ProPetro (PUMP) - 2022 Q2 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements Forward-Looking Statements Disclosure This section outlines the company's forward-looking statements, which involve risks and uncertainties that could cause actual results to differ materially - All statements in this Form 10-Q that are not historical facts are considered forward-looking statements, indicating expectations or forecasts of future events[9] - Key factors that could cause actual results to differ materially include the severity and duration of current world health events and armed conflicts, actions by OPEC+, and actions by the Biden Administration impacting oil and natural gas production[10] - Other significant risks include changes in general economic and geopolitical conditions, laws/regulations, cost increases and supply chain constraints, and technological changes[10] - Readers are cautioned not to place undue reliance on forward-looking statements, and the company disclaims any duty to update or revise them, except as required by applicable securities laws[12] PART I – FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements and detailed notes for the periods ended June 30, 2022, and December 31, 2021 Condensed Consolidated Balance Sheets Total assets and liabilities slightly increased from December 31, 2021, to June 30, 2022, while shareholders' equity experienced a minor decrease | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :--- | :--- | :--- | | Total Assets | $1,067,623 | $1,061,236 | | Total Liabilities | $250,587 | $234,934 | | Total Shareholders' Equity | $817,036 | $826,302 | - Cash and cash equivalents decreased from $111.9 million at December 31, 2021, to $69.8 million at June 30, 2022[16] - Accounts receivable (net) increased from $128.1 million to $182.0 million, indicating higher sales or slower collections[16] Condensed Consolidated Statements of Operations The company's net loss widened significantly for the three and six months ended June 30, 2022, compared to the prior year, due to a large impairment expense | Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $315,083 | $216,887 | $597,763 | $378,345 | | Net Income (Loss) | $(32,860) | $(8,511) | $(21,043) | $(28,886) | | Basic EPS | $(0.32) | $(0.08) | $(0.20) | $(0.28) | - Revenue increased significantly, with a 45.3% increase for the three months and a 58.0% increase for the six months ended June 30, 2022, compared to 2021[18] - An impairment expense of $57.5 million was recorded for the three and six months ended June 30, 2022, contributing to the increased net loss[18] Condensed Consolidated Statements of Shareholders' Equity Shareholders' equity decreased from $826.3 million to $817.0 million during the first six months of 2022, driven by the net loss incurred | Metric (in thousands) | January 1, 2022 | June 30, 2022 | | :--- | :--- | :--- | | Total Shareholders' Equity | $826,302 | $817,036 | | Accumulated Deficit | $(18,630) | $(39,673) | - Stock-based compensation cost contributed $14.8 million to additional paid-in capital during the six months ended June 30, 2022[20] - The accumulated deficit increased significantly from $(18.6) million at January 1, 2022, to $(39.7) million at June 30, 2022, reflecting the net losses[20] Condensed Consolidated Statements of Cash Flows Operating activities generated substantially more cash in the first half of 2022, while investing activities saw a significant increase in cash used for capital expenditures | Metric (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $103,308 | $61,480 | | Net cash used in investing activities | $(141,568) | $(50,920) | | Net cash used in financing activities | $(3,869) | $(6,631) | | Cash and cash equivalents - End of period | $69,789 | $72,701 | - The increase in cash from operating activities was driven by higher activity levels and a net tax refund, partially offset by timing of receivables and vendor payments[22] - Capital expenditures significantly increased to $144.5 million in 2022 from $52.2 million in 2021, leading to higher cash used in investing activities[22] Notes to Condensed Consolidated Financial Statements These notes provide essential details on accounting policies, financial instruments, debt, and other items, offering context to the financial statements Note 1 - Basis of Presentation The financial statements are prepared per SEC and GAAP requirements, with revenue recognized from pressure pumping and coiled tubing operations - The company's primary revenue-generating activities are aggregated into one reportable segment, 'Pressure Pumping', which includes hydraulic fracturing and cementing services[25][26] - Hydraulic fracturing revenue is recognized over time, while acidizing and cementing revenues are recognized at a point-in-time upon service completion[27][28][29] - Accrued revenue within accounts receivable increased from $19.4 million at December 31, 2021, to $43.2 million at June 30, 2022[32] Allowance for Credit Losses (in thousands) | Metric | January 1, 2022 | June 30, 2022 | | :--- | :--- | :--- | | Balance - Allowance for Credit Losses | $217 | $217 | Note 2 - Recently Issued Accounting Standards The company adopted ASU No 2020-04 for Reference Rate Reform, which did not materially affect the condensed consolidated financial statements - The company adopted ASU No 2020-04, Reference Rate Reform, effective January 1, 2022, providing guidance for the transition away from LIBOR[36] - The adoption of this guidance did not materially affect the Company's condensed consolidated financial statements[36] Note 3 - Fair Value Measurement A significant nonrecurring impairment expense of $57.5 million was recorded for DuraStim® hydraulic fracturing pumps due to commercialization uncertainty - Fair value is defined as the exit price in an orderly transaction, with a hierarchy (Level 1, 2, 3) based on the observability of inputs[37][38][39][40] - The estimated fair value of the company's financial instruments approximated their carrying values at June 30, 2022, and December 31, 2021[42] Assets Measured at Fair Value on a Nonrecurring Basis (in thousands) | Asset | Balance (June 30, 2022) | Total Gains (Losses) | | :--- | :--- | :--- | | Property and equipment, net | $11,341 | $(57,454) | - An impairment expense of approximately $57.5 million was recorded for DuraStim® hydraulic fracturing pumps in Q2 2022 due to performance issues and market conditions[43] Note 4 - Long-Term Debt The company amended its ABL Credit Facility, reducing borrowing capacity to $150.0 million and extending maturity to April 2027, with no outstanding borrowings - Effective April 13, 2022, the ABL Credit Facility's borrowing capacity was decreased to $150.0 million and the maturity date extended to April 13, 2027[46] - The Borrowing Base as of June 30, 2022, was approximately $120.5 million, based on eligible accounts receivable[46] - Interest accrues based on SOFR or the base rate, plus an applicable margin ranging from 1.50% to 2.00% for SOFR loans and 0.50% to 1.00% for base rate loans[46] - There were no borrowings outstanding under the revolving credit facility as of June 30, 2022, and December 31, 2021[47] Note 5 - Reportable Segment Information The company operates through one primary reportable segment, 'Pressure Pumping,' which saw a significant increase in Adjusted EBITDA - The company has one reportable segment, 'Pressure Pumping,' comprising hydraulic fracturing and cementing operations[50] - Hydraulic fracturing revenue approximated 92.9% and 93.2% of pressure pumping revenue for the three and six months ended June 30, 2022, respectively[51] Adjusted EBITDA by Segment (in thousands) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Pressure Pumping Adjusted EBITDA | $86,291 | $46,826 | $163,285 | $78,697 | | All Other Adjusted EBITDA | $(10,344) | $(11,133) | $(20,805) | $(22,988) | | Total Adjusted EBITDA | $75,947 | $35,693 | $142,480 | $55,709 | - Total corporate administrative expense for the three and six months ended June 30, 2022, was $7.7 million and $25.0 million, respectively, up from the prior year[50] Note 6 - Net Income (Loss) Per Share Basic and diluted net loss per share increased for the three-month period but decreased for the six-month period, with certain equity awards being anti-dilutive Net Income (Loss) Per Common Share | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Basic EPS | $(0.32) | $(0.08) | $(0.20) | $(0.28) | | Diluted EPS | $(0.32) | $(0.08) | $(0.20) | $(0.28) | - Weighted average common shares outstanding for basic and diluted calculations were approximately 104.2 million for the three months and 104.0 million for the six months ended June 30, 2022[66] Anti-Dilutive Equity Awards (in thousands) | Award Type | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Stock options | 587 | 995 | 587 | 995 | | Restricted stock units | 1,207 | 1,380 | 1,207 | 1,380 | | Performance stock units | 1,788 | 1,489 | 1,788 | 1,489 | | Total | 3,582 | 3,864 | 3,582 | 3,864 | Note 7 - Stock-Based Compensation Total stock-based compensation expense increased significantly to $14.8 million for the first half of 2022, partly due to accelerated vesting for a former officer - No new stock option grants were made during the six months ended June 30, 2022[69] - 631,233 RSUs were granted, with unrecognized compensation expense of $10.6 million to be recognized over approximately 2.0 years[71][72] - 327,939 PSUs were granted, and an incremental stock expense of $3.7 million was recorded due to PSU modifications for a former officer[74][75] Total Stock-Based Compensation Expense (in thousands) | Period | Total Stock-Based Compensation Expense | | :--- | :--- | | Six Months Ended June 30, 2022 | $14,800 | Note 8 - Related-Party Transactions Revenue from Pioneer, a significant customer, totaled $238.7 million for the first six months of 2022 under an amended services agreement - The company rents five operations and maintenance yards from an entity in which a director has an equity interest[81] - An amended agreement with Pioneer effective January 1, 2022, reduced contracted fleets from eight to six and replaced idle fees with equipment reservation fees[82] Revenue from Pioneer (in millions) | Period | Revenue from Pioneer | | :--- | :--- | | Three Months Ended June 30, 2022 | $115.2 | | Three Months Ended June 30, 2021 | $130.7 | | Six Months Ended June 30, 2022 | $238.7 | | Six Months Ended June 30, 2021 | $217.0 | - Accounts receivable due from Pioneer increased from $62.1 million at December 31, 2021, to $69.0 million at June 30, 2022[84] Note 9 - Leases The company has operating leases for real estate, with total undiscounted future lease payments of $0.8 million - The company has a ten-year Real Estate Lease and a two-year Maintenance Facility Lease, both classified as operating leases[87][89] - Total operating lease right-of-use asset cost was approximately $1.9 million at June 30, 2022, with accumulated amortization of $1.1 million[91] Maturity Analysis of Lease Liabilities (in thousands) | Year | Totals | | :--- | :--- | | 2022 | $360 | | 2023 | $398 | | 2024 | $50 | | Total undiscounted future lease payments | $808 | | Present value of future lease payments | $785 | - Short-term lease expense for the six months ended June 30, 2022, was approximately $0.4 million[94] Note 10 - Commitments and Contingencies The company has a $43.0 million commitment for new equipment and is involved in ongoing litigation, with outcomes currently not estimable - Total remaining lease commitments for short-term leases and lodging were approximately $2.5 million at June 30, 2022[95] - In August 2022, the company entered into a contractual arrangement to purchase and convert additional Tier IV DGB equipment for approximately $43.0 million[95] - The company is a defendant in the Logan Lawsuit, a class action alleging violations of the Exchange Act and Securities Act, with the outcome not yet estimable[98][99][103] - A $10.7 million net tax refund was received in March 2022 from the Texas Comptroller for sales, excise, and use tax[107] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial performance, highlighting significant revenue growth offset by increased costs and a substantial impairment charge Overview ProPetro is a Permian Basin-focused oilfield services company transitioning to lower emissions equipment but recorded a $57.5 million impairment on its DuraStim® assets - ProPetro is a Midland, Texas-based oilfield services company providing hydraulic fracturing and other complementary services, primarily in the Permian Basin[112] - Total available HHP as of June 30, 2022, was 1,315,000 HHP, including 197,500 HHP of Tier IV Dynamic Gas Blending (DGB) equipment[113] - The company recorded approximately $57.5 million of impairment expense on DuraStim® electric powered hydraulic fracturing equipment in Q2 2022[114] - An amended agreement with Pioneer reduced contracted fleets from eight to six and introduced equipment reservation fees, contributing to revenue[115] Commodity Price and Other Economic Conditions Industry volatility, driven by global events, has increased crude oil prices and service demand but also brought cost inflation and supply chain tightness - The Russia-Ukraine war and COVID-19 pandemic have contributed to significant increases and volatility in oil and natural gas prices, with global average crude oil prices exceeding $100 per barrel in 2022[122][124] - Increased crude oil prices led to a rise in Permian Basin rig count from approximately 179 to 349 at the end of June 2022, driving demand for oilfield services[124] - The company negotiated pricing increases with customers due to growing demand and significant cost inflation[124] - The industry is transitioning to lower emissions operating environments, requiring significant capital investment in new technologies[125] How We Evaluate Our Operations Management evaluates performance using non-GAAP measures Adjusted EBITDA and Adjusted EBITDA margin to provide a consistent basis for comparison - Management uses Adjusted EBITDA and Adjusted EBITDA margin as key performance indicators[128] - Adjusted EBITDA is defined as EBITDA adjusted for items like loss/(gain) on asset disposals, stock-based compensation, and other unusual or nonrecurring expenses[129] - Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures used to assess financial performance by removing the effects of capital structure and nonrecurring items[130][131] Results of Operations Revenue grew significantly, but this was offset by rising costs and a $57.5 million impairment expense, leading to a widened net loss for the quarter Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021 Revenue increased 45.3% to $315.1 million, but a $57.5 million impairment expense contributed to a widened net loss of $(32.9) million Key Financials (Three Months Ended June 30, in thousands) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $315,083 | $216,887 | $98,196 | 45.3% | | Cost of services | $218,813 | $162,837 | $55,976 | 34.4% | | General and administrative | $25,135 | $17,529 | $7,606 | 43.4% | | Impairment expense | $57,454 | $0 | $57,454 | 100.0% | | Loss on disposal of assets | $22,485 | $15,025 | $7,460 | 49.7% | | Net loss | $(32,860) | $(8,511) | $24,349 | 286.1% | | Adjusted EBITDA | $75,947 | $35,693 | $40,254 | 112.8% | | Adjusted EBITDA Margin | 24.1% | 16.5% | 7.6% | 46.1% | - Effectively utilized fleet count increased to approximately 14.8 active fleets in Q2 2022 from 13.1 in Q2 2021[142] - Pressure pumping cost of services as a percentage of revenue decreased to 69.0% in Q2 2022 from 74.7% in Q2 2021, reflecting improved operational efficiencies[144] - General and administrative expenses increased primarily due to $5.1 million in non-recurring legal fees and $0.5 million in stock-based compensation[145] Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021 Revenue surged 58.0% to $597.8 million, and a $10.7 million tax refund helped reduce the net loss to $(21.0) million despite a large impairment charge Key Financials (Six Months Ended June 30, in thousands) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $597,763 | $378,345 | $219,418 | 58.0% | | Cost of services | $416,083 | $286,215 | $129,868 | 45.4% | | General and administrative | $56,842 | $37,731 | $19,111 | 50.7% | | Impairment expense | $57,454 | $0 | $57,454 | 100.0% | | Loss on disposal of assets | $38,603 | $28,076 | $10,527 | 37.5% | | Other income | $(10,364) | $(1,487) | $8,877 | 597.0% | | Net loss | $(21,043) | $(28,886) | $(7,843) | (27.2)% | | Adjusted EBITDA | $142,480 | $55,709 | $86,771 | 155.8% | | Adjusted EBITDA Margin | 23.8% | 14.7% | 9.1% | 61.9% | - Effectively utilized fleet count increased to approximately 14.3 active fleets in H1 2022 from 11.7 in H1 2021[154] - General and administrative expenses increased due to a $9.4 million rise in stock-based compensation and $7.5 million in non-recurring legal fees[158] - Other income increased significantly due to a $10.7 million net tax refund from the Texas Comptroller[163] Liquidity and Capital Resources Total liquidity was $185.3 million as of June 30, 2022, comprising cash and availability under its amended ABL Credit Facility - Liquidity is provided by existing cash balances, operating cash flows, and borrowings under the ABL Credit Facility[167] Liquidity Position (as of June 30, 2022, in millions) | Metric | Amount | | :--- | :--- | | Cash and cash equivalents | $69.8 | | ABL Credit Facility availability | $115.5 | | Total Liquidity | $185.3 | - The ABL Credit Facility was amended on April 13, 2022, decreasing borrowing capacity to $150.0 million and extending maturity to April 13, 2027[173] - The Borrowing Base as of June 30, 2022, was approximately $120.5 million, and there were no borrowings under the facility[173][174] Future Sources and Use of Cash and Contractual Obligations Future cash will primarily fund capital expenditures for maintenance and DGB conversions, with a $43.0 million commitment for new equipment in August 2022 - Capital expenditures incurred were $89.1 million during the three months ended June 30, 2022, compared to $30.8 million in the prior year[175] - Future capital expenditures are projected for maintenance, costs to convert existing equipment to lower emissions (Tier IV DGB), and strategic purchases[176] - The company expects to fund capital expenditures through existing cash, cash flows from operations, and, if needed, borrowings under its ABL Credit Facility[177] - In August 2022, the company committed to purchase and convert additional Tier IV DGB equipment with a total cost of approximately $43.0 million[178] Cash and Cash Flows Operating cash flow increased to $103.3 million, while cash used in investing rose significantly due to investments in lower emissions equipment Historical Cash Flows (Six Months Ended June 30, in thousands) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $103,308 | $61,480 | | Net cash used in investing activities | $(141,568) | $(50,920) | | Net cash used in financing activities | $(3,869) | $(6,631) | - The $41.8 million increase in net cash from operating activities was primarily due to increased activity levels, higher crude oil prices, and a net tax refund[180] - The increase in net cash used in investing activities was primarily attributable to investment in lower emissions Tier IV DGB equipment[181] - The decrease in net cash used in financing activities was mainly due to a reduction in net settlement of equity awards and no repayments of insurance financing in 2022[182] Off-Balance Sheet Arrangements As of June 30, 2022, the company had no off-balance sheet arrangements - The company had no off-balance sheet arrangements as of June 30, 2022[183] Critical Accounting Policies and Estimates There have been no material changes to the company's critical accounting policies and estimates during the first half of 2022 - No material changes occurred in the methodology for critical accounting policies and estimates during the six months ended June 30, 2022[184] Recently Issued Accounting Standards Disclosure concerning recently issued accounting standards is incorporated by reference to Note 2 of the financial statements - Information on recently issued accounting standards is incorporated by reference to Note 2 of the Condensed Consolidated Financial Statements[185] Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in market risk from the information previously provided in the company's Form 10-K - No material changes in market risk have occurred as of June 30, 2022, compared to the disclosures in the Form 10-K[186] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - The company's disclosure controls and procedures were evaluated and deemed effective at the reasonable assurance level as of June 30, 2022[189] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2022[190] PART II – OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 10 in the financial statements for detailed information on legal proceedings - Details regarding legal proceedings are provided in Note 10 – Commitments and Contingencies of the Condensed Consolidated Financial Statements[193] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Form 10-K - No material changes to the risk factors disclosed in the company's Form 10-K have occurred[194] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report - No unregistered sales of equity securities or use of proceeds to report[195] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report - No defaults upon senior securities to report[196] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[197] Item 5. Other Information There is no other information to report under this item - No other information to report[198] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, credit agreements, and certifications - The exhibits include the Amended and Restated Certificate of Incorporation and Bylaws, Certificate of Designations of Series B Preferred Stock, and the Restatement Agreement for the ABL Credit Facility[201] - Certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a) and 18 U.S.C. Section 1350 are filed/furnished[201] - XBRL Instance Document and Taxonomy Extension Schema, Calculation, Label, Presentation, and Definition Linkbase Documents are included[201] Signatures Report Signatures The report was duly signed on behalf of the registrant by its principal officers on August 4, 2022 - The report was signed on August 4, 2022[205] - Signatories include Samuel D. Sledge (Chief Executive Officer and Director), David S. Schorlemer (Chief Financial Officer), and Elo Omavuezi (Chief Accounting Officer)[205]