Liberty Oilfield Services Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The filing registrant is Liberty Oilfield Services Inc. (the company identified in the request as Liberty Energy Inc.). In January 2018, the company completed its IPO and corporate reorganization; 2017 comparative results are those of its predecessor, which was generally a pass-through entity. Accordingly, taxes and income attributable to public-company shareholders are not directly comparable across periods.
Business context and results
The company provides hydraulic fracturing services across several North American basins. It had 22 active fleets at September 30, 2018, compared with 17 at September 30, 2017; average active fleets were 22.0 and 16.7, respectively, in the third quarter.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $558.8 million | $441.9 million | $1,682.0 million | $1,041.0 million |
| Operating income | $82.2 million | $67.0 million | $265.0 million | $118.1 million |
| Operating margin | 14.7% | 15.2% | 15.8% | 11.3% |
| Net income | $66.4 million | $63.7 million | $215.1 million | $110.8 million |
| Adjusted EBITDA (non-GAAP) | $117.5 million | $93.7 million | $366.3 million | $189.0 million |
Q3 revenue rose 26.5%, mainly from 31.7% more average active fleets; revenue per average fleet declined 4.0% as fleets pumped fewer hours. For the nine-month period, revenue grew 61.6%, reflecting 48.6% more average active fleets and an 8.7% increase in revenue per fleet, attributed to improved pricing and throughput. Q3 operating income increased 22.8%, slower than revenue growth, and operating margin edged lower. Nine-month operating income more than doubled.
Net income attributable to Liberty Oilfield Services Inc. stockholders was $34.1 million in Q3 and $107.4 million for the nine months; the filing reports no comparable 2017 parent-company amount because the predecessor structure differed. Q3 basic and diluted EPS were $0.50 and $0.49; nine-month EPS was $1.56 and $1.53.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $223.6 million, versus $115.1 million in 2017. Cash used in investing was $183.9 million, including $187.1 million of capital expenditures. Financing provided $31.1 million.
- Cash was $87.1 million at September 30, up from $16.3 million at year-end 2017. Current assets were $502.1 million and current liabilities $204.8 million.
- Debt was $112.6 million gross ($107.1 million net of financing costs and discount), down from $204.6 million gross at year-end. The company had no ABL borrowings, a $0.3 million letter of credit, and $249.7 million of ABL availability. Term-loan weighted-average interest was 9.8%; the company reported compliance with applicable covenants.
- Management said operating cash flow and available credit were expected to fund operations for at least the next 12 months. A 1 percentage-point change in the weighted-average rate would change annual interest expense by approximately $1.1 million, assuming debt stayed unchanged.
Outlook, risks and notable items
- Management reported that demand exceeded current capacity and expected to deploy two additional fleets in the first half of 2019, bringing the total to 24 fleets and approximately 1.17 million hydraulic horsepower. It expected frac-service demand to remain stable through the remainder of 2018, particularly for high-efficiency fleets.
- Management cited Q3 average WTI of $69.76 per barrel and a North American horizontal rig count of 922. It noted uncertainty from Permian takeaway constraints, while describing markets outside the Permian as constructive.
- Colorado Proposition 112 was pending a November 2018 vote when the filing was made. The company warned that expanded setbacks could materially restrict new development and reduce demand for its services in Colorado, where it derived a significant portion of consolidated revenue.
- Material commitments included $154.6 million of future operating lease payments and $649.8 million of proppant, chemical and rail-car commitments. The company reported no supply-volume shortfalls at September 30.
- SandBox Logistics and Oren Technologies alleged patent infringement and contract breaches and sought monetary and injunctive relief. The company intended to defend the case; its outcome was uncertain, and management did not expect litigation matters in aggregate to materially affect financial position or results.
- The company recorded a $3.4 million inventory write-down during the first half of 2018. It repurchased 2.84 million shares for $53.9 million at an average $18.96 per share, leaving $46.1 million under a $100 million authorization. It also declared a first quarterly dividend of $0.05 per Class A share.
- After quarter-end, holders redeemed 3.0 million LLC units for Class A shares on October 4; the company expected related deferred-tax and tax-receivable-agreement balance changes. A further $0.05 quarterly dividend was approved for payment in December.
Important facts for investors to verify
- Whether planned 2019 fleet additions are deployed on schedule and achieve expected utilization, pricing and returns.
- How Q3’s decline in revenue per average fleet and operating margin develops, given lower pumping hours and rising materials and repair costs.
- Colorado Proposition 112’s outcome and any resulting effects on customer activity and the company’s basin mix.
- Liquidity and covenant headroom under the credit facilities, including exposure to floating interest rates and the high-cost term loan.
- The cash and timing consequences of lease and supply commitments, share repurchases, dividends, and tax receivable agreement obligations.
- Developments in the SandBox litigation and the distinction between consolidated net income and income attributable to public-company stockholders under the post-IPO ownership structure.