Business context and reporting period
Solaris Oilfield Infrastructure, Inc. provides mobile proppant and chemical management systems, related field and logistics services, transloading, and inventory-management software to the U.S. oil and gas industry. This unaudited Form 10-Q covers the three months ended March 31, 2020; comparisons are with the three months ended March 31, 2019 unless noted.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data, percentages, and system count.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $47.8 | $55.1 |
| Operating income (loss) | $(39.3) | $27.7 |
| Net income (loss) | $(33.2) | $23.4 |
| Net loss attributable to Solaris | $(19.1) | Net income $12.3 |
| Diluted EPS | $(0.65) | $0.43 |
| Adjusted EBITDA | $18.0 | $32.0 |
| Cash from operations | $11.7 | $23.0 |
| Cash used in investing activities | $(0.7) | $(20.3) |
Revenue fell 13%. System rental revenue declined 30% to $26.1 million; system services rose 83% to $21.0 million, mainly from proppant-delivery coordination; transloading revenue fell 93% to $0.5 million, including because Q1 2019 included deferred contract-termination revenue. Operating loss included $47.8 million of impairment losses. Adjusted EBITDA margin was approximately 37.7% of revenue, versus 58.1% a year earlier; these are calculated ratios, and adjusted EBITDA is a non-GAAP measure.
At March 31, cash was $46.0 million, down from $66.9 million at year-end 2019. Current assets were $100.8 million and current liabilities $24.9 million. The company had no borrowings under its $50 million revolving credit facility, was compliant with its covenants, and reported $345.7 million of total equity. The balance sheet also included $68.1 million payable under the Tax Receivable Agreement (TRA); this is not funded debt. The company paid $26.7 million for share repurchases and $4.8 million in distributions and dividends during the quarter.
Material changes versus the prior comparable period
- Average fully utilized system count was 84, down approximately 5% sequentially and 26% year over year.
- Adjusted EBITDA declined $14.0 million, or 44%; operating cash flow declined $11.3 million.
- Capital spending was $0.7 million, versus $20.4 million in Q1 2019, reflecting reduced system manufacturing and investment.
- The company recorded approximately $47.8 million in impairment and inventory-related charges amid deteriorating market conditions. These included $37.8 million for property and equipment, $4.2 million for Railtronix goodwill, $2.8 million for lease right-of-use assets, $2.6 million for inventory, and $0.4 million for other receivables/assets. The Kingfisher Facility long-lived assets were fully impaired.
- The allowance for credit losses increased to $1.2 million from $0.3 million at December 31, 2019.
Outlook, commentary, and risks
Management cited COVID-19, lower oil demand and prices, and producer actions as drivers of reduced customer budgets and activity. It expected U.S. drilling and completion activity could decline 75% to 85% sequentially in Q2 2020. WTI’s 12-month strip was around $27 per barrel on April 24, 2020, according to the filing. The company cut its 2020 capital expenditure budget from a prior range of $20 million to $40 million to $10 million or less, and said cash, operating cash flow, and available credit should fund operations for at least 12 months.
Key risks include further declines in oilfield activity, customer defaults or loss of major customers, uncertainty in the duration and effects of COVID-19, and additional impairment charges if adverse conditions persist. The company said remote work had not significantly disrupted operations to date but its duration and ultimate impact were uncertain. It reported no material pending litigation, no material off-balance-sheet arrangements, and effective disclosure controls as of quarter-end.
Important facts for investors to verify
- Whether actual Q2 activity and customer demand tracked management’s projected 75%–85% sequential decline.
- Cash generation, working-capital movements, and the adequacy of liquidity as cash fell during the quarter; confirm continued access to the revolver and covenant compliance.
- Whether impairment assumptions for the Kingfisher Facility and Railtronix remain supportable, and whether further impairment or inventory write-downs occur.
- Customer collections and credit exposure, including the increased allowance and disclosed customer and supplier concentrations.
- Progress on the reduced capital budget, operating-cost measures, dividends, and any future share repurchases.
- The assumptions supporting deferred tax asset realization and the $68.1 million TRA liability.