ProPetro Holding Corp. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This annual filing also reports fourth-quarter results. Unless otherwise noted, financial amounts are in U.S. dollars.
Business context
ProPetro provides hydraulic fracturing and complementary oilfield services, primarily in the Permian Basin. Pressure pumping, including hydraulic fracturing and cementing, is its reportable segment. At year-end, it had 16 deployed fracturing units totaling 690,000 HHP; two more units were deployed through March 2018, bringing the fleet to 18 units and 780,000 HHP. The company reported full fleet utilization since September 2016. Approximately 97% of revenue came from Permian Basin operations.
Financial and operating results
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $981.9 million | $436.9 million |
| Operating income (loss) | $24.1 million | $(67.4) million |
| Net income (loss) | $12.6 million | $(53.1) million |
| Diluted EPS | $0.16 | $(1.19) |
| Adjusted EBITDA (non-GAAP) | $137.4 million | $7.8 million |
| Adjusted EBITDA margin (non-GAAP) | 14.0% | 1.8% |
| Cash provided by operations | $109.3 million | $10.7 million |
| Capital expenditures incurred | $305.3 million | $46.0 million |
| Cash and cash equivalents at year-end | $23.9 million | $133.6 million |
| Long-term debt, net of deferred loan costs | $57.2 million | $159.4 million |
FY 2017 cost of services was $813.8 million, excluding depreciation and amortization. Revenue less cost of services was $168.0 million, or approximately 17.1% of revenue. The filing reports pressure-pumping adjusted EBITDA margin of 15.4%, up from 3.8%.
In Q4 2017, revenue was $313.7 million, gross profit was $51.7 million, and net income was $10.1 million, or $0.12 per share (basic and diluted). Q4 2016 revenue was $163.9 million, gross profit was $15.1 million, and net loss was $17.3 million.
Year-end total debt was $72.9 million before deferred loan costs, comprising $55.0 million drawn under the ABL facility and $17.9 million of equipment financing. The company reported $79.0 million of ABL availability, in addition to $23.9 million of cash. Operating cash flow less cash capital expenditures was approximately $(176.6) million.
Changes versus comparable periods
- FY revenue rose 124.7% year over year, primarily from higher customer activity, fleet growth, demand, and pricing. Pressure-pumping revenue increased 131.1%.
- Cost of services rose 101.4%, slower than revenue growth. Pressure-pumping cost of services declined to 83.0% of segment revenue from 92.9%, which management attributed to improved pricing and operating leverage.
- Net results improved from a loss to a profit; Adjusted EBITDA increased substantially. FY 2016 included $7.0 million of debt-extinguishment gain and impairment charges that did not recur in 2017.
- Operating cash flow increased, but substantial fleet investment drove capital expenditures to $305.3 million. Cash declined by $109.6 million during 2017.
- Interest expense fell to $7.3 million from $20.4 million, following repayment of the former term loan and revolving facility in 2017.
Outlook, commentary, risks, and unusual items
- Management expected higher oil prices and continued increases in rig counts and pressure-pumping demand in 2018, assuming commodity prices remained at or above recent levels. It anticipated potential pricing improvement as demand rose and competing equipment exited the market. The filing provides no quantified revenue, earnings, or capital-expenditure guidance.
- Management’s stated strategy is to add equipment in response to visible customer demand, cross-sell complementary services, improve efficiency, and preserve financial flexibility. Two additional fracturing units were placed in service through March 2018.
- Risk exposure includes commodity-price and E&P spending cycles, geographic concentration in the Permian, customer concentration, competition and pricing, labor and supplier constraints, water availability, operating and environmental hazards, and significant capital requirements. The top five customers accounted for approximately 66% of 2017 revenue; the largest represented 15.0%.
- Revenue is generally earned per job or under other service arrangements; the company said it generally lacks long-term written customer contracts beyond master service agreements. It does not hedge commodity-price exposure and may be unable to pass future material and fuel cost increases to customers.
- Notable 2017 items included a $39.1 million loss on asset disposals, an $8.4 million deferred IPO bonus, and $9.5 million of stock-based compensation. The Tax Cuts and Jobs Act resulted in a $3.4 million reduction in net deferred tax liability recorded in 2017.
- The March 2017 IPO generated approximately $170.1 million in net proceeds to the company; proceeds were used mainly for debt repayment and equipment purchases. In February 2018, the ABL facility capacity was increased from $150 million to $200 million.
- The company disclosed no material ongoing legal proceedings or off-balance-sheet arrangements. Its auditor issued an unqualified opinion on the financial statements; the auditor did not opine on internal control effectiveness. Management stated disclosure controls were effective, and noted it was not yet required to assess internal control over financial reporting.
Important facts for investors to verify
- Whether utilization, pricing, and customer demand remained strong after year-end, and whether new fleet capacity was deployed on customer-backed terms.
- How the large 2017 capital program is funded and whether operating cash generation can support ongoing growth and maintenance spending.
- Current ABL borrowings, borrowing-base availability, covenant headroom, and equipment-financing obligations following the 2018 facility amendment.
- Customer concentration, contract duration, receivable collections, and exposure to changes in Permian activity or commodity prices.
- The sustainability of reported profitability and Adjusted EBITDA after considering asset-disposal losses, IPO-related compensation, stock compensation, and the non-GAAP nature of Adjusted EBITDA.
- Potential effects of equipment wear and replacement needs, skilled-labor availability, supplier costs, environmental requirements, and water constraints on margins and capacity.