ProPetro (PUMP) - 2020 Q4 - Annual Report

Part I Business ProPetro Holding Corp. provides hydraulic fracturing services in the Permian Basin, transitioning to lower-emission equipment amidst market volatility Our Company and Services ProPetro focuses on hydraulic fracturing in the Permian Basin, investing in lower-emission equipment while streamlining core services Hydraulic Horsepower Capacity (as of December 31, 2020) | Metric | Value | | :--- | :--- | | Total Available HHP (as of Dec 31, 2020) | 1,373,000 HHP | | Conventional Tier II HHP | 1,265,000 HHP | | DuraStim® Electric HHP | 108,000 HHP | | HHP in process of permanent retirement | ~150,000 HHP | - The company has committed to purchasing 50,000 HHP of Tier IV Dynamic Gas Blending (DGB) dual-fuel equipment, expected to be delivered in the first half of 2021[28] - The company aims to commercialize its first DuraStim® electric-powered fleet in the second half of 2021 and holds an option to purchase an additional 108,000 HHP of this equipment through July 2022[29] - In 2020, the company shut down its flowback and drilling operations, disposing of the related assets to focus on core services[46][47] Market Conditions and Customers Performance is tied to volatile commodity prices, with a concentrated customer base where top five clients accounted for 86.5% of 2020 revenue - WTI crude oil prices declined by approximately 67% from January 2020 to the end of March 2020, falling from ~$62/barrel to just over $20/barrel, before recovering to ~$62/barrel by March 2021[35] Revenue Concentration by Customer (2020) | Customer Group | % of Total Revenue (2020) | | :--- | :--- | | Top 5 Customers | 86.5% | | Pioneer Natural Resources USA Inc. | 42.5% | | XTO Energy Inc. | 20.3% | Competition, Risks, and Regulations Operates in a competitive market, subject to operational hazards and stringent environmental regulations, with increasing scrutiny on climate change - Major competitors in hydraulic fracturing services include Halliburton Company, Liberty Oilfield Services Inc., and Nextier Oilfield Solutions Inc.[50] - The company maintains pollution legal liability coverage for surface or subsurface environmental clean-up and third-party liability arising from contamination[56][57] - The company anticipates that the Biden administration may introduce more stringent environmental regulations, particularly concerning hydraulic fracturing, permitting, and GHG emissions, which could increase compliance costs[60][70][74] Human Capital Employed approximately 1,100 people as of December 31, 2020, prioritizing safety and implementing COVID-19 response measures - The company employed approximately 1,100 people as of December 31, 2020, with none being unionized[79] - 20% of executive officers' annual target bonuses for 2020 were based on achieving safety goals, including a target total recordable incident rate of less than one[81] - COVID-19 response measures included instituting remote work, limiting visitors, and providing company-paid coverage for testing and vaccination[81] Risk Factors Faces substantial risks from industry cyclicality, commodity price volatility, Permian Basin concentration, and legal/regulatory challenges - The business is highly dependent on capital spending by E&P companies in the Permian Basin, which is directly affected by volatile oil and gas prices[83] - Operations are geographically concentrated in the Permian Basin, making the company vulnerable to regional supply/demand factors and regulatory changes; in 2020, approximately 99.5% of revenues were from this region[90] - The company is subject to a pending SEC investigation and multiple shareholder lawsuits (the Logan Lawsuit and the Shareholder Derivative Lawsuit), which could result in significant legal expenses, penalties, and reputational damage[111][115][117] - Reliance on a few large customers is a significant risk; Pioneer Natural Resources accounted for 42.5% of revenue in 2020, and its 10-year service agreement can be terminated by Pioneer as early as December 31, 2022[132][133] - Federal and state legislative initiatives related to hydraulic fracturing and climate change could result in increased costs, operating restrictions, and reduced demand for services[137][145] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[170] Properties Corporate headquarters in Midland, Texas, with adequate owned and leased properties for current Permian Basin operations - The corporate headquarters is located at 1706 S. Midkiff, Midland, Texas 79701[171] Legal Proceedings Legal proceedings information is incorporated by reference from Note 15 of the Consolidated Financial Statements - Details on legal proceedings are found in "Note 15. Commitments and Contingencies—Contingent Liabilities" of the financial statements[172] Mine and Safety Disclosures The company reports no mine and safety disclosures - There are no mine and safety disclosures[173] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common stock trades on NYSE under 'PUMP'; no cash dividends anticipated, with earnings retained for business growth - The company's common stock trades on the NYSE under the symbol "PUMP"[175] - The company does not anticipate paying cash dividends in the foreseeable future and intends to retain earnings to finance growth[177] Selected Financial Data Provides five years of historical financial data, affected by the 2020 industry downturn and the 2018 Pioneer acquisition Selected Financial Data (in thousands, except per share data) | Metric (in thousands, except per share data) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total revenue | $789,232 | $2,052,314 | $1,704,562 | | Operating (Loss) Income | $(131,243) | $221,362 | $232,669 | | Net (loss) income | $(107,020) | $163,010 | $173,862 | | Diluted (loss) income per share | $(1.06) | $1.57 | $2.00 | | Net cash provided by operating activities | $139,124 | $455,290 | $393,079 | | Total assets (at year end) | $1,050,739 | $1,436,111 | $1,274,522 | | Long-term debt — net (at year end) | $0 | $130,000 | $70,000 | Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue decreased 61.5% in 2020, to $789.2 million, due to the pandemic and oil price collapse, leading to cost-saving measures and a net loss Results of Operations (2020 vs. 2019) Revenue decreased 61.5% to $789.2 million in 2020, resulting in a net loss of $107.0 million due to demand decline and pricing pressures Key Financial Performance (2020 vs. 2019, in millions) | Metric (in millions) | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $789.2 | $2,052.3 | (61.5)% | | Net (Loss) Income | $(107.0) | $163.0 | (165.7)% | | Adjusted EBITDA | $141.5 | $519.1 | (72.7)% | - The decrease in revenue was primarily due to a significant drop in the average effectively utilized fleet count to 10.2 active fleets in 2020 from 23.9 in 2019[231] - Revenue from idle fees charged to a customer increased to $47.2 million in 2020 from $13.3 million in 2019, partially offsetting the decline in activity[231] - The company recorded an impairment expense of $38.0 million in 2020, compared to $3.4 million in 2019, primarily related to goodwill and property and equipment[236] Liquidity and Capital Resources Liquidity from cash and ABL Credit Facility totaled $120.7 million as of December 31, 2020, with reduced operating cash flow and capital expenditures - As of December 31, 2020, the company had no borrowings under its ABL Credit Facility and total liquidity of $120.7 million[243] Cash Flow Summary (in millions) | Cash Flow (in millions) | 2020 | 2019 | | :--- | :--- | :--- | | Net cash from operating activities | $139.1 | $455.3 | | Net cash used in investing activities | $(94.2) | $(495.3) | | Net cash (used in) provided by financing activities | $(125.2) | $56.3 | - Capital expenditures for 2021 are projected to range between $115.0 million and $130.0 million, including approximately $37.0 million for new and converted lower-emissions equipment[258] Critical Accounting Policies and Estimates Critical policies involve property valuation, impairment assessment of long-lived assets and goodwill, and income tax accounting, requiring significant judgment - The company reviews long-lived assets for impairment when events indicate the carrying value may not be recoverable; in 2020, triggering events (commodity price collapse, decreased share price) led to impairment tests and write-downs[273][274] - Goodwill of $9.4 million was fully impaired and written off in the first quarter of 2020 due to a significant decline in crude oil prices and the resulting market outlook[343][277] - The company recorded a total property and equipment impairment of $28.6 million in 2020, which included a $21.3 million charge for the planned retirement of 150,000 HHP of conventional Tier II equipment[274][275] Quantitative and Qualitative Disclosures About Market Risk Exposed to commodity price, interest rate, and credit risks, but does not currently use derivative instruments for hedging - The company is exposed to commodity price risk for materials (proppants, chemicals) and fuel (diesel, natural gas) but does not engage in hedging activities[283] - A hypothetical 1% increase in interest rates would have increased 2020 interest expense by approximately $0.4 million[284] Financial Statements and Supplementary Data Presents audited consolidated financial statements and auditor's unqualified opinion, highlighting related-party transactions as a critical audit matter Report of Independent Registered Public Accounting Firm Auditor issued an unqualified opinion on financial statements and internal controls, identifying related-party transactions as a critical audit matter - The auditor issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting[287][297] - Related-party transactions were identified as a critical audit matter due to previously reported material weaknesses in internal controls related to their identification and approval[293] Consolidated Financial Statements Balance sheet shows total assets of $1.05 billion, total liabilities of $180.0 million, and a net loss of $107.0 million for 2020 Consolidated Balance Sheet (in thousands) | Balance Sheet (in thousands) | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $167,726 | $375,591 | | Property and Equipment - Net | $880,477 | $1,047,535 | | Total Assets | $1,050,739 | $1,436,111 | | Total Current Liabilities | $104,163 | $232,966 | | Long-Term Debt | $0 | $130,000 | | Total Shareholders' Equity | $870,771 | $969,305 | Consolidated Statement of Operations (in thousands) | Statement of Operations (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Revenue | $789,232 | $2,052,314 | $1,704,562 | | Operating (Loss) Income | $(131,243) | $221,362 | $232,669 | | Net (Loss) Income | $(107,020) | $163,010 | $173,862 | Notes to Consolidated Financial Statements Notes detail segment performance, major customers, related-party transactions, and pending litigation, with no loss provision recorded - The company has one reportable segment, Pressure Pumping, which generated $773.5 million in revenue and $174.0 million in Adjusted EBITDA in 2020[386][390] - Related-party transactions in 2020 included property rentals from entities affiliated with former executives and equipment maintenance services from an entity with a family relationship to an executive officer[431][434] - The company is facing a class action lawsuit (Logan Lawsuit), a shareholder derivative lawsuit, and an SEC investigation; no provision for loss has been recorded as the outcomes are not yet reasonably estimable[457][461][462][463] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - There were no changes in or disagreements with accountants[470] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of December 31, 2020[472] - Management concluded that the company maintained effective internal control over financial reporting as of December 31, 2020[475] Other Information The company reports no other information - There is no other information to report[478] Part III Directors, Executive Officers, Corporate Governance, Compensation, Security Ownership, and Related Party Transactions Information for Items 10 through 14 is incorporated by reference from the Company's forthcoming 2021 Proxy Statement - Information regarding Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, Certain Relationships and Related Transactions, and Principal Accounting Fees and Services is incorporated by reference from the forthcoming 2021 Proxy Statement[481][483][484][485][486] Part IV Exhibits and Financial Statement Schedules Lists financial statements from Item 8 and provides an index of all exhibits, including corporate documents and certifications - The financial statements from Item 8 are filed as part of this report, and no financial statement schedules are included[488][489] - An exhibit index lists all required filings, including agreements, corporate governance documents, and executive certifications[490] Form 10-K Summary The company reports no Form 10-K summary - There is no Form 10-K summary provided[497]