Solaris Oilfield Infrastructure, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Solaris provides equipment, field services, logistics and software for oil and gas well completions. Financial amounts below are in millions unless otherwise stated.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $20.5 | $59.6 | $77.7 | $178.8 |
| Operating income (loss) | $(6.4) | $22.8 | $(56.5) | $77.8 |
| Net income (loss) attributable to Solaris | $(3.3) | $11.4 | $(27.9) | $37.0 |
| EPS, diluted | $(0.12) | $0.36 | $(0.97) | $1.33 |
| Adjusted EBITDA | $3.1 | $28.0 | $20.7 | $92.5 |
- Revenue fell 65.6% year over year in Q3 and 56.5% for the first nine months, with declines across rental, system services and transloading. Management cited reduced customer activity amid COVID-19, lower commodity demand and oil-market volatility.
- Q3 operating loss was 31.2% of revenue; nine-month operating loss reflected $47.8 million in impairment charges. Q3 Adjusted EBITDA margin was approximately 15.3%, compared with 46.9% a year earlier.
- Q3 system services costs, excluding depreciation and amortization, were 121% of system services revenue. For the first nine months, they were 123%.
- Nine-month operating cash flow was $38.0 million, versus $88.5 million in 2019. Investing cash outflow was $2.1 million, versus $32.2 million; financing cash outflow was $41.8 million, including $26.7 million of share repurchases and $14.3 million of dividends and distributions.
- Cash was $60.9 million at September 30, down from $66.9 million at year-end 2019. Current assets were $82.8 million and current liabilities $17.8 million. The company had no credit-facility borrowings and $50 million available under its revolving facility; it reported compliance with covenants.
- Total liabilities were $94.3 million, including $68.2 million payable under the Tax Receivable Agreement. The filing reports no outstanding borrowings under the senior secured facility; lease liabilities are also recorded.
Material changes and unusual items
- Q3 average fully utilized system count was 34, up approximately 70% from Q2 but down approximately 70% from Q3 2019.
- The company recorded $47.8 million of nine-month impairment and write-down charges: $37.8 million for property and equipment, $4.2 million for goodwill, $2.8 million for right-of-use assets, $2.6 million for inventory and $0.4 million for other assets. These were associated with reduced activity, customer losses and market uncertainty.
- Nine-month operating cash flow declined by $50.5 million year over year. Capital expenditures fell to $2.9 million from $32.9 million.
- Solaris completed its repurchase plan by March 31, 2020, having bought and retired 2.6 million shares for $30.0 million in total. Nine-month repurchases were 2.4 million shares for $26.7 million.
Outlook, risks and contingencies
- Management expected drilling and completion activity to remain depressed in Q4 2020 and said Solaris activity should generally track U.S. land drilling and completion trends. It maintained a 2020 capital expenditure budget of approximately $5 million or less, reduced from an earlier $20–$40 million range. The filing provides no quantified revenue or earnings guidance.
- Management said cash, operating cash flow and available credit were expected to fund operations for at least the next 12 months. It continued cost reductions, including workforce and SG&A cuts, and monitored customer credit risk.
- COVID-19, oil and gas price volatility, lower customer spending, customer insolvencies or late payments, and possible renewed restrictions were identified as significant risks. Two customers represented 40% of accounts receivable at quarter-end; one customer generated 28% of Q3 revenue. The company recorded $2.9 million of credit-loss expense for the nine months.
- Management reported no pending legal matters expected to have a material adverse effect. A related-party guarantee for headquarters office rent totaled $4.5 million at quarter-end. The filing also reports no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether system utilization and customer demand recovered after quarter-end, and the resulting effect on rental and service revenue.
- Whether further impairments, inventory write-downs or credit losses were required as market conditions and customer solvency evolved.
- Customer concentration, receivable collection and the collectability of balances from distressed oilfield customers.
- Cash use, planned capital spending, dividends and repurchases relative to the $60.9 million cash balance and $50 million undrawn credit availability.
- The assumptions supporting deferred tax asset realization and the timing and amount of Tax Receivable Agreement payments.