Ranger Energy Services, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; the filing also provides unaudited quarterly results. Prior-year comparisons are affected by the ESCO acquisition, which closed in August 2017, and expanded operations during 2018.
Business context and reporting period
Ranger provides high-specification well-service rigs and related services, wireline and other completion services, and modular natural-gas processing equipment across major U.S. oil and gas basins. At year-end it operated 141 well-service rigs, including 140 high-spec rigs, and 29 modular processing units. In fourth-quarter 2018, it split its former Well Services segment into High Specification Rigs and Completion and Other Services; prior-period segment amounts were reclassified without changing consolidated results.
Key financial and operating metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $303.1 million | $154.0 million |
| Operating income (loss) | $(2.1) million | $(20.6) million |
| Net income (loss) | $(5.8) million | $(27.3) million |
| Net loss attributable to Ranger, Inc. | $(3.3) million | $(6.6) million |
| Adjusted EBITDA (non-GAAP) | $41.1 million | $11.2 million |
| Operating cash flow | $27.6 million | $(17.3) million |
| Capital expenditures | $75.9 million | $56.9 million |
| Cash and cash equivalents at year-end | $2.6 million | $5.3 million |
| Working capital at year-end | $2.2 million | $(3.8) million |
| Long-term debt at year-end | $44.7 million | $5.8 million |
Cost of services was $236.9 million, or 78% of revenue, versus $126.4 million, or 82%, in 2017. The resulting gross profit before depreciation and amortization was $66.2 million, approximately 21.8% of revenue, compared with $27.6 million, approximately 17.9%, in 2017. These are calculated from the filing’s revenue and cost-of-services figures.
Fourth-quarter 2018 revenue was $85.3 million; operating income was $3.3 million; net income was $1.7 million; net income attributable to Ranger, Inc. was $1.0 million; and diluted earnings per share were $0.11. For the full year, rig hours rose 37% to 290,000, while average monthly hours per rig declined to 176 from 194 as the fleet expanded faster than hours.
Year-end debt included $18.5 million drawn under the revolving credit facility, $37.5 million principal under the Encina equipment financing, and $5.8 million of ESCO seller notes. The balance sheet reports $60.5 million of debt net of issuance costs, split between $15.8 million current and $44.7 million long-term. The filing reports $17.7 million of remaining revolver availability. Operating cash flow less capital expenditures was negative $48.3 million.
Material changes versus the prior comparable period
- Revenue increased 97% to $303.1 million. High Specification Rigs revenue rose 38% to $149.9 million, principally reflecting more rigs in service and a full year of ESCO assets. Completion and Other Services revenue increased to $136.0 million, primarily from the wireline business, which contributed approximately $95.0 million of the year-over-year increase. Processing Solutions revenue rose to $17.2 million, supported by higher MRU utilization and rental rates.
- Operating loss narrowed to $2.1 million from $20.6 million; net loss narrowed to $5.8 million from $27.3 million. Adjusted EBITDA increased to $41.1 million from $11.2 million. Adjusted EBITDA is non-GAAP and should not be treated as a substitute for net income or cash flow.
- Operating cash flow improved by $44.9 million, moving from use of cash to generation of cash. Investment spending remained substantial: capital expenditures were $75.9 million, and investing activities used $74.4 million.
- Debt increased materially following the 2018 Encina equipment financing. Interest expense declined to $3.7 million from $6.3 million, mainly reflecting repayment of the 2017 bridge loan and lower average interest costs.
- The company recorded a $9.0 million goodwill impairment, eliminating the remaining goodwill balance. A sustained decrease in the share price triggered the impairment assessment.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing provides no quantified revenue, earnings, capital-spending, or utilization guidance. Management said cash from operations, revolver availability, and the Encina financing were expected to be sufficient for liquidity needs for at least the next 12 months.
- Industry and customer exposure: Results depend on U.S. E&P spending, commodity prices, service pricing and utilization. EOG Resources accounted for approximately 20% of 2018 revenue; the top five customers accounted for approximately 42%. Customer concentration was especially high in Processing Solutions, where the top five represented 82% of segment revenue.
- Liquidity and debt: Cash was $2.6 million at year-end, and the company had $17.7 million of revolver availability. The Encina financing carried an approximately 10.3% weighted-average rate at year-end and is secured by certain rig assets. Debt agreements contain financial and other covenants, with default potentially allowing acceleration. The company reported compliance with the applicable covenants at December 31, 2018.
- ESCO seller-note dispute: Ranger suspended payment of the $5.8 million remaining seller-note principal and unpaid interest while pursuing indemnification claims against ESCO Leasing. Resolution and the ultimate payment obligation were not established in the filing.
- Tax receivable agreement: Ranger generally owes certain holders 85% of realized or deemed tax savings. The company estimated that termination at December 31, 2018 would have required an approximately $7.1 million present-value payment, based on assumptions; a change of control or early termination could accelerate payments.
- Other obligations: A $3.0 million obligation to CSL was due in February 2019; the company said it would satisfy it by March 31, 2019, with payment options including cash or shares. Operating lease obligations totaled $10.5 million, and capital lease obligations totaled $12.0 million.
- Risks and contingencies: The filing highlights commodity-price volatility, seasonality and weather, competition, skilled-labor availability and cost, environmental and safety regulation, induced seismicity restrictions affecting customers, and operational, cyber and insurance risks. Ordinary-course lawsuits and claims, including environmental and employee matters, were not expected by management to have a material adverse effect. No quantified material loss contingency was identified in the provided filing text.
- Controls and audit: Management concluded internal control over financial reporting was effective at year-end and said a prior-year material weakness related to complex transactions and accounting staffing had been remediated. The independent auditor issued an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
Important facts for investors to verify
- Track resolution of the ESCO indemnification dispute, the suspended $5.8 million seller note, and any related interest.
- Confirm subsequent liquidity, revolver availability, covenant headroom, and scheduled debt and lease payments, particularly given negative operating cash flow less capital expenditures.
- Assess whether the 2018 operating improvement and segment margins are sustainable, accounting for acquisition effects, expanded wireline activity, fleet growth, and lower rig utilization per rig.
- Monitor customer concentration and collection risk, including EOG’s revenue contribution and the concentrated customer base in Processing Solutions.
- Review the assumptions behind the goodwill impairment, the estimated tax receivable agreement obligation, and the $3.0 million CSL payment reported as due after year-end.