ProPetro Holding Corp. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results; it is an annual report, not a standalone Q4 filing. Financial amounts below are in U.S. dollars.
Business context
ProPetro provides hydraulic fracturing and complementary oilfield services, primarily in the Permian Basin. Hydraulic fracturing and cementing comprise its reportable pressure-pumping segment. The company reported 99% of 2018 revenue from Permian Basin operations and said its fleets were approximately fully utilized.
On December 31, 2018, ProPetro completed an asset purchase from Pioneer for $110 million cash and 16.6 million shares. The assets included eight fracturing fleets (510,000 HHP), four coiled-tubing units and a maintenance facility. The transaction increased stated fracturing capacity from 905,000 to 1,415,000 HHP across 28 fleets, and included a service relationship with Pioneer for up to 10 years. Because it closed on the last day of the year, the filing does not show a full year of operations from the acquired assets.
Financial and operating results
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $1,704.6 million | $981.9 million |
| Operating income | $232.7 million | $24.1 million |
| Net income | $173.9 million | $12.6 million |
| Diluted EPS | $2.00 | $0.16 |
| Adjusted EBITDA, non-GAAP | $388.5 million | $137.4 million |
| Adjusted EBITDA margin, non-GAAP | 22.8% | 14.0% |
| Operating cash flow | $393.1 million | $109.3 million |
| Cash and equivalents at year-end | $132.7 million | $23.9 million |
| Long-term debt at year-end | $70.0 million | $57.2 million |
Revenue rose 73.6%, primarily with larger fleet capacity, higher activity and demand. Pressure-pumping revenue increased 75.5% to $1,658.4 million. Cost of services, excluding depreciation and amortization, rose 56.1% to $1,270.6 million, declining to 74.5% of revenue from 82.9%; management attributed improved margins to operating efficiencies and cost controls. The company reported $51.3 million of income tax expense, compared with $3.1 million in 2017.
For Q4 2018, revenue was $425.4 million, gross profit was $125.0 million and net income was $51.8 million, or $0.62 basic and $0.59 diluted per share. Q4 2017 revenue was $313.7 million and net income was $10.1 million.
Investing cash outflow was $280.6 million and financing cash outflow was $3.7 million; cash increased by $108.8 million during the year. Capital expenditures incurred were $592.6 million, versus $305.3 million in 2017. The filing reports $204.5 million of noncash property-and-equipment purchases and $137.6 million of capital expenditures included in payables and accruals, so incurred capex differs materially from cash capex.
Year-end current assets were $349.3 million and current liabilities were $352.8 million. The $300 million ABL facility had $70 million drawn and $125 million of availability at year-end; it matures December 19, 2023. The facility is secured by substantially all company assets and includes covenants and a springing fixed-charge coverage test.
Material changes, outlook and risks
- The Pioneer transaction was funded partly with equity, increasing shares outstanding to 100.2 million at year-end from 83.0 million a year earlier. The ABL capacity was increased from $200 million to $300 million and its maturity extended.
- ProPetro divested its surface air drilling operations in August 2018, citing a strategic focus on Permian Basin pressure pumping. The reported loss on disposal of all assets was $59.2 million for 2018; the filing attributes the increase principally to fleet size and job intensity.
- Management’s 2019 priorities included maintaining fleet utilization, improving efficiency and costs, growing complementary services, maintaining supplier relationships, and evaluating acquisitions. The filing gives no quantified revenue, earnings or capital-spending guidance.
- Key exposures include oil-and-gas activity and commodity prices, geographic concentration in the Permian, customer concentration (the five largest customers generated 68.7% of 2018 revenue), pricing competition, labor and equipment supply, and water availability. Environmental, hydraulic-fracturing, induced-seismicity, safety, weather and insurance risks are also discussed.
- Management reported no material pending legal proceedings and no 2018 impairment of property and equipment. The auditors issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- How much incremental revenue, margin and cash flow the Pioneer assets and long-term service agreement generate after closing, including any customer concentration implications.
- Whether high utilization and improved pressure-pumping margins persist amid commodity-price volatility, competition and changes in customer spending.
- The cash requirements of continued fleet investment and the reconciliation of incurred capital expenditures, cash expenditures, noncash asset purchases and accrued capex.
- ABL borrowing-base availability, covenant headroom and liquidity under weaker operating conditions.
- Customer concentration, particularly the largest customer’s 24.1% share of 2018 revenue, and the impact of any reduction in its activity or payment capacity.