustments.
Cash flow: Operating cash flow was $29.4 million in Q2, compared with $1.7 million in Q2 2022; first-half operating cash flow was $32.6 million versus cash used of $0.6 million. First-half capital expenditures were $10.5 million. Cash declined to $8.9 million at June 30 from $17.3 million at year-end 2022.
Debt and liquidity: Revolver borrowings were $59.4 million at June 30, against a $89.4 million borrowing base, with $13.6 million available after letters of credit and the required reserve. The facility matures October 19, 2023. The company reported compliance with its covenants at June 30. Current liabilities were $205.1 million and current assets $477.0 million, but working capital includes substantial PREPA receivables. At August 9, cash was $10.6 million, revolver borrowings $72.3 million, and available capacity $16.9 million.
Material changes versus the prior comparable period
- Q2 revenue fell 16%, primarily because well completion activity weakened: segment revenue declined 37%, completed stages fell 44%, and an average of 1.6 pressure-pumping fleets operated versus 3.5 a year earlier.
- Infrastructure revenue increased 11%, supported by storm restoration and improved pricing. Sand revenue decreased 25%, despite higher average sand prices and volumes, mainly due to lower freight and shortfall revenue. Drilling revenue increased 65% as directional-drilling utilization improved.
- Q2 operating loss widened and net results shifted to a loss. First-half revenue rose 26%, and the operating loss narrowed substantially, reflecting stronger activity across divisions and lower depreciation expense.
- Interest expense increased in both periods, which management attributed primarily to higher rates on the revolving facility. First-half net income includes $22.5 million of interest income charged on delinquent PREPA receivables; Q2 included $11.3 million. These amounts materially affect reported results but are not cash collections.
Outlook, commentary, risks and unusual items
- Management said lower oil and gas prices slowed customer completion activity, particularly in the Utica and Marcellus, and expected softness to continue through at least Q3 2023. It anticipated activity could improve in Q4 and 2024. The company was operating one of six pressure-pumping fleets at the time of its outlook and described planned fleet upgrades, subject to market, supply-chain and liquidity constraints.
- Management expected sand pricing and demand to remain strong for the rest of 2023, while noting Canadian wildfires disrupted transport in Q2. It cited strong infrastructure funding prospects and anticipated increased bidding activity in late 2023 and 2024.
- The 2023 capital expenditure estimate was reduced to approximately $18 million from $24 million; $10.5 million had been spent in the first half. Some oilfield services remain suspended and the Muskie sand facility remains idled.
- PREPA collection exposure: At June 30, PREPA owed approximately $390.7 million, including $174.5 million of accrued interest; the principal for services was stated as approximately $216.2 million. PREPA is in bankruptcy, and collection depends substantially on FEMA or other funding. FEMA approved $233 million of invoices tied to a contract review; about $99 million of the related federal funding was identified for outstanding Cobra invoices. PREPA paid $10.8 million in June, which was applied to revolver borrowings. PREPA later reported that $72 million in FEMA-approved costs awaited engineer certification. The court extended the stay in the collection proceedings through October 31, 2023. The company recorded no allowance against the PREPA receivable, while warning it may not be collectible in full.
- On August 10, the company entered two non-binding agreements to repay and refinance the revolver before maturity; closing was uncertain and subject to conditions. Failure to refinance or repay by maturity could materially harm liquidity and operations. The same day, the board authorized a repurchase program of up to the lesser of $55 million or 10 million shares, conditional on refinancing and other factors; it does not require purchases.
- After quarter-end, Mammoth sold its ARS subsidiary for $3.3 million cash plus conditional deferred consideration of $0.3 million and expected to record a gain of approximately $2.1 million.
- Contingencies include litigation related to PREPA contracts and FEMA funding, Puerto Rico municipal tax claims, employment claims, and other proceedings. The company also disclosed a FEMA claim appeal and a Department of Justice investigation; it said neither the company nor its subsidiaries was charged in the concluded criminal case involving a former Cobra executive and a former FEMA official. The SEC informed the company in 2022 that it did not intend to recommend enforcement action against it.
Important facts for investors to verify
- Progress and terms of the proposed refinancing, including whether it closes before the October 19, 2023 maturity and the resulting borrowing capacity, rates and covenants.
- Cash realization and timing for PREPA receivables, including the status of invoice certification, FEMA funding, bankruptcy proceedings and the company’s accounting assumptions for collectibility.
- Operating activity and profitability of well completion services, including fleet utilization, customer demand and the effects of suspended services and planned equipment upgrades.
- Whether first-half earnings and operating cash flow are sustainable apart from PREPA-related interest income and receivable collections; review the non-GAAP Adjusted EBITDA reconciliation.
- Potential financial effects of pending litigation, tax claims and other contingencies, and whether the conditional stock repurchase program proceeds after refinancing.