Business context and reporting period
Solaris Oilfield Infrastructure, Inc. filed this unaudited Form 10-Q for the quarter ended June 30, 2019. It provides equipment rentals, field services, transloading and inventory software to the oil and gas industry. Financial amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $64.1 | $47.2 | $119.2 | $83.2 |
| Operating income | $27.3 | $24.8 | $55.1 | $40.3 |
| Net income | $22.5 | $21.4 | $45.9 | $34.9 |
| Net income attributable to Solaris | $13.3 | $10.6 | $25.6 | $16.5 |
| Diluted EPS | $0.42 | $0.40 | $0.85 | $0.63 |
| Adjusted EBITDA (non-GAAP) | $35.2 | $30.0 | $70.3 | $52.0 |
- Revenue increased 36% in Q2 and 43% for the first half. Growth came mainly from system services, higher system rental activity and transloading.
- Operating margin was 42.6% in Q2 versus 52.6% a year earlier; first-half margin was 46.2% versus 48.5%. Higher system-service costs and depreciation contributed to the lower margins. System-service costs excluding depreciation exceeded system-service revenue in both periods.
- Operating cash flow was $57.4 million for the first half, compared with $28.6 million in 2018. Investing cash outflow was $28.7 million, primarily capital spending; financing cash outflow was $24.1 million, including $13.0 million of debt repayment and $9.5 million of dividends and distributions.
- Cash was $29.7 million at June 30, 2019, versus $25.1 million at year-end 2018. Current assets were $88.5 million and current liabilities $33.6 million. The company had no credit-facility borrowings and reported $50 million available to draw.
- Total assets were $492.7 million and total liabilities $116.5 million. The balance sheet included a $68.0 million Tax Receivable Agreement liability and $8.7 million of operating lease liabilities. Solaris paid quarterly dividends of $0.10 per Class A share.
Material changes versus the prior comparable period
- Q2 system rental revenue rose 13%, system services revenue 92%, and transloading revenue 250% year over year. First-half increases were 23%, 75% and 494%, respectively. Inventory software revenue declined in both comparisons.
- Transloading growth included recognition of $3.2 million of deferred revenue in Q2 and $6.3 million in the first half from a prior contract termination payment. Remaining deferred revenue was $19.2 million, expected to be recognized over the modified agreement’s remaining two-year term.
- Average fully utilized mobile proppant systems rose 14% in Q2 and 22% in the first half year over year. The fleet comprised 164 mobile proppant systems and eight mobile chemical systems.
- Capital spending was lower than in 2018 as new-system manufacturing slowed and construction of the Kingfisher transload facility had been completed. Depreciation and amortization increased, reflecting the expanded fleet and facility assets placed in service.
- In April 2019, the company replaced its prior credit agreement with a $50 million revolving facility, plus a $25 million uncommitted accordion. It repaid the prior $13 million balance and reported compliance with the new facility’s covenants at quarter-end.
Outlook, risks and unusual items
- Management said operating cash flow and available credit were expected to fund operations for at least the next 12 months. No specific revenue, earnings or capital-spending guidance was provided.
- Management described U.S. drilling and completion activity as relatively flat in 2019; the U.S. land rig count declined sequentially in both Q1 and Q2. A stable oil-price environment, efficiency gains and completion of drilled-but-uncompleted wells could support activity, but equipment-efficiency improvements could also reduce equipment needs.
- Key exposures include oil and gas activity and prices, customer concentration/default risk, competition, execution of growth projects, transportation availability and costs, and access to capital. Four customers represented 53% of accounts receivable at June 30; several customers also represented meaningful shares of period revenue.
- The $528,000 write-off of unamortized debt issuance costs associated with the amended credit agreement contributed to higher reported interest expense. First-half results also included $6.3 million of deferred transloading revenue. No material pending litigation or probable environmental matters were reported.
- A material weakness in internal control over financial reporting had not been remediated as of June 30, 2019. The company described remediation efforts, including controls over equity and tax-account reconciliations, additional management review and staff training. Management said disclosure controls were not effective as of December 31, 2018.
Important facts for investors to verify
- How much of transloading revenue and future performance depends on the deferred contract payment and minimum-volume arrangements.
- Whether system-service economics improve, given reported service costs above related service revenue.
- Customer concentration, collections and credit quality, particularly the four customers representing 53% of receivables.
- Progress in remediating the material control weakness and any resulting changes to reported financial information.
- Future capital requirements, utilization and returns on the expanded equipment fleet, and the company’s ability to sustain cash generation and dividends.
- Assumptions underlying the $68.0 million Tax Receivable Agreement liability and the realization of deferred tax assets.