ProPetro Holding Corp. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. ProPetro provides oilfield services, primarily hydraulic fracturing and cementing, with operations focused in the Permian Basin. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $133.7 | $541.8 | $634.9 | $1,617.5 |
| Operating income (loss) | $(36.5) | $48.6 | $(75.2) | $191.1 |
| Net income (loss) | $(29.2) | $34.4 | $(62.9) | $140.3 |
| Adjusted EBITDA | $17.4 | $131.9 | $117.7 | $408.7 |
| Adjusted EBITDA margin | 13.0% | 24.3% | 18.5% | 25.3% |
| Operating cash flow | Not separately provided | Not separately provided | $118.0 | $307.6 |
| Capital expenditures | Not separately provided | Not separately provided | $86.5 | $394.3 |
Q3 pressure-pumping revenue was $131.3 million and segment Adjusted EBITDA was $26.7 million, a 20.3% margin. For the first nine months, pressure-pumping revenue was $622.1 million, with Adjusted EBITDA of $139.4 million and a 22.4% margin. Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
- Liquidity and debt: At September 30, cash was $54.3 million; the company had no borrowings under its ABL facility and reported total liquidity of $85.9 million, including $31.6 million of facility availability. It repaid $130.0 million of borrowings during the first nine months. The facility has a $300 million stated capacity, subject to its borrowing base, which was $35.3 million at quarter-end.
- Balance sheet: Current assets were $157.1 million and current liabilities were $96.3 million. Total assets were $1,096.1 million and total liabilities were $184.4 million at September 30, 2020.
- Cash movement: Cash declined by $94.8 million in the first nine months, ending at $54.3 million. Operating cash flow was more than offset by investing and financing outflows, including the debt repayment.
Material changes versus the prior comparable period
- Revenue fell 75.3% in Q3 and 60.7% for the first nine months, primarily due to lower customer activity and pricing discounts amid depressed oil prices and COVID-19 disruption.
- Average effectively utilized fleets declined to about 8.5 in Q3 from 25.1 a year earlier, and to 10.4 for the first nine months from 25.4.
- Adjusted EBITDA fell 86.8% in Q3 and 71.2% for the first nine months; margins also contracted. Pressure-pumping service costs rose as a share of segment revenue, including when idle-fee revenue is excluded.
- The company recorded $16.7 million of impairment expense in the first nine months, including a $9.4 million goodwill write-off and $7.2 million of property-and-equipment impairments. It also recorded $39.9 million of asset-disposal losses.
- Operating cash flow decreased to $118.0 million from $307.6 million. Capital expenditures fell to $86.5 million from $394.3 million, reflecting reduced growth spending and activity.
- ProPetro shut down its flowback segment in March and disposed of the assets; in September it sold its drilling rigs and ancillary assets and shut down drilling operations.
Outlook, risks, contingencies and unusual items
- Management described a gradual third-quarter recovery in demand and liquidity, but emphasized substantial uncertainty. It cited COVID-19, oil prices and supply-demand conditions, customer activity, pricing pressure and seasonal fourth-quarter softness as risks. Further market weakness could adversely affect cash flows and lead to additional impairments.
- Cost and liquidity measures included canceling substantially all planned 2020 growth capital projects, reducing maintenance and consumable spending, negotiating vendor terms, and reducing the workforce by more than 60% between April and May.
- At October 31, 2020, reported liquidity had risen to $110.6 million, comprising $66.7 million cash and $43.9 million of ABL availability. This is a subsequent-date measure, not the September 30 balance.
- Idle fees were $6.9 million in Q3 and $41.1 million for the first nine months, compared with $0.5 million and $11.8 million in the prior-year periods. Pioneer accounted for $68.3 million of Q3 revenue and $259.9 million of nine-month revenue; the filing also reports $46.0 million receivable from Pioneer at September 30.
- Pending matters include the Logan shareholder class action, a shareholder derivative lawsuit and an SEC investigation. The company said it could not predict their outcomes and recorded no provision because outcomes could not be reasonably estimated. The filing also reports no material expected liability from a Texas tax audit to date.
- Management concluded that disclosure controls were ineffective at September 30 and that material weaknesses in internal control over financial reporting remained unremediated. Identified issues included control environment, communication, control activities and related-party transaction controls; remediation efforts were ongoing.
- The company had an option to purchase an additional 108,000 HHP of DuraStim equipment, but said exercise was not probable under current market conditions. The related $6.1 million option fee had been impaired and written off.
Key facts for investors to verify
- Whether utilization, customer pricing and Permian activity improved after quarter-end, and whether reported October liquidity was sustained.
- How much future revenue and cash flow depends on idle fees and major customers, particularly Pioneer, and the collectability and timing of its receivable.
- Whether the ABL borrowing base and availability remain adequate if eligible receivables or operating activity decline, including compliance with the facility’s springing fixed-charge coverage covenant.
- Whether further impairments, asset-disposal losses or capital needs arise from prolonged weak market conditions.
- Developments in the SEC investigation, shareholder litigation and remediation of the material weaknesses; the filing provides no estimated financial exposure for the legal matters.