10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 5, 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, 2020
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 | ☐ | |||||||||||||||
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 31, 2020, was 100,912,777 .
PROPETRO HOLDING CORP.
TABLE OF CONTENTS
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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 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 facts contained in this Form 10-Q are forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended (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 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 effects of consolidation on our customers or competitors;
•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® hydraulic fracturing equipment 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 Shareholder Derivative Lawsuit (each defined herein);
-ii-
•the timing and outcome of, including potential expense associated with, the U.S. Securities and Exchange Commission ("SEC") pending investigation;
•the potential impact on our business and stock price of any announcements regarding the SEC's pending investigation, the Logan Lawsuit or the Shareholder Derivative Lawsuit;
•the material weaknesses in our internal controls over financial reporting and disclosure controls and procedures, as well as the implementation and effectiveness of the Company's remediation plan described under Part I, Item 4, “Controls and Procedures” in this Form 10-Q; 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 our Form 10-K for the year ended December 31, 2019, 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 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 Form 10-K.
-iii-
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
September 30, 2020 | December 31, 2019 | |||||||||||||
ASSETS | ||||||||||||||
CURRENT ASSETS: | ||||||||||||||
Cash and cash equivalents | $ | $ | ||||||||||||
Accounts receivable - net of allowance for credit losses of $ |
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Inventories | ||||||||||||||
Prepaid expenses | ||||||||||||||
Other current assets | ||||||||||||||
Total current assets | ||||||||||||||
PROPERTY AND EQUIPMENT - net of accumulated depreciation | ||||||||||||||
OPERATING LEASE RIGHT-OF-USE ASSETS |
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OTHER NONCURRENT ASSETS: |
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Goodwill | ||||||||||||||
Other noncurrent assets | ||||||||||||||
Total other noncurrent assets | ||||||||||||||
TOTAL ASSETS | $ | $ | ||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||
CURRENT LIABILITIES: |
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Accounts payable | $ | $ | ||||||||||||
Operating lease liabilities | ||||||||||||||
Finance lease liabilities | ||||||||||||||
Accrued and other current liabilities | ||||||||||||||
Accrued interest payable | ||||||||||||||
Total current liabilities | ||||||||||||||
DEFERRED INCOME TAXES | ||||||||||||||
LONG-TERM DEBT | ||||||||||||||
NONCURRENT OPERATING LEASE LIABILITIES | ||||||||||||||
Total liabilities | ||||||||||||||
COMMITMENTS AND CONTINGENCIES (Note 10) | ||||||||||||||
SHAREHOLDERS’ EQUITY: | ||||||||||||||
Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital | ||||||||||||||
Retained earnings | ||||||||||||||
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, | |||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
REVENUE -
|
$ | $ | $ | $ | ||||||||||||||||||||||
COSTS AND EXPENSES | ||||||||||||||||||||||||||
Cost of services (exclusive of depreciation and amortization) |
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General and administrative (inclusive of stock-based compensation) | ||||||||||||||||||||||||||
Depreciation and amortization | ||||||||||||||||||||||||||
Impairment expense | ||||||||||||||||||||||||||
Loss on disposal of assets | ||||||||||||||||||||||||||
Total costs and expenses | ||||||||||||||||||||||||||
OPERATING INCOME (LOSS) | ( |
( |
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OTHER EXPENSE: | ||||||||||||||||||||||||||
Interest expense | ( |
( |
( |
( |
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Other expense | ( |
( |
( |
( |
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Total other expense | ( |
( |
( |
( |
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INCOME (LOSS) BEFORE INCOME TAXES | ( |
( |
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INCOME TAX (EXPENSE) BENEFIT | ( |
( |
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NET INCOME (LOSS) | $ | ( |
$ | $ | ( |
$ | ||||||||||||||||||||
NET INCOME (LOSS) 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 STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||||||
Shares | Amount | Additional Paid-In Capital | Retained Earnings | Total | ||||||||||||||||||||||||||||
BALANCE - January 1, 2020 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
Stock-based compensation cost | — | — | — | |||||||||||||||||||||||||||||
Issuance of equity awards, net | — | — | — | |||||||||||||||||||||||||||||
Tax withholdings paid for net settlement of equity awards | — | — | ( |
— | ( |
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Net loss | — | — | — | ( |
( |
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BALANCE - March 31, 2020 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
Stock-based compensation cost | — | — | — | |||||||||||||||||||||||||||||
Issuance of equity awards, net | — | — | — | |||||||||||||||||||||||||||||
Tax withholdings paid for net settlement of equity awards | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Net loss | — | — | — | ( |
( |
|||||||||||||||||||||||||||
BALANCE - June 30, 2020 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
Stock-based compensation cost | — | — | — | |||||||||||||||||||||||||||||
Issuance of equity awards, net | — | — | — | |||||||||||||||||||||||||||||
Tax withholdings paid for net settlement of equity awards | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Net loss | — | — | — | ( |
( |
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BALANCE - September 30, 2020 | $ | $ | $ | $ |
Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||||||
Shares | Amount | Additional Paid-In Capital | Retained Earnings (Accumulated Deficit) | Total | ||||||||||||||||||||||||||||
BALANCE - January 1, 2019 | $ | $ | $ | ( |
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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 | $ | $ | $ | $ |
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, | ||||||||||||||
2020 | 2019 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||
Net income (loss) | $ | ( |
$ | |||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||
Depreciation and amortization | ||||||||||||||
Impairment expense | ||||||||||||||
Deferred income tax expense (benefit) | ( |
|||||||||||||
Amortization of deferred debt issuance costs | ||||||||||||||
Stock-based compensation | ||||||||||||||
Provision for credit losses | ||||||||||||||
Loss on disposal of assets | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||
Accounts receivable | ( |
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Other current assets | ||||||||||||||
Inventories | ||||||||||||||
Prepaid expenses | ||||||||||||||
Accounts payable | ( |
( |
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Accrued and other current liabilities | ( |
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Accrued interest | ( |
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Net cash provided by operating activities | ||||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||
Capital expenditures | ( |
( |
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Proceeds from sale of assets | ||||||||||||||
Net cash used in investing activities | ( |
( |
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CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||
Proceeds from borrowings | ||||||||||||||
Repayments of borrowings | ( |
( |
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Payment of finance lease obligation | ( |
( |
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Repayments of insurance financing | ( |
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Proceeds from exercise of equity awards | ||||||||||||||
Tax withholdings paid for net settlement of equity awards | ( |
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Net cash provided by (used in) financing activities | ( |
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NET DECREASE IN CASH AND CASH EQUIVALENTS | ( |
( |
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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 limitations, business closures and the institution of quarantining and other restrictions on movement, business operations or gathering in many communities. 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. The slowdown in global economic activity attributable to the COVID-19 pandemic has resulted in a dramatic decline in the demand for energy, and contributed to the continuous depressed crude oil prices experienced starting early March 2020.
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 October 31, 2020, the WTI price for a barrel of crude oil was approximately $36.
If the market continues to be depressed, the aforementioned factors are 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) managing our compensation related costs and (v) negotiating more favorable payment terms with certain of our larger vendors and proactively managing our portfolio of accounts receivable.
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 into our one reportable segment and "all other" category, 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.
-5-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation (Continued)
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. In addition, certain of our hydraulic fracturing equipment is entitled to daily idle fee charges if a customer were to idle committed hydraulic fracturing equipment. The Company recognizes revenue related to idle 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 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.
-6-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation (Continued)
($ in thousands) | |||||
Balance - January 1, 2020 | $ | ||||
Provision for credit losses during the period | |||||
Provision for credit losses no longer required | ( |
||||
Balance - September 30, 2020 | $ |
Note 2 - Recently Issued Accounting Standards
Recently Issued Accounting Standards Adopted in 2020
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 Accounting Standards Codification ("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, which allows for a cumulative-effect adjustment to the condensed consolidated balance sheet as of the beginning of the first reporting period in which the guidance is effective. Periods prior to the adoption date that are presented for comparative purposes are not adjusted. The Company continuously evaluates customers based on risk characteristics, such as historical losses and current economic conditions. Due to the cyclical nature of the oil and gas industry, the Company often evaluates its customers’ estimated losses on a combination of historical losses and on case-by-case basis. There was no material impact to our condensed consolidated financial statements as a result of adoption of ASU 2016-13.
In August 2018, the FASB issued ASU No. 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 January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): 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. Effective January 1, 2020, we adopted this guidance and the adoption did not materially affect the Company's condensed consolidated financial statements. See Note 3 for additional disclosures relating to our goodwill impairment.
Recently Issued Accounting Standards Not Yet Adopted in 2020
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
-7-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 - Recently Issued Accounting Standards (Continued)
Note 3 - Fair Value Measurement
Fair value 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.
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
Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued and other current liabilities, and long-term debt. The estimated fair value of our financial instruments at September 30, 2020 and December 31, 2019 approximated or equaled their carrying values as reflected in our condensed consolidated balance sheets.
Assets Measured at Fair Value on a Nonrecurring Basis
($ in thousands)
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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, 2020: | ||||||||||||||||||||||||||||||||
Property and equipment, net | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Goodwill | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
December 31, 2019: | ||||||||||||||||||||||||||||||||
Property and equipment, net | $ | $ | $ | $ | $ | ( |
||||||||||||||||||||||||||
Goodwill | $ | $ | $ | $ | $ |
In the first quarter of 2020, the negative future near-term outlook resulting from the continued idling of our Permian drilling assets and current market prices were indicative of potential impairment, resulting in the Company comparing the
-8-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Fair Value Measurement (Continued)
carrying value of the Permian drilling assets with its estimated fair value. In the first quarter of 2020, we determined that the carrying value of the Permian drilling assets was greater than its estimated fair value, accordingly impairment expense of $1.1 million was recorded for our Permian drilling assets during the nine months ended September 30, 2020.
In 2019, the Company entered an agreement with its equipment manufacturer granting the Company the option to purchase additional 108,000 hydraulic horsepower (“HHP”) of DuraStim® equipment, with the purchase option expiring at different times through July 31, 2022, as amended. The option fee of $6.1 million, classified as a deposit for property and equipment as part of our pressure pumping reportable segment, has been fully impaired and written off in the first quarter of 2020 because it was not probable that the Company will exercise the option to purchase the equipment given the current depressed crude oil prices and other market conditions that have resulted in a decline in the demand for our hydraulic fracturing services.
The total non-cash property and equipment impairment charges recorded during the nine months ended September 30, 2020 and 2019 in our hydraulic fracturing and drilling segments was $7.2 million and $0 , 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, 2020 and 2019. In the first quarter of 2020, the depressed crude oil prices and crude oil storage challenges faced in the U.S. oil and gas industry triggered the Company to perform an interim goodwill impairment test, and as a result, we compared the carrying value of the goodwill in our hydraulic fracturing reporting unit with the estimated fair value. Our impairment test also considered other relevant factors, including market capitalization and market participants' view of the oil and gas industry in reaching our conclusion that that carrying value of our goodwill in our pressure pumping reportable segment of $9.4 million was fully impaired during the first quarter of 2020. Accordingly, we have recorded a goodwill impairment expense of $9.4 million during the nine months ended September 30, 2020. There was no goodwill impairment expense during the three and nine months ended September 30, 2019.
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 of 85 % of monthly eligible accounts receivable less customary reserves (the "Borrowing Base"), as redetermined monthly. The Borrowing Base as of September 30, 2020 was approximately $35.3 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) $22.5 million. Under this facility we are required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens, indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. Borrowings under the ABL Credit Facility are secured by a first priority lien and security interest in substantially all assets of the Company.
Borrowings under the ABL Credit Facility accrue interest based on a three-tier pricing grid tied to availability, and we may elect for loans to be based on either LIBOR or base rate, plus the applicable margin, which ranges from 1.75 % to 2.25 % for LIBOR loans and 0.75 % to 1.25 % for base rate loans, with a LIBOR floor of zero .
The loan origination costs relating to the ABL Credit Facility are classified as an asset in our balance sheet. The weighted average interest rate for our ABL Credit Facility for the nine months ended September 30, 2020 was 3.6 %.
-9-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Long-Term Debt (Continued)
($ in thousands) | ||||||||||||||
2020 | 2019 | |||||||||||||
ABL Credit Facility | $ | $ | ||||||||||||
Total debt | ||||||||||||||
Less current portion of long-term debt | ||||||||||||||
Total long-term debt | $ | $ |
Note 5 - Reportable Segment Information
The Company has three operating segments for which discrete financial information is readily available: hydraulic fracturing (inclusive of acidizing), cementing and coiled tubing. In March 2020, the Company shut down its flowback operating segment and subsequently disposed of the assets for approximately $1.6 million. In September 2020, the Company disposed of all of its drilling rigs and ancillary assets for approximately $0.5 million. These operating segments represent how the Chief Operating Decision Maker evaluates performance and allocates resources.
In accordance with 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, 2020 was $7.0 million and $27.9 million, respectively. The corporate administrative expense for the three and nine months ended September 30, 2019 was $30.1 million and $87.3 million, respectively.
Our hydraulic fracturing operating segment revenue approximated 95.2 % and 94.0 % of our pressure pumping revenue during the three and nine months ended September 30, 2020, respectively. During the three and nine months ended September 30, 2019, our hydraulic fracturing operating segment revenue approximated 95.7 % and 95.7 % of our pressure pumping revenue, respectively.
Inter-segment revenues are not material and are not shown separately in the table below.
The Company manages and assesses the performance of the reportable segment by its adjusted EBITDA (earnings before other income (expense), interest expense, income taxes, depreciation and amortization, stock-based compensation expense, severance, impairment expense, (gain)/loss on disposal of assets and other unusual or nonrecurring expenses or (income)). A reconciliation from segment level financial information to the consolidated statement of operations is provided in the table below ($ in thousands):
-10-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5- Reportable Segment Information (Continued)
Three Months Ended September 30, 2020 | ||||||||||||||||||||
Pressure Pumping | All Other | Total | ||||||||||||||||||
Service revenue | $ | $ | $ | |||||||||||||||||
Adjusted EBITDA | $ | $ | ( |
$ | ||||||||||||||||
Depreciation and amortization | $ | $ | $ | |||||||||||||||||
Capital expenditures | $ | $ | $ | |||||||||||||||||
Total assets at September 30, 2020 | $ | $ | $ | |||||||||||||||||
Three Months Ended September 30, 2019 | ||||||||||||||||||||
Pressure Pumping | All Other | Total | ||||||||||||||||||
Service revenue | $ | $ | $ | |||||||||||||||||
Adjusted EBITDA | $ | $ | ( |
$ | ||||||||||||||||
Depreciation and amortization | $ | $ | $ | |||||||||||||||||
Goodwill at December 31, 2019 | $ | $ | $ | |||||||||||||||||
Capital expenditures | $ | $ | $ | |||||||||||||||||
Total assets at December 31, 2019 | $ | $ | $ |
Nine Months Ended September 30, 2020 | ||||||||||||||||||||
Pressure Pumping | All Other | Total | ||||||||||||||||||
Service revenue | $ | $ | $ | |||||||||||||||||
Adjusted EBITDA | $ | $ | ( |
$ | ||||||||||||||||
Depreciation and amortization | $ | $ | $ | |||||||||||||||||
Capital expenditures | $ | $ | $ | |||||||||||||||||
Total assets at September 30, 2020 | $ | $ | $ | |||||||||||||||||
Nine Months Ended September 30, 2019 | ||||||||||||||||||||
Pressure Pumping | All Other | Total | ||||||||||||||||||
Service revenue | $ | $ | $ | |||||||||||||||||
Adjusted EBITDA | $ | $ | ( |
$ | ||||||||||||||||
Depreciation and amortization | $ | $ | $ | |||||||||||||||||
Goodwill at December 31, 2019 | $ | $ | $ | |||||||||||||||||
Capital expenditures | $ | $ | $ | |||||||||||||||||
Total assets at December 31, 2019 | $ | $ | $ |
-11-
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, 2020 | ||||||||||||||||||||
Pressure Pumping | All Other | Total | ||||||||||||||||||
Net loss | $ | ( |
$ | ( |
$ | ( |
||||||||||||||
Depreciation and amortization | ||||||||||||||||||||
Interest expense | ||||||||||||||||||||
Income tax benefit | ( |
( |
||||||||||||||||||
Loss on disposal of assets | ||||||||||||||||||||
Stock-based compensation | ||||||||||||||||||||
Other expense | ||||||||||||||||||||
Other general and administrative expense(1)
|
||||||||||||||||||||
Severance expense | ||||||||||||||||||||
Adjusted EBITDA | $ | $ | ( |
$ | ||||||||||||||||
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 | $ | $ | ( |
$ |
-12-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5- Reportable Segment Information (Continued)
Nine Months Ended September 30, 2020 | ||||||||||||||||||||
Pressure Pumping | All Other | Total | ||||||||||||||||||
Net loss | $ | ( |
$ | ( |
$ | ( |
||||||||||||||
Depreciation and amortization | ||||||||||||||||||||
Impairment expense | ||||||||||||||||||||
Interest expense | ||||||||||||||||||||
Income tax benefit | ( |
( |
||||||||||||||||||
Loss on disposal of assets | ||||||||||||||||||||
Stock-based compensation | ||||||||||||||||||||
Other expense | ||||||||||||||||||||
Other general and administrative expense (1)
|
||||||||||||||||||||
Retention bonus and severance expense | ||||||||||||||||||||
Adjusted EBITDA | $ | $ | ( |
$ | ||||||||||||||||
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 | $ | $ | ( |
$ |
(1)Other general and administrative expense relates to nonrecurring professional fees paid to external consultants in connection with the Company's expanded audit committee review, SEC investigation and shareholder litigation. All nonrecurring professional fees incurred after the end of June 2020 are in connection with the pending SEC investigation and shareholder litigation.
-13-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - 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 (loss) 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, | ||||||||||||||
2020 | 2019 | |||||||||||||
Numerator (both basic and diluted) | ||||||||||||||
Net income (loss) relevant to common stockholders | $ | ( |
$ | |||||||||||
Denominator | ||||||||||||||
Denominator for basic income (loss) per share | ||||||||||||||
Dilutive effect of stock options | ||||||||||||||
Dilutive effect of performance share units | ||||||||||||||
Dilutive effect of restricted stock units | ||||||||||||||
Denominator for diluted income (loss) per share | ||||||||||||||
Basic income (loss) per share | $ | ( |
$ | |||||||||||
Diluted income (loss) per share | $ | ( |
$ |
Nine Months Ended September 30, |
||||||||||||||
2020 | 2019 | |||||||||||||
Numerator (both basic and diluted) | ||||||||||||||
Net income (loss) relevant to common stockholders | $ | ( |
$ | |||||||||||
Denominator | ||||||||||||||
Denominator for basic income (loss) per share | ||||||||||||||
Dilutive effect of stock options | ||||||||||||||
Dilutive effect of performance share units | ||||||||||||||
Dilutive effect of restricted stock units | ||||||||||||||
Denominator for diluted income (loss) per share | ||||||||||||||
Basic income (loss) per share | $ | ( |
$ | |||||||||||
Diluted income (loss) per share | $ | ( |
$ |
-14-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands) | ||||||||||||||
2020 | 2019 | |||||||||||||
Stock options | ||||||||||||||
Restricted stock units | ||||||||||||||
Performance stock units | ||||||||||||||
Total |
Note 7 - Stock-Based Compensation
Stock Options
There were no new stock option grants during the nine months ended September 30, 2020. As of September 30, 2020, the aggregate intrinsic value for our outstanding stock options was $2.5 million, and the aggregate intrinsic value for our exercisable stock options was $2.5 million. The remaining exercise period for the outstanding and exercisable stock options as of September 30, 2020, was 3.0 years and 2.9 years, respectively.
Number of Shares | Weighted Average Exercise Price |
|||||||||||||
Outstanding at January 1, 2020 | $ | |||||||||||||
Granted | $ | |||||||||||||
Exercised | $ | |||||||||||||
Forfeited | ( |
$ |