ProPetro Holding Corp. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. ProPetro provides hydraulic fracturing and complementary oilfield services, primarily in the Permian Basin. Its reportable segment is pressure pumping.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $434.0m | $282.7m | $1,279.1m | $668.2m |
| Operating income | $61.5m | $22.7m | $163.6m | $9.9m |
| Net income | $46.3m | $22.0m | $122.1m | $2.5m |
| Diluted EPS | $0.53 | $0.25 | $1.40 | $0.03 |
| Adjusted EBITDA (non-GAAP) | $103.4m | $47.8m | $276.1m | $94.7m |
| Adjusted EBITDA margin (non-GAAP) | 23.8% | 16.9% | 21.6% | 14.2% |
Revenue rose 53.5% in Q3 and 91.4% year to date. Management attributed growth to increased customer activity, fleet size, demand, and pricing. Pressure-pumping revenue grew 55.0% in Q3 and 94.3% year to date; its adjusted EBITDA margin was 24.9% and 22.7%, respectively. The company reported Q3 net margin of approximately 10.7% and nine-month net margin of approximately 9.5%.
Cost of services grew more slowly than revenue. Pressure-pumping cost of services declined as a share of segment revenue to 73.9% in Q3 from 79.9%, and to 76.0% year to date from 82.9%, which management linked to stronger pricing without comparable cost increases. Depreciation and asset-disposal losses increased with the larger, more intensely used fleet.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $251.1m, versus $78.7m in 2017. Investing cash outflow was $208.9m, including $212.2m of cash capital expenditures; financing cash inflow was $12.0m. Cash increased by $54.2m to $78.2m.
- At September 30, cash was $78.2m, accounts receivable $252.4m, current assets $341.3m, and current liabilities $280.4m. The resulting current ratio was approximately 1.22.
- Total debt was $89.1m: $80.0m drawn under the ABL facility and $9.1m of equipment financing. Net debt, using reported cash, was approximately $10.9m. The ABL facility’s stated capacity was increased to $200m in February 2018, but actual borrowing availability is subject to its borrowing base and reserves; the filing does not state undrawn availability.
Changes, outlook, and risks
- At quarter-end, ProPetro operated 19 hydraulic-fracturing fleets with 860,000 HHP. In October, after the reporting period, it put another 45,000-HHP fleet into service, bringing the fleet to 20 and 905,000 HHP.
- On August 31, the company divested surface air drilling operations to focus on Permian pressure pumping. The sale did not qualify as discontinued operations; the reported disposal loss attributable to the divestiture was $0.3m.
- Management described stronger Permian activity and service intensity, and expected continued opportunity if commodity prices remained at or above recent levels. It provided no specific financial guidance. It cautioned that demand depends on customer activity and expectations for oil and gas prices, which are volatile.
- Key disclosed risks include commodity-price and E&P spending volatility, competition and pricing, customer defaults, capital availability, execution and cost risks on growth projects, operating hazards, weather, regulation, and litigation. Management said ordinary-course legal matters were not expected to materially affect the company; no material changes to previously disclosed principal risk factors were reported.
- Income-tax expense was $36.0m for the first nine months, compared with $0.1m in 2017; management cited higher 2018 book income and the prior-year full valuation allowance. The company adopted the new revenue standard in 2018 with no adjustment to prior-period results. It expected the new lease standard to add right-of-use assets and lease liabilities to the balance sheet, but not materially affect results of operations.
Important facts for investors to verify
- Whether Permian customer activity, pricing, and fleet utilization remain strong enough to support margins and returns on substantial equipment spending.
- Actual ABL borrowing-base availability, covenant headroom, and the effect of the facility’s springing fixed-charge coverage test.
- The recurring maintenance and replacement cost of a larger, heavily utilized fleet, particularly given nine-month disposal losses of $43.1m.
- Whether operating cash flow continues to cover capital needs and working-capital growth; receivables reached $252.4m at quarter-end.
- The post-quarter fleet deployment’s contribution to revenue, costs, and utilization, and the financial effect of the surface air drilling divestiture.