10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 3, 2022
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, 2022
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 November 1, 2022, was 114,554,085 .
PROPETRO HOLDING CORP.
TABLE OF CONTENTS
Page | |||||||||||
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this "Form 10-Q") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts contained in this Form 10-Q are forward-looking statements. Forward-looking statements are all statements other than statements of historical facts, and give our expectations or forecasts of future events as of the effective date of this Form 10-Q. Words such as "may," "could," "plan," "project," "budget," "predict," "pursue," "target," "seek," "objective," "believe," "expect," "anticipate," "intend," "estimate," "will," "should" and similar expressions are generally 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 any world health events and armed conflict, including the coronavirus ("COVID-19") pandemic and the Russian-Ukraine war and associated repercussions to supply and demand for oil and gas and the economy generally;
•the actions taken by the members of the Organization of the Petroleum Exporting Countries ("OPEC") and Russia (together with OPEC and other allied producing countries, "OPEC+") with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with supply limitations;
•actions taken by the Biden Administration, such as executive orders or new regulations, that may negatively impact the future production of oil and natural gas in the United States and may adversely affect our future operations;
•the level of production and resulting market prices for crude oil, natural gas and other hydrocarbons;
•changes in general economic and geopolitical conditions, including increasing interest rates, the rate of inflation and potential economic recession;
•the effects of existing and future laws and governmental regulations (or the interpretation thereof) on us and our customers;
•cost increases and supply chain constraints related to our services;
•competitive conditions in our industry;
•our ability to attract and retain employees;
•changes in the long-term supply of, and demand for, oil and natural gas;
•actions taken by our customers, suppliers, competitors and third-party operators and the possible loss of customers or work to our competitors;
•technological changes, including lower emissions oilfield services equipment and similar advancements;
•changes in the availability and cost of capital;
•our ability to successfully implement our business plan, including potential mergers and acquisitions;
•large or multiple customer defaults, including defaults resulting from actual or potential insolvencies;
•the effects of consolidation on our customers or competitors;
•the price and availability of debt and equity financing (including increasing interest rates) for the Company and our customers;
•our ability to complete growth projects on time and on budget;
•operational challenges from 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;
•regulatory and related policy actions intended by federal, state and/or local governments to reduce fossil fuel use and associated carbon emissions, or to drive the substitution of renewable forms of energy for oil and gas, may over time reduce demand for oil and gas and therefore the demand for our services;
-ii-
•new or expanded regulations that materially limit our customers’ access to federal and state lands for oil and gas development, thereby reducing demand for our services in the affected areas;
•growing demand for electric vehicles that result in reduced demand for gasoline and therefore the demand for our services;
•our ability to successfully implement technological developments and enhancements, including our new Tier IV DGB and electric hydraulic fracturing equipment, and other lower-emissions equipment we may acquire or that may be sought by our customers;
•operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control, which risks may be self-insured, or may not be fully covered under our insurance programs;
•acts of terrorism, war or political or civil unrest in the United States or elsewhere; and
•the effects of current and future litigation.
Whether actual results and developments will conform with our expectations and predictions contained in forward-looking statements is subject to a number of risks and uncertainties which could cause actual results to differ materially from such expectations and predictions, including, without limitation, in addition to those specified in the text surrounding such statements, the risks described under Part II, Item 1A, "Risk Factors" in this Form 10-Q and elsewhere throughout this report, the risks described under Part I, Item 1A, "Risk Factors" in our Form 10-K for the year ended December 31, 2021, filed with the SEC (the "Form 10-K") and elsewhere throughout that report, and other risks, many of which are beyond our control.
Readers are cautioned not to place undue reliance on our forward-looking statements, which are made as of the date of this Form 10-Q. We do not undertake, and expressly disclaim, any duty to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable securities laws. Investors are also advised to carefully review and consider the various risks and other disclosures discussed in our SEC reports, including the risk factors described in the Form 10-K.
-iii-
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
September 30, 2022 | December 31, 2021 | |||||||||||||
ASSETS | ||||||||||||||
CURRENT ASSETS: | ||||||||||||||
Cash and cash equivalents | $ | $ | ||||||||||||
Accounts receivable - net of allowance for credit losses of $ |
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Inventories | ||||||||||||||
Prepaid expenses | ||||||||||||||
Short-term investment, net | ||||||||||||||
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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Other noncurrent assets | ||||||||||||||
Total other noncurrent assets | ||||||||||||||
TOTAL ASSETS | $ | $ | ||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||
CURRENT LIABILITIES: |
||||||||||||||
Accounts payable | $ | $ | ||||||||||||
Operating lease liabilities | ||||||||||||||
Accrued and other current liabilities | ||||||||||||||
Total current liabilities | ||||||||||||||
DEFERRED INCOME TAXES | ||||||||||||||
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 | ||||||||||||||
Accumulated deficit | ( |
( |
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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, | |||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
REVENUE - |
$ | $ | $ | $ | ||||||||||||||||||||||
COSTS AND EXPENSES | ||||||||||||||||||||||||||
Cost of services (exclusive of depreciation and amortization) | ||||||||||||||||||||||||||
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 INCOME (EXPENSE): | ||||||||||||||||||||||||||
Interest expense | ( |
( |
( |
( |
||||||||||||||||||||||
Other income (expense) | ( |
( |
||||||||||||||||||||||||
Total other income (expense) | ( |
( |
||||||||||||||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES | ( |
( |
( |
|||||||||||||||||||||||
INCOME TAX (EXPENSE) BENEFIT | ( |
|||||||||||||||||||||||||
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, 2022 | ||||||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||||||
Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Total | ||||||||||||||||||||||||||||
BALANCE - January 1, 2022 | $ | $ | $ | ( |
$ | |||||||||||||||||||||||||||
Stock-based compensation cost | — | — | — | |||||||||||||||||||||||||||||
Issuance of equity awards, net | — | |||||||||||||||||||||||||||||||
Tax withholdings paid for net settlement of equity awards | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Net income (loss) | — | — | — | |||||||||||||||||||||||||||||
BALANCE - March 31, 2022 | $ | $ | $ | ( |
$ | |||||||||||||||||||||||||||
Stock-based compensation cost | — | — | — | |||||||||||||||||||||||||||||
Issuance of equity awards, net | — | — | ||||||||||||||||||||||||||||||
Tax withholdings paid for net settlement of equity awards | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Net income (loss) | — | — | — | ( |
( |
|||||||||||||||||||||||||||
BALANCE - June 30, 2022 | $ | $ | $ | ( |
$ | |||||||||||||||||||||||||||
Stock-based compensation cost | — | — | — | |||||||||||||||||||||||||||||
Issuance of equity awards, net | — | — | ||||||||||||||||||||||||||||||
Tax withholdings paid for net settlement of equity awards | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Net income (loss) | — | — | — | |||||||||||||||||||||||||||||
BALANCE - September 30, 2022 | $ | $ | $ | ( |
$ |
Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||||||
Shares | Amount | Additional Paid-In Capital | Retained Earnings | Total | ||||||||||||||||||||||||||||
BALANCE - January 1, 2021 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
Stock-based compensation cost | — | — | — | |||||||||||||||||||||||||||||
Issuance of equity awards, net | ( |
— | ||||||||||||||||||||||||||||||
Tax withholdings paid for net settlement of equity awards | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Net income (loss) | — | — | — | ( |
( |
|||||||||||||||||||||||||||
BALANCE - March 31, 2021 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
Stock-based compensation cost | — | — | — | |||||||||||||||||||||||||||||
Issuance of equity awards, net | ( |
— | ||||||||||||||||||||||||||||||
Tax withholdings paid for net settlement of equity awards | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Proceeds from exercise of stock awards | — | — | — | |||||||||||||||||||||||||||||
Net income (loss) | — | — | — | ( |
( |
|||||||||||||||||||||||||||
BALANCE - June 30, 2021 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
Stock-based compensation cost | — | — | — | |||||||||||||||||||||||||||||
Issuance of equity awards, net | — | — | — | |||||||||||||||||||||||||||||
Proceeds from exercise of stock awards | — | — | — | |||||||||||||||||||||||||||||
Net income (loss) | — | — | — | ( |
( |
|||||||||||||||||||||||||||
BALANCE - September 30, 2021 | $ | $ | $ | $ |
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, | ||||||||||||||
2022 | 2021 | |||||||||||||
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 | ||||||||||||||
Unrealized loss on short-term investment | ||||||||||||||
Non cash income from settlement with equipment manufacturer | ( |
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Changes in operating assets and liabilities: | ||||||||||||||
Accounts receivable | ( |
( |
||||||||||||
Other current assets | ( |
|||||||||||||
Inventories | ( |
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Prepaid expenses | ||||||||||||||
Accounts payable | ||||||||||||||
Accrued and other current liabilities | ||||||||||||||
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: | ||||||||||||||
Repayments of insurance financing | ( |
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Payment of debt issuance costs | ( |
|||||||||||||
Proceeds from exercise of equity awards | ||||||||||||||
Tax withholdings paid for net settlement of equity awards | ( |
( |
||||||||||||
Net cash used in 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
Revenue Recognition
The Company’s services are sold based upon contracts with customers. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. The following is a description of the principal activities, aggregated into our one reportable segment—"Pressure Pumping," 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.
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 with our customers have one performance obligation, which is the contracted total stages, satisfied over time. We recognize revenue over time using a progress output, unit-of-work performed method, which is based on the agreed fixed transaction price and actual stages completed. We believe that recognizing revenue based on actual stages completed 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 reservation or idle fee charges if a customer were to reserve or idle committed hydraulic fracturing equipment. The Company recognizes revenue related to idle or reservation fee charges on a daily basis or monthly as the performance obligations are met.
Acidizing, which is part of our hydraulic fracturing operating segment, involves a well-stimulation technique where acid or similar chemicals are injected under pressure into formations to form or expand fissures. Our acidizing contracts have one performance obligation, satisfied at a point-in-time, upon completion of the contracted service or sale of the acid or chemical when control is transferred to the customer. Jobs for these services are typically short term in nature, with most jobs completed in less than a day. We recognize acidizing revenue at a point-in-time, upon completion of the performance obligation.
Our cementing services use pressure pumping equipment to deliver a slurry of liquid cement that is pumped down a well between the casing and the borehole. Our cementing contracts have one performance obligation, satisfied at a point-in-time, upon completion of the contracted service when control is transferred to the customer. Jobs for these services are typically short term in nature, with most jobs completed in less than a day. We recognize cementing revenue at a point-in-time, upon completion of the performance obligation.
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 coiled tubing operations, which are downhole well completion/remedial services. The performance obligation for these 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. Effective September 1, 2022, we shut down our coiled tubing operations, and disposed of all our coiled tubing assets.
-5-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation (Continued)
Accounts Receivable
Accounts receivables are stated at the amount billed and billable to customers. At September 30, 2022, and December 31, 2021, accrued revenue (unbilled receivable) included as part of our accounts receivable was $37.1 million and $19.4 million, respectively. At September 30, 2022, the transaction price allocated to the remaining performance obligation for our partially completed hydraulic fracturing operations was $42.3 million, which is expected to be completed and recognized within one month following the current period balance sheet date, in our pressure pumping reportable segment.
Allowance for Credit Losses
As of September 30, 2022, the Company had $0.2 million allowance for credit losses. Our allowance for credit losses is based on the evaluation of both our historic loss experience and the expected impact of any potential deteriorating economic conditions in the oil and gas industry. We evaluated the historic loss experience on our accounts receivable and also separately considered customers with receivable balances that could be negatively impacted by current economic developments and market conditions. While the Company has not experienced significant credit losses in the past and has not yet seen material adverse changes to the payment patterns of its customers, the Company cannot predict with any certainty the degree to which the impacts of the COVID-19 pandemic or potential economic downturn, including the potential impact of periodically adjusted borrowing base limits, level of hedged production, or unforeseen well shut-downs may affect the ability of its customers to timely pay receivables when due. Accordingly, in future periods, the Company may revise its estimates of expected credit losses.
The table below shows a summary of allowance for credit losses during the nine months ended September 30, 2022:
(in thousands) | |||||
Balance - January 1, 2022 | $ | ||||
Provision for credit losses during the period | |||||
Write-off during the period | |||||
Balance - September 30, 2022 | $ |
Note 2 - Recently Issued Accounting Standards
Note 3 - Fair Value Measurement
Fair value ("FV") is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date.
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
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PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Fair Value Measurement (Continued)
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
Assets measured at fair value on a recurring basis as of September 30, 2022 are set forth below:
(In thousands) | |||||||||||||||||||||||||||||
Estimated fair value measurements | |||||||||||||||||||||||||||||
Balance | Quoted prices in active market (Level 1) |
Significant other observable inputs (Level 2) | Significant other unobservable inputs (Level 3) | Total gains (losses) |
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September 30, 2022: | |||||||||||||||||||||||||||||
Short-term investment | $ | $ | $ | $ | $ | ( |
Short-term investment— On September 1, 2022, the Company received 2,616,460 common shares of Step Energy Services, Inc. ("STEP") with an estimated fair value of $11.9 million as part of the consideration for the sale of our coiled tubing assets to STEP. The shares were treated as an investment in equity securities measured at fair value using Level 1 inputs based on observable prices on the Toronto Stock Exchange and are shown under current assets in our condensed consolidated balance sheets. As of September 30, 2022, the fair value of the short-term investment was estimated at $8.5 million, and the unrealized loss resulting from the fluctuation in stock price was $3.3 million. Included in the unrealized loss was a loss of $0.4 million resulting from non-cash foreign currency translation. The unrealized losses resulting from stock price fluctuation and foreign currency translation are included in other income (expense) in our condensed consolidated statements of operations.
Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued and other current liabilities, and long-term debt (if any). The estimated fair value of our financial instruments at September 30, 2022 and December 31, 2021, approximated or equaled their carrying values as reflected in our condensed consolidated balance sheets.
Assets Measured at Fair Value on a Nonrecurring Basis
On September 21, 2022, the Company received equipment inventory from the manufacturer of DuraStim® hydraulic fracturing equipment in connection with its settlement of warranty claims for the DuraStim® hydraulic fracturing equipment acquired from the manufacturer. The fair value of this equipment inventory received from the manufacturer was estimated to be $2.7 million. The estimated fair value was determined using the cost approach, which represents a Level 3 in the fair value measurement hierarchy. Our fair value estimate required us to use significant unobservable inputs, including a third party valuation and assumptions related to replacement cost, among others. Accordingly, we recorded non cash income of $2.7 million, which is presented within other income (expense) in our condensed consolidated statements of operations, and the equipment inventory received included as part of our property and equipment in our condensed consolidated balance sheets. As of September 30, 2022, the remaining carrying value for the equipment inventory was $2.7 million.
-7-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Fair Value Measurement (Continued)
Note 4 - Long-Term Debt
Asset-Based Loan ("ABL") Credit Facility
Our revolving credit facility, as amended in 2018, had a total borrowing capacity of $300.0 million (subject to the borrowing base limit), with a maturity date of December 19, 2023. The revolving credit facility had a borrowing base of 85 % of monthly eligible accounts receivable less customary reserves, as redetermined monthly. The revolving credit facility, included a springing fixed charge coverage ratio to apply when excess availability was less than the greater of (i) 10 % of the lesser of the facility size or the borrowing base or (ii) $22.5 million. Borrowings under this revolving credit facility accrued interest based on a three-tier pricing grid tied to availability, and we had the option to elect for loans to be based on either LIBOR or base rate, plus the applicable margin, which ranged 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 .
Effective April 13, 2022, the Company entered into an amendment and restatement of its revolving credit facility (as amended and restated, "ABL Credit Facility"). The ABL Credit Facility decreased the borrowing capacity to $150.0 million (subject to the Borrowing Base (as defined below) limit), with the maturity date extended to April 13, 2027. The ABL Credit Facility has a borrowing base of 85 % to 90 %, depending on the credit ratings of our accounts receivable counterparties, of monthly eligible accounts receivable less customary reserves (the "Borrowing Base"), as redetermined monthly. The Borrowing Base as of September 30, 2022, was approximately $116.4 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) $10.0 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 the Secured Overnight Financing Rate ("SOFR") or the base rate, plus the applicable margin, which ranges from 1.50 % to 2.00 % for SOFR loans and 0.50 % to 1.00 % for base rate loans.
The loan origination costs relating to the ABL Credit Facility are classified as an asset in our balance sheet. There were no borrowings under the ABL credit facility or our previous revolving credit facility as of September 30, 2022 and December 31, 2021.
Note 5 - Reportable Segment Information
The Company currently has two operating segments for which discrete financial information is readily available: hydraulic fracturing (inclusive of acidizing) and cementing. These operating segments represent how the Chief Operating Decision Maker evaluates performance and allocates resources.
On September 1, 2022, the Company disposed of its coiled tubing assets (included in the "all other" category) to a subsidiary of STEP as part of a strategic repositioning. The divestiture of our coiled tubing assets did not qualify for presentation and disclosure as discontinued operations, and accordingly, we have recorded the resulting loss of approximately $13.8 million as part of our loss on disposal of assets in our consolidated statement of operations. We received approximately $2.8 million in cash and 2,616,460 common shares of STEP valued at $11.9 million as consideration for the coiled tubing assets, for total consideration of $14.6 million. The divestiture of our coiled tubing assets resulted in a reduction in the number of our current operating segments to two . The change in the number of our operating segments did not impact our reportable segment information reported for the three and nine months ended September 30, 2022 and 2021.
-8-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 - Reportable Segment Information (Continued)
In accordance with the FASB Accounting Standards Codification ("ASC") 280—Segment Reporting, the Company has one reportable segment (pressure pumping) comprised of the hydraulic fracturing and cementing operating segments. Our coiled tubing results of operations prior to the divestiture and corporate administrative expense (inclusive of our total income tax expense (benefit), other (income) and 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, 2022 was $20.4 million and $45.4 million, respectively. Total corporate administrative expense for the three and nine months ended September 30, 2021 was $13.5 million and $25.1 million, respectively.
Our hydraulic fracturing operating segment revenue approximated 91.7 % and 92.7 % of our pressure pumping revenue during the three and nine months ended September 30, 2022, respectively. During the three and nine months ended September 30, 2021, our hydraulic fracturing operating segment revenue approximated 93.4 % and 93.5 % 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 expense, income taxes, depreciation and amortization, stock-based compensation expense, severance and related expense, 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):
Three Months Ended September 30, 2022 | ||||||||||||||||||||
Pressure Pumping | All Other | Total | ||||||||||||||||||
Service revenue | $ | $ | $ | |||||||||||||||||
Adjusted EBITDA | $ | $ | ( |
$ | ||||||||||||||||
Depreciation and amortization | $ | $ | $ | |||||||||||||||||
Capital expenditures | $ | $ | $ | |||||||||||||||||
Total assets at September 30, 2022 | $ | $ | $ |
Three Months Ended September 30, 2021 | ||||||||||||||||||||
Pressure Pumping | All Other | Total | ||||||||||||||||||
Service revenue | $ | $ | $ | |||||||||||||||||
Adjusted EBITDA | $ | $ | ( |
$ | ||||||||||||||||
Depreciation and amortization | $ | $ | $ | |||||||||||||||||
Capital expenditures | $ | $ | $ | |||||||||||||||||
Total assets December 31, 2021 | $ | $ | $ |
Nine Months Ended September 30, 2022 | ||||||||||||||||||||
Pressure Pumping | All Other | Total | ||||||||||||||||||
Service revenue | $ | $ | $ | |||||||||||||||||
Adjusted EBITDA | $ | $ | ( |
$ | ||||||||||||||||
Depreciation and amortization | $ | $ | $ | |||||||||||||||||
Capital expenditures | $ | $ | $ | |||||||||||||||||
Total assets at September 30, 2022 | $ | $ | $ |
-9-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 - Reportable Segment Information (Continued)
Nine Months Ended September 30, 2021 | ||||||||||||||||||||
Pressure Pumping | All Other | Total | ||||||||||||||||||
Service revenue | $ | $ | $ | |||||||||||||||||
Adjusted EBITDA | $ | $ | ( |
$ | ||||||||||||||||
Depreciation and amortization | $ | $ | $ | |||||||||||||||||
Capital expenditures | $ | $ | $ | |||||||||||||||||
Total assets December 31, 2021 | $ | $ | $ |
Reconciliation of net income (loss) to adjusted EBITDA (in thousands):
Three Months Ended September 30, 2022 | ||||||||||||||||||||
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 (income) expense (3)
|
( |
|||||||||||||||||||
Other general and administrative expense (1)
|
||||||||||||||||||||
Severance expense | ||||||||||||||||||||
Adjusted EBITDA | $ | $ | ( |
$ | ||||||||||||||||
Three Months Ended September 30, 2021 | ||||||||||||||||||||
Pressure Pumping | All Other | Total | ||||||||||||||||||
Net income (loss) | $ | $ | ( |
$ | ( |
|||||||||||||||
Depreciation and amortization | ||||||||||||||||||||
Interest expense | ||||||||||||||||||||
Income tax benefit | ( |
( |
||||||||||||||||||
Loss on disposal of assets | ||||||||||||||||||||
Stock-based compensation | ||||||||||||||||||||
Other expense | ||||||||||||||||||||
Other general and administrative expense, (net) (1)
|
( |
( |
||||||||||||||||||
Adjusted EBITDA | $ | $ | ( |
$ |
-10-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 - Reportable Segment Information (Continued)
Nine Months Ended September 30, 2022 | ||||||||||||||||||||
Pressure Pumping | All Other | Total | ||||||||||||||||||
Net income (loss) | $ | $ | ( |
$ | ( |
|||||||||||||||
Depreciation and amortization | ||||||||||||||||||||
Impairment expense | ||||||||||||||||||||
Interest expense | ||||||||||||||||||||
Income tax benefit | ( |
( |
||||||||||||||||||
Loss (gain) on disposal of assets | ||||||||||||||||||||
Stock-based compensation | ||||||||||||||||||||
Other income (2) (3)
|
( |
( |
( |
|||||||||||||||||
Other general and administrative expense (1)
|
||||||||||||||||||||
Severance expense | ||||||||||||||||||||
Adjusted EBITDA | $ | $ | ( |
$ | ||||||||||||||||
Nine Months Ended September 30, 2021 | ||||||||||||||||||||
Pressure Pumping | All Other | Total | ||||||||||||||||||
Net income (loss) | $ | ( |
$ | ( |
$ | ( |
||||||||||||||
Depreciation and amortization | ||||||||||||||||||||
Interest expense | ||||||||||||||||||||
Income tax benefit | ( |
( |
||||||||||||||||||
Loss (gain) on disposal of assets | ( |
|||||||||||||||||||
Stock-based compensation | ||||||||||||||||||||
Other income | ( |
( |
||||||||||||||||||
Other general and administrative expense, (net) (1)
|
( |
( |
||||||||||||||||||
Severance expense | ||||||||||||||||||||
Adjusted EBITDA | $ | $ | ( |
$ |
(1)Other general and administrative expense, (net of reimbursement from insurance carriers) primarily relates to nonrecurring professional fees paid to external consultants in connection with our audit committee review, SEC investigation, shareholder litigation, legal settlement to a vendor and other legal matters, net of insurance recoveries. During the three and nine months ended September 30, 2022, we received reimbursement of approximately $3.4 million and $6.9 million, respectively, from our insurance carriers in connection with the SEC investigation and shareholder litigation. During the three and nine months ended September 30, 2021, we received reimbursement of approximately $1.4 million and $8.1 million, respectively.
(2)Includes $10.7 million of net tax refund (net of advisory fees) received in March 2022 from the Texas Comptroller of Public Accounts in connection with limited sales, excise and use tax beginning July 1, 2015 through December 31, 2018.
(3)Includes $2.7 million non cash income from fixed asset inventory received as part of a settlement of warranty claims with an equipment manufacturer and a $3.3 million unrealized loss on short-term investment.
-11-
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.
The table below shows the calculations for the three and nine months ended September 30, 2022 and 2021, (in thousands, except for per share data):
Three Months Ended September 30, | ||||||||||||||
2022 | 2021 | |||||||||||||
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 common share | $ | $ | ( |
|||||||||||
Diluted income (loss) per common share | $ | $ | ( |
Nine Months Ended September 30, | ||||||||||||||
2022 | 2021 | |||||||||||||
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 | $ | ( |
$ | ( |
-12-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Net Income (Loss) Per Share (Continued)
As shown in the table below, the following stock options, restricted stock units and performance stock units outstanding as of September 30, 2022, have not been included in the calculation of diluted income (loss) per common share for the three and nine months ended September 30, 2022 and 2021 because they will be anti-dilutive to the calculation of diluted net income (loss) per common share:
(In thousands) | Three Months Ended September 30, | |||||||||||||
2022 | 2021 | |||||||||||||
Stock options | ||||||||||||||
Restricted stock units | ||||||||||||||
Performance stock units | ||||||||||||||
Total |
(In thousands) | Nine Months Ended September 30, | |||||||||||||
2022 | 2021 | |||||||||||||
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, 2022. As of September 30, 2022, there was no aggregate intrinsic value for our outstanding or exercisable stock options because the closing stock price as of September 30, 2022 was below the cost to exercise these options. The aggregate intrinsic value for the exercised stock options during the nine months ended September 30, 2022 was approximately $2.6 million. The remaining exercise period for both the outstanding and exercisable stock options as of September 30, 2022 was approximately 2.2 years.
A summary of the stock option activity for the nine months ended September 30, 2022 is presented below (in thousands, except for weighted average price):
Number of Shares | Weighted Average Exercise Price |
|||||||||||||
Outstanding at January 1, 2022 | $ | |||||||||||||
Granted | $ | |||||||||||||
Exercised | ( |
$ | ||||||||||||
Forfeited | $ | |||||||||||||
Expired | $ | |||||||||||||
Outstanding at September 30, 2022 | $ | |||||||||||||
Exercisable at September 30, 2022 | $ |
-13-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL