ProPetro Holding Corp. — Form 10-K Summary
Period: Fiscal year ended December 31, 2019; filed June 19, 2020. The request metadata says “2018 Q4,” but the supplied filing is the 2019 annual report, which includes quarterly data for Q4 2019 and Q4 2018.
Business context and reporting period
ProPetro provides hydraulic fracturing and complementary oilfield services, primarily in the Permian Basin. Pressure pumping is its reportable segment. The December 2018 acquisition of 510,000 HHP of pressure-pumping assets from Pioneer was in service for most of 2019 and contributed to higher annual revenue. Total fracturing capacity was 1.469 million HHP at year-end 2019, including 54,000 HHP of DuraStim equipment.
Financial and operating metrics
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $2,052.3 million | $1,704.6 million |
| Operating income | $221.4 million | $232.7 million |
| Net income | $163.0 million | $173.9 million |
| Diluted EPS | $1.57 | $2.00 |
| Adjusted EBITDA (non-GAAP) | $519.1 million | $388.5 million |
| Adjusted EBITDA margin (non-GAAP) | 25.3% | 22.8% |
| Cash from operating activities | $455.3 million | $393.1 million |
| Capital expenditures incurred | $400.7 million | $592.6 million |
| Cash and equivalents at year-end | $149.0 million | $132.7 million |
| Long-term debt at year-end | $130.0 million | $70.0 million |
Cost of services was 71.6% of revenue in 2019, versus 74.5% in 2018. General and administrative expense rose 94.7% to $105.1 million, including about $24.2 million of internal-review legal and professional fees. Loss on disposal of assets increased to $106.8 million; the company also recorded $3.4 million of impairment expense. The filing reports an effective tax rate of 23.7%.
For Q4 2019, revenue was $434.8 million, gross profit $129.1 million and net income $22.7 million; Q4 2018 figures were $425.4 million, $125.0 million and $51.8 million, respectively.
At December 31, 2019, total liquidity was $198.7 million, comprising $149.0 million cash and $49.7 million ABL availability. By June 19, 2020, the company reported no ABL borrowings and liquidity of approximately $57.4 million, comprising $42.2 million cash and $15.2 million availability. The ABL borrowing base fell from $181.2 million at year-end to approximately $16.8 million by June 19, tied to lower eligible receivables. The company reported no off-balance-sheet arrangements at year-end.
Material changes versus prior period
- Revenue increased 20.4%, primarily reflecting the Pioneer assets and an increase in effectively utilized fleets from about 18.8 to 23.9. Pressure-pumping revenue rose 20.7%.
- Net income declined 6.2% and diluted EPS fell from $2.00 to $1.57, despite higher revenue. Higher depreciation, G&A and asset-disposal losses contributed to the decline.
- Adjusted EBITDA rose 33.6% and margin improved 2.5 percentage points, according to the company’s non-GAAP measure.
- Operating cash flow increased, while investing cash outflow rose to $495.3 million, reflecting the acquisition, DuraStim purchases and other capital spending.
- Year-end debt increased to $130.0 million from $70.0 million. The company subsequently repaid its ABL borrowings by June 19, 2020.
- The company shut down flowback operations in 2020 and disposed of related assets; its vertical drilling assets had been idle since 2016.
Outlook, risks and unusual items
- COVID-19 and oil-market downturn: Management warned of a material adverse impact on activity, revenue, results and cash flows. WTI fell from about $62 per barrel at the start of 2020 to just above $20 at March-end; it was about $38 on June 17. No quantified 2020 earnings guidance is provided.
- Response measures: The company cancelled substantially all planned 2020 growth capital spending, reduced maintenance and other costs, cut its workforce by more than 60% after year-end, reduced director and officer compensation, and pursued working-capital measures. Headcount was approximately 700 by June 10, versus about 2,200 at year-end 2019.
- Expected 2020 charges: Management expected first-quarter charges of approximately $9.4 million for goodwill impairment, $1.1 million for drilling-asset impairment and a $6.1 million write-off of DuraStim option deposits. Further impairments were possible if weak conditions persisted.
- Controls and review: An Audit Committee review found about $370,000 in improperly reimbursed executive expenses, subsequently repaid, an undisclosed related-party transaction, and significant control deficiencies. The filing states that no material accounting errors requiring a restatement were found. Management and the auditor concluded internal control over financial reporting was ineffective; the auditor issued an adverse ICFR opinion, while giving an unqualified opinion on the financial statements. Remediation was ongoing.
- Legal and regulatory matters: The SEC investigation and shareholder litigation were unresolved, with outcomes not estimable; no provision was recorded at year-end. The company also disclosed related-party transactions, including purchases of Texas sand totaling approximately $44.3 million in 2019, with an estimated indirect benefit of about $1.5 million to a former executive.
- Concentration and commitments: The top five customers generated 77.1% of 2019 revenue; Pioneer alone represented 25.5%. Sand-supply agreements include minimum-volume commitments and potential shortfall fees. Pioneer’s service agreement covers up to ten years but has specified termination dates.
- The company warned of possible NYSE delisting risk associated with late periodic filings; it received an extension to July 15, 2020 to file delinquent reports.
Important facts for investors to verify
- Whether reduced activity, pricing pressure and customer concentration affect revenue, fleet utilization, margins and cash generation.
- Current borrowing-base availability, liquidity, covenant compliance and the effect of receivables declines on the ABL facility.
- Whether the projected impairment and deposit write-off amounts were recorded as expected, and whether additional impairments followed.
- Progress and independent testing of remediation for the material weaknesses, including related-party and disclosure controls.
- Developments, potential costs and disclosure consequences from the SEC investigation and shareholder lawsuits.
- Actual exposure to sand-contract shortfall fees and the terms, utilization and economics of the Pioneer and DuraStim arrangements.