MAMMOTH ENERGY SERVICES, INC. Management report and analysis of the financial position and operating results (Form 10-Q)
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto presented in this Quarterly Report and the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in Item 1A. "Risk Factors" in our Form 10-K for the year endedDecember 31, 2020 , filed with theSecurities and Exchange Commission , or theSEC , onMarch 1, 2021 and the section entitled "Forward-Looking Statements" appearing elsewhere in this Quarterly Report. Overview We are an integrated, growth-oriented company serving both the electric utility and oil and gas industries inNorth America . Our primary business objective is to grow our operations and create value for stockholders through organic growth opportunities and accretive acquisitions. Our suite of services includes infrastructure services, well completion services, natural sand proppant services, drilling services and other services. Our infrastructure services division provides construction, upgrade, maintenance and repair services to the electrical infrastructure industry. Our well completion services division provides hydraulic fracturing, sand hauling and water transfer services. Our natural sand proppant services division mines, processes and sells natural sand proppant used for hydraulic fracturing. Our drilling services division currently provides rental equipment, such as mud motors and operational tools, for both vertical and horizontal drilling. In addition to these service divisions, we also provide aviation services, equipment rentals, crude oil hauling services, remote accommodations, equipment manufacturing and infrastructure engineering and design services. We believe that the services we offer play a critical role in maintaining and improving electrical infrastructure as well as in increasing the ultimate recovery and present value of production streams from unconventional resources. Our complementary suite of services provides us with the opportunity to cross-sell our services and expand our customer base and geographic positioning. Our transformation towards an industrial based company is ongoing. We offer infrastructure engineering services focused on the transmission and distribution industry and also have equipment manufacturing operations as well as fiber optic services. Our equipment manufacturing operations provide us with the ability to repair much of our existing equipment in-house, as well as the option to manufacture certain new equipment we may need in the future. The equipment manufacturing operations have initially served the internal needs for our water transfer, equipment rental and infrastructure businesses, but we expect to expand into third party sales in the future. Our fiber optic services include the installation of both aerial and buried fiber. We are continuing to explore other opportunities to expand our business lines as we shift to a broader industrial focus.
Recent developments
Impact of the COVID-19 pandemic and the volatility of commodity prices
In March andApril 2020 , concurrent with the spread of COVID-19 and quarantine orders in theU.S. and worldwide, oil prices dropped sharply to below zero for the first time in history due to factors including significantly reduced demand and a shortage of storage facilities. Beginning in earlyMarch 2020 , in response to the COVID-19 pandemic and the depressed commodity prices, many exploration and production companies, including our customers, immediately began to substantially reduce their capital expenditure budgets. As a result, demand for our oilfield services declined at the end of the first quarter of 2020 and continued to decline further throughout the remainder of 2020. Exploration and production companies set their 2021 budgets based on the prevailing prices for oil and gas at the time. Although demand for oil and natural gas and commodity prices have recently increased, these budgets have remained and are expected to remain relatively unchanged throughout the fourth quarter of 2021 with any excess cash flows used for debt repayment or return to shareholders rather than to increase production, as has been the case in the past. Despite the recent improvement in theU.S. economic activity, easing of the COVID-19 pandemic and rising energy use and commodity prices, the near term energy outlook remains subject to heightened levels of uncertainty related to the ongoing economic recovery. Further, onJuly 18, 2021 , the OPEC+ reached an agreement to phase out 5.8 million barrels per day of oil production cuts bySeptember 2022 as prices of crude oil reached their highest levels in more than two years. Coordinated increases in oil supply by OPEC+ began inAugust 2021 , increasing overall oil production by 400,000 barrels per day on a monthly basis from that point forward. We cannot predict the impact of the gradual OPEC+ supply boost on commodity prices and expect a competitive and challenging market for oilfield services for the foreseeable future, which has had, and is likely to continue to have, an adverse effect on both pricing and utilization for our oilfield services and our financial condition and results of operations. 32 -------------------------------------------------------------------------------- We have taken, and continue to take, responsible steps to protect the health and safety of our employees during the COVID-19 pandemic. We are also actively monitoring the recovery process from the COVID-19 pandemic and the adverse industry and market conditions and have taken mitigating steps in an effort to preserve liquidity, reduce costs and lower capital expenditures. These actions have included reducing headcount, adjusting pay and limiting spending. We will continue to take further actions that we deem to be in the best interest of the Company and our stockholders if the current conditions worsen. Given the dynamic nature of these events, we are unable to predict the ultimate impact of the COVID-19 pandemic, the volatility in commodity markets, the reduced demand for oil and oilfield services and uncertain macroeconomic conditions on our business, financial condition, results of operations, cash flows and stock price or the pace or extent of any subsequent recovery.
Third Quarter 2021 Financial Overview
• Announced a 21% increase in revenues for the third quarter of 2021, compared to the second quarter of 2021, reflecting the increase in revenues in each of our operating segments.
• Net loss of
• Adjusted EBITDA of
Industry overview
Energy infrastructure industry
In 2017, we expanded into the electric infrastructure business, offering both commercial and storm restoration services to government-funded utilities, private utilities, public investor owned utilities and cooperatives. Since we commenced operations in this line of business, a substantial portion of our infrastructure revenue has been generated from storm restoration work, primarily from thePuerto Rico Electric Power Authority , or PREPA, due to damage caused by Hurricane Maria. OnOctober 19, 2017 ,Cobra Acquisitions LLC , or Cobra, and PREPA entered into an emergency master services agreement for repairs to PREPA's electrical grid. The one-year contract, as amended, provided for payments of up to$945 million . OnMay 26, 2018 , Cobra and PREPA entered into a new one-year,$900 million master services agreement to provide additional repair services and begin the initial phase of reconstruction of the electrical power system inPuerto Rico . Our work under each of the contracts with PREPA ended onMarch 31, 2019 . As ofSeptember 30, 2021 , PREPA owed us approximately$227 million for services performed excluding approximately$101 million of interest charged on these delinquent balances as ofSeptember 30, 2021 . See Note 2. Basis of Presentation and Significant Accounting Policies-Accounts Receivable of our unaudited condensed consolidated financial statements. PREPA is currently subject to bankruptcy proceedings, which were filed inJuly 2017 and are currently pending in theU.S. District Court for the District of Puerto Rico . As a result, PREPA's ability to meet its payment obligations under the contracts is largely dependent upon funding from theFederal Emergency Management Agency , or FEMA, or other sources. OnSeptember 30, 2019 , we filed a motion with theU.S. District Court for the District of Puerto Rico seeking recovery of the amounts owed to us by PREPA, which motion was stayed by the court. OnMarch 25, 2020 , we filed an urgent motion to modify the stay order and allow our recovery of approximately$62 million in claims related to a tax gross-up provision contained in the emergency master service agreement, as amended, that was entered into with PREPA onOctober 19, 2017 . This emergency motion was denied onJune 3, 2020 and the court extended the stay of our motion. OnDecember 9, 2020 , the Court again extended the stay of our motion and directed PREPA to file a status motion byJune 7, 2021 . OnApril 6, 2021 , we filed a motion to lift the stay order. Following this filing, PREPA initiated discussion, which resulted in PREPA and Cobra filing a joint motion to adjourn all deadlines relative to theApril 6, 2021 motion until theJune 16, 2021 omnibus hearing as a result of PREPA's understanding that FEMA will release a report in the near future relating to the emergency master service agreement between PREPA and Cobra that was executed onOctober 19, 2017 . The joint motion was granted by the court onApril 14, 2021 . OnMay 26, 2021 , FEMA issued a Determination Memorandum related to the first contract between Cobra and PREPA in which, among other things, FEMA raised two contract compliance issues and, as a result, concluded that approximately$47 million in costs were not authorized costs under the contract. OnJune 14, 2021 , the Court issued an order adjourning Cobra's motion to lift the stay order to a hearing onAugust 4, 2021 and directing Cobra and PREPA to meet and confer in good faith concerning (i) theMay 26, 2021 Determination Memorandum issued by FEMA and (ii) whether and when a second determination memorandum is expected. The parties were further directed to file an additional status report, which was filed onJuly 20, 2021 . OnJuly 23, 2021 , with our aid, PREPA filed an appeal of the entire$47 million that FEMA de- 33 -------------------------------------------------------------------------------- obligated in theMay 26, 2021 Determination Memorandum. In the event PREPA (i) does not have or does not obtain the funds necessary to satisfy its obligations to Cobra under the contracts, (ii) obtains the necessary funds but refuses to pay the amounts owed to us or (iii) otherwise does not pay amounts owed to us for services performed, the receivable may not be collected and our financial condition, results of operations and cash flows would be materially and adversely affected. In addition, government contracts are subject to various uncertainties, restrictions and regulations, including oversight audits and compliance reviews by government agencies and representatives. In this regard, onSeptember 10, 2019 , theU.S. District Court for the District of Puerto Rico unsealed an indictment that charged the former president of Cobra with conspiracy, wire fraud, false statements and disaster fraud. Two other individuals were also charged in the indictment. The indictment is focused on the interactions between a former FEMA official and the former President of Cobra. Neither we nor any of our subsidiaries were charged in the indictment. We are continuing to cooperate with the related investigation. We are also subject to investigations and legal proceedings related to our contracts with PREPA. Given the uncertainty inherent in the criminal litigation, investigations and legal proceedings, it is not possible at this time to determine the potential outcome or other potential impacts that they could have on us. See Note 18. Commitments and Contingencies to our unaudited condensed consolidated financial statements included elsewhere in this report for additional information regarding these investigations and proceedings. Further, as noted above, our contracts with PREPA have concluded and we have not obtained, and there can be no assurance that we will be able to obtain, one or more contracts with PREPA or other customers to replace the level of services that we provided to PREPA under our previous contracts. Our crew count declined from approximately 100 crews as ofDecember 31, 2020 to approximately 83 crews as ofSeptember 30, 2021 . Although the COVID-19 pandemic and resulting economic conditions have not had a material impact on demand or pricing for our infrastructure services, revenues for our infrastructure services have declined in 2021 as a result of certain management changes, which resulted in crew departures. During the third quarter of 2021, we made leadership changes in our infrastructure group. We are focused on cutting costs and enhancing accountability across the division, both of which we have already seen improving. Funding for projects in the infrastructure space remains strong with the added opportunity of a new federal infrastructure bill, which we are optimistic will occur in the near future. We continue to pursue opportunities within this sector as we strategically structure our service offerings for growth, intending to increase our infrastructure services activity and expand both our geographic footprint and depth of projects. During the third quarter of 2021, we won our first fiber installation job, which we expect to begin inNovember 2021 . We work for multiple utilities primarily across the northeastern, southwestern, midwestern and western portions ofthe United States . Our infrastructure management team also has experience with both solar and wind projects and we believe that this experience, combined with our vertically integrated service offerings, positions us well to compete and win renewable projects. We believe we will be able to grow our customer base and increase our revenues in the continentalUnited States over the coming years.
Oil and natural gas industry
The oil and natural gas industry has traditionally been volatile and is influenced by a combination of long-term, short-term and cyclical trends, including the domestic and international supply and demand for oil and natural gas, current and expected future prices for oil and natural gas and the perceived stability and sustainability of those prices, production depletion rates and the resultant levels of cash flows generated and allocated by exploration and production companies to their drilling, completion and related services and products budgets. The oil and natural gas industry is also impacted by general domestic and international economic conditions, political instability in oil producing countries, government regulations (both inthe United States and elsewhere), levels of customer demand, the availability of pipeline capacity, storage capacity and other conditions and factors that are beyond our control. See "Recent Developments-Impact of the COVID-19 Pandemic and Volatility in Commodity Prices" above. Demand for most of our oil and natural gas products and services depends substantially on the level of expenditures by companies in the oil and natural gas industry. The levels of capital expenditures of our customers are predominantly driven by the prices of oil and natural gas. As discussed above, oil prices dropped sharply throughout March and April of 2020. While improved commodity pricing has contributed to positive industry movement and increased equipment utilization, oil and natural gas prices are expected to continue to be volatile and we cannot predict if, or at what levels, commodity prices will stabilize. We experienced a weakening in demand for our oilfield services during 2019 as a result of reductions in our customers' capital expenditure budgets. The sharp decline in oil prices beginning inMarch 2020 , the continued volatility and strategic operating decisions by producers to curtail drilling activity have adversely impacted the utilization and pricing of our oilfield services. In response to market conditions, we have temporarily shut down our cementing and acidizing operations and flowback operations beginning inJuly 2019 , our contract drilling operations beginning inDecember 2019 , our rig hauling operations beginning inApril 2020 , our coil tubing and full service transportation operations beginning inJuly 2020 and our 34 -------------------------------------------------------------------------------- crude oil hauling operations beginning inJuly 2021 . We continue to monitor the market to determine if and when we can recommence these services. We are currently operating two of our six pressure pumping fleets. Based on feedback from our exploration and production customers, they are taking a cautious approach to activity levels for the remainder of 2021 given the recent volatility in oil prices and investor sentiment calling for activities to remain within or below cash flows. Market fundamentals are challenging for our oilfield businesses and we expect this trend to continue. Although we believe the reported retirement of equipment across the industry may, at some point, help the market, pricing and utilization for our oilfield services are expected to remain competitive for the foreseeable future. While the oilfield portion of our service offerings continue to experience significant challenges, we expect to be ready to ramp up our oilfield service offerings when oilfield demand, pricing and margins strengthen. We continue to closely monitor our cost structure in response to market conditions and intend to pursue additional cost savings where possible. Further, a significant portion of our revenue from our pressure pumping business had been derived from Gulfport. OnDecember 28, 2019 , Gulfport filed a lawsuit alleging our breach of our pressure pumping contract with Gulfport and seeking to terminate the contract and recover damages for alleged overpayments, audit costs and legal fees. Gulfport did not make the payments owed to us under this contract for any periods subsequent to its allegedDecember 28, 2019 termination date. Further, onNovember 13, 2020 , Gulfport filed petitions for voluntary relief under chapter 11 of the Bankruptcy Code. OnSeptember 21, 2021 , we reached a settlement with Gulfport under which all litigation relating to theStingray Pressure Pumping contract will be terminated,Stingray Pressure Pumping will release all claims against Gulfport and its subsidiaries with respect to Gulfport's bankruptcy proceedings and each of the parties will release all claims they had against the others with respect to the litigation matters discussed above. We have not been able to obtain long-term contracts with other customers to replace our contract with Gulfport. See Note 18. Commitments and Contingencies to our unaudited condensed consolidated financial statements included elsewhere in this report for additional information.
Natural sand proppant industry
In the natural sand proppant industry, demand growth for frac sand and other proppants is primarily driven by advancements in oil and natural gas drilling and well completion technology and techniques, such as horizontal drilling and hydraulic fracturing, as well as overall industry activity growth. In 2018 and 2019, several new and existing suppliers completed planned capacity additions of frac sand supply, particularly in thePermian Basin . The industry expansion, coupled with increased capital discipline, budget exhaustion and the impact on oil demand from the COVID-19 pandemic, caused the frac sand market to become oversupplied, particularly in finer grades. With the frac sand market oversupplied, pricing for all grades has fallen significantly from the peaks experienced throughout 2018 and during the first half of 2019. This oversupply resulted in several industry participants idling and closing high cost mines in an attempt to restore the supply and demand balance and reduce the number of industry participants. Nevertheless, demand for our sand declined significantly in the second half of 2019 and throughout 2020 as a result of completion activity falling due to lower oil demand and pricing as discussed above, increased capital discipline by our customers, budget exhaustion and the COVID-19 pandemic. Activity has rebounded modestly in 2021 as we have seen an increase in the volume of sand sold, however the prices of frac sand have continued to be depressed compared to prior levels. We cannot predict if and when pricing and demand will recover sufficiently to return our natural sand proppant services segment to profitability. Further, as a result of adverse market conditions, production at our Muskie sand facility inPierce County, Wisconsin has been temporarily idled sinceSeptember 2018 . Our contracted capacity has provided a baseline of business, which has kept our Taylor and Piranha plants operating and our costs low. A portion of our revenue from our natural sand proppant business had been derived from Gulfport pursuant to a contract. Gulfport did not made the payments owed to us under this contract for any periods subsequent toMay 2020 . InSeptember 2020 , we filed a lawsuit seeking to recover delinquent payments owed to us under this contract. OnNovember 13, 2020 , Gulfport filed petitions for voluntary relief under chapter 11 of the Bankruptcy Code. OnSeptember 21, 2021 , the Company and Gulfport reached a settlement under which all litigation relating to the Muskie contract will be terminated and a portion of Muskie's contract claim against Gulfport will be allowed under Gulfport's plan of reorganization. The settlement remains subject to the final approval by the bankruptcy court overseeing Gulfport's bankruptcy. See Note 18. Commitments and Contingencies to our unaudited condensed consolidated financial statements included elsewhere in this report for additional information. 35 --------------------------------------------------------------------------------
Results of operations
Three Months EndedSeptember 30, 2021 Compared to Three Months EndedSeptember 30, 2020 Three Months Ended September 30, 2021 September 30, 2020 (in thousands) Revenue: Infrastructure services $ 23,489 $ 43,582 Well completion services 22,732 15,765 Natural sand proppant services 8,419 6,031 Drilling services 1,207 1,204 Other services 6,153 4,677 Eliminations (4,515) (725) Total revenue 57,485 70,534
Cost of turnover: Infrastructure services (excluding depreciation and amortization of
20,595 29,045
Well completion services (excluding depreciation and amortization of
21,329 6,959
Natural sand proppant services (excluding damping, depletion and accretion of
9,368 4,154
Drilling services (excluding depreciation and amortization of
1,566 1,955
Other services (excluding depreciation and amortization of
5,241 4,541 Eliminations (4,515) (725) Total cost of revenue 53,584 45,929 Selling, general and administrative expenses 41,866 12,180 Depreciation, depletion, amortization and accretion 19,148 23,132 Impairment of other long-lived assets 547 - Operating loss (57,660) (10,707) Interest expense, net (1,484) (1,098) Other income (expense), net 11,056 9,042 Loss before income taxes (48,088) (2,763) Benefit for income taxes (7,187) (6,193) Net (loss) income $ (40,901) $ 3,430 Revenue. Revenue for the three months endedSeptember 30, 2021 decreased$13.0 million , or 18%, to$57.5 million from$70.5 million for the three months endedSeptember 30, 2020 . The decrease in total revenue is primarily attributable to a decline in infrastructure services revenue of$20.1 million during the three months endedSeptember 30, 2021 , partially offset by an increase in well completion services revenue of$6.9 million . Revenue derived from related parties was a nominal amount for the three months endedSeptember 30, 2021 and$10.4 million , or 15% of our total revenue, for the three months endedSeptember 30, 2020 . Substantially all of our related party revenue was derived from Gulfport under pressure pumping and sand contracts. For additional information regarding the status of these contracts and the litigation related to the pressure pumping contract, see "Industry Overview -Oil and Natural Gas Industry," "Industry Overview - Natural Sand Proppant Industry" and Note 18. Commitments and Contingencies to our unaudited condensed consolidated financial statements included elsewhere in 36 --------------------------------------------------------------------------------
this report. Following its exit from bankruptcy, Gulfport is no longer a related party. The turnover by operational division is as follows:
Infrastructure Services. Infrastructure services division revenue decreased$20.1 million , or 46%, to$23.5 million for the three months endedSeptember 30, 2021 from$43.6 million for the three months endedSeptember 30, 2020 primarily due to a decline in storm activity during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 , resulting in a$20.4 million decline in storm restoration revenue. Well Completion Services. Well completion services division revenue increased$6.9 million , or 44%, to$22.7 million for the three months endedSeptember 30, 2021 from$15.8 million for the three months endedSeptember 30, 2020 . Revenue derived from related parties was$8.4 million , or 53% of total well completion revenue, for the three months endedSeptember 30, 2020 . We did not recognize any related party revenue for the three months endedSeptember 30, 2021 . All of our well completion related party revenue for the three months endedSeptember 30, 2020 was derived from Gulfport under a pressure pumping contract. For additional information regarding the status of this contract and the litigation related to this contract, see "Industry Overview - Oil and Natural Gas Industry" above and Note 18 to our unaudited condensed consolidated financial statements included elsewhere in this report. The increase in our well completion services revenue was primarily driven by a 53% increase in the number of stages completed from 449 for the three months endedSeptember 30, 2020 to 688 for the three months endedSeptember 30, 2021 as well as an increase in sand and chemical materials revenue. An average of 1.2 of our fleets were active for the three months endedSeptember 30, 2021 as compared to an average of 0.9 fleets for the three months endedSeptember 30, 2020 . Natural Sand Proppant Services. Natural sand proppant services division revenue increased$2.4 million , or 40%, to$8.4 million for the three months endedSeptember 30, 2021 , from$6.0 million for the three months endedSeptember 30, 2020 . Revenue derived from related parties was$1.9 million , or 32% of total sand revenue, for the three months endedSeptember 30, 2020 . We did not recognize any related party revenue for the three months endedSeptember 30, 2021 . All of our related party revenue for the three months endedSeptember 30, 2020 was derived from Gulfport under a sand supply contract. For additional information regarding the status of this contract and the pending litigation related to this contract, see "Industry Overview - Natural Sand Proppant Industry" above and Note 18 to our unaudited condensed consolidated financial statements included elsewhere in this report. Inter-segment revenue, consisting primarily of revenue derived from our pressure pumping segment, was$4.0 million , or 47% of total sand revenue, for the three months endedSeptember 30, 2021 . The natural sand proppant services division did not have inter-segment revenues for the three months endedSeptember 30, 2020 . The increase in our natural sand proppant services revenue was primarily attributable to a 365% increase in tons of sand sold from 67,715 tons for the three months endedSeptember 30, 2020 to 315,066 tons for the three months endedSeptember 30, 2021 , and a 6% increase in the average price per ton of sand sold from$15.59 per ton during the three months endedSeptember 30, 2020 to$16.58 per ton during the three months endedSeptember 30, 2021 . These increases were partially offset by a decrease in shortfall revenue by$4.9 million .
Drilling services. Revenues for the Drilling Services division remained stable at
Other Services. Other services revenue, consisting of revenue derived from our aviation, coil tubing, pressure control, equipment rental, full service transportation, crude oil hauling, remote accommodation, equipment manufacturing and infrastructure engineering and design businesses, increased$1.5 million , or 32%, to$6.2 million for the three months endedSeptember 30, 2021 from$4.7 million for the three months endedSeptember 30, 2020 . Inter-segment revenue, consisting primarily of revenue derived from our well completion segment, was$0.5 million and$0.7 million for the three months endedSeptember 30, 2021 and 2020, respectively. The increase in our other services revenue was primarily due to an increase in utilization for our equipment rental business. An average of 162 pieces of equipment was rented to customers during the three months endedSeptember 30, 2021 , an increase of 131% from an average of 70 pieces of equipment rented to customers during the three months endedSeptember 30, 2020 . Due to market conditions, we have temporarily shut down our coil tubing and full service transportation operations beginning inJuly 2020 and our crude oil hauling business beginning inJuly 2021 . 37 -------------------------------------------------------------------------------- Cost of Revenue (exclusive of depreciation, depletion, amortization and accretion expense). Cost of revenue, exclusive of depreciation, depletion, amortization and accretion expense, increased$7.7 million from$45.9 million , or 65% of total revenue, for the three months endedSeptember 30, 2020 to$53.6 million , or 93% of total revenue, for the three months endedSeptember 30, 2021 . The increase is primarily due to an increase in cost of revenue for the well completion services division, partially offset by a decrease in cost of revenue for the infrastructure services division. Cost of revenue by operating division was as follows: Infrastructure Services. Infrastructure services division cost of revenue, exclusive of depreciation and amortization expense, decreased$8.4 million , or 29%, to$20.6 million for the three months endedSeptember 30, 2021 from$29.0 million for the three months endedSeptember 30, 2020 , primarily due to a decline in activity. As a percentage of revenue, cost of revenue, exclusive of depreciation and amortization expense of$4.9 million and$7.3 million for the three months endedSeptember 30, 2021 and 2020, respectively, was 88% and 67% for the three months endedSeptember 30, 2021 and 2020, respectively. The increase as a percentage of revenue is primarily due to increases in labor related costs and insurance costs as a percentage of revenue. Well Completion Services. Well completion services division cost of revenue, exclusive of depreciation and amortization expense, increased$14.3 million , or 204%, to$21.3 million for the three months endedSeptember 30, 2021 from$7.0 million for the three months endedSeptember 30, 2020 , primarily due to an increase in costs of goods sold as a result of providing sand and chemicals with our service package to customers during the three months endedSeptember 30, 2021 . As a percentage of revenue, our well completion services division cost of revenue, exclusive of depreciation and amortization expense of$6.5 million and$7.2 million for the three months endedSeptember 30, 2021 and 2020, respectively, was 94% and 44% for the three months endedSeptember 30, 2021 and 2020, respectively. The increase as a percentage of revenue is primarily due to the recognition of standby revenue during the three months endedSeptember 30, 2020 , of which there was a lower percentage of costs recognized compared to the three months endedSeptember 30, 2021 . Additionally, during the three months endedSeptember 30, 2021 , we provided sand and chemicals with our service package to customers, resulting in higher cost of goods sold as a percentage of revenue for this period in comparison to the three months endedSeptember 30, 2020 . Natural Sand Proppant Services. Natural sand proppant services division cost of revenue, exclusive of depreciation, depletion and accretion expense, increased$5.2 million , or 124%, to$9.4 million for the three months endedSeptember 30, 2021 from$4.2 million for the three months endedSeptember 30, 2020 . As a percentage of revenue, cost of revenue, exclusive of depreciation, depletion and accretion expense of$2.5 million and$2.7 million for the three months endedSeptember 30, 2021 and 2020, respectively, was 112% and 70% for the three months endedSeptember 30, 2021 and 2020, respectively. The increase is primarily due to the recognition of shortfall revenue during the three months endedSeptember 30, 2020 , for which there are no associated costs, compared to the three months endedSeptember 30, 2021 . Drilling Services. Drilling services division cost of revenue, exclusive of depreciation and amortization expense, decreased$0.4 million , or 20%, to$1.6 million for the three months endedSeptember 30, 2021 from$2.0 million for the three months endedSeptember 30, 2020 . As a percentage of revenue, our drilling services division cost of revenue, exclusive of depreciation and amortization expense of$1.9 million and$2.3 million for the three months endedSeptember 30, 2021 and 2020, respectively, was 133% and 167% for the three months endedSeptember 30, 2021 and 2020, respectively. Other Services. Other services division cost of revenue, exclusive of depreciation and amortization expense, increased$0.7 million , or 16%, to$5.2 million for the three months endedSeptember 30, 2021 from$4.5 million for the three months endedSeptember 30, 2020 , primarily due to increased activity. As a percentage of revenue, cost of revenue, exclusive of depreciation and amortization expense of$3.2 million and$3.7 million for the three months endedSeptember 30, 2021 and 2020, respectively, was 84% and 96% for the three months endedSeptember 30, 2021 and 2020, respectively. The decrease is primarily due to a decline in labor costs as a percentage of revenue. 38 --------------------------------------------------------------------------------
Selling, general and administrative expenses. Selling, general and administrative expenses, or SG&A, represent the costs associated with managing and supporting our operations. The table below shows the breakdown of general and administrative expenses for the periods indicated (in thousands):
Three Months Ended
September 30, 2021 September 30, 2020
Cash expenses:
Compensation and benefits $ 3,353 $ 3,449
Professional services 4,571 5,651
Other(a) 2,252 2,163
Total cash SG&A expense 10,176 11,263
Non-cash expenses:
Bad debt provision(b) 31,449 626
Stock based compensation 241 291
Total non-cash SG&A expense 31,690 917
Total SG&A expense $ 41,866 $ 12,180
a. Includes travel-related costs, information technology expenses, rent,
utilities and other general and administrative-related costs.
b. The bad debt provision for the three months ended September 30, 2021
includes $31.2 million related to the Stingray Pressure Pumping and Muskie
contracts with Gulfport. See "Industry Overview - Oil and Natural Gas Industry,"
"Industry Overview - Natural Sand Proppant Industry" and Note 18. Commitments
and Contingencies to our unaudited condensed consolidated financial statements
included elsewhere in this report.
Depreciation, Depletion, Amortization and Accretion. Depreciation, depletion,
amortization and accretion decreased $4.0 million , or 17%, to $19.1 million for
the three months ended September 30, 2021 from $23.1 million for the three
months ended September 30, 2020 . The decrease is primarily attributable to a
decline in property and equipment depreciation expense.
Impairment of long-lived assets. During the three months ended
Operating Loss. We reported an operating loss of$57.7 million for the three months endedSeptember 30, 2021 compared to an operating loss of$10.7 million for the three months endedSeptember 30, 2020 . The increase in operating loss is primarily due to the recognition of$31.4 million in bad debt expense attributable to our contracts with Gulfport, as well as an increase in costs of revenue as a percentage of revenue. Interest Expense, Net. Interest expense, net increased$0.4 million , or 36%, to$1.5 million for the three months endedSeptember 30, 2021 from$1.1 million for the three months endedSeptember 30, 2020 . The increase is primarily due to an increase in average borrowings outstanding under our revolving credit facility. Other Income (Expense), Net. Other income increased$2.0 million during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 primarily due to an increase in interest on trade accounts receivable. Income Taxes. We recorded an income tax benefit of$7.2 million on pre-tax losses of$48.1 million for the three months endedSeptember 30, 2021 compared to an income tax expense of$6.2 million on pre-tax losses of$2.8 million for the three months endedSeptember 30, 2020 . During the three months endedSeptember 30, 2020 , we recorded a benefit of$8 million related to provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. 39 -------------------------------------------------------------------------------- Nine Months EndedSeptember 30, 2021 Compared to Nine Months EndedSeptember 30, 2020 Nine Months EndedSeptember 30 ,
2021
(in thousands) Revenue: Infrastructure services $ 69,965 $ 99,307 Well completion services 63,059 75,629 Natural sand proppant services 24,011 22,516 Drilling services 3,288 7,182 Other services 17,365 26,629 Eliminations (5,958) (3,237) Total revenue 171,730 228,026
Cost of turnover: Infrastructure services (excluding depreciation and amortization of
67,029 80,977
Well completion services (excluding depreciation and amortization of
47,788 41,864
Natural sand proppant services (excluding damping, depletion and accretion of
22,631 21,845
Drilling services (excluding amortization of
4,739 9,743
Other services (excluding depreciation and amortization of
15,810 25,396 Eliminations (5,958) (3,237) Total cost of revenue 152,039 176,588 Selling, general and administrative expenses 74,697 36,677 Depreciation, depletion, amortization and accretion 60,559 73,130 Impairment of goodwill - 54,973 Impairment of long-lived assets 547 12,897 Operating loss (116,112) (126,239) Interest expense, net (3,878) (4,207) Other income, net 5,489 25,721 Loss before income taxes (114,501) (104,725) Benefit for income taxes (26,370) (8,979) Net loss $ (88,131) $ (95,746) Revenue. Revenue for the nine months endedSeptember 30, 2021 decreased$56.3 million , or 25%, to$171.7 million from$228.0 million for the nine months endedSeptember 30, 2020 . The decrease in total revenue is primarily attributable to declines in revenue across most business lines. Revenue derived from related parties was$17.8 million , or 10% of our total revenue, for the nine months endedSeptember 30, 2021 and$40.9 million , or 18% of our total revenue, for the nine months endedSeptember 30, 2020 . Substantially all of our related party revenue was derived from Gulfport under pressure pumping and sand contracts. For additional information regarding the status of these contracts and the pending litigation related to the pressure pumping contract, see "Industry Overview - Oil and Natural Gas Industry," "Industry Overview - Natural Sand Proppant Industry" and Note 18. Commitments and Contingencies to our unaudited condensed consolidated financial statements included elsewhere in this report. Revenue by operating division was as follows: 40 -------------------------------------------------------------------------------- Infrastructure Services. Infrastructure services division revenue decreased$29.3 million , or 30%, to$70.0 million for the nine months endedSeptember 30, 2021 from$99.3 million for the nine months endedSeptember 30, 2020 primarily due to crew departures as a result of certain changes in management. Additionally, there was less storm activity during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 , resulting in an$11.5 million decline in storm restoration revenue. Well Completion Services. Well completion services division revenue decreased$12.5 million , or 17%, to$63.1 million for the nine months endedSeptember 30, 2021 from$75.6 million for the nine months endedSeptember 30, 2020 . Revenue derived from related parties was$14.8 million , or 23% of total well completion, for the nine months endedSeptember 30, 2021 compared to$35.0 million , or 46% of total well completion revenue, for the nine months endedSeptember 30, 2020 . All of our well completion related party revenue was derived from Gulfport under a pressure pumping contract. OnNovember 13, 2020 , Gulfport filed petitions for voluntary relief under chapter 11 of the Bankruptcy Code. During the nine months endedSeptember 30, 2021 , we recognized revenue totaling$15 million related to the modification of our pressure pumping contract with Gulfport. For additional information regarding the status of this contract and the pending litigation related to this contract, see "Industry Overview - Oil and Natural Gas Industry" above and notes 2 and 3 to our unaudited condensed consolidated financial statements included elsewhere in this report. Inter-segment revenues, consisting primarily of revenue derived from our sand segment, was$0.1 million and$1.1 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The decrease in our well completion services revenue was primarily driven by a declines in pressure pumping services utilization and pricing. The number of stages completed decreased 36% to 1,653 for the nine months endedSeptember 30, 2021 from 2,589 for the nine months endedSeptember 30, 2020 . An average of 1.0 of our six fleets were active for the nine months endedSeptember 30, 2021 as compared to an average of 1.8 fleets for the nine months endedSeptember 30, 2020 . Natural Sand Proppant Services. Natural sand proppant services division revenue increased$1.5 million , or 7%, to$24.0 million for the nine months endedSeptember 30, 2021 , from$22.5 million for the nine months endedSeptember 30, 2020 . Revenue derived from related parties was$2.1 million , or 9% of total sand revenue, for the nine months endedSeptember 30, 2021 and$6.0 million , or 27% of total sand revenue, for the nine months endedSeptember 30, 2020 . All of our related party revenue was derived from Gulfport under a sand supply contract. OnNovember 13, 2020 , Gulfport filed petitions for voluntary relief under chapter 11 of the Bankruptcy Code. During the three months endedMarch 31, 2021 , we recognized revenue totaling$2 million related to the modification of our sand supply contract with Gulfport. For additional information regarding the status of this contract and the pending litigation related to this contract, see "Industry Overview - Natural Sand Proppant Industry" above and notes 2 and 3 to our unaudited condensed consolidated financial statements included elsewhere in this report. Inter-segment revenue, consisting primarily of revenue derived from our pressure pumping segment, was$4.0 million , or 17% of total sand revenue, for the nine months endedSeptember 30, 2021 . The natural sand proppant services division did not have inter-segment revenues for the nine months endedSeptember 30, 2020 . The increase in our natural sand proppant services revenue was primarily attributable to a 90% increase in tons of sand sold from approximately 389,436 tons for the nine months endedSeptember 30, 2020 to approximately 741,458 tons for the nine months endedSeptember 30, 2021 and a 14% increase in the average sales price per ton of sand sold from$14.32 per ton during the nine months endedSeptember 30, 2020 to$16.37 per ton during the nine months endedSeptember 30, 2021 . This increase was partially offset by an$8.7 million decline in shortfall revenue for the nine months endedSeptember 30, 2021 . Drilling Services. Drilling services division revenue decreased$3.9 million , or 54%, to$3.3 million for the nine months endedSeptember 30, 2021 from$7.2 million for the nine months endedSeptember 30, 2020 . The decline in our drilling services revenue was primarily attributable to declines in directional drilling and rig hauling revenue. In response to market conditions, we have temporarily shut down our contract land drilling operations beginning inDecember 2019 and our rig hauling operations beginning inApril 2020 . Other Services. Other services revenue, consisting of revenue derived from our coil tubing, equipment rental, full service transportation, crude oil hauling, remote accommodation, equipment manufacturing and infrastructure engineering businesses, decreased$9.2 million , or 35%, to$17.4 million for the nine months endedSeptember 30, 2021 from$26.6 million for the nine months endedSeptember 30, 2020 . Inter-segment revenue, consisting primarily of revenue derived from our infrastructure and well completion segments, totaled$1.8 million and$2.0 million for the nine months endedSeptember 30, 2021 and 2020, respectively. 41 -------------------------------------------------------------------------------- The decrease in our other services revenue was primarily due to a decline in utilization for our equipment rental business. An average of 117 pieces of equipment was rented to customers during the nine months endedSeptember 30, 2021 , a decrease of 52% from an average of 245 pieces of equipment rented to customers during the nine months endedSeptember 30, 2020 . Additionally, utilization for remote accommodations business declined. Due to market conditions, we have temporarily shut down our coil tubing and full service transportation operations beginning inJuly 2020 . These decreases were partially offset by increases in revenue from our infrastructure engineering business. Cost of Revenue (exclusive of depreciation, depletion, amortization and accretion expense). Cost of revenue, exclusive of depreciation, depletion, amortization and accretion expense, decreased$24.6 million from$176.6 million , or 77% of total revenue, for the nine months endedSeptember 30, 2020 to$152.0 million , or 89% of total revenue, for the nine months endedSeptember 30, 2021 . The decrease in cost of revenue was primarily due to a decline in activity for our infrastructure services and other services divisions. Cost of revenue by operating division was as follows: Infrastructure Services. Infrastructure services division cost of revenue, exclusive of depreciation and amortization expense, decreased$14.0 million , or 17%, to$67.0 million for the nine months endedSeptember 30, 2021 from$81.0 million for the nine months endedSeptember 30, 2020 , primarily due to a decline in activity. As a percentage of revenue, cost of revenue, exclusive of depreciation and amortization expense of$17.5 million and$22.4 million , respectively, for the nine months endedSeptember 30, 2021 and 2020 was 96% and 82% for the nine months endedSeptember 30, 2021 and 2020, respectively. The increase as a percentage of revenue is primarily due to increased labor costs as a percentage of revenue. Well Completion Services. Well completion services division cost of revenue, exclusive of depreciation and amortization expense, increased$5.9 million , or 14%, to$47.8 million for the nine months endedSeptember 30, 2021 from$41.9 million for the nine months endedSeptember 30, 2020 , primarily due to an increase in cost of goods sold as a result of providing sand and chemicals with our service package to customers during the nine months endedSeptember 30, 2021 . As a percentage of revenue, our well completion services division cost of revenue, exclusive of depreciation and amortization expense of$19.7 million and$23.3 million for the nine months endedSeptember 30, 2021 and 2020, respectively, was 76% and 55% for the nine months endedSeptember 30, 2021 and 2020, respectively. The increase as a percentage of revenue is primarily due to the recognition of more pressure pumping services standby revenue during the nine months endedSeptember 30, 2020 , of which there was a lower percentage of costs recognized compared to the nine months endedSeptember 30, 2021 . Additionally, during the nine months endedSeptember 30, 2021 , we provided sand and chemicals with our service package to customers, resulting in higher cost of goods sold as a percentage of revenue for this period in comparison to the nine months endedSeptember 30, 2020 . Natural Sand Proppant Services. Natural sand proppant services division cost of revenue, exclusive of depreciation, depletion and accretion expense, increased$0.8 million , or 4%, from$21.8 million for the nine months endedSeptember 30, 2020 to$22.6 million for the nine months endedSeptember 30, 2021 . As a percentage of revenue, cost of revenue, exclusive of depreciation, depletion and accretion expense of$7.1 million and$7.4 million for each of the nine months endedSeptember 30, 2021 and 2020, respectively, was 94% and 97% for the nine months endedSeptember 30, 2021 and 2020, respectively. The decrease in cost as a percentage of revenue is primarily due to a 14% increase is average sales price. Drilling Services. Drilling services division cost of revenue, exclusive of depreciation and amortization expense, decreased$5.0 million , or 52%, from$9.7 million for the nine months endedSeptember 30, 2020 to$4.7 million for the nine months endedSeptember 30, 2021 , as a result of reduced activity. In response to market conditions, we have temporarily shut down our contract land drilling operations beginning inDecember 2019 and our rig hauling operations beginning inApril 2020 . As a percentage of revenue, our drilling services division cost of revenue, exclusive of depreciation and amortization expense of$6.2 million and$7.8 million , for the nine months endedSeptember 30, 2021 and 2020, respectively, was 142% and 135% for the nine months endedSeptember 30, 2021 and 2020, respectively. The increase as a percentage of revenue is primarily due to a decline in utilization. Other Services. Other services division cost of revenue, exclusive of depreciation and amortization expense, decreased$9.6 million , or 38%, from$25.4 million for the nine months endedSeptember 30, 2020 to$15.8 million for the nine months endedSeptember 30, 2021 , primarily due to a decline in costs for our equipment rental, coil tubing and full service transportation businesses as a result of reduced activity. Due to market conditions, we have temporarily shut down our coil tubing and full service transportation operations beginning inJuly 2020 . These declines were partially offset by an increase in costs for our infrastructure engineering business. As a percentage of revenue, cost of revenue, exclusive of depreciation and amortization expense of$10.1 million and$12.2 million for the nine 42 --------------------------------------------------------------------------------
months ended
Selling, general and administrative expenses. Selling, general and administrative expenses represent the costs associated with managing and supporting our operations. The table below shows the breakdown of general and administrative expenses for the periods indicated (in thousands):
Nine Months Ended
September 30, 2021 September 30, 2020
Cash expenses:
Compensation and benefits $ 11,379 $ 11,138
Professional services 13,783 15,335
Other(a) 7,058 6,572
Total cash SG&A expenses 32,220 33,045
Non-cash expenses:
Bad debt provision 41,650 2,306
Stock based compensation 827 1,326
Total non-cash SG&A expenses 42,477 3,632
Total SG&A expenses $ 74,697 $ 36,677
a. Includes travel-related costs, IT expenses, rent, utilities and other
general and administrative-related costs.
b. The bad debt provision for the nine months ended September 30, 2021 includes
$41.2 million related to the Stingray Pressure Pumping and Muskie contracts with
Gulfport. See "Industry Overview - Oil and Natural Gas Industry," "Industry
Overview - Natural Sand Proppant Industry" and Note 18. Commitments and
Contingencies to our unaudited condensed consolidated financial statements
included elsewhere in this report.
Depreciation, Depletion, Amortization and Accretion. Depreciation, depletion,
amortization and accretion decreased $12.5 million to $60.6 million for the nine
months ended September 30, 2021 from $73.1 million for the nine months ended
September 30, 2020 . The decrease is primarily attributable to a decline in
property and equipment depreciation expense.
Impairment of Goodwill . As a result of market conditions, we performed an
impairment assessment of our goodwill as of March 31, 2020 . We determined that
the carrying value of goodwill for certain of our entities exceeded their fair
values, resulting in impairment expense of $55.0 million .
Impairment of Other Long-Lived Assets. During the three months ended
September 30, 2021 , we temporarily shut down our crude oil hauling operations,
resulting in impairment of trade names of $0.5 million . During the nine months
ended September 30, 2020 , we recorded impairment of property and equipment,
including water transfer, crude oil hauling, coil tubing and equipment rental
assets, totaling $12.9 million .
Operating Loss. We reported an operating loss of $116.1 million for the nine
months ended September 30, 2021 compared to an operating loss of $126.2
million for the nine months ended September 30, 2020 . The reduced operating loss
was primarily due to the recognition of $67.9 million in impairment expense
during the nine months ended September 30, 2020 , partially offset by a $39.3
million increase in bad debt expense.
Interest charges, net. Interest expense, net reduced
Other Income (Expense), Net. We recognized other income, net of$5.5 million during the nine months endedSeptember 30, 2021 compared to$25.7 million for the nine months endedSeptember 30, 2020 . During the nine months endedSeptember 30, 2021 we recognized expense of$25.0 million related to an agreement to settle a legal matter. We recognized interest on trade accounts receivable of$25.1 million for the nine months endedSeptember 30, 2021 compared to$26.1 million for nine months endedSeptember 30, 2020 . Income Taxes. We recorded an income tax benefit of$26.4 million on pre-tax losses of$114.5 million for the nine months endedSeptember 30, 2021 compared to an income tax benefit of$9.0 million on pre-tax loss of$104.7 million for the nine months endedSeptember 30, 2020 . Our effective tax rate was 23% for the nine months endedSeptember 30, 2021 compared to 9% for the nine months endedSeptember 30, 2020 . The increase compared to the nine months endedSeptember 30, 2020 was partially due to the mix of earnings betweenthe United States andPuerto Rico as well as changes in 43 -------------------------------------------------------------------------------- the valuation allowance. Additionally, during the nine months endedSeptember 30, 2020 , we recorded a benefit of$2 million related to provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was enacted onMarch 27, 2020 . Our effective tax rate was also impacted by permanent differences such as goodwill impairment for the nine months endedSeptember 30, 2020 . Non-GAAP Financial Measures Adjusted EBITDA Adjusted EBITDA is a supplemental non-GAAP financial measure that is used by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. We define Adjusted EBITDA as net (loss) income before depreciation, depletion, amortization and accretion, impairment of goodwill, impairment of other long-lived assets, public offering costs, stock based compensation, interest expense, net, other (income) expense, net (which is comprised of the (gain) or loss on disposal of long-lived assets and interest on trade accounts receivable) and (benefit) provision for income taxes, further adjusted to add back interest on trade accounts receivable. We exclude the items listed above from net (loss) income in arriving at Adjusted EBITDA because these amounts can vary substantially from company to company within our industries depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net (loss) income or cash flows from operating activities as determined in accordance with GAAP or as an indicator of our operating performance or liquidity. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of Adjusted EBITDA. Our computations of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. We believe that Adjusted EBITDA is a widely followed measure of operating performance and may also be used by investors to measure our ability to meet debt service requirements. The following tables provide a reconciliation of Adjusted EBITDA to the GAAP financial measure of net income or (loss) for each of our operating segments for the specified periods (in thousands).
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