Solaris Oilfield Infrastructure, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial amounts are in U.S. dollars; amounts below are in millions unless stated otherwise.
Business context
Solaris designs, manufactures and rents mobile proppant and chemical management systems for oil and gas well completions, and provides related field, logistics, transloading and inventory software services. Demand is closely tied to U.S. drilling and completion activity. COVID-19, lower oil demand and prices, and producer spending cuts sharply reduced customer activity during the period.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $9.3 | $64.1 | $57.2 | $119.2 |
| Operating income (loss) | ($10.7) | $27.3 | ($50.1) | $55.1 |
| Net income (loss) | ($9.5) | $22.5 | ($42.6) | $45.9 |
| Net income (loss) attributable to Solaris | ($5.5) | $13.3 | ($24.6) | $25.6 |
| Adjusted EBITDA | ($0.4) | $32.6 | $17.6 | $64.6 |
| Class A diluted EPS | ($0.20) | $0.42 | ($0.85) | $0.85 |
- Q2 revenue fell 85% year over year; system rental revenue declined 86%, system services 82%, and transloading 94%. Q2 operating margin was approximately negative 115%, versus positive 43% a year earlier.
- For the first half, revenue declined 52% and the company recorded $47.8 million of impairment losses, including charges related to property and equipment, goodwill, lease assets and other assets. The filing also reports a $2.6 million inventory write-down. Six-month Adjusted EBITDA includes the impairment add-back.
- Six-month operating cash flow was $34.3 million, compared with $57.4 million in 2019; capital investment was $1.6 million, compared with $28.7 million. Financing cash outflow was $36.7 million, principally $26.7 million of share repurchases and $9.5 million of distributions and dividends. Cash declined $3.3 million to $63.6 million.
- At June 30, cash was $63.6 million, current assets $80.6 million and current liabilities $11.0 million. There were no borrowings under the $50 million revolving credit facility, all of which was available; the company reported covenant compliance. The balance sheet also included $68.1 million payable under the Tax Receivable Agreement, which is not funded borrowing.
- Total assets were $419.8 million and total stockholders’ equity was $332.5 million. Lease liabilities totaled $8.2 million. The quarterly Class A dividend was $0.105 per share; the first-quarter repurchase program used $30 million in total.
Material changes, outlook and risks
- Average fully utilized system count was 20 in Q2, down approximately 76% from Q1 and 84% from Q2 2019. Management expected activity to remain depressed in Q3, with a modest improvement from Q2, and anticipated activity broadly tracking U.S. land drilling and completion trends.
- Management reduced operating costs and SG&A, including workforce reductions, and lowered capital spending. The filing gives inconsistent descriptions of the 2020 capital budget: $5–10 million in one passage and $10 million or less in another; it also cites a prior budget of $20–40 million in the liquidity discussion.
- Risks include the uncertain duration and effects of COVID-19, commodity-price volatility, weak customer activity and potential customer insolvencies, difficulty redeploying equipment, and customer and supplier concentration. Two customers represented 27% of receivables at quarter-end; one supplier represented 40% of Q2 purchases.
- The company increased its allowance for credit losses, with $1.6 million of credit-loss expense in the first half. Management warned that prolonged weak market conditions could cause further impairment charges. No material pending litigation or material off-balance-sheet arrangements were reported.
- Management said operating cash flow, cash on hand and available credit were expected to fund operations for at least 12 months. This outlook depends on uncertain activity, commodity markets and customer collections.
Important facts for investors to verify
- Confirm the capital-expenditure target, given the filing’s differing budget descriptions.
- Track system utilization, customer activity, collections and credit-loss allowances as oilfield demand and customer solvency change.
- Review impairment assumptions and whether additional asset or inventory write-downs become necessary.
- Assess cash use, distributions and repurchases against operating cash generation, and monitor the Tax Receivable Agreement liability and credit-facility availability.
- Evaluate customer and supplier concentration and the extent to which activity and revenue recover after Q2’s sharp decline.