Business context and reporting period
Solaris Oilfield Infrastructure, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2017, with results also presented for the nine months ended that date. The filing describes a business that manufactures and rents mobile proppant-management systems and provides related field and transportation services to oil and gas customers. In May 2017, Solaris completed its IPO and reorganization; the company became the managing member of Solaris LLC and consolidates its results, while reporting substantial non-controlling interests. The filing’s legal company name is Solaris Oilfield Infrastructure, Inc., which differs from the company name in the request metadata.
Financial performance and position
Unless otherwise noted, dollar amounts below are in millions. Comparisons are with the corresponding 2016 period; pre-IPO and post-IPO results are not fully comparable.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $18.48 | $4.75 | $42.19 | $10.87 |
| Operating income (loss) | $8.08 | $0.72 | $14.58 | $(0.19) |
| Net income (loss), consolidated | $7.41 | $0.71 | $13.25 | $(0.22) |
| Net income attributable to Solaris | $1.38 | $0 | $1.54 | $0 |
| Adjusted EBITDA (non-GAAP) | $11.20 | $1.73 | $24.70 | $2.67 |
| Operating cash flow | Not separately presented | Not separately presented | $13.00 | $0.77 |
- Q3 revenue increased 289% year over year; rental revenue was $15.06 million and services revenue was $3.42 million. Nine-month revenue increased 288%.
- Operating margin was approximately 43.7% in Q3 2017 versus 15.2% in Q3 2016; for the nine-month periods, it was 34.5% versus a loss. Consolidated net income includes earnings attributable to non-controlling interests: $6.03 million in Q3 and $8.05 million for the nine months.
- Q3 diluted EPS was $0.12; nine-month diluted EPS was $0.14. The filing reports no EPS for 2016 and notes that 2017 EPS covers only the period after the May 17 IPO and reorganization.
- Revenue growth reflected more system revenue days and higher rental rates. Q3 system revenue days rose 202% to 4,564; utilization reached 100%, versus 69% a year earlier. The fleet had grown to 68 systems by November 2, 2017.
- At September 30, cash was $54.00 million, current assets $74.23 million, current liabilities $9.98 million, and working capital approximately $64.25 million. Net property, plant and equipment was $100.01 million.
- Nine-month investing cash outflow was $49.05 million, mainly capital spending; financing cash inflow was $86.48 million, principally IPO proceeds. Cash increased $50.43 million from year-end 2016.
- Debt: no notes payable or revolver borrowings at quarter end. The revolver provided $20 million of availability and matures May 17, 2021. Capital lease obligations totaled $0.22 million. Total liabilities were $21.79 million, including an $11.48 million tax receivable agreement liability.
Material changes versus the prior comparable period
- Higher system deployment and utilization, alongside increased rental rates, drove sharp revenue and operating-income growth. Average systems deployed in Q3 increased to 49.6 from 16.4.
- Operating expenses rose to $10.40 million in Q3 from $4.02 million, including higher service labor and transportation, depreciation, personnel, stock compensation, and public-company costs. Nine-month expenses included $3.77 million of other operating expenses, primarily IPO-related bonuses and other reorganization costs.
- Capital spending accelerated: nine-month investment in property, plant and equipment was $49.02 million, compared with $5.93 million in 2016. Manufacturing new systems accounted for $40.5 million of 2017 investing activity.
- The IPO generated $111.1 million of net proceeds reported in financing cash flows; proceeds were also used to repay $5.5 million of credit-facility borrowings and distribute $25.8 million to legacy members. Solaris owned 25.9% of Solaris LLC at September 30, 2017, including unvested restricted stock.
Outlook, risks, contingencies and unusual items
- Management estimated 2017 capital expenditures of $80–$95 million, primarily to build additional systems and advance the Kingfisher transload facility. The initial facility phase is expected to require approximately $40 million and was scheduled for completion by August 2018. Management believed operating cash flow, IPO proceeds and available credit would fund operations for at least twelve months.
- Solaris signed a seven-year transloading contract for Kingfisher, effective upon completion. At the time of the filing, the facility had only one contracted customer, creating customer-concentration and construction-completion risks; remaining obligations under executed construction agreements were approximately $1.9 million. The company also disclosed $7.0 million of other purchase commitments and $6.9 million of future minimum operating lease payments, including commitments for the Oklahoma land lease.
- Four customers represented 61% of Q3 revenue and 63% of nine-month revenue. Two customers accounted for 46% of accounts receivable at quarter end. Management identified dependence on customer activity, commodity-price-related drilling and completion levels, competition, supply and transportation conditions, and ability to complete growth projects on time and on budget as business risks.
- The credit facility is secured by substantially all assets and includes leverage and fixed-charge covenants; Solaris reported compliance at September 30. Its $80 million annual capital-expenditure limit may be supplemented by qualifying equity-funded spending.
- The Tax Receivable Agreement generally entitles legacy investors to 85% of specified realized or deemed tax savings. The recorded liability was $11.5 million; estimates depend on future taxable income. Certain early-termination or change-of-control circumstances can require a substantial immediate payment.
- Management reported no material pending legal or environmental matters and no material changes to previously disclosed risks other than the Kingfisher risks. It stated disclosure controls were effective and reported no material internal-control changes during the quarter.
- Forward-looking statements are subject to risks including oil and gas industry spending and prices, customer defaults, competition, capital availability, regulation, litigation, and construction delays or cost increases. The filing gives no specific revenue or earnings guidance.
Important facts for investors to verify
- Whether fleet utilization, rental rates, and customer demand remain strong, and whether customer concentration changes.
- Kingfisher construction progress, total cost and timing versus the August 2018 target, and whether additional customers or volumes are contracted.
- Actual 2017 capital expenditures versus the $80–$95 million estimate, and the resulting effect on cash and liquidity.
- The sustainability of margins and cash generation, including service costs, stock-based compensation, IPO-related adjustments, and management’s non-GAAP Adjusted EBITDA reconciliation.
- Use of revolver capacity, covenant headroom, and the assumptions underlying the $11.5 million Tax Receivable Agreement liability.
- The reported entity name: the filing is for Solaris Oilfield Infrastructure, Inc., while the request metadata identifies Solaris Energy Infrastructure, Inc.