This Annual Report on Form 10-K contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future operating results and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. Our forward-looking statements are generally accompanied by words such as “may,” “should,” “expect,” “believe,” “plan,” “anticipate,” “could,” “intend,” “target,” “goal,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other similar expressions. Any forward-looking statements contained in this Annual Report on Form 10-K speak only as of the date on which we make them and are based upon our historical performance and on current plans, estimates and expectations. Except as required by law, we have no obligation to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements about:
• the competitive nature of the industry in which we conduct our business, including pricing pressures;
• the effect of a loss of, or the financial distress of, one or more key customers;
• the effect of a loss of, or interruption in operations of, one or more key suppliers;
• our ability to maintain the right level of commitments under our supply agreements;
• our ability to obtain permits, approvals and authorizations from governmental and third parties;
• our ability to maintain an effective system of internal controls over financial reporting;
• financial strategy, liquidity or capital required for our ongoing operations and acquisitions, and our ability to raise additional capital;
• our ability or intention to pay dividends or to effectuate repurchases of our common stock;
• the impact of our corporate governance structure.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K.
This Annual Report on Form 10-K includes market and industry data and certain other statistical information based on third-party sources including independent industry publications, government publications and other published independent sources. Although we believe these third-party sources are reliable as of their respective dates, we have not independently verified the accuracy or completeness of this information. Some data is also based on our own good faith estimates, which are supported by our management’s knowledge of and experience in the markets and businesses in which we operate.
Item 1. Business
Our completion services are designed in partnership with our customers to enhance both initial production rates and estimated ultimate recovery from new and existing wells. The core services provided through our Completion Services segment are hydraulic fracturing, wireline and pumping services. We utilize our in-house capabilities, including our R&T department and data control instruments business, to offer a technologically advanced and efficiency focused range of completion techniques. The majority of revenue for this segment is generated by our fracturing business.
collection. Fracturing fluid mixtures include proppant that becomes lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons upward through the well.
investing further in driving efficiencies, including our robust maintenance program;
maintaining a conservative balance sheet to preserve operational and strategic flexibility; and
continuing to evaluate potential consolidation opportunities that strengthen our capabilities, increase our scale and create shareholder value.
Our customers primarily include major integrated and large independent oil and natural gas E&P companies. For the year ended December 31, 2019, we had four customers who individually represented more than 10% of our consolidated revenue. These four customers collectively represented 55% of our consolidated revenue and 21% of our total accounts receivable for the fiscal year ended December 31, 2019. For the year ended December 31, 2018, we had three customers who individually represented more than 10% of our consolidated revenue. These three customers collectively represented 39% of our consolidated revenue and 45% of our total accounts receivable for the fiscal year ended December 31, 2018. For the year ended December 31, 2017, no customer individually represented more than 10% of our consolidated revenue. For the year ended December 31, 2016, we had three customers who individually represented more than 10% of our consolidated revenue. These three customers collectively represented 48% of our consolidated revenue
Schlumberger Limited, Superior Energy Services, Inc. and U.S. Well Services. Our major competitors for our Well Support Services include Key Energy Services, Basic Energy Services, Superior Energy Services, Precision Drilling, Forbes Energy Services, Pioneer Energy Services and Ranger Energy Services. We also compete regionally in each segment with a significant number of smaller service providers.
We believe the principal competitive factors in the markets we serve are our multi-basin service capability and close proximity to our customers, technical expertise, equipment reliability, work force competency, efficiency, safety record, reputation, experience and prices. Additionally, projects are often awarded on a bid basis, which tends to create a highly competitive environment. While we seek to be competitive in our pricing, we believe many of our customers elect to work with us based on our customer-tailored partnership approach, our safety record, the performance and competency of our crews and the quality of our equipment and our services. We seek to differentiate ourselves from our competitors by delivering the highest-quality services and equipment possible, coupled with superior execution and operating efficiency, resulting in cost effective operations and a safe working environment.
We purchase a wide variety of raw materials, parts and components that are manufactured and supplied for our operations. We are not dependent on any single source of supply for those parts, supplies or materials. To date, we have generally been able to obtain the equipment, parts and supplies necessary to support our operations on a timely basis. While we believe we will be able to make satisfactory alternative arrangements in the event of any interruption in the supply of these materials and/or products by one of our suppliers, this may not always be the case. In addition, certain materials for which we do not currently have long-term supply agreements could experience shortages and significant price increases in the future. For the year ended December 31, 2019, purchases from one supplier represented approximately 5% to 10% of the Company’s overall purchases.
We own a number of patents and have pending certain patent applications covering various products and services. We are also licensed to utilize technology covered by patents owned by others. Furthermore, we believe the information regarding our customer and supplier relationships are valuable proprietary assets, and we have pending applications and registered trademarks for various names under which our entities conduct business or provide products or services. We do not own or license any patents, trademarks or other intellectual property that we believe to be material to the success of our business.
Our results of operations have historically reflected seasonal tendencies, generally in the first and fourth quarters, related to the conclusion and restart of our customers’ annual capital expenditure budgets, the holidays and inclement winter weather, during which we may experience declines in our operating results. Our operations in North Dakota and Pennsylvania are particularly affected by seasonality due to inclement winter weather. During the spring and summer months, our operations in certain areas may be impacted by transportation restrictions due to the work-site conditions caused by the spring thaws or tropical weather systems.
The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or the “Superfund law”), and comparable state laws impose liability on certain classes of persons that are considered to be responsible for the release of hazardous or other state-regulated substances into the environment. These persons include the current owner or operator of the site and the owner or operator of the site at the time of the release and the parties that disposed or arranged for the disposal or treatment of hazardous or other state-regulated substances that have been released at the site. Under CERCLA, these persons may be subject to strict liability, joint and several liability, or both, for the costs of investigating and cleaning up hazardous substances that have been released into the environment, damages to natural resources and human health studies without regard to fault. In addition, companies that incur a CERCLA liability frequently confront claims by neighboring landowners and other third parties for personal injury and property damage allegedly caused by the release of hazardous or other regulated substances or pollutants into the environment.
The federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, (“RCRA”) and analogous state lawlaws generally excludes oil and gas exploration and production wastes (e.g., drilling fluids, produced waters) from regulation as hazardous wastes. However, these wastes remain subject to potential regulation as solid wastes under RCRA and as hazardous waste under other state and local laws. Moreover, wastesWastes from some of our operations (such as, but not limited to, our chemical development, blending and distribution operations, as well as some maintenance and manufacturing operations) are or may be regulated under RCRA and
From time to time, releases of materials or wastes have occurred at locations we own or at which we have operations. These properties and the materials or wastes released thereon may be subject to CERCLA, RCRA, the federal Clean Water Act, the Safe Drinking Water Act (the “SDWA”) and analogous state laws. Under these laws or other laws and regulations, we have been and may be required to remove or remediate these materials or wastes and make expenditures associated with personal injury or property damage. At this time, with respect to any properties where materials or wastes may have been released, it is not possible to estimate the potential costs that may arise from unknown, latent liability risks.
persons conducting hydraulic fracturing to disclose the chemical constituents of their fracturing fluids to a regulatory agency, although they would not require the disclosure of the proprietary formulas except in cases of emergency. Currently, several states already require public disclosure of non-proprietary chemicals on FracFocus.org and other equivalent Internet sites. Disclosure of our proprietary chemical formulas to third parties or to the public, even if inadvertent, could diminish the value of those formulas and could result in competitive harm to our business. Moreover, in response to seismic events near underground injection wells used for the disposal of oil and gas-related wastewater, federal and some state agencies have begun investigating whether such wells have caused increased seismic activity, and some states have imposed volumetric injection limits, shut down or imposed moratorium on the use of such injection wells. At this time, it is not clear what action, if any, the United States Congress will take on the FRAC Act or other related federal and state bills, or the ultimate impact of any such legislation.
If the FRAC Act or similar legislation becomes law, or the Department of the Interior or another federal agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, additional regulatory requirements could be established at the federal level that could lead to operational delays or increased operating costs, making it more difficult to perform hydraulic fracturing and increasing the costs of compliance and doing business for us and our customers. States in which we operate have considered and may again consider legislation that could impose additional regulations and/or restrictions on hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing.
In addition, at the direction of Congress, the EPA undertook a study of the potential impacts of hydraulic fracturing on drinking water and groundwater and issued its report in December 2016. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking water resources under some circumstances and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Similarly, other federal and state studies such as those currently being conducted by, for example, the Secretary of Energy’s Advisory Board and the New York Department of Environmental Conservation, may recommend additional requirements or restrictions on hydraulic fracturing operations.
The federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, the EPA has developed and continues to develop stringent regulations governing emissions of toxic air pollutants from specified sources. We are or may be required to obtain federal and state permits in connection with certain operations ofconducted in our manufacturing and maintenance facilities. These permits impose certain conditions and restrictions on our operations, some of which require significant expenditures for filtering or other emissions control devices at each of our manufacturing and maintenance facilities. Changes in these requirements, or in the permits we operate under, could increase our costs or limit certain activities. Additionally,Many of these regulatory requirements, including New Source Performance Standards and Maximum Achievable Control Technology standards have been made more stringent over time as a result of stricter national ambient air quality standards (“NAAQS”) and other air quality protection goals adopted by the EPA’s Transition Program for Equipment Manufacturers regulations apply to certain off-road diesel engines used by us to power equipmentEPA. State implementation of the revised NAAQS could result in the field. Under these regulations, we are
Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds, wetlands and natural resources. These statutes include the Endangered Species Act, the Migratory Bird Treaty Act, the Clean Water Act and CERCLA. Government entities or private parties may act to prevent oil and gas exploration activities or seek damages where harm to species, habitat or natural resources may result from the filling of jurisdictional streams or wetlands, or the construction of oil and gas facilities or the release of oil, wastes, hazardous substances or other regulated materials. The U.S. Fish and Wildlife Service must also designate the species’ critical habitat and suitable habitat as part of the effort to ensure survival of the species. A critical habitat or suitable habitat designation could result in further material restrictions to land use and may materially delay or prohibit land access for oil and natural gas development. If our customers were to have areas within their business and operations designated as critical or suitable habitat or a protected species, it could decrease demand for our services and have a material adverse effect on our business. At this time, it is not possible to estimate the potential impact on our business of these speculative federal, state or private actions or the enactment of additional federal or state legislation or regulations with respect to these matters.
The EPA has proposed and finalized a number of rules requiring various industry sectors to track and report, and, in some cases, control greenhouse gas emissions. The EPA’s Mandatory ReportingEPA has also adopted rules requiring the monitoring and reporting of Greenhouse Gases Rule was published in October 2009. This rule requires largeGHG emissions from specified GHG sources, and suppliers in the U.S. to track and report greenhouse gas emissions. In June 2010, the EPA’s Greenhouse Gas Tailoring Rule became effective. For this rule to apply initially, the source must already be subject to the Clean Air Act Prevention of Significant Deterioration program or Title V permit program; we are not currently subject to either Clean Air Act program. On November 8, 2010, the EPA finalized a rule that sets forth reporting requirements for the petroleumincluding, among others, certain oil and natural gas industry. Among other things, thisproduction facilities, on an annual basis. Implementation and status of 2016 final rules that establish new air emission controls for emissions of methane from certain equipment and processes in the oil and natural gas source category, including production, processing transmission and storage activities. The EPA’s final rule requires persons that hold state permits for onshorepackage included first-time standards to address emissions of methane from equipment and processes across the source category, including hydraulically fractured oil and natural gas well completions. However, regulatory developments to ease or rescind these rules have created uncertainty as to their impact on the oil and gas exploration and production and that emit 25,000 metric tons or more of carbon dioxide equivalent per year to annually report carbon dioxide, methane and nitrous oxide combustion emissions from (i) stationary and portable equipment and (ii) flaring. Under the final rule, our customers may be required to include calculated emissions from our hydraulic fracturing equipment located on their well sites in their emission inventory.industry.
The trajectory of future greenhouse regulations remains unsettled. In March 2014, the White House announced its intention to consider further regulation of methane emissions from the oil and gas sector. It is unclear whether Congress will take further action on greenhouse gases, for example, to further regulate greenhouse gas emissions or alternatively to statutorily limit the EPA’s authority over greenhouse gases. Even without federal legislationHowever, almost one-half of the states have established or regulationjoined GHG cap and trade programs. Most of these cap and trade programs work by requiring major sources of emissions or major producers of fuels, to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to achieve the overall greenhouse gas emissions, states may pursue the issue either directly or indirectly.emission reduction goal. Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect the oil and natural gas industry and, therefore, could reduce the demand for our products and services.
Climate change regulation may also impact our business positively by increasing demand for natural gas for use in producing electricity and as a transportation fuel. Currently, our operations are not materially adversely impacted by existing state and local climate change initiatives. At this time, we cannot accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business.
We seek to minimize the possibility of a pollution event through equipment and job design, as well as through training of employees. We also maintain a pollution risk management program that is activated in the event a pollution event occurs. This program includes an internal emergency response plan that provides specific procedures for our employees to follow in the event of a chemical release or spill. In addition, we have contracted with several third-
We also seek to manage environmental liability risks through provisions in our contracts with our customers that generally allocate risks relating to surface activities associated with the hydraulic fracturing process, other than water disposal, to us and risks relating to “down-hole” liabilities to our customers. Our customers are responsible for the disposal of the fracturing fluid that flows back out of the well as waste water, for which they use a controlled flow-back process. We are not involved in that process or the disposal of the resulting fluid. Our contracts generally require our customers to indemnify us against pollution and environmental damages originating below the surface of the ground or arising out of water disposal, or otherwise caused by the customer, other contractors or other third parties. In turn, we generally indemnify our customers for pollution and environmental damages originating at or above the surface caused solely by us. We seek to maintain consistent risk-allocation and indemnification provisions in our customer agreements to the extent possible. Some of our contracts, however, contain less explicit indemnification provisions, which typically provide that each party will indemnify the other against liabilities to third parties resulting from the indemnifying party’s actions, except to the extent such liability results from the indemnified party’s gross negligence, willful misconduct or intentional act.
Our operations are subject to hazards inherent in the oil and natural gas industry, including accidents, blowouts, explosions, craterings,cratering, fires, oil spills, surface and underground pollution and contamination, hazardous material spills, loss of well control, damage to or loss of the wellbore, formation or underground reservoir, damage or loss from the use of explosives and radioactive materials, spills.and damage or loss from inclement weather or natural disasters. These conditions can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment and wildlife, and interruption or suspension of operations, among other adverse effects. In addition, claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. If
Despite our efforts to maintain high safety standards, we from time to time have sufferedexperienced accidents in the past, and we anticipate that we could experience accidents in the future. In addition to the property and personal
losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability, as well as our relationships with customers, employees and regulatory agencies. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other adverse effects on our financial condition and results of operations.
We carry a variety of insurance coverages for our operations, and we are partially self-insured for certain claims, in amounts that we believe to be customary and reasonable. However, our insurance may not be sufficient to cover any particular loss or may not cover all losses. Historically, insurance rates have been subject to various market fluctuations that may result in less coverage, increased premium costs, or higher deductibles or self-insured retentions.
Our Annual reports on Form 10-K, Quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available free of charge on our internet web site at www.keanegrp.com,www.nextierofs.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the Securities and Exchange Commission (the “SEC”). The SEC maintains an internet site that contains our reports, proxy and information statements and our other SEC filings. The address of that web site is https://www.sec.gov/.
We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website at https://investors.keanegrp.com/.investors.nextierofs.com/ir-home. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases and blogs as part of our investor relations website. We have used, and intend to continue to use, our investor relations website as means of disclosing material information and for complying with our disclosure obligations under Regulation Fair Disclosure. Further corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters and code of business conduct and ethics, is also available on our investor relations website under the heading “Corporate Governance.” The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
Item 1A. Risk Factors
RISK FACTORS
Described below are certain risks that we believe applyAn investment in our securities involves a variety of risks. In addition to our business and the industryother information included or incorporated by reference in which we operate. You should carefully consider each ofthis annual report, the following risk factors in conjunction with other information provided in this Annual Reportshould be carefully considered, as they could have a significant adverse impact on Form 10-K and in our other public disclosures. The risks described below highlight potential events, trends or other circumstances that could adversely affect our business, financial condition and results of operations, cash flows, liquidity or access to sources of financing, and consequently, the market value of our common stock.operations. These risks could cause our future results to differ materially from historical results and from guidance we may provide regarding our expectations of future financial performance. TheThese risk factors do not identify all risks described below are those that we have identified as material and isface; our operations could also be affected by factors, events, or uncertainties that are not an exhaustive list of all the risks we face. There may be others that we have not identified,presently known to us or that we have deemedcurrently do not consider to be immaterial.present significant risks to our operations. In addition, the global economic climate amplifies many of these risks. All forward-looking statements made by us or on our behalf are qualified by the risks described below.
Risks Related to Our Industry
Our business is cyclical and depends on spending and well completions by the onshore oil and natural gas industry predominately in the U.S.,United States, and the level of such activity is volatile. Our business has been, and may continue to be, adversely affected by industry and financial marketconditions that are beyond our control.
Our business is cyclical, and we depend on the willingness of our customers to make expenditures to explore for, develop and produce oil and natural gas from onshore unconventional resources located predominantly in the United States (“U.S.”). The willingness of our customers to undertake these activities depends largely upon prevailing industry and financial market conditions that are influenced by numerous factors over which we have no control, including:
prices and expectations about future prices for oil and natural gas;
domestic and foreign supply of, and demand for, oil and natural gas and related products;
the level of global and domestic oil and natural gas inventories;
the supply of and demand for hydraulic fracturing and other oilfield services and equipment in the U.S.; and the areas in which we operate;
the cost of exploring for, developing, producing and delivering oil and natural gas;
availablethe availability of adequate pipeline, storage and other transportation capacity;
lead times associated with acquiring equipment and products and availability of qualified personnel;
the discovery rates ofat which new oil and natural gas reserves;reserves are discovered;
federal, state and local regulation of hydraulic fracturing and other oilfield service activities, as well as exploration and production activities, including public pressure on governmental bodies and regulatory agencies to regulate our industry;
the availability of water resources, suitable proppant and chemicals in sufficient quantities for use in hydraulic fracturing fluids;
geopolitical developments, and political instability and recent (and potential future) armed hostilities in oil and natural gas producing countries;
actions of the Organization of the Petroleum Exporting Countries (“OPEC”), its members and other state-controlled oil companies relating to oil price and production controls;
advances in exploration, development and production technologies or in technologies affecting energy consumption;
the price and availability of alternative fuels and energy sources;
disruptions due to natural disasters, unexpected or extreme weather conditions, public health crises (such as coronavirus) and similar factors;
merger and divestiture activity amongst oil and natural gas producers;
uncertainty in capital and commodities markets and the ability of oil and natural gas producers and oil and natural gas midstream operators to raise equity capital and debt financing;
investor and activist focus on corporate social responsibility and sustainability; and
U.S. federal, state and local and non-U.S. governmental regulations and taxes.
The volatility of the oil and natural gas industry and the resulting impact on exploration and production activity could adversely impact the level of drilling and completion activity by some of our customers. This volatility may result in a decline in the demand for our services or adversely affect the price of our services. In addition, material declines in oil and natural gas prices, or drilling or completion activity in the U.S. oil and natural gas shale regions, could have a material adverse effect on our business, financial condition, prospects, results of operations and cash flows. Furthermore, a decrease in the development of oil and natural gas reserves in the U.S. may also have an adverse impact on our business, even in an environment of strong oil and natural gas prices.
A decline in or substantial volatility of crude oil and natural gas commodity prices could adversely affect the demand for our services.
The demand for our services is substantially influenced by current and anticipated crude oil and natural gas commodity prices, the related level of drilling and completion activity and general production spending in the areas in which we have operations. Volatility or weakness in crude oil and natural gas commodity prices (or the perception that crude oil and natural gas commodity prices will decrease) affects the operational and capital spending patterns of our customers, and the products and services we provide are, to a substantial extent, deferrable in the event oil and natural gas companies reduce capital expenditures. As a result, weDuring periods of declining oil and natural gas prices, or when pricing remains depressed, our customer base may experience lowersignificant declines in drilling, completion and production activities, which in turn may result in reduced utilization of, and may be forcedincreased competition and pricing pressure to lowervarying degrees across our prices or rates charged for, our equipmentservice lines and services.operating areas.
HistoricalHistorically, prices for crude oil and natural gas have been extremely volatile, and these prices are expected to experience continued volatility. For example, since 1999,2014, crude oil prices have ranged from as low as approximately $10 per barrel to over $100 per barrel, reaching a high of $107.95 per barrel in June of 2014. From late 2014 to the second half of 2016, oil and natural gas prices and, therefore, the level of exploration, development and production activity, experienced a sustained decline from the highs in the latter half of 2014, as a result of an increasing global supply of oil and a decision by OPEC to sustain its production levels in spite of the decline in oil prices and slowing economic growth in the Eurozone and China. Although oil and natural gas prices experienced modest recovery since the first quarter of 2016, with oil reaching a high of $76.40 per barrel on October 3, 2018 before declining by approximately 42% over the course of almost three months to a low of $44.48 per barrel in late December 2018. During the first quarter of 2016,2019, NYMEX crude oil prices ranged from approximately $46.31 to $66.24 per barrel, with natural gas prices were as low as $1.49ranging from $1.75 per million British thermal units (“MMbtu”) and, despite volatility, reached a high of $4.70to $4.25 per MMbtu on November 21, 2018, before declining to $3.25 per MMbtu on December 28, 2018.MMbtu. Continued price volatility for oil and natural gas is expected during 2019.2020.
E&P companies have historically moved to reduce costs in connection with significant declines inWorldwide military, political and economic events, including initiatives by OPEC, affect both the pricedemand for, and the supply of, oil, both by decreasing drilling and completion activity and by demanding price concessions from their service providers, including providers of hydraulic fracturing and well completions services. In turn, service providers, including hydraulic fracturing and well completions service providers, may be forced to lower their operating costs and capital expenditures, while continuing to operate their businesses in an extremely competitive environment. Prolonged periods of decreased oil prices or price instability in the oil and natural gas industry will adversely affectgas. Weather conditions, governmental regulation (both in the demand for our productsUnited States and services and our financial condition, prospects and resultselsewhere), levels of operations. For more information, see Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations–Business Outlook.”
Additionally, theconsumer demand, commercial development of economically viable alternative energy sources (such as wind, solar, geothermal, tidal, fuel cells and biofuels) and, fuel conservation measures, the availability of pipeline capacity and other factors that will be beyond our control may also affect the supply of, demand for, and price of oil and natural gas. This, in turn, could reduceresult in lower demand for our services and create downward pressure on the revenue we are able to derive from such services, as they are dependent on oilcause lower pricing and natural gas commodity prices.utilization levels for our services.
Pipeline capacity constraints in the Permian Basin may temporarily disrupt our operations during the near term.
One of our most important geographic markets is the Permian Basin. Recently, the oil and gas industry was concerned that the region’s capacity to transport oil to market, primarily to regional refineries, was not sufficient to support the growing production of the region. Additional pipeline capacity under construction in the region is not anticipated to be completed until the third quarter of 2019. If pipeline capacity remains or becomes more constrained in the Permian Basin, our activity in the region may decline, which could have a material adverse effect on our business, results of operations, prospects and financial condition.
Adverse weather conditions could impact demand for our services or materially impact our costs.
Our business could be materially adversely affected by adverse weather conditions. Our operations and the operations of our customers may be adversely affected by seasonal weather conditions, severe weather events and natural disasters. For example, unusually warm winters could adversely affect the demand forperiods of drought, hurricanes, tropical storms, heavy snow, ice or rain may result in customer delays and other disruptions to our services, by decreasing the demand for natural gas. In addition, unusually cold winters and other weather conditions could adversely affect our ability to perform our services due to delays in the delivery of products that we need to provide our services. For example, weather-induced rail congestion, combined with flooding impacts at suppliers’ mines, has contributed previously to a reduction in theincluding availability of key products such as sand used in our operations. Our operations in arid regions can also be affected by droughts and limited access to water used in our hydraulic fracturing operations. Adverse weather can also directly impede our own operations.water. Repercussions of adverse weather conditions may include:
curtailment of services;
weather-related damage to facilities and equipment, resulting in delays in operations;
inability to deliver equipment, personnel and products to job sites in accordance with contract schedules;
increase in the price of key products or insurance; and
loss of productivity.
Competition and availability of excess equipment within the oilfield services industry may adversely affect our ability to market and price our services.
The oilfield services industry is highly competitive. The principal competitive tactics in our markets are generally price, technical expertise, the availability and condition of equipment, work force capability, safety record, reputation and experience. Furthermore, as a result of this competition, available equipment in the markets in which one or more of our product lines competes at times may exceed the demand for such equipment. This excess supply of equipment may result from many factors, including without limitation, a low commodity price environment, increase in the construction of new equipment, or reactivation and improvement of existing equipment. Excess capacity may result in (1) substantial competition for a diminishing amount of demand and/or (2) significant price competition, which could have a material adverse effect on our results of operations, financial condition and prospects.
The oilfield services industry is highly fragmented and includes several large companies that compete in many of the markets we serve, as well as numerous small companies that compete with us on a local basis. Some of our competitors may have greater resources and/or name recognition, which could allow them to better withstand industry downturns and to compete more effectively on the basis of technology, geographic scope, retained skilled personnel and economies of scale. In addition, our industry has experienced recent consolidation through mergers and acquisitions, which could lead to increased resources and capabilities for our competitors. There may also be new companies that enter our business, or re-enter our business with significantly reduced indebtedness following emergence from bankruptcy, or our existing and potential future customers may develop their own oilfield solutions. Our operations may be adversely affected if our current competitors or new market entrants introduce new products, technology or services with better features, performance, prices or other characteristics than our products and services or expand in service areas where we operate.
We periodically seek to increase prices of our services to offset rising costs and to generate higher returns for our stockholders. Because we operate in a very competitive industry, however, we are not always successful in raising or maintaining our existing prices. Even if we are able to increase our prices, we may not be able to do so at a rate that is sufficient to offset rising costs without adversely affecting our activity levels. The inability to maintain our pricing and to increase our pricing could have a material adverse effect on our business, financial condition, cash flows and results of operations. In addition, we may be unable to replace dedicated contracts that were terminated early, extend expiring contracts or obtain new contracts in the spot market, and the rates and other material terms under any new or extended contracts may be on substantially less favorable rates and terms.
Accordingly, high competition and excess equipment in the market can cause us to have difficulty maintaining pricing, utilization and profit margins and, at times, result in operating losses. We cannot predict the
future level of competition or excess equipment in the oil and natural gas service businesses or the level of demand for our services.
Our operations are subject to hazards inherent in the energy services industry.
Risks inherent to our industry can cause personal injury, loss of life, suspension of or impact upon operations, damage to geological formations, damage to facilities, business interruption and damage to, or destruction of, property, equipment and the environment. Such risks may include, but are not limited to:
equipment defects;
vehicle accidents;
fires, explosions and uncontrollable flows of gas or well fluids;
unusual or unexpected geological formations or pressures and industrial accidents;
blowouts;
cratering;
loss of well control;
collapse of the borehole; and
damaged or lost drilling and well completions equipment.
Catastrophic or significantly adverse events can occur at well sites where we conduct our operations, including blow outs resulting in explosions, fires, personal injuries, property damage, pollution, clean-up responsibility and regulatory responsibility. In response, we typically require indemnities, releases and limitations on liability in our contracts with our customers, together with liability insurance coverage, to protect us from potential liability related to such occurrences. However, it is possible that customers or insurers could seek to avoid or be financially unable to meet their obligations, or a court may decline to enforce such provisions. Damages that are not indemnified or released could greatly exceed available insurance coverage and could have a material adverse effect on our business, financial condition, prospects and results of operations.
Catastrophic or significantly adverse events can also occur at our facilities and during transport of our equipment, commodities and personnel to well sites. In response, we also typically require indemnities, releases and limitations on liability in our contracts with our suppliersOur safety procedures may not always prevent such damages. Our insurance coverage or coverage of applicable vendors and service providers together withmay be inadequate to cover our liabilities. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable and commercially justifiable or on terms as favorable as our current arrangements. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance coverage,could have a material adverse effect on our ability to protect us from potential liability related to such occurrences.conduct normal business operations and on our financial condition, results of operations and cash flows.
In addition, our hydraulic fracturing and well completion services could become a source of spills or releases of fluids, including chemicals used during hydraulic fracturing activities, at the site where such services are performed, or could result in the discharge of such fluids into underground formations that were not targeted for fracturing or well completion activities, such as potable aquifers. These risks could expose us to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution and other environmental damages and could result in a variety of claims, losses and remedial obligations that could have an adverse effect on our business and results of operations. The existence, frequency and severity of such incidents could affect operating costs, insurability, reputation and relationships with customers, employees and regulators. In particular, our customers may elect not to purchase our services if they view our safety record as unacceptable, which could cause us to lose customers and substantial revenue. Any litigation or claims, even if fully indemnified or insured, could negatively affect our reputation with our customers and the public and make it more difficult for us to compete effectively or obtain adequate insurance in the future.
Competition and excess equipment within the oilfield services industry may adversely affect our ability to market our services.
The oilfield services industry is highly competitive and at times, available pressure pumping and well completions equipment exceed the demand for such equipment. A low commodity price environment can result in substantially more pressure pumping and well completion equipment being available than are needed to meet demand. In addition, in recent years, there has been a substantial increase in the construction of new pressure pumping equipment. Low commodity prices and the construction of new equipment can result in excess capacity and substantial competition for a diminishing amount of pressure pumping demand. Even in an environment of high oil and natural gas prices and increased drilling completions activity, reactivation and improvement of existing pressure pumping equipment and operations and the construction of new pressure pumping equipment can lead to an excess supply of equipment.
The oilfield services industry is highly fragmented and includes several large companies that compete in many of the markets we serve, as well as numerous small companies that compete with us on a local basis. Our larger competitors’ greater resources could allow them to better withstand industry downturns and to compete more effectively on the basis of technology, geographic scope, retained skilled personnel and economies of scale. We believe the principal competitive factors in the market areas we serve are multi-basin service capability, proximity to customers, technical expertise, equipment capacity, work force competency, efficiency, safety records, reputation, experience and price. Our operations may be adversely affected if our current competitors or new market entrants introduce new products, technology or services with better features, performance, prices or other characteristics than our products and services or expand in service areas where we operate.
Competitive pressures or other factors may also result in significant price competition, particularly during industry downturns, which could have a material adverse effect on our results of operations, financial condition and prospects. We periodically seek to increase prices on our services to offset rising costs and to generate higher returns for our stockholders. Because we operate in a very competitive industry, however, we are not always successful in
raising or maintaining our existing prices. With the active rig count below the peak seen in 2014 and pressure pumping equipment still idle, there is considerable pricing pressure on pressure pumping services. Even if we are able to increase our prices, we may not be able to do so at a rate that is sufficient to offset rising costs without adversely affecting our activity levels. The inability to maintain our pricing and to increase our pricing as costs increase could have a material adverse effect on our business, financial condition, cash flows and results of operations. In addition, we may be unable to replace dedicated contracts that were terminated early, extend expiring contracts or obtain new contracts in the spot market, and the rates and other material terms under any new or extended contracts may be on substantially less favorable rates and terms.
Accordingly, high competition and excess equipment can cause oil and natural gas service contractors to have difficulty maintaining pricing, utilization and profit margins and, at times, result in operating losses. We cannot predict the future level of competition or excess equipment in the oil and natural gas service businesses or the level of demand for our pressure pumping and well completion services.
Competition among oilfield service and equipment providers is affected by each provider’s reputation for environmental impact, safety and quality.
Our activities are subject to a wide range of national, state and local environmental, occupational health and safety laws and regulations. In addition, customers maintain their own compliance and reporting requirements. Failure to comply with these environmental, health and safety laws and regulations, or failure to comply with our customers’ compliance or reporting requirements, could tarnish our reputation for safety and quality and have a material adverse effect on our competitive position. In particular, our customers may elect not to purchase our services if they view our environmental or safety record as unsatisfactory, which could cause us to lose customers and substantial revenue.
Oilfield anti-indemnity provisions enacted by many states may restrict or prohibit a party’s indemnification of us.
We typically enter into agreements with our customers governing the provision of our services, which usually include certain indemnification provisions for losses resulting from operations. Such agreements may require each party to indemnify the other against certain claims regardless of the negligence or other fault of the indemnified party; however, many states place limitations on contractual indemnity agreements, particularly agreements that indemnify a party against the consequences of its own negligence. Furthermore, certain states, including Louisiana, New Mexico, Texas and Wyoming, have enacted statutes generally referred to as “oilfield anti-indemnity acts” expressly prohibiting certain indemnity agreements contained in or related to oilfield services agreements. Such oilfield anti-indemnity acts may restrict or void a party’s indemnification of us, which could have a material adverse effect on our business, financial condition, prospects and results of operations.
New technology may cause us to become less competitive.
The oilfield services industry is subject to the introduction of new drilling and completion techniques and services using new technologies, some of which may be subject to patent or other intellectual property protections. As competitors and others use or develop new or comparable technologies in the future, we may lose market share or be placed at a competitive disadvantage. In addition, technological changes, process improvements and other factors that increase operational efficiencies could continue to result in oil and natural gas wells being completed more quickly, which could reduce the number of revenue earning days. Furthermore, we may face competitive pressure to develop, implement or acquire certain new technologies at a substantial cost. Some of our competitors have greater financial, technical and personnel resources that may allow them to enjoy technological advantages and develop and implement new products on a timely basis or at an acceptable cost. We cannot be certain that we will be able to develop and implement new technologies or products on a timely basis or at an acceptable cost. Limits on our ability to develop, acquire, effectively use and implement new and emerging technologies may have a material adverse effect on our business, financial condition, prospects or results of operations.
We are subject to federal, state and local laws and regulations regarding issues of health, safety and protection of the environment. Under these laws and regulations, we may become liable for penalties, damages or costs of remediation or other corrective measures. Any changes in laws or government regulations could increase our costs of doing business.
Our operations are subject to stringent federal, state, local and tribal laws and regulations relating to, among other things, protection of natural resources, clean air and drinking water, wetlands, endangered species, greenhouse gasses, nonattainment areas that are not in attainment with air quality standards, the environment, health and safety, chemical use and storage, waste management, waste disposal and transportation of waste and other hazardous and nonhazardous materials. Our operations involve risks of environmental liability, including leakage from an operator’s casing during our operations or accidental spills onto or into surface or subsurface soils, surface water or groundwater. Some environmental laws and regulations may impose strict liability, joint and several liability or both. In some situations, we could be exposed to liability as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, third parties without regard to whether we caused or contributed to the conditions. Additionally, environmental concerns, including potential emissions affecting clean air, drinking water contamination and seismic activity, have prompted investigations that could lead to the enactment of regulations,
limitations, restrictions or moratoria that could potentially have a material adverse impact on our business. Actions arising under these laws and regulations could result in the shutdown of our operations, fines and penalties (administrative, civil or criminal), revocations of or restrictions in permits to conduct business, expenditures for remediation or other corrective measures and/or claims for liability for property damage, exposure
to hazardous materials, exposure to hazardous waste, nuisance or personal injuries. Sanctions for noncompliance with applicable environmental laws and regulations may also include the assessment of administrative, civil or criminal penalties, revocation of or restrictions in permits and temporary or permanent cessation of operations in a particular location and issuance of corrective action orders. Such claims or sanctions and related costs could cause us to incur substantial costs or losses and could have a material adverse effect on our business, financial condition, prospects and results of operations. Additionally, an increase in regulatory requirements, limitations, restrictions or moratoria on oil and natural gas exploration and completion activities at a federal, state or local level could significantly delay or interrupt our operations, limit the amount of work we can perform, increase our costs of compliance, or increase the cost of our services; thereby possibly having a material adverse impact on our financial condition.
If we do not perform in accordance with government, industry, customer or our own health, safety and environmental standards, we could lose business from our customers, many of whom have an increased focus on environmental and safety issues.
We are subject to requirements imposed by the EPA, U.S. Department of Transportation, U.S. Nuclear RegulationRegulatory Commission, OSHA and state regulatory agencies that regulate operations to prevent air, soil and water pollution.pollution, and protect worker health and safety.
The EPA regulates air emissions from all engines, including off-road diesel engines that are used by us to power equipment in the field. Under these U.S. emission control regulations, we could be limited in the number of certain off-road diesel engines we can purchase. Further, the requirement to comply with emission control and fuel quality regulations could result in increased costs.
In addition, as part of our business, we handle, transport, and dispose of a variety of fluids and substances used by our customers in connection with their oil and natural gas exploration and production activities. We also generate and dispose of nonhazardous and hazardous wastes. The generation, handling, transportation, and disposal of these fluids, substances, and wastes are regulated by a number of laws, including CERCLA, RCRA, the Clean Water Act, the SDWA and analogous state laws. Under RCRA, the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes are regulated. RCRA currently exempts many oil and gas exploration and production wastes from classification as hazardous waste. However, these oil and gas exploration and production wastes may still be regulated under state solid waste laws and regulations, and it is possible that certain oil and natural gas exploration and production wastes now classified as non-hazardous could be classified as hazardous waste in the future.
Failure to properly handle, transport or dispose of these materials or otherwise conduct our operations in accordance with these and other environmental laws could expose us to liability for governmental penalties, third-party claims, cleanup costs associated with releases of such materials, damages to natural resources, and other damages, as well as potentially impair our ability to conduct our operations. Moreover, certain of these environmental laws impose joint and several, strict liability even though our conduct in performing such activities was lawful at the time it occurred or the conduct of, or conditions caused by, prior operators or other third-parties was the basis for such liability. In addition, environmental laws and regulations are subject to frequent change and if existing laws, regulatory requirements or enforcement policies were to change in the future, we may be required to make significant unanticipated capital and operating expenditures.
Laws and regulations protecting the environment generally have become more stringent over time, and we expect them to continue to do so. This could lead to material increases in our costs, and liability exposure, for future environmental compliance and remediation.
Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing could prohibit, restrict or limit hydraulic fracturing operations, could increase our operating costs or could result in the disclosure of proprietary information resulting in competitive harm.
During recent sessions of the U.S. Congress, several pieces of legislation were introduced in the U.S. Senate and House of Representatives for the purpose of amending environmental laws such as the Clean Air Act, the SDWA and the Toxic SubstanceSubstances Control Act with respect to activities associated with extraction and energy production industries, especially the oil and gas industry. Furthermore, various items of legislation and rulemaking have been proposed that would regulate or prevent federal regulation of hydraulic fracturing on federally owned land. Proposed rulemaking from the EPA and OSHA could increase our regulatory requirements, which could increase our costs of compliance or increase the costs of our services, thereby possibly having a material adverse impact on our business and results of operations.
If the EPA or another federal or state-levelstate agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, an additional level of regulation established at the federal or state level could lead to operational delays and increase our costs. In December 2016, the EPA issued a study of the potential impacts of hydraulic fracturing on drinking water and groundwater. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking resources under some circumstances, and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Many regulatory and legislative bodies routinely evaluate the adequacy and effectiveness of laws and regulations affecting the oil and gas industry. As a result, state legislatures, state regulatory agencies and local municipalities may consider legislation, regulations or ordinances, respectively, that could affect all aspects of the oil and natural gas industry and occasionally take action to restrict or further regulate hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state and municipal actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. Compliance, stricter regulations or the consequences of any failure to comply by us could have a material adverse effect on our business, financial condition, prospects and results of operations.
Many states in which we operate require the disclosure of some or all of the chemicals used in our hydraulic fracturing operations. Certain aspects of one or more of these chemicals may be considered proprietary by us or our chemical suppliers. Disclosure of our proprietary chemical information to third parties or to the public, even if inadvertent, could diminish the value of our trade secrets or those of our chemical suppliers and could result in competitive harm to us, which could have an adverse impact on our business, financial condition, prospects and results of operations.
We are also aware that some states, counties and municipalities have enacted or are considering moratoria on hydraulic fracturing. For example, New York and Vermont, states in which we have no operations, have banned or are in the process of banning the use of high-volume hydraulic fracturing. Alternatively, some municipalities are considering or have considered zoning and other ordinances, the conditions of which could impose a de facto ban on drilling and/or hydraulic fracturing operations. Further, some states, counties and municipalities are closely examining water use issues, such as permit and disposal options for processed water, which could have a material adverse impact on our financial condition, prospects and results of operations, if such additional permitting requirements are imposed upon our industry. Additionally, our business could be affected by a moratorium or increased regulation of companies in our supply chain, such as sand mining by our proppant suppliers, which could limit our access to supplies and increase the costs of our raw materials. At this time, it is not possible to estimate how these various restrictions could affect our ongoing operations. For more information, see “Item 1. Business—Environmental regulation.”
Existing or future laws and regulations related to greenhouse gases and climate change could have a negative impact on our business and may result in additional compliance obligations with respect to the release, capture and use of carbon dioxide that could have a material adverse effect on our business, results of operations, prospects and financial condition.
Changes in environmental requirements related to greenhouse gases and climate change may negatively impact demand for our services. For example, oil and natural gas exploration and production may decline as a result of environmental requirements, including land use policies responsive to environmental concerns. Federal, state and local agencies have been evaluating climate-related legislation and other regulatory initiatives that would restrict emissions of greenhouse gases in areas in which we conduct business. Because our business depends on the level of activity in the oil and natural gas industry, existing or future laws and regulations related to emissions of greenhouse gases and climate change, including incentives to conserve energy or use alternative energy sources, could have a negative impact on our business if such laws or regulations reduce demand for oil and natural gas. Likewise, such restrictions may result in additional compliance obligations with respect to the release, capture, sequestration and use of carbon dioxide that could have a material adverse effect on our business, results of operations, prospects and financial condition.
Additionally, increasing political and social attention to global climate change has resulted in pressure upon shareholders, financial institutions and/or financial markets to modify their relationships with oil and gas companies and to limit investments and/or funding to such companies, which could increase our costs or otherwise adversely affect our business and results of operations.
Changes in transportation regulations may increase our costs and negatively impact our results of operations.
We are subject to various transportation regulations, including as aregulation of motor carriercarriers by the U.S. Department of Transportation and by various federal, state and tribal agencies, whose regulations include certain permit requirements ofimposed by highway and safety authorities. These regulatory authorities exercise broad powers over our trucking operations, generally governing such matters as the authorization to engage in motor carrier operations, safety, equipment testing, driver requirements and specifications and insurance requirements. The trucking industry is subject to possible regulatory and legislative changes that may impact our operations, such as changes in fuel emissions limits, hours of service regulations that govern the amount of time a driver may drive or work in any specific period and limits on vehicle weight and size. As the federal government continues to develop and propose regulations relating to fuel quality, engine efficiency and greenhouse gas emissions, we may experience an increase in costs related to truck purchases and maintenance, impairment of equipment productivity, a decrease in the residual value of vehicles, unpredictable fluctuations in fuel prices and an increase in operating expenses. Increased truck traffic may contribute to deteriorating road conditions in some areas where our operations are performed. Our operations, including routing and weight restrictions, could be affected by road construction, road repairs, detours and state and local regulations and ordinances restricting access to certain roads. Proposals to increase federal, state or local taxes, including taxes on motor fuels, are also made from time to time, and any such increase would increase
our operating costs. Also, state and local regulation of permitted routes and times on specific roadways could adversely affect our operations. We cannot predict whether, or in what form, any legislative or regulatory changes or municipal ordinances applicable to our logistics operations will be enacted and to what extent any such legislation or regulations could increase our costs or otherwise adversely affect our business or operations.
We could be negatively impacted by the recent outbreak of coronavirus (COVID-19).
In light of the uncertain and rapidly evolving situation relating to the spread of the coronavirus (COVID-19), this public health concern could pose a risk to our employees, our customers, our vendors and the communities in which we operate, which could negatively impact our business. The extent to which the coronavirus (COVID-19) may impact our business will depend on future developments, which are highly uncertain and cannot be predicted at this time. We may experience an impact to the timing and availability of key products from suppliers, customer shutdowns to prevent spread of the virus, employee impacts from illness, school closures and other community response measures, all of which could negatively impact our business. We continue to monitor the situation and may adjust our current policies and practices as more information and guidance become available.
Risks Related to Our Recent Merger
We may not be able to retain customers or suppliers or customers or suppliers may seek to modify contractual obligations with us, which could have an adverse effect on our business and operations. Third parties may terminate or alter existing contracts or relationships with us.
As a result of the C&J Merger, we may experience impacts on relationships with customers and suppliers that may harm our business and results of operations. Certain customers or suppliers may seek to terminate or modify contractual obligations following the C&J Merger whether or not contractual rights are triggered as a result of the C&J Merger. There can be no guarantee that customers and suppliers will remain with or continue to have a relationship with us or do so on the same or similar contractual terms following the C&J Merger. If any customers or suppliers seek to terminate or modify contractual obligations or discontinue the relationship with us, then our business and results of operations may be harmed. Furthermore, we do not have long-term arrangements with many of our significant suppliers. If our suppliers were to seek to terminate or modify an arrangement with us, then we may be unable to procure necessary supplies from other suppliers in a timely and efficient manner and on acceptable terms, or at all.
Combining the businesses of legacy Keane and C&J may be more difficult, costly or time-consuming than expected and we may fail to realize the anticipated benefits of the C&J Merger, which may adversely affect our business results and negatively affect the value of our common stock.
The success of the C&J Merger will depend on, among other things, our ability to combine the legacy Keane and C&J in a manner that realizes cost savings and facilitates growth opportunities. However, we must successfully integrate the legacy Keane and C&J businesses in a manner that permits these benefits to be realized. In addition, we must achieve the cost savings and anticipated growth without adversely affecting current revenues and investments in future growth. If we are not able to successfully achieve these objectives, the anticipated benefits of the C&J Merger may not be realized fully, or at all, or may take longer to realize than expected.
An inability to realize the full extent of the anticipated benefits of the C&J Merger and the other transactions contemplated by the C&J Merger Agreement, as well as any delays encountered in the integration process, could have an adverse effect upon our revenues, level of expenses and operating results of the Company, which may adversely affect the value of our common stock.
In addition, the actual integration may result in additional and unforeseen expenses and may cost more than anticipated, and the anticipated benefits of the integration plan may not be realized. Actual cost savings, if achieved, may be lower than what we expect and may take longer to achieve than anticipated. If we are not able to adequately address integration challenges, it may be unable to successfully integrate the operations of legacy Keane and C&J or realize the anticipated benefits of the integration of the two companies.
The failure to successfully integrate the businesses and operations of the Company and C&J in the expected time frame may adversely affect the Company's future results.
There can be no assurances that the businesses of the Company and C&J can be integrated successfully. It is possible that the integration process could result in the loss of key employees, the loss of customers, the disruption of ongoing businesses, inconsistencies in standards, controls, procedures and policies, unexpected integration issues, higher than expected integration costs and an overall post-completion integration process that takes longer than originally anticipated. Specifically, the following issues, among others, must be addressed in integrating the operations of the two businesses in order to realize the anticipated benefits of the C&J Merger so the Company performs as expected:
combining the businesses operations and corporate functions of the Company and C&J, in a manner that permits the Company to achieve any cost savings or revenue synergies anticipated to result from the C&J Merger, the failure of which would result in the anticipated benefits of the C&J Merger not being realized in the time frame currently anticipated or at all;
reducing additional and unforeseen expenses to prevent integration costs from more than anticipated;
avoiding delays in the integration process;
integrating personnel from the two companies and retaining key employees;
integrating the companies' technologies;
integrating and standardizing the offerings and services available to customers;
identifying and eliminating redundant and underperforming functions and assets;
harmonizing the companies' operating practices, employee development and compensation programs, internal controls and other policies, procedures and processes;
maintaining existing agreements with customers, distributors, providers and vendors and avoiding delays in entering into new agreements with prospective customers, distributors, providers and vendors;
addressing possible differences in business backgrounds, corporate cultures and management philosophies;
consolidating the companies' administrative and information technology infrastructure;
coordinating distribution and marketing efforts;
managing the movement of certain positions to different locations; and
effecting actions that may be required in connection with obtaining regulatory approvals.
In addition, at times the attention of certain members of the Company's management and resources may be focused on the integration of the businesses of the two companies and diverted from day-to-day business operations or other opportunities that may have been beneficial to the Company, which may disrupt the business of the Company.
Furthermore, the Company's board of directors and executive leadership of the Company consists of former directors and executive officers from each of the Company and C&J. Combining the boards of directors and management teams of each company into a single board and a single management team could require the reconciliation of differing priorities and philosophies.
Risks Related to Our Business
We may be subject to claims for personal injury and property damage, whichThe loss of one or more significant customers could materially adversely affect our financial condition, prospects and results of operations.
Our business, financial condition, prospects and results of operations could be materially adversely affected, if one or more of our significant customers ceases to engage us for our services on favorable terms or at all, or fails to pay or delays in paying us significant amounts of our outstanding receivables. Our completions business has historically had contracts with a portion of our customers that are annual to multi-year.
Additionally, the E&P industry is characterized by frequent consolidation activity. Changes in ownership of our customers may result in the loss of, or reduction in, business from those customers, which could materially and adversely affect our business, financial condition, prospects or results of operations.
We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our financial results.
We are subject to inherent risks that can cause personal injurythe risk of loss resulting from nonpayment or lossnonperformance by our customers, many of life, damage to or destruction of property, equipment or the environment or the suspension of our operations. Ourwhose operations are concentrated solely in the domestic E&P industry which, as described above, is subject to
volatility and, exposed to, employee/employer liabilitiestherefore, credit risk. Our credit procedures and risks such as wrongful termination, discrimination, labor organizing, retaliation claims and general human resource related matters. Litigation arising from operations where our facilities are located, or our services are provided, may cause us to be named as a defendant in lawsuits asserting potentially large claims including claims for exemplary damages. We maintain what we believe is customary and reasonable insurance to protect our business against these potential losses, but such insurancepolicies may not be adequate to cover our liabilities, andfully reduce customer credit risk. If we are not fully insured against all risks. Further,unable to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our insurance has deductiblesinability to re-market or self-insured retentions and contains certain coverage exclusions. The current trend in the insurance industry is towards larger deductibles and self-insured retentions. In addition, insurance may not be available in the future at rates that we consider reasonable and commercially justifiable, compelling us to have larger deductibles or self-insured retentions to effectively manage expenses. As a result, we could become subject to material uninsured liabilities or situations where we have high deductibles or self-insured retentions that expose us to liabilities thatotherwise use our equipment could have a material adverse effect on our business, financial condition, prospects or results of operations.
Litigation and other proceedings could have a negative impact on our business.
The nature of our business makes us susceptible to legal proceedings and governmental audits and investigations from time to time. In addition, during periods of depressed market conditions, we may be subject to an increased risk of our customers, vendors, current and former employees and others initiating legal proceedings against us that could have a material adverse effect on our business, financial condition and results of operations. Similarly, any legal proceedings or claims, even if fully indemnified or insured, could negatively impact our reputation among our customers and the public, and make it more difficult for us to compete effectively or obtain adequate insurance in the future. See Note (18) Commitments and Contingenciesof Part II, “Item 8. Financial Statements and Supplementary Data” for further discussion of our legal and environmental contingencies for the years ended December 31, 2018, 2017 and 2016.
Our assets require significant amounts of capital for maintenance, upgrades and refurbishment and may require significant capital expenditures for new equipment.
Our hydraulic fracturing fleets and other completion service-related equipment require significant capital investment in maintenance, upgrades and refurbishment to maintain their competitiveness. Our fleets and other equipment typically do not generate revenue while they are undergoing maintenance, refurbishment or upgrades. Any maintenance, upgrade or refurbishment project for our assets could increase our indebtedness or reduce cash available for other opportunities. Furthermore, such projects may require proportionally greater capital investments as a percentage of total asset value, which may make such projects difficult to finance on acceptable terms. To the extent we are unable to fund such projects, we may have less equipment available for service, or our equipment may not be attractive to potential or current customers. Additionally, increased demand, competition, environmental and safety requirements or advances in technology within our industry may require us to update or replace existing fleets or build or acquire new fleets. For example, in 2018, we purchased approximately 150,000 newbuild hydraulic horsepower, representing three additional hydraulic fracturing fleets, for approximately $129.4 million. Such demands on our capital or reductions in demand for our hydraulic fracturing fleets and other completion service-related equipment and the increase in cost to maintain labor necessary for such maintenance and improvement, in each case, could have a material adverse effect on our business, liquidity position, financial condition, prospects and results of operations.
The loss of one or more significant customers could adversely affect our financial condition, prospects and results of operations.
Our customers are engaged in the oil and natural gas E&P business in the U.S. Historically, we have been dependent upon a few customers for a significant portion of our revenues. For the year ended December 31, 2018, we had three customers who individually represented more than 10% of our consolidated revenue. These three customers collectively represented 39% of our consolidated revenue and 45% of our total accounts receivable for the fiscal year ended December 31, 2018. For the year ended December 31, 2017, no customer individually represented more than 10% of our consolidated revenue. For the year ended December 31, 2016, we had three customers who individually represented more than 10% of our consolidated revenue. These three customers collectively represented 48% of our consolidated revenue and 42% of our total accounts receivable.
Our business, financial condition, prospects and results of operations could be materially adversely affected, if one or more of our significant customers ceases to engage us for our services on favorable terms or at all, or fails to pay or delays in paying us significant amounts of our outstanding receivables. Our contracts with our customers are typically annual to multi-year contracts.
Additionally, the E&P industry is characterized by frequent consolidation activity. Changes in ownership of our customers may result in the loss of, or reduction in, business from those customers, which could materially and adversely affect our business, financial condition, prospects or results of operations.
We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our financial results.
We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers, many of whose operations are concentrated solely in the domestic E&P industry which, as described above, is subject to volatility and, therefore, credit risk. Our credit procedures and policies may not be adequate to fully reduce customer credit risk. If we are unable to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re-market or otherwise use our equipment could have a material adverse effect on our business, financial condition, prospects and results of operations.
Our commitments under supply agreements could exceed our requirements, and our reliance on suppliers exposes us to risks including price, timing of delivery and quality of products and services upon which our business relies.
We have purchase commitments with certain vendors to supply a majority of the proppant used in our operations. Some of these agreements are take-or-pay agreements with minimum purchase obligations. If demand for our hydraulic fracturing services decreases from current levels, demand for the raw materials and products we supply as part of these services will also decrease. If demand decreases enough, we could have contractual minimum commitments that exceed the required amount of goods we need to supply to our customers. In this instance, we could be required to purchase goods that we do not have a present need for, pay for goods that we do not take delivery of or pay prices in excess of market prices at the time of purchase. Additionally, our reliance on outside suppliers for some of the key materials and equipment we use in providing our services involves risks, including limited control over the price, timely delivery availability and quality of such materials or equipment. In addition to continued growth and demand for sand, some transitory factors that also can potentially affect timely delivery and availability of sand include inclement weather, flooding impacts, rail-related output constraints and delays on opening new mine sources.
Unexpected and immediate changes in the availability and pricing of raw materials, or the loss of or interruption in operations of one or more of our suppliers, could have a material adverse effect on our results of operations, prospects and financial condition.
Raw materials essential to our business are normally readily available. However, high levels of demand for raw materials, such as gels, guar, proppant and hydrochloric acid, have triggered constraints in the supply chain of those raw materials and could dramatically increase the prices of such raw materials. For example, during 2012, companies in our industry experienced a shortage of guar, which is a key ingredient in fracturing fluids. This shortage resulted in an unexpected and immediate increase in the price of guar. During 2008, our industry faced sporadic proppant shortages requiring work stoppages, which adversely impacted the operating results of several competitors. An increase in the cost of proppant as a result of increased demand or a decrease in the number of proppant providers could increase our cost of an essential raw material in hydraulic stimulation and have a material adverse effect on our business, operations, prospects and financial condition. We may not be able to mitigate any future shortages of raw materials.
New technology may cause us to become less competitive.
The oilfield services industry is subject to the introduction of new drilling and completion techniques and services using new technologies, some of which may be subject to patent or other intellectual property protections. Although we believe our equipment and processes currently give us a competitive advantage, as competitors and others use or develop new or comparable technologies in the future, we may lose market share or be placed at a competitive disadvantage. In addition, technological changes, process improvements and other factors that increase operational efficiencies could continue to result in oil and natural gas wells being completed more quickly, which could reduce the number of revenue earning days. Furthermore, we may face competitive pressure to develop, implement or acquire certain new technologies at a substantial cost. Some of our competitors have greater financial, technical and personnel resources that may allow them to enjoy technological advantages and develop and implement new products on a timely basis or at an acceptable cost. We cannot be certain that we will be able to develop and implement new technologies or products on a timely basis or at an acceptable cost. Limits on our ability to develop, acquire, effectively use and implement new and emerging technologies may have a material adverse effect on our business, financial condition, prospects or results of operations.
We may be unable to employ a sufficient number of key employees, technical personnel and other skilled or qualified workers.
The delivery of our services and products requires personnel with specialized skills and experience who can perform physically demanding work. As a result of the volatility in the energy service industry and the demanding nature of the work, workers may choose to pursue employment with our competitors or in fields that offer a less demanding work environment. Furthermore, we require full compliance with the Immigration Reform and Control Act of 1986 and other laws concerning immigration and the hiring of legally documented workers. We recognize that foreign nationals may be a valuable source of talent, but that not all foreign nationals are authorized to work for U.S. companies immediately, without first obtaining a required work authorization from the U.S. Department of Homeland Security or similar government agency. Our ability to be productive and profitable will depend upon our ability to employ and retain skilled workers. In addition, our ability to adjust our operations according to geographic demand for our services depends in part on our ability to relocate or increase the size of our skilled labor force. The demand for skilled workers in our areas of operations can be high, the supply may be limited, and we may be unable to relocate our employees from areas of lower utilization to areas of higher demand. A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we must pay, or both. Furthermore, a significant decrease in the wages paid by us or our competitors as a result of reduced industry demand could result in a reduction of the available skilled labor force, and there is no assurance that the availability of skilled labor will improve following a subsequent increase in demand for our services or an increase in wage rates. If any of these events were to occur, our capacity and profitability could be diminished and our growth potential could be impaired.
We depend heavily on the efforts of executive officers, managers and other key employees to manage our operations. The unexpected loss or unavailability of key members of management or technical personnel may have a material adverse effect on our business, financial condition, prospects or results of operations.
Our commitments under supply agreements could exceed our requirements, exposing us to risks including price, timing of delivery and quality of products and services upon which our business relies.
We have purchase commitments with certain vendors to supply a majority of the proppant that we may provide in our operations. Some of these agreements are take-or-pay agreements with minimum purchase obligations. If demand for our hydraulic fracturing services decreases from current levels, demand for the raw materials and products we supply as part of these services will also decrease. If demand decreases enough, we could have contractual minimum commitments that exceed the required amount of goods we need to supply to our customers. In this instance, we could be required to purchase goods that we do not have a present need for, pay for goods that we do not take delivery of or pay prices in excess of market prices at the time of purchase.
Delays in deliveries of key raw materials or increases in the cost of key raw materials could harm our business, results of operations and financial condition.
We have established relationships with a limited number of suppliers of our raw materials (such as proppant, guar, chemicals or coiled tubing) and finished products (such as fluid-handling equipment). Raw materials essential to our business are normally readily available. However, high levels of demand for raw materials, such as gels, guar, proppant and hydrochloric acid, have triggered constraints in the supply chain of those raw materials and could dramatically increase the prices of such raw materials. Should any of our current suppliers be unable to provide the necessary raw materials or finished products or otherwise fail to deliver the products in a timely manner and in the quantities required, any resulting delays in the provision of services could have a material adverse effect on our business, financial condition, results of operations and cash flows. Additionally, increasing costs of certain raw materials, including guar or proppant, may negatively impact demand for our services or the profitability of our business operations. In the past, our industry faced sporadic shortages associated with hydraulic fracturing operations, such as proppant and guar, requiring work stoppages, which adversely impacted the operating results of several competitors. We may not be able to mitigate any future shortages of raw materials, including proppants.
We may be subject to claims for personal injury and property damage, which could materially adversely affect our financial condition, prospects and results of operations.
Our services are subject to inherent risks that can cause personal injury or loss of life, damage to or destruction of property, equipment or the environment or the suspension of our operations. Our operations are subject to, and exposed to, employee/employer liabilities and risks such as wrongful termination, discrimination, labor organizing, retaliation claims and general human resource related matters. Litigation arising from operations where our facilities are located, or our services are provided, may cause us to be named as a defendant in lawsuits asserting potentially large claims including claims for exemplary damages. We maintain what we believe is customary and reasonable insurance to protect our business against these potential losses, but such insurance may not be adequate to cover our liabilities, and we are not fully insured against all risks. Further, our insurance has deductibles or self-insured retentions and contains certain coverage exclusions. The current trend in the insurance industry is towards larger deductibles and self-insured retentions. In addition, insurance may not be available in the future at rates that we consider reasonable and commercially justifiable, compelling us to have larger deductibles or self-insured retentions to effectively manage expenses. As a result, we could become subject to material uninsured liabilities or situations where we have high deductibles or self-insured retentions that expose us to liabilities that could have a material adverse effect on our business, financial condition, prospects or results of operations.
Litigation and other proceedings could have a negative impact on our business.
The nature of our business makes us susceptible to legal proceedings and governmental audits and investigations from time to time. In addition, during periods of depressed market conditions, we may be subject to an increased risk of our customers, vendors, current and former employees and others initiating legal proceedings against us that could have a material adverse effect on our business, financial condition and results of operations. Similarly, any legal proceedings or claims, even if fully indemnified or insured, could negatively impact our reputation among our customers and the public, and make it more difficult for us to compete effectively or obtain adequate insurance in the future. See Note (18) Commitments and Contingenciesof Part II, “Item 8. Financial Statements and Supplementary Data” for further discussion of our legal and environmental contingencies for the years ended December 31, 2019, 2018 and 2017.
Delays in obtaining, or inability to obtain or renew, permits or authorizations by our customers for their operations or by us for our operations could impair our business.
In most states, our customers are required to obtain permits or authorizations from one or more governmental agencies or other third parties to perform drilling and completion activities, including hydraulic fracturing. Such permits or approvals are typically required by state agencies, but can also be required by federal and local governmental agencies or other third parties. The requirements for such permits or authorizations vary depending on the location where such drilling and completion activities will be conducted. As with most permitting and authorization processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit or approval to be issued and the conditions which may be imposed in connection with the granting of the permit. In some jurisdictions, such as within the jurisdiction of the Delaware River Basin Commission, certain regulatory authorities have delayed or suspended the issuance of permits or authorizations, while the potential environmental impacts associated with issuing such permits can be studied and appropriate mitigation measures evaluated. New York and Vermont, states in which we have no operations, have prohibited hydraulic fracturing statewide. In Texas, rural water districts have begun to impose restrictions on water use and may require permits for water used in drilling and completion activities. Permitting, authorization or renewal delays, the inability to obtain new permits or the revocation of current permits could cause a loss of revenue and potentially have a materially adverse effect on our business, financial condition, prospects or results of operations.
We are also required to obtain federal, state, local and/or third-party permits and authorizations in some jurisdictions in connection with our wireline services. These permits, when required, impose certain conditions on our operations. Any changes in these requirements could have a material adverse effect on our business, financial condition, prospects and results of operations.
We may not be successful in identifying and making acquisitions.
Part of our strategy is to continue to expand our geographic scope and customer relationships, increase our access to technology and to grow our business, which is dependent on our ability to make acquisitions that result in accretive revenues and earnings. We may be unable to make accretive acquisitions or realize expected benefits of any acquisitions for any of the following reasons:
failure to identify attractive targets;
incorrect assumptions regarding the future liabilities or future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized as a result of acquiring operations or assets;
failure to obtain financing on acceptable terms or at all;
restrictions in our debt agreements;
failure to successfully integrate the operations or management of any acquired operations or assets;assets (particularly as we undertake the integration of the legacy Keane and C&J businesses);
failure to retain or attract key employees;
new or expanded areas of operational risk (such as offshore or international operations) and related costs and demands of any applicable regulatory compliance; and
diversion of management’s attention from existing operations or other priorities.
Our acquisition strategy requires that we successfully integrate acquired companies into our business practices, as well as our procurement, management and enterprise-wide information technology systems. We may not be successful in implementing our business practices at acquired companies, and our acquisitions could face difficulty in transitioning from their previous information technology systems to our own. Furthermore, unexpected costs and challenges may arise whenever businesses with different operations or management are combined. Any
such difficulties, or increased costs associated with such integration, could affect our business, financial performance and operations.
If we are unable to identify, complete and integrate acquisitions, it could have a material adverse effect on our growth strategy, business, financial condition, prospects and results of operations.
Integrating acquisitions may be time-consuming and create costs that could reduce our net income and cash flows.
Part of our strategy includes pursuing acquisitions that we believe will be accretive to our business. If we consummate an acquisition, the process of integrating the acquired business may be complex and time consuming, may be disruptive to the business and may cause an interruption of, or a distraction of management’s attention from, the business as a result of a number of obstacles, including, but not limited to:
a failure of our due diligence process to identify significant risks or issues;
the loss of customers of the acquired company or our company;
negative impact on the brands or banners of the acquired company or our company;
a failure to maintain or improve the quality of our customer service;
difficulties assimilating the operations and personnel of the acquired company;
our inability to retain key personnel of the acquired company;
the incurrence of unexpected expenses and working capital requirements;
our inability to achieve the financial and strategic goals, including synergies, for the combined businesses;
difficulty in maintaining internal controls, procedures and policies;
mistaken assumptions about the overall costs of equity or debt; and
unforeseen difficulties operating in new product areas or new geographic areas.
Any of the foregoing obstacles, or a combination of them, could decrease gross profit margins or increase selling, general and administrative expenses in absolute terms and/or as a percentage of net sales, which could in turn negatively impact our net income and cash flows. The foregoing obstacles could prove to be especially difficult in light of the C&J Merger since we are a newly combined company in the process of integrating the legacy Keane and C&J businesses.
We may not be able to consummate acquisitions in the future on terms acceptable to us, or at all. In addition, future acquisitions are accompanied by the risk that the obligations and liabilities of an acquired company may not be adequately reflected in the historical financial statements of that company and the risk that those historical financial statements may be based on assumptions which are incorrect or inconsistent with our assumptions or approach to accounting policies. Any of these material obligations, liabilities or incorrect or inconsistent assumptions could adversely impact our results of operations, prospects and financial condition.
If labor costs increase or we fail to attract and retain qualified employees our business, results of operations, cash flows and financial condition may be adversely affected.
The labor markets in the industries in which we operate are competitive. We must attract, train and retain a large number of qualified employees while controlling related labor costs. We face significant competition for these employees from the industries in which we operate as well as from other industries. Tighter labor markets may make it even more difficult for us to hire and retain qualified employees and control labor costs. Our ability to attract
qualified employees and control labor costs is subject to numerous external factors, including prevailing wage rates, employee preferences, employment law and regulation, environmental, health and safety regulation, labor relations and immigration policy. A significant increase in competition or cost increase arising from any of the aforementioned factors in may have a material adverse impact on our business, results of operations and financial condition.
A failure of our information technology systems, including the implementation of our new enterprise resource planning system, could have a material adverse effect on our business, financial condition, results of operations and cash flows and could adversely affect the effectiveness of our internal control over financial reporting.
We rely on sophisticated information technology systems and infrastructure to support our business. Any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, usage errors by employees, computer viruses, cyber-attacks or other security breaches or similar events. A failure or prolonged interruption in our information technology systems, or difficulties encountered in upgrading our systems or implementing new systems that compromises our ability to meet our customers’ needs or impairs our ability to record, process and report accurate information, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are in the process of implementing anintegrating our enterprise resource planning (“ERP”) systemsystems from each of the legacy entities to the C&J Merger that will assist with the collection, storage, management and interpretation of data from our business activities to support future growth and to integrate significant processes. Our ERP system is critical to our ability to accurately maintain books and records, record transactions, provide important information to our management and prepare our consolidated financial statements. ERP system implementations areintegration is complex and time-consuming and involveinvolves substantial expenditures on system software and implementationintegration activities, as well as changes to business processes and, possibly, adjustments to internal control over financial reporting. The implementationintegration of the ERP system may prove to be more difficult, costly, or time consuming than expected, and there can be no assurance that this system will continue to be beneficial to the extent anticipated. Any disruptions, delays or deficiencies in the design and implementationintegration of our new ERP system, particularly ones that impact our financial reporting and accounting systems or our ability to provide services, send invoices, track payments or fulfill contractual obligations, could adversely affect our business, financial condition, results of operations and cash flows. Additionally, if the ERP system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected or our ability to assess it adequately could be impacted, which could cause us to fail to meet our reporting obligations.
We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss.
The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain processing activities. We use these technologies for internal purposes, including data storage (which may include personal identification information of our employees as well as our proprietary business information and that of our customers, suppliers, investors and other stakeholders), processing, and transmissions, as well as in our interactions with customers and suppliers. For example, we depend on digital technologies to perform many of our services and processes and to record operational and financial data. At the same time, cyber incidents, includingwhich could include, among other things, deliberate attacks, or unintentional events, computer viruses, malicious or destructive code, ransomware, social engineering attacks (including phishing and impersonation), hacking, denial-of-service attacks and other attacks and similar disruptions from the unauthorized use of or access to computer systems, have increased. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats. Our technologies, systems and networks, as well as those of our customers, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary information, personal information and other data, or other disruption of our business operations. In addition, certain cyber incidents, such as unauthorized surveillance, may remain undetected for an extended period of time. Our systems and insurance coverage for protecting against cyber security risks, including cyberattacks, may not be sufficient and may not protect against or cover all of the losses we may experience as a result of the realization of such risks. In addition, these risks could harm our reputation and our relationships with customers, suppliers, employees, and other third-
parties, and may result in claims against us, including liability under laws that protect the privacy of personal information. As cyber incidents continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate the effects of cyber incidents.
If we fail to maintain an effective system of internal controls as required by Section 404 of the Sarbanes-Oxley Act of 2002, we may not be able to report our financial results accurately or prevent fraud, which could adversely affect our business and result in material misstatements in our financial statements.
Effective internal controls are necessary for us to provide timely and reliable financial reports, prevent fraud and to operate successfully as a publicly traded company. Our efforts to maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future or to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). For example, Section 404 requires us, among other things, to annually review and report on, and our independent
registered public accounting firm to attest to, the effectiveness of our internal controls over financial reporting. This assessment includes disclosure of any deficiencies or material weaknesses identified by our management in our internal control over financial reporting. Any failure to develop, implement or maintain effective internal controls or to improve our internal controls could harm our operating results, prevent us from identifying future deficiencies and material weaknesses or cause us to fail to meet our reporting obligations. Given the difficulties inherent in the design and operation of internal controls over financial reporting, we can provide no assurance as to our, or our independent registered public accounting firm’s conclusions, about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Ineffective internal controls could result in material misstatements in our financial statements and subject us to increased regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar foreign anti-bribery laws.
The United States Foreign Corrupt Practices Act (the “FCPA”) and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries and partners from making, offering or authorizing improper payments to non-U.S. government officials for the purpose of obtaining or retaining business. Although we currently have limited international operations, we may do business in the future in countries or regions where strict compliance with anti-bribery laws may conflict with local customs and practices. Our employees, intermediaries, and partners may face, directly or indirectly, corrupt demands by government officials, political parties and officials, tribal or insurgent organizations, or private entities in the countries in which we operate or may operate in the future. As a result, we face the risk that an unauthorized payment or offer of payment could be made by one of our employees, intermediaries, or partners even if such parties are not always subject to our control or are not themselves subject to the FCPA or other anti-bribery laws to which we may be subject. We are committed to doing business in accordance with applicable anti-bribery laws and have implemented policies and procedures concerning compliance with such laws. Our existing safeguards and any future improvements, however, may prove to be less than effective, and our employees, intermediaries, and partners may engage in conduct for which we might be held responsible. Violations of the FCPA and other anti-bribery laws (either due to our acts, the acts of our intermediaries or partners, or our inadvertence) may result in criminal and civil sanctions and could subject us to other liabilities in the U.S. and elsewhere. Even allegations of such violations could disrupt our business and result in a material adverse effect on our business and operations.
Risks Related to Owning Our Indebtedness
Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our indebtedness.
We have a significant amount of indebtedness. As of December 31, 2018,2019, we had $340.7$337.6 million of debt outstanding, net of discounts and deferred financing costs (not including capital lease obligations). After giving effect to our borrowing base, we had approximately $184.0$303.8 million of availability under our 20172019 ABL Facility (as defined herein).
Our substantial indebtedness could have important consequences to you. For example, it could:
adversely affect the market price of our common stock;
increase our vulnerability to interest rate increases and general adverse economic and industry conditions;
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes, including acquisitions;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
limit our ability to obtain additional financing on satisfactory terms to fund our working capital requirements, capital expenditures, acquisitions, investments, debt service requirements and other general corporate requirements; and
place us at a competitive disadvantage compared to our competitors that have less debt.
In addition, we cannot assure you that we will be able to refinance any of our debt, or that we will be able to refinance our debt on commercially reasonable terms. If we were unable to make payments or refinance our debt or obtain new financing under these circumstances, we would have to consider other options, such as:
sales of assets;
sales of equity; or
negotiations with our lenders to restructure the applicable debt.
Our debt instruments may restrict, or market or business conditions may limit, our ability to use some of our options.
Despite our significant indebtedness levels, we may still be able to incur additional debt, which could further exacerbate the risks associated with our substantial leverage.
We and our subsidiaries may be able to incur additional indebtedness in the future. The terms of the credit agreements that govern the 20172019 ABL Facility and the 2018 Term Loan Facility (as defined herein and, together with the 20172019 ABL Facility, the “Senior Secured Debt Facilities”) permit us to incur additional indebtedness, subject to certain limitations. If new indebtedness is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face would intensify. See Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations–PrincipalOperations-Principal Debt Agreements” for further details.
The agreements governing our indebtedness contain operating covenants and restrictions that limit our operations and could lead to adverse consequences if we fail to comply with them.
The agreements governing our indebtedness contain certain operating covenants and other restrictions relating to, among other things, limitations on indebtedness (including guarantees of additional indebtedness) and liens, mergers, consolidations and dissolutions, sales of assets, investments and acquisitions, dividends and other restricted payments, repurchase of shares of capital stock and options to purchase shares of capital stock and certain transactions with affiliates. In addition, our Senior Secured Debt Facilities include certain financial covenants.
The restrictions in the agreements governing our indebtedness may prevent us from taking actions that we believe would be in the best interest of our business and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. We may also incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility.
Failure to comply with these financial and operating covenants could result from, among other things, changes in our results of operations, the incurrence of additional indebtedness, declines in the pricing of our services and products, difficulties in implementing cost reduction initiatives, difficulties in implementing our overall business strategy or changes in general economic conditions, which may be beyond our control. The breach of any of these covenants or restrictions could result in a default under the agreements that govern these facilities that would permit the lenders to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest. If we are unable to repay such amounts, lenders having secured obligations could proceed against the collateral securing these obligations. The collateral includes the capital stock of our domestic subsidiaries and substantially all of our and our subsidiaries’ other tangible and intangible assets, subject in each case to certain exceptions. This could have serious consequences on our financial condition and results of operations and could cause us to become bankrupt or otherwise insolvent. In addition, these covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our business and stockholders.
See Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations–PrincipalOperations-Principal Debt Agreements” for further details.
Substantially all of our debt is variable rate and increases in interest rates could negatively affect our financing costs and our ability to access capital.
We have exposure to future interest rates based on the variable rate debt under the Senior Secured Debt Facilities, and to the extent we raise additional debt in the capital markets to meet maturing debt obligations, to fund our capital expenditures and working capital needs and to finance future acquisitions. Daily working capital requirements are typically financed with operational cash flow and through borrowings under our 20172019 ABL Facility, if needed. The interest rate on these borrowing arrangements is generally determined from the inter-bank offering rate at the borrowing date plus a pre-set margin. Although we employ risk management techniques to hedge against interest rate volatility, significant and sustained increases in market interest rates could materially increase our financing costs and negatively impact our reported results.
In addition, in certain circumstances, our variable rate indebtedness uses the London Interbank Offer Rate (“LIBOR”) as a benchmark for establishing the interest rate. The LIBOR has been subject of national, international,
and other regulatory guidance and proposals for reform. In July 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit rates for calculation of LIBOR after 2021. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The consequences of these developments cannot be entirely predicted, but could include an increase in our financing costs and our ability to access capital.
Disruptions in the capital and credit markets, continued low commodity prices, our debt level and other factors may restrict our ability to raise capital on favorable terms, or at all.
Disruptions in the capital and credit markets, in particular with respect to companies in the energy sector, could limit our ability to access these markets or may significantly increase our cost to borrow. Continued low commodity prices, among other factors, have caused some lenders to increase interest rates, enact tighter lending standards which we may not satisfy as a result of our debt level or otherwise, refuse to refinance existing debt at maturity on favorable terms, or at all, and in certain instances have reduced or ceased to provide funding to borrowers. If we are unable to access the capital and credit markets on favorable terms or at all, it could adversely affect our business, financial condition and results of operations.
Ability to use net operating loss carryforwards to offset future taxable income for U.S. federal income tax purposes is subject to limitation under Section 382 of the Internal Revenue Code, and NOLs and other tax attributes is subject to reduction, causing less NOL or tax deductions to be available to offset future taxable income for U.S. federal income tax purpose.
Under U.S. federal income tax law, a corporation is generally permitted to deduct from taxable income net operating losses (“NOLs”) carried forward from prior years. As of December 31, 2019, we reported consolidated federal NOL carryforwards of approximately $787.6 million of which $721.3 million are pre-change NOL's subject to limitation. Our ability to utilize our NOL carryforwards to offset future taxable income and to reduce U.S. federal income tax liability is subject to certain requirements and restrictions. In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. An ownership change generally occurs if one or more shareholders (or groups of shareholders) who are each deemed to own at least 5% of our stock have aggregate increases in their ownership of such stock of more than 50 percentage points over such stockholders’ lowest ownership percentage during the testing period (generally a rolling three year period). We believe we experienced an ownership change in October 2019 as a result of the C&J Merger. We also believe we experienced an ownership change in January 2017 as a result of the implementation of the IPO. Thus our pre-change NOLs are subject to limitation under Section 382 of the Code as a result. Such limitation may cause U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitation were not in effect and could cause a portion of our pre-change NOLs generated prior to 2018 to expire unused, in each case reducing or eliminating the benefit of such NOLs. Similar rules and limitations may apply for state income tax purposes.
Risks Related to Owning Our Common Stock
The price of our common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the public offering price.
The market price for our common stock is volatile. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including
the failure of securities analysts to cover, or continue to cover, our common stock or changes in financial estimates by analysts;
changes in, or investors’ perception of, the oil field services industry, including hydraulic fracturing industry;fracturing;
the activities of competitors;
future issuances and sales of our common stock, including in connection with acquisitions;
our quarterly or annual earnings or those of other companies in our industry;
the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
regulatory or legal developments in the U.S.;
litigation involving us, our industry, or both; and
general economic conditions.
In addition, the stock market often experiences extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of a particular company. These broad market fluctuations and industry factors may materially reduce the market price of our common stock, regardless of our operating performance.
If a substantial number of shares becomes available for sale and are sold in a short period of time, the market price of our common stock could decline and our stockholders may be diluted.
As of February 25,March 9, 2019, 104,405,121213,193,419 shares of common stock were outstanding, of which 51,668,175approximately 19.1% of the shares were held by Cerberus through Keane Investor. If Keane Investor sellsthey sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease. The perception in the public market that Keane Investor might sell shares of common stock could also create a perceived overhang and depress our market price.
Because we do not currently pay dividends, our stockholders may not receive any return on investment, unless they sell their common stock for a price greater than that which they paid for it.
We do not currently pay dividends, and our stockholders willdo not be guaranteed, or have contractual or other rights, to receive dividends. Our board of directors may, in its discretion, modify or repeal our dividend policy. The declaration and payment of dividends depends on various factors, including: our net income, financial condition, cash requirements, future prospects and other factors deemed relevant by our board of directors.
In addition, we are a holding company that does not conduct any business operations of our own. As a result, we arewould be dependent upon cash dividends and distributions and other transfers from our subsidiaries to make dividend payments. Our subsidiaries’ ability to pay dividends is restricted by agreements governing their debt instruments and may be restricted by agreements governing any of our subsidiaries’ future indebtedness. Furthermore, our subsidiaries are permitted under the terms of their debt agreements to incur additional indebtedness that may severely restrict or prohibit the payment of dividends. See Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations–LiquidityOperations-Liquidity and Capital Resources.”
Under the Delaware General Corporation Law (the “DGCL”), our board of directors may not authorize payment of a dividend unless it is either paid out of our surplus, as calculated in accordance with the DGCL, or if we do not have a surplus, it is paid out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
We cannot guaranteemay not execute our capital return program, including the repurchase of our common stock pursuant to our share repurchase program under the capital return program, and such programs may not have the desired effect.
In December 2019, our board of directors approved a capital return program under which we may expend a total of up to $100 million through December 31, 2020, through stock repurchases, dividends or other capital return strategies. As part of the capital return program, our board of directors approved a stock repurchase program of up to $50 million of the Company's common stock, subject to U.S. Securities and Exchange Commission regulations, stock market conditions, capital needs of the business and other factors. Since the inception of our share repurchase program through December 31, 2019, we have made no share repurchases. We can provide no assurance that we will repurchase our common stock pursuant to our share repurchase program or that our share repurchase program will
enhance long-term stockholder value. Share repurchases could also increase the volatility of the price of our common stock and could diminish our cash reserves.
We cannot guarantee that we will repurchase our common stock pursuant to our share repurchase program or that our share repurchase program will enhance long-term stockholder value. Share repurchases could also increase the volatility of the price of our common stock and could diminish our cash reserves. In February 2018, our board of directors approved a share repurchase program, authorizing us to repurchase up to $100 million of common stock. The share purchase program has been periodically reset and is currently set to expire in December 2019. The share repurchase program currently has the capacity to spend up to an additional $100.0 million on share repurchases. Since the inception of our share repurchase program through December 31, 2018, we have repurchased 8.1 million shares at an aggregate cost of approximately $105.0 million.
Although our board of directors has approved a share repurchase program, the share repurchase program does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares. The timing and amount of repurchases, if any, will depend upon several factors, including market and business conditions, the trading price of our common stock and the nature of other investment opportunities. The repurchase program may be limited, suspended or discontinued at any time without prior notice. In addition, repurchases of our common stock pursuant to our share repurchase program could cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. Additionally,Furthermore, our share repurchase program could diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions. There can be no assurance that any share repurchases will enhance stockholder value, because the market price of our common stock may decline below levels at which we repurchased shares of stock. Although our share repurchase program is intended to enhance long-term stockholder value, there is no assurance that it will do so and short-term stock price fluctuations could reduce the program’s effectiveness.
Our stockholders may be diluted by the future issuance of additional common stock in connection with our equity incentive plans, acquisitions or otherwise.
We have 395,594,879286,806,581 shares of common stock authorized but unissued under our certificate of incorporation. We will be authorized to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for consideration and on terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved 7,734,60114,054,982 shares of our common stock available for awardsaward that may be issued under our Equity and Incentive Award Plan.equity incentive plans. Any common stock that we issue, including under our Equity and Incentive Award Planequity incentive plans or other equity incentive plans that we may adopt in the future, may result in additional dilution to our stockholders.
In the future, we may also issue our securities, including shares of our common stock, in connection with investments or acquisitions. We regularly evaluate potential acquisition opportunities, including ones that would be significant to us, and at any one time we may be participating in processes regarding several potential acquisition opportunities, including ones that would be significant to us. We cannot predict the timing of any contemplated transactions, and none are currently probable. The number of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to our stockholders.
Keane Investor and Cerberus own a significant amount of our common stock and continue to have significant influence over us, which could limit your ability to influence the outcome of key transactions, including a change of control.
Keane InvestorCerberus currently controls approximately 49.5%19.1% of our common stock. Even though Keane InvestorCerberus no longer controls a majority of our common stock, Keane InvestorCerberus continues to have significant influence over us, including the election of our directors, determination of our corporate and management policies and determination of the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. FourTwo of our 12 directors are employees of, appointees of, or advisors to, members of Cerberus. With Keane Investor’s common stock ownership falling below 50.0% as of December 6, 2018, we ceased being a “controlled company” within the meaning of the New York Stock Exchange (“NYSE”) rules and are subject to further independence requirements by the NYSE. We currently anticipate that the Compensation Committee and Nominating and Corporate Governance Committee of our board of directors will be comprised of a majority of independent directors by of March 6, 2019, and will be entirely independent by December 6, 2019. Furthermore, we anticipate that our board of directors will be comprised of a majority of independent directors by December 6, 2019 in compliance with NYSE requirements. The interests of Cerberus may not coincide with the interests of other holders of our common stock. For example, the concentration of ownership held by Cerberus could delay, defer or prevent a change of control of our company or impede a merger, takeover or other business combination that may otherwise be favorable for us. Additionally, Cerberus is in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Cerberus may also pursue, for its own members’ accounts, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as Cerberus continues to directly or indirectly own a significant amount of our equity, Cerberus will continue to be able to substantially influence or effectively control our ability to enter into corporate transactions.
Although we are no longer a “controlled company” within the meaning of the New York Stock Exchange rules, we continue to qualify for, and intend to rely on, certain transition-based exemptions from such corporate governance requirements, and as a result you will not have the same protections afforded to stockholders of companies that are subject to such requirements.
Keane Investor no longer controls a majority of our outstanding common stock. As a result, we ceased being a “controlled company” within the meaning of the NYSE rules. Under the NYSE rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:
• the requirement that a majority of the board of directors consist of independent directors;
the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.
We currently utilize some of these exemptions. As a result, we do not have a majority of independent directors nor do our nominating and corporate governance and compensation committees consist entirely of independent directors. The NYSE rules provide for phase-in periods for these requirements. As a result, our nominating and corporate governance and compensation committees will not be required to be composed of a majority of independent directors until March 6, 2019, and we will not be required to be fully compliant with all of the requirements until December 6, 2019. Accordingly, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements. In addition, we may not be able to attract and retain the number of independent directors needed to comply with NYSE rules during the transition period.
Provisions in our charter documents, certain agreements governing our indebtedness, our Stockholders’ Agreement (as defined herein) and Delaware law could make acquiring us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.
Provisions in our certificate of incorporation, our bylaws and our Stockholders’ Agreement, may discourage, delay or prevent a merger, acquisition or other change in control that some stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares of our common stock. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, possibly depressing the market price of our common stock.
In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace members of our management team. Examples of such provisions are as follows:
the authorized number of our directors may be increasedon or decreased only by the affirmative vote of two-thirds of the then-outstanding shares of our common stock or by resolution of our board of directors;
our stockholders may only amend our bylaws with the approval of at least two-thirds of all of the outstanding shares of our capital stock entitled to vote;
the manner in which stockholders can remove directors from the board will be limited;
stockholder actions must be effected at a duly called stockholder meeting and actions by our stockholders by written consent are prohibited;
from and after such date that Keane Investor and its respective Affiliates (as defined in Rule 12b-2 of the Exchange Act, or any person who is an express assignee or designee of Keane Investor’s respective rights under our certificate of incorporation (and such assignee’s or designee’s Affiliates)) (of these entities, the entity that is the beneficial owner of the largest number of shares is referred to as the “Designated Controlling Stockholder”) ceases to own, in the aggregate, at least 50% of the then-outstanding shares of our common stock (the “50% Trigger Date”),the authorized number of our directors may be increased or decreased only by the affirmative vote of two-thirds of the then-outstanding shares of our common stock or by resolution of our board of directors;
on or after the 50% Trigger Date, our stockholders may only amend our bylaws with the approval of at least two-thirds of all of the outstanding shares of our capital stock entitled to vote;
the manner in which stockholders can remove directors from the board will be limited;
on or after the 50% Trigger Date, stockholder actions must be effected at a duly called stockholder meeting and actions by our stockholders by written consent are prohibited;
from and after such date that the Designated Controlling Stockholder ceases to own, in the aggregate, at least 35% of the then-outstanding shares of our common stock (the “35% Trigger Date”), advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors will be established;
• who may call stockholder meetings is limited;
requirements on any stockholder (or group of stockholders acting in concert), other than, prior to the 35% Trigger Date, the Designated Controlling Stockholder, who seeks to transact business at a meeting or nominate directors for election to submit a list of derivative interests in any of our Company’s securities, including any short interests and synthetic equity interests held by such proposing stockholder;
requirements on any stockholder (or group of stockholders acting in concert) who seeks to nominate directors for election to submit a list of “related party transactions” with the proposed nominee(s) (as if such nominating person were a registrant pursuant to Item 404 of Regulation S-K, and the proposed nominee was an executive officer or director of the “registrant”); and
our board of directors is authorized to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors.
Our certificate of incorporation authorizes our board of directors to issue up to 50,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined by our board of directors at the time of issuance or fixed by resolution without further action by the stockholders. These terms may include voting rights, preferences as to dividends and liquidation, conversion rights, redemption rights
and sinking fund provisions. The issuance of preferred stock could diminish the rights of holders of our common stock, and therefore, could reduce the value of our common stock. In addition, specific rights granted to holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could delay, discourage, prevent or make it more difficult or costly to acquire or effect a change in control, thereby preserving the current stockholders’ control.
In addition, under the agreements governing the Senior Secured Debt Facilities, a change in control may lead the lenders and/or holders to exercise remedies such as acceleration of the obligations thereunder, termination of their commitments to fund additional advances and collection against the collateral securing such obligations.
In connection with the Keane IPO, Keane entered into a Stockholders’ Agreement (thewith Keane Investor. This stockholders’ agreement was amended and restated in conjunction with the C&J Merger (as amended and restated, the “Stockholders’ Agreement”) with Keane Investor. Our Stockholders’ Agreementand provides that, except as otherwise required by applicable law, from the date on which (a) Keane isInvestor or, in the event a Cerberus Holder no longer a controlled company under the applicable rules of the NYSE but prior to the 35% Trigger Date,holds Company shares through Keane Investor, has the right to designate a number of individuals who satisfy the director requirements equal to one director fewer than 50% of our board of directors at any time and shall cause its directors appointed to our board of directors to vote in favor of maintaining an 11-person board of directors unless the management board of Keane Investor otherwise agrees by the affirmative vote of 80% of the management board of Keane Investor; (b) aCerberus Holder has beneficial ownership of at least 20% but less than 35%12.5% or greater of ourthe aggregate number of company shares then outstanding, common stock,Keane Investor or, in the event Cerberus Holder willno longer holds company shares through Keane Investor, Cerberus Representative shall have the right to designate a numberto the board of directors two individuals who satisfy the Director Requirements equal toRequirements; and (b) Keane Investor or, in the greater of three or 25% of the size of our board of directors at any time (rounded up to the next whole number); (c) aevent Cerberus Holder no longer holder company shares through Keane Investor, Cerberus Holder has beneficial ownership of less than 12.5% but at least 15% but less than 20%7.5% of ourthe aggregate number of company shares then outstanding, common stock,Keane Investor or, in the event Cerberus Holder willno longer holds company shares through Keane Investor, Cerberus Representative shall have the right to designate to the greater of two or 15% of the size of our board of directors at any time (rounded up to the next whole number); and (d) a Holder has beneficial ownership of at least 10% but less than 15% of our outstanding common stock, it will have the right to designate one individual who satisfies the Director Requirements. The ability of Keane Investor or a Holder to appoint one or more directors could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.
Our certificate of incorporation and bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.
Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the exclusive forum for: (a) any derivative action or proceeding brought on our behalf; (b) any action asserting a claim for breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders; (c) any action asserting a claim arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws; or (d) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds more favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition, prospects or results of operations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Properties
OurWe lease office space for our principal properties includeexecutive headquarters, which is located at 3990 Rogerdale Rd., Houston, Texas 77042, for our corporate headquarters, district offices, sales officesresearch and technology facility at 10771 Westpark Dr., Houston, Texas 77042 and for our engineering and technology center at 8301 New Trails Dr., The Woodlands, Texas. We also own property for our maintenance facility as well asat 1214 Gas Plant Rd., San Angelo, Texas 76904.
In addition, we own or lease numerous other smaller facilities and administrative offices across the hydraulic fracturing unitsgeographic regions in which we operate to support our ongoing operations, including district offices, local sales offices, yard facilities and other equipmenttemporary facilities to house employees in regions where infrastructure is limited. Our leased properties are subject to various lease terms and vehicles operating out of these facilities.expirations. We believe that our existing facilities are in good condition and suitableadequate for our current operations. Below is a table detailingoperations and our locations allow us to efficiently serve our customers. However, we continue to evaluate the purchase or lease of additional properties or the consolidation of our properties, by purpose, in the United States.as our business requires. We do not believe that any single facility is material to our operations and, if necessary, we could readily obtain a replacement facility.
|
| | | | | |
Location | Own/
Lease | Purpose | Service | Active/
Idle
| Size (sqft/acres) |
| | | | | |
Denver, CO | Lease | Executive / Finance | N/A | Active | 19,706 sqft |
Houston, TX | Lease | Executive / Finance | N/A | Active | 43,768 sqft |
Houston, TX | Lease | Executive / Finance | N/A | Active | 5,588 sqft |
The Woodlands, TX | Lease | Engineering & Technology | N/A | Active | 23,040 sqft |
Canonsburg, PA | Lease | Sales Office | Sales | Active | 4,697 sqft |
Dickinson, ND | Own | Field Operations | Hydraulic Fracturing | Active | 21,772 sqft/34.9 acres |
Mansfield, PA | Own | Field Operations | Hydraulic Fracturing, Wireline | Active | 30,200 sqft/77.0 acres |
Odessa, TX | Own | Field Operations | Hydraulic Fracturing, Wireline, Cementing | Active | 97,006 sqft/40.0 acres |
Springtown, TX | Own | Field Operations | Hydraulic Fracturing | Active | 29,855 sqft/14.7 acres |
Dickinson, ND | Lease | Field Operations | Hydraulic Fracturing | Active | 33,375 sqft/9.7 acres |
Williston, ND | Lease | Field Operations | Wireline, Cementing | Active | 43,375 sqft |
Williston, ND | Lease | Field Operations | Hydraulic Fracturing | Active | 16,825 sqft/5.71 acres |
Bellafonte, PA | Lease | Field Operations | Hydraulic Fracturing | Active | 12,000 sqft/7.5 acres |
Mill Hall, PA | Lease | Field Operations | Hydraulic Fracturing | Active | 64,000 sqft/8.2 acres |
Mount Pleasant, PA | Lease | Field Operations | Hydraulic Fracturing, Wireline | Active | 20,126 sqft/7.5 acres |
Pleasanton, TX | Lease | Field Operations | Hydraulic Fracturing, Wireline | Active | 10,488 acres |
Alexander, ND | Lease | Field Maintenance and Storage Facility | Hydraulic Fracturing | Active | 6,500 sqft/16.3 acres |
Mount Pleasant, PA | Lease | Field Maintenance and Storage Lot | Hydraulic Fracturing, Wireline | Active | 5 acres |
Fort Worth, TX | Lease | Warehouse | Hydraulic Fracturing, Wireline, Cementing | Active | 78,272 sqft |
Shawnee, OK | Own | Abandoned | Hydraulic Fracturing | Idle | 39,100 sqft/56.1 acres |
Lewis Run, PA | Own | Abandoned | N/A | Idle | 2,500 sqft |
Oklahoma City, OK | Lease | Abandoned | Sales | Idle | 3,366 sqft |
Houston, TX | Lease | Abandoned | N/A | Idle | 9,998 sqft |
Item 3. Legal Proceedings
Due to the nature of our business, we are, from time to time and in the ordinary course of business, involved in routine litigation or subject to disputes or claims related to our business activities. It is our management’s opinion that although the amount of liability with respect to certain of the matters described hereinthese known legal proceedings and claims cannot be ascertained at this time, any resulting liability will not have a material adverse effect individually or in the aggregate on our financial condition, cash flows or results of operations; however, there can be no assurance as to the ultimate outcome of these matters.
See Note (18) CommitmentsLitigation Related to the C&J Merger
In connection with the Merger Agreement and Contingenciesthe transactions contemplated thereby the following complaints have been filed: (i) one putative class action complaint was filed in the United States District Court for the District of Part II, “Item 8. Financial StatementsColorado by a purported C&J stockholder on behalf of himself and Supplementary Data”all other C&J stockholders (excluding defendants and related or affiliated persons) against C&J and members of the C&J board of directors, (ii) two putative class action complaints were filed in the United States District Court for further discussionthe District of our legal contingencies.Delaware by a purported C&J stockholder on behalf of himself and all other C&J stockholders (excluding defendants and related or affiliated persons) against C&J, members of the C&J board of directors, the Company and Merger Sub, (iii) one putative class action complaint was filed in the United States District Court for the Southern District of Texas by a purported stockholder of the Company on behalf of himself and all other stockholders of the Company (excluding defendants and related or affiliated persons) against the Company and members of its board of directors, and (iv) one putative class action was filed in the Delaware Chancery Court by a purported stockholder of the Company on behalf of himself and all other stockholders of the Company (excluding defendants and related or affiliated persons) against members of the Company's board of directors. The five stockholder actions are captioned as follows: Palumbos v. C&J Energy Services, Inc., et al., Case No. 1:19-cv-02386 (D. Colo.), Wuollet v. C&J Energy Services, Inc., et al., Case No. 1:19-cv-01411 (D. Del.), Plumley v. C&J Energy Services, Inc., et al., Case No. 1:19-cv-01446 (D. Del.), Bushansky v. Keane Group, Inc. et al., Case No. 4:19-cb-02924 (S.D. Tex) and Woods v. Keane Group, Inc., et al., Case No. 2019-0590 (Del. Chan.) (collectively, the "Stockholder Actions").
In general, the Stockholder Actions allege that the defendants violated Sections 14(a) and 20(a) of the Exchange Act, or aided and abetted in such alleged violations, because the Registration Statement on Form S-4 filed with the SEC on July 16, 2019 in connection with the proposed C&J Merger allegedly omitted or misstated material information.
The Stockholder Actions seek, among other things, injunctive relief preventing the consummation of the C&J Merger, unspecified damages and attorneys' fees. C&J, the Company and the other named defendants believe that no supplemental disclosures were required under applicable laws; however, to avoid the risk of the Stockholder Actions delaying the C&J Merger and to minimize the expense of defending the Stockholder Actions, and without admitting any liability or wrongdoing, C&J and the Company filed a Form 8-K on October 11, 2019 making certain supplemental disclosures in connection with the C&J Merger. Following those supplemental disclosures, plaintiffs in the Woods and Bushansky actions voluntarily dismissed their claims as moot on October 16, 2019 and October 29, 2019, respectively. The defendants have not yet answered or otherwise responded to the complaints in the remaining Stockholder Actions, but the Company continues to believe that the allegations therein lack merit and no supplemental disclosures were required under applicable law, and intends to defend itself vigorously.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
References Within This Annual Report
As used in Part II of this Annual Report on Form 10-K, unless the context otherwise requires, references to (i) the terms “Company,” “Keane,” “we,” “us” and “our” refer to Keane Group Holdings, LLC and its consolidated subsidiaries for periods prior to our initial public offering (“IPO”), and, for periods as of and following the IPO, Keane Group, Inc. and its consolidated subsidiaries; (ii) the term “Keane Group” refers to Keane Group Holdings, LLC and its consolidated subsidiaries; (iii) the term “Trican Parent” refers to Trican Well Service Ltd. and, where appropriate, its subsidiaries; (iv) the term “Trican U.S.” refers to Trican Well Service L.P.; (v) the term “Trican” refers to Trican Parent and Trican U.S., collectively; (vi) the term “RockPile” refers to RockPile Energy Services, LLC and its consolidated subsidiaries; (vii) the term “RSI” refers to Refinery Specialties, Incorporated; (viii) the term “Keane Investor” refers to Keane Investor Holdings LLC and (ix) the term “Sponsor” or “Cerberus” refers to Cerberus Capital Management, L.P. and its controlled affiliates and investment funds.
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information
On January 25, 2017, we consummated an initial public offeringFrom the consummation of our IPO in January of 2017 until October 30, 2019, our common stock at a price of $19.00 per share. Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “FRAC.” Prior to that time, thereAs of October 31, 2019, our common stock trades on the NYSE under the symbol “NEX”. On March 9, 2020, the last reported sales price of our common stock on the NYSE was no public market for our stock.$2.03 per share.
Comparative Stock Performance Graph
The information contained in this Comparative Stock Performance Graph section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act.
The graph below compares the cumulative total shareholder return on our common stock, the cumulative total return on the Standard & Poor’s 500 Stock Index, the Standard & Poor’s MidCap Index, the Oilfield Service Index and a composite average of publicly traded peer companies (C&J(Basic Energy Services, Inc., FTS International, Inc., Liberty Oilfield Services Inc., Patterson-UTI Energy, Inc., ProPetro Holding Corp., Quintana Energy Services, RPC, Inc., and Superior Energy Services, Inc. and Weatherford International plc)), since January 1, 2018.
20, 2017.
The graph assumes $100 was invested on January 1, 201820, 2017 in our common stock, the Standard & Poor’s 500 Stock Index, the Standard & Poor’s MidCap Index, the Oilfield Service Index and a composite of publicly traded peer companies. The cumulative total return assumes the reinvestment of all dividends. We elected to include the stock performance of a composite of our publicly traded peers, as we believe it is an appropriate benchmark for our line of business/industry.
Holders
As of February 25, 2019, there were four shareholdersMarch 9, 2020, we had 213,193,419 shares of record of our common stock.stock issued and outstanding, held by approximately 8 registered holders. The number of recordregistered holders does not include persons who held shares of ourholders that have common stock held for them in nominee“street name,” meaning that the stock is held for their accounts by a broker or “street name” accounts through brokers.other nominee.
Dividends
We have not paid any cash dividends on our common stock to date. However, we anticipate that our board of directors will consider the payment of dividends in the future based on our levels of profitability and indebtedness. The declaration and payment of any future dividends will be at the sole discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends and other considerations that our board of directors deems relevant. Our board of directors may decide, in its discretion, at any time, to modify or repeal the dividend policy or discontinue entirely the payment of dividends.
The ability of our board of directors to declare a dividend is also subject to limits imposed by Delaware corporate law. Under Delaware law, our board of directors and the boards of directors of our corporate subsidiaries incorporated in Delaware may declare dividends only to the extent of our “surplus,” which is defined as total assets at fair market value minus total liabilities, minus statutory capital, or if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
On February 26, 2018,December 11, 2019, we announced that our board of directors had authorized a stock repurchase program of up to $100$50 million of our outstanding common stock, with the intent of returning value to our shareholders, as we continue to expect further growth and profitability. The program does not obligate us to
purchase any particular number of shares of common stock during any period, and the program may be modified or suspended at any time at our discretion. The duration of the stock buy-back program was 12 months.through December 31, 2020.
Purchases of Equity Securities
|
| | | | | | | | | | | | | | |
Issuer Purchases of Equity Securities |
Settlement Period | | (a) Total Number of Shares Purchased(3) |
| | (b) Average Price Paid per Share |
| | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
| | (d) Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs(1)(2) |
|
October 1, 2019 through October 31, 2019 | | 407,023 |
| | $ | 4.32 |
| | — |
| | $ | 100,000,000 |
|
November 1, 2019 through November 30, 2019 | | 36,952 |
| | $ | 4.61 |
| | — |
| | $ | 100,000,000 |
|
December 1, 2019 through December 31, 2019 | | 137,890 |
| | $ | 6.02 |
| | — |
| | $ | 150,000,000 |
|
Total | | 581,865 |
| | $ | 4.74 |
| | — |
| | $ | 150,000,000 |
|
| | | | | | | | |
(1) On JulyFebruary 26, 2018, we announced that our board of directors authorized a reset of capacity on the existinga12-month stock repurchase program backof up to $100 million.
Effective October 26, 2018, our board$100.0 million of directors authorized a reset of capacity on the existing stock repurchase program back to $100 million. Additionally, the program’s expiration date was extended to September 2019 from a previous expiration of February 2019.
Company’s outstanding common stock. Effective February 25, 2019, our board of directors authorized a reset of capacity on the existing stock repurchase program back to $100$100.0 million. Additionally, the program’s expiration date was extended to December 2019 from a previous expiration of September 2019.
Securities Authorized(2) On December 11, 2019, the Company announced the board of directors approved a new share repurchase program for Issuance Under Equity Compensation Plansup to $50.0 million through December 2020.
In accordance with(3)Consists of shares that were withheld by us to satisfy tax withholding obligations of employees that arose upon the rulesvesting of restricted shares. The value of such shares is based on the SEC,closing price of our common shares on the following table sets forth information about our equity compensation plans as of December 31, 2018. As of December 31, 2018, we had in place the Keane Management Holdings LLC Management Incentive Plan, which was approved by the security holders of Keane Management Holdings LLC, and the Equity and Incentive Award Plan, which was approved by the security holders of Keane Group, Inc.vesting date.
|
| | | | | | | | | |
Equity Compensation Plan Information |
| | Number of securities to be issued upon exercise of outstanding options, warrants and rights
(#)
| | Weighted-average exercise price of outstanding options, warrants and rights
($)
| | Number of securities remaining available for future issuance under equity compensation plans
(#)
|
Equity compensation plans approved by security holders(1)
| | — |
| | — |
| | 7,734,601 |
|
Equity compensation plans not approved by security holders | | — |
| | — |
| | — |
|
Total | | — |
| | — |
| | 7,734,601 |
|
| |
(1) | In connection with the IPO and the Organizational Transactions, described within Note (1) Basis of Presentation and Nature of Operations of Part II, “Item 8. Financial Statements and Supplemental Data,” the Keane Management Holdings LLC Management Incentive Plan was assigned to and assumed by Keane Investor and no further awards will be granted thereunder.
|
Purchases of Equity Securities
|
| | | | | | | | | | | | | | |
Issuer Purchases of Equity Securities |
Settlement Period | | (a) Total Number of Shares Purchased |
| | (b) Average Price Paid per Share |
| | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)(2) |
| | (d) Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs(1)(2)(3) |
|
October 1, 2018 through October 26, 2018 | | 1,551,330 |
| | $ | 11.70 |
| | 1,551,330 |
| | $ | 52,544,047 |
|
October 26, 2018 through October 31, 2018 | | — |
| | $ | — |
| | — |
| | $ | 100,000,000 |
|
November 1, 2018 through November 30, 2018 | | 1,000,000 |
| | $ | 11.73 |
| | 1,000,000 |
| | $ | 88,270,000 |
|
December 1, 2018 through December 31, 2018 | | 520,000 |
| | $ | 10.66 |
| | — |
| | $ | 88,270,000 |
|
Total | | 3,071,330 |
| | $ | 11.53 |
| | 2,551,330 |
| | $ | 88,270,000 |
|
| | | | | | | | |
| |
(1) | On February 26, 2018, we announced that our board of directors authorized a12-month stock repurchase program of up to $100.0 million of the Company’s outstanding common stock. Effective February 25, 2019, our board of directors authorized a reset of capacity on the existing stock repurchase program back to $100.0 million. Additionally, the program’s expiration date was extended to December 2019 from a previous expiration of September 2019. |
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(2) | On December 3, 2018, we entered into an Underwriting Agreement (the “Underwriting Agreement”) with Morgan Stanley & Co. LLC (the “Underwriter”) and Keane Investor, relating to the underwritten offering of 5,251,249 shares (the “Shares”). All of the Shares were sold by Keane Investor. The Underwriter purchased the Shares from Keane Investor pursuant to the Underwriting Agreement at a price of $10.66 per share. In addition, pursuant to the Underwriting Agreement, we purchased from the Underwriter 520,000 shares of common stock that were sold by Keane Investor to the Underwriter, at a price per share equal to the price paid by the Underwriter to Keane Investor. This repurchase was not made pursuant to our stock repurchase program authorized by our board of directors. |
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(3) | Commission costs incurred by the Company to repurchase its shares are not included in the calculation of Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs. |
Item 6. Selected Financial Data
The selected financial data for the periods presented was derived from theour audited consolidated and combined financial statements of Keane. The selected historical financial data presented below is not intended to replace our historical financial statements, and should be read in conjunction with Part I, “Item 1A. Risk Factors,” Part II, “Item 7. Management’s Discussion and Analysis of Financial and Results of Operations” and our audited consolidated and combined financial statements included in Part II, “Item 8. Financial Statements and Supplementary Data” of this Annual Report in order to understand those factors, such as the C&J Merger, which may affect the comparability of the Selected Financial Data.”
| | | | | | | | | | | | | Years Ended December 31, |
| | Year ended December 31, 2018 | | Year ended December 31, 2017(1) | | Year ended December 31, 2016(2) | | Year ended December 31, 2015 | | 2019(1) | | 2018 | | 2017(2) | | 2016(3) | | 2015 |
(in thousands of dollars, except per share amounts) | | | | | | | | | | | | | | | | | | |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 2,137,006 |
| | $ | 1,542,081 |
| | $ | 420,570 |
| | $ | 366,157 |
| | $ | 1,821,556 |
| | $ | 2,137,006 |
| | $ | 1,542,081 |
| | $ | 420,570 |
| | $ | 366,157 |
|
Cost of services(3) | | 1,660,546 |
| | 1,282,561 |
| | 416,342 |
| | 306,596 |
| |
Cost of services(4) | | | 1,403,932 |
| | 1,660,546 |
| | 1,282,561 |
| | 416,342 |
| | 306,596 |
|
Depreciation and amortization | | 259,145 |
| | 159,280 |
| | 100,979 |
| | 69,547 |
| | 292,150 |
| | 259,145 |
| | 159,280 |
| | 100,979 |
| | 69,547 |
|
Selling, general and administrative expenses | | 114,258 |
| | 93,526 |
| | 53,155 |
| | 26,081 |
| | 123,676 |
| | 113,810 |
| | 84,853 |
| | 36,615 |
| | 26,081 |
|
Merger and integration | | | 68,731 |
| | 448 |
| | 8,673 |
| | 16,540 |
| | — |
|
(Gain) loss on disposal of assets | | 5,047 |
| | (2,555 | ) | | (387 | ) | | (270 | ) | | 4,470 |
| | 5,047 |
| | (2,555 | ) | | (387 | ) | | (270 | ) |
Impairment | | — |
| | — |
| | 185 |
| | 3,914 |
| | 12,346 |
| | — |
| | — |
| | 185 |
| | 3,914 |
|
Total operating costs and expenses | | 2,038,996 |
| | 1,532,812 |
| | 570,274 |
| | 405,868 |
| | 1,905,305 |
| | 2,038,996 |
| | 1,532,812 |
| | 570,274 |
| | 405,868 |
|
Operating income (loss) | | 98,010 |
| | 9,269 |
| | (149,704 | ) | | (39,711 | ) | | (83,749 | ) | | 98,010 |
| | 9,269 |
| | (149,704 | ) | | (39,711 | ) |
Other income (expense), net | | (905 | ) | | 13,963 |
| | 916 |
| | (1,481 | ) | | 453 |
| | (905 | ) | | 13,963 |
| | 916 |
| | (1,481 | ) |
Interest expense(4) | | (33,504 | ) | | (59,223 | ) | | (38,299 | ) | | (23,450 | ) | |
Interest expense(5) | | | (21,856 | ) | | (33,504 | ) | | (59,223 | ) | | (38,299 | ) | | (23,450 | ) |
Total other expenses | | (34,409 | ) | | (45,260 | ) | | (37,383 | ) | | (24,931 | ) | | (21,403 | ) | | (34,409 | ) | | (45,260 | ) | | (37,383 | ) | | (24,931 | ) |
Income (loss) before income taxes | | 63,601 |
| | (35,991 | ) | | (187,087 | ) | | (64,642 | ) | | (105,152 | ) | | 63,601 |
| | (35,991 | ) | | (187,087 | ) | | (64,642 | ) |
Income tax expense | | (4,270 | ) | | (150 | ) | | — |
| | — |
| | (1,005 | ) | | (4,270 | ) | | (150 | ) | | — |
| | — |
|
Net income (loss) | | $ | 59,331 |
| | $ | (36,141 | ) | | $ | (187,087 | ) | | $ | (64,642 | ) | | $ | (106,157 | ) | | $ | 59,331 |
| | $ | (36,141 | ) | | $ | (187,087 | ) | | $ | (64,642 | ) |
Per Share Data(5) | | | | | | | | | |
Per Share Data(6) | | | | | | | | | | | |
Basic net income (loss) per share | | $ | 0.54 |
| | $ | (0.34 | ) | | $ | (2.14 | ) | | $ | (0.74 | ) | | $ | (0.86 | ) | | $ | 0.54 |
| | $ | (0.34 | ) | | $ | (2.14 | ) | | $ | (0.74 | ) |
Diluted net Income (loss) per share | | 0.54 |
| | (0.34 | ) | | (2.14 | ) | | (0.74 | ) | |
Diluted net income (loss) per share | | | (0.86 | ) | | 0.54 |
| | (0.34 | ) | | (2.14 | ) | | (0.74 | ) |
Weighted average number of shares: basic | | 109,335 |
| | 106,321 |
| | 87,313 |
| | 87,313 |
| | 122,977 |
| | 109,335 |
| | 106,321 |
| | 87,313 |
| | 87,313 |
|
Weighted average number of shares: diluted | | 109,660 |
| | 106,321 |
| | 87,313 |
| | 87,313 |
| | 122,977 |
| | 109,660 |
| | 106,321 |
| | 87,313 |
| | 87,313 |
|
Statement of Cash Flows Data: | | | | | | | | | |
Cash flows from operating activities | | $ | 350,311 |
| | $ | 79,691 |
| | $ | (54,054 | ) | | $ | 37,521 |
| |
Cash flows from investing activities | | (297,506 | ) | | (250,776 | ) | | (227,161 | ) | | (26,038 | ) | |
Cash flows from financing activities | | (68,554 | ) | | 218,122 |
| | 276,633 |
| | (10,518 | ) | |
Other Financial Data: | | | | | | | | | |
Capital expenditures(6) | | $ | 291,543 |
| | $ | 189,629 |
| | $ | 23,545 |
| | $ | 27,246 |
| |
| | | | Year ended December 31, 2018 | | Year ended December 31, 2017(1) | | Year ended December 31, 2016(2) | | Year ended December 31, 2015 | | Years Ended December 31, |
Adjusted EBITDA(8) | | 391,856 |
| | 214,525 |
| | 1,921 |
| | 41,885 |
| |
Statement of Cash Flows Data: | | | | | | | | | | | |
Cash flows from operating activities | | | $ | 305,463 |
| | $ | 350,311 |
| | $ | 79,691 |
| | $ | (54,054 | ) | | $ | 37,521 |
|
Cash flows from investing activities | | | (114,100 | ) | | (297,506 | ) | | (250,776 | ) | | (227,161 | ) | | (26,038 | ) |
Cash flows from financing activities | | | (16,746 | ) | | (68,554 | ) | | 218,122 |
| | 276,633 |
| | (10,518 | ) |
Other Financial Data: | | | | | | | | | | | |
Capital expenditures(7) | | | $ | 193,187 |
| | $ | 291,543 |
| | $ | 189,629 |
| | $ | 23,545 |
| | $ | 27,246 |
|
Balance Sheet Data (at end of period): | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,054,579 |
| | $ | 1,043,116 |
| | $ | 536,940 |
| | $ | 324,795 |
| | $ | 1,664,907 |
| | $ | 1,054,579 |
| | $ | 1,043,116 |
| | $ | 536,940 |
| | $ | 324,795 |
|
Long-term debt (including current portion) (7) | | 340,730 |
| | 275,055 |
| | 269,750 |
| | 207,067 |
| |
Long-term debt (including current portion) (8) | | | 337,623 |
| | 340,730 |
| | 275,055 |
| | 269,750 |
| | 207,067 |
|
Total liabilities | | 567,398 |
| | 530,024 |
| | 374,688 |
| | 244,635 |
| | 778,135 |
| | 567,398 |
| | 530,024 |
| | 374,688 |
| | 244,635 |
|
Total stockholders’ equity | | 487,181 |
| | 513,092 |
| | 162,252 |
| | 80,160 |
| | 886,772 |
| | 487,181 |
| | 513,092 |
| | 162,252 |
| | 80,160 |
|
| | | | | | | | | | | | | | | | | | |
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(1) | Commencing on November 1, 2019, our consolidated and combined financial statements also include the financial position, results of operations and cash flows of C&J. |
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(2) | Commencing on July 3, 2017, our consolidated and combined financial statements also include the financial position, results of operations and cash flows of RockPile. |
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(2)(3) | Commencing on March 16, 2016, our consolidated and combined financial statements also include the financial position, results of operations and cash flows of the Acquired Trican Operations. |
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(3)(4) | Excludes depreciation and amortization, shown separately. |
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(4)(5) | Interest expense during the year ended December 31, 2019 includes $0.5 million in write-offs in connection with the modification of the 2017 ABL Facility. Interest expense during the year ended December 31, 2018 includes $7.6 million in write-offs of deferred financing costs, incurred in connection with the early debt extinguishment of our 2017 Term Loan Facility (as defined herein). Interest expense during the year ended December 31, 2017 includes $15.8 million of prepayment penalties and $15.3 million in write-offs of deferred financing costs, incurred in connection with the refinancing of our then existing revolving credit and security agreement (as amended, the “2016 ABL Facility”) and the early debt extinguishment of our the term loan facility provided by that certain credit agreement entered into on March 16, 2016 by KGH Intermediate Holdco I, LLC, Holdco II and Keane Frac, LP (as amended, the “2016 Term Loan Facility”) with certain financial institutions (collectively, the “2016 Term Lenders”) and CLMG Corp., as administrative agent for the 2016 Term Lenders, and Senior Secured Notes (as defined herein). |
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(5)(6) | The pro forma earnings per unit amounts for 2017, 2016 and 2015 have been computed to give effect to the Organizational Transactions, including the limited liability company agreement of Keane Investor to, among other things, exchange all of our Existing Owners’ membership interests for the newly-created ownership interests. The computations of pro forma earnings per unit do not consider the 15,700,000 shares of common stock newly-issued by the Company to investors in the IPO. |
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(6)(7) | Capital expenditures do not include, for the year ended December 31, 2018, $35.0 million of capital expenditures related to the asset acquisition from RSI, for the year ended December 31, 2017, $116.6 million of capital expenditures related to the acquisition of RockPile and, for the year ended December 31, 2016, $205.4 million of capital expenditures related to the acquisition of the Acquired Trican Operations. |
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(7)(8) | Long-term debt includes $7.1 million, $7.5 million, $8.2 million and $18.4 million of unamortized debt discount and debt issuance costs for 2019, 2018, 2017, and 2016 respectively, and excludes capital lease obligations. |
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(8) | Adjusted EBITDA and Adjusted Gross Profit are Non-GAAP Measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other generally accepted accounting principles (“GAAP”) measures such as net income, operating income and gross profit. These non-GAAP financial measures exclude the financial impact of items we do not consider in assessing our ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different capital structures and comparability to our results of operations may be impacted by the effects of acquisition accounting on its depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe Adjusted EBITDA and Adjusted Gross Profit provide helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies. |
Adjusted EBITDA is defined as net income (loss) adjusted to eliminate the impact of interest, income taxes, depreciation and amortization, along with certain items management does not consider in assessing ongoing performance. Adjusted Gross Profit is defined as Adjusted EBITDA, further adjusted to eliminate the impact of all activities in the Corporate segment, such as selling, general and administrative expenses, along with cost of services that management does not consider in assessing ongoing performance.
Set forth below is a reconciliation of net loss to Adjusted EBITDA and Adjusted Gross Profit:
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| | | | | | | | | | | | | | | | | |
| | (Thousands of Dollars)
Year Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | |
Net income (loss) | | $ | 59,331 |
| | $ | (36,141 | ) | | $ | (187,087 | ) | | $ | (64,642 | ) | |
Depreciation and amortization | | 259,145 |
| | 159,280 |
| | 100,979 |
| | 69,547 |
| |
Interest expense, net | | 33,504 |
| | 59,223 |
| | 38,299 |
| | 23,450 |
| |
Income tax (benefit) expense(a) | | 4,270 |
| | 150 |
| | (114 | ) | | 793 |
| |
EBITDA | | $ | 356,250 |
| | $ | 182,512 |
| | $ | (47,923 | ) | | $ | 29,148 |
| |
Acquisition, integration and expansion(b) | | 16,609 |
| | (4,674 | ) | | 35,630 |
| | 6,272 |
| |
Offering-related expenses(c) | | 12,969 |
| | 7,069 |
| | 1,672 |
| | — |
| |
Commissioning costs | | — |
| | 12,565 |
| | 9,998 |
| | — |
| |
Impairment of assets(d) | | — |
| | — |
| | 185 |
| | 3,914 |
| |
Non-cash stock compensation(e) | | 17,166 |
| | 10,578 |
| | 1,985 |
| | 312 |
| |
Other(f) | | (11,138 | ) | | 6,475 |
| | 374 |
| | 2,239 |
| |
Adjusted EBITDA | | $ | 391,856 |
| | $ | 214,525 |
| | $ | 1,921 |
| | $ | 41,885 |
| |
Other income (expense), net | | 905 |
| | (13,963 | ) | | $ | (916 | ) | | $ | 1,481 |
| |
(Gain) loss on disposal of assets | | 5,047 |
| | (2,555 | ) | | $ | (387 | ) | | $ | (270 | ) | |
Selling, general and administrative(a) | | 114,258 |
| | 93,526 |
| | $ | 53,269 |
| | $ | 26,081 |
| |
Management Adjustments not associated with Cost of Services(g) | | (35,379 | ) | | (16,573 | ) | | $ | (26,062 | ) | | $ | (8,263 | ) | |
Adjusted gross profit | | $ | 476,687 |
| | $ | 274,960 |
| | $ | 27,825 |
| | $ | 60,914 |
| |
| | | | | | | | | |
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(a) | Income tax (benefit) expense as presented in the consolidated and combined statement of operations does not include the provision for Texas margin tax for 2016. |
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(b) | Represents professional fees, integration and divestiture costs, contingent value rights liability adjustments, earn-outs, lease-termination costs, severance, start-up and other costs associated with the acquisition of RockPile and the Acquired Trican Operations, the asset acquisition from RSI and organic growth initiatives and wind-down of our Canadian operations. For the year ended December 31, 2018, $0.2 million was recorded in cost of services, $0.4 million was recorded in selling, general and administrative expenses, $2.7 million was recorded in gain on disposal of assets and $13.3 million was recorded in other expense, net. For the year ended December 31, 2017, $1.7 million was recorded in costs of services, $10.7 million was recorded in selling, general and administrative expense, $3.3 million gain was recorded in gain on disposal of assets and $13.8 million of income was recorded in other expense, net. For the year ended December 31, 2016, $13.9 million was recorded in costs of services, $21.4 million was recorded in selling, general and administrative expenses and $0.3 million was recorded in other expense, net. For the year ended December 31, 2015, $1.1 million was recorded in costs of services, $2.9 million was recorded in selling, general and administrative expenses, $0.6 million gain was recorded in gain on disposal of assets and $1.7 million was recorded in other expense, net. |
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(c) | Represents professional fees and other miscellaneous expenses related to the Organizational Transactions, the Company's initial public offering and the sale of the Company's stock by a selling stockholder in January 2018. For the year ended December 31, 2018, $13.0 million was recorded in selling, general and administrative expenses. For the year ended December 31, 2017, $1.3 million was recorded in cost of services and $5.8 million was recorded in selling, general and administrative expense. For the year ended December 31, 2016, $1.7 million was recorded in selling, general and administrative expenses. |
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(d) | Represents non-cash impairment charges with respect to our long-lived assets and intangible assets. |
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(e) | In 2018 and 2017, represents non-cash amortization of equity awards issued under Keane Group, Inc.’s Equity and Incentive Award Plan (the “Plan”). According to the Plan, the Compensation Committee of the Board of Directors can approve awards in the form of restricted stock, restricted stock units and/or other deferred compensation. In 2016, represents adjustments to the non-cash profit interests related to Keane Group Holdings, LLC. In all three years, these costs were recorded in selling, general and administrative expenses. |
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(f) | Represents gain recognized for insurance proceeds received in connection with a fire that damaged a portion of one hydraulic fracturing fleet on July 1, 2018, contingency accruals related to certain litigation claims, readiness costs associated with our initial internal controls design documentation for Sarbanes-Oxley compliance, using COSO 2013 framework, net gains on disposal of assets, rating agency fees for establishing initial ratings in connection with entering into the 2018 Term Loan Facility (as defined herein) and forfeiture of deposits on |
hydraulic fracturing equipment purchase orders. For the year ended December 31, 2018, $3.8 million was recorded in selling, general and administrative expenses and $14.9 million was recorded in other expense, net. For the year ended December 31, 2017, $0.7 million was recorded in gain on disposal of assets and $7.2 million was recorded in selling, general and administrative expenses. For the year ended December 31, 2016, $0.4 million was recorded in other expense, net. For the year ended December 31, 2015, $0.2 million was recorded in costs of services and $2.0 million was recorded in other expense, net.
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(g) | Excludes management adjustments associated with selling, general and administrative expenses, gain (loss) on disposal of assets within the Corporate segment and other income (expense), net. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated and combined financial statements and related notes included within Part II, “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
On January 25, 2017, we consummated an IPO For additional information related to forward looking statements or information related to the basis of 30,774,000 sharespresentation and comparability of our common stock, of which 15,700,000 shares were offered by usfinancial information, please see “Cautionary Statement Regarding Forward-Looking Statements and 15,074,000 shares were offered by the selling stockholder. To effectuate the IPO, we effected a series of transactions that resulted in a reorganization of our business. Specifically, among other transactions, we effected the Organizational Transactions described within Note (1) BasisInformation” and “Basis of Presentation and Nature of Operations of Part II, “Item 8. Financial Statements and Supplemental Data.”
The information in this “Management’s Discussion of Analysis of Financial Condition and Results of Operations” reflects the following: (1) as it pertains to periods prior to the completion of the IPO, the accounts of Keane Group; and (2) as it pertains to the periods subsequent to the completion of the IPO, the accounts of Keane.
This section and other parts of this Annual Report on Form 10-K contain forward-looking statements, within10-K”, both of which immediately follow the meaningtable of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “may,” “can,” “will,” “would,” “could,” “should,” the negatives thereof and other similar expressions. Forward-looking statements are not guarantees of future performance and actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, “Item 1A. Risk Factors”contents of this Annual Report on Form 10-K, which are incorporated herein by reference. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years. We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by law.10-K.
EXECUTIVE OVERVIEWBusiness Overview
Organization
We are oneNexTier Oilfield Solutions Inc. is an industry-leading U.S. land oilfield focused service company, with a diverse set of the largest pure-play providers of integrated well completion and production services in the U.S., withacross a focus on complex, technicallyvariety of active and demanding completion solutions. Our primary service offerings include horizontal and vertical fracturing, wireline perforation and logging and engineered solutions. Our total capacity includes approximately 1.4 million hydraulic horsepower. From our 29 currently deployable hydraulic fracturing fleets (“fleets”), 34 wireline trucks, 24 cementing units and other ancillary assets located in the Permian Basin, the Marcellus/Utica Shale, the Eagle Ford Formation, the Bakken Formation and other active oil and gas basins, we pride ourselves on providing industry-leading completion services withbasins. We have a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. We distinguish ourselveshistory of growth through three key principles, which includeacquisition, including (i) our partnerships with high-quality customers, (ii) our intense focus on safety and efficiency and (iii) a track record of creating value for all our stakeholders.
We provide our services in conjunction with onshore well development, in addition to stimulation operations on existing wells, to well-capitalized oil and gas exploration and production customers, with some of the highest quality and safety standards in the industry and long-term development programs that enable us to maximize operational efficiencies and the return on our assets. We believe our integrated approach and proven capabilities enable us to deliver cost-effective solutions for increasingly complex and technically demanding well completion
requirements, which include longer lateral segments, higher pressure rates and proppant intensity and multiple fracturing stages in challenging high-pressure formations. In addition, our technical team and engineering center, which is located in The Woodlands, Texas, provides us with the ability to supplement our service offerings with engineered solutions specifically tailored to address customers’ completion requirements and unique challenges.
We are organized into two reportable segments, consisting of Completion Services, which includes our hydraulic fracturing, wireline divisions and ancillary services; and Other Services, which exclusively includes our cementing division. We evaluate the performance of these segments based on equipment utilization, revenue, segment gross profit and gross margin. Segment gross profit is a key metric that we use to evaluate segment operating performance and to determine resource allocation between segments. We define segment gross profit as segment revenue less segment direct and indirect cost of services, excluding depreciation and amortization. Additionally, our operations management make rapid and informed decisions, such as price adjustments that offset commodity inflation and align with market rates, decisions to strategically deploy our existing and new fleets and real-time supply chain management decisions, by utilizing top line revenue, together with individual direct and indirect costs on a per stage and per fleet basis.
Asset Acquisition from Refinery Specialties, Incorporated
On July 24, 2018, we executed a purchase agreement with RSI to acquire approximately 90,000 hydraulic horsepower and related support equipment for approximately $35.4 million, inclusive of a $0.8 million deposit reimbursement related to future equipment deliveries. This2017 acquisition was partially funded by the insurance proceeds we received in connection with a fire that resulted in damage to a portion of one of our fleets (for further details see Note(7) Property and Equipment, net of Part II, “Item 8. Financial Statements and Supplementary Data”). We also assumed operating leases for light duty vehicles in connection with the RSI transaction, and RSI entered into a non-compete arrangement in turn with us. In September 2018, we reached an agreement with RSI to refund us $0.8 million of the purchase price due to repair costs required for certain acquired equipment. The resulting purchase price after the refund was $34.6 million, and we incurred $0.4 million of transaction costs related to the acquisition, bringing total cash consideration related to the acquisition to $35.0 million.
Acquisition of RockPile
On July 3, 2017, we acquired 100% of the outstanding equity interests of RockPile, a multi-basin provider of integrated well completion services in the U.S., whose primary service offerings included hydraulic fracturing, wireline perforation and workover rigs. Therigs, and (ii) our 2018 asset acquisition of RockPilefrom RSI to acquire approximately 90,000 hydraulic horsepower and related support equipment. Our most recent strategic transaction was completed for cash consideration of $116.6 million, subject to post-closing adjustments, 8,684,210 sharesthe October 31, 2019, merger transaction with C&J Energy Services, Inc. (“C&J Merger”), a publicly traded Delaware corporation. This history impacts the comparability of our common stockoperational results from year to year. See Part I, “Item 1. Business” of this Annual Report for an overview of our history, including additional information on the acquisitions noted above, including the C&J Merger, our 2017 IPO, predecessor, and contingent value rights (“CVR”) granted pursuant to the Contingent Value Rights Agreement (“CVR Agreement”), as further describedbusiness environment. Additional information on these transactions can be found in Note (3) Acquisitions) Mergers and Acquisitionsof Part II, “Item 8. Financial Statements and SupplementarySupplemental Data.”
Through this acquisition, we expanded our existing presence in the Permian Basin and Bakken Formation by increasing our hydraulic fracturing fleet size by more than 25%, and further strengthened our position as one of the largest pure-play providers of integrated well completion services in the U.S. We acquired 245,000 hydraulic horsepower at newbuild economics, eight wireline trucks, 10 cementing units and 12 workover rigs. We also acquired a high-quality customer base, with minimal overlap to our existing customer base and expanded certain service offerings and capabilities within our Other Services segment.
Subsequent to the acquisition, we sold the twelve acquired workover rigs during the third and fourth quarters of 2017.
In early April 2018, in accordance with the terms and conditions of the CVR Agreement, we calculated and paid the final Aggregate CVR Payment Amount, due to the Holders of the CVRs, of $19.9 million.
Financial results
Revenue in 2018 totaled $2.1 billion, an increase of 39% compared to revenue in 2017 of $1.5 billion. Our strong revenue growth in 2018 was driven by the following factors, (i) an increase in deployed fleets as a result of a full-year contribution of assets acquired during the acquisition of Rockpile and additional newbuild fleets commissioned throughout 2018, (ii) stronger completions performance on a relative per crew basis in terms of stages completed and hours pumped and (iii) continued execution of our strategy of aligning with our clients under dedicated agreements, with periodic re-openers priced at market rate. We exited 2018 with 29 deployable fleets, which included the three newbuild fleets in 2018 and one fleet acquired through the acquisition of RSI. We exited 2017 with 27 operating fleets, which included six acquired fleets, including one newbuild fleet acquired through the acquisition of RockPile. In 2018, due to market conditions and client budget constraints creating white space on our calendar, we operated an equivalent of 24.5 fleets at 100% utilization, compared to 21.1 fleets at 100% utilization during 2017. The revenue growth drivers for 2018 had a favorable impact on operating margins, which is calculated by dividing operating income (loss) by revenue, but headwinds in input cost inflation persisted, particularly with, trucking, labor and chemicals, partially offset by deflation in sand prices due to surplus of sand supply. Consistent with our efforts to maintain and grow the supply of our key commodities and skilled workforce, as influenced by market demand, we continued to secure key contracts with suppliers, as well as position labor rates to facilitate retaining skilled employees and attracting new talent. We reported operating income of $98.0 million in 2018, as compared to an operating income of $9.3 million in 2017.
We reported net income of $59.3 million, or 0.54 per basic and diluted share, in 2018, compared to net loss of $36.1 million, or $(0.34) per basic and diluted share, in 2017. Excluding the adjustments discussed below, adjusted net income in 2018 and 2017 was $95.0 million and $4.1 million, respectively, or $0.87 and $(0.04) per basic and diluted share, respectively.
Net income in 2018 includes approximately $0.2 million of management adjustments to arrive at Adjusted Gross Profit (as defined herein), which is related to integration costs associated with the asset acquisition from RSI. Net income in 2018 includes a further $35.5 million of management adjustments to arrive at Adjusted EBITDA (as defined herein), driven by $17.2 million of non-cash stock compensation expense, $14.9 million gain from the insurance proceeds received in connection with the July 1, 2018 accidental fire, a $13.2 million adjustment to our CVR liability associated with the acquisition of RockPile, based on the cash settlement in early April 2018, $13.0 million of transaction costs primarily incurred to consummate the secondary stock offering completed in January 2018, $2.8 million of legal contingencies, a $2.7 million markdown to fair value of our idle real estate in Mathis, Texas, upon its sale, $0.9 million in refinancing costs, $0.5 million of integration costs associated with the asset acquisition from RSI and $0.1 million of other financing fees and expenses.
Net income in 2017 includes $11.2 million of management adjustments to arrive at Adjusted Gross Profit, driven by $12.4 million of re-commissioning costs for seven previously idled fleets, $1.7 million of acquisition and integration costs related to the acquisition of RockPile and $1.3 million of bonuses paid out to key operational employees in connection with our IPO, offset by a $4.2 million gain on disposal of assets. Net income in 2017 includes a further $20.8 million of management adjustments to arrive at Adjusted EBITDA, driven primarily by $10.7 million of transaction costs primarily related to the acquisition of RockPile, $10.6 million of non-cash stock compensation expense, a $7.8 million gain on indemnification settlements with Trican, $7.2 million of litigation contingencies, a $5.3 million gain related to the mark-to-market valuation adjustment of our CVR liability associated with the acquisition of RockPile, $3.6 million in bonuses to key personnel in connection with our IPO, $1.2 million of transaction costs related to the secondary offering in January 2018, $1.0 million of organizational restructuring costs, a $0.7 million gain due to the negotiated settlement of assumed liabilities with a certain vendor from a prior acquisition and $0.2 million in commissioning costs.
Financial markets, liquidity, and capital resources
On January 25, 2017, we completed the IPO of 30,774,000 shares of our common stock at the public offering price of $19.00 per share, which included 15,700,000 shares offered by us and 15,074,000 shares offered by the selling stockholder, including 4,014,000 shares sold as a result of the underwriters’ exercise of their overallotment option. The IPO proceeds to us, net of underwriters’ fees and capitalized cash payments of $4.8 million for professional services and other direct IPO related activities, was $255.5 million. The net proceeds were used to fully repay KGH Intermediate Holdco II, LLC (“Holdco II”)’s 2016 Term Loan Facility balance of $99.0 million and the associated prepayment premium of $13.8 million, and to repay $50.0 million of its 12% secured notes due 2019 (“Senior Secured Notes”) and the associated prepayment premium of approximately $0.5 million. The remaining proceeds were used for general corporate purposes, including capital expenditures, working capital and potential acquisitions and strategic transactions. Upon completion of the IPO and the reorganization, we had 103,128,019 shares of common stock outstanding.
On February 17, 2017, we also obtained a $150.0 million asset-based revolving credit facility (“2017 ABL Facility”), replacing our pre-existing $100.0 million asset-based revolving credit facility. On December 22, 2017, our 2017 ABL Facility was amended to increase the commitments thereunder by $150.0 million, for total commitments of $300.0 million.
On May 25, 2018, we obtained a $350.0 million term loan facility (the “2018 Term Loan Facility”). The proceeds of the 2018 Term Loan Facility were used to repay Keane Group’s then-existing term loan facility (the “2017 Term Loan Facility”) and to pay related fees and expenses, with the excess proceeds going to fund general corporate purposes. As a result of entering into the 2018 Term Loan Facility, we experienced an average annualized savings of $7.9 million in interest expense in 2018, when compared to the 2017 Term Loan Facility.
At December 31, 2018, we had approximately $80.2 million of cash available. We also had $184.0 million available under our asset-based revolving credit facility as of December 31, 2018, which, with our cash balance, we believe provides us with sufficient liquidity for at least the next 12 months, including for capital expenditures and working capital investments.
We filed a Registration Statement on Form S-1 (File No. 333-222500) that was declared effective on January 17, 2018 by the Securities and Exchange Commission (the “SEC”) for an offering of shares of our common stock on behalf of Keane Investor (the “selling stockholder”). 15,320,015 shares were registered and sold by the selling stockholder (including 1,998,262 shares sold pursuant to the exercise of the underwriters’ over-allotment option) at a price to the public of $18.25 per share. We did not sell any common stock in, and did not receive any of the proceeds from, the secondary offering. Subsequently, we filed a Registration Statement on Form S-3 (File No. 333-222831) that was effective upon its filing. In December 2018, the selling stockholder sold 5,251,249 shares of our common stock at a price to the public of $11.02 per share. In conjunction with this subsequent offering, we repurchased 520,000 shares of our common stock. We did not sell any common stock in, and did not receive any of the proceeds from this secondary offering. As a direct result of this secondary offering, Keane Investor owned approximately 49.6% of our outstanding common stock as of December 31, 2018 and currently owns approximately 49.5% of our common stock.
For additional information on market conditions and our liquidity and capital resources, see “Liquidity and Capital Resources,” and “Business Environment and Results of Operations” herein.
Fiscal 2018 Highlights
Acquisition: executed strategic asset acquisition of approximately 90,000 hydraulic horsepower from RSI at attractive value;
Revenue: increased average annualized Revenue per deployed fleet to $85.5 million in 2018 compared to $72.4 million in 2017;
Profitability: increased average annualized Adjusted Gross Profit per fully-utilized fleet to $19.5 million in 2018 compared to $12.9 million in 2017;
Utilization: increased efficiency by maintaining average fleet utilization of 88% and increased wireline bundling to 78%;
Safety: achieved a total recordable incident rate of 0.37, which remains substantially less than the industry average;
Balance sheet: maintained and improved conservative balance sheet, financial flexibility and liquidity;
Liquidity: generated operating cash flow of $350.3 million;
Share repurchases: completed $105 million of stock repurchases, representing 8.1 million shares of our common stock; and
Secondary offerings: completed two secondary offerings on behalf of Keane Investor for approximately 18.6 million shares, which increased public float and reduced Keane Investor’s ownership in the Company to 49.6% as of December 31, 2018 and 49.5% as of February 25, 2019.
Business outlook
In 2017 and through a significant portion of 2018, our industry experienced an increase in the level of drilling activity, driven by growth in E&P capital spending budgets. Commodity prices improved, with crude oil and natural gas prices well above levels prevailing at the beginning of 2017. West Texas Intermediate (“WTI”) crude oil prices averaged $64.94 per barrel in 2018, as compared to $50.88 per barrel in 2017, and Henry Hub Natural Gas prices averaged $3.17 per MMBtu in 2018, as compared to $2.99 per MMBtu in 2017. These dynamics, combined with the completion of previously drilled wells, led to significant growth in the demand for U.S. completion services. At the same time, the availability and supply of completions services was impacted by higher completions intensity, which drove increases in the amount of equipment that must be utilized per fleet and acceleration of maintenance cycles, both of which had a tightening effect on available supply.
In the fourth quarter of 2018, the industry faced growing headwinds, including E&P capital budget exhaustion, early achievement of E&P production targets, price differentials and normal seasonality, resulting in softness in demand for completions services. At the same time, the price of crude oil experienced a significant and rapid decline beginning in November 2018, exacerbating the negative impacts on completions activity. The decline in crude oil prices coincided with E&P budgeting processes, driving many E&P companies to delay budgeting cycles and activity in early 2019. In addition, as we reached the price re-opener periods on a portion of our dedicated agreements, the current imbalance of frac supply resulted in pressure on net price. Most of our customers see value in a long-term partnership with us, and as a result, traded some price concessions by us for extended terms or additional work scope. We currently believe we have strong visibility on utilization for approximately two-thirds of our fleets in 2019, providing a strong baseload upon which to build.
Fiscal 2019 Objectives
In 2019, our principal business objective continues to be growing our business and safely providing best-in-class services in Completion Services and Other Services segments, while delivering shareholder value. We expect to achieve our objective through:
partnering and growing with well-capitalized customers under dedicated agreements who focus their efforts on safety, high-efficiency completions, continuous improvement and innovation;
allocating our assets to maximize utilization and returns, including diversification of geographies and commodities;
maximizing profitability of fully-utilized fleets through leading-edge pricing and efficiencies;
investing in technology to further drive efficiencies and differentiation of service offerings;
leveraging our flexible and scalable logistics infrastructure to provide assurance of supply at lowest landed cost;
leveraging our platform to identify, retain and promote talent to sustain growth and support operational and commercial excellence;
pursuing organic expansion opportunities for our cementing assets;
maintaining agreements with our existing strategic suppliers and identify and develop relationships with additional strategic suppliers to ensure continuity of supply and optimize efficiency;
maintaining our conservative and flexible capital position, supporting continued growth and maintenance of active equipment;
exploring potential opportunities for mergers or acquisitions, focused on gaining scale, achieving synergies and delivering shareholder returns; and
returning capital to shareholders in a disciplined fashion.
Our operating performance and business outlook are described in more detail in “Business Environment and Results of Operations” herein.
BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONSIndustry Overview
We provide our services in several of the most active basins in the U.S.,United States, including the Permian, Basin, the Marcellus Shale/Utica, Shale, the Eagle Ford Formation and the Bakken Formation.Bakken/Rockies. These regions are expected to account for approximately 68%73% of all new horizontal wells anticipated to be drilled during 2019 through 2021. In addition, the high density of our operations in the basins in which we are most active provides us the opportunity to leverage our fixed costs and to quickly respond with what we believe are highly efficient, integrated solutions that are best suited to address customer requirements.
In particular, we are one of the largest providers of completion services in the Permian Basin, and the Marcellus Shale/Utica Shale, the most prolific and cost-competitive oil and natural gas basinsbasin in the U.S. According to Spears & Associates, theUnited States. The Permian Basin and the Marcellus Shale/Utica ShaleBasins are expected to account for 53%56% of total active rigs in the U.S. during 2019United States through 2021 based on forecasted rig counts.2022. These basins have experienced a recovery in activity since the spring of 2016, with an 229%156% increase in rig count from their combined Maysecond quarter of 2016 low of 170185 to 560475 as of December 31, 2018.2019. Our financial performance is significantly affected by rig and well count in North America, as well as oil and natural gas prices, which are summarized in the tables below.
Activity within our business segments is significantly impacted by spending on upstream exploration, development and production programs by our customers. Also impacting our activity is the status of the global economy, which impacts oil and natural gas demand.
Some of the more significant determinants of current and future spending levels of our customers are oil and natural gas prices, global oil supply, the world economy, the availability of credit, government regulation and global stability, which together drive worldwide drilling activity. Our financial performance is significantly affected by rig and well count in North America, as well as oil and natural gas prices, which are summarized in the tables below.
The following table showsWhile it is too early to determine the averageimpact, the recent actions taken by OPEC are expected to have a material negative impact on crude oil and natural gas prices for WTI and Henry Hub natural gas:
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
Oil price - WTI(1) | | $ | 64.94 |
| | $ | 50.88 |
| | $ | 43.14 |
|
Natural gas price - Henry Hub(2) | | $ | 3.17 |
| | $ | 2.99 |
| | $ | 2.52 |
|
(1) Oil price measured in dollars per barrel (2) Natural gas price measured in dollars per million British thermal units (Btu), or MMBtu |
| | | | | | |
The historical average U.S. rig counts based on the weekly Baker Hughes Incorporated rig count information were as follows:
|
| | | | | | | | | |
| | Year Ended December 31, |
Product Type | | 2018 | | 2017 | | 2016 |
Oil | | 841 |
| | 703 |
| | 408 |
|
Natural Gas | | 190 |
| | 172 |
| | 100 |
|
Other | | 1 |
| | 1 |
| | 1 |
|
Total | | 1,032 |
| | 876 |
| | 509 |
|
| | | | | | |
|
| | | | | | | | | |
| | Year Ended December 31, |
Drilling Type | | 2018 | | 2017 | | 2016 |
Horizontal | | 900 |
| | 736 |
| | 400 |
|
Vertical | | 63 |
| | 70 |
| | 60 |
|
Directional | | 69 |
| | 70 |
| | 49 |
|
Total | | 1,032 |
| | 876 |
| | 509 |
|
| | | | | | |
prices. Our customers’ cash flows, in most instances, depend upon the revenue they generate from the sale of oil and natural gas. Lower oil and natural gas prices usually translate into lower exploration and production budgets. We are closely monitoring the situation including potential activity responses by our E&P customers.
Following a trough in early 2016,The following table shows the average historical oil prices and natural gas prices have recovered to $45.15 and $3.25, respectively, or approximately 72% and 118%, respectively, as of December 31, 2018 from their lows in early 2016 of $26.19 and $1.49, respectively. As of January 2019, the US Energy Information Administration (the “EIA”) projectsfor WTI spot prices to average $53.0 in the first quarter of 2019 before gradually increasing to $57.0 in the fourth quarter of 2019 and Henry Hub natural gas prices togas:
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Oil price - WTI(1) | | $ | 56.98 |
| | $ | 64.94 |
| | $ | 50.88 |
|
Natural gas price - Henry Hub(2) | | $ | 2.57 |
| | $ | 3.17 |
| | $ | 2.99 |
|
(1) Oil price measured in dollars per barrel (2) Natural gas price measured in dollars per million British thermal units (Btu), or MMBtu |
| | | | | | |
The historical average $2.89 in 2019.
WithU.S. rig counts based on the rebound in commodity prices from their lows in early 2016, drilling and completion activity continued to increase in 2017 and 2018, with U.S. activeweekly Baker Hughes Incorporated rig count in December 2018 more than doubling the trough in the active rig count registered in May 2016. The significant growth in production resulting from increased drilling activity has contributed to increased uncertainty concerning the direction of oil and gas prices over the near and immediate term, and market volatility continues to persist. Despite this market volatility, we continued to experience increased demand for our services during 2018.information were as follows:
The EIA projects that the average WTI spot price will increase through 2020 due to growing demand. |
| | | | | | | | | |
| | Year Ended December 31, |
Product Type | | 2019 | | 2018 | | 2017 |
Oil | | 773 |
| | 841 |
| | 703 |
|
Natural Gas | | 169 |
| | 190 |
| | 172 |
|
Other | | 1 |
| | 1 |
| | 1 |
|
Total | | 943 |
| | 1,032 |
| | 876 |
|
| | | | | | |
|
| | | | | | | | | |
| | Year Ended December 31, |
Drilling Type | | 2019 | | 2018 | | 2017 |
Horizontal | | 826 |
| | 900 |
| | 736 |
|
Vertical | | 54 |
| | 63 |
| | 70 |
|
Directional | | 63 |
| | 69 |
| | 70 |
|
Total | | 943 |
| | 1,032 |
| | 876 |
|
| | | | | | |
As of January 2019,February 2020, global liquids demand is expected to average 101.5101.7 million barrels per day in 2019.2020. The EIA anticipates continued growth in the long-term U.S. domestic demand for natural gas, supported by various factors, including (i) increased likelihood of favorable regulatory and legislative initiatives, (ii) increased acceptance of natural gas as a clean and abundant domestic fuel source and (iii) the emergence of low-cost natural gas shale
developments. As of January 2019,February 2020, natural gas demand in North Americathe United States is expected to average 82.6586.24 billion cubic feet per day in 2019.2020.
Operating Approach & Strategy
We believe our integrated approach and proven capabilities enable us to deliver cost-effective solutions for increasingly complex and technically demanding well completion requirements, which include longer lateral segments, higher pressure rates and proppant intensity and multiple fracturing stages in challenging high-pressure formations. In addition, our technical team and our three innovation centers, provide us with the ability to supplement our service offerings with engineered solutions specifically tailored to address customers’ completion requirements and unique challenges.
Our financial performancerevenues and profits are generated by providing services and equipment to customers who operate oil and gas properties and invest capital to drill new wells and enhance production or perform maintenance on existing wells. Our results of operations in 2018our core service lines are driven primarily by five interrelated, fluctuating variables: (1) the drilling, completion and production activities of our customers, which is reflectiveprimarily driven by oil and natural gas prices and directly affects the demand for our services; (2) the price we are able to charge for our services and equipment, which is primarily driven by the level of demand for our services and the increased demand withinsupply of equipment capacity in the completionmarket; (3) the cost of materials, supplies and labor involved in providing our services, industry and our ability to navigatepass those costs on to our customers; (4) our activity, or deployed equipment “utilization” levels; and (5) the anticipated sector-wide challengesquality, safety and efficiency of our service execution.
Our operating strategy is focused on maintaining high utilization levels of deployed equipment to maximize revenue generation while controlling costs to gain a competitive advantage and drive returns. We believe that the quality and efficiency of our service execution and aligning with customers who recognize the value that we provide through service quality and efficiency gains are central to our efforts to support equipment utilization and grow our business.
However, equipment utilization cannot be relied on as wholly indicative of our financial or operating performance due to variations in revenue and profitability from job to job, the type of service to be performed and the equipment, personnel and consumables required for the job, as well as competitive factors and market conditions in the region in which the services are performed. Given the volatile and cyclical nature of activity drivers in the U.S. onshore oilfield services industry, coupled with the varying prices we are able to charge for our services and the cost of providing those services, among other factors, operating margins can fluctuate widely depending on supply and demand at a given point in the cycle.
Historically, our utilization levels have been highly correlated to U.S. onshore spending by our customers, which is heavily driven by the price of oil and natural gas. Generally, as capital spending by our customers increases, drilling, completion and production activity also increases, resulting in increased demand for our services, and therefore more days or hours worked (as the case may be). Conversely, when drilling, completion and production activity levels decline due to lower spending by our customers, we generally provide fewer services, which results in fewer days or hours worked (as the case may be). Additionally, during periods of decreased spending by our customers, we may be required to discount our rates or provide other pricing concessions to remain competitive and support deployed equipment utilization, which negatively impacts our revenue and operating margins. During periods of pricing weakness for our services, we may not be able to reduce our costs accordingly, and our ability to achieve any cost reductions from our suppliers typically lags behind the decline in pricing for our services, which could further adversely affect our results. Furthermore, when demand for our services increases following a period of low demand, our ability to capitalize on such increased demand may be delayed while we reengage and redeploy equipment and crews that have been idled during a downturn. The mix of customers that we are working for, as well as limited periods of exposure to the spot market, also impacts our deployed equipment utilization.
Our Reportable Segments
As of December 31, 2019, we were organized into three reportable segments:
Completion Services, which consists of the following businesses and services lines: (1) hydraulic fracturing; (2) wireline and pumpdown services; and (3) completion support services, which includes our innovation centers and activities.
Well Construction and Intervention Services, which consists of the following businesses and service lines: (1) cementing services and (2) coiled tubing services.
Well Support Services, which consists of the following businesses and service lines: (1) rig services; (2) fluids management; and (3) other special well site services.
Completion Services
The core services provided through our Completion Services segment are hydraulic fracturing, wireline and pumpdown services. As of December 31, 2019, we had approximately 45 hydraulic fracturing fleets, 118 wireline trucks and 80 pumpdown units capable of being deployed. Our completion support services are focused on supporting the efficiency, reliability and quality of our operations. Our Innovation Centers provide in-house manufacturing capabilities that help to reduce operating cost and enable us to offer more technologically advanced and efficiency focused completion services, which we believe is a competitive differentiator. For example, through our Innovation Centers we manufacture the data control instruments used in our fracturing operations and the perforating guns and addressable switches used in our wireline operations; these products are also available for sale to third-parties. The majority of revenue for this segment is generated by our fracturing business.
Well Construction and Intervention Services
The core services provided through our Well Construction and Intervention Services segment are cementing and coiled tubing services. The majority of revenue for this segment is generated by our cementing business. As of December 31, 2019, we had approximately 25 coiled tubing units and 101 cementing units capable of being deployed.
Well Support Services
Our Well Support Services segment was divested in a transaction that closed on March 9, 2020. It focused on post-completion activities at the well site, including rig services, such as workover and plug and abandonment, fluids management services, and other specialty well site services. Since early 2017, in response to the highly competitive landscape and reflecting our returns-focused strategy, we had focused on operational rightsizing measures to better align these businesses with current market conditions. This strategy resulted in closing facilities and idling unproductive equipment. For example, we either sold or shut down numerous businesses or asset packages, which included the divestiture of the majority of our fluids management assets in both West and South Texas in the third quarter of 2019. As of December 31, 2019, we had approximately 276 workover rigs and 348 fluids management trucks capable of being deployed. The majority of revenue for this segment is generated by our rig services business, and we consider rig services and fluids management to be the primary businesses within this segment.
How we calculate utilization for each segment
Our management team monitors asset utilization, among other factors, for purposes of assessing our overall activity levels and customer demand. For our Completion Services segment, asset utilization levels for our own fleets is defined as the ratio of the average number of deployed fleets to the number of total fleets for a given time period. We define active fleets as fleets available for deployment; we consider one of our fleets deployed if the fleet has been put in service at least one day during the period for which we calculate utilization; and we define fully-
utilized fleets per month as fleets that were deployed and working with our customers for a significant portion of a given month. As a result, as additional fleets are incrementally deployed, our utilization rate increases. We define industry utilization of fracturing assets as the ratio of the total industry demand of hydraulic horsepower to the total available capacity of hydraulic horsepower, in each case as reported by an independent industry source. Our method for calculating the utilization rate for our own fracturing fleets or the industry may differ from the method used by other companies or industry sources which could, for example, be based off a ratio of the total number of days a fleet is put in service to the total number of days in the relevant period. We believe that our measures of utilization, based on the number of deployed fleets, provide an accurate representation of existing, available capacity for additional revenue generating activity.
In our Well Construction and Intervention Services segment, we measure our asset utilization levels for our cementing business primarily by the total number of days that our asset base works on a monthly basis, based on the available working days per month. In our coiled tubing business, we measure certain asset utilization levels by the hour to better understand measures between daylight and 24-hour operations. Both the financial and operating performance of our coiled tubing and cement units can vary in revenue and profitability from job to job depending on the type of service to be performed and the equipment, personnel and consumables required for the job, as well as competitive factors and market conditions in the region in which the services are performed.
In our Well Support Services segment, we measured asset utilization levels primarily by the number of hours our assets work on a monthly basis, based on the available working days per month.
Our operating strategy is focused on maintaining high asset utilization levels to maximize revenue generation while controlling costs to gain a competitive advantage and drive returns. We believe that the safety, quality and efficiency of our service execution and our alignment with customers who recognize the value that we provide are central to our efforts to support utilization and grow our business. Given the volatile and cyclical nature of activity drivers in the U.S. onshore oilfield services industry, coupled with the varying prices we are able to charge for our services and the cost of providing those services, among other factors, operating margins can fluctuate widely depending on supply and demand at a given point in the cycle. For additional information about factors impacting our business and results of operations, please see “Industry Trends and Outlook” in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report.
RESULTS OF OPERATIONS IN2018COMPARED TO2017
The following table sets forth our financial results for the year ended December 31, 2019 as compared to the year ended the year ended December 31, 2018. Our financial results for 2019 include the financial and operating results of the businesses acquired in the C&J Merger for the partial period beginning November 1, 2019 through December 31, 2019.
A comparison of our financial results for the year ended December 31, 2018 and for the year ended December 31, 2017 can be found in the "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed on February 27, 2019.
Year Ended December 31, 20182019 Compared with Year Ended December 31, 20172018
| | | | Year Ended December 31, | | Year Ended December 31, |
(Thousands of Dollars) | | | | | | As a % of Revenue | | Variance | | | | | | As a % of Revenue | | Variance |
Description | | 2018 | | 2017 | | 2018 | | 2017 | | $ | | % | | 2019 | | 2018 | | 2019 | | 2018 | | $ | | % |
Completion Services | | $ | 2,100,956 |
| | $ | 1,527,287 |
| | 98 | % | | 99 | % | | $ | 573,669 |
| | 38 | % | | $ | 1,709,934 |
| | $ | 2,100,956 |
| | 94 | % | | 98 | % | | $ | (391,022 | ) | | (19 | %) |
Other Services | | 36,050 |
| | 14,794 |
| | 2 | % | | 1 | % | | 21,256 |
| | 144 | % | |
Well Construction and Intervention Services | | | 63,039 |
| | 36,050 |
| | 3 | % | | 2 | % | | 26,989 |
| | 75 | % |
Well Support Services | | | 48,583 |
| | — |
| | 3 | % | | 0 | % | | 48,583 |
| | 0 | % |
Revenue | | 2,137,006 |
| | 1,542,081 |
| | 100 | % | | 100 | % | | 594,925 |
| | 39 | % | | 1,821,556 |
| | 2,137,006 |
| | 100 | % | | 100 | % | | (315,450 | ) | | (15 | %) |
Completion Services | | 1,622,106 |
| | 1,269,263 |
| | 76 | % | | 82 | % | | 352,843 |
| | 28 | % | | 1,308,089 |
| | 1,622,106 |
| | 72 | % | | 76 | % | | (314,017 | ) | | (19 | %) |
Other Services | | 38,440 |
| | 13,298 |
| | 2 | % | | 1 | % | | 25,142 |
| | 189 | % | |
Costs of services (excluding depreciation and amortization, shown separately) | | 1,660,546 |
| | 1,282,561 |
| | 78 | % | | 83 | % | | 377,985 |
| | 29 | % | |
Completion Services | | 478,850 |
| | 258,024 |
| | 22 | % | | 17 | % | | 220,826 |
| | 86 | % | |
Other Services | | (2,390 | ) | | 1,496 |
| | 0 | % | | 0 | % | | (3,886 | ) | | (260 | %) | |
Gross profit | | 476,460 |
| | 259,520 |
| | 22 | % | | 17 | % | | 216,940 |
| | 84 | % | |
Well Construction and Intervention Services | | | 55,227 |
| | 38,440 |
| | 3 | % | | 2 | % | | 16,787 |
| | 44 | % |
Well Support Services | | | 40,616 |
| | — |
| | 2 | % | | 0 | % | | 40,616 |
| | 0 | % |
Costs of services | | | 1,403,932 |
| | 1,660,546 |
| | 77 | % | | 78 | % | | (256,614 | ) | | (15 | %) |
Depreciation and amortization | | 259,145 |
| | 159,280 |
| | 12 | % | | 10 | % | | 99,865 |
| | 63 | % | | 292,150 |
| | 259,145 |
| | 16 | % | | 12 | % | | 33,005 |
| | 13 | % |
Selling, general and administrative expenses | | 114,258 |
| | 93,526 |
| | 5 | % | | 6 | % | | 20,732 |
| | 22 | % | | 123,676 |
| | 113,810 |
| | 7 | % | | 5 | % | | 9,866 |
| | 9 | % |
Merger and integration | | | 68,731 |
| | 448 |
| | 4 | % | | 0 | % | | 68,283 |
| | 15,242 | % |
(Gain) loss on disposal of assets | | 5,047 |
| | (2,555 | ) | | 0 | % | | 0 | % | | 7,602 |
| | (298 | %) | | 4,470 |
| | 5,047 |
| | 0 | % | | 0 | % | | (577 | ) | | (11 | %) |
Impairment | | | 12,346 |
| | — |
| | 1 | % | | 0 | % | | 12,346 |
| | 0 | % |
Operating income | | 98,010 |
| | 9,269 |
| | 5 | % | | 1 | % | | 88,741 |
| | 957 | % | | (83,749 | ) | | 98,010 |
| | (5 | %) | | 5 | % | | (181,759 | ) | | (185 | %) |
Other income (expense), net | | (905 | ) | | 13,963 |
| | 0 | % | | 1 | % | | (14,868 | ) | | (106 | %) | | 453 |
| | (905 | ) | | 0 | % | | 0 | % | | 1,358 |
| | (150 | %) |
Interest expense | | (33,504 | ) | | (59,223 | ) | | (2 | %) | | (4 | %) | | 25,719 |
| | (43 | %) | | (21,856 | ) | | (33,504 | ) | | (1 | %) | | (2 | %) | | 11,648 |
| | (35 | %) |
Total other expenses | | (34,409 | ) | | (45,260 | ) | | (2 | %) | | (3 | %) | | 10,851 |
| | (24 | %) | | (21,403 | ) | | (34,409 | ) | | (1 | %) | | (2 | %) | | 13,006 |
| | (38 | %) |
Income tax expense | | (4,270 | ) | | (150 | ) | | 0 | % | | 0 | % | | (4,120 | ) | | 2,747 | % | | (1,005 | ) | | (4,270 | ) | | 0 | % | | 0 | % | | 3,265 |
| | (76 | %) |
Net income (loss) | | $ | 59,331 |
| | $ | (36,141 | ) | | 3 | % | | (2 | %) | | $ | 95,472 |
| | (264 | %) | | $ | (106,157 | ) | | $ | 59,331 |
| | (6 | %) | | 3 | % | | $ | (165,488 | ) | | (279 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Revenue. Total revenue is comprised of revenue from our Completion Services, Well Construction and OtherIntervention Services and Well Support Services segments. Revenue in 2018 increased2019 decreased by $594.9$315.5 million, or 39%15%, to $1.8 billion from $2.1 billion in 2018. The net decline was driven primarily by a decrease in rig count and fleet utilization, combined with pricing pressures from $1.5 billionmacroeconomic market conditions. This decrease in 2017.utilization was primarily from our customers shifting their focus to capital discipline through reduced activity levels and pricing. Despite pricing pressures, we retained our core customer base by aligning with high quality and efficient customers under dedicated agreements. This change in revenue by reportable segment is discussed below.
Completion Services:Completion Services segment revenue decreased by $391.0 million, or 19%, to $1.7 billion in 2019 from $2.1 billion in 2018. The segment revenue decline was driven by lower fleet utilization and decreased activity levels year over year, in addition to continued pricing pressures from market conditions. This was offset by an increase in revenue attributable to the C&J Merger.
Well Construction and Intervention: Well Construction and Intervention Services segment revenue increased by $573.7$27.0 million, or 38%75%, to $2.1 billion in 2018 from $1.5 billion in 2017. This change was primarily attributable to a 17% growth in our average number of fully-utilized fleets, as a result of a full-year contribution of assets acquired during the acquisition of Rockpile and deployment of additional fleets throughout 2018, together with increased stage count and efficiency from both our existing and newly-deployed fleets. These factors drove an increase in annualized revenue per fully-utilized fleet of 18%.
Other Services: Other Services segment revenue increased by $21.3 million, or 144%, to $36.0$63.0 million in 20182019 from $14.8$36.1 million in 2017.2018. This increase in revenue was primarily attributable to the C&J Merger.
Well Support Services: Well Support Services segment revenue was $48.6 million in 2019 with no comparison period in 2018. This increase in revenue was solely attributable to the acquisition of Other Services divisions from RockPile and reactivation of cementing assets that were previously idled. Revenue in 2018 was primarily earned in our cementing division, while revenue in 2017 was earned in our cementing, workover andthe segment through the C&J Merger.
coiled tubing divisions. We idled our coiled tubing division in December 2016 and divested our coiled tubing assets during the fourth quarter of 2017. We divested our workover assets during the third and fourth quarters of 2017.
Cost of services. Cost of services in 2018 increased2019 decreased by $378.0$256.6 million, or 29%15%, to $1.4 billion from $1.7 billion from $1.3 billion in 2017.2018. This change was driven by several factors including (i) higherlower overall activity in the Completion Services segment (asand fleet utilization, as discussed above under Revenue,), (ii) price inflation in our keyaddition to the impact of cost optimization from cost management efforts and input costs, including labor, chemicals, and sand trucking, partially offset by sand deflation, (iii) increased maintenance costs associated with increased service intensity stemming from larger sand volumes and well configurations, such as zipper designs and (iv) an increase in fleets working twenty-four hour operations. In 2018, we had management adjustments of $0.2 million in integration costs related to our asset acquisition from RSI. In 2017, we had management adjustments of $12.4 million in fleet commissioning costs, $1.7 million in acquisition and integration costs associated with the acquisition of RockPile and $1.3 million in bonuses paid out to key operational employees in connection with our IPO. Cost of services as a percentage of total revenue in 2018 was 78%, which represented a decrease of 5% from 83% in 2017. Excluding the above-mentioned management adjustments, total cost of services was $1.7 billion and $1.3 billion in 2018 and 2017, or 78% and 82% of revenue, respectively, a decrease as a percentage of revenue of 4%.deflation.
Cost of services, as a percentage of total revenue is presented below:
|
| | | | | | | | | |
| | Year Ended December 31, |
Description | | 2018 | | 2017 | | % Change |
Segment cost of services as a percentage of segment revenue: | | | | | | |
Completion Services | | 77 | % | | 83 | % | | (6 | )% |
Other Services | | 107 | % | | 90 | % | | 17 | % |
Total cost of services as a percentage of total revenue | | 78 | % | | 83 | % | | (5 | )% |
| | | | | | |
The change in cost of services by reportable segment is further discussed below.
Completion Services: Completion Services segment cost of services increased by $352.8 million, or 28%, to $1.6 billion in 2018 from $1.3 billion in 2017. As a percentage of segment revenue, total cost of services was 77% and 83%, in 2018 and 2017, respectively, a decrease as a percentage of revenue of 6%. This decrease was driven by higher revenue and operational performance on a per fleet basis, partially offset by (i) net price inflation in our key input costs and (ii) increased maintenance costs associated with increased service intensity and higher-pressure jobs. In 2018, we had management adjustments of $0.2 million in integration costs related to our asset acquisition from RSI. In 2017, we had management adjustments of $11.6 million in fleet commissioning costs, $1.7 million in acquisition and integration costs associated with the acquisition of RockPile and $1.3 million in bonuses paid out to key operational employees in connection with our IPO. Excluding the above-mentioned management adjustments, Completion Services segment cost of services was $1.6 billion and $1.3 billion in 2018 and 2017, or 77% and 82% of segment revenue, respectively, a decrease as a percentage of revenue of 5%.
Other Services: Other Services segment cost of services increased by $25.1 million, or 189%, to $38.4 million in 2018 from $13.3 million in 2017. This change in cost of services was primarily due to a full year of costs incurred to ramp up our cementing division. In 2017, we incurred management adjustments of $0.8 million in commissioning costs related to ramping our idle cementing assets in response to increased customer demand and $0.05 million in acquisition and integration costs associated with the acquisition of RockPile. Excluding the above-mentioned management adjustments, Other Services segment cost of services was $38.4 million and $12.4 million in 2018 and 2017, or 107% and 84% of segment revenue, respectively, an increase as a percentage of revenue of 23%.
Depreciation and amortization. Equipment Utilization. Depreciation and amortization expense increased by $99.9$33.0 million, or 63%13%, to $292.2 million in 2019 from $259.1 million in 2018. The change in depreciation and amortization was primarily related to additional equipment purchases from the RSI Acquisition in late 2018, from $159.3maintenance spend for fleet readiness, and other equipment used for continuing to enhance safety and efficiency through our multi-faceted approach of surface, digital and downhole technologies. Loss on disposal of assets in 2019 decreased by $0.6 million, to a loss of $4.5 million in 2017. This change was2019 from a loss of $5.0 million in 2018. The decrease in loss on disposal of assets is primarily attributablerelated to depreciationa larger number of additional equipment purchasedearly failures of major components in 2018 compared to maintain existing fleets, the purchase2019, primarily due to higher activity and use of newbuild equipment thein 2018.
assets acquired from RSI, a full-year depreciation of assets acquired in the RockPile acquisition and changes in the estimated useful lives of certain assets during the first half of 2018.
Selling, general and administrative expense. Selling, general and administrative (“SG&A”) expense, which represents costs associated with managing and supporting our operations, increased by $20.7$9.9 million, or 22%9%, to $114.3$123.7 million in 20182019 from $93.5$113.8 million in 2017.2018. This change in SG&A was primarily related to non-cash compensation expense of $19.4 million and transactionslitigation contingencies of $3.8 million.
Merger and integration expense. Merger and integration expense increased by $68.3 million to $68.7 million in 2019 from $0.4 million in 2018. The $68.7 million in merger and integration expense in 2019 was due to the C&J Merger, which consisted primarily of professional services, severance costs, and facility consolidation. The $0.4 million in 2018 is related to the secondary offering we consummated in January 2018, compared with transaction costs incurred in 2017cost associated with the acquisition of RockPile. SG&A as a percentage of total revenue was 5% in 2018 compared with 6% in 2017. Total management adjustments were $34.5 million in 2018, driven by $17.2 million of non-cash stock compensation expense, $13.0 million of transaction costs primarily incurred to consummate the secondary stock offering completed in January 2018, $2.8 million of legal contingencies, $0.9 million in refinancing costs, $0.5 million of integration costs associated with the asset acquisition from RSI and $0.1 million of other financing fees and expenses. Management adjustments in 2017 were $34.5 million, driven by $10.7 million of transaction costs primarily incurred for the acquisition of RockPile, $10.6 million of non-cash compensation expense, $5.8 million of organizational restructuring costs and bonuses to key personnel in connection with our IPO, together with transaction costs related to our secondary offering in 2018, $7.2 million primarily related to litigation contingencies and $0.2 million related to commissioning costs. Excluding these management adjustments, SG&A expense was $79.8 million and $59.0 million in 2018 and 2017, respectively, which represents an increase of 35%.Acquisition.
(Gain) loss on disposal of assets. Gain on disposal of assets in 2018 decreased by $7.6 million, to a loss of $5.0 million in 2018 from a gain of $2.6 million in 2017. This change was primarily attributable to the sale of our coiled tubing units and ancillary coiled tubing equipment in 2017, together with the loss recognized on the sale of our idle real estate in Mathis, Texas in 2018 and the increase in early disposals of various hydraulic fracturing pump components in 2018.
Other income (expense), net. Other income (expense), net, in 2018 decreased2019 increased by $14.9$1.4 million, or 106%150%, to income of $0.5 million in 2019 from expense of $0.9 million in 2018 from income of $14.0 million in 2017.2018. In 2018, other income (expense),expense, net was primarily due to a $13.2 million adjustment to our Rockpile CVR liability, $2.7 million loss on foreign currency related to the wind-down of the Canadian entity, offset by a $14.9 million gain on the insurance proceeds received for losses resulting from the July 1, 2018 accidental fire. In 2017, other income (expense), net was primarily due to a $7.8 million of indemnification settlements with Trican, $0.7 million from the negotiated settlement of assumed liabilities with a certain vendor from a prior acquisition and a $5.3 million mark-to-market valuation adjustment of our RockPile CVR liability.
Interest expense, net. Interest expense, net of interest income, decreased by $25.7$11.6 million, or 43%35%, to $21.9 million in 2019 from $33.5 million in 2018 from $59.2 million in 2017.2018. This change was primarily attributable to prepayment premiums of $15.8 million and write-offs of deferred financing costs of $15.3 million in 2017, in connection with the refinancing of our asset-based revolving credit facility and debt extinguishment of our 2016 Term Loan Facility and Senior Secured Notes, compared to the $7.6 million write-offs of deferred financing costs in 2018, in connection with the debt extinguishment of our 2017 Term Loan Facility.While we incurred higher interest expense on our debt facilities in 2018 compared to our debt facilities in 2017, primarily due to the higher principal balance under the 2018 Term Loan Facility, this increase was offset by lower amortization expense of our unamortized deferred financing costs.
Effective tax rate. Upon consummation of the IPO, the Company became a corporation subject to federal income taxes. Our effective tax rate on continuing operations in 20182019 was 6.71%(0.96)%, as compared to (0.53)%6.71% in 2017.2018. For 2018,2019, the effective rate is primarily made up of state taxes and a tax benefit derived from the current period operating incomeloss offset by a valuation allowance. For 2017,2018, the effective rate was primarily made up of astate taxes and tax benefitbenefits derived from the current period operating income offset by a valuation allowance. As a result of market conditions and their corresponding impact on our business outlook, we determined that a valuation allowance was appropriate as it is not more likely than not that we will utilize our net deferred tax assets. The remaining tax impact not offset by a valuation allowance is related to tax amortization onindefinite-lived assets.
Industry Drivers of 2019 Operations
Between January and April 2019, the increase in oil prices incentivized many of our indefinite-lived intangible assets.customers to significantly increase activity levels early in 2019. This resulted in E&P capital budget exhaustion and early
Net income. Net income was $59.3 millionachievement of E&P production targets, and in 2018, as comparedcombination with net loss of $36.1 millionnormal year-end seasonality, resulted in 2017. The increase from the net loss in 2017 is due to the changes in revenue and expenses discussed above.
Year Ended December 31, 2017 Compared with Year Ended December 31, 2016
|
| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(Thousands of Dollars) | | | | | | As a % of Revenue | | Variance |
Description | | 2017 | | 2016 | | 2017 | | 2016 | | $ | | % |
Completion Services | | $ | 1,527,287 |
| | $ | 410,854 |
| | 99 | % | | 98 | % | | $ | 1,116,433 |
| | 272 | % |
Other Services | | 14,794 |
| | 9,716 |
| | 1 | % | | 2 | % | | 5,078 |
| | 52 | % |
Revenue | | 1,542,081 |
| | 420,570 |
| | 100 | % | | 100 | % | | 1,121,511 |
| | 267 | % |
Completion Services | | 1,269,263 |
| | 401,891 |
| | 82 | % | | 96 | % | | 867,372 |
| | 216 | % |
Other Services | | 13,298 |
| | 14,451 |
| | 1 | % | | 3 | % | | (1,153 | ) | | (8 | %) |
Costs of services (excluding depreciation and amortization, shown separately) | | 1,282,561 |
| | 416,342 |
| | 83 | % | | 99 | % | | 866,219 |
| | 208 | % |
Completion Services | | 258,024 |
| | 8,963 |
| | 17 | % | | 2 | % | | 249,061 |
| | 2,779 | % |
Other Services | | 1,496 |
| | (4,735 | ) | | 0 | % | | (1 | %) | | 6,231 |
| | (132 | %) |
Gross profit | | 259,520 |
| | 4,228 |
| | 17 | % | | 1 | % | | 255,292 |
| | 6,038 | % |
Depreciation and amortization | | 159,280 |
| | 100,979 |
| | 10 | % | | 24 | % | | 58,301 |
| | 58 | % |
Selling, general and administrative expenses | | 93,526 |
| | 53,155 |
| | 6 | % | | 13 | % | | 40,371 |
| | 76 | % |
Gain on disposal of assets | | (2,555 | ) | | (387 | ) | | 0 | % | | 0 | % | | (2,168 | ) | | 560 | % |
Impairment | | — |
| | 185 |
| | 0 | % | | 0 | % | | (185 | ) | | (100 | %) |
Operating income (loss) | | 9,269 |
| | (149,704 | ) | | 1 | % | | (36 | %) | | 158,973 |
| | (106 | %) |
Other income, net | | 13,963 |
| | 916 |
| | 1 | % | | 0 | % | | 13,047 |
| | 1,424 | % |
Interest expense | | (59,223 | ) | | (38,299 | ) | | (4 | %) | | (9 | %) | | (20,924 | ) | | 55 | % |
Total other expenses | | (45,260 | ) | | (37,383 | ) | | (3 | %) | | (9 | %) | | (7,877 | ) | | 21 | % |
Income tax expense | | (150 | ) | | — |
| | 0 | % | | 0 | % | | (150 | ) | | — | % |
Net loss | | $ | (36,141 | ) | | $ | (187,087 | ) | | (2 | %) | | (44 | %) | | $ | 150,946 |
| | (81 | %) |
| | | | | | | | | | | | |
Revenue. Total revenue is comprised of revenue from our Completion Services and Other Services segments. Revenue in 2017 increasedsoftening demand for completions services by $1.1 billion, or 267%, to 1.5 billion from 420.6 million in 2016. This change in revenue by reportable segment is discussed below.
Completion Services: Completion Services segment revenue increased by $1.1 billion, or 272%, to $1.5 billion in 2017 from $410.9 million in 2016. This change was primarily attributable to a 105% growth in our average number of deployed fleets, as a result of increased utilization of our combined asset base following our acquisition of RockPile and our acquisition of the majority of the U.S. assets and assumptions of certain liabilities of the Acquired Trican Operations, as well as increased stage count and efficiency from both our existing and newly-deployed recommissioned fleets. In addition, annualized revenue per deployed fleet increased 81%.
Other Services: Other Services segment revenue increased by $5.1 million, or 52%, to 14.8 million in 2017 from 9.7 million in 2016. This change in revenue was primarily attributable to the acquisition of Other Services divisions from RockPile. Revenue in 2017 was earned in our cementing and workover divisions and revenue in 2016 was earned in our cementing and coiled tubing divisions. We idled our coiled tubing division in December 2016 and divested of our coiled tubing assets during the fourth quarter of 2017. We divested2019. In addition, lackluster oil and gas prices in 2019 resulted in the E&P budgeting process to be more muted, causing many E&P companies to delay activity start-up into early 2020. Furthermore, the current market oversupply of fracturing equipment created a competitive pricing environment at year-end 2019 during E&P budgeting season, which resulted in pricing pressure in order win new work or extend existing dedicated agreements that were up for renewal. With that said, most of our workovercustomers see value in a long-term partnership with us, and as a result, traded some price concessions by us for extended terms or additional work scope.
We are committed to continuing to manage our business in line with demand for our services and make adjustments as necessary to effectively respond to changes in market conditions, customer activity levels, pricing for our services and equipment, and utilization of our deployed equipment and personnel. Our response to the industry's persistent uncertainty is to maintain sufficient liquidity, preserve our conservative capital structure and closely monitor our discretionary spending. We take a measured approach to asset deployment, balancing our view of current and expected customer activity levels with a focus on generating positive returns for our shareholders. Our priorities remain to drive revenue by maximizing deployed equipment utilization, to improve margins through cost controls, to protect and grow our market share by focusing on the quality, safety and efficiency of our service execution, and to ensure that we are strategically positioned to capitalize on constructive market dynamics.
Looking Ahead to 2020
We face many challenges and risks in the industry in which we operate. Although many factors contributing to these risks are beyond our ability to control, we continuously monitor these risks and have taken steps to mitigate them to the extent practicable. In addition, while we believe that we are well positioned to capitalize on available growth opportunities, we may not be able to achieve our business objectives and, consequently, our results of operations may be adversely affected. Please read the factors described in the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in Part I, Item 1A of this Annual Report for additional information about the known material risks that we face.
Fiscal 2020 Objectives
With recent commodity price volatility, we intend to closely monitor the market and will adjust our approach as the situation develops. At this time, in 2020, our principal business objective continues to be growing our business and safely providing best-in-class services in all of our operating segments, while delivering shareholder value and maintaining a disciplined capital deployment strategy. We expect to achieve our objective through:
partnering and growing with well-capitalized customers under dedicated agreements who focus their efforts on safety, high-efficiency completions, continuous improvement and innovation;
allocating our assets during the thirdto maximize utilization and fourth quartersreturns, including diversification of 2017.geographies and commodities;
maximizing profitability of fully-utilized fleets through leading-edge pricing and efficiencies;
investing in technology to further drive efficiencies, enable differentiation of service offerings, and reduce our overall cost structure;
leveraging our flexible and scalable logistics infrastructure to provide assurance of supply at lowest landed cost;
leveraging our platform to identify, retain and promote talent to sustain growth and support operational and commercial excellence; maintaining agreements with our existing strategic suppliers and identify and develop relationships with additional strategic suppliers to ensure continuity of supply and optimize efficiency;
Costmaintaining our conservative and flexible capital position, supporting continued growth and maintenance of services. Cost of servicesactive equipment;
gaining scale, enhancing our service offering, and capturing targeted cost synergies from the C&J Merger; and
returning capital to shareholders in 2017 increased by $866.2 million, or 208%, to $1.3 billion from $416.3 million in 2016. This change was driven by several factors including (i) higher activity in thea disciplined fashion.
Completion Services
In our Completion Services segment, (as discussed above under Revenue), (ii) price inflationour strategy remains focused on deploying our market-ready fracturing fleets and bundling more of our wireline and pumpdown units with our deployed fracturing fleets and on a stand-alone basis. We are focused on increasing our dedicated fracturing fleet count with efficient customers that allow us to achieve high equipment utilization, which should result in improved financial performance. Additionally, we are focused on bundling more of our wireline and pumpdown units with our fracturing fleets to increase operational efficiencies and profitability. With that said, current market conditions remain challenging, and our primary focus remains to lower our overall cost structure by aligning with efficient, dedicated customers with deep inventories of work and proven track records of efficient operations, many of which we have created long-term relationships with over the past several years.
Well Construction and Intervention Services
In our Well Construction and Intervention Services segment, our strategy remains focused on deploying our market-ready cementing equipment and two newbuild coiled tubing units that we will take delivery of in the first quarter of 2020. In our cementing business, even though market conditions remain challenged due to customers releasing drilling rigs and declining E&P capital spending in 2020, we remain focused on providing high-quality, timely service and deploying more of our stacked units with efficient customers with deep inventories of work in our key inputcore operating basins. We will stay focused on controlling costs, including labor, sand and sand trucking, (iii) increased maintenance costs associatedimproving market share with increased service intensity stemming from larger sand volumes and well configurations, such as zipper designs, (iv) an increaseefficient customer base that plan to maintain stable drilling rig counts in fleets working twenty-four hour operations and (v) rapid deployment and commissioning of our idle fleets.2020. In 2017, we incurred $12.4 million of fleet commissioning costs, $1.7 million of acquisition and integration costs associated with the acquisition of RockPile and $1.3 million for bonuses paid out to key operational employees in connection with our IPO. In 2016, we had management adjustments of $13.9 million primarily related to acquisition and integration costs associated with the acquisition of the Acquired Trican Operations and $10.0 million primarily related to commissioning of our idle fleets. Cost of services as a percentage of total revenue in 2017 was 83%, which represented a decrease of 16% from 99% in 2016. Excluding the above-mentioned management adjustments, total cost of services was $1.3 billion and $392.4 million in 2017 and 2016 or 82% and 93% of revenue, respectively, a decrease as a percentage of revenue of 11%.
Cost of services, as a percentage of total revenue is presented below:
|
| | | | | | | | | |
| | Year Ended December 31, |
Description | | 2017 | | 2016 | | % Change |
Segment cost of services as a percentage of segment revenue: | | | | | | |
Completion Services | | 83 | % | | 98 | % | | (15 | )% |
Other Services | | 90 | % | | 149 | % | | (59 | )% |
Total cost of services as a percentage of total revenue | | 83 | % | | 99 | % | | (16 | )% |
| | | | | | |
The change in cost of services by reportable segment is further discussed below.
Completion Services: Completion Services segment cost of services increased by $867.4 million, or 216%, to $1.3 billion in 2017 from $401.9 million in 2016. As a percentage of segment revenue, total cost of services was 83% and 98%, in 2017 and 2016, respectively, a decrease as a percentage of revenue of 15%. This change in cost of services was driven by (i) higher activity (as discussed above under Revenue), (ii) price inflation in our key input costs, including sand and trucking, (iii) increased maintenance costs associated with increased service intensity and higher-pressure jobs and (iv) rapid deployment and commissioning of our idle fleets. In 2017, we incurred $11.6 million of fleet commissioning costs, $1.7 million of acquisition and integration costs associated with the acquisition of RockPile and $1.3 million for bonuses paid out to key operational employees in connection with our IPO. In 2016, we had management adjustments of $13.5 million primarily related to acquisition and integration costs associated with the acquisition of the Acquired Trican Operations and $9.3 million primarily related to commissioning of our idle fleets. Excluding the above-mentioned management adjustments, Completion Services segment cost of services were $1.2 billion and $379.1 million in 2017 and 2016, or 82% and 92% of segment revenue, respectively, a decrease as a percentage of revenue of 10%.
Other Services: Other Services segment cost of services decreased by $1.2 million, or 8%, to $13.3 million in 2017 from $14.5 million in 2016. This change in cost of services was primarily attributable to the idling of our cementing and coiled tubing divisions in April 2016 and December 2016, respectively, partially offset by the acquisition of Other Services divisions from RockPile. In 2017, we incurred management adjustments of $0.8 million of commissioning costs related to ramping our idle cementing assets in response to increased customer demand and $0.05 million of acquisition and integration costs associated with the acquisition of RockPile. In 2016, we incurred management adjustments of $0.7 million in commissioning costs and $0.4 million in acquisition and integration costs associated with the Acquired Trican Operations. Excluding the above-mentioned management adjustments, Other Services segment cost of services was $12.4 million and $13.4 million in 2017 and 2016, or 84% and 138% of segment revenue, respectively, a decrease as a percentage of revenue of 54%.
Depreciation and amortization. Depreciation and amortization expense increased by $58.3 million, or 58%, to $159.3 million in 2017 from $101.0 million in 2016. This change was primarily attributable to depreciation of additional equipment purchased in 2017 to recondition existing fleets and the acquisition of the RockPile assets.
Selling, general and administrative expense. Selling, general and administrative (“SG&A”) expense, which represents costs associated with managing and supporting our operations, increased by $40.4 million, or 76%, to $93.5 million in 2017 from $53.2 million in 2016. This change in SG&A was primarily related to non-cash amortization expense of equity awards issued under our Equity and Incentive Award Plan in 2017 and transactions driving overall company growth associated with the acquisition of RockPile. SG&A as a percentage of total revenue was 6% in 2017 compared with 13% in 2016. Total management adjustments were $34.5 million in 2017, driven by $10.7 million of transaction costs primarily incurred for the acquisition of RockPile, $10.6 million of non-cash compensation expense for the restricted stock units and stock options awarded to certain of our employees in connection with our IPO, $5.8 million of organizational restructuring costs and bonuses to key personnel in connection with our IPO, together with transaction costs related to our secondary offering in 2018, $7.2 million primarily related to litigation contingencies and $0.2 million related to commissioning costs. Management adjustments in 2016 were $26.9 million, primarily driven by $23.2 million of transaction costs and lease exit costs related to the integration of the Acquired Trican Operations, $2.0 million in non-cash compensation expense of our unit-based awards and $1.7 million in IPO-readiness costs. Excluding these management adjustments, SG&A expense was $59.0 million and $26.3 million in 2017 and 2016, respectively, which represents an increase of 124%.
Gain on disposal of assets. Gain on disposal of assets in 2017 increased by $2.2 million, or 560%, to a gain of $2.6 million in 2017 from a gain of $0.4 million in 2016. This change was primarily attributable to the sale of our coiled tubing business, we are focused on deploying two newbuild, large-diameter units into our core operating basins and ancillary coiled tubing equipment,increasing market share with large, efficient customers with deep inventories of completion-oriented work that will keep our air compressornew units and idle property in Woodward, Oklahoma and Searcy, Arkansas.highly utilized.
Other income (expense), net. Other income (expense), net, in 2017 increased by $13.0 million, or 1,424%, to incomeWell Support Services
We divested our Well Support Services segment on March 9, 2020, for total consideration of $14.0 million in 2017 from income of $0.9 million in 2016. This change is primarily due to $7.8 million of gain on indemnification settlements with Trican, $0.7 million due to the negotiated settlement of assumed liabilities with a certain vendor from a prior acquisition and a $5.3 million mark-to-market valuation adjustment of our RockPile CVR liability.
Interest expense, net. Interest expense, net of interest income, increased by $20.9 million, or 55%, to $59.2 million in 2017 from $38.3 million in 2016. This change was primarily attributable to prepayment premiums of $15.8 million and write-offs of deferred financing costs of $15.3 million, incurred in connection with the refinancing of our asset-based revolving credit facility and debt extinguishment of our 2016 Term Loan Facility and Senior Secured Notes. This increase was offset by lower interest expense under our 2017 Term Loan Facility, which replaced our 2016 Term Loan Facility and Senior Secured Notes that bore higher interest rates.
Effective tax rate. Upon consummation of the IPO, the Company became a corporation subject to federal
income taxes. Our effective tax rate on continuing operations in 2017 was (0.53)%. The effective rate is primarily
made up of a tax benefit derived from the current period operating income offset by a valuation allowance. As a
result of market conditions and their corresponding impact on our business outlook, we determined that a valuation
allowance was appropriate as it is not more likely than not that we will utilize our net deferred tax assets. The
remaining tax impact not offset by a valuation allowance is related to tax amortization on our indefinite-lived intangible assets.
Net loss. Net loss was $36.1 million in 2017, as compared with net loss of $187.1 million in 2016. This decrease in net loss from 2016 is due to the changes in revenue and expenses discussed above.
ENVIRONMENTAL MATTERS
We are subject to numerous environmental, legal and regulatory requirements related to our operations worldwide. For information related to environmental matters, see Note (18) (Commitments and Contingencies) of Part II, “Item 8. Financial Statements and Supplementary Data.”$93.7 million.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity represents a company’s ability to adjust its future cash flows to meet needs and opportunities, both expected and unexpected.
As of December 31, 2018, we had $80.2 million of cash and $351.2 million of total debt, compared to $96.1 million of cash and $282.9 million of total debt as of December 31, 2017. In 2018, 2017 and 2016, we had capital expenditures of $291.5 million, $189.6 million and $23.5 million, respectively, exclusive of the cash payment attributable to the asset acquisition from RSI on July 24, 2018 of $35.0 million, the acquisition of RockPile on July 3, 2017 of $116.6 million and the acquisition of the Acquired Trican Operations on March 16, 2016 of $203.9 million. |
| | | | | | | | |
| | (Thousands of Dollars) |
| | Year Ended December 31, |
| | 2019 | | 2018 |
Cash | | $ | 255,015 |
| | $ | 80,206 |
|
Debt, net of deferred financing costs and debt discount | | $ | 337,623 |
| | $ | 340,730 |
|
| | | | (Thousands of Dollars) | | (Thousands of Dollars) |
| | Year Ended December 31, | | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2019 | | 2018 | | 2017 |
Net cash provided by (used) in operating activities | | $ | 350,311 |
| | $ | 79,691 |
| | $ | (54,054 | ) | |
Net cash provided by operating activities | | | $ | 305,463 |
| | $ | 350,311 |
| | $ | 79,691 |
|
Net cash used in investing activities | | $ | (297,506 | ) | | $ | (250,776 | ) | | $ | (227,161 | ) | | $ | (114,100 | ) | | $ | (297,506 | ) | | $ | (250,776 | ) |
Net cash provided by (used in) financing activities | | $ | (68,554 | ) | | $ | 218,122 |
| | $ | 276,633 |
| | $ | (16,746 | ) | | $ | (68,554 | ) | | $ | 218,122 |
|
| | | | | | | | | | | | |
Financing activities: Cash used to repay our debt facilities, including capital leases but excluding interest, in 2017 was $310.8 million. We used a portion of our IPO proceeds and the proceeds of the 2017 Term Loan Facility to repay our 2016 Term Loan Facility and Senior Secured Notes.
In the normal course of business, we enter into various contractual obligations that impact or could impact our liquidity. The table below contains our known contractual commitments as of December 31, 2018.2019.