10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 2, 2023
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q
______________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2023
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-38035
______________________________
(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)
Former address: 1706 South Midkiff, Midland, Texas 79701
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | |||||||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | |||||||||||||||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of the registrant’s common shares, par value $0.001 per share, outstanding at October 30, 2023, was 110,237,703 .
PROPETRO HOLDING CORP.
TABLE OF CONTENTS
Page | |||||||||||
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this "Form 10-Q") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts contained in this Form 10-Q are forward-looking statements. Forward-looking statements are all statements other than statements of historical facts, and give our expectations or forecasts of future events as of the effective date of this Form 10-Q. Words such as "may," "could," "plan," "project," "budget," "predict," "pursue," "target," "seek," "objective," "believe," "expect," "anticipate," "intend," "estimate," "will," "should" and similar expressions are generally used to identify forward-looking statements. These statements include, but are not limited to statements about our business strategy, industry, future profitability, future capital expenditures, our fleet conversion strategy and our share repurchase program. Such statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those implied or projected by the forward-looking statements. Factors that could cause our actual results to differ materially from those contemplated by such forward-looking statements include:
•changes in general economic and geopolitical conditions, including increasing interest rates, the rate of inflation and a potential economic recession;
•central bank policy actions, bank failures and associated liquidity risks and other factors;
•the severity and duration of any world events and armed conflict, including the Russia-Ukraine war, conflicts in the Israel-Gaza region and associated repercussions to supply and demand for oil and gas and the economy generally;
•the actions taken by the members of the Organization of the Petroleum Exporting Countries ("OPEC") and Russia (together with OPEC and other allied producing countries, "OPEC+") with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with supply limitations;
•actions taken by the Biden Administration, such as executive orders or new regulations, that may negatively impact the future production of oil and natural gas in the United States and may adversely affect our future operations;
•the level of production and resulting market prices for crude oil, natural gas and other hydrocarbons;
•the effects of existing and future laws and governmental regulations (or the interpretation thereof) on us, our suppliers and our customers;
•cost increases and supply chain constraints related to our services;
•competitive conditions in our industry;
•our ability to attract and retain employees;
•changes in the long-term supply of, and demand for, oil and natural gas;
•actions taken by our customers, suppliers, competitors and third-party operators and the possible loss of customers or work to our competitors;
•technological changes, including lower emissions oilfield services equipment and similar advancements;
•changes in the availability and cost of capital;
•our ability to successfully implement our business plan, including execution of potential mergers and acquisitions;
•large or multiple customer defaults, including defaults resulting from actual or potential insolvencies;
•the effects of consolidation on our customers or competitors;
•the price and availability of debt and equity financing (including increasing interest rates) for us and our customers;
•our ability to complete growth projects on time and on budget;
•increases in tax rates or types of taxes enacted that specifically impact E&P and related operations resulting in changes in the amount of taxes owed by us;
•regulatory and related policy actions intended by federal, state and/or local governments to reduce fossil fuel use and associated carbon emissions, or to drive the substitution of renewable forms of energy for oil and gas, may over time reduce demand for oil and gas and therefore the demand for our services;
•new or expanded regulations that materially limit our customers’ access to federal and state lands for oil and gas development, thereby reducing demand for our services in the affected areas;
-ii-
•growing demand for electric vehicles that result in reduced demand for gasoline and therefore the demand for our services;
•our ability to successfully implement technological developments and enhancements, including our new Tier IV DGB dual-fuel and FORCESM electric-powered hydraulic fracturing equipment, and other lower-emissions equipment we may acquire or that may be sought by our customers;
•the projected timing, purchase price and number of shares purchased under our share repurchase program, the sources of funds under the repurchase program and the impacts of the repurchase program;
•operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control, such as fires, which risks may be self-insured, or may not be fully covered under our insurance programs;
•exposure to cyber-security events which could cause operational disruptions or reputational harm;
•acts of terrorism, war or political or civil unrest in the United States or elsewhere; and
•the effects of current and future litigation.
Whether actual results and developments will conform with our expectations and predictions contained in forward-looking statements is subject to a number of risks and uncertainties which could cause actual results to differ materially from such expectations and predictions, including, without limitation, in addition to those specified in the text surrounding such statements, the risks described under Part II, Item 1A, "Risk Factors" in this Form 10-Q and elsewhere throughout this report, the risks described under Part I, Item 1A, "Risk Factors" in our Form 10-K for the year ended December 31, 2022, filed with the SEC (the "Form 10-K") and elsewhere throughout that report, and other risks, many of which are beyond our control.
Readers are cautioned not to place undue reliance on our forward-looking statements, which are made as of the date of this Form 10-Q. We do not undertake, and expressly disclaim, any duty to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable securities laws. Investors are also advised to carefully review and consider the various risks and other disclosures discussed in our SEC reports, including the risk factors described in the Form 10-K.
-iii-
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
September 30, 2023 | December 31, 2022 | |||||||||||||
ASSETS | ||||||||||||||
CURRENT ASSETS: | ||||||||||||||
Cash, cash equivalents and restricted cash | $ | $ | ||||||||||||
Accounts receivable - net of allowance for credit losses of $ |
||||||||||||||
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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FINANCE LEASE RIGHT-OF-USE ASSETS | ||||||||||||||
OTHER NONCURRENT ASSETS: |
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Goodwill | ||||||||||||||
Intangible assets - net of amortization | ||||||||||||||
Other noncurrent assets | ||||||||||||||
Total other noncurrent assets | ||||||||||||||
TOTAL ASSETS | $ | $ | ||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||
CURRENT LIABILITIES: |
||||||||||||||
Accounts payable | $ | $ | ||||||||||||
Accrued and other current liabilities | ||||||||||||||
Operating lease liabilities | ||||||||||||||
Finance lease liabilities | ||||||||||||||
Total current liabilities | ||||||||||||||
DEFERRED INCOME TAXES | ||||||||||||||
LONG-TERM DEBT | ||||||||||||||
NONCURRENT OPERATING LEASE LIABILITIES | ||||||||||||||
NONCURRENT FINANCE LEASE LIABILITIES | ||||||||||||||
Total liabilities | ||||||||||||||
COMMITMENTS AND CONTINGENCIES (Note 13) | ||||||||||||||
SHAREHOLDERS’ EQUITY: | ||||||||||||||
Preferred stock, $ |
||||||||||||||
Common stock, $ |
||||||||||||||
Additional paid-in capital | ||||||||||||||
Retained earnings (accumulated deficit) | ( |
|||||||||||||
Total shareholders’ equity | ||||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ |
See notes to condensed consolidated financial statements.
-1-
PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
REVENUE - |
$ | $ | $ | $ | ||||||||||||||||||||||
COSTS AND EXPENSES | ||||||||||||||||||||||||||
Cost of services (exclusive of depreciation and amortization) | ||||||||||||||||||||||||||
General and administrative expenses (inclusive of stock-based compensation) | ||||||||||||||||||||||||||
Depreciation and amortization | ||||||||||||||||||||||||||
Impairment expense | ||||||||||||||||||||||||||
Loss on disposal of assets | ||||||||||||||||||||||||||
Total costs and expenses | ||||||||||||||||||||||||||
OPERATING INCOME (LOSS) | ( |
|||||||||||||||||||||||||
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, 2023 | ||||||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||||||
Shares | Amount | Additional Paid-In Capital | Retained Earnings (Accumulated Deficit) | Total | ||||||||||||||||||||||||||||
BALANCE - January 1, 2023 | $ | $ | $ | ( |
$ | |||||||||||||||||||||||||||
Stock-based compensation cost | — | — | — | |||||||||||||||||||||||||||||
Issuance of equity awards, net | ( |
— | ||||||||||||||||||||||||||||||
Tax withholdings paid for net settlement of equity awards | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Net income | — | — | — | |||||||||||||||||||||||||||||
BALANCE - March 31, 2023 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
Stock-based compensation cost | — | — | — | |||||||||||||||||||||||||||||
Issuance of equity awards, net | — | — | — | |||||||||||||||||||||||||||||
Tax withholdings paid for net settlement of equity awards | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Share repurchases | ( |
( |
( |
— | ( |
|||||||||||||||||||||||||||
Excise tax on share repurchases | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Net income | — | — | — | |||||||||||||||||||||||||||||
BALANCE - June 30, 2023 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
Stock-based compensation cost | — | — | — | |||||||||||||||||||||||||||||
Issuance of equity awards, net | — | — | — | |||||||||||||||||||||||||||||
Tax withholdings paid for net settlement of equity awards | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Share repurchases | ( |
( |
( |
— | ( |
|||||||||||||||||||||||||||
Excise tax on share repurchases | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Net income | — | — | — | |||||||||||||||||||||||||||||
BALANCE - September 30, 2023 | $ | $ | $ | $ |
See notes to condensed consolidated financial statements.
-3-
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 | — | — | — | |||||||||||||||||||||||||||||
BALANCE - March 31, 2022 | $ | $ | $ | ( |
$ | |||||||||||||||||||||||||||
Stock-based compensation cost | — | — | — | |||||||||||||||||||||||||||||
Issuance of equity awards, net | — | — | ||||||||||||||||||||||||||||||
Tax withholdings paid for net settlement of equity awards | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Net 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 | — | — | — | |||||||||||||||||||||||||||||
BALANCE - September 30, 2022 | $ | $ | $ | ( |
$ |
See notes to condensed consolidated financial statements.
-4-
PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30, | ||||||||||||||
2023 | 2022 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||
Net income (loss) | $ | $ | ( |
|||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||
Depreciation and amortization | ||||||||||||||
Impairment expense | ||||||||||||||
Deferred income tax expense | ( |
|||||||||||||
Amortization of deferred debt issuance costs | ||||||||||||||
Stock-based compensation | ||||||||||||||
Loss on disposal of assets | ||||||||||||||
Unrealized loss on short-term investment | ||||||||||||||
Non cash income from settlement with equipment manufacturer | ( |
|||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||
Accounts receivable | ( |
( |
||||||||||||
Other current assets | ( |
( |
||||||||||||
Inventories | ( |
|||||||||||||
Prepaid expenses | ( |
|||||||||||||
Accounts payable | ||||||||||||||
Accrued and other current liabilities | ||||||||||||||
Accrued interest | ||||||||||||||
Net cash provided by operating activities | ||||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||
Capital expenditures | ( |
( |
||||||||||||
Proceeds from sale of assets | ||||||||||||||
Net cash used in investing activities | ( |
( |
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CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||
Proceeds from borrowings | ||||||||||||||
Repayments of borrowings | ( |
|||||||||||||
Payments on finance lease obligations | ( |
|||||||||||||
Payment of debt issuance costs | ( |
( |
||||||||||||
Proceeds from exercise of equity awards | ||||||||||||||
Tax withholdings paid for net settlement of equity awards | ( |
( |
||||||||||||
Share repurchases | ( |
|||||||||||||
Net cash used in financing activities | ( |
( |
||||||||||||
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ( |
( |
||||||||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - Beginning of period | ||||||||||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - End of period | $ | $ | ||||||||||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||||||||
Capital expenditures included in accounts payable and accrued liabilities | $ | $ |
See notes to condensed consolidated financial statements.
-5-
PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
(Unaudited)
The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the condensed consolidated balance sheets:
Nine Months Ended September 30, | |||||||||||
2023 | 2022 | ||||||||||
Summary of cash, cash equivalents and restricted cash | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Restricted cash | |||||||||||
Total cash, cash equivalents and restricted cash — End of period | $ | $ |
See notes to condensed consolidated financial statements.
-6-
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 one reportable segment—"Completion Services," from which the Company generates its revenue and an "All Other" category.
Completion Services — Completion Services consists of downhole pumping services, which include hydraulic fracturing, cementing and wireline operations.
Hydraulic fracturing is an oil well completion technique, which is part of the overall well completion process. It is a well-stimulation technique intended to optimize hydrocarbon flow paths during the completion phase of shale wellbores. The process involves the injection of water, sand and chemicals under high pressure into shale formations. Our hydraulic fracturing contracts with our customers have one performance obligation, which is the contracted total stages, satisfied over time. We recognize revenue over time using a progress output, unit-of-work performed method, which is based on the agreed fixed transaction price and actual stages completed. We believe that recognizing revenue based on actual stages completed accurately depicts how our hydraulic fracturing services are transferred to our customers over time. In addition, certain of our hydraulic fracturing equipment may be entitled to reservation fee charges if a customer were to reserve committed hydraulic fracturing equipment. The Company recognizes revenue related to reservation fee charges on a daily basis as the performance obligations are met.
Acidizing, which is part of our hydraulic fracturing operating segment, involves a well-stimulation technique where acid or similar chemicals are injected under pressure into formations to form or expand fissures. Our acidizing contracts have one performance obligation, satisfied at a point-in-time, upon completion of the contracted service or sale of the acid or chemical when control is transferred to the customer. Jobs for these services are typically short term in nature, with most jobs completed in less than a day. We recognize acidizing revenue at a point-in-time, upon completion of the performance obligation.
Our cementing services use pressure pumping equipment to deliver a slurry of liquid cement that is pumped down a well between the casing and the borehole. Our cementing contracts have one performance obligation, satisfied at a point-in-time, upon completion of the contracted service when control is transferred to the customer. Jobs for these services are typically short term in nature, with most jobs completed in less than a day. We recognize cementing revenue at a point-in-time, upon completion of the performance obligation.
Wireline services (including pumpdown) are oil well completion techniques, which are part of the well completion process. Our wireline services utilize equipment with a drum of wireline to deploy perforating guns in the well to perforate the casing, cement, and formation. Once the well is perforated, the well can be fractured. Pumpdown utilizes pressure pumping equipment to pump water into the well to deploy perforating guns attached to wireline through the lateral section of a well. Our wireline contracts with our customers have one performance obligation, which is the contracted total stages, satisfied over time. We recognize revenue over time using a progress output, unit-of-work performed method, which is based on the agreed fixed transaction price and actual stages completed. We believe that recognizing revenue based on actual stages completed accurately depicts how our wireline services are transferred to our customers over time. In addition, certain of our wireline equipment is entitled to daily equipment charges while the equipment is on the customer’s locations. The Company recognizes revenue related to daily equipment charges on a daily basis as the performance obligations are met.
The transaction price for each performance obligation for all our completion services is fixed per our contracts with our customers.
-7-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation (Continued)
Restricted Cash and Customer Cash Advances
Our restricted cash relates to cash advances received from a customer in connection with our contract with the customer to provide FORCESM electric-powered hydraulic fracturing equipment and services. The restricted cash will be used to pay for contractually agreed upon expenditures. The cash advances from the customer will be credited towards the customer’s invoice as our revenue performance obligations are met over the contract period. Our restricted cash balances as of September 30, 2023 and December 31, 2022, were $0 and $10.0 million, respectively.
The cash advances received represent contract liabilities in connection with the performance of certain completion services. The cash advance (contract liability) balances, which are included in accrued and other current liabilities in our condensed consolidated balance sheets, were $20.5 million and $10.0 million as of September 30, 2023 and December 31, 2022, respectively. During the nine months ended September 30, 2023, we recognized revenue of $4.2 million from the cash advance amount outstanding at the beginning of the period.
Accounts Receivable
Accounts receivable are stated at the amount billed and billable to customers. At September 30, 2023 and December 31, 2022, accrued revenue (unbilled receivable) included as part of our accounts receivable was $78.6 million and $51.9 million, respectively. At September 30, 2023, the transaction price allocated to the remaining performance obligation for our partially completed hydraulic fracturing and wireline operations was $40.9 million, which is expected to be completed and recognized as revenue within one month following the current period balance sheet date.
Allowance for Credit Losses
As of September 30, 2023, the Company had $0.2 million allowance for credit losses. Our allowance for credit losses is based on the evaluation of both our historic collection experience and the economic outlook for the oil and gas industry. We evaluated the historic loss experience on our accounts receivable and also separately considered customers with receivable balances that may be negatively impacted by current or future economic developments and market conditions. While the Company has not experienced significant credit losses in the past and has not yet seen material adverse changes to the payment patterns of its customers, the Company cannot predict with any certainty the degree to which the impacts of depressed economic activities, including the potential impact of periodically adjusted borrowing base limits, level of hedged production, or unforeseen well shut-downs may affect the ability of its customers to timely pay receivables when due. Accordingly, in future periods, the Company may revise its estimates of expected credit losses.
The table below shows a summary of allowance for credit losses during the nine months ended September 30, 2023:
(in thousands) | |||||
Balance - January 1, 2023 | $ | ||||
Provision for credit losses during the period | |||||
Write-off during the period | ( |
||||
Balance - September 30, 2023 | $ |
-8-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation (Continued)
Change in Accounting Estimates
Current trends in hydraulic fracturing equipment operating conditions such as larger pads, changes to job design and increased pumping hours per day have resulted in shorter useful lives for certain critical components that are included in our property and equipment assets. These recent trends necessitated a review of useful lives of our critical components like fluid ends, power ends, hydraulic fracturing units and other components in the first quarter of 2023. We determined that the estimated useful life of fluid ends is now less than one year, resulting in our determination that costs associated with the replacement of these components will no longer be capitalized, but instead recorded in inventories and amortized to cost of services over their estimated useful life. We have also shortened the estimated useful lives of power ends to two years from five years and hydraulic fracturing units to ten years from fifteen years . This change in accounting estimates was made effective January 1, 2023 and accounted for prospectively. The net effect of this change for the three and nine months ended September 30, 2023 was a $2.8 million and $10.0 million decrease in net income, or $0.02 and $0.09 per basic and diluted share, respectively.
Additionally, in connection with the review of our power ends estimated useful life, effective January 1, 2023, we are accelerating the depreciation of the remaining book value of power ends that prematurely fail. In 2022, we wrote off the remaining book value of prematurely failed and disposed of power ends to loss on disposal of assets. The amounts included in depreciation in connection with premature failure of power ends during the three and nine months ended September 30, 2023 were $8.4 million and $32.7 million, respectively. Furthermore, to conform to current period presentation, we have reclassified the amounts relating to premature failure of power ends previously included in loss on disposal of assets to depreciation expense for prior periods. The amounts reclassified were $11.2 million and $26.8 million, which relate to the three and nine months ended September 30, 2022, respectively.
Depreciation and Amortization
Depreciation and amortization comprised of the following:
(in thousands) | |||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
Depreciation and amortization related to cost of services | $ | $ | $ | $ | |||||||||||||||||||
Depreciation and amortization related to general and administrative expenses | |||||||||||||||||||||||
Total depreciation and amortization | $ | $ | $ | $ |
Note 2 - Recently Issued Accounting Standards
Note 3 - Silvertip Acquisition
-9-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Silvertip Acquisition (Continued)
certain closing and transaction costs (the "Silvertip Acquisition"). The Silvertip Acquisition positions the Company as a more integrated completions-focused oilfield services provider headquartered in the Permian Basin.
The Company accounted for the Silvertip Acquisition using the acquisition method of accounting. The Silvertip Purchase Price was allocated to the major categories of assets acquired and liabilities assumed based upon their estimated fair value at the Silvertip Acquisition Date. The estimated fair values of certain assets and liabilities, including accounts receivable, require significant judgments and estimates. The measurements of assets acquired and liabilities assumed, are based on inputs that are not observable in the market and thus represent Level 3 inputs.
The following table summarizes the fair value of the consideration transferred in the Silvertip Acquisition and the Silvertip Purchase Price to the fair value of the assets acquired and liabilities assumed (which are included within the accompanying condensed consolidated balance sheets) as of the Silvertip Acquisition Date:
(in thousands) | |||||
Total Purchase Consideration: | |||||
Cash consideration | $ | ||||
Equity consideration | |||||
Debt payments and closing costs | |||||
Total consideration | $ | ||||
Cash and cash equivalents | $ | ||||
Accounts receivable and unbilled revenue | |||||
Inventories | |||||
Prepaid expenses | |||||
Other current assets | |||||
Property and equipment (1)
|
|||||
Intangible assets: | |||||
Trademark/trade name (2)
|
|||||
Customer relationships (2)
|
|||||
Goodwill | |||||
Operating lease right-of-use asset | |||||
Total identifiable assets acquired | |||||
Accounts payable | |||||
Accrued and other current liabilities | |||||
Operating lease liability | |||||
Total liabilities assumed | |||||
Total purchase consideration | $ |
(1)Remaining useful lives ranging from less than 22 years.
to
(2)Definite-lived intangible assets with amortization period of 10 years.
The goodwill arising from the Silvertip Acquisition is attributable to the expected operational synergies resulting from our integrated service offerings. The goodwill arising from the Silvertip Acquisition has been allocated to our wireline operations and is included in our wireline operating segment.
Note 4 - Fair Value Measurements
-10-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Fair Value Measurements (Continued)
In determining fair value, the Company uses various valuation approaches and establishes a hierarchy for inputs used in measuring fair value that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used, when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the assumptions other market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the observability of inputs as follows:
Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment.
Level 2 — Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair values of cash, cash equivalents and restricted cash, accounts receivable, accounts payable, accrued and other current liabilities, and long-term debt are estimated to be approximately equivalent to carrying amounts as of September 30, 2023 and December 31, 2022 and have been excluded from the table below.
Assets measured at fair value on a recurring basis are set forth below:
(in thousands) | |||||||||||||||||||||||||||||
Estimated fair value measurements | |||||||||||||||||||||||||||||
Balance | Quoted prices in active market (Level 1) |
Significant other observable inputs (Level 2) | Significant other unobservable inputs (Level 3) | Total gains (losses) |
|||||||||||||||||||||||||
September 30, 2023: | |||||||||||||||||||||||||||||
Short-term investment | $ | $ | $ | $ | $ | ( |
|||||||||||||||||||||||
December 31, 2022: | |||||||||||||||||||||||||||||
Short-term investment | $ | $ | $ | $ | $ | ( |
Short-term investment— On September 1, 2022, the Company received 2.6 million common shares of STEP Energy Services Ltd. ("STEP") with an estimated fair value of $11.8 million as part of the consideration for the sale of our coiled tubing assets to STEP. The shares were treated as an investment in equity securities measured at fair value using Level 1 inputs based on observable prices on the Toronto Stock Exchange and are shown under current assets in our condensed consolidated balance sheets. As of September 30, 2023, the fair value of the short-term investment was estimated at $8.2 million. The fluctuation in stock price resulted in an unrealized gain of $1.8 million for the three months ended September 30, 2023 and an unrealized loss of $2.1 million for the nine months ended September 30, 2023. Included in the unrealized gain for the three months ended September 30, 2023 and the unrealized loss for the nine months ended September 30, 2023 was a loss of $0.2 million and $0.1 million resulting from non-cash foreign currency translation during the three and nine months ended September 30, 2023, respectively. The unrealized loss resulting from stock price fluctuation and the unrealized gain resulting from non-cash foreign currency translation are included in other income (expense) in our condensed consolidated statements of operations. The Company is restricted from selling, transferring or assigning more than 0.9 million shares in any one calendar month.
-11-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Fair Value Measurements (Continued)
Assets Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis. These items are not measured at fair value on an ongoing basis but may be subject to fair value adjustments in certain circumstances. These assets and liabilities include those acquired through the Silvertip Acquisition, which are required to be measured at fair value on the acquisition date according to the FASB Accounting Standards Codification ("ASC") Topic 805, Business Combinations.
Whenever events or circumstances indicate that the carrying value of long-lived assets may not be recoverable, the Company reviews the carrying values of long‑lived assets, such as property and equipment and other assets to determine if they are recoverable. If any long‑lived assets are determined to be unrecoverable, an impairment expense is recorded in the period. No impairment of property and equipment was recorded during the nine months ended September 30, 2023. We recorded impairment expense of approximately $57.5 million during the nine months ended September 30, 2022.
As of September 30, 2023 and December 31, 2022, our goodwill carrying value was $23.6 million and $23.6 million, respectively. There were no additions to goodwill during the three and nine months ended September 30, 2023 and 2022. The wireline operating segment is the only segment with goodwill at September 30, 2023 and December 31, 2022. There were no goodwill impairment losses during the three and nine months ended September 30, 2023 and 2022. We conducted our annual impairment test of goodwill in accordance with ASC 850, Intangibles—Goodwill and Other, as of December 31, 2022 and determined that no impairment to the carrying value of goodwill for our reporting unit (wireline operating segment) was required.
Note 5 - Intangible Assets
Intangible assets consist of customer relationships and trademark/trade name. Intangible assets are amortized on a straight‑line basis with a useful life of ten years . Amortization expense included in net income for the three and nine months ended September 30, 2023 was $1.4 million and $4.2 million, respectively. There was no amortization expense during the three and nine months ended September 30, 2022. The Company’s intangible assets subject to amortization consisted of the following:
(in thousands) |
|||||||||||
September 30, 2023 | December 31, 2022 | ||||||||||
Intangible assets acquired: | |||||||||||
Trademark/trade name | $ | $ | |||||||||
Customer relationships | |||||||||||
Total intangible assets acquired | |||||||||||
Accumulated amortization: | |||||||||||
Trademark/trade name | ( |
( |
|||||||||
Customer relationships | ( |
( |
|||||||||
Total accumulated amortization | ( |
( |
|||||||||
Intangible assets — net | $ | $ |
-12-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 - Intangible Assets (Continued)
The average amortization period for our remaining intangible assets is approximately 9.1 years. Estimated remaining amortization expense for each of the subsequent fiscal years is expected to be as follows:
(in thousands) |
|||||
Year | Estimated future amortization expense | ||||
2023 | $ | ||||
2024 | |||||
2025 | |||||
2026 | |||||
2027 and beyond | |||||
Total | $ |
Note 6 - Long-Term Debt
Asset-Based Loan ("ABL") Credit Facility
Our revolving credit facility, as amended and restated in April 2022, prior to giving effect to the amendment to the revolving credit facility in June 2023, had a total borrowing capacity of $150.0 million. The revolving credit facility had a borrowing base of 85 % to 90 %, depending on the credit ratings of our accounts receivable counterparties, of monthly eligible accounts receivable less customary reserves. The revolving credit facility included a springing fixed charge coverage ratio to apply when excess availability was less than the greater of (i) 10 % of the lesser of the facility size or the borrowing base or (ii) $10.0 million. Under the revolving credit facility we were required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens, indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities.
Effective June 2, 2023, the Company entered into an amendment to its amended and restated revolving credit facility (the revolving credit facility, as amended and restated in April 2022, as amended in June 2023 and as may be amended further, "ABL Credit Facility"). The amendment increased the borrowing capacity under the ABL Credit Facility to $225.0 million (subject to the Borrowing Base (as defined below) limit), and extended the maturity date to June 2, 2028. The ABL Credit Facility has a borrowing base of the sum of 85 % to 90 % of monthly eligible accounts receivable and 80 % of eligible unbilled accounts (up to a maximum of 25 % of the Borrowing Base) less customary reserves (the "Borrowing Base"), in each case, depending on the credit ratings of our accounts receivable counterparties, as redetermined monthly. The Borrowing Base as of September 30, 2023, was approximately $176.3 million. The ABL Credit Facility includes a springing fixed charge coverage ratio to apply when excess availability is less than the greater of (i) 10 % of the lesser of the facility size or the Borrowing Base or (ii) $15.0 million. Under the ABL Credit Facility we are required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens or indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. Borrowings under the ABL Credit Facility are secured by a first priority lien and security interest in substantially all assets of the Company.
Borrowings under the ABL Credit Facility accrue interest based on a three-tier pricing grid tied to availability, and we may elect for loans to be based on either the Secured Overnight Financing Rate ("SOFR") or the base rate, plus the applicable margin, which ranges from 1.75 % to 2.25 % for SOFR loans and 0.75 % to 1.25 % for base rate loans. For the nine months ended September 30, 2023, the weighted average interest rate on our outstanding borrowings under the ABL Credit Facility was 6.51 %.
-13-
PROPETRO HOLDING CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Reportable Segment Information
The Company currently has three operating segments for which discrete financial information is readily available: hydraulic fracturing (inclusive of acidizing), cementing and wireline. These operating segments represent how the Chief Operating Decision Maker evaluates performance and allocates resources.
On September 1, 2022, the Company shut down its coiled tubing operations and disposed of its coiled tubing assets to STEP as part of a strategic repositioning, and recorded a loss on disposal of $13.8 million. The divestiture of our coiled tubing assets did not qualify for presentation and disclosure as discontinued operations, and accordingly, we have recorded the resulting loss from the disposal as part of our loss on disposal of assets in our condensed consolidated statement of operations. Following the divestiture of our coiled tubing operations, which were historically included in the "All Other" category, and the Silvertip Acquisition, which resulted in our new wireline operations in 2022, we have three operating segments. All three remaining operating segments are now aggregated into Completion Services, which is our only reportable segment.
In accordance with ASC 280—Segment Reporting, the Company has one reportable segment (Completion Services) comprised of the hydraulic fracturing, cementing and wireline operating segments. The Silvertip Acquisition which resulted in the addition of a new wireline operating segment, and the disposal of our coiled tubing operations (previously included in the "All Other" category), collectively resulted in a change to the structure and composition of our reportable segment and "All Other" category. Our previous Pressure Pumping reportable segment is now renamed "Completion Services" because of the inclusion of the new wireline completion services. In addition, we have reclassified all our corporate overhead costs (inclusive of income taxes and interest expense) previously included in the "All Other" category to the Completion Services reportable segment. As a result of the change in the structure and composition of our reportable segment, we have reclassified the presentation of our segment disclosure for the three and nine months ended September 30, 2022 to include corporate costs in our Completion Services reportable segment to make this period comparable to the three and nine months ended September 30, 2023. Total corporate administrative expense for the three and nine months ended September 30, 2023 was $25.4 million and $77.7 million, respectively. Total corporate administrative expense for the three and nine months ended September 30, 2022 was $20.4 million and $45.4 million, respectively.
A breakout of our Completion Services revenue by operating segment for the three and nine months ended September 30, 2023 and 2022 is presented below:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
Hydraulic fracturing revenue | % | % | % | % | ||||||||||||||||||||||
Cementing revenue | % | % | % | % | ||||||||||||||||||||||
Wireline revenue | % | % | % | % | ||||||||||||||||||||||
Total Completion Services revenue | % | % | % | % |
The Company manages and assesses the performance of the reportable segment by its adjusted EBITDA (earnings before other income (expense), interest expense, income taxes, depreciation and amortization, stock-based compensation expense, retention bonuses, severance and related expense, impairment expense, (gain)/loss on disposal of assets and other unusual or nonrecurring expenses or (income)).
-14-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Reportable Segment Information (Continued)
A reconciliation from segment level financial information to the consolidated statements of operations is provided in the table below; inter-segment revenues are not material and not shown separately (in thousands):
Three Months Ended September 30, 2023 | ||||||||||||||||||||
Completion Services | All Other | Total | ||||||||||||||||||
Service revenue | $ | $ | $ | |||||||||||||||||
Adjusted EBITDA | $ | $ | $ | |||||||||||||||||
Depreciation and amortization | $ | $ | $ | |||||||||||||||||
Capital expenditures | $ | $ | $ | |||||||||||||||||
Goodwill at September 30, 2023 | $ | $ | $ | |||||||||||||||||
Total assets September 30, 2023 | $ | $ | $ |
Three Months Ended September 30, 2022 | ||||||||||||||||||||
Completion Services | All Other | Total | ||||||||||||||||||
Service revenue | $ | $ | $ | |||||||||||||||||
Adjusted EBITDA | $ | $ | ( |
$ | ||||||||||||||||
Depreciation and amortization | $ | $ | $ | |||||||||||||||||
Capital expenditures | $ | $ | $ | |||||||||||||||||
Total assets December 31, 2022 | $ | $ | $ |
Nine Months Ended September 30, 2023 | ||||||||||||||||||||
Completion Services | All Other | Total | ||||||||||||||||||
Service revenue | $ | $ | $ | |||||||||||||||||
Adjusted EBITDA | $ | $ | $ | |||||||||||||||||
Depreciation and amortization | $ | $ | $ | |||||||||||||||||
Capital expenditures | $ | $ | $ | |||||||||||||||||
Goodwill at September 30, 2023 | $ | $ | $ | |||||||||||||||||
Total assets September 30, 2023 | $ | $ | $ |
Nine Months Ended September 30, 2022 | ||||||||||||||||||||
Completion Services | All Other | Total | ||||||||||||||||||
Service revenue | $ | $ | $ | |||||||||||||||||
Adjusted EBITDA | $ | $ | ( |
$ | ||||||||||||||||
Depreciation and amortization | $ | $ | $ | |||||||||||||||||
Impairment expense | $ | $ | $ | |||||||||||||||||
Capital expenditures | $ | $ | $ | |||||||||||||||||
Total assets December 31, 2022 | $ | $ | $ |
-15-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Reportable Segment Information (Continued)
Reconciliation of net income (loss) to adjusted EBITDA (in thousands):
Three Months Ended September 30, 2023 | ||||||||||||||||||||
Completion Services | All Other | Total | ||||||||||||||||||
Net income | $ | $ | $ | |||||||||||||||||
Depreciation and amortization | ||||||||||||||||||||
Interest expense | ||||||||||||||||||||
Income tax expense | ||||||||||||||||||||
Loss on disposal of assets | ||||||||||||||||||||
Stock-based compensation | ||||||||||||||||||||
Other income (1)
|
( |
( |
||||||||||||||||||
Other general and administrative expense, (net) (2)
|
||||||||||||||||||||
Retention bonus and severance expense | ||||||||||||||||||||
Adjusted EBITDA | $ | $ | $ | |||||||||||||||||
Three Months Ended September 30, 2022 | ||||||||||||||||||||
Completion Services | All Other | Total | ||||||||||||||||||
Net income (loss) | $ | $ | ( |
$ | ||||||||||||||||
Depreciation and amortization | ||||||||||||||||||||
Interest expense | ||||||||||||||||||||
Income tax expense | ||||||||||||||||||||
Loss on disposal of assets | ||||||||||||||||||||
Stock-based compensation | ||||||||||||||||||||
Other expense (3)
|
||||||||||||||||||||
Other general and administrative expense, (net) (2)
|
||||||||||||||||||||
Severance expense | ||||||||||||||||||||
Adjusted EBITDA | $ | $ | ( |
$ |
-16-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Reportable Segment Information (Continued)
Nine Months Ended September 30, 2023 | ||||||||||||||||||||
Completion Services | All Other | Total | ||||||||||||||||||
Net income | $ | $ | $ | |||||||||||||||||
Depreciation and amortization | ||||||||||||||||||||
Interest expense | ||||||||||||||||||||
Income tax expense | ||||||||||||||||||||
Loss on disposal of assets | ||||||||||||||||||||
Stock-based compensation | ||||||||||||||||||||
Other expense (1)
|
||||||||||||||||||||
Other general and administrative expense, (net) (2)
|
||||||||||||||||||||
Retention bonus and severance expense | ||||||||||||||||||||
Adjusted EBITDA | $ | $ | $ | |||||||||||||||||
Nine Months Ended September 30, 2022 | ||||||||||||||||||||
Completion Services | All Other | Total | ||||||||||||||||||
Net income (loss) | $ | $ | ( |
$ | ( |
|||||||||||||||
Depreciation and amortization | ||||||||||||||||||||
Impairment expense | ||||||||||||||||||||
Interest expense | ||||||||||||||||||||
Income tax benefit | ( |
( |
||||||||||||||||||
Loss on disposal of assets | ||||||||||||||||||||
Stock-based compensation | ||||||||||||||||||||
Other income (3) (4)
|
( |
( |
||||||||||||||||||
Other general and administrative expense, (net) (2)
|
||||||||||||||||||||
Severance expense | ||||||||||||||||||||
Adjusted EBITDA | $ | $ | ( |
$ |
(1)Includes unrealized gain on short-term investment of $1.8 million for the three months ended September 30, 2023 and unrealized loss on short-term investment of $2.1 million for the nine months ended September 30, 2023.
(2)Other general and administrative expense, (net of reimbursement from insurance carriers) primarily relates to nonrecurring professional fees paid to external consultants in connection with our audit committee review, SEC investigation, shareholder litigation, legal settlement to a vendor and other legal matters, net of insurance recoveries. During the three and nine months ended September 30, 2023, we received reimbursement of approximately $0.1 million and $0.4 million, respectively, from our insurance carriers in connection with the SEC investigation and shareholder litigation. During the three and nine months ended September 30, 2022, we received reimbursement of approximately $3.4 million and $6.9 million, respectively, from our insurance carriers in connection with the SEC investigation and shareholder litigation. See "Note 13 - Commitments and Contingencies—Contingent Liabilities—Legal Matters" for further information.
(3)Includes unrealized loss on short-term investment of $3.3 million and non cash income of $2.7 million from fixed asset inventory received as part of a settlement of warranty claims with an equipment manufacturer.
(4)Includes a $10.7 million net tax refund (net of advisory fees) received in March 2022 from the Texas Comptroller of Public Accounts in connection with limited sales, excise and use tax audit of the period July 1, 2015 through December 31, 2018.
-17-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 - Net Income (Loss) Per Share
Basic net income (loss) per common share is computed by dividing the net income (loss) relevant to the common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share uses the same net income divided by the sum of the weighted average number of shares of common stock outstanding during the period, plus dilutive effects of options, performance and restricted stock units outstanding during the period calculated using the treasury method and the potential dilutive effects of preferred stocks (if any) calculated using the if-converted method.
The table below shows the calculations for the three and nine months ended September 30, 2023 and 2022 (in thousands, except for per share data):
Three Months Ended September 30, | ||||||||||||||
2023 | 2022 | |||||||||||||
Numerator (both basic and diluted) | ||||||||||||||
Net income relevant to common stockholders | $ | $ | ||||||||||||
Denominator | ||||||||||||||
Denominator for basic income per share | ||||||||||||||
Dilutive effect of stock options | ||||||||||||||
Dilutive effect of performance share units | ||||||||||||||
Dilutive effect of restricted stock units | ||||||||||||||
Denominator for diluted income per share | ||||||||||||||
Basic income per common share | $ | $ | ||||||||||||
Diluted income per common share | $ | $ |
Nine Months Ended September 30, | ||||||||||||||
2023 | 2022 | |||||||||||||
Numerator (both basic and diluted) | ||||||||||||||
Net income (loss) relevant to common stockholders | $ | $ | ( |
|||||||||||
Denominator | ||||||||||||||
Denominator for basic income per share | ||||||||||||||
Dilutive effect of stock options | ||||||||||||||
Dilutive effect of performance share units | ||||||||||||||
Dilutive effect of restricted stock units | ||||||||||||||
Denominator for diluted income per share | ||||||||||||||
Basic income (loss) per common share | $ | $ | ( |
|||||||||||
Diluted income (loss) per common share | $ | $ | ( |
-18-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 - Net Income (Loss) Per Share (Continued)
(in thousands) | Three Months Ended September 30, | |||||||||||||
2023 | 2022 | |||||||||||||
Stock options | ||||||||||||||
Restricted stock units | ||||||||||||||
Performance stock units | ||||||||||||||
Total |
(in thousands) | Nine Months Ended September 30, | |||||||||||||
2023 | 2022 | |||||||||||||
Stock options | ||||||||||||||
Restricted stock units | ||||||||||||||
Performance stock units | ||||||||||||||
Total |
Note 9 - Share Repurchase Program
On May 17, 2023, the Company's board of directors (the "Board") authorized and the Company announced a share repurchase program that allows the Company to repurchase up to $100 million of the Company's common stock beginning immediately and continuing through and including May 31, 2024. The shares may be repurchased from time to time in open market transactions, block trades, accelerated share repurchases, privately negotiated transactions, derivative transactions or otherwise, certain of which may be made pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Exchange Act, in compliance with applicable state and federal securities laws. The timing, as well as the number and value of shares repurchased under the program, will be determined by the Company at its discretion and will depend on a variety of factors, including management's assessment of the intrinsic value of the Company's common stock, the market price of the Company's common stock, general market and economic conditions, available liquidity, compliance with the Company's debt and other agreements, applicable legal requirements, and other considerations. The Company is not obligated to purchase any shares under the repurchase program, and the program may be suspended, modified, or discontinued at any time without prior notice. The Company expects to fund the repurchases using cash on hand and expected free cash flow to be generated through May 2024. The Inflation Reduction Act of 2022 (the "IRA 2022") provides for, among other things, the imposition of a new 1% U.S. federal excise tax on certain repurchases of stock by publicly traded U.S. corporations such as us after December 31, 2022. Accordingly, the excise tax will apply to our share repurchase program in 2023 and in subsequent taxable years.
All shares of common stock repurchased under the share repurchase program are canceled and retired upon repurchase. The Company accounts for the purchase price of repurchased shares of common stock in excess of par value ($0.001 per share of common stock) as a reduction of additional-paid-in capital, and will continue to do so until additional paid-in-capital is reduced to zero. Thereafter, any excess purchase price will be recorded as a reduction of retained earnings. During the three months ended September 30, 2023, the Company paid an aggregate of $18.8 million, an average price per share of $9.93 including commissions, for share repurchases under the share repurchase program. The Company has accrued $0.3 million in respect of the IRA 2022 repurchase excise tax as of September 30, 2023. As of September 30, 2023, $63.7 million remained authorized for future repurchases of common stock under the repurchase program.
Note 10 - Stock-Based Compensation
Stock Options
There were no new stock option grants during the nine months ended September 30, 2023. As of September 30, 2023, there was no aggregate intrinsic value for our outstanding or exercisable stock options because the closing stock price as of September 30, 2023 was below the cost to exercise these options. No stock options were exercised during the nine months ended September 30, 2023. The weighted average remaining contractual term for the outstanding and exercisable stock options as of September 30, 2023 was approximately 3.4 years.
-19-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 - Stock-Based Compensation (Continued)
A summary of the stock option activity for the nine months ended September 30, 2023 is presented below (in thousands, except for weighted average price):
Number of Shares | Weighted Average Exercise Price |
|||||||||||||
Outstanding at January 1, 2023 | $ | |||||||||||||
Granted | $ | |||||||||||||
Exercised | $ | |||||||||||||
Forfeited | $ | |||||||||||||
Expired | ( |
$ | ||||||||||||
Outstanding at September 30, 2023 | $ | |||||||||||||
Exercisable at September 30, 2023 | $ |
Restricted Stock Units
On May 11, 2023, the Company's stockholders approved the Amended and Restated ProPetro Holding Corp. 2020 Long Term Incentive Plan (the "A&R 2020 Incentive Plan"), which had been previously approved by the Board and replaced the ProPetro Holding Corp. 2020 Long Term Incentive Plan.
During the nine months ended September 30, 2023, we granted 1,081,010 restricted stock units ("RSUs") to employees, officers and directors pursuant to the A&R 2020 Incentive Plan, which generally vest ratably over a three-year vesting period, in the case of awards to employees and officers, and generally vest in full after one year , in the case of awards to directors. RSUs are subject to restrictions on transfer and are generally subject to a risk of forfeiture if the award recipient ceases to be an employee or director of the Company prior to vesting of the award. Each RSU represents the right to receive one share of common stock. The grant date fair value of the RSUs is based on the closing share price of our common stock on the date of grant. As of September 30, 2023, the total unrecognized compensation expense for all RSUs was approximately $11.9 million, and is expected to be recognized over a weighted average period of approximately 1.8 years.
The following table summarizes RSUs activity during the nine months ended September 30, 2023 (in thousands, except for fair value):
Number of Shares |
Weighted Average Grant Date Fair Value |
|||||||||||||
Outstanding at January 1, 2023 | $ | |||||||||||||
Granted | $ | |||||||||||||
Vested | ( |
$ | ||||||||||||
Forfeited | ( |
$ | ||||||||||||
Canceled | $ | |||||||||||||
Outstanding at September 30, 2023 | $ |
-20-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 - Stock-Based Compensation (Continued)
Performance Share Units
During the nine months ended September 30, 2023, we granted 454,788 performance share units ("PSUs") to certain key employees and officers as new awards under the A&R 2020 Incentive Plan. Each PSU earned represents the right to receive either one share of common stock or, as determined by the A&R 2020 Incentive Plan administrator in its sole discretion, a cash amount equal to fair market value of one share of common stock or amount of cash on the day immediately preceding the settlement date. The actual number of shares of common stock that may be issued under the PSUs ranges from 0 % up to a maximum of 200 % of the target number of PSUs granted to the participant, based on our total shareholder return ("TSR") relative to a designated peer group, generally at the end of a three year period. In addition to the TSR conditions, vesting of the PSUs is generally subject to the recipient’s continued employment through the end of the applicable performance period. Compensation expense is recorded ratably over the corresponding requisite service period. The grant date fair value of PSUs is determined using a Monte Carlo probability model. Grant recipients do not have any shareholder rights until performance relative to the peer group has been determined following the completion of the performance period and shares have been issued.
The following table summarizes information about PSUs activity during the nine months ended September 30, 2023 (in thousands, except for weighted average fair value):
Period Granted |
Target Shares Outstanding at January 1, 2023 | Target Shares Granted |
Target Shares Vested | Target Shares Forfeited |
Target Shares Outstanding at September 30, 2023 | |||||||||||||||||||||||||||
2020 | ( |
( |
||||||||||||||||||||||||||||||
2021 | ( |
|||||||||||||||||||||||||||||||
2022 | ( |
|||||||||||||||||||||||||||||||
2023 | ( |
|||||||||||||||||||||||||||||||
Total | ( |
( |
||||||||||||||||||||||||||||||
Weighted Average FV Per Share | $ | $ | $ | $ | $ |
Note 11 - Related-Party Transactions
Operations and Maintenance Yards
The Company rents three yards from an entity in which a director of the Company has an equity interest, and the total annual rent expense for each of the three yards was approximately $0.03 million, $0.1 million and $0.1 million, respectively. The Company previously rented two yards from this entity and incurred rent expense of $0.02 million and $0.1 million, respectively during the nine months ended September 30, 2023.