10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on June 22, 2020
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, 2019
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
______________________________
(Exact name of registrant as specified in its charter)
______________________________
(State or other jurisdiction of
incorporation or organization)
|
(I.R.S. Employer
Identification No.)
|
(Address of principal executive offices)
(432 ) 688-0012
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
N/A |
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, 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.
☒ |
Accelerated filer |
☐ |
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Non-accelerated filer |
☐ |
Smaller reporting company |
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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 June 9, 2020, was 100,849,840 .
PROPETRO HOLDING CORP.
TABLE OF CONTENTS
Page |
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-i-
EXPLANATORY NOTE
Audit Committee Internal Review
In May 2019, the Audit Committee (the “Committee”) of ProPetro Holding Corp.’s (the “Company”) board of directors (the “Board”), with assistance of independent outside counsel and accounting advisors, began conducting an internal review initially focused on the Company’s disclosure of agreements previously entered into with AFGlobal Corporation for the purchase of Durastim® hydraulic fracturing fleets and effective communications related thereto. The review was later expanded (collectively, the “Expanded Audit Committee Review”) to, among other items, review expense reimbursements, certain transactions involving related parties or potential conflicts of interest, and certain transactions entered into by our former chief executive officer.
Findings of the Expanded Audit Committee Review
Based on the information collected and reviewed by the Committee’s independent outside counsel and accounting advisors, the Expanded Audit Committee Review resulted in numerous factual findings, including but not limited to, the following significant findings:
• |
approximately $370,000 of expenses reimbursed to members of senior management, including the former chief executive officer (approximately $346,000) and former chief financial officer (approximately $18,000), were incorrectly recorded as expenses of the Company and should have been the responsibility of the officers individually; each of these officers has reimbursed the Company in full for the identified amounts. These improper reimbursements were attributable to inadequate documentation stemming from the lack of a more robust employee expense review and approval procedure; |
• |
the Company’s former chief accounting officer entered into a related party transaction that was not properly disclosed in the Company’s filings with the Securities and Exchange Commission (the “SEC”); |
• |
a number of internal and disclosure control deficiencies and material weaknesses were identified, as described in more detail in Part I - Item 4. “Controls and Procedures,” including, but not limited to, the following: |
◦ |
the Company’s former executive management team did not establish and promote a control environment with an appropriate tone of compliance and control consciousness throughout the entire Company; |
◦ |
the Company did not appropriately identify and monitor conflicts of interest; |
◦ |
certain whistleblower allegations were not properly investigated and elevated to the Committee; |
◦ |
instances were identified of non-compliance with the Company’s internal policies, including its Insider Trading Compliance Policy and Code of Conduct and Ethics; and |
◦ |
management did not appropriately communicate information internally and externally, including communication between management and the Board. |
The Expanded Audit Committee Review did not identify any material accounting errors in the Company’s consolidated financial statements, and no restatement or revision was required of the Company’s consolidated financial statements previously reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Annual Report”) and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 (the “2019 First Quarter 10-Q”).
Following completion of the Expanded Audit Committee Review and in connection with performing additional procedures to position the Company’s current principal executive and principal financial officers to be in a position to certify the Company’s future filings with the SEC, the Company determined that its former chief executive officer entered into a pledge agreement covering all of the Company’s common stock owned by him at that time as collateral for a personal loan in January 2017, in violation of the shareholders agreement then in place through pledging of shares. The Company formally adopted its Insider Trading Compliance Policy in March 2017 (in connection with its initial public offering), which prohibits pledging the Company’s securities as collateral to secure loans. The Company also believes that, in 2018 in connection with another personal loan, its former chief executive officer executed a share pledge agreement that was subsequently replaced with a negative pledge with respect to all of the Company’s common stock owned by him at that time or acquired thereafter and engaged in other inappropriate conduct in connection with these personal loans. The Company did not appropriately disclose such pledges in the Company’s prior SEC filings that included management share ownership. Also in connection with performing additional procedures, the Company determined that it had previously failed to appropriately disclose in its annual proxy statements certain perquisites as compensation paid to some of the Company's named executive officers in 2017 and
-ii-
2018, including, among other later reimbursed perquisites, ticket purchases, charitable donations, and costs associated with pilots provided by the Company for its former chief executive officer’s personal use of his plane.
Internal Control over Financial Reporting and Disclosure Controls and Procedures
As a result of the material weaknesses in the Company’s internal control over financial reporting described above and as further described in Part I, Item 4. “Controls and Procedures,” the Company concluded that (i) its disclosure controls and procedures were not effective as of December 31, 2018, and March 31, June 30 and September 30, 2019 and (ii) its internal control over financial reporting was not effective as of December 31, 2018. Due to the existence of such material weaknesses, the Company’s internal control over financial reporting remained ineffective as of March 31, June 30 and September 30, 2019. The Company previously announced on November 13, 2019 that investors should no longer rely on management’s report on internal control over financial reporting or the internal control over financial reporting opinion of the Company’s independent registered public accounting firm included in the 2018 Annual Report. The conclusions regarding effectiveness previously expressed by the Company’s former management in Part II, Item 9A, “Controls and Procedures” in the 2018 Annual Report and Part I, Item 4, “Controls and Procedures” in the 2019 First Quarter 10-Q are hereby amended by the conclusions expressed in Part I, Item 4. “Controls and Procedures” of this Quarterly Report on Form 10-Q. In light of the disclosures herein, the Company does not intend to file amendments to the 2018 Annual Report or the 2019 First Quarter 10-Q to reflect these conclusions.
Remediation Plan
The Company’s remediation efforts are ongoing, and it will continue its initiatives to implement and document policies, procedures, and internal controls. The Board and management have implemented a number of measures to address the material weaknesses identified, including appointing new executive officers with extensive public company experience; enhancing certain of the Company’s policies and monitoring compliance with such policies; designing and implementing control activities related to the identification and approval of related party transactions and potential conflicts of interest, as well as the evaluation of whistleblower allegations; forming a disclosure committee and appointing a chief disclosure officer. The Company’s remediation efforts are described in more detail in Part I, Item 4. “Controls and Procedures.”
-iii-
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this "Form 10-Q") contains forward-looking statements that are intended to be covered by the safe harbor provided by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 21E of the Exchange Act. 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 to identify forward-looking statements. These statements include, but are not limited to statements about our business strategy, industry, future profitability and future capital expenditures. 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:
• |
the severity and duration of world health events, including the recent outbreak of the novel coronavirus (“COVID-19”) pandemic, related economic repercussions and the resulting severe disruption in the oil and gas industry and negative impact on demand for oil and gas, which is negatively impacting our business; |
• |
the current significant surplus in the supply of oil and actions 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; |
• |
uncertainty regarding the timing, pace and extent of an economic recovery in the United States and elsewhere, which in turn will likely affect demand for crude oil and natural gas and therefore the demand for our services; |
• |
the level of production and resulting market prices for crude oil, natural gas and other hydrocarbons; |
• |
changes in general economic and geopolitical conditions; |
• |
competitive conditions in our industry; |
•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;
•changes in the availability and cost of capital;
•our ability to successfully implement our business plan;
•large or multiple customer defaults, including defaults resulting from actual or potential insolvencies;
•the price and availability of debt and equity financing (including changes in interest rates);
•our ability to complete growth projects on time and on budget;
• |
operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions; |
•changes in our tax status;
•technological changes;
• |
our ability to successfully implement technological developments and enhancements, including the new DuraStim® fleets and associated power solutions;
|
•operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control;
•acts of terrorism, war or political or civil unrest in the United States or elsewhere;
•the effects of existing and future laws and governmental regulations (or the interpretation thereof);
• |
the effects of current and future litigation, including the Logan Lawsuit, the Boca Raton Lawsuit and the Chang Lawsuit (each defined herein); |
• |
the timing and outcome of, including potential expense associated with, the SEC pending investigation; |
-iv-
• |
the potential impact on our business and stock price of any announcements regarding the SEC's pending investigation, the Logan Lawsuit, the Boca Raton Lawsuit or the Chang Lawsuit; |
• |
the material weaknesses in our internal controls over financial reporting and disclosure controls and procedures described under Part I, Item 4, “Controls and Procedure” in this Form 10-Q; |
• |
matters related to the Expanded Audit Committee Review and related findings, as well as the implementation and effectiveness of the Company's remediation plan; and |
•our ability to successfully execute on our plans and objectives.
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 the 2018 Annual Report 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 effective 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 2018 Annual Report.
-v-
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
September 30, 2019 |
December 31, 2018 |
|||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ |
$ |
||||||
Accounts receivable - net of allowance for doubtful accounts of $575 and $100, respectively |
||||||||
Inventories |
||||||||
Prepaid expenses |
||||||||
Other current assets |
||||||||
Total current assets |
||||||||
PROPERTY AND EQUIPMENT - net of accumulated depreciation |
||||||||
OPERATING LEASE RIGHT-OF-USE ASSETS |
||||||||
OTHER NONCURRENT ASSETS: |
||||||||
Goodwill |
||||||||
Intangible assets - net of amortization |
||||||||
Other noncurrent assets |
||||||||
Total other noncurrent assets |
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TOTAL ASSETS |
$ |
$ |
||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable |
$ |
$ |
||||||
Operating lease liabilities |
||||||||
Finance lease liabilities |
||||||||
Accrued and other current liabilities |
||||||||
Accrued interest payable |
||||||||
Total current liabilities |
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DEFERRED INCOME TAXES |
||||||||
LONG-TERM DEBT |
||||||||
NONCURRENT OPERATING LEASE LIABILITIES |
||||||||
OTHER LONG-TERM LIABILITIES |
||||||||
Total liabilities |
||||||||
COMMITMENTS AND CONTINGENCIES (Note 10) |
||||||||
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,100,617,240 and 100,190,126 shares issued, respectively |
||||||||
Additional paid-in capital |
||||||||
Retained earnings (accumulated deficit) |
( |
) |
||||||
Total shareholders’ equity |
||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ |
$ |
See notes to condensed consolidated financial statements
1
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, |
|||||||||||||||
2019 |
2018 |
2019 |
2018 |
|||||||||||||
REVENUE - Service revenue |
$ |
$ |
$ |
$ |
||||||||||||
COSTS AND EXPENSES |
||||||||||||||||
Cost of services (exclusive of depreciation and amortization) |
||||||||||||||||
General and administrative (inclusive of stock-based compensation) |
||||||||||||||||
Depreciation and amortization |
||||||||||||||||
Loss on disposal of assets |
||||||||||||||||
Total costs and expenses |
||||||||||||||||
OPERATING INCOME |
||||||||||||||||
OTHER EXPENSE: |
||||||||||||||||
Interest expense |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Other expense |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Total other expense |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
INCOME BEFORE INCOME TAXES |
||||||||||||||||
INCOME TAX EXPENSE |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
NET INCOME |
$ |
$ |
$ |
$ |
||||||||||||
NET INCOME PER COMMON SHARE: |
||||||||||||||||
Basic |
$ |
$ |
$ |
$ |
||||||||||||
Diluted |
$ |
$ |
$ |
$ |
||||||||||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
||||||||||||||||
Basic |
||||||||||||||||
Diluted |
See notes to condensed consolidated financial statements
2
PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
Nine Months Ended September 30, 2019 |
|||||||||||||||||||
Common Stock |
|||||||||||||||||||
Shares |
Amount |
Additional Paid-In Capital |
Retained Earnings (Accumulated Deficit) |
Total |
|||||||||||||||
BALANCE - January 1, 2019 |
$ |
$ |
$ |
( |
) |
$ |
|||||||||||||
Stock-based compensation cost |
— |
— |
— |
||||||||||||||||
Issuance of equity awards, net |
— |
||||||||||||||||||
Net income |
— |
— |
— |
||||||||||||||||
BALANCE - March 31, 2019 |
$ |
$ |
$ |
$ |
|||||||||||||||
Stock-based compensation cost |
— |
— |
— |
||||||||||||||||
Issuance of equity awards, net |
— |
||||||||||||||||||
Net income |
— |
— |
— |
||||||||||||||||
BALANCE - June 30, 2019 |
$ |
$ |
$ |
$ |
|||||||||||||||
Stock-based compensation cost |
— |
— |
— |
||||||||||||||||
Issuance of equity awards, net |
— |
||||||||||||||||||
Net income |
— |
— |
— |
||||||||||||||||
BALANCE - September 30, 2019 |
$ |
$ |
$ |
$ |
Nine Months Ended September 30, 2018 |
|||||||||||||||||||
Common Stock |
|||||||||||||||||||
Shares |
Amount |
Additional Paid-In Capital |
Retained Earnings (Accumulated Deficit) |
Total |
|||||||||||||||
BALANCE - January 1, 2018 |
$ |
$ |
$ |
( |
) |
$ |
|||||||||||||
Stock-based compensation cost |
— |
— |
— |
||||||||||||||||
Issuance of equity awards, net |
— |
— |
— |
— |
|||||||||||||||
Net income |
— |
— |
— |
||||||||||||||||
BALANCE - March 31, 2018 |
$ |
$ |
$ |
( |
) |
$ |
|||||||||||||
Stock-based compensation cost |
— |
— |
— |
||||||||||||||||
Issuance of equity awards, net |
— |
||||||||||||||||||
Net income |
— |
— |
— |
||||||||||||||||
BALANCE - June 30, 2018 |
$ |
$ |
$ |
( |
) |
$ |
|||||||||||||
Stock-based compensation cost |
— |
$ |
— |
$ |
$ |
— |
|||||||||||||
Issuance of equity awards, net |
— |
||||||||||||||||||
Net income |
— |
— |
— |
||||||||||||||||
BALANCE - September 30, 2018 |
$ |
$ |
$ |
( |
) |
$ |
See notes to condensed consolidated financial statements
3
PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30, |
||||||||
2019 |
2018 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ |
$ |
||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
||||||||
Deferred income tax expense |
||||||||
Provision for bad debt expense |
||||||||
Amortization of deferred revenue rebate |
||||||||
Amortization of deferred debt issuance costs |
||||||||
Stock-based compensation |
||||||||
Loss on disposal of assets |
||||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
( |
) |
( |
) |
||||
Other current assets |
( |
) |
||||||
Inventories |
( |
) |
||||||
Prepaid expenses |
||||||||
Accounts payable |
( |
) |
||||||
Accrued and other current liabilities |
||||||||
Accrued interest |
||||||||
Net cash provided by operating activities |
||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Capital expenditures |
( |
) |
( |
) |
||||
Proceeds from sale of assets |
||||||||
Net cash used in investing activities |
( |
) |
( |
) |
||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Proceeds from borrowings |
||||||||
Repayments of borrowings |
( |
) |
( |
) |
||||
Payment of finance lease obligation |
( |
) |
||||||
Repayments of insurance financing |
( |
) |
( |
) |
||||
Payment of debt issuance costs |
( |
) |
||||||
Proceeds from exercise of equity awards |
||||||||
Net cash provided by financing activities |
||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
( |
) |
||||||
CASH AND CASH EQUIVALENTS - Beginning of period |
||||||||
CASH AND CASH EQUIVALENTS - End of period |
$ |
$ |
See notes to condensed consolidated financial statements
4
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
Risks and Uncertainties
As an oilfield services company, we are exposed to a number of risks and uncertainties that are inherent to our industry. In addition to such industry-specific risks, the global public health crisis associated with the novel coronavirus (“COVID-19”) pandemic has, and is anticipated to continue to have, an adverse effect on global economic activity for the immediate future and has resulted in travel restrictions, business closures and the institution of quarantining and other restrictions on movement in many communities. The slowdown in global economic activity attributable to the COVID-19 pandemic has resulted in a dramatic decline in the demand for energy, which directly impacts our industry and the Company. In addition, global crude oil prices experienced a collapse starting in early March 2020 as a direct result of failed negotiations between the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia. In response to the global economic slowdown, OPEC had recommended a decrease in production levels in order to accommodate reduced demand. Russia rejected the recommendation of OPEC as a concession to U.S. producers. After the failure to reach an agreement, Saudi Arabia, a dominant member of OPEC, and other Persian Gulf OPEC members announced intentions to increase production and offer price discounts to buyers in certain geographic regions.
As the breadth of the COVID-19 health crisis expanded throughout the month of March 2020 and governmental authorities implemented more restrictive measures to limit person-to-person contact, global economic activity continued to decline commensurately. The associated impact on the energy industry has been adverse and continued to be exacerbated by the unresolved conflict regarding production. In the second week of April 2020, OPEC, Russia and certain other petroleum producing nations (“OPEC+”), reconvened to discuss the matter of production cuts in light of unprecedented disruption and supply and demand imbalances that expanded since the failed negotiations in early March 2020. Tentative agreements were reached to cut production by up to 10 million barrels of oil per day with allocations to be made among the OPEC+ participants. Some of these production cuts went into effect in the first half of May 2020, however, commodity prices remain depressed as a result of an increasingly utilized global storage network and near-term demand loss attributable to the COVID-19 health crisis and related economic slowdown.
The combined effect of COVID-19 and the energy industry disruptions led to a decline in WTI crude oil prices of approximately 67 percent from the beginning of January 2020, when prices were approximately $62 per barrel, through the end of March 2020, when they were just above $20 per barrel. Overall crude oil price volatility has continued despite apparent agreement among OPEC+ regarding production cuts and as of June 17, 2020, the WTI price for a barrel of crude oil was approximately $38.
Despite a significant decline in drilling and completion activities by U.S. producers starting in mid-March 2020, domestic supply is exceeding demand which has led to significant operational stress with respect to capacity limitations associated with storage, pipeline and refining infrastructure, particularly within the Gulf Coast region. The combined effect of the aforementioned factors is anticipated to have an adverse impact on the industry in general and our operations specifically.
Since March 2020, we initiated several actions to mitigate the anticipated adverse economic conditions for the immediate future and to support our financial position and liquidity. The more significant actions that we have taken included: (i) canceling substantially all of our growth capital projects, (ii) significantly reducing our maintenance expenditures and field level consumable costs, (iii) reducing our workforce to follow our activity levels, (iv) efforts to manage our compensation costs, such as compensation reductions and management of work schedules to reduce overtime costs and (v) negotiating more favorable payment terms with certain of our larger vendors and proactively managing our portfolio of accounts receivable.
-5-
PROPETRO HOLDING CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation (Continued)
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, separated by reportable segment and all other, from which the Company generates its revenue.
Pressure Pumping — Pressure pumping consists of downhole pumping services, which includes hydraulic fracturing (inclusive of acidizing services) and cementing.
Hydraulic fracturing 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 have one performance obligation, contracted total stages, satisfied over time. We recognize revenue over time using a progress output method, 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 faithfully depicts how our hydraulic fracturing services are transferred to our customers over time.
Acidizing, which is part of our hydraulic fracturing operating segment, involves a well-stimulation technique where acid is 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 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.
The transaction price for each performance obligation for all our pressure pumping services is fixed per our contracts with our customers.
All Other— All other consists of our coil tubing, drilling and flowback, which are all downhole well stimulation and completion/remedial services. The performance obligation for each of the services has a fixed transaction price which is satisfied at a point-in-time upon completion of the service when control is transferred to the customer. Accordingly, we recognize revenue at a point-in-time, upon completion of the service and transfer of control to the customer.
Accounts Receivable
Note 2 - Recently Issued Accounting Standards
Recently Issued Accounting Standards Adopted in 2019
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2016-02, Leases. This new lease standard introduces a lessee model that brings most leases on the balance sheet. This new standard increases transparency and comparability by recognizing a lessee’s rights and obligations resulting from leases by recording them on the balance sheet as Right of Use ("ROU") Assets and Lease Liabilities. Leases will be classified as either finance or operating, which will impact the pattern of expense recognition on the income statement. This ASU also requires additional qualitative and quantitative disclosures to better enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. Effective January 1, 2019, we adopted the new leases standard using the modified retrospective transition method and electing to account for comparative periods under legacy GAAP. We also elected other practical expedients provided by the new leases standard, the short-term lease recognition practical expedient in which leases with an initial term of 12 months or less will not be recognized on the balance sheet and the practical expedient to not separate lease and non-lease components for our real estate class of leased assets. See Note 9 for additional disclosures relating to our adoption of ASU 2016-02.
-6-
PROPETRO HOLDING CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 - Recently Issued Accounting Standards (Continued)
Recently Issued Accounting Standards Not Yet Adopted in 2019
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduces a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable and lease receivables. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which clarified that receivables arising from operating leases are not within the scope of ASC 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost, and should be accounted for in accordance with ASC 842. ASU 2016-13 and ASU 2018-19 are effective for annual periods beginning after December 15, 2019. Effective January 1, 2020, the Company adopted ASU 2016-13 using the modified-retrospective approach. The adoption of this guidance did not materially affect our consolidated financial statements. While there was no material impact to the financial statements as a result of adoption of ASU 2016-13, as a result of deteriorating economic conditions for the oil and gas industry brought on by the COVID-19 pandemic, during the first quarter of 2020 the Company recorded a provision for credit losses of $4.3 million.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test. As a result, under this ASU, an entity would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, although the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This ASU is effective for impairment tests in fiscal years beginning after December 15, 2019, on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance did not materially affect the Company's condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. The Company adopted ASU 2018-13 on January 1, 2020 and determined the adoption of this standard did not impact the Company’s condensed consolidated financial statements.
In December 2019, the FASB issued ASU No 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company does not expect ASU 2019-12 to have a material effect on the Company’s condensed consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform, which provides temporary optional guidance to companies impacted by the transition away from the London Interbank Offered Rate (“LIBOR”). The guidance provides certain expedients and exceptions to applying GAAP in order to lessen the potential accounting burden when contracts, hedging relationships, and other transactions that reference LIBOR as a benchmark rate are modified. This guidance is effective upon issuance and expires on December 31, 2022. The Company is currently assessing the impact of the LIBOR transition and this ASU on the Company’s condensed consolidated financial statements.
Note 3 - Fair Value Measurement
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
-7-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Fair Value Measurement (Continued)
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
Our financial instruments include cash and cash equivalents, accounts receivable and accounts payable, accrued expenses and long-term debt. The estimated fair value of our financial instruments at September 30, 2019 and December 31, 2018 approximated or equaled their carrying values as reflected in our condensed consolidated balance sheets.
Assets Measured at Fair Value on a Nonrecurring Basis
No assets were measured at fair value on a nonrecurring basis at September 30, 2019 and December 31, 2018, respectively.
We generally apply fair value techniques to our reporting units on a nonrecurring basis associated with valuing potential impairment loss related to goodwill. Our estimate of the reporting unit fair value is based on a combination of income and market approaches, Level 1 and 3, respectively, in the fair value hierarchy. The income approach involves the use of a discounted cash flow method, with the cash flow projections discounted at an appropriate discount rate. The market approach involves the use of comparable public companies' market multiples in estimating the fair value. Significant assumptions include projected revenue growth, capital expenditures, utilization, gross margins, discount rates, terminal growth rates, and weight allocation between income and market approaches. If the reporting unit's carrying amount exceeds its fair value, we consider goodwill impaired, and the impairment loss is calculated and recorded in the period. There were no additions to, or disposal of, goodwill during the nine months ended September 30, 2019 and 2018. At December 31, 2018, we determined our goodwill carrying value not to be impaired as per our annual impairment test.
Note 4 - Long-Term Debt
ABL Credit Facility
Our revolving credit facility (“ABL Credit Facility”), as amended, has a total borrowing capacity of $300 million (subject to the Borrowing Base limit), with a maturity date of December 19, 2023. The ABL Credit Facility has a borrowing base, as determined monthly, of 85 % of monthly eligible accounts receivable less customary reserves (the "Borrowing Base"). The Borrowing Base as of September 30, 2019 was approximately $191.1 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) $22.5 million. Under this facility we are required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens, indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. Borrowings under the ABL Credit Facility are secured by a first priority lien and security interest in substantially all assets of the Company.
Borrowings under the ABL Credit Facility accrue interest based on a three-tier pricing grid tied to availability, and we may elect for loans to be based on either LIBOR or base rate, plus the applicable margin, which ranges from 1.75 % to 2.25 % for LIBOR loans and 0.75 % to 1.25 % for base rate loans, with a LIBOR floor of zero . The weighted average interest rate for our ABL Credit Facility for the nine months ended September 30, 2019 was 4.4 %.
In March 2020, we obtained a waiver from our lenders under the ABL Credit Facility to extend the time period for us to provide our lenders the Company’s audited financial statements for the year ended December 31, 2019 to July 31, 2020.
-8-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Long-Term Debt (Continued)
($ in thousands) |
2019 |
2018 |
||||||
ABL Credit Facility |
$ |
$ |
||||||
Total debt |
||||||||
Less current portion of long-term debt |
||||||||
Total long-term debt |
$ |
$ |
The loan origination costs relating to the ABL Credit Facility are classified as an asset in our balance sheet.
Annual Maturities — Scheduled remaining annual maturities of total debt are as follows at September 30, 2019:
($ in thousands) |
||||
2019 |
$ |
|||
2020 |
||||
2021 |
||||
2022 |
||||
2023 and thereafter |
||||
Total |
$ |
Note 5 - Reportable Segment Information
The Company has five operating segments for which discrete financial information is readily available: hydraulic fracturing (inclusive of acidizing), cementing, coil tubing, flowback, and drilling. These operating segments represent how the Chief Operating Decision Maker evaluates performance and allocates resources.
In accordance with Accounting Standards Codification ("ASC") 280—Segment Reporting, the Company has one reportable segment (pressure pumping) comprised of the hydraulic fracturing and cementing operating segments. All other operating segments and corporate administrative expense (inclusive of our total income tax expense and interest expense) are included in the ‘‘all other’’ category in the table below. Total corporate administrative expense for the three and nine months ended September 30, 2019 was $30.1 million and $87.3 million, respectively. The corporate administrative expense for the three and nine months ended September 30, 2018 was $21.6 million and $59.6 million, respectively.
Our hydraulic fracturing operating segment revenue approximated 95.7 % and 95.7 % of our pressure pumping revenue during the three and nine months ended September 30, 2019, respectively. During the three and nine months ended September 30, 2018, our hydraulic fracturing operating segment revenue approximated 94.9 % and 95.5 % of our pressure pumping revenue, respectively.
Inter-segment revenues are not material and are not shown separately in the table below.
The Company manages and assesses the performance of the reportable segment by its adjusted EBITDA (earnings before other income (expense), interest, taxes, depreciation and amortization, stock-based compensation expense, severance, impairment expense, (gain)/loss on disposal of assets and other unusual or nonrecurring expenses or (income)). A reconciliation from segment level financial information to the consolidated statement of operations is provided in the table below ($ in thousands):
-9-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5- Reportable Segment Information (Continued)
Three Months Ended September 30, 2019 |
||||||||||||
Pressure Pumping |
All Other |
Total |
||||||||||
Service revenue |
$ |
$ |
$ |
|||||||||
Adjusted EBITDA |
$ |
$ |
( |
) |
$ |
|||||||
Depreciation and amortization |
$ |
$ |
$ |
|||||||||
Goodwill at September 30, 2019 |
$ |
$ |
$ |
|||||||||
Capital expenditures |
$ |
$ |
$ |
|||||||||
Total assets at September 30, 2019 |
$ |
$ |
$ |
|||||||||
Three Months Ended September 30, 2018 |
||||||||||||
Pressure Pumping |
All Other |
Total |
||||||||||
Service revenue |
$ |
$ |
$ |
|||||||||
Adjusted EBITDA |
$ |
$ |
( |
) |
$ |
|||||||
Depreciation and amortization |
$ |
$ |
$ |
|||||||||
Goodwill at December 31, 2018 |
$ |
$ |
$ |
|||||||||
Capital expenditures |
$ |
$ |
$ |
|||||||||
Total assets at December 31, 2018 |
$ |
$ |
$ |
Nine Months Ended September 30, 2019 |
||||||||||||
Pressure Pumping |
All Other |
Total |
||||||||||
Service revenue |
$ |
$ |
$ |
|||||||||
Adjusted EBITDA |
$ |
$ |
( |
) |
$ |
|||||||
Depreciation and amortization |
$ |
$ |
$ |
|||||||||
Goodwill at September 30, 2019 |
$ |
$ |
$ |
|||||||||
Capital expenditures |
$ |
$ |
$ |
|||||||||
Total assets at September 30, 2019 |
$ |
$ |
$ |
|||||||||
Nine Months Ended September 30, 2018 |
||||||||||||
Pressure Pumping |
All Other |
Total |
||||||||||
Service revenue |
$ |
$ |
$ |
|||||||||
Adjusted EBITDA |
$ |
$ |
( |
) |
$ |
|||||||
Depreciation and amortization |
$ |
$ |
$ |
|||||||||
Goodwill at December 31, 2018 |
$ |
$ |
$ |
|||||||||
Capital expenditures |
$ |
$ |
$ |
|||||||||
Total assets at December 31, 2018 |
$ |
$ |
$ |
-10-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5- Reportable Segment Information (Continued)
Reconciliation of net income (loss) to adjusted EBITDA ($ in thousands):
Three Months Ended September 30, 2019 |
||||||||||||
Pressure Pumping |
All Other |
Total |
||||||||||
Net income (loss) |
$ |
$ |
( |
) |
$ |
|||||||
Depreciation and amortization |
||||||||||||
Interest expense |
||||||||||||
Income tax expense |
||||||||||||
Loss on disposal of assets |
||||||||||||
Stock-based compensation |
||||||||||||
Other expense |
||||||||||||
Other general and administrative expense(1)
|
||||||||||||
Retention bonus and severance expense |
||||||||||||
Adjusted EBITDA |
$ |
$ |
( |
) |
$ |
|||||||
Three Months Ended September 30, 2018 |
||||||||||||
Pressure Pumping |
All Other |
Total |
||||||||||
Net income (loss) |
$ |
$ |
( |
) |
$ |
|||||||
Depreciation and amortization |
||||||||||||
Interest expense |
||||||||||||
Income tax expense |
||||||||||||
Loss on disposal of assets |
||||||||||||
Stock-based compensation |
||||||||||||
Other expense |
||||||||||||
Deferred IPO bonus expense |
||||||||||||
Adjusted EBITDA |
$ |
$ |
( |
) |
$ |
-11-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5- Reportable Segment Information (Continued)
Nine Months Ended September 30, 2019 |
||||||||||||
Pressure Pumping |
All Other |
Total |
||||||||||
Net income (loss) |
$ |
$ |
( |
) |
$ |
|||||||
Depreciation and amortization |
||||||||||||
Interest expense |
||||||||||||
Income tax expense |
||||||||||||
Loss on disposal of assets |
||||||||||||
Stock-based compensation |
||||||||||||
Other expense |
||||||||||||
Other general and administrative expense (1)
|
||||||||||||
Deferred IPO, retention bonus and severance expense |
||||||||||||
Adjusted EBITDA |
$ |
$ |
( |
) |
$ |
|||||||
Nine Months Ended September 30, 2018 |
||||||||||||
Pressure Pumping |
All Other |
Total |
||||||||||
Net income (loss) |
$ |
$ |
( |
) |
$ |
|||||||
Depreciation and amortization |
||||||||||||
Interest expense |
||||||||||||
Income tax expense |
||||||||||||
Loss (gain) on disposal of assets |
( |
) |
||||||||||
Stock-based compensation |
||||||||||||
Other expense |
||||||||||||
Other general and administrative expense (1)
|
||||||||||||
Deferred IPO bonus expense |
||||||||||||
Adjusted EBITDA |
$ |
$ |
( |
) |
$ |
(1) |
Other general and administrative expense primarily relates to professional fees paid to external consultants in connection with the Company's expanded audit committee review and advisory services in 2019, and legal settlement in 2018. |
-12-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Net Income Per Share
Basic net income per common share is computed by dividing the net income relevant to the common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income 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.
Three Months Ended September 30, |
||||||||
2019 |
2018 |
|||||||
Numerator (both basic and diluted) |
||||||||
Net income relevant to common stockholders |
$ |
$ |
||||||
Denominator |
||||||||
Denominator for basic income per share |
||||||||
Dilutive effect of stock options |
||||||||
Dilutive effect of performance share units |
||||||||
Dilutive effect of restricted stock units |
||||||||
Denominator for diluted income per share |
||||||||
Basic income per common share |
$ |
$ |
||||||
Diluted income per common share |
$ |
$ |
Nine Months Ended September 30, |
||||||||
2019 |
2018 |
|||||||
Numerator (both basic and diluted) |
||||||||
Net income relevant to common stockholders |
$ |
$ |
||||||
Denominator |
||||||||
Denominator for basic income per share |
||||||||
Dilutive effect of stock options |
||||||||
Dilutive effect of performance share units |
||||||||
Dilutive effect of restricted stock units |
||||||||
Denominator for diluted income per share |
||||||||
Basic income per common share |
$ |
$ |
||||||
Diluted income per common share |
$ |
$ |
There were no anti-dilutive stock options, performance share units and restricted stock units during the nine months ended September 30, 2019 and 2018. A total of 702,170 stock options outstanding as of September 30, 2019 was not included in our calculation of diluted income per common share for the three months ended September 30, 2019 because the options' exercise price was greater than the average market price of our common shares.
-13-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Stock-Based Compensation
Stock Options
A summary of the stock option activity for the nine months ended September 30, 2019 is presented below.
Number of Shares |
Weighted Average Exercise Price |
||||||
Outstanding at January 1, 2019 |
$ |
||||||
Granted |
$ |
||||||
Exercised |
( |
) |
$ |
||||
Forfeited |
( |
) |
$ |
||||
Expired |
$ |
||||||
Outstanding at September 30, 2019 |
$ |
||||||
Exercisable at September 30, 2019 |
$ |
There were no new stock option grants during the nine months ended September 30, 2019 and 2018. As of September 30, 2019, the aggregate intrinsic value for our outstanding stock options was $20.8 million, and the aggregate intrinsic value for our exercisable stock options was $20.8 million. The aggregate intrinsic value for the exercised stock options during the nine months ended September 30, 2019 was $2.9 million. The remaining exercise period for the outstanding and exercisable stock options as of September 30, 2019, was 5.1 years and 5.0 years, respectively. For the nine months ended September 30, 2019 and 2018, we recognized $0.4 million and $0.5 million, respectively, in stock compensation expense related to these stock option awards.
Restricted Stock Units
During the nine months ended September 30, 2019, we granted a total of 385,661 restricted stock units ("RSUs") to employees, officers and directors pursuant to the ProPetro Holding Corp. 2017 Incentive Award Plan (the "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. During the nine months ended September 30, 2019 and 2018, the recorded stock compensation expense for all RSUs was $2.3 million and $2.0 million, respectively. As of September 30, 2019, the total unrecognized compensation expense for all RSUs was approximately $7.4 million, and is expected to be recognized over a weighted average period of approximately 2.0 years.
Number of Shares |
Weighted Average Grant Date Fair Value |
||||||
Outstanding at January 1, 2019 |
$ |
||||||
Granted |
$ |
||||||
Vested |
( |
) |
$ |
||||
Forfeited |
( |
) |