Solaris Oilfield Infrastructure, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Solaris designs and supplies equipment, field support, logistics and software for oil and gas well completions. Financial amounts below are in millions unless noted.
Key financial results
- Revenue: Q2 revenue was $35.2, up from $9.3 in Q2 2020. First-half revenue was $63.8, up from $57.2. Q2 system rental revenue rose to $14.3 from $5.5, and system services revenue rose to $20.6 from $3.4.
- Profitability: Q2 operating loss was $2.0 versus $10.7; net loss was $1.9 versus $9.5. Net loss attributable to Solaris was $1.2 versus $5.5, or $0.04 per share versus $0.20. First-half operating loss was $4.1 versus $50.1 and net loss was $3.8 versus $42.6; the prior-year period included $47.8 of impairment losses. First-half net loss attributable to Solaris was $2.4 versus $24.6.
- Non-GAAP measures: Q2 EBITDA was $4.7 versus negative $4.1; Adjusted EBITDA was $6.5 versus negative $0.4. First-half EBITDA was $9.3 versus negative $36.3, while Adjusted EBITDA declined to $12.6 from $17.6. These company-defined measures are not GAAP substitutes.
- Costs and margins: System services costs, excluding depreciation and amortization, were $23.3 against $20.6 of Q2 system services revenue; the company reported these costs at 113% of system services revenue. That ratio improved from 176% a year earlier. Total Q2 operating margin was approximately negative 5.8%.
- Cash flow: First-half operating cash flow was $4.0, down from $34.3. Investing cash outflow was $7.7, including $7.7 of property and equipment investment. Financing cash outflow was $10.5, primarily dividends and distributions of $9.6. Cash declined by $14.1 to $46.3.
- Liquidity and obligations: Current assets were $83.4 and current liabilities $28.3. The company had no credit-facility borrowings and $50.0 of available capacity; it reported covenant compliance. The facility expires April 2022. Tax Receivable Agreement payables totaled $73.5, including $0.6 current. Total liabilities were $108.9.
- Balance sheet and shareholder distributions: Total assets were $411.6 and stockholders’ equity was $302.7. First-half dividends and distributions were $9.6; the stated rate was $0.105 per Class A share and Solaris LLC unit.
Changes, outlook and management commentary
- Management attributed the revenue recovery to more fully utilized mobile proppant systems and higher last-mile services coordinating proppant deliveries. Six-month system rental revenue nevertheless declined 11% year over year, while system services revenue increased 45%.
- Management raised full-year 2021 capital expenditure guidance to $15–$20, from $10–$15 previously, including expected investment of $5–$10 in new technology.
- Management said U.S. land rig activity had risen 34% since the start of 2021, compared with a 26% increase in fully utilized systems since Q4 2020. It expected completions activity to be relatively flat for the remainder of 2021 and saw drilled-but-uncompleted wells as potential support for higher activity in early 2022.
- Management stated cash, operating cash flow and available credit were expected to fund operations for at least 12 months. It cautioned that COVID-19, oil-market volatility, customer consolidation and industry capital discipline could affect demand and results; the impact of COVID-19 remained uncertain.
- In August 2021, Solaris entered a three-year related-party agreement with ProFrac and Cisco. Solaris is to be ProFrac’s dedicated wellsite sand storage provider with volume-based pricing and will purchase certain equipment from Cisco.
Risks, contingencies and unusual items
- Customer concentration increased: one customer accounted for 30% of Q2 revenue and 22% of first-half revenue. Two customers represented 46% of receivables at June 30.
- THRC, which acquired 8.7% of Class A shares and 6.0% of total shares outstanding, is affiliated with customers and suppliers. Q2 revenue from THRC affiliates was $3.1; receivables from them were $2.4 at quarter-end.
- The filing identifies no material pending litigation or other contingencies, and no material change to previously disclosed risk factors. It reports no material off-balance-sheet arrangements.
- Revenue and activity remain exposed to oil and gas prices, completion demand, customer credit and consolidation, COVID-19 effects, competition, regulation and capital availability. The filing provides no specific earnings or revenue guidance.
Important facts for investors to verify
- Whether the higher system utilization and service revenue persist, and whether system services costs can be reduced relative to revenue.
- Customer concentration, collections and exposure to the two customers representing 46% of receivables.
- Progress and expected returns on the increased $15–$20 full-year capital expenditure plan, including new-technology spending.
- Terms, expected economics and related-party disclosures for the ProFrac-Cisco agreement and Cisco equipment purchases.
- Cash generation and liquidity, including the April 2022 credit-facility maturity and the substantial Tax Receivable Agreement payable.