10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 2, 2024
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 March 31, 2024
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) (Zip Code)
(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 | ||||||
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 April 26, 2024, was 107,039,149 .
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 (the "Securities Act"), 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 fact, and given 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 as a result of 2024 presidential election, higher 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 Russian-Ukraine war, conflicts in the Israel-Gaza region and continued hostilities in the Middle East, including rising tensions with Iran, 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 current government, such as executive orders or new regulations, including climate-related 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, including any delays and/or supply chain disruptions due to increased hostilities in the Middle East;
•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 service 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 higher 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 exploration and production and related operations resulting in changes in the amount of taxes owed by us;
-ii-
•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;
•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, 2023 (the "Form 10-K"), filed with the U.S. Securities and Exchange Commission (the "SEC") 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)
March 31, 2024 | December 31, 2023 | |||||||||||||
ASSETS | ||||||||||||||
CURRENT ASSETS: | ||||||||||||||
Cash and cash equivalents | $ | $ | ||||||||||||
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 | ||||||||||||||
OTHER LONG-TERM LIABILITIES | ||||||||||||||
Total liabilities | ||||||||||||||
COMMITMENTS AND CONTINGENCIES (Note 13) | ||||||||||||||
SHAREHOLDERS’ EQUITY: | ||||||||||||||
Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital | ||||||||||||||
Retained earnings | ||||||||||||||
Total shareholders’ equity | ||||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ |
See notes to condensed consolidated financial statements.
-1-
PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended March 31, | ||||||||||||||
2024 | 2023 | |||||||||||||
REVENUE - |
$ | $ | ||||||||||||
COSTS AND EXPENSES | ||||||||||||||
Cost of services (exclusive of depreciation and amortization) | ||||||||||||||
General and administrative expenses (inclusive of stock-based compensation) | ||||||||||||||
Depreciation and amortization | ||||||||||||||
Loss on disposal of assets | ||||||||||||||
Total costs and expenses | ||||||||||||||
OPERATING INCOME | ||||||||||||||
OTHER (EXPENSE) INCOME: | ||||||||||||||
Interest expense | ( |
( |
||||||||||||
Other income (expense), net | ( |
|||||||||||||
Total other (expense) income, net | ( |
( |
||||||||||||
INCOME BEFORE INCOME TAXES | ||||||||||||||
INCOME TAX EXPENSE | ( |
( |
||||||||||||
NET INCOME | $ | $ | ||||||||||||
NET INCOME PER COMMON SHARE: | ||||||||||||||
Basic | $ | $ | ||||||||||||
Diluted | $ | $ | ||||||||||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||
Basic | ||||||||||||||
Diluted |
See notes to condensed consolidated financial statements.
-2-
PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
Three Months Ended March 31, 2024 | ||||||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||||||
Shares | Amount | Additional Paid-In Capital | Retained Earnings | Total | ||||||||||||||||||||||||||||
BALANCE - January 1, 2024 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
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 - March 31, 2024 | $ | $ | $ | $ |
Three Months Ended March 31, 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 | $ | $ | $ | $ |
See notes to condensed consolidated financial statements.
-3-
PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
(Unaudited)
Three Months Ended March 31, | ||||||||||||||
2024 | 2023 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||
Net income | $ | $ | ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
Depreciation and amortization | ||||||||||||||
Deferred income tax expense | ||||||||||||||
Amortization of deferred debt issuance costs | ||||||||||||||
Stock-based compensation | ||||||||||||||
Loss on disposal of assets | ||||||||||||||
Unrealized loss on short-term investment | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||
Accounts receivable | ( |
( |
||||||||||||
Other current assets | ( |
|||||||||||||
Inventories | ( |
( |
||||||||||||
Prepaid expenses | ( |
|||||||||||||
Accounts payable | ||||||||||||||
Accrued and other current liabilities | ( |
|||||||||||||
Net cash provided by operating activities | ||||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||
Capital expenditures | ( |
( |
||||||||||||
Proceeds from sale of assets | ||||||||||||||
Net cash used in investing activities | ( |
( |
||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||
Payments on finance lease obligations | ( |
|||||||||||||
Tax withholdings paid for net settlement of equity awards | ( |
( |
||||||||||||
Share repurchases | ( |
|||||||||||||
Net cash used in financing activities | ( |
( |
||||||||||||
NET INCREASE (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 | $ | $ |
The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the condensed consolidated balance sheets:
Three Months Ended March 31, | ||||||||||||||
2024 | 2023 | |||||||||||||
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.
-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.
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.
-5-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 was used to pay for contractually agreed upon expenditures. We had no restricted cash as of March 31, 2024 and December 31, 2023.
Accounts Receivable
Allowance for Credit Losses
As of March 31, 2024, 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 three months ended March 31, 2024:
(in thousands) | |||||
Balance - January 1, 2024 | $ | ||||
Provision for credit losses during the period | |||||
Write-off during the period | |||||
Balance - March 31, 2024 | $ |
Reclassification of Prior Period Presentation
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PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Depreciation and Amortization
Depreciation and amortization comprised of the following:
(in thousands) | |||||||||||
Three Months Ended March 31, | |||||||||||
2024 | 2023 | ||||||||||
Depreciation and amortization related to cost of services | $ | $ | |||||||||
Depreciation and amortization related to general and administrative expenses | |||||||||||
Total depreciation and amortization | $ | $ |
Share Repurchases
Note 2 - Recently Issued Accounting Standards
In October 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. This ASU incorporates certain SEC disclosure requirements into the FASB Accounting Standards Codification (“Codification”). The amendments in the ASU represent changes to clarify or improve disclosure and presentation requirements of a variety of Codification topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. ASU 2023-06 will become effective for each amendment on the effective date of the SEC's corresponding disclosure rule changes. We do not expect ASU No. 2023-06 to have a material impact on our condensed consolidated financial statements.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires public entities to disclose on an annual and interim basis, 1) significant segment expenses that are regularly provided to the Chief Operating Decision Maker (the “CODM”) and included within each reported measure of segment profit or loss (collectively referred to as the “significant expense principle”) and 2) an amount for other segment items representing the difference between segment revenue less the segment expenses disclosed under the significant expense principle and each reported measure of segment profit or loss. This ASU also requires public entities to provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by Topic 280 in interim periods, clarifies that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit or loss but at least one of the reported segment profit or loss measures (or the single reported measure, if only one is disclosed) should be the measure that is most consistent with the measurement principles under GAAP. This ASU also requires disclosure of the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources, and requires a public entity that has a single reportable segment to provide all the disclosures required by the amendments in this ASU and all existing segment disclosures in Topic 280. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. We do not expect to early adopt ASU No. 2023-07. We are currently evaluating the impact ASU No. 2023-07 will have on our segment disclosures.
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PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Par Five Acquisition
On December 1, 2023, the Company completed the acquisition of certain assets and certain liabilities of Par Five Energy Services LLC ("Par Five"), an oilfield service company based in Artesia, New Mexico that provides cementing and remediation services across the Permian Basin in Texas and New Mexico (the "Par Five Acquisition"). As a result of the Par Five Acquisition, the Company expanded its operations in the cementing service business unit.
The following table summarizes the consideration transferred to Par Five and the recognized amounts of identified assets acquired and liabilities assumed at the acquisition date:
(in thousands) | |||||
Total purchase consideration: | |||||
Cash | $ | ||||
Deferred cash payment | |||||
Total consideration | $ |
(in thousands) | |||||
Recognized amounts of assets acquired and liabilities assumed: | |||||
Accounts receivable | $ | ||||
Inventory | |||||
Property, plant and equipment | |||||
Accrued liabilities | ( |
||||
Total net assets acquired | $ |
The deferred cash consideration of $3.2 million will be used to cover the amount by which the estimated purchase price exceeds the final purchase price, if any. The unused amount is payable to Par Five or its beneficiary on June 1, 2025 and accrues interest at 4.0 % per annum. This obligation is shown within other long-term liabilities in our condensed consolidated balance sheets. As of March 31, 2024, the outstanding amount for this obligation was $3.2 million.
Note 4 - Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date.
In determining fair value, the Company uses various valuation approaches and establishes a hierarchy for inputs used in measuring fair value that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used, when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the assumptions other market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the observability of inputs as follows:
Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment.
Level 2 — Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
-8-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Fair Value Measurements (Continued)
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 March 31, 2024 and December 31, 2023 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) |
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March 31, 2024: | |||||||||||||||||||||||||||||
Short-term investment | $ | $ | $ | $ | $ | ( |
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December 31, 2023: | |||||||||||||||||||||||||||||
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 March 31, 2024, the fair value of the short-term investment was estimated at $7.1 million. The fluctuation in stock price resulted in an unrealized loss of $0.6 million and $3.8 million for the three months ended March 31, 2024 and 2023, respectively. Included in the unrealized loss for the three months ended March 31, 2024 was a loss of $0.2 million resulting from non-cash foreign currency translation during the three months ended March 31, 2024. There was no unrealized gain or loss resulting from non-cash foreign currency translation during the three months ended March 31, 2023. The unrealized loss resulting from stock price fluctuation and the unrealized loss 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.
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 Par Five 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 three months ended March 31, 2024 and 2023.
There were no additions to goodwill during the three months ended March 31, 2024 and 2023. The wireline operating segment is the only segment with goodwill at March 31, 2024 and December 31, 2023. There were no goodwill impairment losses during the three months ended March 31, 2024 and 2023. We conducted our annual impairment test of goodwill in accordance with ASC 350, Intangibles—Goodwill and Other, as of December 31, 2023 and determined that no impairment to the carrying value of goodwill for our reporting unit (wireline operating segment) was required.
-9-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 months ended March 31, 2024 and 2023 was $1.4 million and $1.4 million, respectively. The Company’s intangible assets subject to amortization consisted of the following:
(in thousands) |
|||||||||||
March 31, 2024 | December 31, 2023 | ||||||||||
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 | $ | $ |
Estimated remaining amortization expense for each of the subsequent fiscal years is expected to be as follows:
(in thousands) |
|||||
Year | Estimated future amortization expense | ||||
2024 | $ | ||||
2025 | |||||
2026 | |||||
2027 | |||||
2028 and beyond | |||||
Total | $ |
Note 6 - Long-Term Debt
Asset-Based Loan 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
-10-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Long-Term Debt (Continued)
(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), in each case, depending on the credit ratings of our accounts receivable counterparties, less customary reserves (the "Borrowing Base"), as redetermined monthly. The Borrowing Base as of March 31, 2024, was approximately $192.1 million. The ABL Credit Facility includes a springing fixed charge coverage ratio to apply when excess availability is less than the greater of (i) 10 % of the lesser of the facility size or the Borrowing Base or (ii) $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 three months ended March 31, 2024, the weighted average interest rate on our outstanding borrowings under the ABL Credit Facility was 7.21 %.
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), wireline and cementing. These operating segments represent how the CODM evaluates performance and allocates resources.
Prior to the fourth quarter of fiscal year 2023, our operating segments met the aggregation criteria in accordance with ASC 280—Segment Reporting and were aggregated into the “Completion Services” reportable segment. Effective as of the fourth quarter of fiscal year 2023, we revised our segment reporting as we determined that our three operating segments no longer met the criteria to be aggregated. Our Hydraulic Fracturing and Wireline operating segments meet the criteria of a reportable segment. Our cementing segment does not meet the reportable segment criteria and is included within the “All Other” category. Additionally, our corporate administrative activities do not involve business activities from which it may earn revenues and its results are not regularly reviewed by the Company’s CODM when making key operating and resource decisions. As a result, corporate administrative expenses have been included under “Reconciling Items.” Prior period segment information has been revised to conform to our current presentation.
Our hydraulic fracturing operating segment revenue approximated 76.2 % and 79.0 % of our revenue for the three months ended March 31, 2024 and 2023, respectively. Revenue from our wireline operating segment approximated 15.0 % and 14.7 % of our revenue for the three months ended March 31, 2024 and 2023, respectively. Our cementing operating segment revenue approximated 8.8 % and 6.3 % of our revenue for the three months ended March 31, 2024 and 2023, respectively. Our operating segments are subject to inherent uncertainties which may influence our prospective activities. Inter-segment revenues are not material and are not shown separately in the tables below.
The Company manages and assesses the performance of the reportable segment by its adjusted EBITDA (earnings before interest expense, income taxes, depreciation and amortization, stock-based compensation expense, other income or expense, gain or loss on disposal of assets and other unusual or nonrecurring expenses or income such as impairment charges, retention bonuses, severance, costs related to asset acquisitions, insurance recoveries, one-time professional fees and legal settlements).
-11-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Reportable Segment Information (Continued)
The following tables set forth certain financial information with respect to the Company’s reportable segments; inter-segment revenues are not material and not shown separately (in thousands):
Three Months Ended March 31, 2024 | ||||||||||||||||||||||||||||||||
Hydraulic Fracturing | Wireline | All Other | Reconciling Items | Total | ||||||||||||||||||||||||||||
Service revenue | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Adjusted EBITDA for reportable segments | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Depreciation and amortization | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Capital expenditures incurred | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Goodwill | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Total assets March 31, 2024 | $ | $ | $ | $ | $ |
Three Months Ended March 31, 2023 | ||||||||||||||||||||||||||||||||
Hydraulic Fracturing | Wireline | All Other | Reconciling Items | Total | ||||||||||||||||||||||||||||
Service revenue | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Adjusted EBITDA for reportable segments | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Depreciation and amortization (1)
|
$ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Capital expenditures incurred | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Goodwill | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Total assets at December 31, 2023 | $ | $ | $ | $ | $ |
(1)The write-offs of remaining book value of prematurely failed power ends are recorded as loss on disposal of assets in 2024. In order to conform to current period presentation, we have reclassified the corresponding amount of $12.5 million from depreciation to loss on disposal of assets for the three months ended March 31, 2023.
-12-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Reportable Segment Information (Continued)
A reconciliation from reportable segment level financial information to the condensed consolidated statement of operations is provided in the table below (in thousands):
Three Months Ended March 31, | |||||||||||
2024 | 2023 | ||||||||||
Service Revenue | |||||||||||
Hydraulic Fracturing | $ | $ | |||||||||
Wireline | |||||||||||
All Other | |||||||||||
Total service revenue for reportable segments | |||||||||||
Elimination of intersegment service revenue | |||||||||||
Total consolidated service revenue | $ | $ | |||||||||
Adjusted EBITDA | |||||||||||
Hydraulic Fracturing | $ | $ | |||||||||
Wireline | |||||||||||
All Other | |||||||||||
Total Adjusted EBITDA for reportable segments | |||||||||||
Unallocated corporate administrative expenses | ( |
( |
|||||||||
Depreciation and amortization (1)
|
( |
( |
|||||||||
Interest expense | ( |
( |
|||||||||
Income tax expense | ( |
( |
|||||||||
Loss on disposal of assets (1)
|
( |
( |
|||||||||
Stock-based compensation | ( |
( |
|||||||||
Other income (expense), net (2)
|
( |
||||||||||
Other general and administrative expense, net | ( |
( |
|||||||||
Retention bonus and severance expense | ( |
( |
|||||||||
Net income | $ | $ |
(1)The write-offs of remaining book value of prematurely failed power ends are recorded as loss on disposal of assets in 2024. In order to conform to current period presentation, we have reclassified the corresponding amount of $12.5 million from depreciation to loss on disposal of assets for the three months ended March 31, 2023.
(2)Other income for the three months ended March 31, 2024 is primarily comprised of insurance reimbursements of $2.0 million, partially offset by a $0.6 million unrealized loss on short-term investment. Other expense for the three months ended March 31, 2023 is primarily comprised of a $3.8 unrealized loss on short-term investment.
-13-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 - Net Income Per Share
Basic net income per common share is computed by dividing the net income relevant to the common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per common share uses the same net income divided by the sum of the weighted average number of shares of common stock outstanding during the period, plus dilutive effects of options, performance stock units ("PSUs") and restricted stock units ("RSUs") 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 months ended March 31, 2024 and 2023 (in thousands, except for per share data):
Three Months Ended March 31, | ||||||||||||||
2024 | 2023 | |||||||||||||
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 | $ | $ |
As shown in the table below, the following stock options, restricted stock units and performance stock units have not been included in the calculation of diluted income per common share for the three months ended March 31, 2024 and 2023 because they will be anti-dilutive to the calculation of diluted net income per common share:
(in thousands) | Three Months Ended March 31, | |||||||||||||
2024 | 2023 | |||||||||||||
Stock options | ||||||||||||||
Restricted stock units | ||||||||||||||
Performance stock units | ||||||||||||||
Total |
Note 9 - Share Repurchase Program
On April 24, 2024, the Company's board of directors (the "Board") approved an increase and extension to the share repurchase program previously authorized on May 17, 2023. The program permits the repurchase of up to an additional $100 million of the Company's common stock for a total of $200 million and extends the expiration date by one year to May 31, 2025. 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
-14-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 - Share Repurchase Program (Continued)
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 2025. The 1% U.S. federal excise tax on certain repurchases of stock by publicly traded U.S. corporations enacted as part of the Inflation Reduction Act of 2022 ("IRA 2022") applies to our share repurchase program.
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 March 31, 2024, the Company paid an aggregate of $22.5 million, an average price per share of $7.58 including commissions, for share repurchases under the share repurchase program. The Company has accrued $0.6 million in respect of the IRA 2022 repurchase excise tax as of March 31, 2024. As of April 24, 2024, $125.8 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 three months ended March 31, 2024. As of March 31, 2024, there was no aggregate intrinsic value for our outstanding or exercisable stock options because the closing stock price as of March 31, 2024 was below the cost to exercise these options. No stock options were exercised during the three months ended March 31, 2024. The weighted average remaining contractual term for the outstanding and exercisable stock options as of March 31, 2024 was approximately 3.0 years.
A summary of the stock option activity for the three months ended March 31, 2024 is presented below (in thousands, except for weighted average price):
Number of Shares | Weighted Average Exercise Price |
|||||||||||||
Outstanding at January 1, 2024 | $ | |||||||||||||
Granted | $ | |||||||||||||
Exercised | $ | |||||||||||||
Forfeited | $ | |||||||||||||
Expired | ( |
$ | ||||||||||||
Outstanding at March 31, 2024 | $ | |||||||||||||
Exercisable at March 31, 2024 | $ |
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.
-15-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 - Stock-Based Compensation (Continued)
During the three months ended March 31, 2024, we granted 1,620,150 RSUs to employees, officers and directors pursuant to the A&R 2020 Incentive Plan, which generally vest ratably over a three-year vesting period or a two-year period at one-third after first year anniversary and two-thirds after the second year anniversary, 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 March 31, 2024, the total unrecognized compensation expense for all RSUs was approximately $24.6 million, and is expected to be recognized over a weighted average period of approximately 2.2 years.
The following table summarizes RSUs activity during the three months ended March 31, 2024 (in thousands, except for fair value):
Number of Shares |
Weighted Average Grant Date Fair Value |
|||||||||||||
Outstanding at January 1, 2024 | $ | |||||||||||||
Granted | $ | |||||||||||||
Vested | ( |
$ | ||||||||||||
Forfeited | ( |
$ | ||||||||||||
Canceled | $ | |||||||||||||
Outstanding at March 31, 2024 | $ |
Performance Share Units
During the three months ended March 31, 2024, we granted 637,266 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.
-16-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 - Stock-Based Compensation (Continued)
The following table summarizes information about PSUs activity during the three months ended March 31, 2024 (in thousands, except for weighted average fair value):
Period Granted |
Target Shares Outstanding at January 1, 2024 | Target Shares Granted |
Target Shares Vested | Target Shares Forfeited |
Target Shares Outstanding at March 31, 2024 | |||||||||||||||||||||||||||
2021 | ( |
|||||||||||||||||||||||||||||||
2022 | ||||||||||||||||||||||||||||||||
2023 | ||||||||||||||||||||||||||||||||
2024 | ||||||||||||||||||||||||||||||||
Total | ( |
|||||||||||||||||||||||||||||||
Weighted Average Fair Value 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 $0.01 million and $0.05 million, respectively during the three months ended March 31, 2023.
Pioneer
On December 31, 2018, we consummated the purchase of certain pressure pumping assets and real property from Pioneer Natural Resources USA, Inc. ("Pioneer") and Pioneer Pumping Services (the "Pioneer Pressure Pumping Acquisition"). In connection with the Pioneer Pressure Pumping Acquisition, Pioneer received 16.6 million shares of our common stock and approximately $110.0 million in cash. In October 2023, Pioneer entered into a merger agreement with Exxon Mobil Corporation. On March 31, 2022, we entered into an amended and restated pressure pumping services agreement (the "A&R Pressure Pumping Services Agreement"), which was initially entered into in connection with the Pioneer Pressure Pumping Acquisition. The A&R Pressure Pumping Services Agreement was effective January 1, 2022 through December 31, 2022. The A&R Pressure Pumping Services Agreement reduced the number of contracted fleets from eight fleets to six fleets, modified the pressure pumping scope of work and pricing mechanism for contracted fleets, and replaced the idle fees arrangement with equipment reservation fees (the "Reservation fees"). As part of the Reservation fees arrangement, the Company was entitled to receive compensation for all eligible contracted fleets that were made available to Pioneer at the beginning of every quarter in 2022 through the term of the A&R Pressure Pumping Services Agreement. The A&R Pressure Pumping Services Agreement expired at the conclusion of its term and was replaced by the Fleet One Agreement and Fleet Two Agreement described below.
On October 31, 2022, we entered into two pressure pumping services agreements (the "Fleet One Agreement" and "Fleet Two Agreement") with Pioneer, pursuant to which we provided hydraulic fracturing services with two committed fleets, subject to certain termination and release rights. The Fleet One Agreement was effective as of January 1, 2023 and was terminated on August 31, 2023. The Fleet Two Agreement was effective as of January 1, 2023 and was terminated on May 12, 2023.
Revenue from services provided to Pioneer (including Reservation fees) accounted for approximately $4.9 million and $54.3 million of our total revenue during the three months ended March 31, 2024 and 2023, respectively.
As of March 31, 2024, the total accounts receivable due from Pioneer, including estimated unbilled receivables for services we provided, amounted to approximately $3.3 million and the amount due to Pioneer was $0 . As of December 31, 2023, the balance due from Pioneer for services we provided amounted to approximately $2.4 million and the amount due to Pioneer was $0 .
-17-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 - Leases
Operating Leases
Description of Lease
In March 2013, we entered into a ten-year real estate lease contract (the "Real Estate One Lease") with a commencement date of April 1, 2013, as part of the expansion of our equipment yard. The assets and liabilities under this contract are included in our Hydraulic Fracturing reportable segment. In addition to the contractual lease period, the contract included an optional renewal of up to ten years , however, the Company terminated the Real Estate One Lease at the end of the term, March 1, 2023. During the three months ended March 31, 2023, the Company made lease payments of approximately $0.1 million.
We accounted for our Real Estate One Lease as an operating lease. This conclusion resulted from the existence of the right to control the use of the assets throughout the lease term. We did not account for the land separately from the building of the Real Estate One Lease because we concluded that the accounting effect was insignificant.
As part of our expansion of our hydraulic fracturing equipment maintenance program, we entered into a two-year maintenance facility real estate lease contract (the "Maintenance Facility Lease") with a commencement date of March 14, 2022. The assets and liabilities under this contract are included in our Hydraulic Fracturing reportable segment. During the three months ended March 31, 2024 and 2023, the Company made lease payments of approximately $0.1 million and $0.1 million, respectively. In addition to the contractual lease period, the contract included an optional renewal for three additional periods of one year each, however, the Company terminated the Maintenance Facility Lease at the end of the term, March 13, 2024.
We accounted for our Maintenance Facility Lease as an operating lease. Our assumptions resulted from the existence of the right to control the use of the assets throughout the lease term. We did not account for the land separately from the building of the Maintenance Facility Lease because we concluded that the accounting effect was insignificant.
In August 2022 and December 2022, we entered into equipment lease contracts (the "Electric Fleet Leases") for a duration of approximately three years each for a total of four FORCESM electric-powered hydraulic fracturing fleets with 60,000 hydraulic horsepower ("HHP") per fleet. The Electric Fleet Leases contain options to either extend each lease for up to three additional periods of one year each or purchase the equipment at the end of their initial term of approximately three years or at the end of each subsequent renewal period.
The first of these leases (the "Electric Fleet One Lease") commenced on August 23, 2023 when we received some of the equipment associated with the first FORCESM electric-powered hydraulic fracturing fleet. During the three months ended March 31, 2024, the Company made lease payments of approximately $2.3 million on the Electric Fleet One Lease, including variable lease payments of approximately $0.3 million. During the three months ended March 31, 2024, the Company incurred initial direct costs of approximately $3.0 million to place the leased equipment into its intended use, which are included in the right-of-use asset cost related to the Electric Fleet One Lease. The assets and liabilities under this contract are included in our Hydraulic Fracturing reportable segment. In management's judgment the exercise of neither the renewal option nor the purchase option is reasonably assured. In addition to fixed rent payments, the Electric Fleet One Lease contains variable payments based on equipment usage. The Electric Fleet One Lease does not include a residual value guarantee, covenants or financial restrictions.
We accounted for the Electric Fleet One Lease as an operating lease. Our assumptions resulted from the existence of the right to control the use of the assets throughout the lease term. As of March 31, 2024, the weighted average discount rate and remaining lease term was approximately 7.3 % and 2.7 years, respectively.
The second of the Electric Fleet Leases (the "Electric Fleet Two Lease") commenced on November 1, 2023 when we received some of the equipment associated with the second FORCESM electric-powered hydraulic fracturing fleet. During the three months ended March 31, 2024, the Company made lease payments of approximately $2.3 million, on the Electric Fleet Two Lease, including variable lease payments of approximately $0.3 million. During the three months ended March 31, 2024, the Company incurred initial direct costs of approximately $1.6 million to place the leased equipment into its intended use, which are included in the right-of-use asset cost related to the Electric Fleet Two Lease. The assets and liabilities under this contract are included in our Hydraulic Fracturing reportable segment. In management's judgment the exercise of neither the renewal option nor the purchase option is reasonably assured. In addition to fixed rent payments, the Electric Fleet Two Lease contains variable payments based on equipment usage. The Electric Fleet Two Lease does not include a residual value guarantee, covenants or financial restrictions.
-18-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 - Leases (Continued)
We accounted for the Electric Fleet Two Lease as an operating lease. Our assumptions resulted from the existence of the right to control the use of the assets throughout the lease term. As of March 31, 2024, the weighted average discount rate and remaining lease term was approximately 7.2 % and 2.9 years, respectively.
The third of the Electric Fleet Leases (the "Electric Fleet Three Lease") commenced on December 19, 2023, when we received some of the equipment associated with the third FORCESM electric-powered hydraulic fracturing fleet. During the three months ended March 31, 2024, the Company made lease payments of approximately $1.6 million, including variable lease payments of approximately $0.05 million. During the three months ended March 31, 2024, the Company incurred initial direct costs of approximately $0.2 million to place the leased equipment into its intended use, which are included in the right-of-use asset cost related to the Electric Fleet Three Lease. The assets and liabilities under this contract are included in our Hydraulic Fracturing reportable segment. In management's judgment the exercise of neither the renewal option nor the purchase option is reasonably assured. In addition to fixed rent payments, the Electric Fleet Three Lease contains variable payments based on equipment usage. The Electric Fleet Three Lease does not include a residual value guarantee, covenants or financial restrictions.
We accounted for the Electric Fleet Three Lease as an operating lease. Our assumptions resulted from the existence of the right to control the use of the assets throughout the lease term. As of March 31, 2024, the weighted average discount rate and remaining lease term was approximately 7.2 % and 3.0 years, respectively. As of March 31, 2024, we have not received some of the equipment contracted under the Electric Fleet Three Lease. Since we have not taken possession of these assets and do not control them, we have not accounted for the associated right-of-use asset and lease obligation on our balance sheet as of March 31, 2024.
The fourth of the Electric Fleet Leases (the "Electric Fleet Four Lease") commenced on February 9, 2024, when we received some of the equipment associated with the fourth FORCESM electric-powered hydraulic fracturing fleet. During the three months ended March 31, 2024, the Company made lease payments of approximately $0.3 million with no variable lease payments. During the three months ended March 31, 2024, the Company incurred initial direct costs of approximately $1.4 million to place the leased equipment into its intended use, which are included in the right-of-use asset cost related to the Electric Fleet Four Lease. The assets and liabilities under this contract are included in our Hydraulic Fracturing reportable segment. In management's judgment the exercise of neither the renewal option nor the purchase option is reasonably assured. In addition to fixed rent payments, the Electric Fleet Four Lease contains variable payments based on equipment usage. The Electric Fleet Four Lease does not include a residual value guarantee, covenants or financial restrictions.
We accounted for the Electric Fleet Four Lease as an operating lease. Our assumptions resulted from the existence of the right to control the use of the assets throughout the lease term. As of March 31, 2024, the weighted average discount rate and remaining lease term was approximately 7.2 % and 3.0 years, respectively. As of March 31, 2024, we have not received some of the equipment contracted under the Electric Fleet Four Lease. Since we have not taken possession of these assets and do not control them, we have not accounted for the associated right-of-use asset and lease obligation on our balance sheet as of March 31, 2024.
We currently expect to receive the remaining equipment associated with the third and fourth fleets in the first half of 2024.
In October 2022, we entered into a real estate lease contract for 5.3 years (the "Real Estate Two Lease"), with a commencement date of March 1, 2023. During the three months ended March 31, 2024, the Company made lease payments of approximately $0.1 million. The assets and liabilities under this contract are included in our Completion Services reportable segment. In addition to the contractual lease period, the contract includes two optional renewals of one year each, and in management's judgment the exercise of the renewal option is not reasonably assured. The contract does not include a residual value guarantee, covenants or financial restrictions. Further, the Real Estate Two Lease does not contain variability in payments resulting from either an index change or rate change.
We accounted for our Real Estate Two Lease as an operating lease. Our assumptions resulted from the existence of the right to control the use of the assets throughout the lease term. We did not account for the land separately from the building of the Real Estate Two Lease because we concluded that the accounting effect was insignificant. As of March 31, 2024, the weighted average discount rate and remaining lease term was approximately 6.3 % and 4.1 years, respectively.
As part of our acquisition of Silvertip Completion Services Operating, LLC, we assumed two real estate lease contracts (the "Silvertip One Lease" and "Silvertip Two Lease," and collectively the "Silvertip Leases") with remaining terms of 4.8 years and 6.1 years, respectively, from November 1, 2022. During 2023, we extended the Silvertip One Lease for an additional 1.3 years. During the three months ended March 31, 2024, the Company made lease payments of approximately $0.05 million and $0.1 million on the Silvertip One Lease and Silvertip Two Lease, respectively. The assets and liabilities under these contracts are
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PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 - Leases (Continued)
recorded in our wireline operating segment within our Completion Services reportable segment. The Silvertip Leases do not have any renewal options, residual value guarantees, covenants or financial restrictions. Further, the Silvertip Leases do not contain variability in payments resulting from either an index change or rate change.
We accounted for the Silvertip One Lease and the Silvertip Two Lease as operating leases. This conclusion resulted from the existence of the right to control the use of the assets throughout the lease term. We did not account for the land separately from the building of the Silvertip Leases because we concluded that the accounting effect was insignificant. As of March 31, 2024, the weighted average discount rate and remaining lease term for the Silvertip One Lease was approximately 6.3 % and 4.7 years, respectively. As of March 31, 2024, the weighted average discount rate and remaining lease term for the Silvertip Two Lease was approximately 2.1 % and 4.7 years, respectively.
In March 2023, we entered into a real estate lease contract for 5.7 years (the "Silvertip Three Lease"), with a commencement date of April 1, 2023. During the three months ended March 31, 2024 and 2023, the Company made lease payments of approximately $0.03 million and $0 , respectively. The assets and liabilities under this contract are recorded in our wireline operating segment within our Completion Services reportable segment. The contract does not include a residual value guarantee, covenants or financial restrictions. Further, the Silvertip Three Lease does not contain variability in payments resulting from either an index change or rate change.
We accounted for the Silvertip Three Lease as an operating lease. This conclusion resulted from the existence of the right to control the use of the assets throughout the lease term. We did not account for the land separately from the building of the Silvertip Three Lease because we concluded that the accounting effect was insignificant. As of March 31, 2024, the weighted average discount rate and remaining lease term was approximately 6.3 % and 4.7 years, respectively.
On June 1, 2023, we commenced an office space lease contract for 5.0 years (the "Silvertip Office Lease"). During the three months ended March 31, 2024, the Company made lease payments of approximately $0.04 million on the Silvertip Office Lease. The assets and liabilities under this contract are recorded in our wireline operating segment within our Completion Services reportable segment. The contract does not include a residual value guarantee, covenants or financial restrictions. Further, the Silvertip Office Lease does not contain variability in payments resulting from either an index change or rate change.
We accounted for the Silvertip Office Lease as an operating lease. This conclusion resulted from the existence of the right to control the use of the assets throughout the lease term. As of March 31, 2024, the weighted average discount rate and remaining lease term was approximately 6.5 % and 4.2 years, respectively.
In August 2023, in connection with the relocation of our corporate office, we entered into an office space lease contract for 2.1 years (the "Corporate Office Lease"), with a commencement date of September 8, 2023. During the three months ended March 31, 2024, the Company made lease payments of approximately $0.04 million on the Corporate Office Lease. The assets and liabilities under this contract are recorded in our Completion Services reportable segment. In addition to the contractual lease period, the contract includes an optional renewal for 0.8 years, and in management's judgment the exercise of the renewal option is not reasonably assured. The contract does not include a residual value guarantee, covenants or financial restrictions. Further, the Corporate Office Lease does not contain variability in payments resulting from either an index change or rate change.
We accounted for the Corporate Office Lease as an operating lease. This conclusion resulted from the existence of the right to control the use of the assets throughout the lease term. As of March 31, 2024, the weighted average discount rate and remaining lease term was approximately 7.1 % and 1.5 years, respectively.
As of March 31, 2024, the total operating lease right-of-use asset cost was approximately $124.4 million, and accumulated amortization was approximately $15.0 million. As of December 31, 2023, our total operating lease right-of-use asset cost was approximately $85.8 million, and accumulated amortization was approximately $7.2 million.
Finance Leases
Description of Lease
In January 2023, we entered into a three-year equipment lease contract (the "Power Equipment Lease") for certain power generation equipment with a commencement date of August 23, 2023. During the three months ended March 31, 2024, the Company made lease payments of approximately $5.0 million on the Power Equipment Lease. The assets and liabilities under this contract are included in our Hydraulic Fracturing reportable segment. In addition to the contractual lease period, the contract includes an optional renewal for one year , and in management's judgment the exercise of the renewal option is not
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PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 - Leases (Continued)
reasonably assured. The contract does not include a residual value guarantee, covenants or financial restrictions. Further, the Power Equipment Lease does not contain variability in payments resulting from either an index change or rate change.
We accounted for the Power Equipment Lease as a finance lease. This conclusion resulted from the existence of the right to control the use of the assets throughout the lease term, the present value of lease payments being equal to or in excess of substantially all of the fair value of the underlying assets and the lease term being the major part of the remaining economic life of the underlying assets. As of March 31, 2024, the weighted average discount rate and remaining lease term was approximately 7.3 % and 2.4 years, respectively.
As of March 31, 2024, the total finance lease right-of-use asset cost was approximately $52.6 million, and accumulated amortization was approximately $9.7 million. As of December 31, 2023, the total finance lease right-of-use was approximately $52.6 million, and accumulated amortization was approximately $5.2 million.
Maturity Analysis of Lease Liabilities
The maturity analysis of liabilities and reconciliation to undiscounted and discounted remaining future lease payments for our leases as of March 31, 2024 are as follows:
(in thousands) | Operating Leases | Finance Leases | ||||||||||||
2024 | $ | $ | ||||||||||||
2025 | ||||||||||||||
2026 | ||||||||||||||
2027 | ||||||||||||||
2028 | ||||||||||||||
Total undiscounted future lease payments | ||||||||||||||
Less: amount representing interest | ( |
( |
||||||||||||
Present value of future lease payments (lease obligation) | $ | $ |
The total cash paid for amounts included in the measurement of our operating lease liabilities during the three months ended March 31, 2024 was approximately $6.3 million. The total cash paid for amounts included in the measurement of our finance lease liabilities during the three months ended March 31, 2024 was approximately $4.2 million. During the three months ended March 31, 2024, we recorded non-cash operating lease obligations totaling approximately $32.4 million arising from obtaining right-of-use assets related to the receipt of equipment under the Electric Fleet Two Lease, the Electric Fleet Three Lease and the Electric Fleet Four Lease. During the three months ended March 31, 2023, total cash paid for amounts included in the measurement of our operating lease liabilities was approximately $0.3 million. During the three months ended March 31, 2023, we recorded a non-cash operating lease obligation of approximately $1.8 million as a result of our execution of the Real Estate Two Lease and our extension of the Silvertip One Lease.
Short-Term Leases
We elected the practical expedient option, consistent with ASC 842, to exclude leases with an initial term of twelve months or less ("short-term lease") from our balance sheet and continue to record short-term leases as a period expense.
Initial Direct Costs
We elected to analogize to the measurement guidance of ASC 360 to capitalize costs incurred to place a leased asset into its intended use and to present such capitalized costs as part of the related lease right-of-use asset cost as initial direct costs.
Lease Costs
For the three months ended March 31, 2024 and 2023, we recorded operating lease cost of approximately $9.0 million and $0.3 million, respectively, in our condensed consolidated statements of operations. For the three months ended March 31, 2024, we recorded finance lease cost of approximately $5.3 million in our condensed consolidated statements of operations comprising of amortization of finance right-of-use asset of approximately $4.5 million and interest on finance lease liabilities of approximately $0.8 million. For the three months ended March 31, 2023, we had no finance lease costs. For the three months ended March 31, 2024 and 2023, we recorded variable lease cost of approximately $0.6 million and $0 , respectively, in our
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PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 - Leases (Continued)
condensed consolidated statements of operations. For the three months ended March 31, 2024 and 2023, we recorded short-term lease cost of approximately $0.2 million and $0.3 million, respectively, in our condensed consolidated statements of operations.
Note 13 - Commitments and Contingencies
Commitments
We entered into certain commitments for fixed assets, consumables and services incidental to the ordinary conduct of our business, generally for quantities required for our operations and at competitive market prices. These commitments are designed to assure sources of supply and are not expected to be in excess of normal requirements. We entered into the Electric Fleet Leases, which contain options to extend the leases or purchase the equipment at the end of each lease or at the end of each subsequent renewal period. As of March 31, 2024, all four of the Electric Fleet Leases commenced when the Company took possession of all equipment associated with the first and second FORCESM electric-powered hydraulic fracturing fleet and some of the equipment associated with the third and fourth fleets. Lease payments pertaining to the remaining equipment associated with the third and fourth Electric Fleet Leases are expected to commence when the Company takes possession of the remaining associated equipment. We currently expect to receive the remaining equipment associated with the third and fourth fleets in the first half of 2024. The total estimated contractual commitment in connection with the Electric Fleet Leases excluding the cost associated with the option to purchase the equipment at the end of each lease is approximately $100.7 million. We also entered into the Power Equipment Lease. The total estimated contractual commitment in connection with the Power Equipment Lease is approximately $47.6 million.
The Company enters into purchase agreements with its sand suppliers (the "Sand Suppliers") to secure supply of sand as part of its normal course of business. The agreements with the Sand Suppliers require that the Company purchase a minimum volume of sand, based primarily on a certain percentage of our sand requirements from our customers or in certain situations based on predetermined fixed minimum volumes, otherwise certain penalties (shortfall fees) may be charged. The shortfall fee represents liquidated damages and is either a fixed percentage of the purchase price for the minimum volumes or a fixed price per ton of unpurchased volumes. Our agreements with the Sand Suppliers expire at different times prior to December 31, 2025. Our sand agreement with one of our Sand Suppliers that will expire on December 31, 2024 has a remaining take-or-pay commitment of $13.1 million. During the three months ended March 31, 2024 and 2023, no shortfall fee was recorded.
As of March 31, 2024, the Company had issued letters of credit of approximately $6.0 million under the ABL Credit Facility in connection with the Company’s casualty insurance policy.
Contingent Liabilities
Environmental and Equipment Insurance
The Company is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for protection of the environment. The Company cannot predict the future impact of such standards and requirements, which are subject to change and can have retroactive effectiveness. The Company continues to monitor the status of these laws and regulations. Currently, the Company has not been fined, cited or notified of any environmental violations that would have a material adverse effect upon its financial position, liquidity or capital resources. However, management does recognize that by the very nature of the Company's business, material costs could be incurred in the near term to maintain compliance. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions which may be required, the determination of the Company's liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification.
The Company is self-insured up to $10 million per occurrence for certain losses arising from or attributable to fire and/or explosion at the wellsites that do not have qualified fire suppression measures. No accrual was recorded in our financial statements in connection with this self-insurance strategy because the occurrence of fire and/or explosion cannot be reasonably estimated.
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PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 13 - Commitments and Contingencies (Continued)
Regulatory Audits
In 2020, the Texas Comptroller of Public Accounts (the "Comptroller") commenced a routine audit of the Company's motor vehicle and other related fuel taxes for the periods of July 2015 through December 2020. As of March 31, 2024, the audit was substantially complete and the Company accrued for an estimated settlement expense of $6.0 million.
In May 2022, the Company received a notification from the Comptroller that it will commence a routine audit of the Company's gross receipt taxes, which typically covers up to a four-year period. As of March 31, 2024, the audit is still ongoing and the final outcome cannot be reasonably estimated.
In June 2023, the Company received confirmation from the Comptroller that it will commence a routine audit of the Company's direct payment sales tax in August 2023 for the period February 1, 2020 to December 31, 2022. As of March 31, 2024, the audit is still ongoing and the final outcome cannot be reasonably estimated.
Note 14 - Subsequent Events
In April 2024, we received some of the remaining equipment associated with our third FORCESM electric-powered hydraulic fracturing fleet and additional equipment associated with our fourth FORCESM electric-powered hydraulic fracturing fleet under the Electric Fleet Leases, resulting in the addition of non-cash operating lease obligations totaling approximately $5.3 million arising from obtaining right-of-use assets related to this equipment.
In April 2024, we entered into a contract with Exxon Mobil Corporation to provide hydraulic fracturing services with two FORCESM electric-powered hydraulic fracturing fleets and other completion services with an option to add a third FORCESM fleet for a period of three years or contracted hours, whichever occurs last with respect to each fleet.
On April 24, 2024, the Board approved an increase and extension to the share repurchase program previously authorized on May 17, 2023. The approval permits the repurchase of up to an additional $100 million of the Company's common stock for a total of $200 million and has extended the expiration date of the program by one year to May 31, 2025.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The financial information, discussion and analysis that follow should be read in conjunction with our consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2023 ("Form 10-K") as well as the financial and other information included therein.
Unless otherwise indicated, references in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" to the "Company," "we," "our," "us" or like terms refer to ProPetro Holding Corp. and its subsidiaries.
Overview
We are a leading integrated oilfield service company, located in Midland, Texas, focused on providing innovative hydraulic fracturing, wireline and other complementary oilfield completion services to leading upstream oil and gas companies engaged in the exploration and production ("E&P") of North American oil and natural gas resources. Our operations are primarily focused in the Permian Basin, where we have cultivated longstanding customer relationships with some of the region's most active and well-capitalized E&P companies. The Permian Basin is widely regarded as one of the most prolific oil-producing areas in the United States, and we believe we are one of the leading providers of completion services in the region.
Our completion services include our operating segments comprised of hydraulic fracturing, wireline and cementing operations. Our hydraulic fracturing operations account for approximately 76.2% of our total revenues and operations. Our total available hydraulic horsepower ("HHP") as of March 31, 2024, was 1,539,500 HHP, which was comprised of 452,500 HHP of our Tier IV Dynamic Gas Blending ("DGB") dual-fuel equipment, 222,000 HHP of FORCESM electric-powered equipment and 865,000 HHP of conventional Tier II equipment. Our hydraulic fracturing fleets range from approximately 50,000 to 80,000 HHP depending on the job design and customer demand at the wellsite. Our equipment has been designed to handle the operating conditions commonly encountered in the Permian Basin and the region’s increasingly high-intensity well completions (including simultaneous hydraulic fracturing ("Simul-Frac"), which involves fracturing multiple wellbores at the same time), which are characterized by longer horizontal wellbores, more stages per lateral and increasing amounts of proppant per well. With the industry transition to lower emissions equipment and Simul-Frac, in addition to several other changes to our customers' job designs, we believe that our available fleet capacity could decline if we decide to reconfigure our fleets to increase active HHP and backup HHP at wellsites. In addition, in 2021 and 2022, we committed to additional conversions of our Tier II equipment to Tier IV DGB, and to purchase new Tier IV DGB dual-fuel equipment. As such, we entered into conversion and purchase agreements with our equipment manufacturers for a total of 452,500 HHP of Tier IV DGB dual-fuel equipment and we have received all of the converted and new Tier IV DGB dual-fuel equipment by the end of 2023. In 2022, we entered into three-year electric fleet leases for a total of four FORCESM electric-powered hydraulic fracturing fleets with 60,000 HHP per fleet (the "Electric Fleet Leases"). As of March 31, 2024, we have received 222,000 HHP of FORCESM electric-powered equipment. We currently expect to receive the remaining equipment associated with the third and fourth fleets in the first half of 2024. We currently have 24 wireline units and 37 cement units.
On November 1, 2022, we consummated the acquisition of all of the outstanding limited liability company interests of Silvertip Completion Services Operating, LLC (the "Silvertip Acquisition"), which provides wireline perforation and ancillary services solely in the Permian Basin in exchange for 10.1 million shares of our common stock valued at $106.7 million, $30.0 million of cash, the payoff of $7.2 million of assumed debt, and the payment of certain other closing and transaction costs. The Silvertip Acquisition positions the Company as a more resilient and diversified completions-focused oilfield service provider headquartered in the Permian Basin.
On December 1, 2023, we consummated the purchase of the assets and operations of Par Five Energy Services LLC (“Par Five”), which provides cementing services in the Delaware Basin, in exchange for $25.4 million of cash, including deferred cash consideration of $3.2 million which is payable to Par Five or its beneficiary on June 1, 2025 with interest at 4.0% per annum. Par Five’s business complements our existing cementing business and enables us to serve both the Midland and Delaware Basins of the Permian Basin.
Our competitors include many large and small oilfield service companies, including Halliburton Company, Liberty Energy Inc., Patterson-UTI Energy Inc., ProFrac Holding Corp., RPC, Inc., and a number of private and locally-oriented businesses. The markets in which we operate are highly competitive. To be successful, an oilfield services company must provide services that meet the specific needs of oil and natural gas E&P companies at competitive prices. Competitive factors impacting sales of our services are price, reputation, technical expertise, emissions profile, service and equipment design and quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in an E&P company's criteria in choosing a service provider. However, we have recently observed the energy industry and our customers shift to lower emissions equipment, which we believe will be an increasingly important factor in an E&P company's selection of a service provider. The transition to lower emissions equipment has been challenging for companies in the oilfield service industry because of the capital requirements, lack of large scale deployment of certain new technology such as electric-powered equipment, pricing for services and expected return on invested capital. While we seek to price our services competitively, we
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believe many of our customers elect to work with us based on our operational efficiencies, productivity, equipment portfolio and quality, reliability, ability to manage multifaceted logistics challenges, commitment to safety and the ability of our people to handle the most complex Permian Basin well completions.
Our substantial market presence in the Permian Basin positions us well to capitalize on drilling and completion activity in the region. Primarily, our operational focus has been in the Permian Basin's Midland sub-basin, where our customers have operated. However, we have increased our operations in the Delaware sub-basin and are well-positioned to support further increases to our activity in this area in response to demand from our customers. Over time, we expect the Permian Basin's Midland and Delaware sub-basins to continue to command a disproportionate share of future North American E&P spending.
We have historically conducted our business through four operating segments: hydraulic fracturing, wireline, cementing and coiled tubing. Prior to the fourth quarter of fiscal year 2023, our operating segments met the aggregation criteria and were aggregated into the “Completion Services” reportable segment. Effective as of the fourth quarter of fiscal year 2023, we revised our segment reporting as we determined that our three operating segments no longer met the criteria to be aggregated. Our Hydraulic Fracturing and Wireline operating segments meet the criteria of a reportable segment. Our cementing segment is not material, is not separately reportable, and is included within the “All Other” category. Prior period segment information has been revised to conform to our current presentation. For additional financial information on our reportable segments presentation, please see "Note 7 - Reportable Segment Information."
Pioneer Pressure Pumping Acquisition
On December 31, 2018, we consummated the purchase of certain pressure pumping assets and real property from Pioneer Natural Resources USA, Inc. ("Pioneer") and Pioneer Pumping Services (the "Pioneer Pressure Pumping Acquisition") in exchange for 16.6 million shares of our common stock and $110.0 million in cash, and concurrently entered into a pressure pumping services agreement (the "Pioneer Services Agreement") with Pioneer.
On March 31, 2022, we entered into an amended and restated pressure pumping services agreement (the "A&R Pressure Pumping Services Agreement") to replace the Pioneer Services Agreement that was entered into in connection with the Pioneer Pressure Pumping Acquisition. This agreement expired at the conclusion of its term and was replaced by the Fleet One Agreement and Fleet Two Agreement described below.
On October 31, 2022, we entered into two pressure pumping services agreements (the "Fleet One Agreement" and the "Fleet Two Agreement") with Pioneer, pursuant to which we provided hydraulic fracturing services with two committed fleets, subject to certain termination and release rights. The Fleet One Agreement was effective as of January 1, 2023 and was terminated on August 31, 2023. The Fleet Two Agreement was effective as of January 1, 2023 and was terminated on May 12, 2023. In October 2023, Pioneer entered into a merger agreement with Exxon Mobil Corporation.
Commodity Price and Other Economic Conditions
The oil and gas industry has traditionally been volatile and is characterized by a combination of long-term, short-term and cyclical trends, including domestic and international supply and demand for oil and gas, current and expected future prices for oil and gas and the perceived stability and sustainability of those prices, and capital investments of E&P companies toward their development and production of oil and gas reserves. The oil and gas industry is also impacted by general domestic and international economic conditions such as supply chain disruptions and inflation, war and political instability in oil producing countries, government regulations (both in the United States and internationally), levels of consumer demand, adverse weather conditions, and other factors that are beyond our control.
Since October 2023, an ongoing conflict between Israel and Palestinian militants in the Israel-Gaza region has led to significant armed hostilities, including elsewhere in the Middle East. On April 13, 2024, Iran launched an attack on several targets in Israel, and in response the U.S. and a number of its allies have stated an intent to impose additional sanctions on Iran. The geopolitical and macroeconomic consequences of this conflict remain uncertain, and such events, or any further hostilities in the Israel-Gaza region, with Iran or elsewhere, could severely impact the world economy, the demand for and price of crude oil and the oil and gas industry generally and may adversely affect our financial condition.
Similarly, the geopolitical and macroeconomic consequences of the Russian invasion of Ukraine, including the associated sanctions, and the adverse impacts of the COVID-19 pandemic in recent years have resulted in volatility in supply and demand dynamics for crude oil and associated volatility in crude oil pricing. As the global response to the COVID-19 pandemic began to wane, the demand and prices for crude oil increased from the lows experienced in 2020, with the West Texas Intermediate ("WTI") average crude oil price reaching approximately $94 per barrel in 2022, the highest average price in the prior nine years. The WTI average crude oil price declined to approximately $78 per barrel in 2023 before slightly increasing to approximately $81 per barrel in March 2024. We believe that the volatility of crude oil prices in recent years has been partly
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driven by declines in crude oil supplies, concerns over sanctions resulting from Russia's invasion of Ukraine, concerns over a potential disruption of Middle Eastern oil supplies resulting from the ongoing conflict between Israel and Palestinian militants in the Israel-Gaza region, slower crude oil production growth due to the lack of reinvestment in the oil and gas industry in the last two years, recent OPEC+ production cuts of approximately 2.2 million barrels per day and concerns of a potential global recession resulting from high inflation and interest rates.
With the significant increase in global crude oil prices from 2021, including the WTI crude oil price, there has been an increase in the Permian Basin rig count from approximately 179 at the beginning of 2021 to approximately 353 at the end of 2022, according to the Baker Hughes Company. Following the increase in rig count and the WTI crude oil price, the oilfield service industry has experienced increased demand for its completion services, and improved pricing. However, we have recently experienced a 13% decrease in the rig count in 2023 to 309 at the end of 2023 which resulted in a reduction in the demand for completion services and pressure on pricing of our services. The Permian Basin rig count has subsequently increased to 316 at the end of March 2024.
Sustained levels of high inflation have likewise caused the U.S. Federal Reserve and other central banks to increase interest rates, and to the extent elevated inflation remains, we may experience further cost increases for our operations, including interest rates, labor costs and equipment. We cannot predict any future trends in the rate of inflation and crude oil prices. A significant increase in or continued high levels of inflation, to the extent we are unable to timely pass-through the cost increases to our customers, or further declines in crude oil prices would negatively impact our business, financial condition and results of operations.
Government regulations and investors are demanding the oil and gas industry transition to a lower emissions operating environment, including upstream and oilfield service companies. As a result, we are working with our customers and equipment manufacturers to transition our equipment to a lower emissions profile. Currently, a number of lower emission solutions for pumping equipment, including Tier IV DGB dual-fuel, FORCESM electric, direct drive gas turbine and other technologies have been developed, and we expect additional lower emission solutions will be developed in the future. We are continually evaluating these technologies and other investment and acquisition opportunities that would support our existing and new customer relationships. The transition to lower emissions equipment is quickly evolving and will be capital intensive. Over time, we may be required to convert substantially all of our conventional Tier II equipment to lower emissions equipment. We have transitioned our hydraulic fracturing equipment portfolio from approximately 10% lower emissions equipment in 2021 to approximately 35% in 2022 and approximately 60% in 2023, and expect to increase to approximately 65% by the end of the first half of 2024. To the extent any of our customers have certain expectations or requirements with respect to emissions reductions from their contractors, if we are unable to continue quickly transitioning to lower emissions equipment, the demand for our services could be adversely impacted.
If the Permian Basin rig count and market conditions improve, including improved pricing for our services and labor availability, and we are able to meet our customers' lower emissions equipment demands, we believe our operational and financial results will also improve. If the rig count or market conditions do not improve or decline in the future, and we are unable to increase our pricing or pass-through future cost increases to our customers, there could be a material adverse impact on our business, results of operations and cash flows.
Our results of operations have historically reflected seasonal tendencies, typically in the fourth quarter, relating to the holiday season, inclement winter weather and exhaustion of our customers' annual budgets. As a result, we typically experience declines in our operating and financial results in November and December, even in a stable commodity price and operations environment.
How We Evaluate Our Operations
Our management uses Adjusted EBITDA or Adjusted EBITDA margin to evaluate and analyze the performance of our various operating segments.
Adjusted EBITDA and Adjusted EBITDA Margin
We view Adjusted EBITDA and Adjusted EBITDA margin as important indicators of performance. We define EBITDA as our earnings, before (i) interest expense, (ii) income taxes and (iii) depreciation and amortization. We define Adjusted EBITDA as EBITDA, plus (i) loss/(gain) on disposal of assets, (ii) stock-based compensation, (iii) other expense/(income), (iv) other unusual or nonrecurring (income)/expenses such as costs related to asset acquisitions, insurance recoveries, one-time professional fees and legal settlements and (v) retention bonuses and severance. Adjusted EBITDA margin reflects our Adjusted EBITDA as a percentage of our revenues.
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Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures utilized by our management and other users of our financial statements such as investors, commercial banks, and research analysts, to assess our financial performance because it allows us and other users to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization), nonrecurring (income)/expenses and items outside the control of our management team (such as income taxes). Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools and should not be considered as an alternative to net income/(loss), operating income/(loss), cash flow from operating activities or any other measure of financial performance presented in accordance with accounting principles generally accepted in the United States of America ("GAAP").
Note Regarding Non-GAAP Financial Measures
Adjusted EBITDA and Adjusted EBITDA margin are not financial measures presented in accordance with GAAP ("non-GAAP"), except when specifically required to be disclosed by GAAP in the financial statements. We believe that the presentation of Adjusted EBITDA and Adjusted EBITDA margin provide useful information to investors in assessing our financial condition and results of operations because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure, asset base, nonrecurring expenses (income) and items outside the control of the Company. Net income (loss) is the GAAP measure most directly comparable to Adjusted EBITDA. Adjusted EBITDA and Adjusted EBITDA margin should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as analytical tools because they exclude some, but not all, items that affect the most directly comparable GAAP financial measures. You should not consider Adjusted EBITDA or Adjusted EBITDA margin in isolation or as a substitute for an analysis of our results as reported under GAAP. Because Adjusted EBITDA and Adjusted EBITDA margin may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
The following tables set forth certain financial information with respect to the Company’s reportable segments; inter-segment revenues are not material and not shown separately (in thousands):
Three Months Ended March 31, 2024 | ||||||||||||||||||||||||||||||||
Hydraulic Fracturing | Wireline | All Other | Reconciling Items | Total | ||||||||||||||||||||||||||||
Service revenue | $ | 309,300 | $ | 60,805 | $ | 35,738 | $ | — | $ | 405,843 | ||||||||||||||||||||||
Adjusted EBITDA | $ | 86,119 | $ | 16,786 | $ | 4,861 | $ | (14,371) | $ | 93,395 | ||||||||||||||||||||||
Depreciation and amortization | $ | 44,995 | $ | 4,915 | $ | 2,271 | $ | 25 | $ | 52,206 | ||||||||||||||||||||||
Operating lease expense on FORCESM fleets (1)
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$ | 8,592 | $ | — | $ | — | $ | — | $ | 8,592 | ||||||||||||||||||||||
Capital expenditures incurred | $ | 35,988 | $ | 2,386 | $ | 1,466 | $ | — | $ | 39,840 | ||||||||||||||||||||||
Goodwill | $ | — | $ | 23,624 | $ | — | $ | — | $ | 23,624 | ||||||||||||||||||||||
Total assets March 31, 2024 | $ | 1,236,940 | $ | 210,579 | $ | 74,664 | $ | 12,077 | $ | 1,534,260 |
Three Months Ended March 31, 2023 | ||||||||||||||||||||||||||||||||
Hydraulic Fracturing | Wireline | All Other | Reconciling Items | Total | ||||||||||||||||||||||||||||
Service revenue | $ | 334,441 | $ | 62,560 | $ | 26,569 | $ | — | $ | 423,570 | ||||||||||||||||||||||
Adjusted EBITDA | $ | 108,581 | $ | 18,331 | $ | 3,963 | $ | (11,710) | $ | 119,165 | ||||||||||||||||||||||
Depreciation and amortization (2)
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$ | 32,412 | $ | 4,408 | $ | 1,360 | $ | 91 | $ | 38,271 | ||||||||||||||||||||||
Capital expenditures incurred | $ | 95,073 | $ | 1,033 | $ | 1,064 | $ | — | $ | 97,170 | ||||||||||||||||||||||
Goodwill | $ | — | $ | 23,624 | $ | — | $ | — | $ | 23,624 | ||||||||||||||||||||||
Total assets at December 31, 2023 | $ | 1,189,526 | $ | 198,957 | $ | 78,475 | $ | 13,354 | $ | 1,480,312 |
(1)Represents lease cost related to operating leases on our FORCESM electric-powered hydraulic fracturing fleets. This cost is recorded within cost of services in our condensed consolidated statements of operations. We did not have these leases in the three months ended March 31, 2023.
(2)The write-offs of remaining book value of prematurely failed power ends are recorded as loss on disposal of assets in 2024. In order to conform to current period presentation, we have reclassified the corresponding amount of $12.5 million from depreciation to loss on disposal of assets for the three months ended March 31, 2023.
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A reconciliation of net income to Adjusted EBITDA is provided in the table below (in thousands):
Three Months Ended March 31, | |||||||||||
2024 | 2023 | ||||||||||
Net income | $ | 19,930 | $ | 28,733 | |||||||
Depreciation and amortization (1)
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52,206 | 38,271 | |||||||||
Interest expense | 2,029 | 667 | |||||||||
Income tax expense | 9,758 | 8,356 | |||||||||
Loss on disposal of assets (1)
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6,458 | 34,607 | |||||||||
Stock-based compensation | 3,742 | 3,536 | |||||||||
Other (income) expense, net (2)
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(1,405) | 3,704 | |||||||||
Other general and administrative expense, net | 59 | 946 | |||||||||
Retention bonus and severance expense | 618 | 345 | |||||||||
Adjusted EBITDA | $ | 93,395 | $ | 119,165 |
(1)The write-offs of remaining book value of prematurely failed power ends are recorded as loss on disposal of assets for the three months ended March 31, 2024. In order to conform to current period presentation, we have reclassified the corresponding amount of $12.5 million from depreciation to loss on disposal of assets for the three months ended March 31, 2023.
(2)Other income for the three months ended March 31, 2024 is primarily comprised of insurance reimbursements of $2.0 million, partially offset by a $0.6 million unrealized loss on short-term investment. Other expense for the three months ended March 31, 2023 is primarily comprised of a $3.8 million unrealized loss on short-term investment.
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Results of Operations
As of March 31, 2024, we conducted our business through three operating segments: hydraulic fracturing, wireline and cementing. Our cementing operating segment is shown in the "All Other" category for segment reporting purposes.
On December 1, 2023, we consummated the purchase of the assets and operations of Par Five, which provides cementing services in the Delaware Basin in exchange for cash consideration of $25.4 million. Par Five’s business complements our existing cementing business and enables us to serve both the Midland and Delaware Basins of the Permian Basin. The Company's 2024 results include the impact of Par Five's operations for the entire period which was not included in our 2023 results herein because we acquired Par Five in December 2023. Accordingly, the full impact of the results of Par Five may affect the comparability of our 2024 results when compared to prior period. Par Five's operations resulted in $9.6 million in revenue and $8.6 million in cost of services which are included in the All Other category for the three months ended March 31, 2024.
The following table sets forth the results of operations for the periods presented:
(in thousands, except for percentages) | Three Months Ended March 31, | Change Increase (Decrease) |
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2024 | 2023 | $ | % | |||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||
Hydraulic Fracturing | $ | 309,300 | $ | 334,441 | $ | (25,141) | (7.5) | % | ||||||||||||||||||
Wireline | 60,805 | 62,560 | (1,755) | (2.8) | % | |||||||||||||||||||||
All Other (1)
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35,738 | 26,569 | 9,169 | 34.5 | % | |||||||||||||||||||||
Total revenue | 405,843 | 423,570 | (17,727) | (4.2) | % | |||||||||||||||||||||
Cost of services (2)
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Hydraulic Fracturing | 218,024 | 218,565 | (541) | (0.2) | % | |||||||||||||||||||||
Wireline | 41,152 | 40,960 | 192 | 0.5 | % | |||||||||||||||||||||
All Other (1)
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29,465 | 20,961 | 8,504 | 40.6 | % | |||||||||||||||||||||
Total cost of services | 288,641 | 280,486 | 8,155 | 2.9 | % | |||||||||||||||||||||
General and administrative expense (3)
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28,226 | 28,746 | (520) | (1.8) | % | |||||||||||||||||||||
Depreciation and amortization | 52,206 | 38,271 | 13,935 | 36.4 | % | |||||||||||||||||||||
Loss on disposal of assets | 6,458 | 34,607 | (28,149) | (81.3) | % | |||||||||||||||||||||
Interest expense | 2,029 | 667 | 1,362 | 204.2 | % | |||||||||||||||||||||
Other (income) expense | (1,405) | 3,704 | 5,109 | 137.9 | % | |||||||||||||||||||||
Income tax expense | 9,758 | 8,356 | 1,402 | 16.8 | % | |||||||||||||||||||||
Net income | $ | 19,930 | $ | 28,733 | $ | (8,803) | (30.6) | % | ||||||||||||||||||
Adjusted EBITDA (3)
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$ | 93,395 | $ | 119,165 | $ | (25,770) | (21.6) | % | ||||||||||||||||||
Adjusted EBITDA Margin (3)
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23.0 | % | 28.1 | % | (5.1) | % | (18.1) | % | ||||||||||||||||||
Hydraulic Fracturing segment results of operations: | ||||||||||||||||||||||||||
Revenue | $ | 309,300 | $ | 334,441 | $ | (25,141) | (7.5) | % | ||||||||||||||||||
Cost of services | $ | 218,024 | $ | 218,565 | $ | (541) | (0.2) | % | ||||||||||||||||||
Adjusted EBITDA (4)
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$ | 86,119 | $ | 108,581 | $ | (22,462) | (20.7) | % | ||||||||||||||||||
Adjusted EBITDA Margin (5)
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27.8 | % | 32.5 | % | (4.7) | % | (14.5) | % |
(1)Includes our cementing operations.
(2)Exclusive of depreciation and amortization.
(3)Inclusive of stock-based compensation.
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(4)For definitions of the non-GA