Solaris Oilfield Infrastructure, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Amounts below are in millions of dollars unless noted. The filing identifies the registrant as Solaris Oilfield Infrastructure, Inc.
Business context
Solaris designs and manufactures equipment and provides field technician support, last-mile logistics, and software to oil and gas operators during well completions. Most revenue comes from mobile proppant and fluid management systems and last-mile logistics; newer offerings include top-fill equipment and the AutoBlend integrated electric blender.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Total revenue | $77.2 | $86.7 | $159.9 | $143.6 |
| Operating income | $15.8 | $10.3 | $30.7 | $17.7 |
| Net income | $12.2 | $8.3 | $24.2 | $14.0 |
| Net income attributable to Solaris | $7.5 | $5.5 | $15.1 | $9.0 |
| Diluted earnings per Class A share | $0.24 | $0.16 | $0.47 | $0.27 |
| Adjusted EBITDA (non-GAAP) | $26.8 | $21.1 | $51.9 | $36.8 |
- Q2 revenue declined 11%, primarily due to lower last-mile tonnage, partly offset by fully utilized systems increasing to 108 from 88. First-half revenue rose 11%, reflecting demand and updated pricing; fully utilized systems averaged 113 versus 83.
- Cost of services excluding depreciation was 59% of revenue in Q2 versus 71% a year earlier, and 62% for the first half versus 69%. Q2 operating income increased despite lower revenue.
- Q2 interest expense was $0.9 versus $0.1; first-half interest expense was $1.3 versus $0.2, reflecting increased borrowing and higher rates.
Cash flow, liquidity, and capital
- First-half operating cash flow was $45.5, compared with $22.4 in 2022. Investing cash outflow was $39.9, including $40.1 of property and equipment investment, versus $31.4 of investing outflow and $32.3 of capital investment in the prior-year period.
- Financing cash outflow was $5.0; net borrowings of $35.0 partly offset $25.8 of share repurchases, $7.0 of Class A dividends, and $3.5 of unitholder distributions. Cash increased $0.5 to $9.4 during the first half.
- At June 30, borrowings were $43.0, with approximately $32.0 available under the amended facility. The facility’s stated maturity is April 26, 2025; the weighted-average borrowing rate was approximately 8.10%. Solaris reported compliance with its covenants.
- Total assets were $484.3 and total liabilities $175.9 at June 30. The Tax Receivable Agreement liability was $71.5. The company reported $308.5 of total stockholders’ equity.
- The board authorized up to $50.0 of repurchases; $25.8 had been spent by June 30, leaving $24.2 available. Quarterly Class A dividends were $0.11 per share.
Outlook, risks, and notable items
- Management said U.S. land rig count had fallen about 14% since year-end 2022, mainly due to lower natural gas prices. It expects new-product growth, pricing, and incremental earnings could support earnings growth and outperform underlying activity trends. The filing provides no quantified earnings or revenue guidance.
- Management cited oil and gas prices, completion activity, supply-chain disruptions, regulation, economic slowdown, geopolitical events, and customer consolidation as factors affecting demand and results. Customer consolidation has historically produced both market-share gains and losses.
- A Texas property-tax exemption dispute remained on appeal, with a ruling anticipated in the second half of 2023. The company had accrued $3.1; an adverse outcome could materially affect results or cash flows.
- Customer concentration remains relevant: two customers represented 15% and 11% of Q2 revenue; three represented 12%, 12%, and 10% of receivables at June 30. Related-party revenue was $7.3 for Q2 and $12.2 for the first half. Certain customer-affiliated counterparties also are suppliers.
- Disclosure controls were assessed as ineffective because of a material weakness in IT general controls for a third-party system supporting last-mile logistics financial reporting. Management reported no identified financial-statement misstatements and described remediation plans, including developing replacement software and strengthening IT controls.
- The filing reports no material off-balance-sheet arrangements, apart from purchase commitments under supply agreements; approximately $14.6 of purchase obligations were due within 12 months. Management said cash, operating cash flow, and available borrowing capacity should cover expected needs, including capital expenditures, working capital, and dividends.
Important facts for investors to verify
- Whether last-mile tonnage and activity trends stabilize, and whether new products and pricing sustain earnings as rig counts decline.
- The appellate outcome and potential financial impact of the $3.1 property-tax contingency.
- Progress in remediating the IT-control material weakness and whether controls are validated as effective over subsequent reporting periods.
- Customer concentration, related-party transactions, and the ability to collect receivables from major customers.
- Borrowing costs, covenant headroom, capital spending, and the company’s capacity to fund repurchases and dividends while maintaining liquidity.
- The assumptions supporting realization of deferred tax assets and the $71.5 Tax Receivable Agreement liability.