MAMMOTH ENERGY SERVICES, INC. quarterly report, Q2 FY2022

Full document

Mammoth Energy Services, Inc. — Q2 2022 Form 10-Q

Reporting period: Three and six months ended June 30, 2022. Mammoth provides electric utility infrastructure services and oilfield services, including well completion, natural sand proppant, and drilling. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.

Financial performance and position

  • Second-quarter revenue: $89.7 million, up 89% from $47.4 million in Q2 2021. Growth came across operating divisions, particularly well completion and sand, reflecting higher utilization and, for those divisions, improved pricing.
  • Second-quarter earnings: Net income was $1.7 million, or $0.04 per diluted share, versus a $34.8 million net loss, or $0.75 loss per diluted share, a year earlier. Operating loss narrowed to $4.8 million from $33.1 million. Other income of $13.1 million helped produce pretax income of $5.6 million; it included $10.2 million of interest on delinquent PREPA receivables.
  • Six-month results: Revenue was $152.0 million, up 33% from $114.2 million. Operating loss was $22.8 million versus $53.5 million, while net loss was $13.1 million versus $47.2 million. Other income was $22.3 million, including $20.0 million of PREPA receivable interest. Income tax expense was $7.6 million despite the pretax loss, with a reported effective tax rate of negative 139%.
  • Margins and adjusted EBITDA: Q2 cost of revenue excluding depreciation, depletion, amortization and accretion was 77% of revenue, compared with 106% in Q2 2021. Adjusted EBITDA, a non-GAAP measure, was $23.0 million for Q2 and $32.3 million for the first half, compared with negative $3.3 million and $5.9 million, respectively, in the prior-year periods. The filing cautions that adjusted EBITDA is not a substitute for GAAP earnings or operating cash flow.
  • Cash flow: Operating cash flow was negative $0.6 million for the first half, versus positive $4.5 million in 2021. Investing activities provided $3.5 million, mainly from equipment disposals; capital expenditures were $4.0 million. Financing activities provided $0.1 million. Cash ended June at $12.7 million, up from $9.9 million at year-end.
  • Debt and liquidity: Total debt was $85.5 million at June 30, including $82.9 million under the revolving facility; the facility matures October 2023. June 30 borrowing capacity was $14.3 million after letters of credit and the required reserve. By July 26, available capacity had declined to $8.2 million, with $84.1 million borrowed. The revolver’s weighted-average rate was 8.75%; the company reported compliance with its applicable revolver covenants at June 30.
  • Balance sheet: Accounts receivable was $430.4 million and current assets were $461.7 million, against current liabilities of $144.9 million. Reported working capital was $316.8 million, but it includes substantial PREPA receivables. Equity was $450.3 million, with an accumulated deficit of $85.6 million.

Changes versus comparable periods

  • Q2 well completion revenue rose 152% to $43.8 million; completed stages increased to 1,716 from 520, and an average of 3.5 pressure-pumping fleets operated versus 0.9.
  • Q2 sand revenue rose 125% to $15.5 million, supported by a 70% increase in average selling price per ton and a 37% increase in tons sold. First-half sand revenue increased 58%.
  • Infrastructure revenue increased 39% in Q2 to $25.6 million, partly due to stronger storm restoration activity, but was essentially flat for the first half at $48.6 million.
  • First-half SG&A declined to $16.9 million from $27.9 million, largely reflecting lower prior-year bad-debt expense and other prior-period differences. First-half interest expense increased to $5.0 million from $2.4 million, primarily due to higher rates and average revolver borrowings.

Outlook, risks and unusual items

  • Operating outlook: Management expected oilfield services utilization and pricing to improve through the rest of 2022 and into 2023. It planned to operate a fifth pressure-pumping fleet in Q4 2022 and activate a sixth in Q1 2023; a possible seventh fleet by year-end 2023 is subject to liquidity. These are management expectations, not guaranteed results.
  • Infrastructure and capital spending: Management cited more than 100 infrastructure crews as of July 2022, anticipated seasonal storm-restoration work, and expected federal infrastructure spending to create opportunities later in 2022 and in 2023. Estimated 2022 capital expenditures were raised to $20.0 million, including pressure-pumping fleet upgrades and maintenance.
  • PREPA collection risk: PREPA owed approximately $227.0 million for services plus $130.8 million of interest at June 30, or $357.8 million in total. PREPA is in bankruptcy, collection proceedings remain stayed until January 2023, and FEMA previously questioned about $47 million of contract costs; its appeal process found $24.4 million of staffing costs eligible. Management recorded no allowance, but warns nonpayment could materially harm liquidity and results.
  • MasTec settlement: The company had $19.8 million accrued for the settlement at June 30. The $9.25 million installment due August 1, 2022 was not paid by the filing date; management expected the missed installment, the remaining $9.25 million installment due December 1, and accrued interest to be paid by December 1. Failure to pay could allow MasTec to enforce a confessed judgment beginning December 2.
  • Legal and regulatory matters: The DOJ investigation connected to the Puerto Rico matters remained ongoing; Cobra was cooperating. The former Cobra president and a former FEMA official pleaded guilty to gratuities, with sentencing scheduled for October 2022. The SEC stated on July 6 that it had concluded its investigation and did not intend to recommend enforcement against the company based on information then available. Foreman and related MLI claims, Puerto Rico tax lawsuits, and other litigation remained unresolved.
  • Other covenant issue: The company did not meet the Aviation Note’s minimum debt coverage ratio at June 30; Bank7 granted a waiver on July 27, extending the minimum cash requirement through September 30.
  • Market risks: Management highlighted commodity-price volatility, inflation and labor or supply-chain costs, rising interest rates, customer concentration, weather-related seasonality, and the risk that suspended oilfield services may require additional liquidity to restart.

Investor verification priorities

  • Track PREPA court proceedings, FEMA funding and appeals, and actual cash collections against the $357.8 million receivable; distinguish billed service amounts from accrued interest.
  • Confirm payment of both MasTec installments and interest, and assess the effect on cash, borrowing availability, and covenant headroom.
  • Monitor revolver availability, borrowing costs, covenant compliance, and the October 2023 maturity, especially given the decline in available capacity from $14.3 million at June 30 to $8.2 million on July 26.
  • Compare reported earnings with operating cash flow and adjusted EBITDA, including the significant contribution of PREPA interest and other income to reported results.
  • Verify fleet activation, utilization, pricing, infrastructure crew deployment, and whether the $20.0 million capital program can be funded without constraining liquidity.
  • Follow the DOJ, Foreman/MLI and other legal matters, as well as the status of the Aviation Note waiver.