Mammoth Energy Services, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018; filed March 15, 2019. The filing also provides unaudited quarterly results. Mammoth provides electric infrastructure, pressure pumping, frac sand and other oilfield services.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $1,690.1 million | $691.5 million |
| Operating income | $394.5 million | $62.8 million |
| Net income | $236.0 million | $59.0 million |
| Diluted EPS | $5.24 | $1.42 |
| Operating cash flow | $386.7 million | $57.6 million |
| Capital expenditures | $191.9 million | $133.9 million |
| Cash dividends paid | $11.2 million | None |
Revenue increased 144%, chiefly because infrastructure services expanded substantially under Puerto Rico Electric Power Authority (PREPA) restoration contracts. Operating margin was approximately 23.3% (9.1% in 2017); net margin was approximately 14.0% (8.5% in 2017). The effective tax rate rose to 39.4% from 4.9%; 2017 included a $31.0 million Tax Act benefit. Figures are annual, not standalone fourth-quarter results.
Fourth quarter: Revenue was approximately $278.2 million, down from $384.0 million in Q3 2018. Operating income was $48.9 million versus $145.2 million in Q3. Net income was $68.2 million; the quarter included a $21.0 million income-tax benefit. Quarterly SG&A included a large Q3 credit from reversing previously recorded PREPA bad-debt reserves after collection of reserved amounts.
Liquidity and debt: At year-end, cash was $67.6 million, working capital was $216 million, and the company had no borrowings under its revolving facility; availability was about $176 million after letters of credit. Total liabilities were $319.0 million and equity was $754.1 million. The amended facility matures October 19, 2023, with a $185 million initial maximum advance amount and potential capacity increases subject to conditions. Mammoth reported compliance with its financial covenants at year-end. On March 13, 2019, it borrowed $82 million to pay 2018 Puerto Rico income taxes, leaving $93 million available after letters of credit.
Material changes and operating developments
- Infrastructure revenue rose to $1,082.4 million from $224.4 million. PREPA represented approximately 60% of consolidated 2018 revenue; PREPA work generated 94% of infrastructure revenue.
- Pressure pumping revenue increased 32% to $369.5 million, while sand revenue increased 44% to $168.3 million. Oilfield demand weakened from Q3 and accelerated downward in Q4 amid lower oil prices, customer budget exhaustion, takeaway constraints and oversupply of frac sand.
- PREPA’s first contract, capped at $945 million, was completed in July 2018. The second contract is capped at $900 million and runs through May 25, 2019; Mammoth expected work to end by March 31, 2019 and did not expect further work orders. Puerto Rico staffing was expected to fall to about 50 by early April 2019.
- Continental U.S. infrastructure demand was increasing: Mammoth reported about 120 distribution crews as of March 1, 2019, versus approximately 50 at year-end 2017. Year-end 2018 infrastructure backlog was $765 million, including $625 million in the continental U.S. and $140 million in Puerto Rico; the company estimated $340 million could be realized in 2019. About $691 million of backlog was under agreements without committed minimum purchases and may be canceled or delayed.
- 2018 included acquisitions and business expansion in crude hauling, cementing, acidizing, water transfer, rentals and aviation. The company also expanded sand-plant capacity; the Pierce County Muskie plant was idled from September due to market conditions.
Outlook, risks and unusual items
- Management estimated 2019 capital expenditures of approximately $80 million and said cash, operating cash flow and facility availability should fund operations for at least 12 months, while noting cash generation depends in part on PREPA collections. This is not earnings guidance.
- Management expected cautious oilfield customer activity early in 2019 and no material near-term pricing improvement. It reported improved first-quarter 2019 sand demand and 40/70 pricing about 30% above the Q4 2018 average low, while noting market oversupply remained a concern.
- PREPA owed Mammoth approximately $225 million at December 31, 2018 and $281 million as of March 8, 2019. PREPA is in bankruptcy proceedings, and payment depends substantially on FEMA or other funding. Collection delays, nonpayment or contract termination could materially affect liquidity and results.
- Key exposures include customer concentration, the end of PREPA restoration work, oil and gas price volatility, oilfield-service and frac-sand oversupply, transportation constraints, contract cancellation, regulatory and environmental requirements, and uninsured operational hazards.
- A putative Puerto Rico business class action alleges at least $300 million in damages related to electrical failure; Mammoth says it believes the claim is without merit but cannot predict the outcome. Four municipal lawsuits allege unpaid license and construction excise taxes; outcomes and potential effects are uncertain. The filing also reports an Ohio tax appeal and routine legal matters.
- Unusual 2018 items include $17.5 million of noncash sponsor-level equity compensation, $8.9 million of long-lived-asset impairments (including cementing-related goodwill and intangible impairments), and a $14.6 million net reversal of bad-debt expense, primarily reflecting PREPA collections and reserve changes. The 2018 tax provision was $153.3 million.
- The company adopted ASC 606 in 2018 with no material effect. It expected adoption of lease accounting in 2019 to add approximately $60 million of right-of-use assets and lease liabilities, without a material income-statement impact. The 10-K reports unqualified audit opinions and effective internal control over financial reporting.
Most important facts for investors to verify
- Whether and when PREPA pays the outstanding receivables, including the $45 million contractual tax-related amount, and whether any additional work or replacement infrastructure contracts are secured.
- Actual post-PREPA infrastructure revenue, crew utilization, backlog conversion and the proportion of backlog supported by committed work orders.
- Oilfield-service utilization, pricing and margins, plus frac-sand demand, realized prices, plant utilization and rail-delivery reliability.
- The effect of the March 2019 $82 million borrowing on liquidity, covenant headroom and the capacity to fund the $80 million capital plan and dividends.
- Developments and potential financial exposure in the Puerto Rico class action and municipal tax lawsuits.