ProPetro Holding Corp. — Form 10-Q Summary
Period and filing: The supplied filing reports the unaudited quarter and nine months ended September 30, 2019, and was signed June 19, 2020. This is a third-quarter 2019 report, not a first-quarter 2019 report as stated in the request metadata. Financial amounts below are in U.S. dollars; figures are rounded.
Business context and reporting period
ProPetro provides hydraulic fracturing and related oilfield services, primarily in the Permian Basin. Pressure pumping is its principal reportable segment. Results reflect higher activity and the addition of eight fleets following the December 2018 Pioneer pressure-pumping acquisition. The filing also discusses later developments through June 2020; those developments should not be confused with results for the reported 2019 periods.
Financial performance and liquidity
| Metric | Three months ended September 30, 2019 | Change year over year | Nine months ended September 30, 2019 | Change year over year |
|---|---|---|---|---|
| Service revenue | $541.8 million | +24.8% | $1,617.5 million | +26.5% |
| Operating income | $48.6 million | Down from $61.5 million | $191.1 million | Up from $163.6 million |
| Net income | $34.4 million | −25.7% | $140.3 million | +14.9% |
| Diluted EPS | $0.33 | Down from $0.53 | $1.35 | Down from $1.40 |
| Adjusted EBITDA (non-GAAP) | $131.9 million | +27.6% | $408.7 million | +48.0% |
| Adjusted EBITDA margin (non-GAAP) | 24.3% | Up from 23.8% | 25.3% | Up from 21.6% |
Management attributed revenue growth mainly to more active fracturing fleets and customer activity. Pressure-pumping service costs declined as a proportion of segment revenue, which management linked to cost controls, lower consumable costs, and customers sourcing more sand and consumables themselves. These improvements were partly offset by sharply higher general and administrative expense, depreciation, and losses on asset disposals. Adjusted EBITDA is a non-GAAP measure and is not a substitute for GAAP earnings or cash flow.
Cash flow and capital spending: For the first nine months of 2019, operating cash flow was $307.6 million, investing cash outflow was $387.6 million, and financing cash inflow was $56.4 million. Capital expenditures were $394.3 million. Cash declined by $23.5 million to $109.2 million. At September 30, 2019, the company had $130.0 million of ABL borrowings and reported total liquidity of $168.8 million, including $59.6 million of facility availability.
Balance sheet: Current assets were $392.7 million and current liabilities were $284.2 million, implying working capital of about $108.6 million and a current ratio of about 1.38. Total assets were $1.456 billion and shareholders’ equity was $944.1 million. Long-term debt rose from $70.0 million at December 31, 2018 to $130.0 million at September 30, 2019. The ABL facility had a $300 million stated capacity, subject to a borrowing base; September 2019 borrowing base was approximately $191.1 million.
Material changes, unusual items, and risks
- Higher operating scale, weaker quarterly GAAP earnings: Third-quarter revenue grew 24.8%, but net income fell 25.7%. Quarterly G&A more than doubled to $27.6 million, including $10.8 million of audit-review and advisory professional fees, as well as retention and severance costs. Nine-month G&A increased 89.9% to $74.0 million.
- Asset disposal losses: Losses on disposal were $31.2 million in the third quarter and $81.6 million in the first nine months, versus $16.4 million and $43.1 million in the comparable 2018 periods. The company also reported a $4.2 million gain on sale of camp assets, which partly offset disposal losses.
- Audit Committee review and control weaknesses: The review found approximately $370,000 of officer expenses improperly charged to the company; the officers reimbursed the amounts. It also identified an undisclosed related-party transaction and deficiencies involving the control environment, conflicts of interest, whistleblower escalation, policy compliance, and communications. The review found no material accounting errors requiring restatement of the 2018 annual or first-quarter 2019 financial statements.
- Controls and reporting: Management concluded disclosure controls were ineffective as of December 31, 2018 and each quarter through September 30, 2019, and internal control over financial reporting remained ineffective through September 30, 2019. Remediation was ongoing and included new executives, enhanced policies, related-party and conflict controls, whistleblower procedures, and a disclosure committee. The company disclosed that several periodic reports were filed late.
- Investigations and litigation: The SEC opened an investigation in October 2019. Securities class-action and shareholder derivative lawsuits were also disclosed. The company said the scope and outcomes could not be predicted and recorded no provision because outcomes could not be reasonably estimated.
- Commitments and related parties: The company reported $21.5 million of remaining contractual commitments for DuraStim fleets, turbines, and related equipment, plus other contracted capital commitments. Sand purchases from a supplier indirectly associated with a former executive totaled $36.8 million in the first nine months of 2019; the filing estimated an indirect benefit to that executive of $1.2 million.
- Subsequent deterioration and outlook: The filing describes the 2020 COVID-19 and oil-market downturn as materially adverse to activity, pricing, revenue, and cash flows. Management later reported substantial growth-capex cancellations, spending and workforce reductions, and compensation actions. It also disclosed later expected impairment charges, including approximately $3.4 million in fourth-quarter 2019 and, for first-quarter 2020, approximately $9.4 million of goodwill impairment, $1.1 million of drilling-asset impairment, and a $6.1 million write-off of DuraStim option deposits. These are subsequent-period developments, not September 2019 results.
Most important facts for investors to verify
- Confirm the intended reporting period: the source is for the quarter ended September 30, 2019, despite the request’s “2019 Q1” label.
- Review the underlying filing and subsequent reports for the status and financial impact of the SEC investigation, shareholder lawsuits, and internal-control remediation.
- Assess cash conversion and capital intensity: nine-month operating cash flow of $307.6 million was below capital expenditures of $394.3 million, while debt increased by $60.0 million.
- Check the company’s customer concentration, receivables quality, borrowing-base availability, and exposure to reduced Permian activity and pricing pressure.
- Verify the final recorded amounts and timing of the disclosed subsequent impairment charges and DuraStim commitments.