Liberty Oilfield Services Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The filing identifies the registrant as Liberty Oilfield Services Inc. (NYSE: LBRT), a North American hydraulic-fracturing services provider.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $88.4 million | $542.1 million | $560.7 million | $1,077.3 million |
| Operating income (loss) | $(73.5) million | $51.2 million | $(67.3) million | $95.4 million |
| Net income (loss) | $(65.8) million | $40.5 million | $(63.4) million | $74.4 million |
| Net income (loss) attributable to Liberty stockholders | $(45.8) million | $22.0 million | $(44.1) million | $40.2 million |
| Adjusted EBITDA (non-GAAP) | $(12.6) million | $92.1 million | $41.0 million | $176.9 million |
- Q2 revenue fell 83.7% year over year; average active fleets declined 80% to 4.6, and revenue per average active fleet decreased 18.6% to $19.2 million.
- For the first half, revenue declined 48.0%; average active fleets fell 39.4% to 13.7 and revenue per average active fleet decreased 14.1% to $40.9 million.
- Operating costs did not fall as quickly as revenue, and depreciation and amortization increased. The company recorded $9.1 million in severance and related costs in Q2, including $7.4 million of one-time severance costs.
- Six-month operating cash flow was $96.6 million, versus $97.7 million a year earlier. Investing cash outflow was $70.0 million, mainly reflecting $70.5 million of property and equipment purchases; financing cash outflow was $14.8 million. Cash increased $11.8 million to $124.5 million.
- At June 30, cash was $124.5 million and total current assets were $299.7 million versus current liabilities of $101.0 million. Management said working capital excluding cash decreased $35.6 million.
- Term-loan principal outstanding was $109.1 million ($105.9 million net of discount and financing costs). There were no ABL borrowings; after a $0.3 million letter of credit, availability was $82.9 million. The term loan matures in September 2022. The company reported compliance with its credit agreements and was not subject to financial covenants at quarter-end.
Material changes and management outlook
- Management attributed the sharp downturn to COVID-19, falling oil demand and prices, and customer capital-budget cuts. WTI averaged $27.96 per barrel in Q2 2020 versus $59.88 in Q2 2019; North American horizontal rigs averaged 353 versus 868.
- In April, the company reduced its workforce and staffed fleet count by approximately 50%, introduced furloughs and compensation reductions, suspended its 401(k) match and quarterly dividend, and cut planned 2020 capital expenditures by approximately 50% to $70–$90 million.
- Management expected Q3 activity to improve modestly, but believed demand below pre-pandemic levels would likely persist through the remainder of 2020. It said the timing and scale of any recovery could not be predicted. Management believed cash, operating cash flow, and credit availability were sufficient for operations for at least the next 12 months.
- The company recognized a $4.7 million provision for credit losses for the first half, including approximately $2.2 million in Q2, primarily related to a customer entering bankruptcy. Four customers together accounted for 53% of Q2 revenue; three customers accounted for 60% of receivables and unbilled revenue at June 30.
- Supply agreements carried forecast commitments of $192.4 million. If minimum purchases were missed and suppliers did not agree to changes, potential shortfall fees could apply; management did not expect significant fees based on forecast activity.
- Two putative securities class actions related to the IPO sought unspecified damages. The company said it planned to defend them; management did not believe other proceedings, in aggregate, would materially adversely affect financial position or results, based on information then available.
Risks, contingencies, and unusual items
- Key risks include prolonged weak oil demand and prices, customer and supplier financial distress, pricing and utilization pressure, and further effects of COVID-19 on operations and collections.
- Management identified possible future impairment of property and equipment if market conditions worsen; it reported no impairment as of June 30. The company also recorded a $0.8 million inventory write-down for the first half.
- The filing disclosed an early-2020 denial-of-service cyberattack that disrupted certain systems for less than one day; the company reported no material operational effect and minimal to no data loss, while noting potential residual or future cyber risks.
- Hydraulic-fracturing regulation, permitting restrictions, litigation, and limits on investment in the sector could raise costs or reduce customer activity. Tax receivable agreement obligations were $51.1 million at June 30 and may affect liquidity; payments can be deferred in certain circumstances, while some early-termination events could accelerate obligations.
- Other notable actions included a $9.3 million CARES Act-related NOL carryback refund, a suspension of dividends, and amendments that reclassified certain finance leases to operating leases without a recognized gain or loss.
Investor verification priorities
- Track fleet utilization, pricing per active fleet, customer budgets, and whether the anticipated Q3 activity improvement occurred.
- Assess cash conversion and the sustainability of operating cash flow, which benefited from substantial receivable and unbilled-revenue collections during the first half.
- Monitor ABL borrowing-base availability, liquidity, term-loan repayment and maturity, and compliance with any triggered covenant tests.
- Review customer concentration, bankruptcy-related collections, credit-loss allowances, and the ability to meet supply commitments without shortfall fees.
- Follow the securities litigation, potential asset impairment indicators, and the effect of tax receivable agreement obligations on available cash.