Solaris Oilfield Infrastructure, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 27, 2019. This is an annual report, not a standalone quarterly filing. The company provides oilfield logistics equipment, services, transloading and inventory-management software.
Business context and financial performance
Solaris manufactures and rents mobile proppant-management systems and provides related field services. It operates the Kingfisher transload facility in Oklahoma and offers Railtronix and Solaris Lens inventory software. At year-end, its fleet comprised 160 proppant systems and three chemical systems. Solaris Inc. owned 58% of Solaris LLC and reports the remaining ownership as non-controlling interest.
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $197.2 million | $67.4 million |
| Operating income | $99.3 million | $25.5 million |
| Operating margin | 50.4% | 37.8% |
| Net income | $86.0 million | $22.5 million |
| Net income attributable to Solaris Inc. | $42.4 million | $3.6 million |
| Diluted EPS | $1.59 | $0.27 |
| Adjusted EBITDA | $123.4 million | $39.9 million |
| Operating cash flow | $116.4 million | $26.7 million |
| Cash capital expenditures | $161.1 million | $93.9 million |
| Cash at year-end | $25.1 million | $63.4 million |
System rental revenue was $143.6 million; system services revenue was $43.0 million; transloading revenue was $8.1 million; and software revenue was $2.5 million. Revenue days rose 142% to 40,526. The company generated operating cash flow below cash capital expenditures, with cash declining by $38.4 million during the year. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
At December 31, 2018, total assets were $425.2 million, total liabilities $117.7 million, and stockholders’ equity $307.4 million. Current assets were $80.8 million and current liabilities $35.3 million. The balance sheet included $39.7 million of accounts receivable and $10.5 million of inventory. Credit-facility borrowings were $13.0 million at year-end; the company repaid them in January 2019. It reported approximately $20 million of revolving capacity and $50 million of advance-loan availability after repayment, subject to facility terms and borrowing-base restrictions.
Material changes and quarterly results
- Revenue increased 193% year over year, principally from fleet expansion, higher utilization and rental rates, and the addition of Kingfisher and Railtronix activity.
- Operating costs and expenses rose to $97.9 million from $41.9 million, but declined as a share of revenue to 50% from 62%, reflecting operating scale. System services costs remained above system services revenue.
- Investing cash outflow increased to $160.5 million, largely for fleet manufacturing and Kingfisher construction. Property, plant and equipment, net, grew to $296.5 million.
- Unaudited Q4 2018 revenue was $57.3 million, operating income $28.2 million, net income $24.7 million, Solaris-attributable income $12.9 million and diluted EPS $0.47. Q4 2017 revenue was $25.2 million and diluted EPS $0.13.
Outlook, commentary and risks
Management expected to commercialize its mobile chemical-management offering during 2019 and to deploy AutoHopper technology across the fleet. The filing says 2019 completion activity could slow relative to 2018 amid oil-price volatility, while a more stable price environment, efficiency gains, drilled-but-uncompleted well activity and manufacturing-style development could support completions. The company stated that existing cash, operating cash flow and credit availability were expected to fund operations for at least 12 months; this is management’s assessment, not a guarantee.
- In December 2018, Solaris received a $26.0 million partial termination payment after amending the Kingfisher customer agreement: its term was reduced from seven years to two and minimum service volumes were reduced. The payment was recorded as deferred revenue; $25.5 million remained to be recognized over the amended two-year term at year-end.
- Customer concentration remains material: three customers generated 35% of FY 2018 revenue; three customers represented 40% of year-end receivables. Kingfisher depended on one material customer contract, whose minimum volume commitment was reduced.
- Demand is exposed to oil and gas prices, customer capital spending, completion activity, proppant demand, competition and changing well-completion technology. Supply-chain disruptions, steel and component costs, transportation availability, customer credit and weather are additional risks.
- Environmental, safety, hydraulic-fracturing and transportation regulation, chemical-release liability, cybersecurity, and limited or costly insurance could affect operations and costs. Management reported no pending legal matters expected to have a material adverse effect and no environmental matters deemed probable at year-end.
- The Tax Receivable Agreement requires payment of 85% of certain realized or deemed tax savings to former LLC members. Its recorded liability was $56.1 million; the filing estimated a hypothetical early-termination payment of about $95.1 million based on year-end assumptions.
- The company paid its first quarterly dividend, $0.10 per Class A share, in December 2018. Future dividends are discretionary and subject to debt-agreement restrictions. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether the amended Kingfisher contract’s reduced term and minimum volumes affect future utilization, revenue and facility returns, and how the deferred payment is recognized.
- Whether customer concentration and receivables exposure have changed, and whether customers remain creditworthy.
- Actual 2019 fleet utilization, rental pricing, capital spending and cash generation versus management’s outlook and the credit agreement’s capital-expenditure limits.
- Whether the chemical-management and AutoHopper products achieve commercial adoption, and what implementation, maintenance or liability costs arise.
- The terms, availability and covenant headroom of the credit facility, as well as the cash demands and potential change-of-control consequences of the Tax Receivable Agreement.
- The audited financial statements received an unqualified opinion; the filing’s quarterly data is unaudited.