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Submission: On July 16 via api from US — Scanned from CA
Submission: On July 16 via api from US — Scanned from CA
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* November 2, 2023 > Form 10-Q > ProPetro Holding Corp.
* Document Links
FORM: 10-Q
Quarterly report pursuant to Section 13 or 15(d)
November 2, 2023
* Complete Filing PDF »
Includes filing and all documents
DOCUMENTS
* 10-Q »
* EX-10.1 »
* EX-31.1 »
* EX-31.2 »
* EX-32.1 »
* EX-32.2 »
10-Q: QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
Published on November 2, 2023
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q
______________________________
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number: 001-38035
______________________________
ProPetro Holding Corp.
(Exact name of registrant as specified in its charter)
______________________________
Delaware 26-3685382 (State or other jurisdiction of
incorporation or organization) (I.R.S. Employer
Identification No.)
303 W. Wall Street, Suite 102
Midland, Texas 79701
(Address of principal executive offices)
(432) 688-0012
(Registrant’s telephone number, including area code)
Former address: 1706 South Midkiff, Midland, Texas 79701
(Former name, former address and former fiscal year, if changed since last
report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.001 per share PUMP New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every
Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit such
files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting company” and "emerging growth company"
in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has
elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of the registrant’s common shares, par value $0.001 per share,
outstanding at October 30, 2023, was 110,237,703.
--------------------------------------------------------------------------------
PROPETRO HOLDING CORP.
TABLE OF CONTENTS
Page
Cautionary Note Regarding Forward-Looking Statements
ii
PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31,
2022
1
Condensed Consolidated Statements of Operations for the three and nine months
ended September 30, 2023 and 2022
2
Condensed Consolidated Statements of Shareholders' Equity for the three and nine
months ended September 30, 2023 and 2022
3
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2023 and 2022
5
Notes to Condensed Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
28
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
40
Item 4.
Controls and Procedures
41
PART II – OTHER INFORMATION
Item 1.
Legal Proceedings
42
Item 1A.
Risk Factors
42
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
43
Item 3.
Defaults Upon Senior Securities
43
Item 4.
Mine Safety Disclosures
43
Item 5.
Other Information
43
Item 6.
Exhibits
44
Signatures
45
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this "Form 10-Q") contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended
(the "Exchange Act"). All statements other than statements of historical facts
contained in this Form 10-Q are forward-looking statements. Forward-looking
statements are all statements other than statements of historical facts, and
give our expectations or forecasts of future events as of the effective date of
this Form 10-Q. Words such as "may," "could," "plan," "project," "budget,"
"predict," "pursue," "target," "seek," "objective," "believe," "expect,"
"anticipate," "intend," "estimate," "will," "should" and similar expressions are
generally used to identify forward-looking statements. These statements include,
but are not limited to statements about our business strategy, industry, future
profitability, future capital expenditures, our fleet conversion strategy and
our share repurchase program. Such statements are subject to risks and
uncertainties, many of which are difficult to predict and generally beyond our
control, that could cause actual results to differ materially from those implied
or projected by the forward-looking statements. Factors that could cause our
actual results to differ materially from those contemplated by such
forward-looking statements include:
•changes in general economic and geopolitical conditions, including increasing
interest rates, the rate of inflation and a potential economic recession;
•central bank policy actions, bank failures and associated liquidity risks and
other factors;
•the severity and duration of any world events and armed conflict, including the
Russia-Ukraine war, conflicts in the Israel-Gaza region and associated
repercussions to supply and demand for oil and gas and the economy generally;
•the actions taken by the members of the Organization of the Petroleum Exporting
Countries ("OPEC") and Russia (together with OPEC and other allied producing
countries, "OPEC+") with respect to oil production levels and announcements of
potential changes in such levels, including the ability of the OPEC+ countries
to agree on and comply with supply limitations;
•actions taken by the Biden Administration, such as executive orders or new
regulations, that may negatively impact the future production of oil and natural
gas in the United States and may adversely affect our future operations;
•the level of production and resulting market prices for crude oil, natural gas
and other hydrocarbons;
•the effects of existing and future laws and governmental regulations (or the
interpretation thereof) on us, our suppliers and our customers;
•cost increases and supply chain constraints related to our services;
•competitive conditions in our industry;
•our ability to attract and retain employees;
•changes in the long-term supply of, and demand for, oil and natural gas;
•actions taken by our customers, suppliers, competitors and third-party
operators and the possible loss of customers or work to our competitors;
•technological changes, including lower emissions oilfield services equipment
and similar advancements;
•changes in the availability and cost of capital;
•our ability to successfully implement our business plan, including execution of
potential mergers and acquisitions;
•large or multiple customer defaults, including defaults resulting from actual
or potential insolvencies;
•the effects of consolidation on our customers or competitors;
•the price and availability of debt and equity financing (including increasing
interest rates) for us and our customers;
•our ability to complete growth projects on time and on budget;
•increases in tax rates or types of taxes enacted that specifically impact E&P
and related operations resulting in changes in the amount of taxes owed by us;
•regulatory and related policy actions intended by federal, state and/or local
governments to reduce fossil fuel use and associated carbon emissions, or to
drive the substitution of renewable forms of energy for oil and gas, may over
time reduce demand for oil and gas and therefore the demand for our services;
•new or expanded regulations that materially limit our customers’ access to
federal and state lands for oil and gas development, thereby reducing demand for
our services in the affected areas;
-ii-
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•growing demand for electric vehicles that result in reduced demand for gasoline
and therefore the demand for our services;
•our ability to successfully implement technological developments and
enhancements, including our new Tier IV DGB dual-fuel and FORCESM
electric-powered hydraulic fracturing equipment, and other lower-emissions
equipment we may acquire or that may be sought by our customers;
•the projected timing, purchase price and number of shares purchased under our
share repurchase program, the sources of funds under the repurchase program and
the impacts of the repurchase program;
•operating hazards, natural disasters, weather-related delays, casualty losses
and other matters beyond our control, such as fires, which risks may be
self-insured, or may not be fully covered under our insurance programs;
•exposure to cyber-security events which could cause operational disruptions or
reputational harm;
•acts of terrorism, war or political or civil unrest in the United States or
elsewhere; and
•the effects of current and future litigation.
Whether actual results and developments will conform with our expectations and
predictions contained in forward-looking statements is subject to a number of
risks and uncertainties which could cause actual results to differ materially
from such expectations and predictions, including, without limitation, in
addition to those specified in the text surrounding such statements, the risks
described under Part II, Item 1A, "Risk Factors" in this Form 10-Q and elsewhere
throughout this report, the risks described under Part I, Item 1A, "Risk
Factors" in our Form 10-K for the year ended December 31, 2022, filed with the
SEC (the "Form 10-K") and elsewhere throughout that report, and other risks,
many of which are beyond our control.
Readers are cautioned not to place undue reliance on our forward-looking
statements, which are made as of the date of this Form 10-Q. We do not
undertake, and expressly disclaim, any duty to update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise, except as required by applicable securities laws.
Investors are also advised to carefully review and consider the various risks
and other disclosures discussed in our SEC reports, including the risk factors
described in the Form 10-K.
-iii-
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PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
September 30, 2023 December 31, 2022 ASSETS CURRENT ASSETS: Cash, cash
equivalents and restricted cash $ 54,330 $ 88,862
Accounts receivable - net of allowance for credit losses of $202 and $419,
respectively
260,757 215,925 Inventories 15,887 5,034 Prepaid expenses 8,753 8,643
Short-term investment, net 8,163 10,283 Other current assets 2,109 38 Total
current assets 349,999 328,785 PROPERTY AND EQUIPMENT - net of accumulated
depreciation 991,593 922,735
OPERATING LEASE RIGHT-OF-USE ASSETS
26,447 3,147 FINANCE LEASE RIGHT-OF-USE ASSETS 26,268 —
OTHER NONCURRENT ASSETS:
Goodwill 23,624 23,624 Intangible assets - net of amortization 52,047 56,345
Other noncurrent assets 2,244 1,150 Total other noncurrent assets 77,915
81,119 TOTAL ASSETS $ 1,472,222 $ 1,335,786 LIABILITIES AND SHAREHOLDERS’
EQUITY
CURRENT LIABILITIES:
Accounts payable $ 194,569 $ 234,299 Accrued and other current liabilities
65,305 49,027 Operating lease liabilities 5,449 854 Finance lease
liabilities 8,498 — Total current liabilities 273,821 284,180 DEFERRED
INCOME TAXES 94,018 65,265 LONG-TERM DEBT 45,000 30,000 NONCURRENT OPERATING
LEASE LIABILITIES 14,199 2,308 NONCURRENT FINANCE LEASE LIABILITIES 17,857 —
Total liabilities 444,895 381,753 COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS’ EQUITY:
Preferred stock, $0.001 par value, 30,000,000 shares authorized, none issued,
respectively
— —
Common stock, $0.001 par value, 200,000,000 shares authorized, 111,091,503 and
114,515,008 shares issued, respectively
111 114 Additional paid-in capital 941,073 970,519 Retained earnings
(accumulated deficit) 86,143 (16,600) Total shareholders’ equity 1,027,327
954,033 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,472,222 $ 1,335,786
See notes to condensed consolidated financial statements.
-1-
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PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023
2022
REVENUE - Service revenue
$ 423,804 $ 333,014 $ 1,282,623 $ 930,776 COSTS AND EXPENSES Cost of
services (exclusive of depreciation and amortization) 292,490 224,118 870,767
640,202 General and administrative expenses (inclusive of stock-based
compensation) 28,597 28,190 86,364 85,031 Depreciation and amortization
53,769 41,600 157,456 120,573 Impairment expense — — — 57,454 Loss on
disposal of assets 4,265 25,453 29,410 48,401 Total costs and expenses
379,121 319,361 1,143,997 951,661 OPERATING INCOME (LOSS) 44,683 13,653
138,626 (20,885) OTHER INCOME (EXPENSE): Interest expense (1,169) (237) (3,016)
(1,040) Other income (expense) 1,883 (616) (1,749) 9,749 Total other income
(expense) 714 (853) (4,765) 8,709 INCOME (LOSS) BEFORE INCOME TAXES 45,397
12,800 133,861 (12,176) INCOME TAX (EXPENSE) BENEFIT (10,644) (2,768) (31,118)
1,164 NET INCOME (LOSS) $ 34,753 $ 10,032 $ 102,743 $ (11,012) NET INCOME
(LOSS) PER COMMON SHARE: Basic $ 0.31 $ 0.10 $ 0.90 $ (0.11) Diluted $ 0.31
$ 0.10 $ 0.90 $ (0.11) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic
112,286 104,372 113,960 104,100 Diluted 112,698 105,070 114,294 104,100
See notes to condensed consolidated financial statements.
-2-
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PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
Nine Months Ended September 30, 2023 Common Stock Shares Amount Additional
Paid-In Capital Retained Earnings (Accumulated Deficit) Total BALANCE - January
1, 2023 114,515 $ 114 $ 970,519 $ (16,600) $ 954,033 Stock-based
compensation cost — — 3,536 — 3,536 Issuance of equity awards, net 656 1
(1) — — Tax withholdings paid for net settlement of equity awards — —
(3,379) — (3,379) Net income — — — 28,733 28,733 BALANCE - March 31, 2023
115,171 $ 115 $ 970,675 $ 12,133 $ 982,923 Stock-based compensation cost —
— 3,758 — 3,758 Issuance of equity awards, net 76 — — — — Tax
withholdings paid for net settlement of equity awards — — (4) — (4) Share
repurchases (2,289) (2) (17,468) — (17,470) Excise tax on share repurchases —
— (105) — (105) Net income — — — 39,257 39,257 BALANCE - June 30, 2023
112,958 $ 113 $ 956,856 $ 51,390 $ 1,008,359 Stock-based compensation cost
— — 3,310 — 3,310 Issuance of equity awards, net 25 — — — — Tax
withholdings paid for net settlement of equity awards — — (123) — (123) Share
repurchases (1,892) (2) (18,785) — (18,787) Excise tax on share repurchases —
— (185) — (185) Net income — — — 34,753 34,753 BALANCE - September 30,
2023 111,091 $ 111 $ 941,073 $ 86,143 $ 1,027,327
See notes to condensed consolidated financial statements.
-3-
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PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
Nine Months Ended September 30, 2022 Common Stock Shares Amount Additional
Paid-In Capital Accumulated Deficit Total BALANCE - January 1, 2022 103,437 $
103 $ 844,829 $ (18,630) $ 826,302 Stock-based compensation cost — —
11,364 — 11,364 Issuance of equity awards, net 562 1 419 — 420 Tax
withholdings paid for net settlement of equity awards — — (2,691) — (2,691)
Net income — — — 11,817 11,817 BALANCE - March 31, 2022 103,999 $ 104 $
853,921 $ (6,813) $ 847,212 Stock-based compensation cost — — 3,458 —
3,458 Issuance of equity awards, net 309 — 321 — 321 Tax withholdings paid
for net settlement of equity awards — — (1,095) — (1,095) Net loss — — —
(32,860) (32,860) BALANCE - June 30, 2022 104,308 $ 104 $ 856,605 $ (39,673)
$ 817,036 Stock-based compensation cost — — 3,306 — 3,306 Issuance of
equity awards, net 118 — 222 — 222 Tax withholdings paid for net settlement
of equity awards — — (58) — (58) Net income — — — 10,032 10,032 BALANCE
- September 30, 2022 104,426 $ 104 $ 860,075 $ (29,641) $ 830,538
See notes to condensed consolidated financial statements.
-4-
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PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 102,743 $ (11,012) Adjustments to reconcile net income
(loss) to net cash provided by operating activities: Depreciation and
amortization 157,456 120,573 Impairment expense — 57,454 Deferred income tax
expense 28,753 (1,926) Amortization of deferred debt issuance costs 250 720
Stock-based compensation 10,604 18,128 Loss on disposal of assets 29,410
48,401 Unrealized loss on short-term investment 2,120 3,349 Non cash income
from settlement with equipment manufacturer — (2,668) Changes in operating
assets and liabilities: Accounts receivable (44,832) (82,374) Other current
assets (2,584) (29,647) Inventories (4,520) 6 Prepaid expenses (275) 2,847
Accounts payable 9,584 7,117 Accrued and other current liabilities 16,004
43,983 Accrued interest 358 — Net cash provided by operating activities
305,071 174,951 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures
(320,747) (247,164) Proceeds from sale of assets 7,976 7,207 Net cash used in
investing activities (312,771) (239,957) CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 30,000 — Repayments of borrowings (15,000) —
Payments on finance lease obligations (889) — Payment of debt issuance costs
(1,179) (824) Proceeds from exercise of equity awards — 963 Tax withholdings
paid for net settlement of equity awards (3,506) (3,843) Share repurchases
(36,258) — Net cash used in financing activities (26,832) (3,704) NET DECREASE
IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (34,532) (68,710) CASH, CASH
EQUIVALENTS AND RESTRICTED CASH - Beginning of period 88,862 111,918 CASH,
CASH EQUIVALENTS AND RESTRICTED CASH - End of period $ 54,330 $ 43,208
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Capital
expenditures included in accounts payable and accrued liabilities $ 33,189 $
65,587
See notes to condensed consolidated financial statements.
-5-
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PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
(Unaudited)
The following table provides a reconciliation of cash, cash equivalents and
restricted cash to amounts reported within the condensed consolidated balance
sheets:
Nine Months Ended September 30, 2023 2022 Summary of cash, cash equivalents and
restricted cash Cash and cash equivalents $ 54,330 $ 43,208 Restricted cash —
— Total cash, cash equivalents and restricted cash — End of period $ 54,330 $
43,208
See notes to condensed consolidated financial statements.
-6-
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PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying condensed consolidated financial statements of ProPetro Holding
Corp. and its subsidiaries (the "Company," "we," "us" or "our") have been
prepared in accordance with the requirements of the U.S. Securities and Exchange
Commission ("SEC") for interim financial information and do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America ("GAAP") for annual financial
statements. Those adjustments (which consisted of normal recurring accruals)
that are, in the opinion of management, necessary for a fair presentation of the
results of the interim periods have been made. Results of operations for such
interim periods are not necessarily indicative of the results of operations for
a full year due to changes in market conditions and other factors. The condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended
December 31, 2022, included in our Form 10-K filed with the SEC (our "Form
10-K").
Revenue Recognition
The Company’s services are sold based upon contracts with customers. The Company
recognizes revenue when it satisfies a performance obligation by transferring
control over a product or service to a customer. The following is a description
of the principal activities, aggregated into one reportable segment—"Completion
Services," from which the Company generates its revenue and an "All Other"
category.
Completion Services — Completion Services consists of downhole pumping services,
which include hydraulic fracturing, cementing and wireline operations.
Hydraulic fracturing is an oil well completion technique, which is part of the
overall well completion process. It is a well-stimulation technique intended to
optimize hydrocarbon flow paths during the completion phase of shale wellbores.
The process involves the injection of water, sand and chemicals under high
pressure into shale formations. Our hydraulic fracturing contracts with our
customers have one performance obligation, which is the contracted total stages,
satisfied over time. We recognize revenue over time using a progress output,
unit-of-work performed method, which is based on the agreed fixed transaction
price and actual stages completed. We believe that recognizing revenue based on
actual stages completed accurately depicts how our hydraulic fracturing services
are transferred to our customers over time. In addition, certain of our
hydraulic fracturing equipment may be entitled to reservation fee charges if a
customer were to reserve committed hydraulic fracturing equipment. The Company
recognizes revenue related to reservation fee charges on a daily basis as the
performance obligations are met.
Acidizing, which is part of our hydraulic fracturing operating segment, involves
a well-stimulation technique where acid or similar chemicals are injected under
pressure into formations to form or expand fissures. Our acidizing contracts
have one performance obligation, satisfied at a point-in-time, upon completion
of the contracted service or sale of the acid or chemical when control is
transferred to the customer. Jobs for these services are typically short term in
nature, with most jobs completed in less than a day. We recognize acidizing
revenue at a point-in-time, upon completion of the performance obligation.
Our cementing services use pressure pumping equipment to deliver a slurry of
liquid cement that is pumped down a well between the casing and the borehole.
Our cementing contracts have one performance obligation, satisfied at a
point-in-time, upon completion of the contracted service when control is
transferred to the customer. Jobs for these services are typically short term in
nature, with most jobs completed in less than a day. We recognize cementing
revenue at a point-in-time, upon completion of the performance obligation.
Wireline services (including pumpdown) are oil well completion techniques, which
are part of the well completion process. Our wireline services utilize equipment
with a drum of wireline to deploy perforating guns in the well to perforate the
casing, cement, and formation. Once the well is perforated, the well can be
fractured. Pumpdown utilizes pressure pumping equipment to pump water into the
well to deploy perforating guns attached to wireline through the lateral section
of a well. Our wireline contracts with our customers have one performance
obligation, which is the contracted total stages, satisfied over time. We
recognize revenue over time using a progress output, unit-of-work performed
method, which is based on the agreed fixed transaction price and actual stages
completed. We believe that recognizing revenue based on actual stages completed
accurately depicts how our wireline services are transferred to our customers
over time. In addition, certain of our wireline equipment is entitled to daily
equipment charges while the equipment is on the customer’s locations. The
Company recognizes revenue related to daily equipment charges on a daily basis
as the performance obligations are met.
The transaction price for each performance obligation for all our completion
services is fixed per our contracts with our customers.
-7-
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PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation (Continued)
All Other— All Other consisted of coiled tubing services, which are
complementary downhole well completion/remedial services. The performance
obligation for these services had a fixed transaction price which was satisfied
at a point-in-time upon completion of the service when control was transferred
to the customer. Accordingly, we recognized revenue at a point-in-time, upon
completion of the service and transfer of control to the customer. Effective
September 1, 2022, we shut down our coiled tubing operations, and disposed of
all our coiled tubing assets.
Restricted Cash and Customer Cash Advances
Our restricted cash relates to cash advances received from a customer in
connection with our contract with the customer to provide FORCESM
electric-powered hydraulic fracturing equipment and services. The restricted
cash will be used to pay for contractually agreed upon expenditures. The cash
advances from the customer will be credited towards the customer’s invoice as
our revenue performance obligations are met over the contract period. Our
restricted cash balances as of September 30, 2023 and December 31, 2022, were $0
and $10.0 million, respectively.
The cash advances received represent contract liabilities in connection with the
performance of certain completion services. The cash advance (contract
liability) balances, which are included in accrued and other current liabilities
in our condensed consolidated balance sheets, were $20.5 million and $10.0
million as of September 30, 2023 and December 31, 2022, respectively. During the
nine months ended September 30, 2023, we recognized revenue of $4.2 million from
the cash advance amount outstanding at the beginning of the period.
Accounts Receivable
Accounts receivable are stated at the amount billed and billable to customers.
At September 30, 2023 and December 31, 2022, accrued revenue (unbilled
receivable) included as part of our accounts receivable was $78.6 million and
$51.9 million, respectively. At September 30, 2023, the transaction price
allocated to the remaining performance obligation for our partially completed
hydraulic fracturing and wireline operations was $40.9 million, which is
expected to be completed and recognized as revenue within one month following
the current period balance sheet date.
Allowance for Credit Losses
As of September 30, 2023, the Company had $0.2 million allowance for credit
losses. Our allowance for credit losses is based on the evaluation of both our
historic collection experience and the economic outlook for the oil and gas
industry. We evaluated the historic loss experience on our accounts receivable
and also separately considered customers with receivable balances that may be
negatively impacted by current or future economic developments and market
conditions. While the Company has not experienced significant credit losses in
the past and has not yet seen material adverse changes to the payment patterns
of its customers, the Company cannot predict with any certainty the degree to
which the impacts of depressed economic activities, including the potential
impact of periodically adjusted borrowing base limits, level of hedged
production, or unforeseen well shut-downs may affect the ability of its
customers to timely pay receivables when due. Accordingly, in future periods,
the Company may revise its estimates of expected credit losses.
The table below shows a summary of allowance for credit losses during the nine
months ended September 30, 2023:
(in thousands) Balance - January 1, 2023 $ 419 Provision for credit losses
during the period — Write-off during the period (217) Balance - September 30,
2023 $ 202
Reclassification of Prior Period Presentation
Certain reclassifications have been made to prior period amounts to conform to
the current period presentation. These reclassifications had no effect on our
balance sheet, operating and net income (loss) or cash flows from operating,
investing and financing activities.
-8-
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PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation (Continued)
Change in Accounting Estimates
Current trends in hydraulic fracturing equipment operating conditions such as
larger pads, changes to job design and increased pumping hours per day have
resulted in shorter useful lives for certain critical components that are
included in our property and equipment assets. These recent trends necessitated
a review of useful lives of our critical components like fluid ends, power ends,
hydraulic fracturing units and other components in the first quarter of 2023. We
determined that the estimated useful life of fluid ends is now less than one
year, resulting in our determination that costs associated with the replacement
of these components will no longer be capitalized, but instead recorded in
inventories and amortized to cost of services over their estimated useful life.
We have also shortened the estimated useful lives of power ends to two years
from five years and hydraulic fracturing units to ten years from fifteen years.
This change in accounting estimates was made effective January 1, 2023 and
accounted for prospectively. The net effect of this change for the three and
nine months ended September 30, 2023 was a $2.8 million and $10.0 million
decrease in net income, or $0.02 and $0.09 per basic and diluted share,
respectively.
Additionally, in connection with the review of our power ends estimated useful
life, effective January 1, 2023, we are accelerating the depreciation of the
remaining book value of power ends that prematurely fail. In 2022, we wrote off
the remaining book value of prematurely failed and disposed of power ends to
loss on disposal of assets. The amounts included in depreciation in connection
with premature failure of power ends during the three and nine months ended
September 30, 2023 were $8.4 million and $32.7 million, respectively.
Furthermore, to conform to current period presentation, we have reclassified the
amounts relating to premature failure of power ends previously included in loss
on disposal of assets to depreciation expense for prior periods. The amounts
reclassified were $11.2 million and $26.8 million, which relate to the three and
nine months ended September 30, 2022, respectively.
Depreciation and Amortization
Depreciation and amortization comprised of the following:
(in thousands) Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022 Depreciation and amortization related to cost of services $
52,298 $ 41,479 $ 152,962 $ 120,274 Depreciation and amortization related to
general and administrative expenses 1,471 121 4,494 299 Total depreciation
and amortization $ 53,769 $ 41,600 $ 157,456 $ 120,573
Share Repurchases
All shares of common stock repurchased through the Company's share repurchase
program are retired upon repurchase. The Company accounts for the purchase price
of repurchased common stock in excess of par value ($0.001 per share of common
stock) as a reduction of additional paid-in capital, and will continue to do so
until additional paid-in capital is reduced to zero. Thereafter, any excess
purchase price will be recorded as a reduction of retained earnings.
Note 2 - Recently Issued Accounting Standards
There were no recently issued Accounting Standards Updates ("ASU") by the
Financial Accounting Standards Board ("FASB") that are expected to have a
material impact on our condensed consolidated financial statements.
Note 3 - Silvertip Acquisition
On November 1, 2022 (the "Silvertip Acquisition Date"), the Company entered into
a purchase and sale agreement with New Silvertip Holdco, LLC, pursuant to which
the Company acquired 100% of the outstanding limited liability company interests
of Silvertip Completion Services Operating, LLC ("Silvertip"), a wireline
services company in the Permian Basin, in exchange for total consideration of
$148.1 million (the "Silvertip Purchase Price") consisting of 10.1 million
shares of our common stock valued at $106.7 million, $30.0 million of cash, the
payoff of $7.2 million of assumed debt, and the payment of $4.1 million of
-9-
--------------------------------------------------------------------------------
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Silvertip Acquisition (Continued)
certain closing and transaction costs (the "Silvertip Acquisition"). The
Silvertip Acquisition positions the Company as a more integrated
completions-focused oilfield services provider headquartered in the Permian
Basin.
The Company accounted for the Silvertip Acquisition using the acquisition method
of accounting. The Silvertip Purchase Price was allocated to the major
categories of assets acquired and liabilities assumed based upon their estimated
fair value at the Silvertip Acquisition Date. The estimated fair values of
certain assets and liabilities, including accounts receivable, require
significant judgments and estimates. The measurements of assets acquired and
liabilities assumed, are based on inputs that are not observable in the market
and thus represent Level 3 inputs.
The following table summarizes the fair value of the consideration transferred
in the Silvertip Acquisition and the Silvertip Purchase Price to the fair value
of the assets acquired and liabilities assumed (which are included within the
accompanying condensed consolidated balance sheets) as of the Silvertip
Acquisition Date:
(in thousands) Total Purchase Consideration: Cash consideration $ 30,000 Equity
consideration 106,736 Debt payments and closing costs 11,320 Total
consideration $ 148,056 Cash and cash equivalents $ 2,681 Accounts receivable
and unbilled revenue 21,079 Inventories 1,209 Prepaid expenses 2,476 Other
current assets 1,059
Property and equipment (1)
52,478 Intangible assets:
Trademark/trade name (2)
10,800
Customer relationships (2)
46,500 Goodwill 23,624 Operating lease right-of-use asset 2,783 Total
identifiable assets acquired 164,689 Accounts payable 7,659 Accrued and other
current liabilities 6,178 Operating lease liability 2,796 Total liabilities
assumed 16,633 Total purchase consideration $ 148,056
(1)Remaining useful lives ranging from less than one to 22 years.
(2)Definite-lived intangible assets with amortization period of 10 years.
The goodwill arising from the Silvertip Acquisition is attributable to the
expected operational synergies resulting from our integrated service offerings.
The goodwill arising from the Silvertip Acquisition has been allocated to our
wireline operations and is included in our wireline operating segment.
Note 4 - Fair Value Measurements
Fair value ("FV") is defined as the price that would be received to sell an
asset or paid to transfer a liability (i.e., the "exit price") in an orderly
transaction between market participants at the measurement date.
-10-
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PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Fair Value Measurements (Continued)
In determining fair value, the Company uses various valuation approaches and
establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of relevant observable inputs and minimizes the use of unobservable
inputs by requiring that the most observable inputs be used, when available.
Observable inputs are inputs that market participants would use in pricing the
asset or liability developed based on market data obtained from sources
independent of the Company. Unobservable inputs are inputs that reflect the
Company's assumptions about the assumptions other market participants would use
in pricing the asset or liability developed based on the best information
available in the circumstances. The hierarchy is broken down into three levels
based on the observability of inputs as follows:
Level 1 — Valuations based on quoted prices in active markets for identical
assets or liabilities that the Company has the ability to access. Valuation
adjustments and block discounts are not applied to Level 1 instruments. Since
valuations are based on quoted prices that are readily and regularly available
in an active market, valuation of these instruments does not entail a
significant degree of judgment.
Level 2 — Valuations based on one or more quoted prices in markets that are not
active or for which all significant inputs are observable, either directly or
indirectly.
Level 3 — Valuations based on inputs that are unobservable and significant to
the overall fair value measurement.
A financial instrument's categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement. The Company's assessment of the significance of a particular input
to the fair value measurement in its entirety requires judgment and considers
factors specific to the asset or liability.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair values of cash, cash equivalents and restricted cash, accounts
receivable, accounts payable, accrued and other current liabilities, and
long-term debt are estimated to be approximately equivalent to carrying amounts
as of September 30, 2023 and December 31, 2022 and have been excluded from the
table below.
Assets measured at fair value on a recurring basis are set forth below:
(in thousands) Estimated fair value measurements Balance Quoted prices in active
market
(Level 1) Significant other observable inputs (Level 2) Significant other
unobservable inputs (Level 3) Total gains
(losses) September 30, 2023: Short-term investment $ 8,163 $ 8,163 $ — $ — $
(2,120) December 31, 2022: Short-term investment $ 10,283 $ 10,283 $ — $ — $
(1,570)
Short-term investment— On September 1, 2022, the Company received 2.6 million
common shares of STEP Energy Services Ltd. ("STEP") with an estimated fair value
of $11.8 million as part of the consideration for the sale of our coiled tubing
assets to STEP. The shares were treated as an investment in equity securities
measured at fair value using Level 1 inputs based on observable prices on the
Toronto Stock Exchange and are shown under current assets in our condensed
consolidated balance sheets. As of September 30, 2023, the fair value of the
short-term investment was estimated at $8.2 million. The fluctuation in stock
price resulted in an unrealized gain of $1.8 million for the three months ended
September 30, 2023 and an unrealized loss of $2.1 million for the nine months
ended September 30, 2023. Included in the unrealized gain for the three months
ended September 30, 2023 and the unrealized loss for the nine months ended
September 30, 2023 was a loss of $0.2 million and $0.1 million resulting from
non-cash foreign currency translation during the three and nine months ended
September 30, 2023, respectively. The unrealized loss resulting from stock price
fluctuation and the unrealized gain resulting from non-cash foreign currency
translation are included in other income (expense) in our condensed consolidated
statements of operations. The Company is restricted from selling, transferring
or assigning more than 0.9 million shares in any one calendar month.
-11-
--------------------------------------------------------------------------------
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Fair Value Measurements (Continued)
Assets Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring
basis. These items are not measured at fair value on an ongoing basis but may be
subject to fair value adjustments in certain circumstances. These assets and
liabilities include those acquired through the Silvertip Acquisition, which are
required to be measured at fair value on the acquisition date according to the
FASB Accounting Standards Codification ("ASC") Topic 805, Business Combinations.
Whenever events or circumstances indicate that the carrying value of long-lived
assets may not be recoverable, the Company reviews the carrying values of
long‑lived assets, such as property and equipment and other assets to determine
if they are recoverable. If any long‑lived assets are determined to be
unrecoverable, an impairment expense is recorded in the period. No impairment of
property and equipment was recorded during the nine months ended September 30,
2023. We recorded impairment expense of approximately $57.5 million during the
nine months ended September 30, 2022.
As of September 30, 2023 and December 31, 2022, our goodwill carrying value was
$23.6 million and $23.6 million, respectively. There were no additions to
goodwill during the three and nine months ended September 30, 2023 and 2022. The
wireline operating segment is the only segment with goodwill at September 30,
2023 and December 31, 2022. There were no goodwill impairment losses during the
three and nine months ended September 30, 2023 and 2022. We conducted our annual
impairment test of goodwill in accordance with ASC 850, Intangibles—Goodwill and
Other, as of December 31, 2022 and determined that no impairment to the carrying
value of goodwill for our reporting unit (wireline operating segment) was
required.
Note 5 - Intangible Assets
Intangible assets consist of customer relationships and trademark/trade name.
Intangible assets are amortized on a straight‑line basis with a useful life of
ten years. Amortization expense included in net income for the three and nine
months ended September 30, 2023 was $1.4 million and $4.2 million, respectively.
There was no amortization expense during the three and nine months ended
September 30, 2022. The Company’s intangible assets subject to amortization
consisted of the following:
(in thousands)
September 30, 2023 December 31, 2022 Intangible assets acquired: Trademark/trade
name $ 10,800 $ 10,800 Customer relationships 46,500 46,500 Total intangible
assets acquired 57,300 57,300 Accumulated amortization: Trademark/trade name
(990) (180) Customer relationships (4,263) (775) Total accumulated amortization
(5,253) (955) Intangible assets — net $ 52,047 $ 56,345
-12-
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PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 - Intangible Assets (Continued)
The average amortization period for our remaining intangible assets is
approximately 9.1 years. Estimated remaining amortization expense for each of
the subsequent fiscal years is expected to be as follows:
(in thousands)
Year Estimated future amortization expense 2023 $ 1,432 2024 5,730 2025 5,730
2026 5,730 2027 and beyond 33,425 Total $ 52,047
Note 6 - Long-Term Debt
Asset-Based Loan ("ABL") Credit Facility
Our revolving credit facility, as amended and restated in April 2022, prior to
giving effect to the amendment to the revolving credit facility in June 2023,
had a total borrowing capacity of $150.0 million. The revolving credit facility
had a borrowing base of 85% to 90%, depending on the credit ratings of our
accounts receivable counterparties, of monthly eligible accounts receivable less
customary reserves. The revolving credit facility included a springing fixed
charge coverage ratio to apply when excess availability was less than the
greater of (i) 10% of the lesser of the facility size or the borrowing base or
(ii) $10.0 million. Under the revolving credit facility we were required to
comply, subject to certain exceptions and materiality qualifiers, with certain
customary affirmative and negative covenants, including, but not limited to,
covenants pertaining to our ability to incur liens, indebtedness, changes in the
nature of our business, mergers and other fundamental changes, disposal of
assets, investments and restricted payments, amendments to our organizational
documents or accounting policies, prepayments of certain debt, dividends,
transactions with affiliates, and certain other activities.
Effective June 2, 2023, the Company entered into an amendment to its amended and
restated revolving credit facility (the revolving credit facility, as amended
and restated in April 2022, as amended in June 2023 and as may be amended
further, "ABL Credit Facility"). The amendment increased the borrowing capacity
under the ABL Credit Facility to $225.0 million (subject to the Borrowing Base
(as defined below) limit), and extended the maturity date to June 2, 2028. The
ABL Credit Facility has a borrowing base of the sum of 85% to 90% of monthly
eligible accounts receivable and 80% of eligible unbilled accounts (up to a
maximum of 25% of the Borrowing Base) less customary reserves (the "Borrowing
Base"), in each case, depending on the credit ratings of our accounts receivable
counterparties, as redetermined monthly. The Borrowing Base as of September 30,
2023, was approximately $176.3 million. The ABL Credit Facility includes a
springing fixed charge coverage ratio to apply when excess availability is less
than the greater of (i) 10% of the lesser of the facility size or the Borrowing
Base or (ii) $15.0 million. Under the ABL Credit Facility we are required to
comply, subject to certain exceptions and materiality qualifiers, with certain
customary affirmative and negative covenants, including, but not limited to,
covenants pertaining to our ability to incur liens or indebtedness, changes in
the nature of our business, mergers and other fundamental changes, disposal of
assets, investments and restricted payments, amendments to our organizational
documents or accounting policies, prepayments of certain debt, dividends,
transactions with affiliates, and certain other activities. Borrowings under the
ABL Credit Facility are secured by a first priority lien and security interest
in substantially all assets of the Company.
Borrowings under the ABL Credit Facility accrue interest based on a three-tier
pricing grid tied to availability, and we may elect for loans to be based on
either the Secured Overnight Financing Rate ("SOFR") or the base rate, plus the
applicable margin, which ranges from 1.75% to 2.25% for SOFR loans and 0.75% to
1.25% for base rate loans. For the nine months ended September 30, 2023, the
weighted average interest rate on our outstanding borrowings under the ABL
Credit Facility was 6.51%.
The loan origination costs relating to the ABL Credit Facility are classified as
an asset in the condensed consolidated balance sheets. As of September 30, 2023
and December 31, 2022, we had borrowings outstanding under our ABL Credit
Facility of $45.0 million and $30.0 million, respectively.
-13-
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PROPETRO HOLDING CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Reportable Segment Information
The Company currently has three operating segments for which discrete financial
information is readily available: hydraulic fracturing (inclusive of acidizing),
cementing and wireline. These operating segments represent how the Chief
Operating Decision Maker evaluates performance and allocates resources.
On September 1, 2022, the Company shut down its coiled tubing operations and
disposed of its coiled tubing assets to STEP as part of a strategic
repositioning, and recorded a loss on disposal of $13.8 million. The divestiture
of our coiled tubing assets did not qualify for presentation and disclosure as
discontinued operations, and accordingly, we have recorded the resulting loss
from the disposal as part of our loss on disposal of assets in our condensed
consolidated statement of operations. Following the divestiture of our coiled
tubing operations, which were historically included in the "All Other" category,
and the Silvertip Acquisition, which resulted in our new wireline operations in
2022, we have three operating segments. All three remaining operating segments
are now aggregated into Completion Services, which is our only reportable
segment.
In accordance with ASC 280—Segment Reporting, the Company has one reportable
segment (Completion Services) comprised of the hydraulic fracturing, cementing
and wireline operating segments. The Silvertip Acquisition which resulted in the
addition of a new wireline operating segment, and the disposal of our coiled
tubing operations (previously included in the "All Other" category),
collectively resulted in a change to the structure and composition of our
reportable segment and "All Other" category. Our previous Pressure Pumping
reportable segment is now renamed "Completion Services" because of the inclusion
of the new wireline completion services. In addition, we have reclassified all
our corporate overhead costs (inclusive of income taxes and interest expense)
previously included in the "All Other" category to the Completion Services
reportable segment. As a result of the change in the structure and composition
of our reportable segment, we have reclassified the presentation of our segment
disclosure for the three and nine months ended September 30, 2022 to include
corporate costs in our Completion Services reportable segment to make this
period comparable to the three and nine months ended September 30, 2023. Total
corporate administrative expense for the three and nine months ended
September 30, 2023 was $25.4 million and $77.7 million, respectively. Total
corporate administrative expense for the three and nine months ended
September 30, 2022 was $20.4 million and $45.4 million, respectively.
A breakout of our Completion Services revenue by operating segment for the three
and nine months ended September 30, 2023 and 2022 is presented below:
Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023
2022 Hydraulic fracturing revenue 80.2 % 91.7 % 79.4 % 92.7 % Cementing
revenue 7.3 % 8.3 % 6.6 % 7.3 % Wireline revenue 12.5 % — % 14.0 % — %
Total Completion Services revenue 100.0 % 100.0 % 100.0 % 100.0 %
The Company manages and assesses the performance of the reportable segment by
its adjusted EBITDA (earnings before other income (expense), interest expense,
income taxes, depreciation and amortization, stock-based compensation expense,
retention bonuses, severance and related expense, impairment expense,
(gain)/loss on disposal of assets and other unusual or nonrecurring expenses or
(income)).
-14-
--------------------------------------------------------------------------------
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Reportable Segment Information (Continued)
A reconciliation from segment level financial information to the consolidated
statements of operations is provided in the table below; inter-segment revenues
are not material and not shown separately (in thousands):
Three Months Ended September 30, 2023 Completion Services All Other Total
Service revenue $ 423,804 $ — $ 423,804 Adjusted EBITDA $ 107,714 $ — $
107,714 Depreciation and amortization $ 53,769 $ — $ 53,769 Capital
expenditures $ 59,081 $ — $ 59,081 Goodwill at September 30, 2023 $ 23,624 $
— $ 23,624 Total assets September 30, 2023 $ 1,472,222 $ — $ 1,472,222
Three Months Ended September 30, 2022 Completion Services All Other Total
Service revenue $ 330,780 $ 2,234 $ 333,014 Adjusted EBITDA $ 92,009 $
(2,009) $ 90,000 Depreciation and amortization $ 41,039 $ 561 $ 41,600
Capital expenditures $ 112,865 $ 2,258 $ 115,123 Total assets December 31,
2022 $ 1,335,501 $ 285 $ 1,335,786
Nine Months Ended September 30, 2023 Completion Services All Other Total Service
revenue $ 1,282,623 $ — $ 1,282,623 Adjusted EBITDA $ 339,692 $ — $
339,692 Depreciation and amortization $ 157,456 $ — $ 157,456 Capital
expenditures $ 271,484 $ — $ 271,484 Goodwill at September 30, 2023 $ 23,624
$ — $ 23,624 Total assets September 30, 2023 $ 1,472,222 $ — $ 1,472,222
Nine Months Ended September 30, 2022 Completion Services All Other Total Service
revenue $ 917,336 $ 13,440 $ 930,776 Adjusted EBITDA $ 233,824 $ (1,344) $
232,480 Depreciation and amortization $ 118,333 $ 2,240 $ 120,573 Impairment
expense $ 57,454 $ — $ 57,454 Capital expenditures $ 273,309 $ 2,623 $
275,932 Total assets December 31, 2022 $ 1,335,501 $ 285 $ 1,335,786
-15-
--------------------------------------------------------------------------------
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Reportable Segment Information (Continued)
Reconciliation of net income (loss) to adjusted EBITDA (in thousands):
Three Months Ended September 30, 2023 Completion Services All Other Total Net
income $ 34,753 $ — $ 34,753 Depreciation and amortization 53,769 — 53,769
Interest expense 1,169 — 1,169 Income tax expense 10,644 — 10,644 Loss on
disposal of assets 4,265 — 4,265 Stock-based compensation 3,310 — 3,310
Other income (1)
(1,883) — (1,883)
Other general and administrative expense, (net) (2)
450 — 450 Retention bonus and severance expense 1,237 — 1,237 Adjusted
EBITDA $ 107,714 $ — $ 107,714 Three Months Ended September 30, 2022
Completion Services All Other Total Net income (loss) $ 26,404 $ (16,372) $
10,032 Depreciation and amortization 41,039 561 41,600 Interest expense 237
— 237 Income tax expense 2,768 — 2,768 Loss on disposal of assets 11,667
13,786 25,453 Stock-based compensation 3,306 — 3,306
Other expense (3)
616 — 616
Other general and administrative expense, (net) (2)
4,920 — 4,920 Severance expense 1,052 16 1,068 Adjusted EBITDA $ 92,009 $
(2,009) $ 90,000
-16-
--------------------------------------------------------------------------------
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Reportable Segment Information (Continued)
Nine Months Ended September 30, 2023 Completion Services All Other Total Net
income $ 102,743 $ — $ 102,743 Depreciation and amortization 157,456 —
157,456 Interest expense 3,016 — 3,016 Income tax expense 31,118 — 31,118
Loss on disposal of assets 29,410 — 29,410 Stock-based compensation 10,604
— 10,604
Other expense (1)
1,749 — 1,749
Other general and administrative expense, (net) (2)
1,659 — 1,659 Retention bonus and severance expense 1,937 — 1,937 Adjusted
EBITDA $ 339,692 $ — $ 339,692 Nine Months Ended September 30, 2022
Completion Services All Other Total Net income (loss) $ 6,367 $ (17,379) $
(11,012) Depreciation and amortization 118,333 2,240 120,573 Impairment
expense 57,454 — 57,454 Interest expense 1,040 — 1,040 Income tax benefit
(1,164) — (1,164) Loss on disposal of assets 34,622 13,779 48,401
Stock-based compensation 18,128 — 18,128
Other income (3) (4)
(9,749) — (9,749)
Other general and administrative expense, (net) (2)
7,711 — 7,711 Severance expense 1,082 16 1,098 Adjusted EBITDA $ 233,824
$ (1,344) $ 232,480
(1)Includes unrealized gain on short-term investment of $1.8 million for the
three months ended September 30, 2023 and unrealized loss on short-term
investment of $2.1 million for the nine months ended September 30, 2023.
(2)Other general and administrative expense, (net of reimbursement from
insurance carriers) primarily relates to nonrecurring professional fees paid to
external consultants in connection with our audit committee review, SEC
investigation, shareholder litigation, legal settlement to a vendor and other
legal matters, net of insurance recoveries. During the three and nine months
ended September 30, 2023, we received reimbursement of approximately $0.1
million and $0.4 million, respectively, from our insurance carriers in
connection with the SEC investigation and shareholder litigation. During the
three and nine months ended September 30, 2022, we received reimbursement of
approximately $3.4 million and $6.9 million, respectively, from our insurance
carriers in connection with the SEC investigation and shareholder litigation.
See "Note 13 - Commitments and Contingencies—Contingent Liabilities—Legal
Matters" for further information.
(3)Includes unrealized loss on short-term investment of $3.3 million and non
cash income of $2.7 million from fixed asset inventory received as part of a
settlement of warranty claims with an equipment manufacturer.
(4)Includes a $10.7 million net tax refund (net of advisory fees) received in
March 2022 from the Texas Comptroller of Public Accounts in connection with
limited sales, excise and use tax audit of the period July 1, 2015 through
December 31, 2018.
-17-
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PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 - Net Income (Loss) Per Share
Basic net income (loss) per common share is computed by dividing the net income
(loss) relevant to the common stockholders by the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per
common share uses the same net income divided by the sum of the weighted average
number of shares of common stock outstanding during the period, plus dilutive
effects of options, performance and restricted stock units outstanding during
the period calculated using the treasury method and the potential dilutive
effects of preferred stocks (if any) calculated using the if-converted method.
The table below shows the calculations for the three and nine months ended
September 30, 2023 and 2022 (in thousands, except for per share data):
Three Months Ended September 30, 2023 2022 Numerator (both basic and diluted)
Net income relevant to common stockholders $ 34,753 $ 10,032 Denominator
Denominator for basic income per share 112,286 104,372 Dilutive effect of
stock options — 28 Dilutive effect of performance share units — 498 Dilutive
effect of restricted stock units 412 172 Denominator for diluted income per
share 112,698 105,070 Basic income per common share $ 0.31 $ 0.10 Diluted
income per common share $ 0.31 $ 0.10
Nine Months Ended September 30, 2023 2022 Numerator (both basic and diluted) Net
income (loss) relevant to common stockholders $ 102,743 $ (11,012) Denominator
Denominator for basic income per share 113,960 104,100 Dilutive effect of
stock options — — Dilutive effect of performance share units 56 — Dilutive
effect of restricted stock units 278 — Denominator for diluted income per
share 114,294 104,100 Basic income (loss) per common share $ 0.90 $ (0.11)
Diluted income (loss) per common share $ 0.90 $ (0.11)
As shown in the table below, the following stock options, restricted stock units
and performance stock units have not been included in the calculation of diluted
income per common share for the three and nine months ended September 30, 2023
and 2022 because they will be anti-dilutive to the calculation of diluted net
income per common share:
-18-
--------------------------------------------------------------------------------
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 - Net Income (Loss) Per Share (Continued)
(in thousands) Three Months Ended September 30, 2023 2022 Stock options 196
488 Restricted stock units 452 615 Performance stock units — — Total 648
1,103
(in thousands) Nine Months Ended September 30, 2023 2022 Stock options 320 488
Restricted stock units 611 1,189 Performance stock units — 1,758 Total 931
3,435
Note 9 - Share Repurchase Program
On May 17, 2023, the Company's board of directors (the "Board") authorized and
the Company announced a share repurchase program that allows the Company to
repurchase up to $100 million of the Company's common stock beginning
immediately and continuing through and including May 31, 2024. The shares may be
repurchased from time to time in open market transactions, block trades,
accelerated share repurchases, privately negotiated transactions, derivative
transactions or otherwise, certain of which may be made pursuant to a trading
plan meeting the requirements of Rule 10b5-1 under the Exchange Act, in
compliance with applicable state and federal securities laws. The timing, as
well as the number and value of shares repurchased under the program, will be
determined by the Company at its discretion and will depend on a variety of
factors, including management's assessment of the intrinsic value of the
Company's common stock, the market price of the Company's common stock, general
market and economic conditions, available liquidity, compliance with the
Company's debt and other agreements, applicable legal requirements, and other
considerations. The Company is not obligated to purchase any shares under the
repurchase program, and the program may be suspended, modified, or discontinued
at any time without prior notice. The Company expects to fund the repurchases
using cash on hand and expected free cash flow to be generated through May 2024.
The Inflation Reduction Act of 2022 (the "IRA 2022") provides for, among other
things, the imposition of a new 1% U.S. federal excise tax on certain
repurchases of stock by publicly traded U.S. corporations such as us after
December 31, 2022. Accordingly, the excise tax will apply to our share
repurchase program in 2023 and in subsequent taxable years.
All shares of common stock repurchased under the share repurchase program are
canceled and retired upon repurchase. The Company accounts for the purchase
price of repurchased shares of common stock in excess of par value ($0.001 per
share of common stock) as a reduction of additional-paid-in capital, and will
continue to do so until additional paid-in-capital is reduced to zero.
Thereafter, any excess purchase price will be recorded as a reduction of
retained earnings. During the three months ended September 30, 2023, the Company
paid an aggregate of $18.8 million, an average price per share of $9.93
including commissions, for share repurchases under the share repurchase program.
The Company has accrued $0.3 million in respect of the IRA 2022 repurchase
excise tax as of September 30, 2023. As of September 30, 2023, $63.7 million
remained authorized for future repurchases of common stock under the repurchase
program.
Note 10 - Stock-Based Compensation
Stock Options
There were no new stock option grants during the nine months ended September 30,
2023. As of September 30, 2023, there was no aggregate intrinsic value for our
outstanding or exercisable stock options because the closing stock price as of
September 30, 2023 was below the cost to exercise these options. No stock
options were exercised during the nine months ended September 30, 2023. The
weighted average remaining contractual term for the outstanding and exercisable
stock options as of September 30, 2023 was approximately 3.4 years.
-19-
--------------------------------------------------------------------------------
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 - Stock-Based Compensation (Continued)
A summary of the stock option activity for the nine months ended September 30,
2023 is presented below (in thousands, except for weighted average price):
Number of Shares Weighted
Average
Exercise
Price Outstanding at January 1, 2023 488 $ 14.00 Granted — $ — Exercised —
$ — Forfeited — $ — Expired (302) $ 14.00 Outstanding at September 30, 2023
186 $ 14.00 Exercisable at September 30, 2023 186 $ 14.00
Restricted Stock Units
On May 11, 2023, the Company's stockholders approved the Amended and Restated
ProPetro Holding Corp. 2020 Long Term Incentive Plan (the "A&R 2020 Incentive
Plan"), which had been previously approved by the Board and replaced the
ProPetro Holding Corp. 2020 Long Term Incentive Plan.
During the nine months ended September 30, 2023, we granted 1,081,010 restricted
stock units ("RSUs") to employees, officers and directors pursuant to the A&R
2020 Incentive Plan, which generally vest ratably over a three-year vesting
period, in the case of awards to employees and officers, and generally vest in
full after one year, in the case of awards to directors. RSUs are subject to
restrictions on transfer and are generally subject to a risk of forfeiture if
the award recipient ceases to be an employee or director of the Company prior to
vesting of the award. Each RSU represents the right to receive one share of
common stock. The grant date fair value of the RSUs is based on the closing
share price of our common stock on the date of grant. As of September 30, 2023,
the total unrecognized compensation expense for all RSUs was approximately $11.9
million, and is expected to be recognized over a weighted average period of
approximately 1.8 years.
The following table summarizes RSUs activity during the nine months ended
September 30, 2023 (in thousands, except for fair value):
Number of
Shares Weighted
Average
Grant Date
Fair Value Outstanding at January 1, 2023 1,268 $ 10.91 Granted 1,081 $ 9.32
Vested (549) $ 10.69 Forfeited (130) $ 10.43 Canceled — $ — Outstanding at
September 30, 2023 1,670 $ 9.99
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PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 - Stock-Based Compensation (Continued)
Performance Share Units
During the nine months ended September 30, 2023, we granted 454,788 performance
share units ("PSUs") to certain key employees and officers as new awards under
the A&R 2020 Incentive Plan. Each PSU earned represents the right to receive
either one share of common stock or, as determined by the A&R 2020 Incentive
Plan administrator in its sole discretion, a cash amount equal to fair market
value of one share of common stock or amount of cash on the day immediately
preceding the settlement date. The actual number of shares of common stock that
may be issued under the PSUs ranges from 0% up to a maximum of 200% of the
target number of PSUs granted to the participant, based on our total shareholder
return ("TSR") relative to a designated peer group, generally at the end of a
three year period. In addition to the TSR conditions, vesting of the PSUs is
generally subject to the recipient’s continued employment through the end of the
applicable performance period. Compensation expense is recorded ratably over the
corresponding requisite service period. The grant date fair value of PSUs is
determined using a Monte Carlo probability model. Grant recipients do not have
any shareholder rights until performance relative to the peer group has been
determined following the completion of the performance period and shares have
been issued.
The following table summarizes information about PSUs activity during the nine
months ended September 30, 2023 (in thousands, except for weighted average fair
value):
Period
Granted Target Shares Outstanding at January 1, 2023 Target
Shares
Granted Target Shares Vested Target
Shares
Forfeited Target Shares Outstanding at September 30, 2023 2020 809 — (493)
(315) — 2021 632 — — (12) 620 2022 316 — — (10) 306 2023 — 455 —
(17) 438 Total 1,757 455 (493) (354) 1,364 Weighted Average FV Per Share $
12.72 $ 14.40 $ 8.30 $ 9.17 $ 15.80
The total stock-based compensation expense for the nine months ended September
30, 2023 and 2022 for all stock awards was $10.6 million and $18.1 million,
respectively, and the associated tax benefit related thereto was $2.2 million
and $3.8 million, respectively. The total unrecognized stock-based compensation
expense as of September 30, 2023 was approximately $19.9 million, and is
expected to be recognized over a weighted average period of approximately 1.5
years.
Note 11 - Related-Party Transactions
Operations and Maintenance Yards
The Company rents three yards from an entity in which a director of the Company
has an equity interest, and the total annual rent expense for each of the three
yards was approximately $0.03 million, $0.1 million and $0.1 million,
respectively. The Company previously rented two yards from this entity and
incurred rent expense of $0.02 million and $0.1 million, respectively during the
nine months ended September 30, 2023.
Pioneer
On December 31, 2018, we consummated the purchase of certain pressure pumping
assets and real property from Pioneer Natural Resources USA, Inc. ("Pioneer")
and Pioneer Pumping Services (the "Pioneer Pressure Pumping Acquisition"). In
connection with the Pioneer Pressure Pumping Acquisition, Pioneer received
16.6 million shares of our common stock and approximately $110.0 million in
cash. In October 2023, Pioneer entered into a merger agreement with Exxon Mobil
Corporation. On March 31, 2022, we entered into an amended and restated pressure
pumping services agreement (the "A&R Pressure Pumping Services Agreement"),
which was initially entered into in connection with the Pioneer Pressure Pumping
Acquisition. The A&R Pressure Pumping Services Agreement was effective January
1, 2022 through December 31, 2022. The A&R Pressure Pumping Services Agreement
reduced the number of contracted fleets from eight fleets to six fleets,
modified the pressure pumping scope of work and pricing mechanism for contracted
fleets, and replaced the idle fees arrangement with equipment reservation fees
(the "Reservation fees"). As part of the Reservation fees arrangement, the
Company was entitled to receive compensation for all eligible contracted fleets
that were made available to Pioneer at the beginning of every quarter in
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PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 - Related-Party Transactions (Continued)
2022 through the term of the A&R Pressure Pumping Services Agreement. The A&R
Pressure Pumping Services Agreement expired at the conclusion of its term and
was replaced by the Fleet One Agreement and Fleet Two Agreement described below.
On October 31, 2022, we entered into two pressure pumping services agreements
(the "Fleet One Agreement" and "Fleet Two Agreement") with Pioneer, pursuant to
which we provided hydraulic fracturing services with two committed fleets,
subject to certain termination and release rights. The Fleet One Agreement was
effective as of January 1, 2023 and was terminated on August 31, 2023. The Fleet
Two Agreement was effective as of January 1, 2023 and was terminated on May 12,
2023.
Revenue from services provided to Pioneer (including Reservation fees) accounted
for approximately $22.3 million and $100.2 million of our total revenue during
the three months ended September 30, 2023 and 2022, respectively. Revenue from
services provided to Pioneer (including Reservation fees) accounted for
approximately $122.1 million and $338.9 million of our total revenue during the
nine months ended September 30, 2023 and 2022, respectively.
As of September 30, 2023, the total accounts receivable due from Pioneer,
including estimated unbilled receivables for services we provided, amounted to
approximately $8.9 million and the amount due to Pioneer was $0. As of
December 31, 2022, the balance due from Pioneer for services we provided
amounted to approximately $46.2 million and the amount due to Pioneer was $0.
Note 12 - Leases
Operating Leases
Description of Lease
In March 2013, we entered into a ten-year real estate lease contract (the "Real
Estate One Lease") with a commencement date of April 1, 2013, as part of the
expansion of our equipment yard. During the nine months ended September 30, 2023
and 2022, the Company made lease payments of approximately $0.1 million and $0.3
million, respectively. The assets and liabilities under this contract are
included in our Completion Services reportable segment. In addition to the
contractual lease period, the contract included an optional renewal of up to ten
years, however, the Company terminated the Real Estate One Lease at the end of
the term, March 1, 2023.
We accounted for our Real Estate One Lease as an operating lease. This
conclusion resulted from the existence of the right to control the use of the
assets throughout the lease term. We did not account for the land separately
from the building of the Real Estate One Lease because we concluded that the
accounting effect was insignificant.
As part of our expansion of our hydraulic fracturing equipment maintenance
program, we entered into a two-year maintenance facility real estate lease
contract (the "Maintenance Facility Lease") with a commencement date of March
14, 2022. During the nine months ended September 30, 2023 and 2022, the Company
made lease payments of approximately $0.2 million and $0.2 million,
respectively. In addition to the contractual lease period, the contract includes
an optional renewal for three additional periods of one year each, and in
management's judgment the exercise of the renewal option is not reasonably
assured. The contract does not include a residual value guarantee, covenants or
financial restrictions. Further, the Maintenance Facility Lease does not contain
variability in payments resulting from either an index change or rate change.
We accounted for our Maintenance Facility Lease as an operating lease. Our
assumptions resulted from the existence of the right to control the use of the
assets throughout the lease term. We did not account for the land separately
from the building of the Maintenance Facility Lease because we concluded that
the accounting effect was insignificant. As of September 30, 2023, the weighted
average discount rate and remaining lease term was approximately 3.4% and 0.4
years, respectively.
In August 2022 and December 2022, we entered into equipment lease contracts (the
"Electric Fleet Leases") for a duration of approximately three years each for a
total of four FORCESM electric-powered hydraulic fracturing fleets with 60,000
hydraulic horsepower ("HHP") per fleet. The Electric Fleet Leases contain
options to either extend each lease for up to three additional periods of one
year each or purchase the equipment at the end of their initial term of
approximately three years or at the end of each subsequent renewal period.
The first of these leases (the "Electric Fleet One Lease") commenced on August
23, 2023 when we received some of the equipment associated with the first
FORCESM electric-powered hydraulic fracturing fleet. During the nine months
ended September 30, 2023, the Company made lease payments of approximately $0.4
million on the Electric Fleet One Lease, including variable lease payments of
approximately $5 thousand. During the nine months ended September 30, 2023, the
Company incurred initial direct costs of approximately $7.2 million to place the
leased equipment into its intended use, which are included in the right-of-use
asset cost related to the Electric Fleet One Lease. The assets and liabilities
under this contract
-22-
--------------------------------------------------------------------------------
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 - Leases (Continued)
are included in our Completion Services reportable segment. In management's
judgment the exercise of neither the renewal option nor the purchase option is
reasonably assured. In addition to fixed rent payments, the Electric Fleet One
Lease contains variable payments based on equipment usage. The Electric Fleet
One Lease does not include a residual value guarantee, covenants or financial
restrictions.
We accounted for the Electric Fleet One Lease as an operating lease. Our
assumptions resulted from the existence of the right to control the use of the
assets throughout the lease term. As of September 30, 2023, the weighted average
discount rate and remaining lease term was approximately 7.14% and 3.0 years,
respectively. As of September 30, 2023, we have not received some of the
equipment contracted under the Electric Fleet One Lease. Since we have not taken
possession of these assets and do not control them, we have not accounted for
the associated right-of-use asset and lease obligation on our balance sheet as
of September 30, 2023.
The Electric Fleet Leases on the remaining three FORCESM electric-powered
hydraulic fracturing fleets have not yet commenced. We currently do not control
the assets under these leases because they are currently being manufactured by
the vendor and we have not taken possession of the assets. The delivery of the
FORCESM electric-powered hydraulic fracturing fleets is as each fleet is
manufactured. We currently expect to receive the remaining equipment associated
with the first fleet and all equipment associated with the second fleet in the
fourth quarter of 2023, and all equipment associated with the third and fourth
fleets in the first half of 2024. Given that the Company has not yet taken
possession of the assets under these leases, the Company has not accounted for
the associated right-of-use asset and lease obligation on its balance sheet as
of September 30, 2023.
In October 2022, we entered into a real estate lease contract for 5.3 years (the
"Real Estate Two Lease"), with a commencement date of March 1, 2023. During the
nine months ended September 30, 2023, the Company made lease payments of
approximately $0.2 million. The assets and liabilities under this contract are
included in our Completion Services reportable segment. In addition to the
contractual lease period, the contract includes two optional renewals of one
year each, and in management's judgment the exercise of the renewal option is
not reasonably assured. The contract does not include a residual value
guarantee, covenants or financial restrictions. Further, the Real Estate Two
Lease does not contain variability in payments resulting from either an index
change or rate change.
We accounted for our Real Estate Two Lease as an operating lease. Our
assumptions resulted from the existence of the right to control the use of the
assets throughout the lease term. We did not account for the land separately
from the building of the Real Estate Two Lease because we concluded that the
accounting effect was insignificant. As of September 30, 2023, the weighted
average discount rate and remaining lease term was approximately 6.3% and 4.6
years, respectively.
As part of the Silvertip Acquisition, we assumed two real estate lease contracts
(the "Silvertip One Lease" and "Silvertip Two Lease," and collectively the
"Silvertip Leases") with remaining terms of 4.8 years and 6.1 years,
respectively, from the Silvertip Acquisition Date. During the nine months ended
September 30, 2023, we extended the Silvertip One Lease for an additional 1.3
years. During the nine months ended September 30, 2023, the Company made lease
payments of approximately $0.1 million and $0.2 million on the Silvertip One
Lease and Silvertip Two Lease, respectively. The assets and liabilities under
these contracts are recorded in our wireline operating segment within our
Completion Services reportable segment. The Silvertip Leases do not have any
renewal options, residual value guarantees, covenants or financial restrictions.
Further, the Silvertip Leases do not contain variability in payments resulting
from either an index change or rate change.
We accounted for the Silvertip One Lease and the Silvertip Two Lease as
operating leases. This conclusion resulted from the existence of the right to
control the use of the assets throughout the lease term. We did not account for
the land separately from the building of the Silvertip Leases because we
concluded that the accounting effect was insignificant. As of September 30,
2023, the weighted average discount rate and remaining lease term for the
Silvertip One Lease was approximately 6.3% and 5.2 years, respectively. As of
September 30, 2023, the weighted average discount rate and remaining lease term
for the Silvertip Two Lease was approximately 2.1% and 5.2 years, respectively.
In March 2023, we entered into a real estate lease contract for 5.7 years (the
"Silvertip Three Lease"), with a commencement date of April 1, 2023. During the
nine months ended September 30, 2023, the Company made lease payments of
approximately $0.1 million on the Silvertip Three Lease. The assets and
liabilities under this contract are recorded in our wireline operating segment
within our Completion Services reportable segment. The contract does not include
a residual value guarantee, covenants or financial restrictions. Further, the
Silvertip Three Lease does not contain variability in payments resulting from
either an index change or rate change.
We accounted for the Silvertip Three Lease as an operating lease. This
conclusion resulted from the existence of the right to control the use of the
assets throughout the lease term. We did not account for the land separately
from the building of the Silvertip Three Lease because we concluded that the
accounting effect was insignificant. As of September 30, 2023, the weighted
average discount rate and remaining lease term was approximately 6.3% and 5.2
years, respectively.
-23-
--------------------------------------------------------------------------------
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 - Leases (Continued)
On June 1, 2023, we commenced an office space lease contract for 5.0 years (the
"Silvertip Office Lease"). During the nine months ended September 30, 2023, the
Company made lease payments of approximately $0.1 million on the Silvertip
Office Lease. The assets and liabilities under this contract are recorded in our
wireline operating segment within our Completion Services reportable segment.
The contract does not include a residual value guarantee, covenants or financial
restrictions. Further, the Silvertip Office Lease does not contain variability
in payments resulting from either an index change or rate change.
We accounted for the Silvertip Office Lease as an operating lease. This
conclusion resulted from the existence of the right to control the use of the
assets throughout the lease term. As of September 30, 2023, the weighted average
discount rate and remaining lease term was approximately 6.5% and 4.7 years,
respectively.
In August 2023, in connection with the relocation of our corporate office, we
entered into an office space lease contract for 2.1 years (the "Corporate Office
Lease"), with a commencement date of September 8, 2023. During the nine months
ended September 30, 2023, the Company made lease payments of approximately $5
thousand on the Corporate Office Lease. The assets and liabilities under this
contract are recorded in our Completion Services reportable segment. In addition
to the contractual lease period, the contract includes an optional renewal for
0.8 years, and in management's judgment the exercise of the renewal option is
not reasonably assured. The contract does not include a residual value
guarantee, covenants or financial restrictions. Further, the Corporate Office
Lease does not contain variability in payments resulting from either an index
change or rate change.
We accounted for the Corporate Office Lease as an operating lease. This
conclusion resulted from the existence of the right to control the use of the
assets throughout the lease term. As of September 30, 2023, the weighted average
discount rate and remaining lease term was approximately 7.1% and 2.0 years,
respectively.
As of September 30, 2023, the total operating lease right-of-use asset cost was
approximately $29.5 million, and accumulated amortization was approximately $3.1
million. As of December 31, 2022, our total operating lease right-of-use asset
cost was approximately $4.6 million, and accumulated amortization was
approximately $1.5 million.
Finance Leases
Description of Lease
In January 2023, we entered into a three-year equipment lease contract (the
"Power Equipment Lease") for certain power generation equipment with a
commencement date of August 23, 2023 when we received some of the equipment
associated with this lease. During the nine months ended September 30, 2023, the
Company made lease payments of approximately $1.1 million on the Power Equipment
Lease. The assets and liabilities under this contract are included in our
Completion Services reportable segment. In addition to the contractual lease
period, the contract includes an optional renewal for one year, and in
management's judgment the exercise of the renewal option is not reasonably
assured. The contract does not include a residual value guarantee, covenants or
financial restrictions. Further, the Power Equipment Lease does not contain
variability in payments resulting from either an index change or rate change.
We accounted for the Power Equipment Lease as a finance lease. This conclusion
resulted from the existence of the right to control the use of the assets
throughout the lease term, the present value of lease payments being equal to or
in excess of substantially all of the fair value of the underlying assets and
the lease term being the major part of the remaining economic life of the
underlying assets. As of September 30, 2023, the weighted average discount rate
and remaining lease term was approximately 7.1% and 2.9 years, respectively.
As of September 30, 2023, the total finance lease right-of-use asset cost was
approximately $27.2 million, and accumulated amortization was approximately $1.0
million. As of December 31, 2022, we had no finance lease right-of-use assets.
As of September 30, 2023, we have not received some of the equipment contracted
under the Power Equipment Lease. Since we have not taken possession of these
assets and do not control them, we have not accounted for the associated
right-of-use asset and lease obligation on our balance sheet as of September 30,
2023.
-24-
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PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 - Leases (Continued)
Maturity Analysis of Lease Liabilities
The maturity analysis of liabilities and reconciliation to undiscounted and
discounted remaining future lease payments for our leases as of September 30,
2023 are as follows:
(in thousands) Operating Leases Finance Leases 2023 $ 1,626 $ 2,513 2024
6,596 10,052 2025 6,518 10,052 2026 5,146 6,470 2027 1,225 — 2028 821
— Total undiscounted future lease payments 21,932 29,087 Less: amount
representing interest (2,284) (2,732) Present value of future lease payments
(lease obligation) $ 19,648 $ 26,355
The total cash paid for amounts included in the measurement of our operating
lease liabilities during the nine months ended September 30, 2023 was
approximately $1.4 million. The total cash paid for amounts included in the
measurement of our finance lease liabilities during the nine months ended
September 30, 2023 was approximately $0.9 million. During the nine months ended
September 30, 2023, we recorded non-cash operating lease obligations totaling
approximately $24.9 million arising from obtaining right-of-use assets related
to our execution of the Real Estate Two Lease, the Silvertip Three Lease, the
Silvertip Office Lease, the Electric Fleet One Lease and the Corporate Office
Lease, and our extension of the Silvertip One Lease. During the nine months
ended September 30, 2023, we recorded non-cash finance lease obligations
totaling approximately $27.2 million arising from obtaining right-of-use assets
related to the commencement of the Power Equipment Lease. During the nine months
ended September 30, 2022, total cash paid for amounts included in the
measurement of our operating lease liabilities was approximately $0.5 million.
During the nine months ended September 30, 2022, we recorded a non-cash
operating lease obligation of approximately $0.6 million as a result of our
execution of the Maintenance Facility Lease.
Short-Term Leases
We elected the practical expedient option, consistent with ASC 842, to exclude
leases with an initial term of twelve months or less ("short-term lease") from
our balance sheet and continue to record short-term leases as a period expense.
Initial Direct Costs
We elected to analogize to the measurement guidance of ASC 360 to capitalize
costs incurred to place a leased asset into its intended use and to present such
capitalized costs as part of the related lease right-of-use asset cost as
initial direct costs.
Lease Costs
For the nine months ended September 30, 2023 and 2022, we recorded operating
lease cost of approximately $1.9 million and $0.4 million, respectively, in our
condensed consolidated statements of operations. For the nine months ended
September 30, 2023, we recorded finance lease cost of approximately $1.2 million
in our condensed consolidated statements of operations comprising of
amortization of finance right-of-use asset of approximately $1.0 million and
interest on finance lease liabilities of approximately $0.2 million. For the
nine months ended September 30, 2022, we had no finance lease costs. For the
nine months ended September 30, 2023 and 2022, we recorded variable lease cost
of approximately $5 thousand and $0, respectively, in our condensed consolidated
statements of operations. For the nine months ended September 30, 2023 and 2022,
we recorded short-term lease cost of approximately $0.6 million and $0.6
million, respectively, in our condensed consolidated statements of operations.
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Note 13 - Commitments and Contingencies
Commitments
We entered into certain commitments for fixed assets, consumables and services
incidental to the ordinary conduct of our business, generally for quantities
required for our operations and at competitive market prices. These commitments
are designed to assure sources of supply and are not expected to be in excess of
normal requirements. We entered into the Electric Fleet Leases, which contain
options to extend the leases or purchase the equipment at the end of each lease
or at the end of each subsequent renewal period. As of September 30, 2023, one
of the Electric Fleet Leases commenced when the Company took possession of some
of the equipment associated with the first FORCESM electric-powered hydraulic
fracturing fleet. Lease payments pertaining to the remaining equipment under
this lease and the remaining Electric Fleet Leases are expected to commence when
the Company takes possession of the associated equipment. We currently expect to
receive the remaining equipment associated with the first fleet and all
equipment associated with the second fleet in the fourth quarter of 2023, and
all equipment associated with the third and fourth fleets in the first half of
2024. The total estimated contractual commitment in connection with the Electric
Fleet Leases excluding the cost associated with the option to purchase the
equipment at the end of each lease is approximately $105.1 million. We also
entered into the Power Equipment Lease. The total estimated contractual
commitment in connection with the Power Equipment Lease is approximately $56.9
million.
The Company enters into purchase agreements with its sand suppliers (the "Sand
Suppliers") to secure supply of sand as part of its normal course of business.
The agreements with the Sand Suppliers require that the Company purchase a
minimum volume of sand, based primarily on a certain percentage of our sand
requirements from our customers or in certain situations based on predetermined
fixed minimum volumes, otherwise certain penalties (shortfall fees) may be
charged. The shortfall fee represents liquidated damages and is either a fixed
percentage of the purchase price for the minimum volumes or a fixed price per
ton of unpurchased volumes. Our agreements with the Sand Suppliers expire at
different times prior to December 31, 2025. Our sand agreement with one of our
Sand Suppliers that will expire on December 31, 2024 has a remaining take-or-pay
commitment of $22.4 million. During the nine months ended September 30, 2023 and
2022, no shortfall fee was recorded.
As of September 30, 2023, the Company had issued letters of credit of
approximately $6.0 million under the ABL Credit Facility in connection with the
Company’s casualty insurance policy.
Contingent Liabilities
Legal Matters
In September 2019, a complaint, captioned Richard Logan, Individually and On
Behalf of All Others Similarly Situated, Plaintiff v. ProPetro Holding Corp., et
al., (the "Logan Lawsuit"), was filed against the Company and certain of its
then current and former officers and directors in the U.S. District Court for
the Western District of Texas. As amended by later complaints, the Logan Lawsuit
asserted claims on behalf of a putative class of shareholders who purchased the
Company’s common stock between March 17, 2017 and March 13, 2020 or purchased
the Company's common stock pursuant to the Company's initial public offering in
March 2017. Plaintiffs alleged violations of Sections 10(b) and 20(a) of the
Exchange Act and Rule 10b-5 promulgated thereunder, and Sections 11 and 15 of
the Securities Act of 1933 against the Company, certain former officers and
current and former directors, alleging that the defendants made allegedly
inaccurate or misleading statements or omissions about the Company's business,
operations and prospects. On August 11, 2022, the Company entered into a
settlement of the Logan Lawsuit, pursuant to which the Company's insurers have
paid a cash sum into a settlement fund to be distributed to members of the
putative class. On May 11, 2023, the settlement was granted final court
approval.
Environmental and Equipment Insurance
The Company is subject to various federal, state and local environmental laws
and regulations that establish standards and requirements for protection of the
environment. The Company cannot predict the future impact of such standards and
requirements, which are subject to change and can have retroactive
effectiveness. The Company continues to monitor the status of these laws and
regulations. Currently, the Company has not been fined, cited or notified of any
environmental violations that would have a material adverse effect upon its
financial position, liquidity or capital resources. However, management does
recognize that by the very nature of the Company's business, material costs
could be incurred in the near term to maintain compliance. The amount of such
future expenditures is not determinable due to several factors, including the
unknown magnitude of possible regulation or liabilities, the unknown timing and
extent of the corrective actions which may be required, the determination of the
Company's liability in proportion to other responsible parties and the extent to
which such expenditures are recoverable from insurance or indemnification.
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PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 13 - Commitments and Contingencies (Continued)
The Company is self-insured up to $10 million per occurrence for certain losses
arising from or attributable to fire and/or explosion at the wellsites that do
not have qualified fire suppression measures. No accrual was recorded in our
financial statements in connection with this self-insurance strategy because the
occurrence of fire and/or explosion cannot be reasonably estimated.
Regulatory Audits
In 2020, the Texas Comptroller of Public Accounts (the "Comptroller") commenced
a routine audit of the Company's motor vehicle and other related fuel taxes for
the periods of July 2015 through December 2020. As of September 30, 2023, the
audit is still ongoing and the final outcome cannot be reasonably estimated.
In May 2022, the Company received a notification from the Comptroller that it
will commence a routine audit of the Company's gross receipt taxes, which
typically covers up to a four-year period. As of September 30, 2023, the audit
is still ongoing and the final outcome cannot be reasonably estimated.
In June 2023, the Company received confirmation from the Comptroller that it
will commence a routine audit of the Company's direct payment sales tax in
August 2023 for the period February 1, 2020 to December 31, 2022. As of
September 30, 2023, the audit is still ongoing and the final outcome cannot be
reasonably estimated.
Note 14 - Subsequent Events
In October 2023, we received some of the remaining equipment associated with our
first FORCESM electric-powered hydraulic fracturing fleet under the Electric
Fleet One Lease, resulting in the addition of non-cash operating lease
obligations totaling approximately $5.6 million arising from obtaining
right-of-use assets related to this equipment. In October 2023, we also received
the remaining equipment associated with the Power Equipment Lease, resulting in
the addition of non-cash finance lease obligations totaling approximately $25.2
million million arising from obtaining right-of-use assets related to this
equipment.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The financial information, discussion and analysis that follow should be read in
conjunction with our consolidated financial statements and the related notes
included in the Form 10-K as well as the financial and other information
included therein.
Unless otherwise indicated, references in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" to the "Company,"
"we," "our," "us" or like terms refer to ProPetro Holding Corp. and its
subsidiaries.
Overview
We are a leading integrated oilfield services company, located in Midland,
Texas, focused on providing innovative hydraulic fracturing, wireline and other
complementary oilfield completion services to leading upstream oil and gas
companies engaged in the exploration and production ("E&P") of North American
oil and natural gas resources. Our operations are primarily focused in the
Permian Basin, where we have cultivated longstanding customer relationships with
some of the region's most active and well-capitalized E&P companies. The Permian
Basin is widely regarded as one of the most prolific oil-producing areas in the
United States, and we believe we are one of the leading providers of completion
services in the region.
Our completion services segment includes hydraulic fracturing, wireline and
cementing operations. Our hydraulic fracturing operations account for the
significant portion of our operations, and our hydraulic fracturing operations
revenue is approximately 80.2% of our total revenues, while wireline and
cementing accounts for our remaining revenues. Our total available hydraulic
horsepower ("HHP") in our hydraulic fracturing operations as of September 30,
2023, was 1,354,500 HHP, which was comprised of 447,500 HHP of our Tier IV
Dynamic Gas Blending ("DGB") dual-fuel equipment, 42,000 HHP of electric
equipment and 865,000 HHP of conventional Tier II equipment. Our hydraulic
fracturing fleets range from approximately 50,000 to 80,000 HHP depending on the
job design and customer demand at the wellsite. Our equipment has been designed
to handle the operating conditions commonly encountered in the Permian Basin and
the region’s increasingly high-intensity well completions (including
simultaneous hydraulic fracturing ("Simul-Frac"), which involves fracturing
multiple wellbores at the same time), which are characterized by longer
horizontal wellbores, more stages per lateral and increasing amounts of proppant
per well. With the industry transition to lower emissions equipment and
Simul-Frac, in addition to several other changes to our customers' job designs,
we believe that our available capacity could decline if we decide to reconfigure
our fleets to increase active HHP and backup HHP at wellsites. In addition, in
2021 and 2022, we committed to additional conversions of our Tier II equipment
to Tier IV DGB, and purchase of new Tier IV DGB dual-fuel equipment. As such, we
entered into conversion and purchase arrangements with our equipment
manufacturers for a total 452,500 HHP of Tier IV DGB equipment and as of
September 30, 2023, we have received 447,500 HHP of the converted and new Tier
IV DGB equipment and expect to receive the remaining 5,000 HHP by the end of
2023. In 2022, we entered into three-year electric fleet leases for a total of
four FORCESM electric-powered hydraulic fracturing fleets with 60,000 HHP per
fleet. As of September 30, 2023, we have received 42,000 HHP of electric
equipment. We currently expect to receive the remaining equipment associated
with the first fleet and all equipment associated with the second fleet in the
fourth quarter of 2023, and all equipment associated with the third and fourth
fleets in the first half of 2024. We currently have 23 wireline units and 27
cement units.
On December 31, 2018, we consummated the purchase of certain pressure pumping
assets and real property from Pioneer Natural Resources USA, Inc. ("Pioneer")
and Pioneer Pumping Services (the "Pioneer Pressure Pumping Acquisition") in
exchange for 16.6 million shares of our common stock and $110.0 million in cash,
and concurrently entered into a pressure pumping services agreement (the
"Pioneer Services Agreement") with Pioneer.
On March 31, 2022, we entered into an amended and restated pressure pumping
services agreement (the "A&R Pressure Pumping Services Agreement") to replace
the Pioneer Services Agreement that was entered into in connection with the
Pioneer Pressure Pumping Acquisition. The A&R Pressure Pumping Services
Agreement, which was effective from January 1, 2022 to December 31, 2022,
reduced the number of contracted fleets from eight fleets to six fleets,
modified the pressure pumping scope of work and pricing mechanism for contracted
fleets, and replaced the idle fees arrangement with equipment reservation fees
(the "Reservation fees"). As part of the Reservation fees arrangement, the
Company was entitled to receive compensation for all eligible contracted fleets
that were made available to Pioneer at the beginning of every quarter in 2022
through the term of the A&R Pressure Pumping Services Agreement. This agreement
expired at the conclusion of its term and was replaced by the Fleet One
Agreement and Fleet Two Agreement described below.
On October 31, 2022, we entered into two pressure pumping services agreements
(the "Fleet One Agreement" and "Fleet Two Agreement") with Pioneer, pursuant to
which we provided hydraulic fracturing services with two committed fleets,
subject to certain termination and release rights. The Fleet One Agreement was
effective as of January 1, 2023 and was terminated on August 31, 2023. The Fleet
Two Agreement was effective as of January 1, 2023 and was terminated on May 12,
2023.
Effective September 1, 2022, we disposed of our coiled tubing assets to STEP
Energy Services Ltd. ("STEP") and shut down our coiled tubing operations. We
received cash of approximately $2.8 million and 2.6 million common shares of
STEP valued at $11.9 million as consideration. Upon the sale of our coiled
tubing assets, we recorded a loss on sale of $13.8 million.
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On November 1, 2022, we consummated the acquisition of all of the outstanding
limited liability company interests of Silvertip Completion Services Operating,
LLC ("Silvertip"), which provides wireline perforation and ancillary services
solely in the Permian Basin in exchange for 10.1 million shares of our common
stock valued at $106.7 million, $30.0 million of cash, the payoff of $7.2
million of assumed debt, and the payment of certain other closing and
transaction costs. At September 30, 2023, we had 23 wireline units available to
provide wireline perforation and ancillary services. The Silvertip Acquisition
positions the Company as a more integrated and diversified completions-focused
oilfield services provider headquartered in the Permian Basin.
Our competitors include many large and small oilfield services companies,
including Halliburton Company, Liberty Energy Inc., Patterson-UTI Energy Inc.,
ProFrac Holding Corp., RPC, Inc., and a number of private and locally-oriented
businesses. The markets in which we operate are highly competitive. To be
successful, an oilfield services company must provide services that meet the
specific needs of oil and natural gas E&P companies at competitive prices.
Competitive factors impacting sales of our services are price, reputation,
technical expertise, emissions profile, service and equipment design and
quality, and health and safety standards. Although we believe our customers
consider all of these factors, we believe price is a key factor in an E&P
company's criteria in choosing a service provider. However, we have recently
observed the energy industry and our customers shift to lower emissions
equipment, which we believe will be an increasingly important factor in an E&P
company's selection of a service provider. The transition to lower emissions
equipment has been challenging for companies in the oilfield service industry
because of the capital requirements. While we seek to price our services
competitively, we believe many of our customers elect to work with us based on
our operational efficiencies, productivity, equipment portfolio and quality,
reliability, ability to manage multifaceted logistics challenges, commitment to
safety and the ability of our people to handle the most complex Permian Basin
well completions.
Our substantial market presence in the Permian Basin positions us well to
capitalize on drilling and completion activity in the region. Primarily, our
operational focus has been in the Permian Basin's Midland sub-basin, where our
customers have operated. However, we have increased our operations in the
Delaware sub-basin and are well-positioned to support further increases to our
activity in this area in response to demand from our customers. Over time, we
expect the Permian Basin's Midland and Delaware sub-basins to continue to
command a disproportionate share of future North American E&P spending.
Through our Completion Services segment, which includes our hydraulic
fracturing, cementing and wireline operations, we primarily provide hydraulic
fracturing services to E&P companies in the Permian Basin. During the three
months ended September 30, 2023, our hydraulic fracturing, cementing and
wireline operations accounted for 80.2%, 7.3% and 12.5% of our total revenue,
respectively. During the nine months ended September 30, 2023, our hydraulic
fracturing, cementing and wireline operations accounted for 79.4%, 6.6% and
14.0% of our total revenue, respectively. Our equipment has been designed to
handle Permian Basin specific operating conditions and the region's increasingly
high-intensity well completions, which are characterized by longer horizontal
wellbores, more frac stages per lateral and increasing amounts of proppant per
well. We plan to continually reinvest in our equipment to ensure optimal
performance and reliability.
Our hydraulic fracturing, wireline and cementing operations have been aggregated
into one reportable segment: "Completion Services." In connection with our
divestiture of our coiled tubing operations and the Silvertip Acquisition, we
have revised our reportable segment presentation from Pressure Pumping to
Completion Services and have restated prior periods accordingly. Our now
discontinued coiled tubing, drilling and flowback operations were aggregated
into the "All Other" category.
Commodity Price and Other Economic Conditions
The oil and gas industry has traditionally been volatile and is characterized by
a combination of long-term, short-term and cyclical trends, including domestic
and international supply and demand for oil and gas, current and expected future
prices for oil and gas and the perceived stability and sustainability of those
prices, and capital investments of E&P companies toward their development and
production of oil and gas reserves. The oil and gas industry is also impacted by
general domestic and international economic conditions such as supply chain
disruptions and inflation, political instability in oil producing countries,
government regulations (both in the United States and internationally), levels
of consumer demand, adverse weather conditions, and other factors that are
beyond our control.
In October 2023, an ongoing conflict between Israel and Palestinian militants in
the Israel-Gaza region has led to significant armed hostilities. The
geopolitical and macroeconomic consequences of this conflict remain uncertain,
and such events, or any further hostilities in the Israel-Gaza region or
elsewhere, could severely impact the world economy, the demand for and price of
crude oil and the oil and gas industry generally and may adversely affect our
financial condition.
Similarly, the geopolitical and macroeconomic consequences of the Russian
invasion of Ukraine, including the associated sanctions, and the adverse impacts
of the COVID-19 pandemic in recent years have resulted in volatility in supply
and demand dynamics for crude oil and associated volatility in crude oil
pricing. As the global response to the COVID-19 pandemic began to wane, the
demand and prices for crude oil increased from the lows experienced in 2020,
with the WTI average crude oil price
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reaching approximately $94 per barrel in 2022, the highest average price in the
prior nine years. However, in 2023, the WTI average crude oil price declined to
below $70 per barrel before rebounding to approximately $89 per barrel in
September 2023 and $77 per barrel for the nine months ended in September 30,
2023. We believe that the volatility of crude oil prices in recent years has
been partly driven by declines in crude oil supplies, concerns over sanctions
resulting from Russia's invasion of Ukraine, slower crude oil production growth
due to the lack of reinvestment in the oil and gas industry in the last two
years, recent OPEC+ production cuts of approximately 1.3 million barrels per day
and concerns of a potential global recession resulting from rising inflation and
interest rates.
With the significant increase in global crude oil prices from 2021, including
the WTI crude oil price, there has been an increase in the Permian Basin rig
count from approximately 179 at the beginning of 2021 to approximately 312 at
the end of September 2023, according to Baker Hughes. Following the increase in
rig count and the WTI crude oil price, the oilfield service industry has
experienced increased demand for its completion services, and improved pricing.
However, we have recently experienced a 12% decrease in the rig count between
January and September 2023 which resulted in a reduction in the demand for
completion services and pressure on pricing of our services.
Sustained levels of high inflation have likewise caused the U.S. Federal Reserve
and other central banks to increase interest rates, and to the extent elevated
inflation remains, we may experience further cost increases for our operations,
including interest rates, labor costs and equipment. We cannot predict any
future trends in the rate of inflation and crude oil prices. A significant
increase in or continued high levels of inflation, to the extent we are unable
to timely pass-through the cost increases to our customers, or further declines
in crude oil prices would negatively impact our business, financial condition
and results of operations.
Government regulations and investors are encouraging the oil and gas industry,
including the upstream and oilfield service companies, to transition to a lower
emissions operating environment. As a result, we are working with our customers
and equipment manufacturers to transition our equipment to a lower emissions
profile. Currently, a number of lower emission solutions for pumping equipment,
including Tier IV DGB dual-fuel, electric, direct drive gas turbine and other
technologies have been developed, and we expect additional lower emission
solutions will be developed in the future. We are continually evaluating these
technologies and other investment and acquisition opportunities that would
support our existing and new customer relationships. The transition to lower
emissions equipment is quickly evolving and will be capital intensive. Over
time, we may be required to convert substantially all of our conventional Tier
II equipment to lower emissions equipment. We have transitioned our hydraulic
fracturing equipment portfolio from approximately 10% lower emissions equipment
in 2021 to approximately 35% in 2022, and expect to increase to approximately
65% by the end of the first half of 2024. To the extent any of our customers
have certain expectations or requirements with respect to emissions reductions
from their contractors, if we are unable to continue quickly transitioning to
lower emissions equipment, the demand for our services could be adversely
impacted.
If the rig count and market conditions improve, including improved pricing for
our services and labor availability, and we are able to meet our customers'
lower emissions equipment demands, we believe our operational and financial
results will also continue to improve. If the rig count or market conditions do
not improve or decline in the future, and we are unable to increase our pricing
or pass-through future cost increases to our customers, there could be a
material adverse impact on our business, results of operations and cash flows.
Our results of operations have historically reflected seasonal tendencies,
typically in the fourth quarter, relating to the holiday season, inclement
winter weather and exhaustion of our customers' annual budgets. As a result, we
typically experience declines in our operating and financial results in November
and December, even in a stable commodity price and operations environment.
How We Evaluate Our Operations
Our management uses Adjusted EBITDA or Adjusted EBITDA margin to evaluate and
analyze the performance of our various operating segments.
Adjusted EBITDA and Adjusted EBITDA Margin
We view Adjusted EBITDA and Adjusted EBITDA margin as important indicators of
performance. We define EBITDA as our earnings, before (i) interest expense,
(ii) income taxes and (iii) depreciation and amortization. We define Adjusted
EBITDA as EBITDA, plus (i) loss/(gain) on disposal of assets, (ii) stock-based
compensation, and (iii) other unusual or nonrecurring (income)/expenses such as
impairment charges, retention bonuses, severance, costs related to asset
acquisitions, insurance recoveries, one-time professional fees and legal
settlements. Adjusted EBITDA margin reflects our Adjusted EBITDA as a percentage
of our revenues.
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Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures utilized by
our management and other users of our financial statements such as investors,
commercial banks, and research analysts, to assess our financial performance
because it allows us and other users to compare our operating performance on a
consistent basis across periods by removing the effects of our capital structure
(such as varying levels of interest expense), asset base (such as depreciation
and amortization), nonrecurring (income)/expenses and items outside the control
of our management team (such as income taxes). Adjusted EBITDA and Adjusted
EBITDA margin have limitations as analytical tools and should not be considered
as an alternative to net income/(loss), operating income/(loss), cash flow from
operating activities or any other measure of financial performance presented in
accordance with accounting principles generally accepted in the United States of
America ("GAAP").
Note Regarding Non-GAAP Financial Measures
Adjusted EBITDA and Adjusted EBITDA margin are not financial measures presented
in accordance with GAAP ("non-GAAP"), except when specifically required to be
disclosed by GAAP in the financial statements. We believe that the presentation
of Adjusted EBITDA and Adjusted EBITDA margin provide useful information to
investors in assessing our financial condition and results of operations because
it allows them to compare our operating performance on a consistent basis across
periods by removing the effects of our capital structure, asset base,
nonrecurring expenses (income) and items outside the control of the Company. Net
income (loss) is the GAAP measure most directly comparable to Adjusted EBITDA.
Adjusted EBITDA and Adjusted EBITDA margin should not be considered as
alternatives to the most directly comparable GAAP financial measure. Each of
these non-GAAP financial measures has important limitations as analytical tools
because they exclude some, but not all, items that affect the most directly
comparable GAAP financial measures. You should not consider Adjusted EBITDA or
Adjusted EBITDA margin in isolation or as a substitute for an analysis of our
results as reported under GAAP. Because Adjusted EBITDA and Adjusted EBITDA
margin may be defined differently by other companies in our industry, our
definitions of these non-GAAP financial measures may not be comparable to
similarly titled measures of other companies, thereby diminishing their utility.
Reconciliation of net income (loss) to Adjusted EBITDA (in thousands):
Three Months Ended September 30, 2023 Completion Services All Other Total Net
income $ 34,753 $ — $ 34,753 Depreciation and amortization 53,769 — 53,769
Interest expense 1,169 — 1,169 Income tax expense 10,644 — 10,644 Loss on
disposal of assets 4,265 — 4,265 Stock-based compensation 3,310 — 3,310
Other income (1)
(1,883) — (1,883)
Other general and administrative expense, (net) (2)
450 — 450 Retention bonus and severance expense 1,237 — 1,237 Adjusted
EBITDA $ 107,714 $ — $ 107,714 Three Months Ended September 30, 2022
Completion Services All Other Total Net income (loss) $ 26,404 $ (16,372) $
10,032 Depreciation and amortization 41,039 561 41,600 Interest expense 237
— 237 Income tax expense 2,768 — 2,768 Loss on disposal of assets 11,667
13,786 25,453 Stock-based compensation 3,306 — 3,306
Other expense (3)
616 — 616
Other general and administrative expense, (net) (2)
4,920 — 4,920 Severance expense 1,052 16 1,068 Adjusted EBITDA $ 92,009 $
(2,009) $ 90,000
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Nine Months Ended September 30, 2023 Completion Services All Other Total Net
income $ 102,743 $ — $ 102,743 Depreciation and amortization 157,456 —
157,456 Interest expense 3,016 — 3,016 Income tax expense 31,118 — 31,118
Loss on disposal of assets 29,410 — 29,410 Stock-based compensation 10,604
— 10,604
Other expense (1)
1,749 — 1,749
Other general and administrative expense, (net) (2)
1,659 — 1,659 Retention bonus and severance expense 1,937 — 1,937 Adjusted
EBITDA $ 339,692 $ — $ 339,692 Nine Months Ended September 30, 2022
Completion Services All Other Total Net income (loss) $ 6,367 $ (17,379) $
(11,012) Depreciation and amortization 118,333 2,240 120,573 Impairment
expense 57,454 — 57,454 Interest expense 1,040 — 1,040 Income tax benefit
(1,164) — (1,164) Loss on disposal of assets 34,622 13,779 48,401
Stock-based compensation 18,128 — 18,128
Other income (3) (4)
(9,749) — (9,749)
Other general and administrative expense, (net) (2)
7,711 — 7,711 Severance expense 1,082 16 1,098 Adjusted EBITDA $ 233,824
$ (1,344) $ 232,480
(1)Includes unrealized gain on short-term investment of $1.8 million for the
three months ended September 30, 2023 and unrealized loss on short-term
investment of $2.1 million for the nine months ended September 30, 2023.
(2)Other general and administrative expense, (net of reimbursement from
insurance carriers) primarily relates to nonrecurring professional fees paid to
external consultants in connection with our audit committee review, SEC
investigation, shareholder litigation, legal settlement to a vendor and other
legal matters, net of insurance recoveries. During the three and nine months
ended September 30, 2023, we received reimbursement of approximately $0.1
million and $0.4 million, respectively, from our insurance carriers in
connection with the SEC investigation and shareholder litigation. During the
three and nine months ended September 30, 2022, we received reimbursement of
approximately $3.4 million and $6.9 million, respectively, from our insurance
carriers in connection with the SEC investigation and shareholder litigation.
See "Note 13 - Commitments and Contingencies—Contingent Liabilities—Legal
Matters" for further information.
(3)Includes unrealized loss on short-term investment of $3.3 million and non
cash income of $2.7 million from fixed asset inventory received as part of a
settlement of warranty claims with an equipment manufacturer.
(4)Includes $10.7 million of net tax refund (net of advisory fees) received in
March 2022 from the Texas Comptroller of Public Accounts in connection with
limited sales, excise and use tax of the period July 1, 2015 through December
31, 2018.
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Results of Operations
In 2023, we conducted our business through three operating segments: hydraulic
fracturing, cementing and wireline. For reporting purposes, the hydraulic
fracturing, cementing and wireline operating segments are aggregated into one
reportable segment—Completion Services. We disposed of our coiled tubing assets
and shut down our coiled tubing operations effective September 1, 2022. The
results of our coiled tubing operations prior to September 1, 2022 are reflected
in the "All Other" category.
On November 1, 2022, we consummated the acquisition of all of the outstanding
limited liability company interests of Silvertip, which provides wireline
perforation and ancillary services (wireline operating segment) solely in the
Permian Basin in exchange for 10.1 million shares of our common stock valued at
$106.7 million, $30.0 million of cash, the payoff of $7.2 million of assumed
debt, and the payment of certain other closing and transaction costs. At
September 30, 2023, we had 23 wireline units available to provide wireline
perforation and ancillary services. The Silvertip Acquisition positions the
Company as a more integrated and diversified completions-focused oilfield
services provider headquartered in the Permian Basin. The Company's 2023 results
include the impact of Silvertip's operations for the entire period which was not
included in our 2022 results herein because we acquired Silvertip in November
2022. Accordingly, the full impact of the results of Silvertip may affect the
comparability of our 2023 results when compared to prior period. See "Note 7 —
Reportable Segment Information" in the notes to our financial statements
included in this Form 10-Q for our revenue contribution for wireline operations
and other operating segments.
The following table sets forth the results of operations for the periods
presented:
(in thousands, except for percentages)
Three Months Ended September 30, Change
Increase (Decrease) 2023 2022 $ % Revenue $ 423,804 $ 333,014 $ 90,790 27.3
% Less (Add):
Cost of services (1)
292,490 224,118 68,372 30.5 %
General and administrative expense (2)
28,597 28,190 407 1.4 % Depreciation and amortization 53,769 41,600
12,169 29.3 % Loss on disposal of assets 4,265 25,453 (21,188) (83.2) %
Interest expense 1,169 237 932 393.2 % Other (income) expense (1,883) 616
2,499 405.7 % Income tax expense 10,644 2,768 7,876 284.5 % Net income $
34,753 $ 10,032 $ 24,721 246.4 %
Adjusted EBITDA (3)
$ 107,714 $ 90,000 $ 17,714 19.7 %
Adjusted EBITDA Margin (3)
25.4 % 27.0 % (1.6) % (5.9) % Completion Services segment results of
operations: Revenue $ 423,804 $ 330,780 $ 93,024 28.1 % Cost of services $
292,490 $ 220,299 $ 72,191 32.8 %
Adjusted EBITDA (3)
$ 107,714 $ 92,009 $ 15,705 17.1 %
Adjusted EBITDA Margin (4)
25.4 % 27.8 % (2.4) % (8.6) %
(1)Exclusive of depreciation and amortization.
(2)Inclusive of stock-based compensation.
(3)For definitions of the non-GAAP financial measures of Adjusted EBITDA and
Adjusted EBITDA margin and reconciliation of Adjusted EBITDA to our most
directly comparable financial measures calculated in accordance with GAAP,
please read "How We Evaluate Our Operations". Included in our Adjusted EBITDA is
reservation fees of $0 and $6.8 million for the three months ended September 30,
2023 and 2022, respectively.
(4)The non-GAAP financial measure of Adjusted EBITDA margin for the Completion
Services segment is calculated by taking Adjusted EBITDA for the Completion
Services segment as a percentage of our revenue for the Completion Services
segment.
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Three Months Ended September 30, 2023 Compared to the Three Months Ended
September 30, 2022
Revenues. Revenues increased 27.3%, or $90.8 million, to $423.8
million during the three months ended September 30, 2023, as compared to $333.0
million during the three months ended September 30, 2022. Our Completion
Services segment revenues increased 28.1%, or $93.0 million, for the three
months ended September 30, 2023, as compared to the three months ended
September 30, 2022. The increases were primarily attributable to the significant
increase in our existing and new customers' activity levels, resulting in higher
demand for completion services, improved pricing and the addition of wireline
operations. The addition of wireline operations contributed $52.8 million of the
increase in total revenues. As a result of our customers' increased activity
levels, our effectively utilized hydraulic fracturing fleet count improved to
approximately 16 active fleets during the three months ended September 30, 2023,
from approximately 15 active fleets for the three months ended September 30,
2022. The effective utilized fleet count is determined by dividing the total
number of days our fleets were actively working at wellsites during the month by
25 days (predetermined number of expected active work days in the month). Our
revenue for the three months ended September 30, 2023 and 2022, included
reservation fees charged to a customer of approximately $0 and $6.8 million,
respectively.
Revenues from services other than Completion Services decreased 100.0%, or $2.2
million, to $0 for the three months ended September 30, 2023, as compared to
$2.2 million for the three months ended September 30, 2022. The decrease in
revenue from services other than Completion Services was due to the
discontinuation of our coiled tubing operations effective September 1, 2022.
Cost of Services. Cost of services increased 30.5%, or $68.4 million, to
$292.5 million for the three months ended September 30, 2023, as compared to
$224.1 million during the three months ended September 30, 2022. Cost of
services in our Completion Services segment increased $72.2 million for the
three months ended September 30, 2023, as compared to the three months ended
September 30, 2022. These increases were primarily attributable to the
significantly increased activity levels resulting from the increased demand for
our services as compared to 2022, the addition of wireline operations and the
impact of general cost inflation. The addition of wireline operations
contributed to $35.8 million of the increase in total cost of services. As a
percentage of Completion Services segment revenues (including reservation fees),
Completion Services cost of services was 69.0% for the three months ended
September 30, 2023, as compared to 66.6% for the three months ended
September 30, 2022. Excluding reservation fees revenue of $0 and $6.8 million
recorded during the three months ended September 30, 2023 and 2022,
respectively, our Completion Services cost of services as a percentage of
Completion Services revenues decreased to 69.0% during the three months ended
September 30, 2023, as compared to 68.0% for the three months ended
September 30, 2022. The increase in the percentages was primarily driven by
costs of $11.4 million associated with the replacement of fluid ends during the
three months ended September 30, 2023. Fluid ends were capitalized and
depreciated in 2022. Effective January 1, 2023, the Company commenced expensing
fluid ends as part of cost of services rather than capitalizing fluid ends as
part of property and equipment as a result of the change in estimated useful
life.
General and Administrative Expenses. General and administrative expenses
increased 1.4%, or $0.4 million, to $28.6 million for the three months ended
September 30, 2023, as compared to $28.2 million for the three months ended
September 30, 2022. The net increase was primarily attributable to (i) a $1.8
million increase in payroll and related expenses, (ii) a $0.6 million increase
in travel expenses, (iii) a $0.9 million increase in utilities and other office
expenses, (iv) a $0.4 million increase in consulting fees and (v) a $0.6 million
increase in other general and administrative expenses, partially offset by a
$3.9 million decrease in legal settlements.
Excluding nonrecurring and non-cash items (stock-based compensation, insurance
reimbursements, legal settlements, nonrecurring transaction expenses, retention
bonuses and severance expenses), general and administrative expenses were $23.6
million during the three months ended September 30, 2023, as compared to $18.9
million during the three months ended September 30, 2022.
Depreciation and Amortization. Depreciation and amortization increased 29.3%,
or $12.2 million, to $53.8 million for the three months ended September 30,
2023, as compared to $41.6 million for the three months ended September 30,
2022. The increase was primarily attributable to (i) assets placed into service
since September 30, 2022, (ii) shortening of useful lives of power ends and
hydraulic fracturing units effective January 1, 2023 and (iii) the addition of
wireline assets which included $3.4 million of depreciation and $1.4 million of
amortization of intangible assets.
Loss on Disposal of Assets. Loss on disposal of assets decreased 83.2%, or
$21.2 million, to $4.3 million for the three months ended September 30, 2023, as
compared to $25.5 million for the three months ended September 30, 2022. The
decrease was primarily attributable to the disposal of our coiled tubing assets
on September 1, 2022, which resulted in a loss of approximately $13.8 million
for the three months ended September 30, 2022 and the Company expensing costs
associated with replacement of fluid ends as part of cost of services resulting
from the change in estimated useful life effective January 1, 2023.
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Interest Expense. Interest expense increased to $1.2 million for the three
months ended September 30, 2023, as compared to $0.2 million for the three
months ended September 30, 2022. The increase was primarily attributable to
outstanding borrowings under our ABL Credit Facility during the three months
ended September 30, 2023, compared to no outstanding borrowings during the three
months ended September 30, 2022 and the addition of the Power Equipment Lease (a
finance lease) in August 2023.
Other (Income) Expense. Other income was approximately $1.9 million for the
three months ended September 30, 2023, compared to other expense of $0.6 million
for the three months ended September 30, 2022. Other income for the three months
ended September 30, 2023 is primarily comprised of a $1.8 million unrealized
gain on short-term investment.
Income Taxes. Total income tax expense was $10.6 million resulting in an
effective tax rate of 23.4% for the three months ended September 30, 2023, as
compared to income tax expense of $2.8 million or an effective tax rate of 21.6%
for the three months ended September 30, 2022. The change in income tax expense
recorded during the three months ended September 30, 2023, compared to the three
months ended September 30, 2022, is primarily attributable to the difference in
the estimated pre-tax income for 2023, as compared to 2022.
The following table sets forth the results of operations for the periods
presented:
(in thousands, except for percentages)
Nine Months Ended September 30, Change
Increase (Decrease) 2023 2022 $ % Revenue $ 1,282,623 $ 930,776 $ 351,847
37.8 % Less (Add):
Cost of services (1)
870,767 640,202 230,565 36.0 %
General and administrative expense (2)
86,364 85,031 1,333 1.6 % Depreciation and amortization 157,456 120,573
36,883 30.6 % Impairment expense — 57,454 (57,454) (100.0) % Loss on
disposal of assets 29,410 48,401 (18,991) (39.2) % Interest expense 3,016
1,040 1,976 190.0 % Other expense (income) 1,749 (9,749) 11,498 117.9 %
Income tax expense (benefit) 31,118 (1,164) 32,282 2,773.4 % Net income
(loss) $ 102,743 $ (11,012) $ 113,755 1,033.0 %
Adjusted EBITDA (3)
$ 339,692 $ 232,480 $ 107,212 46.1 %
Adjusted EBITDA Margin (3)
26.5 % 25.0 % 1.5 % 6.0 % Completion Services segment results of operations:
Revenue $ 1,282,623 $ 917,336 $ 365,287 39.8 % Cost of services $ 870,767 $
626,554 $ 244,213 39.0 %
Adjusted EBITDA (3)
$ 339,692 $ 233,824 $ 105,868 45.3 %
Adjusted EBITDA Margin (4)
26.5 % 25.5 % 1.0 % 3.9 %
(1)Exclusive of depreciation and amortization.
(2)Inclusive of stock-based compensation.
(3)For definitions of the non-GAAP financial measures of Adjusted EBITDA and
Adjusted EBITDA margin and reconciliation of Adjusted EBITDA to our most
directly comparable financial measures calculated in accordance with GAAP,
please read "How We Evaluate Our Operations". Included in our Adjusted EBITDA is
reservation fees of $0 and $20.3 million for the nine months ended September 30,
2023 and 2022, respectively.
(4)The non-GAAP financial measure of Adjusted EBITDA margin for the Completion
Services segment is calculated by taking Adjusted EBITDA for the Completion
Services segment as a percentage of our revenue for the Completion Services
segment.
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Nine Months Ended September 30, 2023 Compared to the Nine Months Ended
September 30, 2022
Revenues. Revenues increased 37.8%, or $351.8 million, to $1,282.6
million during the nine months ended September 30, 2023, as compared to $930.8
million during the nine months ended September 30, 2022. Our Completion Services
segment revenues increased 39.8%, or $365.3 million, for the nine months ended
September 30, 2023, as compared to the nine months ended September 30, 2022. The
increases were primarily attributable to the significant increase in our
existing and new customers' activity levels, resulting in higher demand for
completion services, improved pricing and the addition of wireline operations.
The addition of wireline operations contributed $179.2 million of the increase
in total revenues. As a result of our customers' increased activity levels, our
effectively utilized hydraulic fracturing fleet count rose to approximately 16
active fleets during the nine months ended September 30, 2023, from
approximately 14 active fleets for the nine months ended September 30, 2022. Our
revenue for the nine months ended September 30, 2023 and 2022, included
reservation fees charged to a customer of approximately $0 and $20.3 million,
respectively.
Revenues from services other than Completion Services decreased 100.0%, or $13.4
million, to $0 for the nine months ended September 30, 2023, as compared to
$13.4 million for the nine months ended September 30, 2022. The decrease in
revenue from services other than Completion Services was due to the
discontinuation of our coiled tubing operations effective September 1, 2022.
Cost of Services. Cost of services increased 36.0%, or $230.6 million, to
$870.8 million for the nine months ended September 30, 2023, as compared to
$640.2 million during the nine months ended September 30, 2022. Cost of services
in our Completion Services segment increased $244.2 million for the nine months
ended September 30, 2023, as compared to the nine months ended September 30,
2022. These increases were primarily attributable to increased activity levels
resulting from the increased demand for our services as compared to 2022, the
addition of wireline operations and the impact of general cost inflation. The
addition of wireline operations resulted in $118.9 million increase in our cost
of services. As a percentage of Completion Services segment revenues (including
reservation fees), Completion Services cost of services was 67.9% for the nine
months ended September 30, 2023, as compared to 68.3% for the nine months ended
September 30, 2022. Excluding reservation fees revenue of $0 and $20.3 million
recorded during the nine months ended September 30, 2023 and 2022, respectively,
our Completion Services cost of services as a percentage of Completion Services
revenues decreased to 67.9% during the nine months ended September 30, 2023, as
compared to 69.8% for the nine months ended September 30, 2022. The decrease in
the percentages was primarily a result of increased operational efficiencies,
operating scale from higher utilization and improved customer pricing, partially
offset by costs of $28.8 million associated with the replacement of fluid ends
during the nine months ended September 30, 2023. Fluid ends were capitalized and
depreciated in 2022. Effective January 1, 2023, the Company commenced expensing
fluid ends as part of cost of services rather than capitalizing fluid ends as
part of property and equipment as a result of the change in estimated useful
life.
General and Administrative Expenses. General and administrative expenses
increased 1.6%, or $1.4 million, to $86.4 million for the nine months ended
September 30, 2023, as compared to $85.0 million for the nine months ended
September 30, 2022. The net increase was primarily attributable to (i) a $5.7
million increase in payroll and related expenses, (ii) a $5.2 million increase
in advertising expenses, rents, utilities and other office expenses, (iii) a
$1.5 million increase in travel expenses, (iv) a $1.0 million increase in
consulting fees, (v) a $0.8 million increase in retention bonus and severance
expense and (vi) a $1.1 million increase in other general and administrative
expenses, partially offset by a $7.5 million decrease in stock-based
compensation expense driven by the acceleration of stock awards during the nine
months ended September 30, 2022 upon resignation of a former executive; and (ii)
a $6.4 million decrease in legal settlements.
Excluding nonrecurring and non-cash items (stock-based compensation, insurance
reimbursements, legal settlements, transaction expenses, retention bonuses and
severance expenses), general and administrative expenses were $72.2 million
during the nine months ended September 30, 2023, as compared to $58.1 million
during the nine months ended September 30, 2022.
Depreciation and Amortization. Depreciation and amortization increased 30.6%,
or $36.9 million, to $157.5 million for the nine months ended September 30,
2023, as compared to $120.6 million for the nine months ended September 30,
2022. The increase was primarily attributable to (i) assets placed into service
since September 30, 2022, (ii) reduction of the estimated useful life of certain
equipment in 2023, and (iii) the addition of wireline assets which included $9.6
million of depreciation and $4.3 million of amortization of intangible assets.
Impairment Expense. There was no impairment expense during the nine months
ended September 30, 2023. During the nine months ended September 30, 2022, we
recorded a loss of $57.5 million in connection with the impairment of our
DuraStim® electric powered hydraulic fracturing equipment.
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Loss on Disposal of Assets. Loss on disposal of assets decreased 39.2%, or
$19.0 million, to $29.4 million for the nine months ended September 30, 2023, as
compared to $48.4 million for the nine months ended September 30, 2022. The
decrease was primarily attributable to the disposal of our coiled tubing assets
on September 1, 2022, which resulted in a loss of approximately $13.8 million
for the nine months ended September 30, 2022 and the Company expensing costs
associated with replacement of fluid ends as part of cost of services resulting
from the change in estimated useful life effective January 1, 2023, partially
offset by losses incurred from the decommissioning/conversion of certain
hydraulic fracturing equipment and the write-off of certain hydraulic fracturing
equipment as a result of an accidental fire at a wellsite in March 2023.
Interest Expense. Interest expense increased to $3.0 million for the nine
months ended September 30, 2023, as compared to $1.0 million for the nine months
ended September 30, 2022. The increase was primarily attributable to outstanding
borrowings under our ABL Credit Facility during the nine months ended
September 30, 2023, compared to no outstanding borrowings during the nine months
ended September 30, 2022 and the addition of the Power Equipment Lease (a
finance lease) in August 2023.
Other Expense (Income). Other expense was approximately $1.7 million for the
nine months ended September 30, 2023, as compared to other income of $9.7
million for the nine months ended September 30, 2022. Other expense during the
nine months ended September 30, 2023 is primarily comprised of a $2.1 million
unrealized loss on short-term investment. Other income during the nine months
ended September 30, 2022 was primarily comprised of a $10.7 million net tax
refund of sales, excise and use taxes.
Income Taxes. Total income tax expense was $31.1 million resulting in an
effective tax rate of 23.2% for the nine months ended September 30, 2023, as
compared to income tax benefit of $1.2 million or an effective tax rate of 9.6%
for the nine months ended September 30, 2022. The change in income tax expense
(benefit) recorded during the nine months ended September 30, 2023, compared to
the nine months ended September 30, 2022, is primarily attributable to the
difference in the impact of nondeductible expenses on the estimated pre-tax
income for 2023, as compared to the pre-tax loss for 2022.
Liquidity and Capital Resources
Our liquidity is currently provided by (i) existing cash balances, (ii)
operating cash flows and (iii) borrowings under our ABL Credit Facility (as
defined below). Our cash is primarily used to fund our operations, support
growth opportunities, fund share repurchases under our share repurchase program
and satisfy future debt payments. Our restricted cash, which was received from a
customer, will be used solely for the construction or operation of FORCESM
electric-powered hydraulic fracturing equipment. Our Borrowing Base (as defined
below), as redetermined monthly, is tied to the sum of 85% to 90% of monthly
eligible accounts receivable and 80% of eligible unbilled accounts (up to a
maximum of 25% of the Borrowing Base), in each case, depending on the credit
ratings of our accounts receivable counterparties, less customary reserves.
Changes to our operational activity levels and our customers' credit ratings
have an impact on our total eligible accounts receivable, which could result in
significant changes to our Borrowing Base and therefore, our availability under
our ABL Credit Facility.
We received advance payments from a customer for our services, and the amount
outstanding in connection with the advance payments as of September 30, 2023 was
$20.5 million, which does not include any restricted cash.
As of September 30, 2023, our borrowings under our ABL Credit Facility were
$45.0 million and our total liquidity was approximately $179.6 million,
consisting of cash, cash equivalents and restricted cash of $54.3 million and
$125.3 million of availability under our ABL Credit Facility.
On May 17, 2023, the Board authorized and the Company announced a share
repurchase program that allows the Company to repurchase up to $100 million of
the Company's common stock beginning immediately and continuing through and
including May 31, 2024. The shares may be repurchased from time to time in open
market transactions, block trades, accelerated share repurchases, privately
negotiated transactions, derivative transactions or otherwise, certain of which
may be made pursuant to a trading plan meeting the requirements of Rule 10b5-1
under the Exchange Act, as amended, in compliance with applicable state and
federal securities laws. The timing, as well as the number and value of shares
repurchased under the program, will be determined by the Company at its
discretion and will depend on a variety of factors, including management's
assessment of the intrinsic value of the Company's common stock, the market
price of the Company's common stock, general market and economic conditions,
available liquidity, compliance with the Company's debt and other agreements,
applicable legal requirements, and other considerations. The Company is not
obligated to purchase any shares under the repurchase program, and the program
may be suspended, modified, or discontinued at any time without prior notice.
The Company expects to fund the repurchases using cash on hand and expected free
cash flow to be generated through May 2024. During the nine months ended
September 30, 2023, the Company repurchased and retired 4.2 million shares of
common stock for an aggregate of $36.3 million, an average price per share of
$8.67 including commissions, under the repurchase program. As of September 30,
2023, $63.7 million remained authorized for future repurchases of common stock
under the repurchase program.
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As part of our real estate consolidation strategy, we sold our corporate office
building and the associated real property in August 2023 for cash proceeds of
$4.7 million after commission and closing costs and recognized a gain on
disposal of assets of $0.1 million during the nine months ended September 30,
2023. We have subsequently relocated our corporate office to a leased office
space. See "Note 12 - Leases" for further information.
There can be no assurance that our operations and other capital resources will
provide cash in sufficient amounts to maintain planned or future levels of
capital expenditures and to continue with our share repurchases under our share
repurchase program. Future cash flows are subject to a number of variables, and
are highly dependent on the drilling, completion, and production activity by our
customers, which in turn is highly dependent on oil and natural gas prices.
Depending upon market conditions and other factors, we may issue equity and debt
securities or take other actions necessary to fund our business or meet our
future long-term liquidity requirements.
Capital Requirements, Future Sources and Use of Cash and Contractual Obligations
Capital expenditures incurred were $59.1 million during the three months ended
September 30, 2023, as compared to $115.1 million during the three months ended
September 30, 2022. The significant portion of our total capital expenditures
incurred were maintenance capital expenditures and conversion of our hydraulic
fracturing equipment to lower emissions equipment.
Our future material use of cash will be to fund our capital expenditures and
lease payments on our electric fleet and power equipment leases. We may also use
material amounts of cash to repurchase shares under our share repurchase
program. Capital expenditures for 2023 are projected to be primarily related to
extending the useful life of our existing completion services assets, converting
or rebuilding some existing equipment to lower emissions equipment, strategic
purchases and other ancillary equipment purchases, subject to market conditions
and customer demand and potential strategic acquisitions. Our future capital
expenditures depend on our projected operational activity, emission requirements
and planned conversions to lower emissions equipment, among other factors, which
could vary significantly throughout the year. We could incur significant
additional capital expenditures if our projected activity levels increase during
the course of the year, inflation and supply chain tightness continue to
adversely impact our operations or we invest in new or different lower emissions
equipment. The Company will continue to evaluate the emissions profile of its
equipment over the coming years and may, depending on market conditions, convert
or retire additional conventional Tier II equipment in favor of lower emissions
equipment. The Company’s decisions regarding the retirement or conversion of
equipment or the addition of lower emissions equipment will be subject to a
number of factors, including (among other factors) the availability of
equipment, including parts and major components, supply chain disruptions,
prevailing and expected commodity prices, customer demand and requirements and
the Company’s evaluation of projected returns on conversion or other capital
expenditures. Depending on the impacts of these factors, the Company may decide
to retain conventional equipment for a longer period of time or accelerate the
retirement, replacement or conversion of that equipment.
We anticipate our capital expenditures will be funded by existing cash, cash
flows from operations, and if needed, borrowings under our ABL Credit Facility.
Our cash flows from operations will be generated from services we provide to our
customers. In addition, our cash flows could be improved by prepayments received
from certain customers in connection with our completion services contractual
arrangements, as applicable.
We entered into a sand purchase agreement with a supplier that will expire on
December 31, 2024 with a remaining take-or-pay commitment of approximately $22.4
million. We also entered into three-year equipment leases (the "Electric Fleet
Leases") for a total of four FORCESM electric-powered hydraulic fracturing
fleets with capacity of 60,000 HHP per fleet, which contain options to extend
the leases or purchase the equipment at the end of each lease or at the end of
each subsequent renewal period. As of September 30, 2023, one of the Electric
Fleet Leases commenced when the Company took possession of some of the equipment
associated with the first FORCESM electric-powered hydraulic fracturing fleet.
Lease payments pertaining to the remaining equipment under this lease and the
remaining Electric Fleet Leases will commence when we take possession of the
associated equipment. We currently expect to receive the remaining equipment
associated with the first fleet and all equipment associated with the second
fleet in the fourth quarter of 2023, and all equipment associated with the third
and fourth fleets in the first half of 2024. The total estimated contractual
commitment in connection with the Electric Fleet Leases excluding the cost
associated with the option to purchase the equipment at the end of each lease is
approximately $105.1 million. We also entered into a three year lease (the
"Power Equipment Lease") for certain power generation equipment. The total
estimated contractual commitment in connection with the Power Equipment Lease is
approximately $56.9 million.
In the normal course of business, we enter into various contractual obligations
and incur expenses in connection with routine growth, conversion and maintenance
capital expenditures that impact our future liquidity. There were no other known
future material contractual obligations as of September 30, 2023.
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Cash, Restricted Cash and Cash Flows
The following table sets forth the historical cash flows for the nine months
ended September 30, 2023, and 2022:
Nine Months Ended September 30, (in thousands) 2023 2022 Net cash provided by
operating activities $ 305,071 $ 174,951 Net cash used in investing activities
$ (312,771) $ (239,957) Net cash used in financing activities $ (26,832) $
(3,704)
Cash Flows From Operating Activities
Net cash provided by operating activities was $305.1 million for the nine months
ended September 30, 2023, compared to $175.0 million for the nine months ended
September 30, 2022. The net increase of approximately $130.0 million was
primarily due to the improvement in our net income, resulting from the
significant increase in our existing and new customers' activity levels,
resulting in higher demand for completion services, increased operational
efficiencies and reduction in operational downtime. The increase in cash
provided by operating activities was also impacted by timing of our receivable
collections from our customers and payments to our vendors, partially offset by
increases in inventories and prepaid expenses.
Cash Flows From Investing Activities
Net cash used in investing activities increased to $312.8 million for the nine
months ended September 30, 2023, from $240.0 million for the nine months ended
September 30, 2022. The increase was primarily attributable to maintenance
capital expenditures and our investment in lower emissions Tier IV DGB dual-fuel
equipment (conversion of Tier II equipment to Tier IV DGB equipment and new Tier
IV DGB equipment). During the nine months ended September 30, 2023, we have paid
approximately $108.6 million in connection with our Tier IV DGB dual-fuel
equipment and FORCESM electric-powered equipment.
Cash Flows From Financing Activities
Net cash used in financing activities was $26.8 million for the nine months
ended September 30, 2023, compared to $3.7 million for the nine months ended
September 30, 2022. The net increase was primarily driven by share repurchases
of $36.3 million, partially offset by net borrowings of $15.0 million under our
ABL Credit Facility (as defined below) during the nine months ended September
30, 2023.
Credit Facility and Other Financing Arrangements
Our revolving credit facility, as amended and restated in April 2022, prior to
giving effect to the amendment to the revolving credit facility in June 2023,
had a total borrowing capacity of $150.0 million. The revolving credit facility
had a borrowing base of 85% to 90%, depending on the credit ratings of our
accounts receivable counterparties, of monthly eligible accounts receivable less
customary reserves. The revolving credit facility included a springing fixed
charge coverage ratio to apply when excess availability was less than the
greater of (i) 10% of the lesser of the facility size or the borrowing base or
(ii) $10.0 million. Under the revolving credit facility we were required to
comply, subject to certain exceptions and materiality qualifiers, with certain
customary affirmative and negative covenants, including, but not limited to,
covenants pertaining to our ability to incur liens, indebtedness, changes in the
nature of our business, mergers and other fundamental changes, disposal of
assets, investments and restricted payments, amendments to our organizational
documents or accounting policies, prepayments of certain debt, dividends,
transactions with affiliates, and certain other activities.
Effective June 2, 2023, the Company entered into an amendment to its amended and
restated revolving credit facility the revolving credit facility (as amended and
restated in April 2022, as amended in June 2023 and as may be amended further,
"ABL Credit Facility"). The amendment increased the borrowing capacity under the
ABL Credit Facility to $225.0 million (subject to the Borrowing Base (as defined
below) limit), and extended the maturity date to June 2, 2028. The ABL Credit
Facility has a borrowing base of the sum of 85% to 90% of monthly eligible
accounts receivable and 80% of eligible unbilled accounts (up to a maximum of
25% of the Borrowing Base) less customary reserves (the "Borrowing Base"), in
each case, depending on the credit ratings of our accounts receivable
counterparties, as redetermined monthly. The Borrowing Base as of September 30,
2023, was approximately $176.3 million. The ABL Credit Facility includes a
springing fixed charge coverage ratio to apply when excess availability is less
than the greater of (i) 10% of the lesser of the facility size or the Borrowing
Base or (ii) $15.0 million. Under the ABL Credit Facility we are required to
comply, subject to certain exceptions and materiality
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qualifiers, with certain customary affirmative and negative covenants,
including, but not limited to, covenants pertaining to our ability to incur
liens, indebtedness, changes in the nature of our business, mergers and other
fundamental changes, disposal of assets, investments and restricted payments,
amendments to our organizational documents or accounting policies, prepayments
of certain debt, dividends, transactions with affiliates, and certain other
activities. Borrowings under the ABL Credit Facility are secured by a first
priority lien and security interest in substantially all assets of the Company.
Borrowings under the ABL Credit Facility accrue interest based on a three-tier
pricing grid tied to availability, and we may elect for loans to be based on
either the Secured Overnight Financing Rate ("SOFR") or the base rate, plus the
applicable margin, which ranges from 1.75% to 2.25% for SOFR loans and 0.75% to
1.25% for base rate loans.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 30, 2023.
Critical Accounting Policies and Estimates
Other than the change in accounting estimate discussed in Note 1 of our
Condensed Consolidated Financial Statements (Unaudited), there have been no
material changes during the nine months ended September 30, 2023 to the
methodology applied by our management for critical accounting policies
previously disclosed in our Form 10-K. Please refer to Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations—Critical Accounting Policies and Estimates" in our Form 10-K for a
discussion of our critical accounting policies and estimates.
Recently Issued Accounting Standards
Disclosure concerning recently issued accounting standards is incorporated by
reference to Note 2 of our Condensed Consolidated Financial Statements
(Unaudited) contained in this Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2023, there have been no material changes in market risk
from the information provided in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” or “Quantitative and Qualitative
Disclosures of Market Risk” in our Form 10-K.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide
reasonable assurance that the information required to be disclosed by us in our
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms and that such information is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.
As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under
the supervision and with the participation of our management, including our
principal executive officer and principal financial officer, the effectiveness
of the design and operation of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end
of the period covered by this quarterly report. Based upon that evaluation, our
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures were effective at the reasonable assurance
level as of September 30, 2023.
Changes in Internal Control over Financial Reporting
There were no changes in our system of internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that
occurred during the quarter ended September 30, 2023 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings
See “Note 13 – Commitments and Contingencies” in the Notes to Condensed
Consolidated Financial Statements for further information.
ITEM 1A. Risk Factors
Other than as set forth below, there have been no material changes to the risk
factors disclosed in Part I, Item 1A. of our Form 10-K.
Adverse developments affecting the financial services industry, such as events
or concerns involving liquidity, defaults or non-performance by financial
institutions or transactional counterparties, could adversely affect the
Company’s current and projected business operations and its financial condition
and results of operations.
Events involving limited liquidity, defaults, non-performance or other adverse
developments that affect financial institutions, transactional counterparties or
other companies in the financial services industry or the financial services
industry generally, concerns or rumors about such events or other similar risks,
have in the past and may in the future lead to acute or market-wide liquidity
problems. In addition, if any of the Company’s customers, suppliers or other
business counterparties are unable to access funds held by such a financial
institution, such parties’ ability to pay their obligations to the Company or to
enter into new commercial arrangements requiring additional payments to the
Company could be adversely affected.
Inflation and rapid increases in interest rates have led to a decline in the
trading value of previously issued government securities with interest rates
below current market interest rates. Although the U.S. Department of Treasury,
Federal Deposit Insurance Corporation ("FDIC") and Federal Reserve Board have
announced a program to mitigate the risk of potential losses on the sale of such
instruments, widespread demands for customer withdrawals or other needs of
financial institutions for immediate liquidity may exceed the capacity of such
program. Additionally, the Company maintains cash balances at third-party
financial institutions in excess of the FDIC standard insurance limits, and
there is no guarantee that the U.S. Department of Treasury, FDIC and Federal
Reserve Board will provide access to uninsured funds in the future in the event
of the closure of such banks or financial institutions, or that they would do so
in a timely fashion.
Access to funding sources and other credit arrangements in amounts adequate to
finance the Company’s business operations could be significantly impaired by the
foregoing factors that affect the Company, any financial institutions with which
the Company enters into credit agreements or arrangements directly, or the
financial services industry or economy in general. These factors could include,
among others, events such as liquidity constraints or failures, the ability to
perform obligations under various types of financial, credit or liquidity
agreements or arrangements, disruptions or instability in the financial services
industry or financial markets, or concerns or negative expectations about the
prospects for companies in the financial services industry.
The results of events or concerns that involve one or more of these factors
could include a variety of material and adverse impacts on the Company’s current
and projected business operations and the Company’s financial condition and
results of operations. These risks include, but may not be limited to, the
following:
•delayed access to deposits or other financial assets or the uninsured loss of
deposits or other financial assets;
•inability to enter into credit facilities or other working capital resources;
•potential or actual breach of contractual obligations that require the Company
to maintain letters of credit or other credit support arrangements; or
•termination of cash management arrangements and/or delays in accessing or
actual loss of funds subject to cash management arrangements.
In addition, investor concerns regarding the U.S. or international financial
systems could result in less favorable commercial financing terms, including
higher interest rates or costs and tighter financial and operating covenants, or
systemic limitations on access to credit and liquidity sources, thereby making
it more difficult for the Company to acquire financing on acceptable terms or at
all. Any decline in available funding or access to cash and liquidity resources
could, among other risks, adversely impact the Company’s ability to meet
operating expenses or other obligations, financial or otherwise, result in
breaches of the Company’s financial and/or contractual obligations, or result in
violations of federal or state wage and hour laws. In addition, any further
deterioration in the macroeconomic economy or financial services industry could
lead to losses or defaults by the Company’s customers, vendors or suppliers. Any
of these impacts, or any other impacts resulting from the factors described
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above or other related or similar factors, could have material adverse impacts
on the Company’s liquidity and their current and/or projected business
operations and financial condition and results of operations.
There can be no assurance that our share repurchase program will be fully
consummated or that such program will enhance the long-term value of our share
price.
On May 17, 2023, the Company's Board approved a share repurchase program that
allows the Company to repurchase up to $100 million of the Company's common
stock through and including May 31, 2024. There is no obligation for the Company
to continue to repurchase or to repurchase any specific dollar amount of stock.
The timing, as well as the number and value of shares repurchased under the
program, will be determined by the Company at its discretion and will depend on
a variety of factors, including management's assessment of the intrinsic value
of the Company's common stock, the market price of the Company's common stock,
general market and economic conditions, available liquidity, compliance with the
Company's debt and other agreements, applicable legal requirements, and other
considerations. The Company is not obligated to purchase any shares under the
repurchase program, and the program may be suspended, modified, or discontinued
at any time without prior notice. The repurchase program could affect the price
of our stock and increase volatility in the market. We cannot guarantee that the
repurchase program will be fully consummated or that such program will enhance
the long-term value of our share price. In addition, repurchase regulations and
taxes may add additional payment burden to the Company from our share repurchase
program. For example, the Biden administration has proposed increasing the
amount of the excise tax from 1% to 4%. However, it is unclear whether such a
change in the amount of the excise tax will be enacted and, if enacted, how soon
any such change could take effect.
ITEM 2. Unregistered Sales or Purchases of Equity Securities and Use of Proceeds
Share Repurchase Program
The following sets forth information with respect to our repurchases of shares
of common stock during the three months ended September 30, 2023:
Period Total number of shares purchased
Average price paid per share (2)
Total number of shares purchased as part of publicly announced plans or programs
(1)
Approximate dollar value of shares that may yet be purchased under the plans or
programs (1)
July 1, 2023 to July 31, 2023 185,879 $ 8.52 185,879 $ 80,946,386 August 1,
2023 to August 31, 2023 942,269 $ 9.92 942,269 $ 71,595,958 September 1,
2023 to September 30, 2023 763,777 $ 10.28 763,777 $ 63,742,442 Total
1,891,925 $ 9.93 1,891,925 $ 63,742,442
(1)On May 17, 2023, the Board authorized and the Company announced a share
purchase program that allows the Company to repurchase up to $100 million of the
Company's common stock beginning immediately and continuing through and
including May 31, 2024. The shares may be repurchased from time to time in open
market transactions, block trades, accelerated share repurchases, privately
negotiated transactions, derivative transactions or otherwise, certain of which
may be made pursuant to a trading plan meeting the requirements of Rule 10b5-1
under the Exchange Act, as amended, in compliance with applicable state and
federal securities laws.
(2)The average price paid per share includes commissions.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
During the three months ended September 30, 2023, no director or officer of the
Company adopted, modified or terminated any "Rule 10b5-1 trading arrangement" or
"non-Rule 10b5-1 trading arrangement" within the meaning of Item 408 of
Regulation S-K.
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ITEM 6. Exhibits
The exhibits required to be filed or furnished by Item 601 of Regulation S-K are
listed below.
3.1
Amended and Restated Certificate of Incorporation of ProPetro Holding Corp.
dated as of June 19, 2019 (incorporated by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K, dated June 19, 2019).
3.2
Amended and Restated Bylaws of ProPetro Holding Corp. (incorporated by reference
to Exhibit 3.2 to the Company's Current Report on Form 8-K, dated June 19,
2019).
3.3
Certificate of Designations of Series B Junior Participating Preferred Stock of
ProPetro Holding Corp. (incorporated by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K, dated April 14, 2020).
10.1*#
Amended and Restated ProPetro Holding Corp. Non-Employee Director Compensation
Policy.
31.1*
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Exchange Act Rules, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2*
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Exchange Act Rules, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1**
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS* XBRL Instance Document 101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB* XBRL
Taxonomy Extension Label Linkbase Document 101.PRE* XBRL Taxonomy Extension
Presentation Linkbase Document 101.DEF* XBRL Taxonomy Extension Definition
Linkbase Document 104* Cover Page Interactive Data File - the cover page
interactive data file does not appear in the Interactive Data File because its
XBRL tags are embedded within the Inline XBRL document
* Filed herewith. ** Furnished herewith. # Compensatory plan, contract or
arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 2, 2023 By: /s/ Samuel D. Sledge Samuel D. Sledge Chief
Executive Officer and Director (Principal Executive Officer) By: /s/
David S. Schorlemer David S. Schorlemer Chief Financial Officer (Principal
Financial and Accounting Officer)
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