We file or furnish annual, quarterly and current reports, proxy statements and other documents with the SEC under the Exchange Act. The SEC also maintains an internet website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers, including us, that file electronically with the SEC.
We also make available free of charge through our website, www.libertyfrac.com, electronic copies of certain documents that we file with the SEC, including our Annual Reportsannual reports on Form 10-K, Quarterly Reportsquarterly reports on Form 10-Q, Current Reportscurrent reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Item 1A. Risk Factors
Described below are certain risks that we believe apply to our business and the industry in which we operate. You should carefully consider each of the following risk factorsrisks described below in conjunction with other information including the financial statements and related notes provided in this Annual Report 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, results of operations, cash flows, liquidity or access to sources of financing, and consequently, the market value of our Class A Common Stock. 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. The risks described below are those that we have identified as material and is not an exhaustive list of all the risks we face. There may be other risks that we haveand uncertainties not identifiedcurrently known to us or that we have deemedcurrently deem to be immaterial.immaterial which may also materially and adversely affect our business operations in the future. Please refer to the explanation of the qualifications and limitation on forward-looking statements set forth on page ii hereof.
Risks Related to Our Businessthe COVID-19 Pandemic
The COVID-19 pandemic significantly reduced demand for our services, and had, and may in the future have, a material adverse effect on our operations, business and financial results.
We face risks related to public health crises, including the ongoing COVID-19 pandemic. Many of the COVID-19 precautions taken by governments and businesses, including travel bans, prohibitions on group events and gatherings, shutdowns of certain businesses, curfews and shelter-in-place orders that were enacted in 2020 have been lifted or reduced. However, during 2020 these actions resulted in a significant and swift reduction in international and U.S. economic activity. The collapse in the demand for oil during 2020 caused by this unprecedented global health and economic crisis, coupled with an oil oversupply, had a material adverse impact on the demand for our services and on our financial condition, results of operations and cash flows. Additionally, the COVID-19 pandemic could worsen despite the increased availability of vaccines in certain jurisdictions, including as a result of the emergence of more infectious strains of the virus, vaccine hesitancy or increased business and social activities, which may cause governmental authorities to reconsider restrictions on business and social activities.
We are closely monitoring the continuing effects of the pandemic on our customers, operations, and employees. During 2021, oil demand and the demand for our services recovered from the lows experienced during the onset of the pandemic. The extent to which our operating and financial results will be affected by COVID-19 in the future will depend on various factors and consequences, such as the ultimate duration and scope of the pandemic, any additional actions by businesses and governments in response to the pandemic, and the speed and effectiveness of responses to combat the virus. COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, could also aggravate the other risk factors that we identify herein. COVID-19 may also materially adversely affect our operating and financial results in a manner that is not currently known to us or that we do not currently consider presenting significant risks to us.
We cannot predict the ultimate duration or scope of the COVID-19 pandemic. Accordingly, if the pandemic worsens or if actions taken by governments and businesses in response to the pandemic in 2020 are re-enacted, the demand for our services may fall again, which would have a material adverse impact on our financial condition, results of operations and cash flows.
Potential future vaccine mandates for employers could have a material adverse impact on our business and results of operations.
On September 9, 2021, President Biden announced plans for the federal Occupational Safety and Health Administration (“OSHA”) to issue an Emergency Temporary Standard (“ETS”) mandating that all employers with more than 100 employees ensure their workers are either fully vaccinated against COVID-19 or produce, on a weekly basis, a negative COVID-19 test (the “Vaccine Mandate”). OSHA issued the ETS on November 4, 2021, requiring covered employers to comply with the Vaccine Mandate beginning with January 4, 2022 or face substantial penalties for non-compliance. The U.S. Supreme Court issued a stay on the Vaccine Mandate on January 13, 2022, and OSHA thereafter withdrew the ETS. It is possible that future vaccine mandates may be announced by the federal, state or local jurisdictions in which we operate. Although it is not possible to predict with certainty the impact of these measures on our business and workforce, these requirements may result in attrition, including attrition of skilled labor, and difficulty securing future labor needs, which could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to the OneStim Acquisition
The Company's results may suffer if it does not effectively manage its expanded operations following the OneStim Acquisition.
Since the OneStim Acquisition, the size of the Company’s business has increased significantly. In addition, we now own and operate two sand mines. While we have retained qualified personnel to operate the mines, we have not undertaken mining operations in the past. The Company’s future success will depend, in part, on the Company’s ability to manage this expanded business, which poses numerous risks and uncertainties.
The Schlumberger Parties have significant influence over us.
As of February 18, 2022, Schlumberger owned approximately 30.5% of the outstanding shares of Common Stock. As long as Schlumberger owns or controls a significant percentage of the Company’s outstanding voting power, they will have the ability to significantly influence corporate actions requiring stockholder approval, including the election and removal of directors, any amendment to the Company’s certificate of incorporation or bylaws, or the approval of any merger or other significant corporate transaction, including a sale of substantially all of the Company’s assets. Schlumberger’s influence over our management could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which could cause the market price of the shares of Class A Common Stock to decline or prevent stockholders from realizing a premium over the market price for the shares of Class A Common Stock.
Pursuant to the Amended and Restated Stockholders Agreement, dated as of December 13, 2020, Schlumberger has designated two directors to the Company’s board of directors. Schlumberger’s right to designate directors to our Board is subject to the Schlumberger’s ownership percentage of the total outstanding shares of Common Stock. If Schlumberger and its affiliates collectively beneficially own: (a) 20% or greater of the outstanding shares of Common Stock, they will have the right to appoint two directors or (b) at least 10% but less than 20% of the outstanding shares of Common Stock, they will have the right to appoint one director.
Schlumberger’s interests may not align with the Company’s interests or the interests of the Company’s other stockholders.
Following the OneStim Acquisition, we expanded our operations to Canada and may be subject to increased business and economic risks.
The Company has historically owned and operated its assets exclusively within the United States. In connection with the OneStim Acquisition, we acquired certain Canadian assets and liabilities, which marked our entry into a new geographical territory where we had limited experience in owning and operating assets and providing our services. As a result, we are subject to a variety of risks inherent in doing business internationally, including: risks related to the legal and regulatory environment in foreign jurisdictions; fluctuations in currency exchange rates; complying with multiple tax jurisdictions; difficulties in staffing and managing international operations and the increased travel, infrastructure and compliance costs associated with international locations and employees; regulations that might add difficulties in repatriating cash earned outside the United States and otherwise preventing us from freely moving cash; complying with statutory equity requirements; and complying with the U.S. Foreign Corrupt Practices Act and the Corruption of Foreign Public Officials Act (Canada) and other similar laws in Canada. If we fail to manage our operations in Canada successfully, our business may suffer.
Risks Related to the Oil and Natural Gas Industry
Federal, state, local and other applicable legislative and regulatory initiatives relating to hydraulic fracturing may serve to limit future oil and natural gas E&P activities and could have a material adverse effect on our results of operations and business.
Various federal, state, local and other applicable legislative and regulatory initiatives have been, or could be undertaken which could result in additional requirements or restrictions being imposed on hydraulic fracturing operations. Currently, hydraulic fracturing is generally exempt from federal regulation under the Safe Drinking Water Act Underground Injection Control (the “SDWA UIC”) program and is typically regulated by state oil and gas commissions or similar agencies but increased scrutiny and regulation, by federal agencies does occur. For example, in late 2016, the EPA released a final report on the potential impacts of hydraulic fracturing on drinking water resources, concluding that “water cycle” activities associated with hydraulic fracturing may impact drinking water resources. Additionally, the EPA has asserted regulatory authority pursuant to the SDWA UIC program over hydraulic fracturing activities involving the use of diesel fuel in the fracturing fluid and issued guidance regarding the permitting of such activities. Furthermore, the U.S. Bureau of Land Management has previously published rules that established stringent standards relating to hydraulic fracturing on federal and Native American lands. Similarly, the EPA has adopted rules on the capture of methane and other emissions released during hydraulic fracturing. These rules have been the subject of ongoing legal challenges. In January 2021, President Biden issued an executive order that called for issuance of proposed rules by no later than September 2021 that would restore rules for methane standards applicable to new, modified, and reconstructed sources and establish new methane and volatile organic compound standards applicable to existing oil and gas operations, including the production, transmission, processing and storage segments. On November 2021, the EPA proposed such a rule. Such a rule could make it significantly more difficult and/or costly to drill and operate oil and gas wells. As a result, such rule, if adopted, could result in a decline in the completion of new oil and gas wells or the recompletion of existing wells, which could negatively impact the drilling programs of our customers and, consequently, delay, limit or reduce the demand for our services. In addition to federal regulatory actions, legislation has been introduced, but not enacted, in Congress to provide for further federal regulation of hydraulic fracturing and to require disclosure of the chemicals used in the hydraulic fracturing process.
Moreover, many states and local governments have adopted regulations that impose more stringent permitting, disclosure, disposal and well-construction requirements on hydraulic fracturing operations, including states where we or our customers operate, such as Texas, Colorado and North Dakota. States could also elect to place prohibitions on hydraulic fracturing, as several states have already done. In addition, some states have adopted broader sets of requirements related to oil and gas development more generally that could impact hydraulic fracturing activities. For example, in 2019 the Colorado legislature adopted SB 19-181, which gave greater regulatory authority to local jurisdictions and reoriented the mandate of the Colorado Oil and Gas Conservation Commission to place more emphasis on the protection of human health and the environment. In response, a reconstituted Colorado Oil and Gas Conservation Commission modified its rules to address the requirements of the legislation, adopting increased setback requirements, provisions for assessing alternative sites for well pads to minimize environmental impacts, and consideration to cumulative impacts, among other provisions. Environmental groups, local citizens groups and others continue to seek to use a variety of means to force action on additional restrictions on hydraulic fracturing and oil and gas development generally.
Additionally, in July 2021, a non-governmental organization issued a report that raised concerns that chemicals used in hydraulic fracturing could be within the class of chemicals known as per- and polyfluoroalkylated substances (“PFAS”) or precursors to such substances. PFAS is the subject of intense federal and state regulatory scrutiny. Should PFAS be in hydraulic fracturing chemicals, this could open up a new front for the regulation of hydraulic fracturing.
Some 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 the chemicals 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.
In recent years, there have been allegations that hydraulic fracturing may result in seismic activities. Although the extent of any correlation between hydraulic fracturing and seismic activity has been and remains the subject of studies and debate, some parties believe that there is a causal relationship. As a result, federal and state legislatures and agencies may seek to further regulate, restrict or prohibit hydraulic fracturing. Such actions could result in a decline in the completion of new oil and gas wells, which could negatively impact the drilling programs of our customers and, consequently, delay, limit or reduce the demand for our services.
Increased regulation and attention given to the hydraulic fracturing process could lead to greater opposition to, and litigation concerning, oil and natural gas production activities using hydraulic fracturing techniques. Additional legislation or regulation could also lead to operational delays for our customers or increased operating costs in the production of oil and natural gas, including from the developing shale plays, or could make it more difficult for (or could result in a prohibition for) us and our customers to perform hydraulic fracturing. The adoption of any additional laws or regulations regarding hydraulic fracturing or limitation in hydraulic fracturing could potentially cause a decrease in the completion of new oil and natural gas wells and an associated decrease in demand for our services and increased compliance costs and time. Such events could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.
Additionally, in January 2021, the U.S. Department of the Interior issued an order that effectively suspends new oil and gas leases and drilling permits on non-Indian federal lands and waters for a period of 60 days, but the suspension does not limit existing operations under valid leases. President Biden followed with an executive order that ordered the Secretary of the Interior to pause the issuance of new oil and gas leases on federal public lands and offshore waters pending completion of a comprehensive review of federal oil and gas permitting and leasing practices that take into consideration potential climate and other impacts associated with oil and gas activities. This order further directs agencies to identify fossil fuel subsidies provided by such agencies and take measures to ensure that federal funding is not directly subsidizing fossil fuels, with an objective of eliminating fossil fuel subsidies from federal budget requests beginning in 2022. This order is currently being challenged in court by industry groups.
Additional legislation, executive actions, regulations or other regulatory initiatives to limit, delay or prohibit hydraulic fracturing or other aspects of oil and gas development may be pursued. In the event that these or other new federal restrictions, delays or prohibitions relating to the hydraulic fracturing process are adopted in areas where we or our customers conduct business, we or our customers may incur additional costs or permitting requirements to comply with such federal requirements that may be significant and, in the case of our customers, also could result in added restrictions or delays in the pursuit of exploration, development, or production activities, which would in turn reduce the demand for our services and have a material adverse effect on our results of operations.
Our business depends on domestic capital spending by the oil and natural gas industry, and reductions in capital spending could have a material adverse effect on our liquidity, results of operations and financial condition.
Our business is directly affected by our customers’ capital spending to explore for, develop and produce oil and natural gas in the United States. The significant decline in oilStates and natural gas prices that began in late 2014 caused a reduction in the exploration, development and production activities of most of our customers and their spending on our services. These cuts in spending curtailed drilling programs, which resulted in a reduction in the demand for our services, as well as the prices we can charge. These reductions negatively affected our revenue per average active fleet in 2015 and 2016. While industry conditions improved and activity levels increased during 2017 and part of 2018, there can be no assurance that these increased levels will be sustained.Canada. In addition, certain of our customers could become unable to pay their vendors and service providers, including us, as a result of a decline in commodity prices. Reduced discovery rates of new oil and natural gas reserves in our areas of operation as a result of decreased capital spending may also have a negative long-term impact on our business, even in an environment of stronger oil and natural gas prices. Any of these conditions or events could adversely affect our operating results. If the recent recovery and increasedcurrent activity levels do not continuedecrease or our customers fail to further increasereduce their capital spending, it could have a material adverse effect on our liquidity, results of operations and financial condition.
Industry conditions are influenced by numerous factors over which we have no control, including:
•expected economic returns to E&P companies of new well completions;
•domestic and foreign economic conditions and supply of and demand for oil and natural gas;
•the level of prices, and expectations about future prices, of oil and natural gas;
•the level of global oil and natural gas exploration and production;
•the level of domestic and global oil and natural gas inventories;
•the supply of and demand for hydraulic fracturing services and equipment in the United States;States and Canada;
•federal, tribal, state and local laws, regulations and taxes, including the policies of governments regarding hydraulic fracturing, and oil and natural gas exploration, development and production activities and the transportation of oil and gas by pipeline, as well as non-U.S. governmental regulations and taxes;
•governmental regulations, including the policies of governments regarding the exploration for and production and development of their oil and natural gas reserves;
•political and economic conditions in oil and natural gas producing countries;
•actions by the members of the Organization of Petroleum Exporting Countries and other oil exporting nations with respect to oil production levels and potential changes in such levels, including the failure of such countries to comply with production cuts announced in December 2018, to take effect at the beginning of 2019 and to last for six months;levels;
•global weather conditions and natural disasters;
•worldwide political, military and economic conditions;
•the cost of producing and delivering oil and natural gas;
•lead times associated with acquiring equipment and products and availability of qualified personnel;
•the discovery rates of new oil and natural gas reserves;
•the production decline rate of existing oil and gas wells;
•stockholder activism or activities by non-governmental organizations to limit certain sources of funding for the energy sector or to restrict the exploration, development, production and productiontransportation of oil and natural gas;
•the availability of water resources, suitable proppant and chemical additives in sufficient quantities for use in hydraulic fracturing fluids;
•advances in exploration, development and production technologies or in technologies affecting energy consumption;
•the potential accelerationavailability, proximity and capacity of developmentoil and natural gas pipelines and other transportation facilities;
•merger and divestiture activity among oil and natural gas producers;
•the price and availability of alternative fuels;fuels and energy sources; and
•uncertainty in capital and commodities markets and the ability of oil and natural gas companies to raise equity capital and debt financing.
The volatility of oil and natural gas prices may adversely affect the demand for our hydraulic fracturing services and negatively impact our results of operations.
The demand for our hydraulic fracturing services is primarily determined by current and anticipated oil and natural gas prices and the related levels of capital spending and drilling activity in the areas in which we have operations. Volatility or weakness in oil prices or natural gas prices (or the perception that oil prices or natural gas prices will decrease) affects the spending patterns of our customers and may result in the drilling of fewer new wells. This, in turn, could lead to lower demand for our services and may cause lower utilization of our assets. We have experienced, and may in the future experience significant fluctuations in operating results as a result of the reactions of our customers to changes in oil and natural gas prices. For example, prolonged low commodity prices experienced by the oil and natural gas industry beginning in late 2014 and uncertainty about future prices even when prices increased, combined with adverse changes in the capital and credit markets, caused many E&P companies to significantly reduce their capital budgets and drilling activity. This resulted in a significant decline in demand for oilfield services and adversely impacted the prices oilfield services companies could charge for their services.
Prices for oil and natural gas historically have been extremely volatile and are expected to continue to be volatile. During the past four years,year 2021, the posted West Texas Intermediate (“WTI”)WTI price for oil has ranged from a lowtraded at an average of $26.19$68.13 per barrel (“Bbl”) in February 2016, as compared to a highthe 2020 average of $77.41$39.16 per Bbl in June 2018. During 2018, WTI prices ranged from $44.48 to $77.41and the 2019 average of $56.99 per Bbl. The combined impact of the COVID-19 pandemic and the breakdown of OPEC+ production cut negotiations in Spring 2020 caused oil prices to drop to historical lows in April 2020. During the fourth quarter of 2021, WTI oil prices averaged $77.33 compared to $70.58 in the third quarter of 2021 and $42.52 in the fourth quarter of 2020. If the prices of oil and natural gas continue to beremain or become more volatile, our operations, financial condition, cash flows and level of expenditures may be materially and adversely affected.
We may be adversely affected by uncertainty in the global financial markets and the deterioration of the financial condition of our customers.
Our future results may be impacted by the uncertainty caused by an economic downturn, volatility or deterioration in the debt and equity capital markets, inflation, deflation or other adverse economic conditions that may negatively affect us or parties with whom we do business resulting in a reduction in our customers’ spending and their non-payment or inability to perform obligations owed to us, such as the failure of customers to honor their commitments or the failure of major suppliers to complete orders. Additionally, during times when the crude oil or natural gas markets weaken, our customers are more likely to experience financial difficulties, including being unable to access debt or equity financing, which could result in a reduction in our customers’ spending for our services. In addition, in the course of our business we hold accounts receivable from our customers. In the event of the financial distress or bankruptcy of a customer, we could lose all or a portion of such outstanding accounts receivable associated with that customer. Further, if a customer was to enter into bankruptcy, it could also result in the cancellation of all or a portion of our service contracts with such customer at significant expense or loss of expected revenues to us.
Our operations are subject to significant risks, some of which are beyond our control. These risks may be self-insured, or may not be fully covered under our insurance policies.
Our operations are subject to significant hazards often found in the oil and natural gas industry, such as, but not limited to, accidents, blowouts, explosions, craterings, fires, natural gas leaks, oil and produced water spills and releases of hydraulic fracturing fluids or other well fluids into the environment. These conditions can cause:
disruption in operations;
substantial repair or remediation costs;
personal injury or loss of human life;
significant damage to or destruction of property, and equipment;
environmental pollution, including groundwater contamination;
unusual or unexpected geological formations or pressures and industrial accidents;
impairment or suspension of operations; and
substantial revenue loss.
In addition, 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.
The occurrence of a significant event or adverse claim in excess of the insurance coverage that we maintain or that is not covered by insurance could have a material adverse effect on our liquidity, combined results of operations and combined financial condition. Claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. Litigation arising from a catastrophic occurrence at a location where our equipment and services are being used may result in our being named as a defendant in lawsuits asserting large claims.
We do not have insurance against all foreseeable risks, either because insurance is not available or because of the high premium costs. The occurrence of an event not fully insured against or the failure of an insurer to meet its insurance obligations could result in substantial losses. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable. Insurance may not be available to cover any or all of the risks to which we are subject, or, even if available, it may be inadequate, or insurance premiums or other costs could rise significantly in the future so as to make such insurance prohibitively expensive.
Reliance upon a few large customers may adversely affect our revenue and operating results.
Our top five customers represented approximately 42%, 53%, and 59% of our consolidated and combined revenue for the years ended December 31, 2018, 2017 and 2016, respectively. It is likely that we will continue to derive a significant portion of our revenue from a relatively small number of customers in the future. If a major customer fails to pay us, revenue would be impacted and our operating results and financial condition could be materially harmed. Additionally, if we were to lose any material customer, we may not be able to redeploy our equipment at similar utilization or pricing levels or within a short period of time and such loss could have a material adverse effect on our business until the equipment is redeployed at similar utilization or pricing levels.
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 or results of operations.
We face intense competition that may cause us to lose market share and could negatively affect our ability to market our services and expand our operations.
The oilfield services business is highly competitive. Some of our competitors have a broader geographic scope, greater financial and other resources, or other cost efficiencies. Additionally, there may 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 customers may develop their own hydraulic fracturing business, or direct source proppant, negatively affecting our revenue and potentially resulting in shortfall obligations under some of our supply agreements. Our ability to maintain current revenue and cash flows, and our ability to market our services and expand our operations, could be adversely affected by the activities of our competitors and our customers. If our competitors substantially increase the resources they devote to the development and marketing of competitive services or substantially decrease the prices at which they offer their services, we may be unable to effectively compete. All of these competitive pressures could have a material adverse effect on our business, results of operations and financial condition. Some of our larger competitors provide a broader range of services on a regional, national or worldwide basis. These companies may have a greater ability to continue oilfield service activities during periods of low commodity prices and to absorb the burden of present and future federal, tribal, state, local and other laws and regulations.
Any inability to compete effectively with larger companies could have a material adverse impact on our financial condition and results of operations.
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. For example, since January 1, 2011, we have deployed 22 hydraulic fracturing fleets to service customers at a total cost to deploy of approximately $838.1 million. The costs of components and labor have increased in the past and may increase in the future with increases in demand, which will require us to incur additional costs to upgrade any fleets we may acquire in the future. Our fleets and other equipment typically do not generate revenue while they are undergoing maintenance, upgrades or refurbishment. 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, competition or advances in technology within our industry may require us to update or replace existing fleets or build or acquire new fleets. Such demands on our capital or reductions in demand for our hydraulic fracturing fleets and the increase in cost of 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 and may increase our costs.
We rely on a limited number of third parties for proppant and chemical additives, and delays in deliveries of such materials, increases in the cost of such materials or our contractual obligations to pay for materials that we ultimately do not require 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 and chemical additives). Should any of our current suppliers be unable to provide the necessary materials or otherwise fail to deliver the materials 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, results of operations and financial condition. Additionally, increasing costs of such materials may negatively impact demand for our services or the profitability of our business operations. In the past, our industry faced sporadic proppant shortages associated with hydraulic fracturing operations requiring work stoppages, which are believed to have adversely impacted the operating results of several competitors. We may not be able to mitigate any future shortages of materials, including proppant. Furthermore, to the extent our contracts require us to purchase more materials, including proppant, than we ultimately require, we may be forced to pay for the excess amount under “take or pay” contract provisions.
We currently rely on one assembler and a limited number of suppliers for major equipment to both build new fleets and upgrade any fleets we acquire to our custom design, and our reliance on these vendors exposes us to risks including price and timing of delivery.
We currently rely on one assembler and a limited number of suppliers for major equipment to both build our new fleets and upgrade any fleets we may acquire to our custom design. If demand for hydraulic fracturing fleets or the components necessary to build such fleets increases or these vendors face financial distress or bankruptcy, these vendors may not be able to provide the new or upgraded fleets on schedule or at the current price. If this were to occur, we could be required to seek another assembler or other suppliers for major equipment to build or upgrade our fleets, which may adversely affect our revenues or increase our costs.
Interruptions of service on the rail lines by which we receive proppant could adversely affect our results of operations.
We receive a significant portion of the proppant used in our hydraulic fracturing services by rail. Rail operations are subject to various risks that may result in a delay or lack of service, including lack of available capacity, mechanical problems, extreme weather conditions, work stoppages, labor strikes, terrorist attacks and operating hazards. Additionally, if we increase the amount of proppant we require for delivery of our services, we may face difficulty in securing rail transportation for such additional amount of proppant. Any delay or failure in the rail services on which we rely could have a material adverse effect on our financial condition and results of operations.
Delays or restrictions in obtaining permits by us for our operations or by our customers for their operations could impair our business.
In most states, our operations and the operations of our oil and natural gas producing customers require permits from one or more governmental agencies in order to perform drilling and completion activities, secure water rights, or other regulated activities. Such permits are typically issued by state agencies, but federal and local governmental permits may also be required.
The requirements for such permits vary depending on the location where such regulated activities will be conducted. As with all governmental permitting processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit to be issued, and the conditions that may be imposed in connection with the granting of the permit. In addition, some of our customers’ drilling and completion activities may take place on federal land or Native American lands, requiring leases and other approvals from the federal government or Native American tribes to conduct such drilling and completion activities or other regulated activities. Under certain circumstances, federal agencies may cancel proposed leases for federal lands and refuse to grant or delay required approvals. Therefore, our customers’ operations in certain areas of the United States may be interrupted or suspended for varying lengths of time, causing a loss of revenue to us and adversely affecting our results of operations in support of those customers.
Federal or state legislative In January 2021, the U.S. Department of the Interior issued an order that effectively suspends new oil and regulatory initiatives relatedgas leases and drilling permits on non-Indian federal lands and waters for a period of 60 days, but the suspension does not limit existing operations under valid leases. President Biden followed with an executive order that ordered the Secretary of the Interior to induced seismicity could result in operating restrictions or delays inpause the drillingissuance of new oil and gas leases on federal public lands and offshore waters pending completion of a comprehensive review of federal oil and gas permitting and leasing practices that take into consideration potential climate and other impacts associated with oil and gas activities. This order further directs agencies to identify fossil fuel subsidies provided by such agencies and take measures to ensure that federal funding is not directly subsidizing fossil fuels, with an objective of eliminating fossil fuel subsidies from federal budget requests beginning in 2022. This order is currently being challenged by industry groups.
Oil and natural gas companies’ operations using hydraulic fracturing are substantially dependent on the availability of water. Restrictions on the ability to obtain water for E&P activities and the disposal of flowback and produced water may impact their operations and have a corresponding adverse effect on our business, results of operations and financial condition.
Water is an essential component of shale oil and natural gas wells that may reduce demand for our servicesproduction during both the drilling and could have a material adverse effect on our liquidity, combined results of operations and combined financial condition.
hydraulic fracturing processes. Our oil and natural gas producing customers disposecustomers’ access to water to be used in these processes may be adversely affected due to reasons such as periods of flowback and producedextended drought, privatization, third party competition for water in localized areas or certain other oilfield fluids gathered from oil and natural gas producing operations in accordance with permits issued by government authorities overseeing such disposal activities. While these permits are issued pursuantthe implementation of local or state governmental programs to existing laws and regulations, these legal requirements aremonitor or restrict the beneficial use of water subject to change based on concerns of the public or governmental authorities regarding such disposal activities. One such concern relatestheir jurisdiction for hydraulic fracturing to seismic events near underground disposal wells used for the disposal by injection of flowback and producedassure adequate local water or certain other oilfield fluids resulting from oil and natural gas activities. In 2016, the United States Geological Survey identified six states with the most significant hazards from seismicity events suspected of having been induced by injection of oilfield fluids into underground disposal wells, including Oklahoma, Kansas, Texas, Colorado, New Mexico, and Arkansas. In response to concerns regarding the use of underground disposal wells and thesupplies. The occurrence of seismic events, regulators in some states have imposed,these or are considering imposing, additional requirements in the permitting of produced water disposal wells or otherwise to assess any relationship between seismicity and the use of such wells. For example, Oklahoma has issued rules for produced water disposal wells that imposed certain permitting and operating restrictions and reporting requirements on disposal wells in proximity to faults and also, from time to time, has developed and implemented plans directing certain wells where seismic incidents have occurred to restrict or suspend disposal well operations. The Texas Railroad Commission has adopted similar rules. In late 2016, the Oil and Gas Conservation Division of the OCC and the Oklahoma Geological Survey released well completion seismicity guidance, which requires operators to take certain prescriptive actions, including an operator’s planned mitigation practices, following certain unusual seismic activity within 1.25 miles of hydraulic fracturing operations. In recent years, including during 2018, the OCC’s Oil and Gas Conservation Division issued orders limiting future increases in the volume of oil and natural gas produced water injected belowground into the Arbuckle formation in an effort to reduce the number of earthquakes in the state. Another consequence of seismic eventsdevelopments may be lawsuits alleging that disposal well operations have caused damage to neighboring properties or otherwise violated state and federal rules regulating waste disposal. These developments could result in additional regulationlimitations being placed on allocations of water due to needs by third party businesses with more senior contractual or permitting rights to the water. Our customers’ inability to locate or contractually acquire and sustain the receipt of sufficient amounts of water could adversely impact their E&P operations and have a corresponding adverse effect on our business, results of operations and financial condition.
Moreover, the imposition of new environmental regulations and other regulatory initiatives could include increased restrictions on the use of injection wells by our customersproducing customers’ ability to dispose of flowback and produced water and certain other oilfield fluids. Increased regulation and attention given to seismicity events suspected of having been induced by injection of oilfield fluids into underground disposal wells also could lead to greater opposition to, and litigation concerning, oil and natural gas activities utilizing injection wells for waste disposal. Any of these developments may resultgenerated in our customers having to limit disposal well volumes, disposal rates or locations, or require our customers or third party disposal well operators that are used to dispose of customers’ produced water to shut down disposal wells, which developments could adversely affect our customers’ business and result in a corresponding decrease in the need for our services, which could have a material adverse effect on our business, financial condition, and results of operations.
Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing as well as governmental reviews of such activities may serve to limit future oilor other fluids resulting from E&P activities. Applicable laws impose restrictions and natural gas exploration and production activities and could have a material adverse effect on our results of operations and business.
Currently, hydraulic fracturing is generally exempt from regulation under the SDWA UIC program and is typically regulated by state oil and gas commissions or similar agencies. However, federal agencies have conducted investigations or asserted regulatory authority over certain aspects of the process. For example, in late 2016, the EPA released its final report on the potential impacts of hydraulic fracturing on drinking water resources, concluding that “water cycle” activities associated with hydraulic fracturing may impact drinking water resources under certain circumstances. Additionally, the EPA has asserted regulatory authority pursuant to the SDWA’s UIC program over hydraulic fracturing activities involving the use of diesel and issued guidance covering such activities, as well as published an Advance Notice of Proposed Rulemakingstrict controls regarding Toxic Substances Control Act reporting of the chemical substances and mixtures used in hydraulic fracturing. The EPA also published final CAA regulations in 2012 and 2016 governing performance standards, including standards for the capture of emissions released during oil and natural gas hydraulic fracturing. Moreover, in 2016, the EPA published an effluent limit guideline final
rule prohibiting the discharge of produced waterpollutants into waters of the United States and require that permits or other approvals be obtained to discharge pollutants to such waters. Additionally, in 2016 EPA engaged a pretreatment standard that prohibits the discharge of wastewater pollutants from onshore unconventional oil and natural gas extraction facilities to publicly owned wastewater treatment plants. The BLM publishedworks. Further, regulations implemented under both federal and state laws prohibit the discharge of produced water and sand, drilling fluids, drill cuttings and certain other substances related to the natural gas and oil industry into coastal waters. These laws provide for civil, criminal and administrative penalties for any unauthorized discharges of pollutants and unauthorized discharges of reportable quantities of oil and hazardous substances. Compliance with current and future environmental regulations and permit requirements governing the withdrawal, storage and use of surface water or groundwater necessary for hydraulic fracturing of wells and any inability to secure transportation and access to disposal wells with sufficient capacity to accept all of our flowback and produced water on economic terms may increase our customers’ operating costs and could result in restrictions, delays, or cancellations of our customers’ operations, the extent of which cannot be predicted.
Our operations are subject to risks associated with climate change and potential regulatory programs meant to address climate change; these programs may impact or limit our business plans, result in significant expenditures or reduce demand for our services and reduce our revenues.
Climate change continues to be the focus of political and societal attention. Numerous proposals have been made and are likely to be forthcoming on the international, national, regional, state and local levels to reduce GHG emissions. These efforts have included or may include cap-and-trade programs, carbon taxes, GHG reporting obligations and other regulatory programs that limit or require control of GHG’s from certain sources. Upon taking office, President Biden issued several Executive Orders relating climate change, envisioning a final rule“government-wide approach” to climate policy. At the 26th Conference of the Parties of the United Nations Framework Convention on Climate Change held in 2015October and November 2021, President Biden announced a commitment to significantly reduce GHG’s and transition the U.S. economy to net-zero carbon by 2050. Programs addressing climate change may limit the ability to produce crude oil and natural gas, require stricter limits on the release of methane or other GHGs, increase reporting and/or other compliance obligations associated with GHG emissions, limit the ability to explore in new areas, limit the construction of pipelines and related equipment or may make it more expensive to produce, any of which may decrease the demand for our services and our revenues. Related, President Biden has called on OPEC+ to produce more oil, which if heeded could result in lower oil and gas prices and lower domestic production. As of February 2, 2022, OPEC+ authorized a 400,000-barrel-per-day increase for March 2022.
Incentives to conserve energy or use alternative energy sources, which can be part of climate change programs, may increase the competitiveness of alternative energy sources (such as wind, solar, geothermal, tidal and biofuels) or increase the focus on reducing the use of combustion engines in transportation (such as governmental mandates that establishedban the sale of new gasoline-powered automobiles). These actions could, in turn, reduce demand for hydrocarbons and therefore for our services, which would lead to a reduction in our revenues.
An increased societal and governmental focus on ESG and climate change issues may adversely impact our business, impact our access to investors and financing, and decrease demand for our services.
An increased expectation that companies address environmental (including climate change), social and governance (“ESG”) matters may have a myriad of impacts on our business. Some investors and lenders are factoring these issues into investment and financing decisions. They may rely upon companies that assign ratings to a company’s ESG performance. Unfavorable ESG ratings, as well as recent activism around fossil fuels, may dissuade investors or more stringent standards relatinglenders from us and toward other industries, which could negatively impact our stock price or our access to capital. Additionally, some potential sources of investment or financing have announced an intention to avoid or limit investment in companies that engage in hydraulic fracturing. For example, in 2020, Deutsche Bank announced that it would no longer finance oil and gas projects that use hydraulic fracturing in countries with scarce water supplies, and BlackRock affirmed its commitment to divest from investments in fossil fuels due to concerns over climate change. In 2021, BlackRock announced a continuing commitment to the goal of net zero GHG emissions by 2050 or sooner, and noted that key actions for 2021 included asking companies to disclose a business plan aligned with the goal of achieving net zero global GHG emissions by 2050 and using “investment stewardship” to ensure companies its clients invest in are mitigating climate risk and considering opportunities presented by the net zero transition. While a substantial number of major banks and financing sources remain active in investments related to hydraulic fracturing, on federalit is possible that the investment avoidance or limitation theme could expand in the future and Native American lands, but the BLM rescinded the 2015 rule in late 2017; however, litigation challenging the BLM’s decisionrestrict access to rescind the 2015 rule is pending in federal district court. Fromcapital for companies like us.
Moreover, while we have and may continue to create and publish voluntary disclosures regarding ESG matters from time to time, legislation has been introduced, but not enacted, in Congress to provide for federal regulation of hydraulic fracturing and to require disclosuremany of the chemicals usedstatements in the hydraulic fracturing process. In the event that new federal restrictions relating to the hydraulic fracturing processthose voluntary disclosures are adopted in areas where we or our customers conduct business, we or our customers may incur additional costs or permitting requirements to comply with such federal requirementsbased on hypothetical expectations and assumptions that may or may not be significantrepresentative of current or actual risks or events or forecasts of expected risks or events, including the costs associated therewith. Such expectations and inassumptions are necessarily uncertain and may be prone to error or subject to
misinterpretation given the caselong timelines involved and the lack of an established single approach to identifying, measuring and reporting on many ESG matters.
In addition, ESG and climate change issues may cause consumer preference to shift toward other alternative sources of energy, lowering demand for oil and natural gas and consequently lowering demand for our customers, also could result in added restrictions, delaysservices. In some areas these concerns have caused governments to adopt or curtailments inconsider adopting regulations to transition to a lower-carbon economy. These measures may include adoption of cap-and-trade programs, carbon taxes, increased efficiency standards, prohibitions on the pursuitmanufacture of exploration, development,certain types of equipment (such as new automobiles with internal combustion engines), and requirements for the use of alternate energy sources such as wind or production activities, which would in turnsolar. These types of programs may reduce the demand for oil and natural gas and consequently the demand for our services.
Moreover,
Approaches to climate change and a transition to a lower-carbon economy, including government regulation, company policies, and consumer behavior, are continuously evolving. At this time, we cannot predict how such approaches may develop or otherwise reasonably or reliably estimate their impact on our financial condition, results of operations and ability to compete. However, any long-term material adverse effect on the oil and gas industry may adversely affect our financial condition, results of operations and cash flows.
Our operations are subject to significant risks, some states and local governments have adopted, and other governmental entitiesof which are considering adopting, regulations that could impose more stringent permitting, disclosure and well-construction requirements on hydraulic fracturingbeyond our control. These risks may be self-insured, or may not be fully covered under our insurance policies.
Our operations including states where we or our customers operate. For example, Texas, Colorado and North Dakota among others have adopted regulations that impose new or more stringent permitting, disclosure, disposal, and well construction requirements on hydraulic fracturing operations. States could also electare subject to prohibit high volume hydraulic fracturing altogether, followingsignificant hazards often found in the approach taken by the State of New York. Local land use restrictions, such as city ordinances, may also restrict drilling in general and/or hydraulic fracturing in particular.
Additionally, certain interest groups in Colorado opposed to oil and natural gas development generally,industry, such as, but not limited to, accidents, including accidents related to trucking operations provided in connection with our services, blowouts, explosions, craterings, fires, natural gas leaks, oil and produced water spills and releases of hydraulic fracturing fluids or other well fluids into the environment. These conditions can cause:
•disruption in particular, have from timeoperations;
•substantial repair or remediation costs;
•personal injury or loss of human life;
•significant damage to time advanced various options for ballot initiatives that, if approved, would revise either statutory law or the state constitutiondestruction of property, and equipment;
•environmental pollution, including groundwater contamination;
•unusual or unexpected geological formations or pressures and industrial accidents;
•impairment or suspension of operations; and
•substantial revenue loss.
In addition, 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.
The occurrence of a significant event or adverse claim in a manner that would effectively prohibit or make such exploration and production activities in the state more difficult or expensive in the future. For example, in eachexcess of the November 2014, 2016 and 2018 general election cycles, ballot initiatives have been pursued, with the 2018 initiative making the November 2018 ballot, seeking to increase setback distances between new oil and natural gas development and specific occupied structures and/insurance coverage that we maintain or certain environmentally sensitive or recreational areas that if adopted, may have had significant adverse impacts on new oil and natural gas developments in the state. However, in each election cycle, the ballot initiative either didis not secure a place on the general ballot or, as was the case in November 2018, was defeated. In the event that ballot initiatives or other regulatory programs arising out of protests or oppositioncovered by non-governmental organizations are adopted and result in more stringent limitations on the production and development of oil and natural gas in areas where we or our customers conduct operations, whether in Colorado or in another state, we may incur significant costs to comply with such requirements or our customers may experience restrictions, delays or curtailments in the permitting or pursuit of exploration, development, or production activities, which could reduce demand for our services. Such compliance costs or reduced demand for our services could have a material adverse effect on our business, prospects, results of operations, financial conditions, and liquidity.
Increased regulation and attention given to the hydraulic fracturing process could lead to greater opposition to, and litigation concerning, oil and natural gas production activities using hydraulic fracturing techniques. Additional legislation or regulation could also lead to operational delays for our customers or increased operating costs in the production of oil and natural gas, including from the developing shale plays, or could make it more difficult for us and our customers to perform hydraulic fracturing. The adoption of any federal, state or local laws or the implementation of regulations regarding hydraulic fracturing could potentially cause a decrease in the completion of new oil and natural gas wells and an associated decrease in demand for our services and increased compliance costs and time, whichinsurance could have a material adverse effect on our liquidity, consolidated results of operations and consolidated financial condition. Claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. Litigation arising from a catastrophic occurrence at a location where our equipment and services are being used or trucking services provided in connection therewith may result in our being named as a defendant in lawsuits asserting large claims.
Changes
We do not have insurance against all foreseeable risks, either because insurance is not available or because of the high premium costs. The occurrence of an event not fully insured against or the failure of an insurer to meet its insurance obligations could result in transportation regulationssubstantial losses. In addition, we may increase ournot be able to maintain adequate insurance in the future at rates we consider reasonable. Insurance may not be available to cover any or all of the risks to which we are subject, or, even if available, it may be inadequate, or insurance premiums or other costs and negatively impactcould rise significantly in the future so as to make such insurance prohibitively expensive.
We could experience continued or increased severity of trucking related issues or trucking accidents, which could materially affect our results of operations.
Trucking services can be adversely impacted by traffic congestion, shortage of drivers and weather delays which could hinder our service levels. During 2021 and into 2022 there has been a shortage of available trucking services in the United States due to the industry not having enough qualified drivers, which has impacted our field operations at times. In addition, our field employees are generally required to have a commercial driver’s license (“CDL”) so they can drive trucks and move our frac pumps and other equipment from location to location. Obtaining employees with CDLs can be challenging during times when the trucking industry has driver shortages, as competition for qualified employees is often more intense. If we are unable to obtain trucking services on a timely basis or the services of a sufficient number of field employees with CDLs, it could have a material adverse impact on our financial condition, results of operations and cash flows.
In addition, potential liability and unfavorable publicity associated with accidents in the trucking industry can be severe and occurrences are unpredictable. The number and severity of litigation claims may be worsened by distracted driving by both
truck drivers and other motorists. Our transportation operations often involve traveling on unpaved roads located in rural areas, increasing the risk of accidents. If we are involved in an accident involving hazardous substances, if there are releases of hazardous substances we transport, if soil or groundwater contamination is found at our facilities or results from our operations, or if we are found to be in violation of applicable environmental laws or regulations, we could owe cleanup costs and incur related liabilities, including substantial fines or penalties or civil and criminal liability. A material increase in the frequency or severity of accidents or workers’ compensation claims or the unfavorable development of existing claims could materially adversely affect our results of operations. In the event that accidents occur, we may be unable to obtain desired contractual indemnities, and our insurance may be inadequate in certain cases which could result in substantial losses. Any such lawsuits in the future may result in the payment of substantial settlements or damages and increases to our insurance costs.
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 various transportation regulations includinginherent 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. Litigation arising from operations where our services are provided, may cause us to be named as a motor carrierdefendant 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.
In addition, our customers usually assume responsibility for, including control and removal of, all other pollution or contamination which may occur during operations, including that which may result from seepage or any other uncontrolled flow of drilling and completion fluids. We may have liability in such cases if we are grossly negligent or commit willful acts. Our customers generally agree to indemnify us against claims arising from their employees’ personal injury or death to the extent that, in the case of our hydraulic fracturing operations, their employees are injured by such operations, unless resulting from our gross negligence or willful misconduct. Our customers also generally agree to indemnify us for loss or destruction of customer-owned property or equipment. In turn, we agree to indemnify our customers for loss or destruction of property or equipment we own and for liabilities arising from personal injury to or death of any of our employees, unless resulting from gross negligence or willful misconduct of the DOT and by various federal, state and tribal agencies, whose regulations include certain permit requirementscustomer. However, we might not succeed in enforcing such contractual liability allocation or might incur an unforeseen liability falling outside the scope of 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 timeallocation. As a driver may drive or work in any specific period and requiring onboard electronic logging devices or limits on vehicle weight and size. As the federal government continues to develop and propose regulations relating to fuel quality, engine efficiency and GHG emissions,result, we may experience an increase in costs related to truck purchasesincur substantial losses which could materially 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 whatfinancial condition and results of operation.
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 are subject to environmental and occupational health and safety laws and regulations that may expose us to significant costs and liabilities.
Our operations and the operations of our customers are subject to numerous federal, tribal, regional, state and local laws and regulations relating to protection of the environment including natural resources, health and safety aspects of our operations and waste management, including the transportation and disposal of waste and other materials. These laws and regulations may impose numerous obligations on our operations and the operations of our customers, including the acquisition of permits or other approvals to conduct regulated activities, the imposition of restrictions on the types, quantities and concentrations of various substances that may be released into the environment or injected in non-productive formations below ground in connection with oil and natural gas drilling and production activities, the incurrence of capital expenditures to mitigate or prevent releases of materials from our equipment, facilities or from customer locations where we are providing services, the imposition of substantial liabilities for pollution resulting from our operations, and the application of specific health and safety criteria addressing worker protection. Any failure on our part or the part of our customers to comply with these laws and regulations could result in assessment of sanctions including administrative, civil and criminal penalties; imposition of investigatory, remedial or corrective action obligations or the incurrence of capital expenditures; the occurrence of restrictions, delays or cancellations in the permitting, performance or development of projects or operations; and the issuance of orders enjoining performance of some or all of our operations in a particular area. In addition to civil and other penalties associated with enforcement activities regarding compliance with occupational health and safety laws, our operations may be subject to abatement obligations that could require significant modifications to existing operations to achieve compliance.
Our business activities present risks of incurring significant environmental costs and liabilities, including costs and liabilities resulting from our handling of oilfield and other wastes, because of air emissions and wastewater discharges related to our operations, and due to historical oilfield industry operations and waste disposal practices. Moreover, accidental releases or spills may occur in the course of our operations or at facilities where our wastes are taken for reclamation or disposal, and we cannot assure you that we will not incur significant costs and liabilities as a result of such releases or spills, including any third-party claims for injuries to persons or damages to properties or natural resources. Some environmental laws and regulations may impose strict liability, which means that 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, prior operators or other third parties. Remedial and abatement costs and other damages arising as a result of environmental and occupational health and safety laws and costs associated with changes in environmentalthese laws and regulations could be significant and have a material adverse effect on our liquidity, combinedconsolidated results of operations and combined financial condition.
Laws and regulations protecting the environment generally have become more stringent in recent years and are expected to continue to do so, which could lead to material increases in costs for future environmental compliance and remediation. In particular, the ESA restricts activities that may result in a “take” of endangered or threatened species and provides for substantial penalties in cases where listed species are taken by being harmed. The dunes sagebrush lizard is one example of a species that, if listed as endangered or threatened under the ESA, could impact our operations and the operations of our customers. The dunes sagebrush lizard is found in the active and semi-stable shinnery oak dunes of southeastern New Mexico and adjacent portions of Texas, including areas where our customers operate and our frac sand facilities are located. The FWS is currently conducting a review to determine whether listing the dunes sagebrush lizard as endangered or threatened under the ESA is warranted. In July 2020, the FWS published a 90-day finding that a 2018 petition seeking that the dunes sagebrush lizard be listed as endangered or threatened presented substantial evidence indicating that listing may be warranted. In November 2021, an environmental group filed a notice of intent to sue the U.S. Department of the Interior and the FWS for unlawfully delaying protection of the dunes sagebrush lizard and five other species. According to the petition, if a determination is not made by January 2022, the environmental group will file suit to enforce the ESA. If the dunes sagebrush lizard is listed as an endangered or threatened species, our operations and the operations of our customers in any area that is designated as the dunes sagebrush lizard’s habitat may be limited, delayed or, in some circumstances, prohibited, and we and our customers could be required to comply with expensive mitigation measures intended to protect the dunes sagebrush lizard and its habitat. Furthermore, new laws and regulations, amendment of existing laws and regulations, reinterpretation of legal requirements or increased governmental enforcement with respect to environmental matters could restrict, delay or curtail exploratory or developmental drilling for oil and natural gas by our customers and could limit our well servicing opportunities. For example, in 2015 the EPA issued a final rule under the CAA, lowering the NAAQS for ground-level ozone from 75 parts per billion to 70 parts per billion under both the primary and secondary standards to provide requisite protection of public health and welfare, respectively. In 2017 and 2018, the EPA issued area designations with respect to ground-level ozone as either “attainment/unclassifiable,” “unclassifiable” or “nonattainment.” Additionally, in November 2018, the EPA issued final requirements that apply to state, local, and tribal air agencies for implementing the 2015 NAAQS for ground-level ozone. State implementation of the revised NAAQS could, among other things, require installation of new emission controls on some of our or our customer’s equipment, result in longer permitting timelines, and significantly increase our or our customers’ capital expenditures and operating costs. In another example, pursuant to a consent decree issued by the U.S. District Court for the District of Columbia in 2016, the EPA is required to propose no later than March 15, 2019, a rulemaking for revision of certain Subtitle D criteria regulations that could result in oil and natural gas exploration and production wastes being regulated as hazardous wastes, or sign a determination that revision of the regulations is necessary. If the EPA proposes a rulemaking for revised oil and natural gas wastes regulations, the consent decree requires that the EPA take final action following notice and comment rulemaking no later than July 15, 2021. We may not be able to recover some or any of our costs of compliance with these laws and regulations from insurance.
Silica-related legislation, health issues and litigation could have a material adverse effect on our business, reputation or results of operations.
We are subject to laws and regulations relating to human exposure to crystalline silica. For example, in 2016, OSHA published a final rule that established a more stringent permissible exposure limit for exposure to respirable crystalline silica and provided other provisions to protect employees, such as requirements for exposure assessments, methods for controlling exposure, respiratory protection, medical surveillance, hazard communication, and recording. Compliance with most aspects of the 2016 rule relating to hydraulic fracturing was required by June 2018, and the 2016 rule further requires compliance with
engineering control obligations to limit exposures to respirable crystalline silica in connection with hydraulic fracturing activities by June 2021. Historically, our environmental compliance costs with respect to existing crystalline silica requirements have not had a material adverse effect on our results of operations; however, federal regulatory authorities, including OSHA, and analogous state agencies may continue to propose changes in their regulations regarding workplace exposure to crystalline silica, such as permissible exposure limits and required controls and personal protective equipment. We may not be able to comply with any new laws and regulations that are adopted, and any new laws and regulations could have a material adverse effect on our operating results by requiring us to modify or cease our operations.
In addition, the inhalation of respirable crystalline silica is associated with the lung disease silicosis. There is evidence of an association between crystalline silica exposure or silicosis and lung cancer and a possible association with other diseases, including immune system disorders such as scleroderma. These health risks have been, and may continue to be, a significant issue confronting the hydraulic fracturing industry. Concerns over silicosis and other potential adverse health effects, as well as concerns regarding potential liability from the use of hydraulic fracture sand, may have the effect of discouraging our customers’ use of our hydraulic fracture sand. The actual or perceived health risks of handling hydraulic fracture sand could materially and adversely affect hydraulic fracturing service providers, including us, through reduced use of hydraulic fracture sand, the threat of product liability or employee lawsuits, increased scrutiny by federal, state and local regulatory authorities of us and our customers or reduced financing sources available to the hydraulic fracturing industry.
Anti-indemnityOilfield 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 Texas, New Mexico 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 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.
Oil
Technology advancements in well service technologies, including those involving hydraulic fracturing, could have a material adverse effect on our business, financial condition and results of operations.
The hydraulic fracturing industry is characterized by rapid and significant technological advancements and introductions of new products and services using new technologies. As competitors and others use or develop new technologies or technologies comparable to ours in the future, we may lose market share or be placed at a competitive disadvantage. Further, we may face competitive pressure to implement or acquire certain new technologies at a substantial cost. Some of our competitors may have greater financial, technical and personnel resources than we do, which may allow them to gain technological advantages or implement new technologies before we can. Additionally, we may be unable to implement new technologies or services at all, on a timely basis or at an acceptable cost. New technology could also make it easier for our customers to vertically integrate their operations, thereby reducing or eliminating the need for our services. Limits on our ability to effectively use or implement new technologies may have a material adverse effect on our business, financial condition and results of operations.
Risks Related to the TRAs
The Company is required to make payments under the TRAs for certain tax benefits that it may claim, and the amounts of such payments could be significant.
In connection with the Company’s initial public offering (the “IPO”), on January 17, 2018, the Company entered into two Tax Receivable Agreements (the “TRAs”) with R/C Energy IV Direction Partnership, L.P. and the then-existing owners of Liberty Oilfield Services Holdings LLC (“Liberty Holdings”) that continued to own Liberty LLC Units (each such person and any permitted transferee, a “TRA Holder”). The TRAs generally provide for the payment by the Company to each TRA Holder of 85% of the net cash savings, if any, in U.S. federal, state, and local income tax and franchise tax (computed using simplifying assumptions to address the impact of state and local taxes) that the Company actually realizes (or is deemed to realize in certain circumstances) as a result of certain increases in tax basis, net operating losses available to the Company as a result of the corporate reorganization performed in connection with the IPO (the “Corporate Reorganization”), and certain benefits attributable to imputed interest. The Company will retain the benefit of the remaining 15% of these cash savings.
The Company is a holding company and has no material assets other than its equity interest in Liberty LLC. Because the Company has no independent means of generating revenue, its ability to make payments under the TRAs is dependent on the ability of Liberty LLC to make distributions to the Company in an amount sufficient to cover its obligations under the TRAs. To the extent that the Company is unable to make payments under the TRAs for any reason, such payments will be deferred and will accrue interest until paid.
The term of each of the TRAs continues until all tax benefits that are subject to such TRAs have been utilized or expired, unless the Company experiences a change of control (as defined in the TRAs, which includes certain mergers, asset sales and other forms of business combinations) or the TRAs are terminated early (at the Company’s election or as a result of its breach), and the Company makes the termination payments specified in such TRAs. In addition, payments the Company makes under the TRAs will be increased by any interest earned from the due date (without extensions) of the corresponding tax return. Payments under the TRAs commenced in 2020 and so long as the tax savings are realized and the TRAs are not terminated, payments are anticipated to continue for 15 years after the date of the last redemption of the Liberty LLC Units. Accordingly, if the applicable U.S. federal corporate tax rate is increased, then the amount of TRA payments paid in the future may also increase.
In certain cases, if the Company experiences a change of control (as defined under the TRAs, which includes certain mergers, asset sales and other forms of business combinations) or the TRAs terminate early (at the Company’s election or as a result of its breach), the Company would be required to make an immediate lump-sum payment, and such payment may be significantly in advance of, and may materially exceed, the actual realization, if any, of the future tax benefits to which the payment relates. As a result, the Company’s obligations under the TRAs could have a substantial negative impact on its liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, or other forms of business combinations or changes of control. There can be no assurance that we will be able to finance our obligations under the TRAs. Furthermore, as a result of this payment obligation, holders of our Class A Common Stock could receive substantially less consideration in connection with a change in control transaction than they would receive in the absence of such obligation. Since our payment obligations under the TRAs will not be conditioned upon the TRA Holders’ having continued interest in the Company or liberty LLC, the TRA Holders’ interests may conflict with those of the holders of our Class A Common Stock.
Payments under the TRAs are based on the tax reporting positions that we will determine. The TRA Holders will not reimburse us for any payments previously made under the TRAs if any tax benefits that have given rise to payments under the TRAs are subsequently disallowed, except that excess payments made to any TRA Holder will be netted against payments that would otherwise be made to such TRA Holder, if any, after our determination of such excess. As a result, in such circumstances the Company could make payments that are greater than its actual cash tax savings, if any, and may not be able to recoup those payments, which could adversely affect the Company’s liquidity. Furthermore, the payments under the TRAs will not be conditioned upon a holder of rights under each of the TRAs having a continued ownership interest in the Company or Liberty LLC. For further details of the TRAs, see Note 12—Income Taxes to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data.”
General Risks Related to our Business
We may be adversely affected by uncertainty in the global financial markets and the deterioration of the financial condition of our customers.
Our future results may be impacted by the uncertainty caused by an economic downturn, volatility or deterioration in the debt and equity capital markets, inflation, deflation or other adverse economic conditions that may negatively affect us or parties with whom we do business resulting in a reduction in our customers’ spending and their non-payment or inability to perform obligations owed to us, such as the failure of customers to honor their commitments or the failure of major suppliers to complete orders. Additionally, during times when the oil or natural gas markets weaken, our customers are more likely to experience financial difficulties, including being unable to access debt or equity financing, which could result in a reduction in our customers’ spending for our services. In addition, in the course of our business we hold accounts receivable from our customers. In the event of the financial distress or bankruptcy of a customer, we could lose all or a portion of such outstanding accounts receivable associated with that customer. Further, if a customer was to enter into bankruptcy, it could also result in the cancellation of all or a portion of our service contracts with such customer at significant expense or loss of expected revenues to us.
Reliance upon a few large customers may adversely affect our revenue and operating results.
Our top five customers represented approximately 27%, 48%, and 35%, of our consolidated revenue for the years ended December 31, 2021, 2020, and 2019, respectively. It is possible that we will derive a significant portion of our revenue from a concentrated group of customers in the future. If a major customer fails to pay us, revenue would be impacted and our operating results and financial condition could be materially harmed. Additionally, if we were to lose any material customer or our customers were to consolidate or merge with other operators, we may not be able to redeploy our equipment at similar
utilization or pricing levels or within a short period of time and such loss could have a material adverse effect on our business until the equipment is redeployed at similar utilization or pricing levels.
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 companies’ operations usingindustry has become increasingly dependent on digital technologies to conduct certain processing activities. For example, we depend on digital technologies to perform many of our services and to process and record financial and operating data. At the same time, cyber incidents, including deliberate attacks, have increased. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats. In early 2020, we experienced a denial of service cyberattack that targeted a portion of our non-financial data. We immediately shutdown critical systems, diagnosed the root cause of the attack and then methodically returned systems online. This cyberattack disrupted certain non-financial aspects of our internal system for a period of less than one day, while limited and non-critical portions of our systems were kept offline for up to one week in order to properly evaluate the breach. We determined that this cyberattack did not materially affect any of our operations. We engaged in extensive data evaluation for potential damage and concluded that minimal to no data loss had occurred as a result of this cyberattack. Our technologies, systems and networks, and those of our vendors, suppliers and other business partners, may become the target of cyberattacks or information security breaches in the future that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary and other information, or other disruption of business operations. In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period. Our systems and insurance coverage for protecting against cyber security risks may not be sufficient. As cyber incidents continue to evolve, we will likely be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber incidents. Our insurance coverage for cyberattacks may not be sufficient to cover all the losses we may experience as a result of such cyberattacks.
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. The costs of components and labor have increased in the past and may increase in the future with increases in demand, which will require us to incur additional costs for any fleets we may acquire in the future. Our fleets and other equipment typically do not generate revenue while they are substantially dependentundergoing maintenance, upgrades or refurbishment. 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 availability of water. Restrictionsextent 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, competition or advances in technology within our industry may require us to update or replace existing fleets or build or acquire new fleets. Such demands on the ability to obtain waterour capital or reductions in demand for exploration and production activitiesour hydraulic fracturing fleets and the disposalincrease in cost of flowbacklabor necessary for such maintenance and produced water may impact theirimprovement, in each case, could have a material adverse effect on our business, liquidity position, financial condition, prospects and results of operations and may increase our costs.
We rely on certain third parties for materials, and delays in deliveries of such materials, increases in the cost of such materials or our contractual obligations to pay for materials that we ultimately do not require could harm our business, results of operations and financial condition.
We have established relationships with certain suppliers of our materials (such as, but not limited to, proppant and chemical additives) and other parts, supplies and items needed for our operations. Delays or shortages in materials can result from a variety of reasons, including those caused by weather and natural disasters. Presently, the United States is undergoing a supply chain disruption due to backlogged ports and trucking shortages, and our business is not immune from these effects. Even once the root cause of the supply chain disruption or any future shortage or delay has passed, it can take time for our supply chain to recover and run in a regular fashion. Should the nationwide supply chain disruption continue, or should any of our current suppliers be unable to provide the necessary materials or otherwise fail to deliver the materials in a timely manner and in the quantities required, any resulting delays in the provision of services could have a correspondingmaterial adverse effect on our business, results of operations and financial condition.
Water is an essential component Additionally, increasing costs of shale oil and natural gas production during bothsuch materials may negatively impact demand for our services or the drilling andprofitability of our business operations. In the past, our industry faced sporadic proppant shortages associated with hydraulic fracturing processes. Our oil and natural gas producing customers’ accessoperations requiring work stoppages, which are believed to waterhave adversely impacted the operating results of several competitors. We may not be able to be used in these processesmitigate any future shortages of materials, including proppant, or the impact of supply chain disruptions. Furthermore, to the extent our contracts require us to purchase more materials, including proppant, than we ultimately require, we may be adversely affected dueforced to reasons such as periodspay for the excess amount under “take or pay” contract provisions.
We currently utilize two preferred assemblers and a limited number of extended drought, privatization, third party competitionsuppliers for water in localized areas or the implementationmajor equipment to both build new fleets and upgrade any fleets we acquire to our preferred specifications, and our reliance on these vendors exposes us to risks including price and timing of local or state governmental programsdelivery.
We currently utilize two preferred assemblers and a limited number of suppliers for major equipment to monitor or restrict the beneficial use of water subjectboth build our new fleets and upgrade any fleets we may acquire to their jurisdictionour custom design. If demand for hydraulic fracturing fleets or the components necessary to assure adequate local water supplies. The occurrencebuild such fleets increases or these vendors face financial distress or bankruptcy, these vendors may not be able to provide the new or upgraded fleets on schedule or at the current price. If this were to occur, we could be required to seek another assembler or other suppliers for major equipment to build or upgrade our fleets, which may adversely affect our revenues or increase our costs.
Interruptions of these or similar developmentsservice on the rail lines by which we receive proppant could adversely affect our results of operations.
We receive a portion of the proppant used in our hydraulic fracturing services by rail. Rail operations are subject to various risks that may result in limitations being placeda delay or lack of service, including lack of available capacity, mechanical problems, extreme weather conditions, work stoppages, labor strikes, terrorist attacks and operating hazards. Additionally, if we increase the amount of proppant we require for delivery of our services, we may face difficulty in securing rail transportation for such additional amount of proppant. Any delay or failure in the rail services on allocations of water due to needs by third party businesses with more senior contractual or permitting rights to the water. Our customers’ inability to locate or contractually acquire and sustain the receipt of sufficient amounts of waterwhich we rely could adversely impact their exploration and production operations and have a correspondingmaterial adverse effect on our business,financial condition and results of operations and financial condition.operations.
Moreover, the imposition of new environmentalChanges in transportation regulations and other regulatory initiatives could include increased restrictions on our producing customers’ ability to dispose of flowback and produced water generated in hydraulic fracturing or other fluids resulting from exploration and production activities. Applicable laws, including the CWA, impose restrictions and strict controls regarding the discharge of pollutants into waters of the United States and require that permits or other approvals be obtained to discharge pollutants to such waters. In 2015, the EPA and the Corps released a final rule outlining their position on the federal jurisdictional reach over waters of the United States, including wetlands, but legal challenges to this rule followed. Beginning in the first quarter of 2017, the EPA and the Corps agreed to reconsider the 2015 rule and, thereafter, the agencies have (i) published a proposed rule in 2017 to rescind the 2015 rule and recodify the regulatory text that governed waters of the United States prior to promulgation of the 2015 rule, (ii) published a final rule in February 2018 adding a February 6, 2020 applicable date to the 2015 rule, and (iii) published a proposed rule in December 2018 re-defining the CWA’s jurisdiction over waters of the United States for which the agencies will seek public comment. The 2015 and February 2018 final rules are being challenged by various factions in the federal district court and implementation of the 2018 rule has been enjoined to twenty-eight states pending resolution of various federal district court challenges. As a result of these legal developments, future implementation of the 2015 rule is uncertain at this time. Any expansion of the CWA’s jurisdiction in areas where we or our customers operate, could impose additional permitting obligations on us and our customers.
Additionally, regulations implemented under the CWA and similar state laws prohibit the discharge of produced water and sand, drilling fluids, drill cuttings and certain other substances related to the natural gas and oil industry into coastal waters. In 2016, the EPA published final regulations concerning produced water discharges from hydraulic fracturing and certain other natural gas operations to publicly-owned wastewater treatment plants. The CWA and analogous state laws provide for civil, criminal and administrative penalties for any unauthorized discharges of pollutants and unauthorized discharges of reportable quantities of oil and hazardous substances. Compliance with current and future environmental regulations and permit requirements governing the withdrawal, storage and use of surface water or groundwater necessary for hydraulic fracturing of wells and any inability to secure transportation and access to disposal wells with sufficient capacity to accept all of our flowback and produced water on economic terms may increase our customers’ operating costs and negatively impact our results of operations.
We are subject to various transportation regulations including as a motor carrier by the Department of Transportation and by various federal, state, provincial and tribal agencies, whose regulations include certain permit requirements of highway and safety authorities. These regulatory authorities exercise broad powers over our equipment transportation 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 requiring onboard electronic logging devices or limits on vehicle weight and size. As the federal government continues to develop and propose regulations relating to fuel quality, engine efficiency and greenhouse gasses 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. Additionally, we rely on third parties to provide trucking services, including hauling proppant to our customer work sites, and these third parties may fail to comply with various transportation regulations, resulting in our inability to use such third party providers. 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 resultbe affected by road construction, road repairs, detours and state and local regulations and ordinances restricting access to certain roads. Proposals to increase federal, state, provincial 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 restrictions, delays,what form, any legislative or cancellations ofregulatory changes or municipal ordinances applicable to our customers’logistics operations thewill be enacted and to what extent of which cannot be predicted.any such legislation or regulations could increase our costs or otherwise adversely affect our business or operations.
Our current and future indebtedness could adversely affect our financial condition.
As of February 28, 2019,18, 2022, we had $111.7$106.5 million outstanding under our Term Loan Facility and no borrowings$133.0 million outstanding under our ABL Facility (defined herein) with a borrowing base of $177.4 million, except for, as well as a letter of credit in the amount of $0.3$1.5 million, with a borrowing base of $273.1 million. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Debt Agreements.”
Moreover, subject to the limits contained in our ABL Facility and Term Loan Facility (collectively, the “Credit Facilities”), we may incur substantial additional debt from time to time. Any borrowings we may incur in the future would have several important consequences for our future operations, including that:
•covenants contained in the documents governing such indebtedness may require us to meet or maintain certain financial tests, which may affect our flexibility in planning for, and reacting to, changes in our industry, such as being able to take advantage of acquisition opportunities when they arise;
•our ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate and other purposes may be limited;
•our ability to use operating cash flow in other areas of our business may be limited because we must dedicate a substantial portion of these funds to make principal and interest payments on our indebtedness;
•we may be more vulnerable to interest rate increases to the extent that we incur variable rate indebtedness;
•we may be competitively disadvantaged to our competitors that are less leveraged or have greater access to capital resources; and
•we may be more vulnerable to adverse economic and industry conditions.
If we incur indebtedness in the future, we may have significant principal payments due at specified future dates under the documents governing such indebtedness. Our ability to meet such principal obligations will be dependent upon future performance, which in turn will be subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control. Our business may not continue to generate sufficient cash flow from operations to repay any incurred indebtedness. If we are unable to generate sufficient cash flow from operations, we may be required to sell assets, to refinance all or a portion of such indebtedness or to obtain additional financing.
Our Credit Facilities subject us to financial and other restrictive covenants. These restrictions may limit our operational or financial flexibility and could subject us to potential defaults under our Credit Facilities.
Our Credit Facilities subject us to restrictive covenants, including, but not limited to, restrictions on incurring additional debt and certain distributions. Our ability to comply with these financial condition tests can be affected by events beyond our control and we may not be able to do so.
The Credit Facilities are not subject to financial covenants unless our liquidity, as defined in the agreements governing the Credit Facilities, drops below a specified level, at which time we will be required to maintain certain fixed charge coverage ratios. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Debt Agreements.”
If our liquidity falls below the prescribed level and we are unable to remain in compliance with the financial covenants of our Credit Facilities, then amounts outstanding thereunder may be accelerated and become due immediately. Any such acceleration could have a material adverse effect on our financial condition and results of operations.
Increases in interest rates could adversely impact the price of our shares, our ability to issue equity or incur debt for acquisitions or other purposes.
Interest rates on future borrowings, credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. Changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our shares, and a rising interest rate environment could have an adverse impact on the price of our shares, our ability to issue equity or incur debt for acquisitions or other purposes.
Fuel conservation measures could reduce demand for oil and natural gas which would in turn reduce the demand for our services.
Fuel conservation measures, alternative fuel requirements and increasing consumer demand for alternatives to oil and natural gas could reduce demand for oil and natural gas. The impact of the changing demand for oil and natural gas may have a material adverse effect on our business, financial condition, prospects, results of operations and cash flows. Additionally, the increased competitiveness of alternative energy sources (such as wind, solar geothermal, tidal, and biofuels) could reduce demand for hydrocarbons and therefore for our services, which would lead to a reduction in our revenues.
Unsatisfactory safety performance may negatively affect our customer relationships and, to the extent we fail to retain existing customers or attract new customers, adversely impact our revenues.
Our ability to retain existing customers and attract new business is dependent on many factors, including our ability to demonstrate that we can reliably and safely operate our business in a manner that is consistent with applicable laws, rules and permits, which legal requirements are subject to change. Existing and potential customers consider the safety record of their third-party service providers to be of high importance in their decision to engage such providers. If one or more accidents were to occur at one of our operating sites, the affected customer may seek to terminate or cancel its use of our equipment or services and may be less likely to continue to use our services, which could cause us to lose substantial revenues. Furthermore, our ability to attract new customers may be impaired if they elect not to engage us because they view our safety record as unacceptable. In addition, it is possible that we will experience multiple or particularly severe accidents in the future, causing our safety record to deteriorate. This may be more likely as we continue to grow, if we experience high employee turnover or labor shortage, or hire inexperienced personnel to bolster our staffing needs.
Climate change legislation and regulations restricting or regulating emissions of greenhouse gases could result in increased operating and capital costs and reduced demand for our hydraulic fracturing services.
Climate change continues to attract considerable public, governmental and scientific attention. As a result, numerous proposals have been made and are likely to continue to be made at the international, national, regional and state levels of government to monitor and limit emissions of GHGs. These efforts have included consideration of cap-and-trade programs, carbon taxes, GHG reporting and tracking programs and regulations that directly limit GHG emissions from certain sources.
At the federal level, no comprehensive climate change legislation has been implemented to date. The EPA has, however, adopted rules under authority of the existing CAA that, among other things, establish Potential for Significant Deterioration (“PSD”) construction and Title V operating permit reviews for GHG emissions from certain large stationary sources that are also potential major sources of certain principal, or criteria, pollutant emissions, which reviews could require securing PSD permits at covered facilities emitting GHGs and meeting “best available control technology” standards for those GHG emissions. In addition, the EPA has adopted rules requiring the monitoring and annual reporting of GHG emissions from certain petroleum and natural gas system sources in the U.S., including, among others, onshore and offshore production facilities, which include certain of our producing customers’ operations. In 2015, the EPA amended and expanded the GHG reporting requirements to all segments of the oil and natural gas industry, including gathering and boosting facilities as well as completions and workovers from hydraulically fractured oil wells.
Federal agencies also have begun directly regulating emissions of methane, a GHG, from oil and natural gas operations. In 2016, the EPA published NSPS Subpart OOOOa, which requires certain new, modified or reconstructed equipment and processes in the oil and natural gas source category to reduce these methane gas and volatile organic compound (“VOC”) emissions. These Subpart OOOOa standards will expand previously issued NSPS Subpart OOOO published by the EPA in 2012 by using certain equipment-specific emissions control practices. However, in 2017, the EPA published a proposed rule to stay certain portions of these Subpart OOOOa standards for two years but the rule was not finalized. Rather, in February 2018, the EPA finalized amendments to certain requirements of the 2016 final rule, and in September 2018 the EPA proposed additional amendments, including rescission of certain requires and revisions to other requirements, such as fugitive emissions monitoring frequency. Furthermore, in late 2016, the BLM published a final rule that established, among other things, requirements to reduce methane emissions by regulating venting, flaring and leaks from oil and natural gas production activities on onshore federal and Native American lands. However, in September 2018, the BLM published a final rule that rescinds most of the new requirements of the 2016 final rule and codifies the BLM’s prior approach to venting and flaring but the rule rescinding the 2016 final rule has been challenged in federal court and remains pending. In the event that the EPA’s 2016 or the BLM’s 2016 rules should remain or be placed in effect, or should any other new methane emission standards be imposed on the oil and natural gas sector, such requirements could result in increased costs to our or our customers’ operations as well as result in restrictions, delays or curtailments in such operations, which costs, restrictions, delays or curtailments could adversely affect our business. In April 2016 the United States entered into the Paris Agreement to limit GHG emissions through individually determined reduction goals every five years beginning in 2020. However, in August 2017, the U.S. State Department informed
the United Nations of the intent of the United States to withdraw from the Paris Agreement. The Paris Agreement provides for a four-year exit process beginning when it took effect in November 2016, which would result in an effective exit date of November 2020. The United States’ adherence to the exit process and/or the terms on which the United States may reenter the Paris Agreement or a separately negotiated agreement are unclear at this time. The adoption and implementation of any international, federal or state legislation or regulations that require reporting of GHGs or otherwise restrict emissions of GHGs could result in increased compliance costs or additional operating restrictions, and could have a material adverse effect on our business, financial condition, demand for our services, results of operations, and cash flows.
Notwithstanding potential risks related to climate change, the International Energy Agency estimates that oil and natural gas will continue to represent a major share of global energy use through 2040, and other studies by the private sector project continued growth in demand for the next two decades. However, recent activism directed at shifting funding away from companies with energy-related assets could result in limitations or restrictions on certain sources of funding for the energy sector. Ultimately this could make it more difficult to secure funding for exploration and production or midstream activities. Finally, increasing concentrations of GHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods and other climatic events. If any such effects were to occur, they could have an adverse effect on our operations.
The Endangered Species Act and Migratory Bird Treaty Act and other restrictions intended to protect certain species of wildlife govern our and our oil and natural gas producing customers’ operations and additional restrictions may be imposed in the future, which constraints could have an adverse impact on our ability to expand some of our existing operations or limit our customers’ ability to develop new oil and natural gas wells.
Oil and natural gas operations in our operating areas can be adversely affected by seasonal or permanent restrictions on drilling activities designed to protect various wildlife, which may limit our ability to operate in protected areas. Permanent restrictions imposed to protect endangered or threatened species could prohibit drilling in certain areas or require the implementation of expensive mitigation measures.
For example, the ESA restricts activities that may affect endangered or threatened species or their habitats. Similar protections are offered to migratory birds under the MBTA. To the extent species that are listed under the ESA or similar state laws, or are protected under the MBTA, live in the areas where we or our oil and natural gas producing customers’ operate, our and our customers’ abilities to conduct or expand operations and construct facilities could be limited or be forced to incur material additional costs. Moreover, our customer’s drilling activities may be delayed, restricted or precluded in protected habitat areas or during certain seasons, such as breeding and nesting seasons. Some of our operations and the operations of our customers are located in areas that are designated as habitats for protected species.
Moreover, as a result of one or more settlements approved by the federal government, the FWS must make determinations on the listing of numerous species as endangered or threatened under the ESA pursuant to specific timelines. The designation of previously unidentified endangered or threatened species could indirectly cause us to incur additional costs, cause our or our oil and natural gas producing customers’ operations to become subject to operating restrictions or bans, and limit future development activity in affected areas. The FWS and similar state agencies may designate critical or suitable habitat areas that they believe are necessary for the survival of threatened or endangered species. Such a designation could materially restrict use of or access to federal, state and private lands.
We may have difficulty managing growth of our business, which could adversely affect our financial condition and results of operations.
As a recently formed company, growth of our business could place a significant strain on our financial, technical, operational and management resources. As we expand the scope of our activities and our geographic coverage through organic growth, there will be additional demands on our financial, technical, operational and management resources. The failure to continue to upgrade our technical, administrative, operating and financial control systems or the occurrences of unexpected expansion difficulties, including the failure to recruit and retain experienced managers, engineers and other professionals in the oilfield services industry, could have a material adverse effect on our business, financial condition, results of operations and our ability to successfully or timely execute our business plan.
We rely on a few key employees whose absence or loss could adversely affect our business.
Many key responsibilities within our business have been assigned to a small number of employees. The loss of their services could adversely affect our business. In particular, the loss of the services of one or more members of our executive team, including our chief executive officer, chief financial officer and president, could disrupt our operations. We do not have any written employment agreement with our executives at this time. Further, we do not maintain “key person” life insurance policies on any of our employees. As a result, we are not insured against any losses resulting from the death of any of our key employees.
We may be subject to risks in connection with acquisitions.
We have completed and may, in the future, pursue asset acquisitions or acquisitions of businesses. The process of upgrading acquired assets to our specifications and integrating acquired assets or businesses may involve unforeseen costs and delays or other operational, technical and financial difficulties and may require a significant amount time and resources. Our failure to incorporate acquired assets or businesses into our existing operations successfully or to minimize any unforeseen operational difficulties could have a material adverse effect on our financial condition and results of operations. Such events could also mean an acquisition that we expected to be accretive is not accretive and, in extreme cases, the asset is idle.
Our industry overall has experienced a high rate of employee turnover. Any difficulty we experience replacing or adding personnel could have a material adverse effect on our liquidity, results of operations and financial condition.
We are dependent upon the available labor pool of skilled employees and may not be able to find enough skilled labor to meet our needs, which could have a negative effect on our growth. We are also subject to the Fair Labor Standards Act, which governs such matters as minimum wage, overtime and other working conditions. Our services require skilled workers who can perform physically demanding work. As a result of our industry volatility, including pronounced declines in drilling activity, as well as the demanding nature of the work, many workers have left the hydraulic fracturing industry to pursue employment in different fields. Though our historical turnover rates have been significantly lower than those of our competitors, if we are unable to retain or meet growing demand for skilled technical personnel, our operating results and our ability to execute our growth strategies may be adversely affected.
Technology advancements in well service technologies, including those involving hydraulic fracturing, could have a material adverse effect on our business, financial condition and results of operations.
The hydraulic fracturing industry is characterized by rapid and significant technological advancements and introductions of new products and services using new technologies. As competitors and others use or develop new technologies or technologies comparable to ours in the future, we may lose market share or be placed at a competitive disadvantage. Further, we may face competitive pressure to implement or acquire certain new technologies at a substantial cost. Some of our competitors may have greater financial, technical and personnel resources than we do, which may allow them to gain technological advantages or implement new technologies before we can. Additionally, we may be unable to implement new technologies or services at all, on a timely basis or at an acceptable cost. New technology could also make it easier for our customers to vertically integrate their operations, thereby reducing or eliminating the need for our services. Limits on our ability to effectively use or implement new technologies may have a material adverse effect on our business, financial condition and results of operations.
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. Litigation arising from operations where 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.
In addition, our customers assume responsibility for, including control and removal of, all other pollution or contamination which may occur during operations, including that which may result from seepage or any other uncontrolled flow of drilling and completion fluids. We may have liability in such cases if we are grossly negligent or commit willful acts. Our customers generally agree to indemnify us against claims arising from their employees’ personal injury or death to the extent that, in the case of our hydraulic fracturing operations, their employees are injured by such operations, unless resulting from our gross negligence or willful misconduct. Our customers also generally agree to indemnify us for loss or destruction of customer-owned property or equipment. In turn, we agree to indemnify our customers for loss or destruction of property or
equipment we own and for liabilities arising from personal injury to or death of any of our employees, unless resulting from gross negligence or willful misconduct of the customer. However, we might not succeed in enforcing such contractual liability allocation or might incur an unforeseen liability falling outside the scope of such allocation. As a result, we may incur substantial losses which could materially and adversely affect our financial condition and results of operation.
Seasonal weather conditions and natural disasters could severely disrupt normal operations and harm our business.
Our operations are located in different regions of the United States. Some of these areas, including the DJ Basin, Powder River Basin and Williston Basin, are adversely affected by seasonal weather conditions, primarily in the winter and spring. During periods of heavy snow, ice or rain, we may be unable to move our equipment between locations, thereby reducing our ability to provide services and generate revenues. The exploration activities of our customers may also be affected during such periods of adverse weather conditions. Additionally, extended drought conditions in our operating regions could impact our ability or our customers’ ability to source sufficient water or increase the cost for such water. As a result, a natural disaster or inclement weather conditions could severely disrupt the normal operation of our business and adversely impact our financial condition and results of operations.
If we are unable to fully protect our intellectual property rights, we may suffer a loss in our competitive advantage or market share.
We do not have patents or patent applications relating to many of our key processes and technology. If we are not able to maintain the confidentiality of our trade secrets, or if our competitors are able to replicate our technology or services, our competitive advantage would be diminished. We also cannot assure youensure that any patents we may obtain in the future would provide us with any significant commercial benefit or would allow us to prevent our competitors from employing comparable technologies or processes.
We may be adversely affected by disputes regarding intellectual property rights of third parties.
Third parties from time to time may initiate litigation against us by asserting that the conduct of our business infringes, misappropriates or otherwise violates intellectual property rights. We may not prevail in any such legal proceedings related to such claims, and our products and services may be found to infringe, impair, misappropriate, dilute or otherwise violate the intellectual property rights of others. If we are sued for infringement and lose, we could be required to pay substantial damages and/or be enjoined from using or selling the infringing products or technology. Any legal proceeding concerning intellectual property could be protracted and costly regardless of the merits of any claim and is inherently unpredictable and could have a material adverse effect on our financial condition, regardless of its outcome.
If we were to discover that our technologies or products infringe valid intellectual property rights of third parties, we may need to obtain licenses from these parties or substantially re-engineer our products in order to avoid infringement. We may not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to re-engineer our products successfully. If our inability to obtain required licenses for our technologies or products prevents us from selling our products, that could adversely impact our financial condition and results of operations.
Additionally, we currently license certain third party intellectual property in connection with our business, and the loss of any such license could adversely impact our financial condition and results of operations.
We may be subject to interruptions or failures in our information technology systems.
We rely on sophisticated information technology systemsSeasonal weather conditions, natural disasters, public health crises, and infrastructure to support our business, including process control technology. 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. The failure of anycatastrophic events outside of our information technology systems may cause disruptions in ourcontrol could severely disrupt normal operations which could adversely affect our sales and profitability.
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. For example, we depend on digital technologies to perform many of our services and to process and record financial and operating data. At the same time, cyber incidents, including deliberate attacks, 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, and those of our vendors, 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 and other information, or other disruption of business operations. In addition, certain cyber incidents, such as
surveillance, may remain undetected for an extended period. Our systems and insurance coverage for protecting against cyber security risks may not be sufficient. As cyber incidents continue to evolve, we will likely be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber incidents. Our insurance coverage for cyberattacks may not be sufficient to cover all the losses we may experience as a result of such cyberattacks.
A terrorist attack or armed conflict could harm our business.
The occurrence or threatOur operations are located in different regions of terrorist attacks in the United States or other countries, anti-terrorist efforts and other armed conflicts involving the United States or other countries, including continued hostilities in the Middle East, may adversely affect the United States and global economiesCanada. Some of these areas, including the DJ Basin, Powder River Basin, Williston Basin and our Canadian operations, are adversely affected by seasonal weather conditions, primarily in the winter and spring. However, as evidenced by the severe winter weather experienced in the southern United States and Canada during February 2021, weather-related hazards can exist in almost all the areas where we operate. During periods of heavy snow, ice or rain, we may be unable to move our equipment between locations or obtain adequate
supplies of raw material or fuel, thereby reducing our ability to provide services and generate revenues. The exploration activities of our customers may also be affected during such periods of adverse weather conditions. Additionally, extended drought conditions in our operating regions could prevent us from meetingimpact our ability or our customers’ ability to source sufficient water or increase the cost for such water. As a result, a natural disaster or inclement weather conditions could severely disrupt the normal operation of our business and adversely impact our financial condition and other obligations. If anyresults of these events occur,operations. Furthermore, if the resulting political instability and societal disruption could reduce overallarea in which we operate or the market demand for oil and natural gas potentially putting downward pressure on demandis affected by a public health crises, such as the coronavirus, or other similar catastrophic event outside of our control, our business and results of operations could suffer.
The sand mining operations are subject to a number of risks relating to the proppant industry.
In connection with the OneStim Acquisition, we acquired two state-of-the-art sand mines in the Permian Basin. Sand mining operations are subject to risks normally encountered in the proppant industry. These risks include, among others: unanticipated ground, grade or water conditions; inability to acquire or maintain, or public or nongovernmental organization opposition to, necessary permits for mining, access or water rights; our servicesability to timely obtain necessary authorizations, approvals and causing a reduction in our revenues. Oil and natural gas related facilities could be direct targets of terrorist attacks, andpermits from regulatory agencies (including environmental agencies, such as the FWS, where our operations couldin West Texas may be adversely impacted if infrastructure integralslowed, limited or halted due to our customers’ operations is destroyedconservation efforts targeted at the habitat of the dunes sagebrush lizard); pit wall or damaged. Costs for insurancepond failures, and other security may increasesluffing events; costs associated with environmental compliance or as a result of unauthorized releases into the environment; restrictions imposed on our operations related to the protection of natural resources, including plant and animal species; and reduction in the amount of water available for processing. Any of these threats,risks could result in delays, limitations or cancellations in mining or processing activities, losses or possible legal liability.
Silica-related legislation, health issues and some insurance coverage may become more difficult to obtain, if available at all.
We engage in transactions with related parties and such transactions present possible conflicts of interest that could have an adverse effect on us.
We have entered into a significant number of transactions with related parties. Related party transactions create the possibility of conflicts of interest with regard to our management, including that:
we may enter into contracts between us, on the one hand, and related parties, on the other, that are not the result of arm’s-length transactions;
our executive officers and directors that hold positions of responsibility with related parties may be aware of certain business opportunities that are appropriate for presentation to us as well as to such other related parties and may present such business opportunities to such other parties; and
our executive officers and directors that hold positions of responsibility with related parties may have significant duties with, and spend significant time serving, other entities and may have conflicts of interest in allocating time.
Such conflicts could cause an individual in our management to seek to advance his or her economic interests or the economic interests of certain related parties above ours. Further, the appearance of conflicts of interest created by related party transactions could impair the confidence of our investors. Our audit committee reviews these transactions. Notwithstanding this, it is possible that a conflict of interestlitigation could have a material adverse effect on our liquidity,business, reputation or results of operationsoperations.
We are subject to laws and financial condition.
Our historical financial statementsregulations relating to human exposure to crystalline silica. Historically, our environmental compliance costs with respect to existing crystalline silica requirements have not had a material adverse effect on our results of operations; however, federal regulatory authorities and analogous state agencies may continue to propose changes in their regulations regarding workplace exposure to crystalline silica, such as permissible exposure limits, required controls and personal protective equipment. We may not be indicative of future performance.
Dueable to the significant increase in our capacity, our movement intocomply with any new basinslaws and our acquisitions of certain assets, comparisons of our currentregulations that are adopted, and future operating results with prior periods are difficult. As a result, our limited historical financial performance as the owner of the acquired assets may make it difficult for stockholders to evaluate our businessany new laws and results of operations to date and to assess our future prospects and viability. Furthermore, as a result of the volatility in the demand for well services and our future implementation of new business initiatives and strategies, our historical results of operations are not necessarily indicative of our ongoing operations and the operating results to be expected in the future.
We may record losses or impairment charges related to idle assets or assets that we sell.
Prolonged periods of low utilization, changes in technology or the sale of assets below their carrying value may cause us to experience losses. These events could result in the recognition of impairment charges that negatively impact our financial results. Significant impairment charges as a result of a decline in market conditions or otherwiseregulations could have a material adverse effect on our operating results of operations in future periods.
Risks Relatedby requiring us to Our Class A Common Stock
Liberty Inc. is a holding company. Liberty Inc.’s only material asset is its equity interest in Liberty LLC, and Liberty Inc. is accordingly dependent upon distributions from Liberty LLC to pay taxes, make payments under the TRAs and cover its corporate and other overhead expenses.
Liberty Inc. is a holding company and has no material assets other than its equity interest in Liberty LLC. Please see “Item 1. Business—Initial Public Offering and Corporate Reorganization Transaction.” Liberty Inc. has no independent means of generating revenue. To the extent Liberty LLC has available cash, Liberty Inc. intends to cause Liberty LLC to make (i) generally pro rata distributions to its unit holders, including Liberty Inc., in an amount sufficient to allow Liberty Inc. to pay its taxes and to allow it to make payments under the TRAs and (ii) non-pro rata payments to Liberty Inc. to reimburse it for its corporate and other overhead expenses. To the extent that Liberty Inc. needs funds and Liberty LLCmodify or its subsidiaries are restricted from making such distributions or payments under applicable law or regulation or under the terms of any future financing arrangements, or are otherwise unable to provide such funds, Liberty Inc.’s liquidity and financial condition could be materially adversely affected.
Moreover, because Liberty Inc. has no independent means of generating revenue, Liberty Inc.’s ability to make payments under the TRAs is dependent on the ability of Liberty LLC to make distributions to Liberty Inc. in an amount sufficient to cover its obligations under the TRAs. This ability, in turn, may depend on the ability of Liberty LLC’s subsidiaries to make distributions to it. The ability of Liberty LLC, its subsidiaries and other entities in which it directly or indirectly holds an equity interest to make such distributions will be subject to, among other things, (i) the applicable provisions of Delaware law (or other applicable jurisdiction) that may limit the amount of funds available for distribution and (ii) restrictions in relevant debt instruments issued by Liberty LLC or its subsidiaries and other entities in which it directly or indirectly holds an equity interest. To the extent that Liberty Inc. is unable to make payments under the TRAs for any reason, such payments will be deferred and will accrue interest until paid.
The requirements of being a public company, including compliance with the reporting requirements of the Exchange Act, and the requirements of the Sarbanes-Oxley Act, may straincease our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.
As a public company, we need to comply with various laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act, related regulations of the SEC and the requirements of the NYSE, which we were not required to comply with as a private company. Complying with these statutes, regulations and requirements will occupy a significant amount of time of the Board and management and will significantly increase our costs and expenses.
Furthermore, we are required to have our independent registered public accounting firm attest to the effectiveness of our internal controls, in accordance with Section 404 of the Sarbanes Oxley Act for our fiscal year ending December 31, 2019. Our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed, operated or reviewed. Compliance with these requirements may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.operations.
In addition, itthe inhalation of respirable crystalline silica is associated with the lung disease silicosis. There is evidence of an association between crystalline silica exposure or silicosis and lung cancer and a possible that being a public company subjectassociation with other diseases, including immune system disorders such as scleroderma. The actual or perceived health risks of handling hydraulic fracture sand could materially and adversely affect hydraulic fracturing service providers, including us, through reduced use of hydraulic fracture sand, the threat of product liability or employee lawsuits, increased scrutiny by federal, state and local regulatory authorities of us and our customers or reduced financing sources available to these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on the Board or as executive officers. We cannot predict or estimate the amount of additional costsindustry. Furthermore, we may incur or the timing of such costs.
If we failadditional costs with respect to maintain an effective system of internal controls, we may not be ablepurchasing specialized equipment designed to accurately report our financial results or prevent fraud. As a result, current and potential stockholders could lose confidencereduce exposure to crystalline silica in our financial reporting, which would harm our business and the trading price of our Class A Common Stock.
Effective internal controls are necessary for us to provide reliable financial reports, safeguard our assets, prevent fraud and operate successfully as a public company. If we cannot provide reliable financial reports, safeguard our assets, or prevent fraud, our reputation and operating results could be harmed. We cannot be certain that our efforts to develop and maintain our internal controls will be successful, that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to complyconnection with our obligations under Section 404 of the Sarbanes Oxley Act. Any failure to developoperations or maintain effective internal controls, or difficulties encounteredinvest capital in implementing or improving our existing internal controls, could harm our operating results or cause us to fail to meet our reporting obligations. An ineffective system of internal controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our Class A Common Stock.
new equipment.
We are subject to certain requirementsthe Federal Mine Safety and Health Act of Section 4041977, which imposes stringent health and safety standards on numerous aspects of its operations.
Our operations are subject to the Sarbanes-Oxley Act. If we are unableFederal Mine Safety and Health Act of 1977, as amended by the Mine Improvement and New Emergency Response Act of 2006, which imposes stringent health and safety standards on numerous aspects of mineral extraction and processing operations, including the training of personnel, operating procedures, operating equipment, and other matters. Our failure to timely comply with Section 404such standards, or ifchanges in such standards or the costs related to compliance are significant,re-interpretation or more stringent enforcement thereof, could have a material adverse effect on our profitability, stock price, results of operationsbusiness and financial condition could be materially adversely affected.
We are requiredor otherwise impose significant restrictions on its ability to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires that we documentconduct mineral extraction and test our internal control over financial reporting and issue management’s assessment of our internal control over financial reporting. During 2018, we evaluated our existing controls against the standards adopted by the Committee of Sponsoring Organizations of the Treadway Commission and concluded our internal control over financial reporting was effective as of December 31, 2018. As we are not an accelerated filer nor a large accelerated filer as defined in Rule 12b-2 under Section 404, our independent registered public accounting firm is not yet required to formally attest to the effectiveness of our internal control over financial reporting for the year ended December 31, 2018. During the course of our ongoing evaluation and integration of the internal control over financial reporting, we may identify areas requiring improvement, and we may have to design enhanced processes and controls to address issues identified through this review.
An active, liquid and orderly trading market for our Class A Common Stock may not be maintained, and our stock price may be volatile.
Prior to January 2018, our Class A Common Stock was not traded on any market. An active, liquid and orderly trading market for our Class A Common Stock may not be maintained. Active, liquid and orderly trading markets usually result in less price volatility and more efficiency in carrying out investors’ purchase and sale orders. The market price of our Class A Common Stock could vary significantly as a result of a number of factors, some of which are beyond our control. In the event of a drop in the market price of our Class A Common Stock, you could lose a substantial part or all of your investment in our Class A Common Stock.processing operations.
The following factorsoccurrence of explosive incidents could affect our stock price:
quarterly variations in our financial and operating results;
the public reaction to our press releases, our other public announcements and our filings with the SEC;
strategic actions by our competitors;
changes in revenue or earnings estimates, or changes in recommendations or withdrawal of research coverage, by equity research analysts;
speculation in the press or investment community;
the failure of specific research analysts to cover our Class A Common Stock;
sales of our Class A Common Stock by us or other stockholders, or the perception that such sales may occur;
changes in accounting principles, policies, guidance, interpretations or standards;
additions or departures of key management personnel;
actions by our stockholders;
general market conditions, including fluctuations in commodity prices;
domestic and international economic, legal and regulatory factors unrelated to our performance; and
the realization of any risks described under this “Risk Factors” section.
The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our Class A Common Stock. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted against us, could result in very substantial costs, divert our management’s attention and resources and harm our business, operating results and financial condition.
We are a “controlled company” within the meaning of the NYSE rules and, as a result, qualify for and rely on exemptions from certain corporate governance requirements. As a result, our stockholders do not have the same protections afforded to stockholders of companies that cannot rely on such exemptions and are subject to such requirements.
Riverstone/Carlyle Energy Partners IV, L.P., R/C IV Liberty Holdings, L.P. and R/C Energy IV Direct Partnership, L.P. (collectively “Riverstone”) and certain of the Legacy Owners (with Riverstone, collectively, the “Principal Stockholders”) party to a stockholders’ agreement with us control a majority of the combined voting power of our Common Stock. As a result, we are a “controlled company” within the meaning of the NYSE corporate governance standards. Under these rules, a company of which more than 50% of the voting power is held by an individual, a group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements of the NYSE, including the requirement (1) that a majority of the board of directors consist of independent directors, (2) that we have a nominating and corporate governance committee composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities, and (3) that we have a compensation committee composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. We intend to rely on some or all of these exemptions. As a result, we do not have a majority of independent directors or a nominating or governance committee, and our compensation committee does not consist entirely of independent directors. Accordingly, our stockholders do not have the same protections afforded to stockholders of companies subject to all of the corporate governance requirements of the NYSE.
The Principal Stockholders collectively hold a substantial majority of the voting power of our Common Stock
The Principal Stockholders hold over 50% of our Common Stock. As a result, such owners are able to control matters requiring stockholder approval, including the election of directors, changes to our organizational documents and significant corporate transactions. This concentration of ownership makes it unlikely that any other holder or group of holders of our Class A Common Stock will be able to affect the way we are managed or the direction of our business. The interests of the Principal Stockholders with respect to matters potentially or actually involving or affecting us, such as future acquisitions, financings and other corporate opportunities and attempts to acquire us, may conflict with the interests of our other stockholders.
For example, the Principal Stockholders may have different tax positions from us, especially in light of the TRAs, that could influence their decisions regarding whether and when to support the disposition of assets, the incurrence or refinancing of new or existing indebtedness, or the termination of the TRAs and acceleration of our obligations thereunder. In addition, the determination of future tax reporting positions, the structuring of future transactions and the handling of any challenge by any taxing authority to our tax reporting positions may take into consideration the Principal Stockholders tax position or other considerations which may differ from the considerations of us or our other stockholders. For further details of the TRAs, see Note 10, “Income Taxes” to the consolidated and combined financial statements included in “Item 8. Financial Statements and Supplementary Data.”
Given this concentrated ownership, the Principal Stockholders would have to approve any potential acquisition of us. Furthermore, in connection with the IPO, we entered into a stockholders’ agreement with the Principal Stockholders. The stockholders’ agreement provides Riverstone with the right to designate a certain number of nominees to the Board so long as Riverstone and its affiliates collectively beneficially own at least 10% of the outstanding shares of our Class A Common Stock. In addition, the stockholders’ agreement provides Riverstone the right to approve certain material transactions so long as Riverstone and its affiliates own at least 20% of the outstanding shares of our Class A Common Stock. The existence of significant stockholders may have the effect of deterring hostile takeovers, delaying or preventing changes in control or changes in management, or limiting the ability of our other stockholders to approve transactions that they may deem to be in the best interests of our company. Moreover, the Principal Stockholders concentration of stock ownership may adversely affect the trading price of our Class A Common Stock to the extent investors perceive a disadvantage in owning stock of a company with significant stockholders.
Certain of our executive officers and directors have significant duties with, and spend significant time serving, entities that may compete with us in seeking acquisitions and business opportunities and, accordingly, may have conflicts of interest in allocating time or pursuing business opportunities.
Certain of our executive officers and directors, who are responsible for managing the direction ofdisrupt our operations hold positions of responsibility with other entities (including affiliated entities) that are in the oil and natural gas industry. For example, Christopher Wright, our Chairman and Chief Executive Officer, is the Executive Chairman of Liberty Resources LLC (“Liberty Resources”), an E&P company operating primarily in the Williston Basin, a position which may require a portion of his time. These executive officers and directors may become aware of business opportunities that may be appropriate for presentation to us as well as to the other entities with which they are or may become affiliated. Due to these existing and potential future affiliations, they may present potential business opportunities to other entities prior to presenting them to us, which could cause additional conflicts of interest. They may also decide that certain opportunities are more appropriate for
other entities with which they are affiliated, and as a result, they may elect not to present those opportunities to us. These conflicts may not be resolved in our favor.
Riverstone and its respective affiliates are not limited in their ability to compete with us, and the corporate opportunity provisions in our amended and restated certificate of incorporation could enable Riverstone to benefit from corporate opportunities that might otherwise be available to us.
Our governing documents provide that Riverstone and its respective affiliates (including portfolio investments of Riverstone and its affiliates) are not restricted from owning assets or engaging in businesses that compete directly or indirectly with us. In particular, subject to the limitations of applicable law, our amended and restated certificate of incorporation will, among other things:
permits Riverstone and its respective affiliates to conduct business that competes with us and to make investments in any kind of property in which we may make investments; and
provides that if Riverstone or its respective affiliates, or any employee, partner, member, manager, officer or director of Riverstone or its respective affiliates who is also one of our directors or officers, becomes aware of a potential business opportunity, transaction or other matter, they have no duty to communicate or offer that opportunity to us.
Riverstone or its respective affiliates may become aware, from time to time, of certain business opportunities (such as acquisition opportunities) and may direct such opportunities to other businesses in which they have invested, in which case we may not become aware of or otherwise have the ability to pursue such opportunity. Furthermore, such businesses may choose to compete with us for these opportunities, possibly causing these opportunities to not be available to us or causing them to be more expensive for us to pursue. In addition, Riverstone and its respective affiliates may dispose of oil and natural gas properties or other assets in the future, without any obligation to offer us the opportunity to purchase any of those assets. As a result, our renouncing our interest and expectancy in any business opportunity that may be from time to time presented to Riverstone and its respective affiliates could adversely impact our business or prospects if attractive business opportunities are procured by such parties for their own benefit rather than for ours.
Our amended and restated certificate of incorporation and amended and restated bylaws, as well as Delaware law, contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect the market price of our Class A Common Stock and could deprive our investors of the opportunity to receive a premium for their shares.
Our amended and restated certificate of incorporation authorizes the Board to issue preferred stock without stockholder approval in one or more series, designate the number of shares constituting any series, and fix the rights, preferences, privileges and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices and liquidation preferences of such series. If the Board elects to issue preferred stock, it could be more difficult for a third party to acquire us. In addition, some provisions of our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to our stockholders. These provisions include:
after we cease to be a controlled company, dividing the Board into three classes of directors, with each class serving staggered three-year terms;
after we cease to be a controlled company, and subject to the terms of our stockholders’ agreement, providing that all vacancies, including newly created directorships, may, except as otherwise required by law or, if applicable, the rights of holders of a series of preferred stock, only be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum (prior to such time, vacancies may also be filled by stockholders holding a majority of the outstanding Common Stock);
after we cease to be a controlled company, permitting any action by stockholders to be taken only at an annual meeting or special meeting rather than by a written consent of the stockholders, subject to the rights of any series of preferred stock with respect to such rights;
after we cease to be a controlled company, permitting special meetings of our stockholders to be called only by our Chief Executive Officer, the chairman of the Board and the Board pursuant to a resolution adopted by the affirmative vote of a majority of the total number of authorized directors whether or not there exist any vacancies in previously authorized directorships (prior to such time, a special meeting may also be called by our Corporate Secretary at the request of Riverstone);
after we cease to be a controlled company, and subject to the rights of the holders of shares of any series of our preferred stock and the terms of our stockholders’ agreement, requiring the affirmative vote of the holders of at least 66 2⁄3% in voting power of all then outstanding Common Stock entitled to vote generally in the election of
directors, voting together as a single class, to remove any or all of the directors from office at any time, and directors will be removable only for “cause”;
prohibiting cumulative voting in the election of directors;
establishing advance notice provisions for stockholder proposals and nominations for elections to the board of directors to be acted upon at meetings of stockholders; and
providing that the board of directors is expressly authorized to adopt, or to alter or repeal our bylaws.
In addition, certain change of control events have the effect of accelerating the payments due under the TRAs, which could be substantial and accordingly serve as a disincentive to a potential acquirer of our Company. Please see “—In certain cases, payments under the TRAs may be accelerated and/or significantly exceed the actual benefits, if any, Liberty Inc. realizes in respect of the tax attributes subject to the TRAs.”
Our amended and restated certificate of incorporation designates 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, employees or agents.
Our amended and restated 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, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders, (iii) any action asserting a claim against us or any director or officer or other employee of ours arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”), our amended and restated certificate of incorporation or our bylaws, or (iv) any action asserting a claim against us or any director or officer or other employee of ours that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. Any person or entity purchasing or otherwise acquiring any interest in shares of our Common Stock will be deemed to have notice of, and consented to, the provisions of our amended and restated certificate of incorporation described in the preceding sentence. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation 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 orand results of operations.
If a substantial numberThe wireline service we provide to oil and natural gas E&P customers involves the storage and handling of sharesexplosive materials. Despite the use of Class A Common Stock becomes available for salespecialized facilities to store explosive materials and are soldintensive employee training programs, the handling of explosive materials could result in a short period of time, the market price ofincidents that temporarily shut down or otherwise disrupt our Class A Common Stockor E&P customers’ operations or could decline and our stockholders may be diluted.
If our Principal Stockholders sell substantial amounts of our Class A Common Stockcause restrictions, delays or cancellations in the public market, the market pricedelivery of our Class A Common Stockservices. It is possible that an explosion could decrease. The perceptionresult in the public market that our Principal Stockholders might sell shares of our Class A Common Stockdeath or significant injuries to employees and other persons. Material property damage to us, E&P customers and third parties could also create a perceived overhang and depress our market price. Over 50% of our Class A Common Stock outstanding is held by our Legacy Owners. In addition, our Legacy Owners, which includes the Principal Stockholders, hold Liberty LLC Units and shares of our Class B Common Stock which were exchangeable for an additional 45,207,372 shares of Class A Common Stock as of December 31, 2018. In addition, our Principal Stockholders, will have substantial demand and incidental registration rights for their shares.
Future sales or issuances of our Class A Common Stock in the public market, or the perception that such sales may occur,occur. Any explosive incident could reduce our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us.
We may sell additional shares of Class A Common Stock in subsequent public offerings. We may also issue additional shares of Class A Common Stock or convertible securities. We presently have 68,741,273 shares of Class A Common Stock issued and outstanding. The Liberty Unit Holders are party to a registration rights agreement, which requiresexpose us to effect the registration of any shares of Class A Common Stock that they receive in exchangeadverse publicity or liability for their Liberty LLC Units in certain circumstances.
We have 12,908,734 shares of our Class A Common Stock issueddamages or reserved for issuance under our long term incentive plan. Subject to the satisfaction of vesting conditions and the requirements of Rule 144, shares registered under the registration statement on Form S-8 may be made available for resale immediately in the public market without restriction.
We cannot predict the size of future issuances of our Class A Common Stockcause production restrictions, delays or securities convertible into Class A Common Stock or the effect, if any, that future issuances and sales of shares of our Class A Common Stock will have on the
market price of our Class A Common Stock. Sales of substantial amounts of our Class A Common Stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices of our Class A Common Stock.
Liberty Inc. is required to make payments under the TRAs for certain tax benefits that it may claim, and the amounts of such payments could be significant.
The TRAs generally provide for the payment by Liberty Inc. to each TRA Holder of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax (computed using simplifying assumptions to address the impact of state and local taxes) that Liberty Inc. actually realizes (or is deemed to realize in certain circumstances) as a result of certain increases in tax basis, net operating losses available to Liberty Inc. as a result of the Corporate Reorganization, and certain benefits attributable to imputed interest. Liberty Inc. will retain the benefit of the remaining 15% of these cash savings.
The term of each of the TRAs continues until all tax benefits that are subject to such TRAs have been utilized or expired, unless Liberty Inc. experiences a change of control (as defined in the TRAs, which includes certain mergers, asset sales and other forms of business combinations) or the TRAs are terminated early (at Liberty Inc.’s election or as a result of its breach), and Liberty Inc. makes the termination payments specified in such TRAs. In addition, payments Liberty Inc. makes under the TRAs will be increased by any interest accrued from the due date (without extensions) of the corresponding tax return. In the event that the TRAs are not terminated, the payments under the TRAs are anticipated to commence in 2020 and to continue for 15 years after the date of the last redemption of the Liberty LLC Units.
The payment obligations under the TRAs are Liberty Inc.’s obligations and not obligations of Liberty LLC, and Liberty Inc. expects that the payments Liberty Inc. will be required to make under the TRAs will be substantial. Estimating the amount and timing of payments that may become due under the TRAs is by its nature imprecise. For purposes of the TRAs, cash savings in tax generally are calculated by comparing Liberty Inc.’s actual tax liability (determined by using the actual applicable U.S. federal income tax rate and an assumed combined state and local income tax rate) to the amount it would have been required to pay had it not been able to utilizecancellations, any of the tax benefits subject to the TRAs. The amounts payable, as well as the timing of any payments, under the TRAs are dependent upon significant future events and assumptions, including the timing of the redemptions of Liberty LLC Units, the price of our Class A Common Stock at the time of each redemption, the extent to which such redemptions are taxable transactions, the amount of the redeeming unit holder’s tax basis in its Liberty LLC Units at the time of the relevant redemption, the depreciation and amortization periods that apply to the increase in tax basis, the amount of net operating losses available to Liberty Inc. as a result of the Corporate Reorganization, the amount and timing of taxable income Liberty Inc. generates in the future, the U.S. federal income tax rate then applicable, and the portion of Liberty Inc.’s payments under the TRAs that constitute imputed interest or give rise to depreciable or amortizable tax basis.
The payments under the TRAs will not be conditioned upon a holder of rights under each of the TRAs having a continued ownership interest in Liberty Inc. or Liberty LLC. For further details of the TRAs, see Note 10, “Income Taxes” to the consolidated and combined financial statements included in “Item 8. Financial Statements and Supplementary Data.”
In certain cases, payments under the TRAs may be accelerated and/or significantly exceed the actual benefits, if any, Liberty Inc. realizes in respect of the tax attributes subject to the TRAs.
If Liberty Inc. experiences a change of control (as defined under the TRAs, which includes certain mergers, asset sales and other forms of business combinations) or the TRAs terminate early (at Liberty Inc.’s election or as a result of its breach), Liberty Inc. would be required to make a substantial, immediate lump-sum payment. This payment would equal the present value of hypothetical future payments that could be required to be paid under the TRAs (determined by applying a discount rate equal to the long-term Treasury rate in effect on the applicable date plus 300 basis points). The calculation of hypothetical future payments will be based upon certain assumptions and deemed events set forth in the TRAs, including (i) that Liberty Inc. has sufficient taxable income to fully utilize the tax benefits covered by the TRAs, (ii) that any Liberty LLC Units (other than those held by Liberty Inc.) outstanding on the termination date are deemed to be redeemed on the termination date, and (iii) certain loss or credit carryovers will be utilized over five years beginning with the taxable year that includes the termination date. Any early termination payments may be made significantly in advance of, and may materially exceed, the actual realization, if any, of the future tax benefits to which the termination payments relate.
If Liberty Inc. experiences a change of control (as defined under the TRAs) or the TRAs otherwise terminate early, Liberty Inc.’s obligations under the TRAsdevelopments could have a substantial negative impact on its liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, or other forms of business combinations or changes of control. For example, if the TRAs were terminated at December 31, 2018, the estimated termination payments would, in the aggregate, be approximately $67.3 million (calculated using a discount rate equal to the long-term Treasury rate inmaterial adverse effect on the applicable date plus 300 basis points, applied against an undiscounted liabilityour ability to compete, business, financial condition and results of $110.0 million). The foregoing number is merely an
operations.
estimate and the actual payment could differ materially. There can be no assurance that we will be able to finance our obligations under the TRAs.
For further details of the TRAs, see Note 10, “Income Taxes” to the consolidated and combined financial statements included in “Item 8. Financial Statements and Supplementary Data.”
In the event that Liberty Inc.’s payment obligations under the TRAs are accelerated upon certain mergers, other forms of business combinations or other changes of control, the consideration payable to holders of our Class A Common Stock could be substantially reduced.
If Liberty Inc. experiences a change of control (as defined under the TRAs, which includes certain mergers, asset sales and other forms of business combinations), Liberty Inc. would be obligated to make a substantial, immediate lump-sum payment, and such payment may be significantly in advance of, and may materially exceed, the actual realization, if any, of the future tax benefits to which the payment relates. As a result of this payment obligation, holders of our Class A Common Stock could receive substantially less consideration in connection with a change of control transaction than they would receive in the absence of such obligation. Further, our payment obligations under the TRAs will not be conditioned upon the TRA Holders’ having a continued interest in Liberty Inc. or Liberty LLC. Accordingly, the TRA Holders’ interests may conflict with those of the holders of our Class A Common Stock. Please read “Risk Factors—Risks Related to our Class A Common Stock—In certain cases, payments under the TRAs may be accelerated and/or significantly exceed the actual benefits Liberty Inc. realizes, if any, in respect of the tax attributes subject to the TRAs” and Note 10, “Income Taxes” to the consolidated and combined financial statements included in “Item 8. Financial Statements and Supplementary Data.”
We will not be reimbursed for any payments made under the TRAs in the event that any tax benefits are subsequently disallowed.
Payments under the TRAs are based on the tax reporting positions that we will determine. The TRA Holders will not reimburse us for any payments previously made under the TRAs if any tax benefits that have given rise to payments under the TRAs are subsequently disallowed, except that excess payments made to any TRA Holder will be netted against payments that would otherwise be made to such TRA Holder, if any, after our determination of such excess. As a result, in such circumstances, Liberty Inc. could make payments that are greater than its actual cash tax savings, if any, and may not be able to recoup those payments, which could adversely affect Liberty Inc.’s liquidity.
If Liberty LLC were to become a publicly traded partnership taxable as a corporation for U.S. federal income tax purposes, Liberty Inc. and Liberty LLC might be subject to potentially significant tax inefficiencies, and Liberty Inc. would not be able to recover payments previously made by it under the TRAs even if the corresponding tax benefits were subsequently determined to have been unavailable due to such status.
Liberty Inc. intends to operate such that Liberty LLC does not become a publicly traded partnership taxable as a corporation for U.S. federal income tax purposes. A “publicly traded partnership” is a partnership the interests of which are traded on an established securities market or are readily tradable on a secondary market or the substantial equivalent thereof. Under certain circumstances, redemptions of Liberty LLC Units pursuant to the Redemption Right, Liberty Inc.’s Call Right or other transfers of Liberty LLC Units could cause Liberty LLC to be treated as a publicly traded partnership. Applicable U.S. Treasury regulations provide for certain safe harbors from treatment as a publicly traded partnership, and Liberty Inc. intends to operate such that redemptions or other transfers of Liberty LLC Units qualify for one or more such safe harbors. For example, Liberty Inc. intends to limit the number of unit holders of Liberty LLC, and the Liberty LLC Agreement, which was entered into in connection with the closing of the IPO, provides for limitations on the ability of holders of Liberty LLC Units to transfer their Liberty LLC Units and provides Liberty Inc., as managing member of Liberty LLC, with the right to impose restrictions (in addition to those already in place) on the ability of holders of Liberty LLC Units to redeem their Liberty LLC Units pursuant to the Redemption Right to the extent Liberty Inc. believes it is necessary to ensure that Liberty LLC will continue to be treated as a partnership for U.S. federal income tax purposes.
If Liberty LLC were to become a publicly traded partnership, significant tax inefficiencies might result for Liberty Inc. and for Liberty LLC, including as a result of Liberty Inc.’s inability to file a consolidated U.S. federal income tax return with Liberty LLC. In addition, Liberty Inc. would no longer have the benefit of certain increases in tax basis covered under the TRAs, and Liberty Inc. would not be able to recover any payments previously made by it under the TRAs, even if the corresponding tax benefits (including any claimed increase in the tax basis of Liberty LLC’s assets) were subsequently determined to have been unavailable.
In certain circumstances, Liberty LLC is required to make tax distributions and tax advances to the Liberty Unit Holders, including us, and the tax distributions and tax advances that Liberty LLC is required to make may be substantial.
Pursuant to the Liberty LLC Agreement, Liberty LLC makes generally pro rata cash distributions, or tax distributions, to the holders of Liberty LLC Units, including Liberty Inc., in an amount sufficient to allow Liberty Inc. to pay its taxes and to allow it to make payments under the TRAs. In addition to these pro rata distributions, the Liberty Unit Holders are entitled to receive tax advances in an amount sufficient to allow each of the Liberty Unit Holders to pay its respective taxes on such holder’s allocable share of Liberty LLC’s taxable income. Any such tax advance is calculated after taking into account certain other distributions or payments received by the Liberty Unit Holders from Liberty LLC or Liberty Inc. Under the applicable tax rules, Liberty LLC is required to allocate net taxable income disproportionately to its members in certain circumstances. Tax advances are determined based on an assumed individual tax rate and are repaid upon exercise of the Redemption Right or the Call Right, as applicable.
Funds used by Liberty LLC to satisfy its tax distribution and tax advance obligations are not available for reinvestment in our business. Moreover, the tax distributions and tax advances Liberty LLC is required to make may be substantial, and is likely to exceed (as a percentage of Liberty LLC’s income) the overall effective tax rate applicable to a similarly situated corporate taxpayer. In addition, because these payments are calculated with reference to an assumed tax rate, and because of the disproportionate allocation of net taxable income, these payments may exceed the actual tax liability for some of the holders of Liberty LLC Units.
We may issue preferred stock whose terms could adversely affect the voting power or value of our Class A Common Stock.
Our amended and restated certificate of incorporation authorizes us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our Class A Common Stock respecting dividends and distributions, as the Board may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our Class A Common Stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of the Class A Common Stock.
If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our Class A Common Stock or if our operating results do not meet their expectations, our stock price could decline.
The trading market for our Class A Common Stock may be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of the Company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover the Company downgrades our Class A Common Stock or if our operating results do not meet their expectations, our stock price could decline.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Information regarding our properties is contained in “Item 1. Business” and is incorporated by reference herein.
Item 3. Legal Proceedings
On February 23, 2017, SandBox Logistics, LLCThe information with respect to this Item 3. Legal Proceedings is set forth in Note 15—Commitments and Oren Technologies, LLC (collectively “Sandbox”) filed suitContingencies included in the Houston Division of the U.S. District Court for the Southern District of Texas against Proppant Express Investments, LLC, Proppant Express Solutions, LLC,“Item 8. Financial Statements and Liberty Oilfield Services LLC (“LOS”). SandBox alleged that LOS willfully infringed multiple U.S. patents and breached an agreement between SandBox and LOS by “directing, controlling, and funding” inter partes review requests before the U.S. Patent and Trademark Office. In July 2018, SandBox requested permission from the court to allege additional breach of contract claims against LOS, including alleged breaches of a confidentiality agreement and an exclusive purchasing covenant. The court denied these requests in September 2018. On December 19, 2018, the U.S. District Court for the Southern District of Texas entered an order dismissing the claims against LOS with prejudice.Supplementary Data.”
We are named defendants in certain lawsuits, investigations and claims arising in the ordinary course of conducting our business, including certain environmental claims and employee-related matters, and we expect that we will be named defendants in similar lawsuits, investigations and claims in the future. While the outcome of these lawsuits, investigations and claims cannot be predicted with certainty, we do not expect these matters to have a material adverse impact on our business, results of operations, cash flows or financial condition. We have not assumed any liabilities arising out of these existing lawsuits, investigations and claims.
Item 4. Mine Safety Disclosures
Not applicable.
Information concerning mine safety violations or other regulatory matters required by section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Form 10-K.
PART II
Item 5. Market for Registrant'sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
On January 17, 2018, we consummated an initial public offering of our Class A Common Stock at a price of $17.00 per share. Our Class A Common Stock is traded on the NYSE under the symbol “LBRT.” Prior to that time, there was no public market for our Class A Common Stock. There is no public market for our Class B Common Stock.
Holders of our Common Stock
As of February 26, 2019,18, 2022, there were 7229 stockholders of record of our Class A Common Stock and 1522 stockholders of record of our Class B Common Stock. The number of record holders is based upon the actual number of holders registered on the books of the Company at such date and does not include holders of shares in “street names” or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depositories.
Dividend Policy
TheAlthough the Company has previously paid quarterly cash dividends of $0.05 per shareto stockholders of Class A Common Stock, on September 20 andin 2020, the Company suspended future quarterly dividends until business conditions warrant reinstatement. As a result, the Company did not pay any dividends in the year ended December 20, 2018 to shareholders of record as of September 6 and December 6, 2018, respectively.31, 2021. The declaration of dividends is subject to approval by the Board and to the Board’s continuing determination that such declaration of dividends is in the best interests of the Company and its stockholders. Future dividends may be adjusted at the Board’s discretion based on market conditions and capital availability. We are not required to pay dividends, and our stockholders will not be guaranteed, or have contractual or other rights to receive, dividends.
Recent Sales of Unregistered Equity Securities
We had no sales of unregistered equity securities during the period covered by this Annual Report on Form 10-K that were not previously reported in a Current Report on Form 8-K.8-K (or on Form 10-Q in lieu of Form 8-K).
Purchase of Equity Securities By the Issuer and Affiliated Purchasers
On September 10, 2018 the Board authorized a share repurchase plan to repurchase up to $100.0 million of the Company’s Class A Common Stock through September 30, 2019. On January 22, 2019, the Board authorized an additional $100.0 million under the share repurchase plan through January 31, 2021. During the quarteryear ended December 31, 2018, Liberty LLC redeemed and retired 1,750,490 Liberty LLC Units from2021, the Company for $29.0 million, and the Company repurchased and retired 1,750,490did not purchase any shares of Class A Common Stock for $29.0 million, or $16.53 average price per share excluding commissions. The total remainingStock.
As of December 31, 2021, no amounts remained authorized amount available for future repurchases of Class A Common Stock under the share repurchase program was $17.1 million asprogram.
Stock Performance Graph
The following graph and table compares the cumulative total return on our Class A Common Stock with the cumulative total return on the Standard & Poor’s 500 ® Index and the Philadelphia Oil Service Index, since January 12, 2018, the first day on which shares of our Common Stock issued in our IPO commenced trading on the NYSE and each semi-annual period thereafter through December 31, 2018.
|
| | | | | | | | | | | | | | |
| Period | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs (1) | | Approximate dollar value of shares that may yet be purchased under the plans or programs |
| October | | — |
| | $ | — |
| | — |
| | $ | — |
|
| November | | 191,712 |
| | 18.83 |
| | 191,712 |
| | 42,463,090 |
|
| December | | 1,558,778 |
| | 16.25 |
| | 1,558,778 |
| | 17,096,596 |
|
| Total | | 1,750,490 |
| | $ | 16.53 |
| | 1,750,490 |
| | $ | 17,096,596 |
|
(1) All repurchases are made under the share repurchase plan approved on September 10, 2018 by the Board.
2021. The Company accounts for the purchase price of repurchasedgraph assumes that $100 was invested in our Class A Common Stock in excesseach index on January 12, 2018 and that any dividends were reinvested on the last day of par value ($0.01 per sharethe month in which they were paid. The cumulative total return set forth is not necessarily indicative of Class A Common Stock) as a reductionfuture performance.
The following graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of additional paid-in capital, and will continue1933 or the Securities Exchange Act of 1934, except to do so until additional paid-in capital is reduced to zero. Thereafter, any excess purchase price will be recorded as a reduction to retained earnings.
the extent that we specifically incorporate it by reference into such filing.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For Year Ended 2018 | | For the Year Ended 2019 | | For the Year Ended 2020 | | For the Year Ended 2021 |
| January
12, | June
30, | December
31, | | June
30, | December
31, | | June
30, | December
31, | | June
30, | December
31, |
| Liberty Oilfield Services, Inc. | $ | 100.00 | | $ | 83.87 | | $ | 58.38 | | | $ | 73.40 | | $ | 50.91 | | | $ | 25.55 | | $ | 48.08 | | | $ | 66.03 | | $ | 45.23 | |
| Standard & Poor’s 500 ® Index | 100.00 | | 97.00 | | 89.45 | | | 104.97 | | 115.28 | | | 110.62 | | 134.02 | | | 153.34 | | 170.07 | |
| Philadelphia Oil Service Index | 100.00 | | 95.91 | | 49.91 | | | 50.37 | | 48.48 | | | 20.67 | | 27.45 | | | 39.47 | | 32.65 | |
Item 6. Selected Financial Data
The selected financial data set forth below was derived from our audited consolidated and combined financial statements and should be read in conjunction with “Item 1A. Risk Factors,” “Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated and combined financial statements included in “Item 8. Financial Statements and Supplementary Data.”[Reserved]
|
| | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 |
| | | | | | | | |
| | (in thousands, except per share and fleet data) |
| Statement of Operations Data: | | | | | | | |
| Revenue: | | | | | | | |
| Revenue | $ | 2,132,032 |
| | $ | 1,465,133 |
| | $ | 356,890 |
| | $ | 384,330 |
|
| Revenue—related parties | 23,104 |
| | 24,722 |
| | 17,883 |
| | 71,074 |
|
| Total revenue | 2,155,136 |
| | 1,489,855 |
| | 374,773 |
| | 455,404 |
|
| Operating costs and expenses: |
|
| | | | | | |
| Cost of services (exclusive of depreciation and amortization shown separately below) | 1,628,753 |
| | 1,147,008 |
| | 354,729 |
| | 393,340 |
|
| General and administrative | 99,052 |
| | 80,089 |
| | 35,789 |
| | 28,765 |
|
| Depreciation and amortization | 125,110 |
| | 81,473 |
| | 41,362 |
| | 36,436 |
|
| (Gain) loss on disposal of assets | (4,342 | ) | | 148 |
| | (2,673 | ) | | 423 |
|
| Total operating costs and expenses | 1,848,573 |
| | 1,308,718 |
| | 429,207 |
| | 458,964 |
|
| Operating income (loss) | 306,563 |
| | 181,137 |
| | (54,434 | ) | | (3,560 | ) |
| Other expense: | | | | | | | |
| Interest expense | (17,145 | ) | | (11,875 | ) | | (6,126 | ) | | (5,501 | ) |
| Interest expense—related party | — |
| | (761 | ) | | — |
| | — |
|
| Total interest expense | (17,145 | ) | | (12,636 | ) | | (6,126 | ) | | (5,501 | ) |
| Net income (loss) before income taxes | 289,418 |
| | 168,501 |
| | (60,560 | ) | | (9,061 | ) |
| Income tax expense | 40,385 |
| | — |
| | — |
| | — |
|
| Net income (loss) | 249,033 |
| | 168,501 |
| | (60,560 | ) | | (9,061 | ) |
| Less: Net income (loss) attributable to Predecessor, prior to Corporate Reorganization | 8,705 |
| | 168,501 |
| | (60,560 | ) | | (9,061 | ) |
| Less: Net income attributable to noncontrolling interests | 113,979 |
| | — |
| | — |
| | — |
|
| Net income attributable to Liberty Oilfield Services Inc. stockholders | $ | 126,349 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Net Income Per Share Data (1): | | | | | | | |
| Net income attributable to Liberty Oilfield Services Inc. stockholders per common share | | | | | | | |
| Basic | $ | 1.84 |
| | | | | | |
| Diluted | $ | 1.81 |
| | | | | | |
| Weighted average common shares outstanding | | | | | | | |
| Basic | 68,838 |
| | | | | | |
| Diluted | 117,838 |
| | | | | | |
| Statement of Cash Flows Data: | | | | | | | |
| Cash flows provided by (used in) operating activities | $ | 351,258 |
| | $ | 195,109 |
| | $ | (40,708 | ) | | $ | 6,119 |
|
| Cash flows used in investing activities | 255,492 |
| | 310,043 |
| | 96,351 |
| | 38,492 |
|
| Cash flows (used in) provided by financing activities | (8,775 | ) | | 119,771 |
| | 148,543 |
| | 21,485 |
|
| Other Financial Data: | | | | | | | |
| Capital expenditures | $ | 258,835 |
| | $ | 311,794 |
| | $ | 102,428 |
| | $ | 38,492 |
|
| EBITDA (2) | $ | 431,673 |
| | $ | 262,610 |
| | $ | (13,072 | ) | | $ | 32,876 |
|
| Adjusted EBITDA (2) | $ | 438,234 |
| | $ | 280,728 |
| | $ | (5,588 | ) | | $ | 41,213 |
|
| Total Fleets at beginning of period (3) | 19 |
| | 10 |
| | 6 |
| | 5 |
|
| Total Fleets at end of period (3) | 22 |
| | 19 |
| | 10 |
| | 6 |
|
| Average Active Fleets (4) | 21.3 |
| | 15.1 |
| | 7.4 |
| | 5.9 |
|
| Adjusted EBITDA per Average Active Fleet (5) | $ | 20,574 |
| | $ | 18,591 |
| | $ | (755 | ) | | $ | 6,985 |
|
|
| | | | | | | | | | | | | | | |
| Balance Sheet Data (at end of period): |
| |
| |
| | |
| Total assets | $ | 1,116,501 |
| | $ | 852,103 |
| | $ | 451,845 |
| | $ | 296,971 |
|
| Long-term debt (including current portion) | 106,524 |
| | 196,357 |
| | 103,805 |
| | 110,232 |
|
| Total liabilities | 375,687 |
| | 416,851 |
| | 222,873 |
| | 162,920 |
|
| Redeemable common units (6) | — |
| | 42,486 |
| | — |
| | — |
|
| Total equity or member equity | 740,814 |
| | 392,766 |
| | 228,972 |
| | 134,051 |
|
| |
(1) | Net Income Per Share Data above reflects the net income to Class A Common Stock and net income per share for the period indicated based on a weighted average number of Class A Common Stock outstanding for period subsequent to the Corporate Reorganization on January 17, 2018. |
| |
(2) | EBITDA and Adjusted EBITDA are non-GAAP financial measures. For definitions of EBITDA and Adjusted EBITDA and a reconciliation of each to our most directly comparable financial measure calculated and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), please read “Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations—Comparison of Non-GAAP Financial Measures.” |
| |
(3) | Total Fleets represents the number of deployed and active fleets as of the designated date. |
| |
(4) | Average Active Fleets is calculated as the daily average of the active fleets for the period presented. |
| |
(5) | Adjusted EBITDA per Average Active Fleet is calculated as Adjusted EBITDA for the period divided by the Average Active Fleets, as defined above. |
| |
(6) | The redeemable common units were deemed extinguished and satisfied in full in the Corporate Reorganization. |
Item 7. Management'sManagement’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 “Item 6. Selected Financial Data” and our audited consolidated and combined financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.Report. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs and expected performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of risks and uncertainties, including those described in this Annual Reporting on Form 10-KReport under “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors.” WeExcept as required by law, we assume no obligation to update any of these forward-looking statements. This section of this Annual Report generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. For discussion of year ended December 31, 2019, as well as the year ended 2020 compared to the year ended December 31, 2019, refer to Part II, Item 7— “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2020 Annual Report.
Overview
We are an independent provider of hydraulic fracturing services and wireline services and related goods to onshore oil and natural gas E&P companies in North America. We have grown from one active hydraulic fracturing fleet in December 2011 to 22over 30 active fleets in February 2019. We added three fleets during the year endedas of December 31, 2018.2021. We provide our services primarily in the Permian Basin, the Eagle Ford Shale, the DJ Basin, the Williston Basin, the San Juan Basin and the Powder River Basin. Following the completion of the OneStim Acquisition (as defined below) we now also provide services in the Haynesville Shale, the SCOOP/STACK, the Marcellus Shale, Utica Shale, and the Western Canadian Sedimentary Basin. Additionally, we operate two sand mines in the Permian Basin.
On December 31, 2020, the Company acquired certain assets and liabilities of Schlumberger’s OneStim business, which provides hydraulic fracturing pressure pumping services in onshore United States and Canada, including its pressure pumping, pumpdown perforating and Permian frac sand business, in exchange for consideration resulting in a total of 66,326,134 shares of the Class A Common Stock being issued in connection with the OneStim Acquisition. As of February 18, 2022, Schlumberger owned 30.5% of the issued and outstanding shares of our Common Stock. The combined company delivers best-in-class completion services for the sustainable development of unconventional resource plays in the United States and Canada onshore markets.
On October 26, 2021, the Company acquired PropX in exchange for $11.9 million in cash and 3,405,526 shares of Class A Common Stock and 2,441,010 shares of Class B Common Stock, and 2,441,010 Liberty LLC Units, for total consideration of $103.0 million, based on the Class A Common Stock closing price of $15.58 on October 26, 2021, subject to customary post closing adjustments. The Liberty LLC Units are redeemable for an equivalent number of shares of Class A Common Stock at any time, at the election of the shareholder. Founded in 2016, PropX is a leading provider of last-mile proppant delivery solutions including proppant handling equipment and logistics software across North America. PropX offers innovative environmentally friendly technology with optimized dry and wet sand containers and wellsite proppant handling equipment that drive logistics efficiency and reduce noise and emissions. We believe that PropX wet sand handling technology is a key enabler of the next step of cost and emissions reductions in the proppant industry. PropX also offers customers the latest real-time logistics software, PropConnect, for sale or as hosted software as a service.
We believe the following characteristics bothtechnical innovation and strong relationships with our customer and supplier bases distinguish us from our competitors and are the foundations of our business: forming ongoing partnerships of trust and innovation with our customers; developing and utilizing technology to maximize well performance; and promoting a people-centered culture focused on our employees, customers and suppliers.business. We have developed strong relationships with our customers by investing significant time in fracture design collaboration, which substantially enhances their production economics. Our technological innovations have become even more critical asexpect that E&P companies have increased thewill continue to focus on technological innovation as completion complexity and fracture intensity of horizontal wells.wells increases, particularly as customers are increasingly focused on reducing emissions from their completions operations. We areremain proactive in developing innovative solutions to industry challenges, including developing: (i) our proprietary databases of U.S. unconventional wells to which we apply our proprietary multi-variable statistical analysis technologies to provide differential insight into fracture design optimization; (ii) our Liberty Quiet Fleet® design which significantly reduces noise levels compared to conventional hydraulic fracturing fleets; and (iii) hydraulic fracturing fluid systems tailored to the specific reservoir properties in the basins in which we operate. We fosteroperate; (iv) our dual fuel dynamic gas blending fleets that allow our engines to run diesel or a people-centered culture built around honoringcombination of diesel and natural gas, to optimize fuel use, reduce emissions and lower costs; and (v) the successful test of digiFrac™, our commitments to customers, partnering withinnovative, purpose-built electric frac pump that has approximately 25% lower CO2e emission profile than the Tier IV DGB. In addition, our suppliersintegrated supply chain includes proppant, chemicals, equipment, logistics and hiring, training and retaining people thatintegrated software which we believe promotes wellsite efficiency and leads to bemore pumping hours and higher productivity throughout the best talent inyear to better service our field, enabling uscustomers. In order to be one of the safestachieve our technological objectives, we carefully manage our liquidity and most efficient hydraulic fracturing companiesdebt position to promote operational flexibility and invest in the United States.business throughout the full commodity cycle.
Recent Trends and Outlook
Demand for our hydraulic fracturing servicesDuring the year 2021, the posted WTI price traded at an average of $68.13 per barrel (“Bbl”), as compared to the 2020 average of $39.16 per Bbl and the 2019 average of $56.99 Bbl. The recovery of energy demand is predominantly influenced byalso reflected in the level of drilling and completion by E&P companies, which, in turn, depends largely on the current and anticipated profitability of developing oil and natural gas reserves. More specifically, demand for our hydraulic fracturing services is driven by the completion of hydraulic fracturing stages in unconventional wells, which, in turn, is driven by several factors includingincremental improvement to rig count, well count, service intensity andas the timing and style of well completions.
Macro Conditions
From the second half of 2016 and through the first half of 2018, we benefited from an upward trajectory in both crude oil prices and horizontalaverage domestic onshore rig count leading to price increases for our services, including increasesthe United States and Canada was 704 rigs reported in our revenue perthe fourth quarter of 2021, up from the average active fleet. The pricein the fourth quarter of WTI crude oil averaged2020 of $43.29, $50.80 and $65.23 during 2016, 2017 and 2018, respectively. According384, according to a report byfrom Baker Hughes, a GE company (“Baker Hughes”),Company.
E&P operators are responding to oil and gas price signals. The public operators are maintaining discipline and we expect will show only modest production growth this year, while the horizontal rig countprivate operators are likely reacting more robustly to strong commodity prices.
The transformative work our team accomplished in North America average 400, 737,2021 positions us well as we believe our industry is beginning an upcycle driven by rapidly tightening markets for oil & gas. Years of reduced global investment in upstream oil and 900 during 2016, 2017gas production is now colliding with record global demand for natural gas and 2018, respectively.
However, during the second half of 2018, the price of WTI crudenatural gas liquids today, and potential record global demand for oil decreased from an average of $70.98 in July 2018 to an average of $49.52 in December of 2018. Reductions in customer activity, in part duelater this year. Oil and gas are central to the reduction in commodity prices,global economy which is well along the way of recovering from the global COVID-19 pandemic.
Within the frac market, two years of supply attrition and an oversupply of staffedcannibalization plus constraints from labor shortages, and a secular shift towards next generation frac fleetsfleet technologies has led to tightness in the supply of fleets. Liberty has focused on finding the right long-term customer partnerships for the future and has been very disciplined in holding our active frac fleet count steady until financial returns justify significant additional fleet deployments.
During 2021, we worked on the integration of the OneStim Acquisition into Liberty, which was exacerbated by COVID-impacted supply chain and difficult labor challenges. Integration-related costs are still with us today, impacting our financial results. However, we made improvements in these costs during January 2022, and believe these costs will lessen during 2022. We expect sequential revenue growth in the first quarter of 2022, along with improvement in our margins as integration costs start to fade away. We will also benefit from increased pricing in the first quarter of 2022, driven by a reductionpass-through of inflationary costs and higher net service pricing. We expect modest rises in pricing during subsequent quarters in 2022, along with the opportunity for frac services in late 2018.
According to the U.S. Energy Information Administration Short-Term Energy Outlook released in January 2019, worldwide crude oil supply is expected to increase by 1.4 million barrels per day in 2019 led by productionmargin growth from the United States.
We expect to benefit from long-term macro industry trends that improve drilling economics such as (i) greater rig efficiencies that result in more wells drilled per rig in a given periodassociated with lowering our cost of operations and (ii) increased complexity and service intensity of well completions, including longer wellbore laterals, more and larger fracturing stages and higher proppant usage per well. We expect these industry trends to directly benefit hydraulic fracturing companies like us that have the expertise and technological ability to execute increasingly complex and intense well completions.
Although there is uncertainty in the market about the level of customers’ drilling and completion activity in 2019, we expect demand for Liberty Inc.’s high-efficiency frac fleets to remain strong during 2019 due to the diversity of Liberty Inc.’s operating footprint, conversations with our customers and other factors. However, we cannot predict with any certainty when pricing for our frac services will increase. Customer activity levels influenced by commodity prices and the level of frac service supply will continue to impact the prices we charge our customers for our services.increasing efficiencies.
Increase in Drilling Efficiency and Service Intensity of Completions
Over the past decade, E&P companies have focused on exploiting the vast resource potential available across many of North America’s unconventional resource plays through the application of horizontal drilling and completion technologies, including the use of multi-stage hydraulic fracturing, in order to increase recovery of oil and natural gas. As E&P companies have improved drilling and completion techniques to maximize return and efficiency, we believe several long term trendsthat their “break-even oil prices” continue to decline. These improvements in well economics have emerged whichkept U.S. Shale oil and gas production competitive even as oil and gas prices have materially increased the service intensity of current completions.declined. Liberty has been a significant partner with our customers in driving these continued improvements.
Improved drilling economics from horizontal drilling and greater rig efficiencies. Unconventional resources are increasingly being targeted through the use of horizontal drilling. According to Baker Hughes, as reported on January 25, 2019,February 11, 2022, horizontal rigs accounted for approximately 88%94% of all rigs drilling in the United States and Canada, up from 74%77% as of December 31,26, 2014. Over the past several years, North American E&P companies have benefited from improved drilling economics driven by technologies that reduce the number of days, and the cost, of drilling wells. North American drilling rigs have incorporated newer technologies, which allow them to drill rock more effectively and quickly, meaning each rig can drill more wells in a given period. These include improved drilling technologies and the incorporation of geosteering techniques which allow better placement of the wellbore. Drilling rigs have also incorporated new technology which allows fully-assembled rigs to automatically “walk” from one location to the next without disassembling and reassembling the rig, greatly reducing the time it takes to move from one drilling location to the next. AtToday the same time,majority of E&P companies are shifting their development plans to incorporatedrilling is on multi-well pad development, which allows them to drillallowing efficient drilling of multiple horizontal wellbores from the same pad or location. The aggregate effect of these improved techniques and technologies have reduced the average days required to drill a well, which according to CorasLium Research, LLC (“Coras”), has dropped from 28 days in 2014 to 2117 days in 2018.2021.
Increased complexity and service intensity of horizontal well completions. In addition to improved rig efficiencies discussed above, E&P companies are also improving the subsurface techniques and technologies used to exploit unconventional resources. These improvements have targeted increasing the exposure of each wellbore to the reservoir by drilling longer horizontal lateral sections of the wellbore. To complete the well, hydraulic fracturing is applied in stages along the wellbore to break-up the resource so that oil and gas can be produced. As wellbores have increased in length, the number of frac stages and/or the number of perforation clusters (frac initiation points) has also increased. From 2014 to 2018, the average stages per horizontal well have increased from 21 stages per well to 38 stages per well, according to Coras. Further, E&P companies have improved production from each stage by applying increasing amounts of proppant in each stage, which better connects the well to the
resource. The aggregate effect of increased number of stages and the increasing amount of proppant in each stage has greatly increased the total amount of proppant used in each well, according to Coras,Liberty’s FracTrends database, from six million pounds per well in 2014 to over 1318.6 million pounds per well in 2018.2021. Further efficiency gains are being sought via the “simul-frac” technique. Utilizing a larger frac fleet (1.25x to 2x the normal horsepower), operators are fracturing stages in two separate wells on a pad simultaneously as a single operation. When compared to typical zipper-frac operations, this new method allows for more lateral feet to be completed in a day. This emerging trend will allow operators to complete a pad of wells quicker, thereby shortening the time from spud to first production.
These industry trends willcontinue to keep our customers as important suppliers to the global oil and natural gas markets, which directly benefit hydraulic fracturing companies like us that have the expertise and technological innovationsinnovative technology to effectively service today’s more efficient oilfield drilling activity and the increasing complexity and intensity of well completions. Given the expected returns that E&P companies have reported for new well development activities due to improved rig efficiencies and increasing well completion complexity and intensity, we expect these industry trends to continue.
How We Generate Revenue
We currently generate revenue through the provision of hydraulic fracturing services.and wireline services and goods, including sand from our Permian Basin sand mines. These services and goods are performedprovided under a variety of contract structures, primarily master service agreements (“MSAs”) as supplemented by statements of work, pricing agreements and specific quotes. A portion of our statements of work, under master service agreements,MSAs, include provisions that establish pricing arrangements for a period of up to approximately one year in length. However, the majority of those agreements provide for pricing adjustments based on market conditions. The majority of our services are priced based on prevailing market conditions and changing input costs at the time the services are provided, giving consideration to the specific requirements of the customer.
Our hydraulic fracturing and wireline services are performed in sections, which we refer to as fracturing stages. The estimated number of fracturing stages to be completed for a particular horizontal well is determined by the customer’s well completion design. We recognize revenue for each fracturing stage completed, although our revenue per completed fracturing stage varies depending on the actual volumes and types of proppants, chemicals and fluid utilized for each fracturing stage. The number of
fracturing stages that we are able to complete in a period is directly related to the number and utilization of our deployed fleets and size of stages.
Costs of Conducting Our Business
The principal expenses involved in conducting our business are direct cost of personnel, services and materials used in the provision of services, general and administrative expenses, and depreciation and amortization. A large portion of the costs we incur in our business are variable based on the number of hydraulic fracturing jobs and the requirements of services provided to our customers. We manage the level of our fixed costs, except depreciation and amortization, based on several factors, including industry conditions and expected demand for our services.
How We Evaluate Our Operations
We use a variety of qualitative, operational and financial metrics to assess our performance. First and foremost of these is a qualitative assessment of customer satisfaction because ensuring we are a valuable partner to our customers is the key to achieving our quantitative business metrics. Among other measures, management considers each of the following:
•Revenue;
•Operating Income (Loss);Income;
•EBITDA;
•Adjusted EBITDA;
Annualized Adjusted EBITDA per Average Active Fleet;
•Net Income Before Taxes; and
•Earnings per Share.
Revenue
We analyze our revenue by comparing actual monthly revenue to our internal projections for a given period and to prior periods to assess our performance. We also assess our revenue in relation to the number of fleets we have deployed (revenue per average active fleet) from period to period.
Operating Income (Loss)
We analyze our operating income, (loss), which we define as revenues less direct operating expenses, depreciation and amortization and general and administrative expenses, to measure our financial performance. We believe operating income is a meaningful metric because it provides insight on profitability and true operating performance based on the historical cost basis of our assets. We also compare operating income to our internal projections for a given period and to prior periods.
EBITDA and Adjusted EBITDA
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income (loss) before interest, income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA adjusted to eliminate the effects of items such as non-cash stock based compensation expense, new fleet or new basin start-up costs, fleet lay-down costs, costs of asset acquisition, gain or loss on the disposal of assets, asset impairment charges, bad debt reserves, and non-recurring expenses that management does not consider in assessing ongoing operating performance. Annualized Adjusted EBITDA per Average Active Fleet is calculated as Adjusted EBITDA annualized, divided by the Average Active Fleets for the same period. See “—Comparison“Comparison of Non-GAAP Financial Measures” for more information and a reconciliation of EBITDA and Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.
Results of Operations
Year Ended December 31, 2018,2021, Compared to Year Ended December 31, 2017
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| Description | 2018 | | 2017 | | Change |
| | (in thousands) |
| Revenue | $ | 2,155,136 |
| | $ | 1,489,855 |
| | $ | 665,281 |
|
| Cost of services, excluding depreciation and amortization shown separately | 1,628,753 |
| | 1,147,008 |
| | 481,745 |
|
| General and administrative | 99,052 |
| | 80,089 |
| | 18,963 |
|
| Depreciation and amortization | 125,110 |
| | 81,473 |
| | 43,637 |
|
| (Gain) loss on disposal of assets | (4,342 | ) | | 148 |
| | (4,490 | ) |
| Operating income | 306,563 |
| | 181,137 |
| | 125,426 |
|
| Interest expense | (17,145 | ) | | (12,636 | ) | | (4,509 | ) |
| Net income before taxes | 289,418 |
| | 168,501 |
| | 120,917 |
|
| Income tax expense | 40,385 |
| | — |
| | 40,385 |
|
| Net income | 249,033 |
| | 168,501 |
| | 80,532 |
|
| Less: Net income attributable to Predecessor, prior to the Corporate Reorganization | 8,705 |
| | 168,501 |
| | (159,796 | ) |
| Less: Net income attributable to noncontrolling interests | 113,979 |
| | — |
| | 113,979 |
|
| Net income attributable to Liberty Oilfield Services Inc. stockholders | $ | 126,349 |
| | $ | — |
| | $ | 126,349 |
|
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| Description | 2021 | | 2020 | | Change |
| (in thousands) |
| Revenue | $ | 2,470,782 | | | $ | 965,787 | | | $ | 1,504,995 | |
| Cost of services, excluding depreciation and amortization shown separately | 2,249,926 | | | 857,981 | | | 1,391,945 | |
| General and administrative | 123,406 | | | 84,098 | | | 39,308 | |
| Transaction, severance and other costs | 15,138 | | | 21,061 | | | (5,923) | |
| Depreciation, depletion and amortization | 262,757 | | | 180,084 | | | 82,673 | |
| Loss (gain) on disposal of assets | 779 | | | (411) | | | 1,190 | |
| Operating loss | (181,224) | | | (177,026) | | | (4,198) | |
| Other (income) expense, net | (3,436) | | | 14,505 | | | (17,941) | |
| Net loss before taxes | (177,788) | | | (191,531) | | | 13,743 | |
| Income tax expense (benefit) | 9,216 | | | (30,857) | | | 40,073 | |
| Net loss | (187,004) | | | (160,674) | | | (26,330) | |
| Less: Net loss attributable to non-controlling interests | (7,760) | | | (45,091) | | | 37,331 | |
| Net loss attributable to Liberty Oilfield Services Inc. stockholders | $ | (179,244) | | | $ | (115,583) | | | $ | (63,661) | |
Revenue
Our revenue increased $665.3 million,$1.5 billion, or 44.7%156%, to $2.2$2.5 billion for the year ended December 31, 20182021 compared to $1.5$1.0 billion for year ended December 31, 2017. The increase was due to the combined effect of a 41.1% increase in average active fleets deployed and a 2.5% increase in revenue per average active fleet. Our revenue per average active fleet increased to approximately $101.2 million for the year ended December 31, 2018 as compared to approximately $98.7 million for the year ended December 31, 2017, based on 21.3 and 15.1 average active fleets during those respective periods.2020. The increase inis attributable to higher fleet utilization and service prices, as well as additional fleets and service lines obtained through the OneStim Acquisition, which drove higher revenue, per active fleet was due to improved pricing and throughput, compared tocommensurate with the prior year, in conjunction with increasedenergy demand for our services.recovery.
Cost of Services
Cost of services (excluding depreciation and amortization) increased $481.7 million,$1.4 billion, or 42.0%162%, to $1.6$2.2 billion for the year ended December 31, 20182021 compared to $1.1$0.9 billion for the year ended December 31, 2017.2020. The higher expense is duewas primarily related to anthe increase in services provided and reflects a $280.0 million increase attributable to materials, which was driven by a 34.8% increaseactivity, as discussed above, as well as increases in material, volumes in the year ended December 31, 2018 compared to the same period in 2017. Additionally, the cost of components used in ourpersonnel, and repairs and maintenance operations increased by $81.9 million, offset by fuel costs related to global supply chain challenges, inflationary pressures and material prices. The Company also reinstated bonus programs and the 401(k) match program, both of which decreased across the same period by $4.8 million. Personnel costs increased by 39.4% to support the increased activity, including a 41.1% increase in average active fleets deployed, for the year ended December 31, 2018 as compared to the year ended December 31, 2017.we temporarily suspended during 2020.
General and Administrative Expenses
General and administrative expenses increased by $19.0$39.3 million, or 23.7%47%, to $99.1$123.4 million for the year ended December 31, 20182021 compared to $80.1$84.1 million for the year ended December 31, 2017. Payroll and2020 primarily related to an increase in personnel benefits related office expenses and finance expenses increased approximately $3.9 million, $2.7 million and $4.8 million, respectively, in connectiondue to additional headcount commensurate with the increaseacquisitions of OneStim and PropX. The furlough and flexible cost structure implemented in head count2020 also ended prior to support our expanded scope2021. Additionally, during 2021, the Company reinstated bonus programs and the 401(k) match program, both of operations, as well as increased financewhich we temporarily suspended during 2020.
Transaction, Severance and legal services associated with the IPO during the year ended December 31, 2018. In addition, non-cash stock based compensation expense of $4.3 million was recognized during the year ended December 31, 2018 compared to $0 during the prior year.Other Costs
Depreciation and Amortization
Depreciation and amortization expense increased $43.6 million, or 53.6%, to $125.1Transaction costs were $15.1 million for the year ended December 31, 20182021 compared to $81.5$8.5 million for the year ended December 31, 2017, due2020. Such costs incurred primarily relate to nine additional hydraulic fracturing fleets deployed during 2017 thatinvestment banking, legal, accounting, other professional services provided and integration costs in connection with the acquisitions of OneStim and PropX.
Severance and other costs were in service for all of 2018, as well as three additional fleets deployed$0 during the year ended December 31, 2018.
(Gain) Loss on Disposal of Assets
(Gain) loss on disposal of assets in 2018 increased $4.5 million2021 compared to a gain of $4.3$12.6 million for the year ended December 31, 2018 compared2020 which were related to a loss of $0.1one time severance costs and insurance and other benefits for furloughed employees. The Company did not lay-off or furlough any employees during 2021.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization expense increased $82.7 million, or 45.9%, to $262.8 million for the year ended December 31, 2017. The increase is primarily due2021 compared to a $11.5 million gain recognized during the year ended December 31, 2018 on insurance proceeds received in excess of losses incurred for damaged equipment resulting from an accidental fire in November 2018.
Operating Income
We realized operating income of $306.6$180.1 million for the year ended December 31, 2018 compared2020. The increase in 2021 was due to operating incomethe addition of $181.1active fleets and other property from the acquisitions of OneStim and PropX.
Loss (gain) on Disposal of Assets
The Company recorded a loss on disposal of assets of $0.8 million for the year ended December 31, 2017,2021 compared to a gain of $0.4 million for the year ended December 31, 2020. In an effort to consolidate operations in certain basins after the OneStim Acquisition, the Company sold three real estate properties during the fourth quarter of 2021, which collectively resulted in a small loss on sale, along with regular sales of equipment that was no longer being used. During 2020, the Company reduced the number of light duty pick-ups used in fleets based on lower levels of activity; and the Company realized gains upon sale commensurate with lease terminations.
Operating Loss
Operating loss increased $4.2 million, or 2.4%, to $181.2 million for the year ended December 31, 2021 compared to operating loss of $177.0 million for the year ended December 31, 2020. The increased operating loss is primarily due to the cost of services rising at a 41.1% increaseslightly higher rate than revenue increases through the rebound in average active fleets deployed described above.activity levels in 2021.
InterestOther (Income) Expense, net
The increase in interestCompany recorded other income, net of $3.4 million for the year ended December 31, 2021 compared to other expense, net of $4.5 million, or 35.7%, to $17.1$14.5 million during the year ended December 31, 2018 compared2020. Other (income) expense, net is comprised of gain on remeasurement of liability under the TRAs and interest expense, net. During the second quarter of 2021, the Company entered into a three-year cumulative pre-tax book loss primarily due to $12.6COVID-19 related losses and recognized a valuation allowance on a portion of its deferred tax assets in accordance with ASC 740. As a result of the recognition of a valuation allowance, the Company also remeasured the liability under the TRAs resulting in a gain of $19.0 million during the year ended December 31, 2017,2021. Interest expense, net was primarily due to an increaseconsistent between periods, increasing $1.1 million as a result of $5.8 million forincreased borrowings under the credit facility and lower interest expense on the term loan due to a higher weighted average interest rate on borrowings outstandingincome during the year ended December 31, 2018, as well as a $1.6 million increase from debt issuance costs amortization. This increase was offset by a $1.9 million decrease in interest expense on2021 compared to the outstanding borrowings under our ABL Facility that was paid in full in January 2018 with the proceeds from the IPO.year ended December 31, 2020.
Net IncomeLoss Before Taxes
We realized net incomeNet loss before taxes of $289.4decreased $13.7 million, or 7.2%, to $177.8 million for the year ended December 31, 20182021 compared to net income of $168.5$191.5 million for the year ended December 31, 2017.2020. The increasedecrease in net incomeloss is primarily attributabledue to our expanded scopethe gain recognized upon remeasurement of operations from the 41.1% increase in average active fleets deployedTRAs during the year ended December 31, 2018.
Income Tax Expense
As a pass through entity prior2021 as compared to the IPO, the Predecessor was subject only to the Texas margin tax at a statutory rate of 1.0% and was not subject to U.S. federal income tax. Subsequent to the IPO, the pre-tax net income attributable to the Company is taxed at a combined U.S. federal and state tax rate of approximately 23.0%, while no tax is provided for the income attributable to the noncontrolling interests, which remains pass through income attributable to the holders of noncontrolling interests. We recognized $40.4 million of tax expense in the year ended December 31, 2018, an effective rate of 14.0%, compared to $0 recognized during2020 partially offset by the year ended December 31, 2017. This increase was attributable to our status as a corporation subject to U.S. federal income tax as well as a net increase in operating income, the components of which areloss discussed above.
Year Ended December 31, 2017, Compared to Year Ended December 31, 2016Income Tax Expense (Benefit)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| Description | 2017 | | 2016 | | Change |
| | (in thousands) |
| Revenue | $ | 1,489,855 |
| | $ | 374,773 |
| | $ | 1,115,082 |
|
| Cost of services, excluding depreciation and amortization shown separately | 1,147,008 |
| | 354,729 |
| | 792,279 |
|
| General and administrative | 80,089 |
| | 35,789 |
| | 44,300 |
|
| Depreciation and amortization | 81,473 |
| | 41,362 |
| | 40,111 |
|
| Loss (gain) on disposal of assets | 148 |
| | (2,673 | ) | | 2,821 |
|
| Operating income (loss) | 181,137 |
| | (54,434 | ) | | 235,571 |
|
| Interest expense | (12,636 | ) | | (6,126 | ) | | (6,510 | ) |
| Net income (loss) | $ | 168,501 |
| | $ | (60,560 | ) | | $ | 229,061 |
|
Revenue
Our revenue increased $1,115.1Tax expense of $9.2 million or 297.5%, to $1,489.9 millionwas recognized for the year ended December 31, 20172021, an effective rate of (5.2)%, compared to $374.8an income tax benefit of $30.9 million, at an effective rate of 16.1%, recognized for the year ended December 31, 2016.2020. The increase was dueincome tax expense is primarily attributable to the combined effectfull valuation allowance recorded on the net deferred tax assets as of a 104.0% increase in average active fleets deployed and a 94.8% increase in revenue per average active fleet. Our revenue per average active fleet increased to approximately $98.7 million for the year ended December 31, 2017 as compared to approximately $50.6 million for the year ended December 31, 2016, based on 15.1 and 7.4 average active fleets deployed during those respective periods.
The increase in revenue per active fleet was due to improved pricing and throughput in conjunction with increased demand for our services.
Cost of Services
Cost of services (excluding depreciation and amortization) increased $792.3 million, or 223.3%, to $1,147.0 million for the year ended December 31, 2017 compared to $354.7 million for the year ended December 31, 2016. The higher expense is due to an increase in services provided and reflects a $488.4 million increase attributable to materials, which was driven by a 235.7% increase in material volumes in the year ended December 31, 2017 compared to the same period in 2016. Additionally, the cost of components used in our repairs and maintenance operations increased by $96.6 million and fuel costs increased by $52.0 million. Personnel costs increased by 163.7% to support the increased activity, including a 104.0% increase in average active fleets deployed, for the year ended December 31, 2017 as compared to the year ended December 31, 2016.
General and Administrative Expenses
General and administrative expenses increased by $44.3 million, or 123.8%, to $80.1 million for the year ended December 31, 2017 compared to $35.8 million for the year ended December 31, 2016. Payroll and benefits, related office expenses and fleet start-up expenses increased approximately $26.2 million, $5.4 million and $9.7 million, respectively, in connection with the increase in head count to support our expanded scope of operations and the nine fleets deployed during the year ended December 31, 2017. Additionally, other general and administrative expenses increased $3.1 million, primarily driven by a $1.1 million increase in management fees owed to Riverstone/Carlyle Energy Partners IV, L.P.
Depreciation and Amortization
Depreciation and amortization expense increased $40.1 million, or 97.0%, to $81.5 million for the year ended December 31, 2017 compared to $41.4 million for the year ended December 31, 2016, due to four additional hydraulic fracturing fleets deployed during 2016 that were in service for all of 2017, as well as nine additional fleets deployed during the year ended December 31, 2017.
Operating Income (Loss)
We realized operating income of $181.1 million for the year ended December 31, 2017 compared to an operating loss of $54.4 million for the year ended December 31, 2016, primarily due to the increased number of hydraulic fracturing fleets deployed and the higher revenue per average active fleet in response to increased demand for our services.
Interest Expense
Interest expense increased $6.5 million, or 106.3%, to $12.6 million during the year ended December 31, 2017 compared to $6.1 million during the year ended December 31, 2016, primarily due to $1.2 million of deferred financing costs written off in connection with the termination of previously outstanding debt and a $4.2 million increase in interest expense due to the increased average borrowings outstanding during the year ended December 31, 2017 compared to the same period in 2016. Additionally, we incurred $0.8 million of interest on a $60.0 million related party bridge loan that was outstanding during a portion of the three months ended June 30, 2017.2021, and Canada income and provincial taxes.
Net Income (Loss)
We realized net income of $168.5 million for the year ended December 31, 2017 compared to a net loss of $60.6 million for the year ended December 31, 2016. Our net loss for the year ended December 31, 2016 resulted from the significant decrease in pricing for our hydraulic fracturing services following the dramatic decrease in drilling activity by E&P companies during the industry downturn from late 2014 through the first half of 2016. Our net income for the year ended December 31, 2017 was driven by recovery of the oil and gas industry beginning in the third quarter of 2016, as well as our expanded scope of operations following deployment of nine additional hydraulic fracturing fleets during the year ended December 31, 2017.
Comparison of Non-GAAP Financial Measures
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income (loss) (the most directly comparable GAAP financial measure) before interest, income taxes, depreciation, depletion and amortization. We define Adjusted EBITDA as EBITDA adjusted to eliminate the effects of items such as non-cash stock based compensation expense, new fleet or new basin start-up costs, fleet lay-down costs, costs of asset acquisitions, gain or loss on the disposal of assets, asset impairment charges, bad debt reserves and non-recurring expenses that management does not consider in assessing ongoing performance.
34
Our board of directors, management, investors, and lenders use EBITDA and Adjusted EBITDA to assess our financial performance because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation, depletion and amortization) and other items that impact the comparability of financial results from period to period. We present EBITDA and Adjusted EBITDA because we believe they provide useful information regarding the factors and trends affecting our business in addition to measures calculated under GAAP. Additionally, the calculation of Adjusted EBITDA complies with the definition of Consolidated EBITDA, as defined in our Credit Facilities. See “—Liquidity and Capital Resources—Debt Agreements.”
Note Regarding Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial performance and results of operations. Net income (loss) is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as an analytical tool due to exclusion of some but not all items that affect the most directly comparable GAAP financial measures. You should not consider EBITDA or Adjusted EBITDA in isolation or as substitutes for an analysis of our results as reported under GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
The following tables present a reconciliation of EBITDA and Adjusted EBITDA to our net income, (loss), which is the most directly comparable GAAP measure for the periods presented:
Year Ended December 31, 20182021 Compared to Year Ended December 31, 2017:2020: EBITDA and Adjusted EBITDA | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| Description | 2021 | | 2020 | | Change |
| (in thousands) |
| Net loss | $ | (187,004) | | | $ | (160,674) | | | $ | (26,330) | |
| Depreciation and amortization | 262,757 | | | 180,084 | | | 82,673 | |
| Interest expense, net | 15,603 | | | 14,505 | | | 1,098 | |
| Income tax expense (benefit) | 9,216 | | | (30,857) | | | 40,073 | |
| EBITDA | $ | 100,572 | | | $ | 3,058 | | | $ | 97,514 | |
| Stock based compensation expense | 19,946 | | | 17,139 | | | 2,807 | |
| Fleet start-up and lay-down costs | 2,751 | | | 12,175 | | | (9,424) | |
| Transaction, severance and other costs | 15,138 | | | 21,061 | | | (5,923) | |
| Loss (gain) on disposal of assets | 779 | | | (411) | | | 1,190 | |
| Provision for credit losses | 745 | | | 4,877 | | | (4,132) | |
| Gain on remeasurement of liability under tax receivable agreement | (19,039) | | | — | | | (19,039) | |
| Adjusted EBITDA | $ | 120,892 | | | $ | 57,899 | | | $ | 62,993 | |
|
| | | | | | | | | | | |
| | Years Ended
December 31, |
| Description | 2018 | | 2017 | | Change |
| | (in thousands) |
| Net income | $ | 249,033 |
| | $ | 168,501 |
| | $ | 80,532 |
|
| Depreciation and amortization | 125,110 |
| | 81,473 |
| | 43,637 |
|
| Interest expense | 17,145 |
| | 12,636 |
| | 4,509 |
|
| Income tax expense | 40,385 |
| | — |
| | 40,385 |
|
| EBITDA | $ | 431,673 |
| | $ | 262,610 |
| | $ | 169,063 |
|
| Fleet start-up costs | 10,069 |
| | 13,955 |
| | (3,886 | ) |
| Asset acquisition costs | 632 |
| | 2,470 |
| | (1,838 | ) |
| (Gain) loss on disposal of assets | (4,342 | ) | | 148 |
| | (4,490 | ) |
| Advisory services fees | 202 |
| | 1,545 |
| | (1,343 | ) |
| Adjusted EBITDA | $ | 438,234 |
| | $ | 280,728 |
| | $ | 157,506 |
|
EBITDA was $431.7$100.6 million for the year ended December 31, 20182021 compared to $262.6$3.1 million for the year ended December 31, 2017.2020. Adjusted EBITDA was $438.2$120.9 million for the year ended December 31, 20182021 compared to $280.7$57.9 million for the year ended December 31, 2017.2020. The increases in EBITDA and Adjusted EBITDA primarily resulted from theimproved market conditions and increased revenue and other factorsactivity levels as described above under the captions Revenue, Cost of Services, and General and Administrative Expenses above.
for theYear Ended December 31, 2017,2021, Compared to Year Ended December 31, 2016: EBITDA and Adjusted EBITDA2020.
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| Description | 2017 | | 2016 | | Change |
| | (in thousands) |
| Net income (loss) | $ | 168,501 |
| | $ | (60,560 | ) | | $ | 229,061 |
|
| Depreciation and amortization | 81,473 |
| | 41,362 |
| | 40,111 |
|
| Interest expense | 12,636 |
| | 6,126 |
| | 6,510 |
|
| EBITDA | $ | 262,610 |
| | $ | (13,072 | ) | | $ | 275,682 |
|
| Fleet start-up costs | 13,955 |
| | 4,280 |
| | 9,675 |
|
| Asset acquisition costs | 2,470 |
| | 5,420 |
| | (2,950 | ) |
| Loss (gain) on disposal of assets | 148 |
| | (2,673 | ) | | 2,821 |
|
| Advisory services fees | 1,545 |
| | 457 |
| | 1,088 |
|
| Adjusted EBITDA | $ | 280,728 |
| | $ | (5,588 | ) | | $ | 286,316 |
|
EBITDA was $262.6 million for the year ended December 31, 2017 compared to $(13.1) million for the year ended December 31, 2016. Adjusted EBITDA was $280.7 million for the year ended December 31, 2017 compared to $(5.6) million for the year ended December 31, 2016. The increases in EBITDA and Adjusted EBITDA resulted from the increased revenue and other factors described above under the captions Revenue, Cost of Services and General and Administrative Expenses above.
Liquidity and Capital Resources
Overview
Historically, our primary sources of liquidity to date have been cash flows from operations, capital contributionsproceeds from our ownersIPO, and borrowings under our Credit Facilities. We expect to fund operations and organic growth with the proceeds from our IPO and cash flows from operations.operations and available borrowings under our Credit Facilities. We monitor the availability of capital resources such as equity and debt financings that could be leverage for current or future financial obligations including those related to acquisitions, capital expenditures, working capital and other liquidity requirements. We may incur additional indebtedness or issue equity in order to meet our capital expenditure activities and liquidity requirements, as well as to fund growth opportunities that we pursue, including via acquisition, such as with the acquisitions of OneStim and PropX. Our primary uses of capital have been capital expenditures to support organic growth and funding ongoing operations, including maintenance and fleet upgrades.
On January 17, 2018, we completed our IPO of 14,640,755 shares of our Class A Common Stock at a public offering price of $17.00 per share, of which 14,340,214 shares were offered by us and 300,541 shares were offered by the selling shareholder. We received approximately $220.0 million in net proceeds after deducting approximately $23.8 million of underwriting discounts and commissions and other offering costs. We did not receive any proceeds from the sale of the shares of Class A Common Stock by the selling shareholder. We used approximately $25.9 million of net proceeds from the IPO to redeem ownership in us from certain Legacy Owners and contributed the remaining proceeds to Liberty LLC in exchange for Liberty LLC Units. Liberty LLC used a portion of the net proceeds (i) to fully repay our outstanding borrowings and accrued interest under our ABL Facility (as defined herein), totaling approximately $30.1 million, (ii) to repay 35% of our outstanding borrowings, accrued interest and prepayment premium under our Term Loan Facility (as defined herein), totaling approximately $62.5 million and (iii) for general corporate purposes, including repayment of additional indebtedness and funding capital expenditures.
Cash and cash equivalents increased equivalents decreased by $87.0$49.0 million to $103.3$20.0 million as of December 31, 20182021 compared to $16.3$69.0 million as of December 31, 2017, primarily attributable to net proceeds from the IPO. Going forward, we intend to finance the majority of our capital expenditures, contractual obligations and2020, while working capital needs with proceeds from the IPOexcluding cash and operating cash flows. We believe that our operating cash flow and available borrowingscurrent liabilities under our Credit Facilities will be sufficient to fund our operations for at least the next twelve months.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| Description | 2018 | | 2017 | | Change |
| | (in thousands) |
| Net cash provided by operating activities | $ | 351,258 |
| | $ | 195,109 |
| | $ | 156,149 |
|
| Net cash used in investing activities | (255,492 | ) | | (310,043 | ) | | 54,551 |
|
| Net cash (used in) provided by financing activities | (8,775 | ) | | 119,771 |
| | (128,546 | ) |
| Net increase in cash and cash equivalents | $ | 86,991 |
| | $ | 4,837 |
| | $ | 82,154 |
|
Analysis of Cash Flow Changes Between the Years Ended December 31, 2018 and 2017
Operating Activities. Net cash provided by operating activities was $351.3 million for the year ended December 31, 2018, compared to net cash provided by operating activities of $195.1 million for the year ended December 31, 2017. The $156.1 million increase in cash from operating activities was primarily attributable to a $665.3 million increase in revenues, offset by a $495.4 million increase in cash based operating expenses, both resulting from the increase in average active fleets from 15.1 in 2017 to 21.3 in 2018. Further, cash provided by operating activities during 2018 was reduced by $27.3 million cash paid for income taxes, and a $13.0 million decrease in funds used to satisfy working capital obligations.
Investing Activities. Net cash used in investing activities was $255.5 million for the year ended December 31, 2018, compared to $310.0 million for the year ended December 31, 2017. The $54.6 million decrease in net cash used in investing activities was primarily due to the acquisition of Titan Frac Services LLC and Texas real estate properties during the year ended December 31, 2017.
Financing Activities. Net cash used in financing activities was $8.8 million for the year ended December 31, 2018, compared to net cash provided by financing activities of $119.8 million for the year ended December 31, 2017. The $128.5 million decrease in cash provided by financing activities was primarily due to net repayment on debt of $92.8 million, equity repurchases of $82.9 million, distributions for taxes and advances to noncontrolling interest owners of $21.3 million, and dividend and distributions paid of $11.6 million during the year ended December 31, 2018, offset by $198.0 million net proceeds from the IPO, compared to net borrowings of $156.1 million, net payments of $23.0 million from the issuance and redemption of redeemable common units, and $13.2 million of payments for debt issuance and equity offering costs during the year ended December 31, 2017.
The following table summarizes our cash flows for the periods indicated:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| Description | 2017 | | 2016 | | Change |
| | (in thousands) |
| Net cash provided by (used in) operating activities | $ | 195,109 |
| | $ | (40,708 | ) | | $ | 235,817 |
|
| Net cash used in investing activities | (310,043 | ) | | (96,351 | ) | | (213,692 | ) |
| Net cash provided by financing activities | 119,771 |
| | 148,543 |
| | (28,772 | ) |
| Net increase in cash and cash equivalents | $ | 4,837 |
| | $ | 11,484 |
| | $ | (6,647 | ) |
Analysis of Cash Flow Changes Between the Years Ended December 31, 2017 and 2016
Operating Activities. Net cash provided by operating activities was $195.1 million for the year ended December 31, 2017, compared to cash used in operating activities of $40.7 million for the year ended December 31, 2016. The $235.8 million increase in cash from operating activities was attributable to the net impact of the increase in cash receipts for hydraulic fracturing services due to the combined effect of a 104.0% increase in average active fleets and 94.8% increase in revenue per active fleet, partially offset by the increased costs of those services and increased general and administrative expenses, and the changes in related working capital items.
Investing Activities. Net cash used in investing activities was $310.0 million for the year ended December 31, 2017, compared to $96.4 million for the year ended December 31, 2016. The $213.7 million increase in net cash used in investing activities was primarily due to the purchase of, and upgrades to, our hydraulic fracturing fleets, the acquisition of Titan Frac Services LLC, and real estate acquisitions in Texas.
Financing Activities. Net cash provided by financing activities was $119.8 million for the year ended December 31, 2017, compared to $148.5 million for the year ended December 31, 2016. The $28.8 million decrease in cash provided by financing activities was primarily due to a $155.5 million decrease in member contributions, offset by a $97.1 million increase in net debt borrowings and repayments, $60.0 million in proceeds from related party bridge loans and $39.8 million in proceeds from issuance of redeemable common units. Additionally, during the year ended December 31, 2017, the Company redeemed $62.7 million of redeemable common units and paid $13.2 million in debt and equity issuance costs.lease arrangements decreased $104.5 million.
Debt Agreements
On September 19, 2017, the Company entered into two new credit agreements for a revolving line of credit up to $250.0We have $350.0 million (the “ABL Facility”) and a $175.0 million term loan (the “Term Loan Facility”, and together withcommitted under the ABL Facility the “Credit Facilities”). Following is a description(net of the ABL Facility and the Term Loan Facility.
ABL Facility
Under the termsany outstanding letters of the ABL Facility, up to $250.0 million may be borrowed,credit), subject to certain borrowing base limitations based on a percentage of eligible accounts receivable and inventory.inventory (with the ability to request an increase in the size of the ABL Facility by $75 million) available to finance working capital needs. As of December 31, 2018,2021, the borrowing base was calculated to be $224.6$269.0 million, and the Company had no borrowings$18.0 million outstanding except forin addition to a letter of credit in the amount of $0.3$1.5 million, with $224.3$249.5 million of remaining availability. Borrowings under
Additionally, we have $106.5 million borrowings remaining on the Term Loan Facility, which was originally $175.0 million.
On October 22, 2021, the Company entered into an amendment to the ABL Facility bear interest at LIBOR or(the “Revolving Credit Agreement Amendment”). The Revolving Credit Agreement Amendment further amends the credit agreement and guaranty and security agreement originally entered into by the parties on September 19, 2017, which governs the Company’s ABL Facility. Along with other revisions, the Revolving Credit Agreement Amendment (i) expanded the definition of borrowing base to include certain eligible US investment grade accounts, Canadian accounts solely after a base rate, plusspecified event, and both chemical and spare parts inventory; (ii) increased the maximum revolver amount from $250.0 million to $350.0 million (with the ability to request an applicable LIBOR marginincrease in the size of 1.5% to 2.0% or base rate margin of 0.5% to 1.0%, as defined in the ABL Facility credit agreement. The unused commitment is subjectby $75 million); (iii) increased certain indebtedness baskets; (iv) provided additional flexibility for a potential future internal structuring; (v) added new lenders to an unused commitment feethe facility; and (vi) extended the maturity date to the earlier of 0.375%(a) October 22, 2026 and (b) to 0.5%. Interest and fees are payable in arrears at the endextent the debt under the Term Loan Facility remains outstanding 90 days prior to the final maturity of each month, or, in the case of LIBOR loans, at the end of each interest period.Term Loan Facility. The ABL Facility matureswas initially scheduled to mature on the earlier to occur of (i) September 19, 2022 and (ii) to the extent the debt under the Term Loan Facility remains outstanding, 90 days prior to the final maturity of the Term Loan Facility, which maturesFacility.
On October 22, 2021, the Company entered into a Fifth Amendment to Credit Agreement, Second Amendment to Guaranty and Security Agreement and Termination of Right of First Offer Letter. The Term Loan Credit Agreement Amendment further amends the credit agreement and guaranty and security agreement and terminates the Right of First Offer Letter originally entered into by the parties on September 19, 2022. Borrowings under2017, which governs the ABL Facility are collateralized by accounts receivableCompany’s Term Loan Facility. Along with other revisions, the Term Loan Credit Agreement Amendment (i) increased certain indebtedness baskets; (ii) provided additional flexibility for a potential future internal structuring; (iii) extended the maturity date through September 19, 2024; and inventory, and further secured by the Company, Liberty LLC and R/C IV Non-U.S. LOS Corp.,(iv) terminated a Delaware corporation (“R/C IV”) and a subsidiaryright of first offer in favor of the Company, as parent guarantors.
Term Loan Facility
lenders.The Term Loan Facility provideswas initially scheduled to mature on September 19, 2022.
The Credit Facilities contain covenants that restrict our ability to take certain actions. At December 31, 2021, we were in compliance with all debt covenants.
See Note 8—Debt to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” for further details.
Cash Flows
The following table summarizes our cash flows for the periods indicated: | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| Description | 2021 | | 2020 | | Change |
| (in thousands) |
| Net cash provided by operating activities | $ | 135,467 | | | $ | 85,425 | | | $ | 50,042 | |
| Net cash used in investing activities | (186,494) | | | (100,269) | | | (86,225) | |
| Net cash provided by (used in) financing activities | 2,056 | | | (28,868) | | | 30,924 | |
Analysis of Cash Flow Changes Between the Years Ended December 31, 2021 and December 31, 2020
Operating Activities. Net cash provided by operating activities was $135.5 million for the year ended December 31, 2021, compared to net cash provided by operating activities of $85.4 million for the year ended December 31, 2020. The $50.0 million increase in cash from operating activities was primarily attributable to a $175.0$1.5 billion increase in revenues, offset by a $1.4 billion increase in cash operating expenses and a $46.9 million term loan,increase in cash from changes in working capital for the year ended December 31, 2021, compared to a $63.3 million increase in cash from changes in working capital for the year ended December 31, 2020.
Investing Activities. Net cash used in investing activities was $186.5 million for the year ended December 31, 2021, compared to $100.3 million for the year ended December 31, 2020. The $86.2 million increase in cash used in investment activities related to a decrease in spend in 2020 starting in the second quarter and remaining throughout the year due to the COVID-19 pandemic. Investing increased during 2021 when the markets recovered to pre-pandemic levels and $11.9 million was used in the fourth quarter for the PropX Acquisition.
Financing Activities. Net cash provided by financing activities was $2.1 million for the year ended December 31, 2021, compared to net cash used in financing activities of which $111.7$28.9 million remained outstandingfor the year ended December 31, 2020. The $30.9 million change in financing activities was primarily due to net borrowings of $18.0 million on the ABL Facility during the year ended December 31, 2021, compared to no borrowings on the ABL Facility for the year ended December 31, 2020. Additionally, there was a $5.8 million decrease in dividends and per unit distributions to non-controlling interest unitholders as a result of the suspension of the dividend in April 2020. Other distributions and advance payments to non-controlling interest unitholders was a net receipt of $1.4 million during the year ended December 31, 2021, compared to net payment of $6.8 million during the year ended December 31, 2020 due to a decrease in payments made under the TRAs. These decreases were offset by a $2.6 million increase in payments made for tax withholding on restricted stock unit vesting as a larger number of units vested at a higher stock price in 2021 compared to 2020.
Cash Requirements
Our material cash commitments consists primarily of obligations under long-term debt, TRAs, finance and operating leases for property and equipment, and purchase obligations as part of normal operations. Certain amounts included in our contractual obligations as of December 31, 2018. Amounts outstanding bear interest at LIBOR or a base rate, plus an applicable margin of 7.625% or 6.625%, respectively,2021 are based on our estimates and the weighted average rate on borrowings was 10.1%assumptions about these obligations, including pricing, volumes and duration. We have no material off balance sheet arrangements as of December 31, 2018. The Company is required2021, except for purchase commitments under supply agreements disclosed below.
See Note 8—Debt to make quarterly principal paymentsthe consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” for information regarding scheduled maturities of 1% per annumour long-term debt. See Note 6—Leases to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” for information regarding scheduled maturities of the initial principal balance, commencing on December 31, 2017, with final payment due at maturity on September 19, 2022. The Term Loan Facility is collateralized by the fixed assets of LOSfinance and its subsidiaries, and is further secured by the Company, Liberty LLC and R/C IV, as parent guarantors.operating leases.
The Credit Facilities include certain non-financial covenants, including but not limited to restrictions on incurring additional debt and certain distributions. Moreover, the ability of the Company to incur additional debt and to make distributions is dependent on maintaining a maximum leverage ratio. The Term Loan Facility requires mandatory prepayments upon certain dispositions of property or issuance of other indebtedness, as defined, and annually a percentage of excess cash flow (25% to 50%, depending on leverage ratio, of consolidated net income less capital expenditures and other permitted payments, commencing with the year ending December 31, 2018). Certain mandatory prepayments and optional prepayments are subject to a prepayment premium of 3% of the prepaid principal declining annually to 1% during the first three years of the term of the Term Loan Facility.
The Credit Facilities are not subject to financial covenants unless liquidity, as defined in the respective credit agreements, drops below a specified level. Under the ABL Facility, the Company is required to maintain a minimum fixed charge coverage ratio, as defined in the credit agreement governing the ABL Facility, of 1.0 to 1.0 for each period if excess availability is less than 10% of the borrowing base or $12.5 million, whichever is greater. Under the Term Loan Facility, the Company is required to maintain a minimum fixed charge coverage ratio, as defined, of 1.2 to 1.0 for each trailing twelve-month period if the Company’s liquidity, as defined, is less than $25.0 million for at least five consecutive business days. The Company was in compliance with these covenants asAs of December 31, 2018.2021, we had expected cash payments for estimated interest on our long-term debt and finance lease obligations of $10.6 million payable within the next twelve months and $17.4 million payable thereafter.
As of December 31, 2021, we had purchase obligations of $24.6 million payable within the next twelve months and $1.4 million payable thereafter. See Note 15—Commitments & Contingencies to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” for information regarding scheduled contractual obligations.
51We currently do not expect to make any payments under the TRAs within the next twelve months, future amounts payable under the TRAs are dependent upon future events. See Note 12—Income Taxes to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” for information regarding the TRAs.
Other Factors Affecting Liquidity
Contractual Obligations
The table below provides estimatesCustomer receivables: In line with industry practice, we typically bill our customers for services provided in arrears dependent upon contractual terms. In weak economic environments, we may experience delays in collection from our customers. Due to the impact of the timing of futureCOVID-19 pandemic on the industry, we have experienced delays in customer payments thatand agreed to extended payment terms, however, we are contractually obligated to make based on agreements in place at December 31, 2018.have not experienced any material non-payment events.
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Payments Due by Period |
| | | | (dollars in thousands) |
| | Total | | Less than 1 year | | 1 – 3 years | | 4 – 5 years | | More than 5 years |
ABL Facility(1) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Term Loan Facility(1) | 111,715 |
| | 1,750 |
| | 3,500 |
| | 106,465 |
| | — |
|
Estimated interest payments(2) | 41,533 |
| | 11,407 |
| | 22,307 |
| | 7,819 |
| | — |
|
Operating lease obligations(3) | 153,930 |
| | 42,717 |
| | 81,075 |
| | 10,396 |
| | 19,742 |
|
Purchase commitments(4) | 690,862 |
| | 341,970 |
| | 344,947 |
| | 3,945 |
| | — |
|
| Obligations under the TRAs(5) | 16,818 |
| | — |
| 5 |
| 3,994 |
| | 1,947 |
| | 10,877 |
|
| Total | $ | 1,014,858 |
| | $ | 397,844 |
| | $ | 455,823 |
| | $ | 130,572 |
| | $ | 30,619 |
|
| |
(1) | Payments on our ABL Facility and Term Loan Facility exclude interest payments. Payments are based on debt balances as of December 31, 2018. |
| |
(2) | Estimated interest payments are based on debt balances as of December 31, 2018. Interest rates applied are based on the weighted average rate as of December 31, 2018. |
| |
(3) | Operating lease obligations include payments for leased facilities, equipment and vehicles. |
| |
(4) | Purchase commitments represent payments under supply agreements for the purchase and transportation of proppants. The agreements include minimum monthly purchase commitments, including agreements under which a shortfall fee may be applied. The shortfall fee may be offset by purchases in excess of the minimum requirement during future periods, as allowed for by each agreement. |
| |
(5) | The timing and amount(s) of the aggregate payments due under the TRAs may vary based on a number of factors, including the timing and amount of the taxable income we generate each year and the tax rate then applicable. |
Tax Receivable Agreements
In connection with the IPO, on January 17, 2018, the Company entered into two TRAs with the TRA Holders. The TRAs generally provide for the payment by the Company of 85% of the net cash savings, if any, in U.S. federal, state, and local income tax and franchise tax (computed using simplifying assumptions to address the impact of state and local taxes) that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the IPO as a result, as applicable to each of the TRA Holders, of (i) certain increases in tax basis that occur as a result of the Company’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holders’ Liberty LLC Units in connection with the IPO or pursuant to the exercise of the right of each Liberty Unit Holder (the “Redemption Right”), subject to certain limitations, to cause Liberty LLC to acquire all or a portion of its Liberty LLC Units for, at Liberty LLC’s election, (A) shares of our Class A Common Stock at the specific redemption ratio or (B) an equivalent amount of cash, or, upon the exercise of the Redemption Right, the right of the Company (instead of Liberty LLC) to, for administrative convenience, acquire each tendered Liberty LLC Unit directly from the redeeming Liberty Unit Holder (the “Call Right”) for, at its election, (1) one share of Class A Common Stock or the Company’s Call Right,(2) an equivalent amount of cash, (ii) any net operating losses available to the Company as a result of the Corporate Reorganization, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, any payments the Company makes under the TRAs.
With respect to obligations the Company expects to incur under the TRAs (except in cases where the Company elects to terminate the TRAs early, the TRAs are terminated early due to certain mergers, asset sales, or other changes of control or the Company has available cash but fails to make payments when due), generally the Company may elect to defer payments due under the TRAs if the Company does not have available cash to satisfy its payment obligations under the TRAs or if its contractual obligations limit its ability to make such payments. Any such deferred payments under the TRAs generally will accrue interest. In certain cases, payments under the TRAs may be accelerated and/or significantly exceed the actual benefits, if any, the Company realizes in respect of the tax attributes subject to the TRAs. The Company accounts for amounts payable under the TRAs in accordance with Accounting Standard Codification (“ASC”) Topic 450, Contingencies (“ASC Topic 450, Contingencies.450”).
If the Company experiences a change of control (as defined under the TRAs) or the TRAs otherwise terminate early, the Company’s obligations under the TRAs could have a substantial negative impact on its liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, or other forms of business combinations or changes of control. There can be no assurance that we will be able to finance our obligations under the TRAs.
Income Taxes
Following the IPO, theThe Company is a corporation and is subject to U.S. federal, state and local income tax on its share of Liberty LLC’s taxable income. As a result of the IPOThe Company is also subject to Canada federal and Corporate Reorganization, the Company recorded deferred tax assets and liabilities for the difference between the book value of assets and liabilities for financial reporting purposes and those amounts applicable forprovincial income tax purposes. Deferred tax assets have been recorded for tax attributes contributed to the Company as part of the reorganization. Deferred tax liabilities of $29.3 million have been recorded relating to the Liberty LLC Units acquired through the Corporate Reorganization.taxes on its foreign operations.
The effective combined U.S. federal and state incomeeffective tax rate applicable to the Company for the year ended December 31, 20182021 and 2020 was 14.0%.(5.2)% and 16.1%, respectively. The Company’s effective tax rate is significantly less than the federal statutory income tax rate of 21.0% due to the Company recording a valuation allowance on its U.S. net deferred tax assets as of December 31, 2021, due to entering into a three year cumulative pre-tax book loss position, primarily as a result of COVID-19 related losses in 2021. The Company’s effective tax rate is also less than the statutory rate because of foreign operations for 2021, and the non-controlling interest’s share of Liberty LLC’s pass-through results for federal, state and local income tax reporting, upon which no taxes are payable by the Company for the noncontrolling interest’s share of Liberty LLC’s pass-through income for federal, stateyears ended December 31, 2021 and local income tax reporting.2020. The Company recognized income tax expense of $40.4$9.2 million and an income tax benefit of $30.9 million for the twelve monthsyears ended December 31, 2018.2021 and 2020, respectively.
Per the Coronavirus Aid, Relief and Economic Security (“CARES”) Act enacted on March 27, 2020, net operating losses (“NOL”) incurred in 2018, 2019, and 2020 may be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company has previously applied for and expects to receive a NOL carryback refund to recover $5.5 million of cash taxes paid by the Company in 2018. This amount has been reflected as a receivable in the prepaids and other current assets line item in the accompanying audited consolidated balance sheets. Refer to Note 12— Income Taxes to the consolidated financial statements for additional information related to income tax expense.
Critical Accounting Policies and Estimates
The preparation of financial statements requires the use of judgments and estimates. Our critical accounting policies are described below to provide a better understanding of how we develop our assumptions and judgments about future events and related estimates and how they can impact our financial statements. A critical accounting estimate is one that requires our most difficult, subjective or complex estimates and assessments and is fundamental to our results of operations.
We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe the following are the critical accounting policies used in the preparation of our combinedconsolidated financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our combinedconsolidated financial statements and related notes included in “Item 8. Financial Statements and Supplementary Data.”
Business Combinations: Business combinations are accounted for using the acquisition method of accounting in accordance with the ASC Topic 805 - Business Combinations, as amended by Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business. The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Fair value of the acquired assets and liabilities is measured in accordance with the guidance of ASC 850 - Fair Value Measurements, using discounted cash flows and other applicable valuation techniques. Any acquisitions related costs incurred by the Company are expensed as incurred. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill if the definition of a business is met. Operating results of an acquired business are included in our results of operations from the date of acquisition.
Revenue Recognition: Revenue from hydraulic fracturing services is recognized as specific services are provided in accordance with contractual arrangements. If our assessment of performance under a particular contract changes, our revenue and / or costs under that contract may change. In connection with ASC Topic 842 - Leases (“Topic 842”), the Company determined that certain of its service revenue contracts contain a lease component. The Company elected to adopt a practical expedient available to lessors, which allows the Company to combine the lease and service component for certain of the Company’s service contracts when the service component is the predominant component and continues to account for the combined component under ASC Topic 606 - Revenue from Contracts with Customers.
Accounts Receivable: We analyze On January 1, 2020, the needCompany adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets and certain other instruments. Specifically, this new guidance requires using a forward looking, expected loss model for trade and other receivables, held-to-maturity debt securities, loans, and other instruments. Under ASU 2016-13, a company recognizes as an allowance, for doubtful accounts forthe estimate of lifetime expected credit losses, which is expected to result in more timely recognition of such losses.
The Company applies historic loss factors to its receivable portfolio segments that were not expected to be further impacted by current economic developments, and an additional economic conditions factor to portfolio segments anticipated to experience greater losses in the current economic environment. The Company continuously evaluates customers based on risk characteristics, such as historical losses and current economic conditions. Due to the cyclical nature of the oil and gas industry, the Company often evaluates its customers’ estimated losses related to potentially uncollectible accounts receivable on a case-by-case basis throughout the year. We reserve amounts based on specific identification after considering each customer’s situation, including payment patterns, current financial condition as well as general economic conditions.basis. It is reasonably possible that our estimates of the allowance for doubtful accounts will change and that losses ultimately incurred could differ materially from the amounts estimated in determining the allowance.
Inventory: Inventory consists of raw materials used in the hydraulic fracturing process, such as proppants, chemicals and field service equipment maintenance parts, and is stated at the lower of cost or net realizable value, determined using the weighted average cost method. Net realizable value is determined based on our estimates of selling prices in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation, each of which require us to apply judgment.
Property and Equipment: We calculate depreciation and amortization on our assets based on the estimated useful lives and estimated salvage values that we believe are reasonable. The estimated useful lives and salvage values are subject to key assumptions such as maintenance, utilization and job variation. These estimates may change due to a number of factors such as changes in operating conditions or advances in technology.
We incur maintenance costs on our major equipment. The determination of whether an expenditure should be capitalized or expensed requires management judgment in the application of how the costs benefit future periods, relative to our capitalization policy. Costs that either establish or increase the efficiency, productivity, functionality or life of a fixed asset are capitalized and depreciated over the remaining useful life of the asset.
Impairment of long-lived and other intangible assets: Long-lived assets, such as property and equipment, right-of-use lease assets and finite-lived intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Recoverability is assessed using undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets. When alternative
courses of action to recover the carrying amount of the asset group are under consideration, estimates of future undiscounted cash flows take into account possible outcomes and probabilities of their occurrence, which require us to apply judgment. If the carrying amount of the asset is not recoverable based on its estimated undiscounted cash flows expected to result from the use and eventual disposition, an impairment loss is recognized in an amount by which its carrying amount
exceeds its estimated fair value. The inputs used to determine such fair value are primarily based upon internally developed cash flow models. Our cash flow models are based on a number of estimates regarding future operations that may be subject to significant variability, are sensitive to changes in market conditions, and are reasonably likely to change in the future. No
During the year ended December 31, 2020, as a result of negative market indicators including the COVID-19 pandemic, the increased supply of low-priced oil, and customer cancellations, the Company concluded these triggering events or changes in circumstances occurred that wouldcould indicate a potentialpossible impairment of property and equipmentequipment. The Company performed a quantitative and qualitative impairment analysis and determined that no impairment had occurred as of March 31, 2020. As of December 31, 20182020, the Company concluded that no additional triggering events occurred and 2017. the conclusion reached at March 31, 2020 is still appropriate. Such analysis required management to make estimates and assumptions based on historical data and consideration of future market conditions. Given the uncertainty inherent in any projection, heightened by the possibility of unforeseen additional effects of COVID-19, actual results may differ from the estimates and assumptions used, or conditions may change, which could result in impairment charges in the future.
No impairment was recognized during the years ended December 31, 2018, 20172021, 2020 and 2016.2019.
Leases: The Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases ASC Topic 842 effective January 1, 2019.Weelected the modified retrospective transition method under ASC Topic 842 and as such information prior to January 1, 2019 has not been restated and continues to be reported under the accounting standards in effect for the period (ASC Topic 840-Leases). We carried forward the historical lease classifications and assessment of initial direct costs, account for lease and non-lease components as a single component, and exclude leases with an initial term of less than 12 months in the lease assets and liabilities. For leases entered into after January 1, 2019, the Company determines if an arrangement is a lease at inception and evaluates identified leases for operating or finance lease treatment. Operating or finance lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. We use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Lease terms may include options to renew; however, we typically cannot determine our intent to renew a lease with reasonable certainty at inception.
Tax Receivable Agreements: In connection with the IPO, on January 17, 2018, the Company entered into two TRAs with the TRA Holders. The TRAs generally provide for the payment by the Company of 85% of the net cash savings, if any, in U.S. federal, state, and local income tax and franchise tax that the Company actually realizes in periods after the IPO as a result of certain tax attributes applicable to each TRA Holder. The Company accounts for amounts payable under the TRAs in accordance with ASC Topic 450, Contingencies.Contingencies.
Share Repurchases: The Company accounts for the purchase price of repurchased Class A Common Stock in excess of par value ($0.01 per share of Class A Common Stock) as a reduction of additional paid-in capital, and will continue to do so until additional paid-in capital is reduced to zero. Thereafter, any excess purchase price will be recorded as a reduction to retained earnings. Foreign Currency Translation: Effective January 1, 2021, the Company commenced operations in Canada and therefore added a critical accounting policy for foreign currency translation. See Note 2―Significant Accounting Policies in the accompanying audited consolidated financial statements included herein and incorporated by reference into this offering memorandum.
Recent Accounting Pronouncements
See Note 2, “Significant2—Significant Accounting Policies—Recently Issued Accounting Standards” and Note 2, “Significant Accounting Policies—Recently Adopted Accounting Standards”Standards to the consolidated and combined financial statements included in “Item 8. Financial Statements and Supplementary Data” for a discussion of recent accounting pronouncements.
Off Balance Sheet Arrangements
We have no material off balance sheet arrangements as of December 31, 2018, except for the operating leases and purchase commitments under supply agreements as disclosed above under “—Contractual Obligations.” As such, we are not materially exposed to any other financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Industry Risk
The demand, pricing and terms for hydraulic fracturing services and related goods provided by us are largely dependent upon the level of drilling activity in the U.S. oil and natural gas industry, as well as the available supply of hydraulic fracturing equipment. These activity levels are influenced by numerous factors over which we have no control, including, but not limited to: the supply of and demand for oil and natural gas; the level of prices, and expectations about future prices of oil and natural gas; the cost of exploring for, developing, producing and delivering oil and natural gas; the expected rates of declining current production; the discovery rates of new oil and natural gas reserves; supply of actively marketed and staffed fracturing fleets; available rail and other transportation capacity; weather conditions; domestic and worldwide economic conditions; political instability in oil-producing countries; environmental regulations; technical advances affecting energy consumption; the price and availability of alternative fuels; the ability of E&P companies to raise equity capital and debt financing; and merger and divestiture activity among E&P companies.
The level of U.S. oil and natural gas drilling is volatile. Expected trends in oil and natural gas production activities may not materialize and demand for our services may not reflect the level of activity in the industry. Any prolonged and substantial reduction in oil and natural gas prices would likely affect oil and natural gas production levels and therefore affect demand for our services. A material decline in oil and natural gas prices or U.S. activity levels could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Interest Rate Risk
At December 31, 2018,2021, we had $111.7$124.5 million of debt outstanding, with a weighted average interest rate of 10.1%8.6%. Interest is calculated under the terms of our Credit Facilities based on our selection, from time to time, of one of the index rates available to us plus an applicable margin that varies based on certain factors. See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Debt Agreements.” Assuming no change in the amount outstanding, the impact on interest expense of a 1% increase or decrease in the weighted average interest rate would be approximately $1.1$1.2 million per year. We do not currently have or intend to enter into any derivative arrangements to protect against fluctuations in interest rates applicable to our outstanding indebtedness.
Commodity Price Risk
Our material and fuel purchases expose us to commodity price risk. Material costs primarily include inventory consumed while performing hydraulic fracturing services. Fuel costs consist of diesel fuel used by trucks and other motorized equipment used for hydraulic fracturing services. WeAt times, we have been able to pass along price increases for material costs and fuel costs to customers and conversely have been required to pass along price decreases for material costs to our customers, depending on market conditions. Further, we have purchase commitments with certain vendors to supply proppant inventory used in our operations at a fixed purchase price, including certain commitments which include minimum purchase obligations. Refer toto Note 13 “Commitments15—Commitments and Contingencies”Contingencies included in “Item 8. Financial Statements and Supplementary Data” for further discussion regarding purchasepurchase commitments.
Item 8. Financial Statements and Supplementary Data
Our financial statements and supplementary data are included in this Annual Report on Form 10-K beginning on page F-1 and incorporated by reference herein.
Item 9. Changes in and Disagreements Withwith Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and ProceduresProcedures’
As required by Rule 13a-15(b) underIn accordance with the Securities Exchange Act of 1934 Rules 13a-15 and 15d-15, we have evaluated,carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, and principal accounting officer,of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Reportreport. Based on Form 10-K. Ourthat evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are designedwere effective as of December 31, 2021 to provide reasonable assurance that information required to be disclosed in theour reports we filefiled or submitsubmitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Security and Exchange Commission (the “SEC”)SEC’s rules and formsforms. Our disclosure controls and procedures include controls and procedures designed to ensure that such information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our principal executive officer, principal financial officer and principal accounting officer, to allow timely decisions regarding required disclosure. Based upon that evaluation, our principal executive officer, principal financial officer and principal accounting officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2018.
Management’s Annual Report on Internal Control Over Financial Reporting
During the year ended December 31, 2017, we were an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) and were not required to comply with certain requirements that were applicable to other public companies that are not “emerging growth companies.”
Effective as of January 17, 2018, we no longer qualify as an “emerging growth company” as defined in the JOBS Act. However, in accordance with Section 13(a) and 15(d) of the Exchange Act, a company is required to have been subject to the SEC’s requirements for a period of at least 12 calendar months in order to be designated as a large accelerated filer or an accelerated filer. We completed our IPO on January 17, 2018, and therefore do not meet the requirements to be designated as a large accelerated filer or an accelerated filer as of December 31, 2018. Section 404(c) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) provides that Section 404(b) of the Sarbanes-Oxley Act shall not apply with respect to any audit report prepared for an issuer that is neither an accelerated filer nor a large accelerated filer as defined in Rule 12b-2 under the Exchange Act. Accordingly, our independent registered public accounting firm is not yet required to formally attest to the effectiveness of our internal control over financial reporting for the year ended December 31, 2018.
Our management, including our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting for us as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Our internal control over financial reporting includes those policies and procedures that:
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i. | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of the assets; |
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ii. | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
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iii. | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. |
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time.
Under the supervision of, and with the participation of our management, including our principal executive officer and principal financial officer, we conducted anas appropriate, to allow timely decisions regarding required disclosures.
As noted in Management’s Report on Internal Control Over Financial Reporting, management’s evaluation of, and conclusion on, the effectiveness of our internal control over financial reporting based
the entities acquired in the PropX Acquisition, as defined herein, on the framework and criteriaOctober 26, 2021. Under guidelines established in Internal Control-Integrated Framework (2013), issued by the CommitteeSEC, companies are permitted to exclude acquisitions from their assessment of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective asduring the first year of December 31, 2018.
Changesan acquisition while integrating the acquired company. The Company is in Internal Control Over Financial Reporting
During the quarter ended December 31, 2018, we developedprocess of integrating PropX’s and implemented new controls and took additional actions to address a previously identified material weakness in our internal control over financial reporting as of December 31, 2017 related to segregation of duties, including internal controls over journal entries. The new internal controls and additional actions included, among other things, hiring additional personnel, engagingfinancial reporting. As a third party to assist in the documentation, implementation and testing of internal controls, and developing and implementing improved policies, processes and procedures to ensure proper segregation of duties are followed. After completion of the testing of the design and operating effectivenessresult of these new internalintegration activities, certain controls we concluded that we had remediated the previously identified material weaknesswill be evaluated and may be changed. Except as of December 31, 2018. Other than the internal controls implemented to address the previously identified material weakness,noted above, there were no changes into our internal control over financial reporting (as defined in RuleRules 13a-15(f) and 15d-15(f) under the Exchange Act) during theour last fiscal quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
AttestationSee page F-1 for Management’s Report on Internal Control Over Financial Reporting and page F-4 for Report of theIndependent Registered Public Accounting Firm on its assessment of our internal control over financial reporting.
Management’s report was not subject to attestation by our independent registered public accounting firm, pursuant to Rule 12b-2 of the Exchange Act, that permits us to provide only management’s report in this Annual Report on Form 10-K. Therefore, this Annual Report on Form 10-K does not include such an attestation.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item concerning our executive officers, directors and corporate governance is incorporated herein by reference to our definitive proxy statement for our 20192022 annual meeting of shareholders,stockholders, which will be filed with the SEC no later than 120 days after December 31, 2018.2021, under the captions “Proposal 1 — Election of Directors,” “The Board and its Committees,” “Executive Officers” and “Delinquent Section 16(a) Reports.”
Item 11. Executive Compensation
The information required by this item concerning executive compensation is incorporated herein by reference to our definitive proxy statement for our 20192022 annual meeting of shareholders,stockholders, which will be filed with the SEC no later than 120 days after December 31, 2018.2021, under the captions “The Board and its Committees,” “Compensation Discussion & Analysis,” “Compensation Committee Report,” “Executive Compensation Tables,” “Director Compensation” and “CEO Pay Ratio.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item concerning the security ownership of certain beneficial owners and management and related stockholder matters are incorporated herein by reference to our definitive proxy statement for our 20192022 annual meeting of shareholders,stockholders, which will be filed with the SEC no later than 120 days after December 31, 2018.2021, under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item concerning certain relationships and related person transactions and director independence is incorporated herein by reference to our definitive proxy statement for our 20192022 annual meeting of shareholders,stockholders, which will be filed with the SEC no later than 120 days after December 31, 2018.2021, under the captions “Certain Relationships and Related Party Transactions” and “the Board and its Committees.”
Item 14. Principal Accountant Fees and Services
The information required by this item concerning principal accounting fees and services is incorporated herein by reference to our definitive proxy statement for our 20192022 annual meeting of shareholders,stockholders, which will be filed with the SEC no later than 120 days after December 31, 2018.
2021, under the caption “Proposal 3 — Ratification of Appointment of the Company’s Independent Registered Public Accounting Firm.”
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements and Financial Statement Schedules
Refer to Index to Financial Statements on page 65.49.
All schedules are omitted as information required is inapplicable or the information is presented in the consolidated and combined financial statements and the related notes.
(b) Exhibits
The documents listed in the Index to Exhibits are filed, furnished or incorporated by reference as part of this Annual Report, on Form 10-K, and such Index to Exhibits are incorporated herein by reference.
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated and Combined Financial Statements
Item 16. Form 10-K Summary
None.
INDEX TO EXHIBITS
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Exhibit Number | | Description |
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| 1.1 |
| | Underwriting Agreement, dated as of January 11, 2018,June 7, 2021, by and among Liberty Oilfield Services Inc., Liberty Oilfield Services New HoldCo LLC, R/C Energy IV Direct Partnership, L.P., R/C IV Liberty Holdings, L.P. and Morgan Stanley & Co. LLC Goldman Sachs & Co. LLC and Wells Fargo Securities, LLC, as representatives of the several underwriters named therein (2) (14) |
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| 2.1 |
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3.12.2 |
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| 3.1 | | |
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| 3.2 |
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| 4.1 |
| | StockholderAmended and Restated Stockholders Agreement, dated as of January 17, 2018,December 31, 2020, by and among Liberty Oilfield Services Inc., R/C IV Liberty Oilfield Services Holdings, L.P., R/C Energy IV Direct Partnership, L.P.,Riverstone and other parties names thereinthe Schlumberger Parties (2) (12) |
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10.14.2 |
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| 10.1 | | |
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| 10.2 |
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| 10.3 | | |
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| 10.4 | | |
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10.310.5 |
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10.410.6 |
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10.510.7 |
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10.610.8 |
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10.7 |
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10.8 |
| | Credit Agreement, dated September 19, 2017, by and among Wells Fargo Bank, National Association, as Administrative Agent, Wells Fargo Bank, National Association, JPMorgan Chase Bank, N.A. and Citibank, N.A., as Joint Lead Arrangers, Wells Fargo Bank, National Association, as Book Runner, JPMorgan Chase Bank, N.A. and Citibank, N.A., as Syndication Agents, the lender parties thereto, Liberty Oilfield Services Holdings LLC, as Parent and Liberty Oilfield Services LLC and LOS Acquisition Co I LLC, each as a Borrower (1) |
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| 10.9 |
| | Amendment and Parent Joinder to Credit Agreement, dated January 17, 2018, by and among Liberty Oilfield Services Holdings LLC, Liberty Oilfield Services LLC, LOS Acquisition Co I LLC, Liberty Oilfield Services Inc., Liberty Oilfield Services New Holdco LLC, Wells Fargo Bank, National Association, as Administrative Agent, and the lenders signatory thereto (4) |
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10.101010 |
| | Second Amendment and Parent Joinder to Credit Agreement, dated March 21, 2018, by and among Liberty Oilfield Services LLC, LOS Acquisition Co I LLC, Liberty Oilfield Services Inc., Liberty Oilfield Services New Holdco LLC, R/C IV Non-U.S. LOS Corp, Wells Fargo Bank, National Association, as Administrative Agent, and the lenders signatory thereto (4) |
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| 10.11 |
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| 10.12 | | Fourth Amendment to Credit Agreement, dated August 12, 2020, by and among Liberty Oilfield Services LLC, Liberty Oilfield Services Inc., Liberty Oilfield Services New Holdco LLC, R/C IV Non-U.S. LOS Corp, Wells Fargo Bank, National Association, as Administrative Agent, and the lenders signatory thereto (10) |
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| 10.13 | | Consent and Fifth Amendment to Credit Agreement, dated December 29, 2020, by and among Liberty Oilfield Services LLC, Liberty Oilfield Services Inc., Liberty Oilfield Services New Holdco LLC, R/C IV Non-U.S. LOS Corp, LOS Cibolo RE Investments, LLC, LOS Odessa RE Investments, LLC, ST9 Gas and Oil LLC, Wells Fargo Bank, National Association, as Administrative Agent, and the lenders signatory thereto (13) |
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| 10.14 | | Sixth Amendment to Credit Agreement and Second Amendment to Guaranty and Security Agreement, dated October 22, 2021, by and among Liberty Oilfield Services LLC, Liberty Oilfield Services Inc., Liberty Oilfield Services New HoldCo LLC, R/C IV Non-U.S. LOS Corp, LOS Solar Acquisition LLC, Freedom Proppant LLC, LOS Kermit LLC, LOS Cibolo RE Investments, LLC, LOS Odessa RE Investments, LLC, ST9 Gas and Oil LLC, Wells Fargo Bank, National Association, as Administrative Agent, and the lenders signatory thereto (15) |
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| 10.15 | | |
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| 10.16 | | |
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10.1210.17 |
| | Amendment and Joinder to Credit Agreement, dated January 17, 2018, by and among Liberty Oilfield Services Holdings LLC, Liberty Oilfield Services LLC, LOS Acquisition Co I LLC, Liberty Oilfield Services Inc., Liberty Oilfield Services New Holdco LLC, U.S. Bank National Association, as Administrative Agent, and the lenders signatory thereto (4) |
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10.1310.18 |
| | Second Amendment and Joinder to Credit Agreement, dated March 21, 2018, by and among Liberty Oilfield Services LLC, LOS Acquisition Co I LLC, Liberty Oilfield Services Inc., Liberty Oilfield Services New Holdco LLC, R/C IV Non-U.S. LOS Corp, U.S. Bank National Association, as Administrative Agent, and the lenders signatory thereto (4) |
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10.14 |
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| 10.19 | | |
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| 10.20 | | |
10.15 |
| | IndemnificationWaiver, Consent and Fourth Amendment to Credit Agreement (Michael Stock)and First Amendment to Guaranty and Security Agreement, dated December 29, 2020, by and among Liberty Oilfield Services LLC, Liberty Oilfield Services Inc., Liberty Oilfield Services New Holdco LLC, R/C IV Non-U.S. LOS Corp, LOS Cibolo RE Investments, LLC, LOS Odessa RE Investments, LLC, ST9 Gas and Oil LLC, U.S. Bank National Association, as Administrative Agent, and the lenders signatory thereto (2)† (13) |
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10.1610.21 |
| | IndemnificationFifth Amendment to Credit Agreement, (Ron Gusek)Second Amendment to Guaranty and Security Agreement and Termination of Right of First Offer Letter, dated October 22, 2021, by and among Liberty Oilfield Services LLC, Liberty Oilfield Services Inc., Liberty Oilfield Services New HoldCo LLC, R/C IV Non-U.S. LOS Corp, LOS Cibolo RE Investments, LLC, LOS Odessa RE Investments, LLC, ST9 Gas and Oil LLC, LOS Solar Acquisition LLC, Freedom Proppant LLC, LOS Kermit LLC, U.S. Bank National Association, as Administrative Agent, and the lenders signatory thereto (2)† (15) |
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10.1710.22 |
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10.18 |
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10.19 |
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10.20 |
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10.21 |
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10.22 |
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10.23 |
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10.24 |
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10.25 |
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10.26 |
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10.2710.23 |
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10.28 |
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21.110.24 |
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| 10.25 | | |
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| 10.26 | | |
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| 10.27 | | |
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| 21.1 | | |
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| 23.1 |
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| 31.1 |
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| 31.2 |
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| 32.1 |
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| 32.2 |
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101.INS |
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| 95 | | |
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| 101.INS | | XBRL Instance Document * |
| | |
| 101.SCH |
| | XBRL Taxonomy Extension Schema Document * |
| | |
| 101.CAL |
| | XBRL Taxonomy Extension Calculation Linkbase Document * |
| | |
| 101.DEF |
| | XBRL Taxonomy Extension Definition Linkbase Document * |
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| 101.LAB |
| | XBRL Taxonomy Extension Label Linkbase Document * |
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| 101.PRE |
| | XBRL Taxonomy Extension Presentation Linkbase Document * |
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(1)104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)* |
| | |
| (1) | Incorporated by reference to the exhibits to the registrant’s Registration Statement on Form S-1, as amended (SEC File 333-216050). |
| | |
| (2) | Incorporated by reference to the exhibits to the registrant’s Current Report on Form 8-K, filed on January 18, 2018. |
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| (3) | Incorporated by reference to the exhibits to the registrant’s Amendment No. 1 to the Current Report on Form 8-K/A, filed on January 22, 2018. |
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| (4) | Incorporated by reference to the exhibits to the registrant’s Annual Report on Form 10-K, filed on March 23, 2018. |
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|
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| (5) | Incorporated by reference to the exhibits to the registrant’s Registration Statement on Form S-8, filed on June 28, 2018 (SEC File 333-225948). |
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(6) | Incorporated by reference to the exhibits to the registrant’s Current Report on Form 8-K, filed on September 17, 2018. |
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(7) | Incorporated by reference to the exhibits to the registrant’s Quarterly Report on Form 10-Q, filed on May 10, 2018. |
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*(6) | Filed herewith.Incorporated by reference to the exhibits to the registrant’s Quarterly Report on Form 10-Q, filed on May 3, 2019. |
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**(7) | Furnished herewith.Incorporated by reference to the exhibits to the registrant’s Current Report on Form 8-K, filed on August 30, 2019. |
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†
(8) | Incorporated by reference to the exhibits to the registrant’s Annual Report on Form 10-K, filed on February 27, 2020. |
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| (9) | Incorporated by reference to the exhibits to the registrant’s Current Report on Form 8-K, filed on June 3, 2020. |
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| (10) | Incorporated by reference to the exhibits to the registrant’s Quarterly Report on Form 10-Q, filed on October 30, 2020. |
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| (11) | Incorporated by reference to the exhibits to the registrant’s Current Report on Form 8-K, filed on September 1, 2020. |
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| (12) | Incorporated by reference to the exhibits to the registrant’s Current Report on Form 8-K, filed on January 4, 2021. |
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| (13) | Incorporated by reference to the exhibits to the registrant’s Annual Report on Form 10-K, filed on February 24, 2021. |
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| (14) | Incorporated by reference to the exhibits to the registrant’s Current Report on Form 8-K, filed on June 10, 2021. |
| Incorporated by reference to the exhibits to the registrant’s Current Report on Form 8-K, filed on January 4, 2021. |
| (15) | Incorporated by reference to the exhibits to the registrant’s Quarterly Report on Form 10-Q, filed on October 28, 2021. |
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| * | Filed herewith. |
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| ** | Furnished herewith. |
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| † | Denotes a management contract or compensatory plan or arrangement. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | | | | | | | | | | | |
| | | | LIBERTY OILFIELD SERVICES INC.
/s/ Christopher A. Wright |
| Date: | February 28, 201922, 2022 | By: | | Christopher A. Wright Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | | | | | | | | | | |
| Signature | | Title | | Date |
| /s/ Christopher A. Wright | | Chief Executive Officer and Director (Principal Executive Officer) | | February 28, 201922, 2022 |
| Christopher A. Wright | | | | |
| | | | |
| /s/ Michael Stock | | Chief Financial Officer (Principal Financial Officer) | | February 28, 201922, 2022 |
| Michael Stock | | | | |
| | | | |
| /s/ Ryan T. Gosney | | Chief Accounting Officer | | February 28, 201922, 2022 |
| Ryan T. Gosney | | (Principal Accounting Officer) | | |
| | | | |
| /s/ Simon Ayat | | Director | | February 22, 2022 |
| Simon Ayat | | | | |
| | | | |
| /s/ Ken Babcock | | Director | | February 22, 2022 |
| Ken Babcock | | | | |
| | | | |
| /s/ Peter A. Dea | | Director | | February 22, 2022 |
| Peter A. Dea | | | | |
| | | | |
| /s/ William F. Kimble | | Director | | February 22, 2022 |
| William F. Kimble | | | | |
| | | | |
| /s/ James R. McDonald | | Director | | February 22, 2022 |
| James R. McDonald | | | | |
| | | | |
| /s/ Gale A. Norton | | Director | | February 22, 2022 |
| Gale A. Norton | | | | |
| | | | |
| /s/ Audrey Robertson | | Director | | February 22, 2022 |
| Audrey Robertson | | | | |
| | | | |
| /s/ Cary D. Steinbeck | | Director | | February 28, 201922, 2022 |
| Cary D. Steinbeck | | | | |
| | | | |
/s/ N. John Lancaster, Jr. | | Director | | February 28, 2019 |
N. John Lancaster, Jr. | | | | |
| | | | |
/s/ Brett Staffieri | | Director | | February 28, 2019 |
Brett Staffieri | | | | |
| | | | |
/s/ William F. Kimble | | Director | | February 28, 2019 |
William F. Kimble | | | | |
| | | | |
/s/ Peter A. Dea | | Director | | February 28, 2019 |
Peter A. Dea | | | | |
| | | | |
/s/ Ken Babcock | | Director | | February 28, 2019 |
Ken Babcock | | | | |
| | | | |
/s/ Jesal Shah | | Director | | February 28, 2019 |
Jesal Shah | | | | |
Index to Financial Statements
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| Liberty Oilfield Services Inc. | |
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Liberty Oilfield Services Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act.
Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time.
Under the supervision of, and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2021 based on the framework and criteria established in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, management concluded that, as of December 31, 2021, our internal control over financial reporting was effective. Management’s evaluation of, and conclusion on, the effectiveness of internal control over financial reporting did not include the internal controls of the entity acquired in the PropX Acquisition, as defined herein, on October 26, 2021. The acquired business’ financial statements constitute 9% and 6% of net and total assets as of December 31, 2021.
The effectiveness of Liberty Oilfield Services Inc.’s internal control over financial reporting as of December 31, 2021 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report that is included herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholdersshareholders and the Board of Directors of Liberty Oilfield Services Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated and combined balance sheets of Liberty Oilfield Services Inc. and its subsidiaries (the “Company”) as of December 31, 20182021 and 2017,2020, the related consolidated and combined statements of operations, changes in equity, and cash flows, for each of the three years in the period ended December 31, 2018,2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182021 and 2017,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018,2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2022, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on the Company'sCompany’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Income Taxes — Tax Receivable Agreements — Refer to Note 12 to the financial statements
Critical Audit Matter Description
The amounts payable, as well as the timing of such payments, under the tax receivable agreements (“TRA”) are dependent upon significant future events and assumptions, including among others: (i) the amount of the redeeming unit holder’s tax basis in its Liberty Oilfield Services New HoldCo LLC class B units at the time of the relevant redemption, (ii) the characterization of the tax basis step-up, (iii) the depreciation and amortization periods that apply to the increase in tax basis (iv), the amount and timing of taxable income the Company generates in future periods until the TRA payable is settled, and (v) the portion of the Company’s payments under the TRA that constitute imputed interest or give rise to depreciable or amortizable tax basis.
During the year ended December 31, 2021, exchanges of Liberty Oilfield Services New HoldCo LLC class B units and shares of Class B Common Stock resulted in an increase of $58.5 million in amounts payable pursuant to tax receivable
agreements (“TRA payable”), and a net increase of $68.8 million in deferred tax assets, all of which are subject to the valuation allowance and remeasurement of TRA liability. At December 31, 2021, the Company's TRA payable was $37.6 million, all of which is presented as a component of long-term liabilities.
We identified the computation of adjustments to the TRA payable as a critical audit matter because of the multiple owners and complex calculations required to arrive at the correct tax basis upon which to calculate the corresponding TRA payable adjustment. This involved complexity in applying relevant tax law and an increased extent of effort, including the need to involve income tax specialists, when performing audit procedures to evaluate the reasonableness of management’s calculation of tax basis, iterative impact of the computation of adjustments to the TRA payable, and TRA payable as of year-end.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the computation of adjustments to the TRA payable included the following, among others:
• We tested the effectiveness of controls over the computation of adjustments to the TRA payable, including management’s calculation of the step-up in tax basis that serves as the basis for the computation of adjustments to the TRA payable.
• With the assistance of our income tax specialists, we read the individual TRAs and compared the terms in the agreements for consistency with the mathematical model used by management to calculate the adjustments to the TRA payable.
• With the assistance of our income tax specialists, we evaluated management’s computation of adjustments to the TRA payable, and the TRA payable as of year-end that is payable over the contractual period by comparing to our independently recalculated value, taking into account the various class B unit exchanges for Class B Common Stock occurring during the year as well as the adjustments in the TRA payable for each exchange.
/s/ DELOITTE & TOUCHE LLP
Denver, Colorado
February 28, 201922, 2022
We have served as the Company'sCompany’s auditor since 2016.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Liberty Oilfield Services Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Liberty Oilfield Services Inc. and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Company and our report dated February 22, 2022, expressed an unqualified opinion on those financial statements.
As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Proppant Express Solutions, LLC (“PropX”), which was acquired on October 26, 2021 and whose financial statements constitute 9% and 6% of net and total assets, respectively of the consolidated financial statement amounts as of and for the year ended December 31, 2021. Accordingly, our audit did not include the internal control over financial reporting at PropX.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Denver, Colorado
February 22, 2022
LIBERTY OILFIELD SERVICES INC.
Consolidated and Combined Balance Sheets
As of December 31, 20182021 and 20172020
(Dollars in thousands, except share data)
|
| | | | | | | |
| | 2018 | | 2017 |
| Assets | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 103,312 |
| | $ | 16,321 |
|
| Accounts receivable—trade | 153,589 |
| | 195,961 |
|
| Accounts receivable—related party | 15,139 |
| | 3,984 |
|
| Unbilled revenue | 79,233 |
| | 58,784 |
|
| Unbilled revenue—related party | — |
| | 59 |
|
| Inventories | 60,024 |
| | 55,524 |
|
| Prepaid and other current assets | 49,924 |
| | 21,396 |
|
| Total current assets | 461,221 |
| | 352,029 |
|
| Property and equipment, net | 627,053 |
| | 494,776 |
|
| Other assets | 28,227 |
| | 5,298 |
|
| Total assets | $ | 1,116,501 |
| | $ | 852,103 |
|
| Liabilities and Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 80,490 |
| | $ | 66,846 |
|
| Accrued liabilities: |
| |
|
| Accrued vendor invoices | 67,771 |
| | 78,646 |
|
| Operational accruals | 36,414 |
| | 32,208 |
|
| Accrued salaries and benefits | 22,791 |
| | 24,990 |
|
| Deferred revenue | — |
| | 9,231 |
|
| Accrued interest and other | 9,585 |
| | 6,573 |
|
| Accrued liabilities—related party | 2,300 |
| | 2,000 |
|
| Current portion of long-term debt, net of discount of $1,365 and $1,739, respectively | 385 |
| | 11 |
|
| Total current liabilities | 219,736 |
| | 220,505 |
|
| Long-term debt, net of discount of $3,826 and $6,466, respectively, less current portion | 106,139 |
| | 196,346 |
|
| Deferred tax liability | 32,994 |
| | — |
|
| Payable pursuant to tax receivable agreements | 16,818 |
| | — |
|
| Total liabilities | 375,687 |
| | 416,851 |
|
| Commitments & contingencies (Note 13) |
| |
|
| Redeemable common units | — |
| | 42,486 |
|
| Members’ equity: | | | |
| Members’ equity | — |
| | 392,766 |
|
| Stockholders’ equity: | | | |
| Preferred Stock, $0.01 par value, 10,000 shares authorized and none issued and outstanding | — |
| | — |
|
| Common Stock: | | | |
| Class A, $0.01 par value, 400,000,000 shares authorized and 68,359,871 issued and outstanding as of December 31, 2018 and none issued and outstanding as of December 31, 2017 | 684 |
| | — |
|
| Class B, $0.01 par value, 400,000,000 shares authorized and 45,207,372 issued and outstanding as of December 31, 2018 and none issued and outstanding as of December 31, 2017 | 452 |
| | — |
|
| Additional paid in capital | 312,659 |
| | — |
|
| Retained earnings | 119,274 |
| | — |
|
| Total stockholders’ equity | 433,069 |
| | — |
|
| Noncontrolling interest | 307,745 |
| | — |
|
| Total equity | 740,814 |
| | 392,766 |
|
| Total liabilities and equity | $ | 1,116,501 |
| | $ | 852,103 |
|
| | | | | | | | | | | |
| 2021 | | 2020 |
| Assets | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 19,998 | | | $ | 68,978 | |
| Accounts receivable—trade, net of allowances for credit losses of $884 and $773, respectively | 298,531 | | | 244,433 | |
| | | |
| Unbilled revenue | 108,923 | | | 69,516 | |
| | | |
| Inventories | 134,593 | | | 118,568 | |
| Prepaid and other current assets (including receivables from related parties of $0 and $24,708, respectively) | 68,332 | | | 65,638 | |
| Total current assets | 630,377 | | | 567,133 | |
| Property and equipment, net | 1,199,287 | | | 1,120,950 | |
| Finance lease right-of-use assets | 18,201 | | | 38,733 | |
| Operating lease right-of-use assets | 109,899 | | | 75,878 | |
| Other assets | 82,289 | | | 81,888 | |
| Deferred tax asset | 607 | | | 5,360 | |
| Total assets | $ | 2,040,660 | | | $ | 1,889,942 | |
| Liabilities and Equity | | | |
| Current liabilities: | | | |
| Accounts payable (including payables to related parties of $2,732 and $0, respectively) | $ | 288,801 | | | $ | 193,338 | |
| Accrued liabilities (including amounts due to related parties of $1,142 and $0, respectively) | 235,115 | | | 118,383 | |
| Deferred revenue | 4,552 | | | — | |
| Current portion of long-term debt, net of discount of $743 and $1,386, respectively | 1,007 | | | 364 | |
| Current portion of finance lease liabilities | 8,743 | | | 20,580 | |
| Current portion of operating lease liabilities | 31,029 | | | 23,481 | |
| Total current liabilities | 569,247 | | | 356,146 | |
| Long-term debt, net of discount of $1,270 and $1,054, respectively, less current portion | 121,445 | | | 105,411 | |
| Deferred tax liability | 563 | | | — | |
| Payable pursuant to tax receivable agreements, including payables to related parties of $0 and $27,173, respectively | 37,555 | | | 56,594 | |
| Noncurrent portion of finance lease liabilities | 4,445 | | | 11,318 | |
| Noncurrent portion of operating lease liabilities | 76,966 | | | 50,430 | |
| Total liabilities | 810,221 | | | 579,899 | |
| Commitments & contingencies (Note 15) | 0 | | 0 |
| | | |
| | | |
| | | |
| Stockholders’ equity: | | | |
| Preferred Stock, $0.01 par value, 10,000 shares authorized and NaN issued and outstanding | — | | | — | |
| Common Stock: | | | |
| Class A, $0.01 par value, 400,000,000 shares authorized and 183,385,111 issued and outstanding as of December 31, 2021 and 157,952,213 issued and outstanding as of December 31, 2020 | 1,834 | | | 1,579 | |
| Class B, $0.01 par value, 400,000,000 shares authorized and 2,632,347 issued and outstanding as of December 31, 2021 and 21,550,282 issued and outstanding as of December 31, 2020 | 26 | | | 216 | |
| Additional paid in capital | 1,367,642 | | | 1,125,554 | |
| (Accumulated deficit) retained earnings | (155,954) | | | 23,288 | |
| Accumulated other comprehensive (loss) | (306) | | | — | |
| Total stockholders’ equity | 1,213,242 | | | 1,150,637 | |
| Non-controlling interest | 17,197 | | | 159,406 | |
| Total equity | 1,230,439 | | | 1,310,043 | |
| Total liabilities and equity | $ | 2,040,660 | | | $ | 1,889,942 | |
See Notes to Consolidated and Combined Financial Statements.
LIBERTY OILFIELD SERVICES INC.
Consolidated and Combined Statements of Operations
For the Years Ended December 31, 2018, 20172021, 2020, and 20162019
(In thousands, except per share data)
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Revenue: | | | | | |
| Revenue | $ | 2,132,032 |
| | $ | 1,465,133 |
| | $ | 356,890 |
|
| Revenue—related parties | 23,104 |
| | 24,722 |
| | 17,883 |
|
| Total revenue | 2,155,136 |
| | 1,489,855 |
| | 374,773 |
|
| Operating costs and expenses: |
| | | | |
| Cost of services (exclusive of depreciation and amortization shown separately below) | 1,628,753 |
| | 1,147,008 |
| | 354,729 |
|
| General and administrative | 99,052 |
| | 80,089 |
| | 35,789 |
|
| Depreciation and amortization | 125,110 |
| | 81,473 |
| | 41,362 |
|
| (Gain) loss on disposal of assets | (4,342 | ) | | 148 |
| | (2,673 | ) |
| Total operating costs and expenses | 1,848,573 |
| | 1,308,718 |
| | 429,207 |
|
| Operating income (loss) | 306,563 |
| | 181,137 |
| | (54,434 | ) |
| Other expense: |
| | | | |
| Interest expense | (17,145 | ) | | (11,875 | ) | | (6,126 | ) |
| Interest expense related party | — |
| | (761 | ) | | — |
|
| Total interest expense | (17,145 | ) | | (12,636 | ) | | (6,126 | ) |
| Net income (loss) before income taxes | 289,418 |
| | 168,501 |
| | (60,560 | ) |
| Income tax expense | 40,385 |
| | — |
|
| — |
|
| Net income (loss) | 249,033 |
| | 168,501 |
| | (60,560 | ) |
| Less: Net income (loss) attributable to Predecessor, prior to Corporate Reorganization | 8,705 |
| | 168,501 |
| | (60,560 | ) |
| Less: Net income attributable to noncontrolling interests | 113,979 |
| | — |
| | — |
|
| Net income attributable to Liberty Oilfield Services Inc. stockholders | $ | 126,349 |
| | $ | — |
| | $ | — |
|
| |
|
| | | | |
| Net income attributable to Liberty Oilfield Services Inc. stockholders per common share: |
|
| | | | |
| Basic | $ | 1.84 |
| | | | |
| Diluted | $ | 1.81 |
| | | | |
| Weighted average common shares outstanding: |
|
| | | | |
| Basic | 68,838 |
| | | | |
| Diluted | 117,838 |
| | | | |
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Revenue: | | | | | |
| Revenue | $ | 2,447,140 | | | $ | 965,787 | | | $ | 1,972,073 | |
| Revenue—related parties | 23,642 | | | — | | | 18,273 | |
| Total revenue | 2,470,782 | | | 965,787 | | | 1,990,346 | |
| Operating costs and expenses: | | | | | |
| Cost of services (exclusive of depreciation, depletion, and amortization shown separately below) | 2,249,926 | | | 857,981 | | | 1,621,180 | |
| General and administrative | 123,406 | | | 84,098 | | | 97,589 | |
| Transaction, severance and other costs | 15,138 | | | 21,061 | | | — | |
| Depreciation, depletion, and amortization | 262,757 | | | 180,084 | | | 165,379 | |
| Loss (gain) on disposal of assets | 779 | | | (411) | | | 2,601 | |
| Total operating costs and expenses | 2,652,006 | | | 1,142,813 | | | 1,886,749 | |
| Operating (loss) income | (181,224) | | | (177,026) | | | 103,597 | |
| Other (income) and expense: | | | | | |
| Gain on remeasurement of liability under tax receivable agreement | (19,039) | | | — | | | — | |
| Interest income | (2) | | | (297) | | | (983) | |
| Interest income—related party | — | | | (263) | | | (1,821) | |
| Interest expense | 15,605 | | | 15,065 | | | 17,485 | |
| Total other (income) expense, net | (3,436) | | | 14,505 | | | 14,681 | |
| Net (loss) income before income taxes | (177,788) | | | (191,531) | | | 88,916 | |
| Income tax expense (benefit) | 9,216 | | | (30,857) | | | 14,052 | |
| Net (loss) income | (187,004) | | | (160,674) | | | 74,864 | |
| | | | | |
| Less: Net (loss) income attributable to non-controlling interests | (7,760) | | | (45,091) | | | 35,861 | |
| Net (loss) income attributable to Liberty Oilfield Services Inc. stockholders | $ | (179,244) | | | $ | (115,583) | | | $ | 39,003 | |
| | | | | |
| Net (loss) income attributable to Liberty Oilfield Services Inc. stockholders per common share: | | | | | |
| Basic | $ | (1.03) | | | $ | (1.36) | | | $ | 0.54 | |
| Diluted | $ | (1.03) | | | $ | (1.36) | | | $ | 0.53 | |
| Weighted average common shares outstanding: | | | | | |
| Basic | 174,019 | | | 85,242 | | 72,334 |
| Diluted | 174,019 | | | 85,242 | | 105,256 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
See Notes to Consolidated and Combined Financial Statements.
LIBERTY OILFIELD SERVICES INC.
Consolidated and Combined Statements of Changes in EquityComprehensive (Loss) Income
For the Years Ended December 31, 2018, 20172021, 2020, and 20162019
(Amounts inIn thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Members’ Equity | | Shares of Class A Common Stock | | Shares of Class B Common Stock | | Class A Common Stock, Par Value | | Class B Common Stock, Par Value | | Additional Paid in Capital | | Retained Earnings | | Total Stockholders’ equity | | Noncontrolling Interest | | Total Equity |
| Balance—December 31, 2016 | $ | 228,972 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | $ | 228,972 |
|
| Return on redeemable common units | (4,707 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,707 | ) |
| Net income | 168,501 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 168,501 |
|
| Balance—December 31, 2017 | $ | 392,766 |
| | — |
| | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 392,766 |
|
| Return on redeemable common units | (149 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (149 | ) |
| Net income prior to Corporate Reorganization | 8,705 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8,705 |
|
| Balance prior to Corporate Reorganization | $ | 401,322 |
| | — |
| | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | 401,322 |
|
| Corporate Reorganization | | | | | | | | | | | | | | | | | | | |
| Exchange of Liberty LLC Units for Class A Common Stock and Class B Common Stock and extinguishment of redeemable common units | (401,322 | ) | | 55,986 |
| | 48,207 |
| | 560 |
| | 482 |
| | 444,824 |
| | — |
| | 445,866 |
| | — |
| | 44,544 |
|
| Net deferred tax liability due to Corporate Reorganization | — |
| | — |
| | — |
| | — |
| | — |
| | (29,287 | ) | | — |
| | (29,287 | ) | | — |
| | (29,287 | ) |
| Initial Public Offering | | | | | | | | | | | | | | | | | | | |
| Issuance of Class A Common Stock, net of underwriter discount and offering costs | — |
| | 14,340 |
| | — |
| | 143 |
| | — |
| | 219,847 |
| | — |
| | 219,990 |
| | — |
| | 219,990 |
|
| Redemption of Legacy Ownership, net of underwriter discount | — |
| | (1,609 | ) | | — |
| - | (16 | ) | | — |
| | (25,881 | ) | | — |
| | (25,897 | ) | | — |
| | (25,897 | ) |
| Issuance of restricted stock | — |
| | 1,259 |
| | — |
| | 13 |
| | — |
| | (13 | ) | | — |
| | — |
| | — |
| | — |
|
| Liability due to tax receivable agreements | — |
| | — |
| | — |
| | — |
| | — |
| | (2,291 | ) | | — |
| | (2,291 | ) | | — |
| | (2,291 | ) |
| Initial allocation of noncontrolling interest of Liberty LLC effective on the date of the IPO | — |
| | — |
| | — |
| | — |
| | — |
| | (261,048 | ) | | — |
| | (261,048 | ) | | 261,048 |
| | — |
|
| Results Subsequent to Initial Public Offering | | | | | | | | | | | | | | | | | | | |
| Distributions and advances paid to noncontrolling interest unitholders | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (21,288 | ) | | (21,288 | ) |
| Exchange of Class B Common Stock for Class A Common Stock | — |
| | 3,000 |
| | (3,000 | ) | | 30 |
| | (30 | ) | | 20,534 |
| | — |
| | 20,534 |
| | (20,534 | ) | | — |
|
| Effect of exchange on deferred tax asset, net of liability under tax receivable agreements | — |
| | — |
| | — |
| | — |
| | — |
| | 2,592 |
| | — |
| | 2,592 |
| | — |
| | 2,592 |
|
| Restricted stock forfeited | — |
| | (22 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Stock based compensation expense | — |
| | — |
| | — |
| | — |
| | — |
| | 5,450 |
| | — |
| | 5,450 |
| | — |
| | 5,450 |
|
| Regular cash dividends declared and distributions paid | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7,075 | ) | | (7,075 | ) | | (4,671 | ) | | (11,746 | ) |
| Share repurchases | — |
| | (4,594 | ) | | — |
| | (46 | ) | | — |
| | (62,068 | ) | | — |
| | (62,114 | ) | | (20,789 | ) | | (82,903 | ) |
| Net income subsequent to Corporate Reorganization and IPO | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 126,349 |
| | 126,349 |
| | 113,979 |
| | 240,328 |
|
| Balance—December 31, 2018 | $ | — |
| | 68,360 |
| | 45,207 |
| | $ | 684 |
| | $ | 452 |
| | $ | 312,659 |
| | $ | 119,274 |
| | $ | 433,069 |
| | $ | 307,745 |
| | $ | 740,814 |
|
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Net (loss) income | $ | (187,004) | | | $ | (160,674) | | | $ | 74,864 | |
| Other comprehensive loss | | | | | |
| Foreign currency translation | (102) | | | — | | | — | |
| Comprehensive (loss) income | $ | (187,106) | | | $ | (160,674) | | | $ | 74,864 | |
| Comprehensive (loss) income attributable to non-controlling interest | (7,556) | | | (45,091) | | | 35,861 | |
| Comprehensive (loss) income attributable to Liberty Oilfield Services, Inc. | $ | (179,550) | | | $ | (115,583) | | | $ | 39,003 | |
See Notes to Consolidated and Combined Financial Statements.
LIBERTY OILFIELD SERVICES INC.
Consolidated and Combined Statements of Cash FlowsChanges in Equity
For the Years Ended December 31, 2018, 20172021 and 20162020
(Dollars in thousands)In thousands, except share and per unit data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Class A Common Stock | | Shares of Class B Common Stock | | Class A Common Stock, Par Value | | Class B Common Stock, Par Value | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Stockholders’ equity | | Non-controlling Interest | | Total Equity |
| Balance—December 31, 2020 | 157,952 | | | 21,550 | | | $ | 1,579 | | | $ | 216 | | | $ | 1,125,554 | | | $ | 23,288 | | | $ | — | | | $ | 1,150,637 | | | $ | 159,406 | | | $ | 1,310,043 | |
| Exchange of Class B Common Stock for Class A Common Stock | 21,359 | | | (21,359) | | | 214 | | | (214) | | | 153,641 | | | — | | | — | | | 153,641 | | | (153,641) | | | — | |
| Offering Costs | — | | | — | | | — | | | — | | | (1,247) | | | — | | | — | | | (1,247) | | | (75) | | | (1,322) | |
| | | | | | | | | | | | | | | | | | | |
| Issuance of Class A and Class B Common Stock for the PropX Acquisition | 3,406 | | | 2,441 | | | 34 | | | 24 | | | 88,979 | | | — | | | — | | | 89,037 | | | 2,052 | | | 91,089 | |
| Impact of ownership changes from issuance of Class A and Class B Common Stock | — | | | — | | | — | | | — | | | (15,325) | | | — | | | — | | | (15,325) | | | 15,325 | | | — | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Other distributions and advance payments to non-controlling interest unitholders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,372 | | | 1,372 | |
| Stock based compensation expense | — | | | — | | | — | | | — | | | 19,122 | | | — | | | — | | | 19,122 | | | 824 | | | 19,946 | |
| Vesting of restricted stock units | 668 | | | — | | | 7 | | | — | | | (3,082) | | | — | | | — | | | (3,075) | | | (510) | | | (3,585) | |
| Restricted stock and RSU forfeitures | — | | | — | | | — | | | — | | | — | | | 2 | | | — | | | 2 | | | — | | | 2 | |
| Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | (306) | | | (306) | | | 204 | | | (102) | |
| Net loss | — | | | — | | | — | | | — | | | — | | | (179,244) | | | — | | | (179,244) | | | (7,760) | | | (187,004) | |
| Balance—December 31, 2021 | 183,385 | | | 2,632 | | | $ | 1,834 | | | $ | 26 | | | $ | 1,367,642 | | | $ | (155,954) | | | $ | (306) | | | $ | 1,213,242 | | | $ | 17,197 | | | $ | 1,230,439 | |
| | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | 249,033 |
| | $ | 168,501 |
| | $ | (60,560 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | |
| Depreciation and amortization | 125,110 |
| | 81,473 |
| | 41,362 |
|
| (Gain) loss on disposal of assets | (4,342 | ) | | 148 |
| | (2,673 | ) |
| Amortization of debt issuance costs | 4,031 |
| | 2,311 |
| | 630 |
|
| Inventory write down | 3,389 |
| | 259 |
| | — |
|
| Stock based compensation expense | 5,450 |
| | | | |
| Deferred tax expense | 20,488 |
| | | | |
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable and unbilled revenue | 23,074 |
| | (133,689 | ) | | (41,023 | ) |
| Accounts receivable and unbilled revenue—related party | (11,096 | ) | | 3,460 |
| | (1,942 | ) |
| Inventories | (4,610 | ) | | (27,639 | ) | | (11,687 | ) |
| Prepaids and other current assets | (32,771 | ) | | (12,611 | ) | | (3,388 | ) |
| Accounts payable and accrued liabilities | (26,798 | ) | | 111,352 |
| | 38,563 |
|
| Accounts payable and accrued liabilities—related party | 300 |
| | 1,544 |
| | 10 |
|
| Net cash provided by (used in) operating activities | 351,258 |
| | 195,109 |
| | (40,708 | ) |
| Cash flows from investing activities: | | | | | |
| Capital expenditures | (258,835 | ) | | (311,794 | ) | | (102,428 | ) |
| Proceeds from disposal of assets | 3,343 |
| | 1,751 |
| | 6,077 |
|
| Net cash used in investing activities | (255,492 | ) | | (310,043 | ) | | (96,351 | ) |
| Cash flows from financing activities: | | | | | |
| Proceeds from issuance of Class A Common Stock, net of underwriter discount | 230,174 |
| | — |
| | — |
|
| Redemption of LLC Units from Legacy Owners | (25,897 | ) | | — |
| | — |
|
| Proceeds from borrowings on term loan, net of discount | — |
| | 171,500 |
| | — |
|
| Repayments of borrowings on term loan | (62,847 | ) | | (57,438 | ) | | (49,000 | ) |
| Proceeds from borrowings on line-of-credit | — |
| | 140,559 |
| | 84,700 |
|
| Repayments of borrowings on line-of-credit | (30,000 | ) | | (158,559 | ) | | (36,700 | ) |
| Proceeds from Liberty Oilfield Services Holdings LLC | 2,115 |
| | — |
| | — |
|
| Distributions and dividends paid to noncontrolling interest unitholders and Class A Common Stock shareholders | (11,578 | ) | | — |
| | — |
|
| Share Repurchase | (82,903 | ) | | — |
| | — |
|
| Proceeds from related party bridge loans | — |
| | 60,000 |
| | — |
|
| Payments on capital lease obligations | — |
| | (119 | ) | | (5,525 | ) |
| Payments of debt issuance costs | (315 | ) | | (9,036 | ) | | (413 | ) |
| Proceeds from issuance of redeemable common units | — |
| | 39,794 |
| | — |
|
| Payments for redemption of redeemable common units | — |
| | (62,739 | ) | | — |
|
| Member contributions | — |
| | — |
| | 155,481 |
|
| Distributions paid to noncontrolling interest unitholders | (21,288 | ) | | — |
| | — |
|
| Payment of deferred equity offering costs | (6,236 | ) | | (4,191 | ) | | — |
|
| Net cash (used in) provided by financing activities | (8,775 | ) | | 119,771 |
| | 148,543 |
|
| Net increase in cash and cash equivalents | 86,991 |
| | 4,837 |
| | 11,484 |
|
| Cash and cash equivalents—beginning of period | 16,321 |
| | 11,484 |
| | — |
|
| Cash and cash equivalents—end of period | $ | 103,312 |
| | $ | 16,321 |
| | $ | 11,484 |
|
| Supplemental disclosure of cash flow information: | | | | | |
| Cash paid for income taxes | $ | 27,263 |
| | $ | — |
| | $ | — |
|
| Cash paid for interest | $ | 13,957 |
| | $ | 9,766 |
| | $ | 4,725 |
|
| Non-cash investing and financing activities: | | | | | |
| Capital expenditures included in accounts payable and accrued liabilities | $ | 45,703 |
| | $ | 18,687 |
| | $ | 29,688 |
|
| Related party bridge loans exchanged for Redeemable Class 2 Common Units | $ | — |
| | $ | 60,679 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Class A Common Stock | | Shares of Class B Common Stock | | Class A Common Stock, Par Value | | Class B Common Stock, Par Value | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Stockholders’ equity | | Non-controlling Interest | | Total Equity |
| Balance - December 31, 2019 | 81,885 | | | 30,639 | | | $ | 819 | | | $ | 307 | | | $ | 410,596 | | | $ | 143,105 | | | $ | — | | | $ | 554,827 | | | $ | 226,665 | | | $ | 781,492 | |
| Exchange of Class B Common Stock for Class A Common Stock | 9,089 | | | (9,089) | | | 91 | | | (91) | | | 59,474 | | | — | | | — | | | 59,474 | | | (59,474) | | | — | |
| | | | | | | | | | | | | | | | | | | |
| Effect of exchange on deferred tax asset, net of liability under tax receivable agreements | — | | | — | | | — | | | — | | | 2,430 | | | — | | | | | 2,430 | | | — | | | 2,430 | |
| Issuance of Class A Common Stock, net of issuance costs | 66,326 | | | — | | | 663 | | | — | | | 599,618 | | | — | | | — | | | 600,281 | | | 81,900 | | | 682,181 | |
| Impact of changes in ownership from the issuance of Class A Common Stock | — | | | — | | | — | | | — | | | 46,400 | | | — | | | — | | | 46,400 | | | (46,400) | | | — | |
| Deferred tax impact of ownership changes from exchanges and repurchases | — | | | — | | | — | | | — | | | (6,337) | | | — | | | — | | | (6,337) | | | — | | | (6,337) | |
| $0.05/share of Class A Common Stock dividend | — | | | — | | | — | | | — | | | — | | | (4,244) | | | — | | | (4,244) | | | — | | | (4,244) | |
| $0.05/unit distributions to non-controlling unitholders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,532) | | | (1,532) | |
| Other distributions and advance payments to non-controlling interest unitholders | — | | | — | | | — | | | — | | | (1) | | | — | | | — | | | (1) | | | 569 | | | 568 | |
| | | | | | | | | | | | | | | | | | | |
| Stock based compensation expense | — | | | — | | | | | — | | | 12,976 | | | — | | | | | 12,976 | | | 4,163 | | | 17,139 | |
| Vesting of restricted stock units | 657 | | | — | | | 7 | | | — | | | 407 | | | — | | | — | | | 414 | | | (1,402) | | | (988) | |
| Restricted stock and RSU Forfeitures | (5) | | | — | | | (1) | | | — | | | (9) | | | 10 | | | — | | | — | | | 8 | | | 8 | |
| Net loss | — | | | — | | | — | | | — | | | — | | | (115,583) | | | — | | | (115,583) | | | (45,091) | | | (160,674) | |
| Balance - December 31, 2020 | 157,952 | | | 21,550 | | | $ | 1,579 | | | $ | 216 | | | $ | 1,125,554 | | | $ | 23,288 | | | $ | — | | | $ | 1,150,637 | | | $ | 159,406 | | | $ | 1,310,043 | |
See Notes to Consolidated and Combined Financial Statements.
LIBERTY OILFIELD SERVICES INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2021, 2020, and 2019
(Dollars in thousands) | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Cash flows from operating activities: | | | | | |
| Net (loss) income | $ | (187,004) | | | $ | (160,674) | | | $ | 74,864 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation, depletion, and amortization | 262,757 | | | 180,084 | | | 165,379 | |
| Loss (gain) on disposal of assets | 779 | | | (411) | | | 2,601 | |
| (Gain) loss on tax receivable agreements | (19,039) | | | 543 | | | (122) | |
| Amortization of debt issuance costs | 2,037 | | | 2,232 | | | 2,205 | |
| Inventory write-down | — | | | 1,087 | | | 1,953 | |
| Non-cash lease expense | 3,823 | | | 3,668 | | | 3,192 | |
| Stock based compensation expense | 19,946 | | | 17,139 | | | 13,592 | |
| Deferred income tax expense (benefit) | 5,079 | | | (25,546) | | | 23,408 | |
| Provision for credit losses | 745 | | | 4,877 | | | 1,053 | |
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable and unbilled revenue | (90,142) | | | 53,057 | | | (11,512) | |
| Accounts receivable and unbilled revenue—related party | — | | | 9,629 | | | 5,510 | |
| Inventories | (24,612) | | | 2,137 | | | (30,476) | |
| Other assets | (30,955) | | | 13,780 | | | (6,464) | |
| Prepaid and other current assets—related party | 24,708 | | | — | | | — | |
| Deferred revenue | 3,452 | | | — | | | — | |
| Accounts payable and accrued liabilities | 160,584 | | | (15,282) | | | 22,386 | |
| Accounts payable and accrued liabilities—related party | 3,874 | | | — | | | (1,000) | |
| Payment of operating lease liability | (565) | | | (895) | | | (5,469) | |
| Net cash provided by operating activities | 135,467 | | | 85,425 | | | 261,100 | |
| Cash flows from investing activities: | | | | | |
| Purchases of property and equipment and construction in-progress | (198,794) | | | (103,637) | | | (195,173) | |
| Investment in sand logistics | (13,106) | | | — | | | — | |
| Proceeds from sales of assets | 25,406 | | | 3,368 | | | 826 | |
| Net cash used in investing activities | (186,494) | | | (100,269) | | | (194,347) | |
| Cash flows from financing activities: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| Repayments of borrowings on term loan | (1,750) | | | (1,750) | | | (1,750) | |
| Proceeds from borrowings on line-of-credit | 274,000 | | | — | | | — | |
| Repayments of borrowings on line-of-credit | (256,000) | | | — | | | — | |
| Payments on finance lease obligations | (7,363) | | | (11,663) | | | (12,143) | |
| Class A Common Stock dividends and dividend equivalents upon RSU vesting | (168) | | | (4,431) | | | (14,776) | |
| Per unit distributions to non-controlling interest unitholders | — | | | (1,532) | | | (7,747) | |
| Other distributions and advance payments to non-controlling interest unitholders | 1,372 | | | (6,800) | | | (6) | |
| Tax withholding on restricted stock units | (3,585) | | | (988) | | | (1,039) | |
| Share repurchases | — | | | — | | | (18,398) | |
| | | | | |
| Payments of debt issuance costs | (3,120) | | | (63) | | | — | |
| Payment of equity issuance costs | (1,330) | | | (1,641) | | | (1,516) | |
| Net cash provided by (used in) financing activities | 2,056 | | | (28,868) | | | (57,375) | |
| Net (decrease) increase in cash and cash equivalents | (48,971) | | | (43,712) | | | 9,378 | |
| Translation effect on cash | (9) | | | — | | | — | |
| Cash and cash equivalents—beginning of period | 68,978 | | | 112,690 | | | 103,312 | |
| Cash and cash equivalents—end of period | $ | 19,998 | | | $ | 68,978 | | | $ | 112,690 | |
| Supplemental disclosure of cash flow information: | | | | | |
| Net cash (received) paid for income taxes | $ | (9,481) | | | $ | (9,653) | | | $ | 1,042 | |
| Cash paid for interest | $ | 13,268 | | | $ | 11,218 | | | $ | 12,642 | |
| Non-cash investing and financing activities: | | | | | |
| Capital expenditures included in accounts payable and accrued liabilities | $ | 57,475 | | | $ | 10,920 | | | $ | 32,143 | |
| Equity issued in exchange for assets and liabilities | $ | 91,089 | | | $ | 683,822 | | | $ | — | |
See Notes to Consolidated Financial Statements.
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated and Combined Financial Statements
Note 1—Organization and Basis of Presentation
Organization
Liberty Oilfield Services Inc. (the “Company”) was incorporated as a Delaware corporation on December 21, 2016, to become a holding corporation for Liberty Oilfield Services New HoldCo LLC (“Liberty LLC”) and its subsidiaries upon completion of a corporate reorganization (as detailed below, the(the “Corporate Reorganization”) and planned initial public offering of the Company (“IPO”). The Company has no material assets other than its ownership of units in Liberty LLC.
Prior to the Corporate Reorganization, Liberty Oilfield Services Holdings LLC (“Liberty Holdings”) wholly owned Liberty Oilfield Services LLC (“LOS”) and LOS Acquisition CO I LLC (“ACQI” and, together with LOS, the “Predecessor”), which includes the assets and liabilities of LOS Odessa RE Investments, LLC (“Odessa”) and LOS Cibolo RE Investments, LLC (“Cibolo”Units”). Following the Corporate Reorganization, Liberty LLC wholly owns the Predecessor. Effective March 22, 2018, the assets of ACQI were contributed into LOS and ACQI was dissolved.
The Company, together with its subsidiaries, is a multi-basin provider of hydraulic fracturing services and goods, with a focus on deploying the latest technologies in the technically demanding oil and gas reservoirs in which it operates, principally in North Dakota, Colorado, Louisiana, Oklahoma, New Mexico, Wyoming, and Texas.
Corporate Reorganization
In connection with the IPO, the Company completed the Corporate Reorganization, including the following series of transactions:
Liberty Holdings contributed all of its assets to Liberty LLC in exchange for Liberty LLC Units (as defined below);
Liberty Holdings liquidated and distributed to its then-existing owners (the “Legacy Owners”) Liberty LLC Units pursuant to the terms of the limited liability company agreement of Liberty HoldingsTexas and the Master Reorganization Agreement dated asprovinces of January 11, 2018, byAlberta and among the Company, Liberty Holdings, Liberty LLC, and the other parties named therein (the “Master Reorganization Agreement”);
Certain of the Legacy Owners directly or indirectly contributed all or a portion of their Liberty LLC Units to the Company in exchange for 55,685,027 shares of our Class A common stock, par value $0.01 per share (the “Class A Common Stock”), and 1,258,514 restricted shares of Class A Common Stock. Subsequent to the initial exchange, 1,609,122 shares of Class A Common Stock were redeemed for an aggregate price of $25.9 million, upon the exercise of the underwriters’ overallotment option;
the Company issued, at par, the Legacy Owners that continued to own Liberty LLC Units (the “Liberty Unit Holders”) an aggregate amount of 48,207,372 shares of our Class B common stock, par value $0.01 per share (the “Class B Common Stock”); and
the Company contributed the net proceeds it received from the IPO to Liberty LLC in exchange for additional Liberty LLC Units such that the Company held a total number of Liberty LLC Units equal to the number of shares of Class A Common Stock outstanding immediately following the IPO.
Initial Public Offering
On January 17, 2018, the Company completed its IPO of 14,640,755 shares of its Class A Common Stock, par value $0.01 per share (the “Class A Common Stock”) at a public offering price of $17.00 per share, of which 14,340,214 shares were offered by the Company and 300,541 were offered by the selling shareholder. The Company received $220.0 million net proceeds from the IPO, after deducting approximately $13.4 million in underwriting discounts and commissions and $10.4 million in other offering costs. The Company did not receive any proceeds from the sale of the shares of Class A Common Stock by the selling shareholder. The Company used $25.9 million of net proceeds to redeem ownership interests in Liberty LLC from the Legacy Owners. The Company contributed the remaining net proceeds to Liberty LLC in exchange for units in Liberty LLC (the “Liberty LLC Units”). Liberty LLC used a portion of these net proceeds (i) to repay outstanding borrowings and accrued interest under the Predecessor’s ABL Facility (as defined herein), totaling approximately $30.1 million, (ii) to repay 35% of the Predecessor’s outstanding borrowings, accrued interest and prepayment premium under the Term Loan Facility (as defined herein), totaling approximately $62.5 million and (iii) for general corporate purposes, including repayment
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated and Combined Financial Statements
of additional indebtedness and funding capital expenditures. As of December 31, 2018, the Company owned 60.2% of Liberty LLC.British Columbia, Canada.
Basis of Presentation
The accompanying consolidated and combined financial statements were prepared using generally accepted accounting principles in the United States of America (“GAAP”) and the instructions to Form 10-K, Regulation S-X and the rules and regulations of the Securities and Exchange Commission.
The accompanying consolidated and combined financial statements and related notes present the consolidated financial position of the Company, the results of operations, cash flows, and equity of the Company as of and for the year ended December 31, 2018 and the combined financial position of the Predecessor as of December 31, 2017, and the combined results of operations, cash flows, and equity of the Predecessor for the years ended December 31, 20172021, 2020 and 2016.2019.
All intercompany amounts have been eliminated in the presentation of the consolidated financial statements of the Company and the combined financial statements of the Predecessor. Comprehensive income is not reported due to the absence of items of other comprehensive income or loss during the periods presented. The consolidated and combined financial statements include financial data at historical cost as the contribution of assets is considered to be a reorganization of entities under common control. The consolidated and combined financial statements may not be indicative of the actual level of assets, liabilities and costs that would have been incurred by the Predecessor if it had operated as an independent, publicly-traded company during the periods prior to the IPO or of the costs expected to be incurred in the future.
The consolidated and combined financial statements for periods prior to January 17, 2018, reflect the historical results of the Predecessor. The consolidated financial statements include the amounts of the Company and all majority owned subsidiaries where the Company has the ability to exercise control. All intercompany amounts have been eliminated in the presentation of the consolidated financial statements of the Company.
The Company’s operations are organized into a single reportable segment, which consists of hydraulic fracturing and related goods and services.
Note 2—Significant Accounting Policies
Business Combinations
Business combinations are accounted for using the acquisition method of accounting in accordance with the Accounting Standard Codification (“ASC”) Topic 805 - Business Combinations, as amended by Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business. The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Fair value of the acquired assets and liabilities is measured in accordance with the guidance of ASC 850, Fair Value Measurements, using discounted cash flows and other applicable valuation techniques. Any acquisition related costs incurred by the Company are expensed as incurred. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill if the definition of a business is met. Operating results of an acquired business are included in our results of operations from the date of acquisition. Refer to Note 3—Acquisitions.
Use of Estimates
The preparation of consolidated and combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated and combined financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The consolidated and combined financial statements include certain amounts that are based on management’s best estimates and judgments. The most significant estimates relate to the collectibilityfair value of assets acquired and liabilities assumed, collectability of accounts receivable and estimates of allowance for doubtful accounts, the useful lives and salvage values of long-lived assets, future cash flows associated with long-lived assets, net realizable value of inventory, and equity unit valuation. These estimates may be adjusted as more current information becomes available.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated Financial Statements
which it has banking relationships. As of the balance sheet date, and periodically throughout the year, the Company has maintained balances in various operating accounts in excess of federally insured limits.
Accounts Receivable
On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) using the modified-retrospective approach, which allows for a cumulative-effect adjustment to the consolidated balance sheet as of the beginning of the first reporting period in which the guidance is effective. Periods prior to the adoption date that are presented for comparative purposes are not adjusted.
The Company analyzesapplies historic loss factors to its receivable portfolio segments that were not expected to be further impacted by current economic developments, and additional economic conditions factor to portfolio segments anticipated to experience greater losses in the need for an allowance for doubtful accounts forcurrent economic environment. Additionally, the Company continuously evaluates customers based on risk characteristics, such as historical losses and current economic conditions. Due to the cyclical nature of the oil and gas industry, the Company often evaluates its customers’ estimated losses related to potentially uncollectible accounts receivable on a case-by-case basis throughout the year. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and the customers’ financial condition, the amount of receivables, the current receivables aging and current payment patterns. The Company reserves amounts based on specific identification. Account balances are chargedbasis. While there was no impact to the allowance after all meansfinancial statements as a result of collection have been exhaustedadoption of ASU 2016-13, as a result of two customers inability to pay, during the year ended December 31, 2021 the Company recorded a provision for credit losses of $0.7 million. During the year ended December 31, 2020 the Company recorded a provision for credit losses of $4.9 million related to the deteriorating economic conditions for the oil and gas industry brought on by the potentialCOVID-19 pandemic. Provisions for recovery is considered remote. It is reasonably possible thatcredit losses are included in general and administrative expenses in the Company’s estimateaccompanying consolidated statement of operations, in accordance with the allowancenew standard. Refer to “Credit Risk” within Note 9—Fair Value Measurements and Financial Instruments for doubtful accounts will change and that losses ultimately incurred could differ materially from the amounts estimated in determining the allowance.
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated and Combined Financial Statements
additional disclosures required under ASU 2016-13.
Inventories
Inventories consist of raw materials used in the hydraulic fracturing process, such as proppants, chemicals, and field service equipment maintenance parts and other and are stated at the lower of cost, determined using the weighted average cost method, or net realizable value. Inventories are charged to cost of services as used when providing hydraulic fracturing services. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization expense is recognized on property and equipment, excluding land, utilizing the straight-line method over the estimated useful lives, ranging from two to 30 years. The Company estimates salvage values that it does not depreciate.
Construction in-progress, a component of property and equipment, represents long-lived assets not yet in service or being developed by the Company. These assets are not subject to depreciation until they are completed and ready for their intended use, at which point the Company reclassifies them to field services equipment or vehicles, as appropriate.
The Company assesses its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is assessed using undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets. The Company determined the lowest level of identifiable cash flows to be at the asset group, which is the aggregate of the Company’s hydraulic fracturing fleets that are in service. A long-lived asset is not recoverable if its carrying amount exceeds the sum of estimated undiscounted cash flows expected to result from the use and eventual disposition. When alternative courses of action to recover the carrying amount of the asset group are under consideration, estimates of future undiscounted cash flows take into account possible outcomes and probabilities of their occurrence. If the carrying amount of the asset is not recoverable, an impairment loss is recognized in an amount by which its carrying amount exceeds its estimated fair value, such that its carrying amount is adjusted to its estimated fair value, with an offsetting charge to impairment expense.
The Company measures the fair value of its property and equipment using the discounted cash flow method. The expected future cash flows used for impairment reviews and related fair value calculations are based on judgmental assessments of projected revenue growth, fleet count, utilization, gross margin rates, selling, general and administrative rates, working capital fluctuations, capital expenditures, discount rates and terminal growth rates.
During 2018, 2017the year ended December 31, 2020, as a result of negative market indicators including the COVID-19 pandemic, the increased supply of low-priced oil, and 2016,customer cancellations, the Company concluded these triggering events could indicate possible impairment of property and equipment. The Company performed a quantitative and qualitative impairment analysis and determined that no impairment had occurred as of June 30, 2020. As of December 31, 2021 and 2020, the Company concluded that no additional triggering events had occurred, and no impairment was recognized during the years ended December 31, 2021 and 2020.
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated Financial Statements
During 2019, the Company did not test its long-lived assets for recoverability as there were no triggering events. No impairment was recognized during the years ended December 31, 2018, 2017 and 2016.2019.
Major Maintenance Activities
The Company incurs maintenance costs on its major equipment. The determination of whether an expenditure should be capitalized or expensed requires management judgment in the application of how the costs incurred benefit future periods, relative to the Company’s capitalization policy. Costs that either establish or increase the efficiency, productivity, functionality or life of a fixed asset are capitalized and depreciated over the remaining useful life of the asset.
Leases
On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Accounting Standard Codification (“ASC”) Topic 842), as amended by other ASUs issued since February 2016 (“ASU 2016-02” or “ASC Topic 842”), using the modified retrospective transition method applied at the effective date of the standard. By electing this optional transition method, information prior to January 1, 2019 has not been restated and continues to be reported under the accounting standards in effect for the period (ASC Topic 840).
In accordance with ASC Topic 842, the Company determines if an arrangement is a lease at inception and evaluates identified leases for operating or finance lease treatment. Operating or finance lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company uses the rate implicit in the lease, when available, or an estimated fully collateralized incremental borrowing rate corresponding with the lease term and the information available at the commencement date in determining the present value of lease payments. Lease terms may include options to renew, however, the Company typically cannot determine its intent to renew a lease with reasonable certainty at inception.
Additionally, the Company is a lessor in several operating leases in which the lease equipment is carried at amortized cost. Depreciation expense is recorded on a straight-line basis over its useful life to the estimated residual value. The lessee may not purchase the leased equipment and must return such equipment by the lease's scheduled maturity date.
Deferred Financing Costs
Costs associated with obtaining debt financing are deferred and amortized to interest expense using the effective interest method. In accordance with Accounting Standards Update (“ASU”)ASU No. 2015-03 and 2015-15, for all periods the Company has reflected deferred financing costs related to term loan debt as a direct deduction from the carrying amount, and costs associated with line-of-credit arrangements as other assets.
Income Taxes
Following the IPO, the Company is a corporation and is subject to U.S. federal, state and local income tax on its share of Liberty LLC’s taxable income. As a result of the IPO and Corporate Reorganization, the Company recorded deferred tax assets and liabilities for the difference between the book value of assets and liabilities for financial reporting purposes and those amounts applicable for income tax purposes.
Deferred income taxes are computed using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Deferred tax assets and liabilities are calculated using the enacted tax rates in effect for the year in which the deferred tax asset or liability is expected to reverse. The Company classifies all deferred tax assets and liabilities as non-current. The Company records Global Intangible Low Tax Income as a current period expense.
The Company evaluates its deferred tax assets quarterly and considers both positive and negative evidence in applying the guidance of ASC 740 Income Taxes (“ASC 740”) related to the realizability of its deferred tax assets. On June 30, 2021, in accordance with ASC 740, the objective negative evidence of entering into a three year cumulative pre-tax book loss position prevented the consideration of the Company’s subjective positive evidence of expected future profitability in evaluation the realizability of deferred tax assets. As a result, the Company recorded a valuation allowance against U.S. net deferred tax assets.
The Company recognizes the financial statement effects of a tax position when it is more-likely-than-not, based on the technical merits, that the position will be sustained upon examination. A tax position that meets the more-likely-than-not
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated and Combined Financial Statements
recognition threshold is measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority. Previously recognized tax positions are reversed in the first period in which it is no longer more-likely-than-not that the tax position would be sustained upon examination. Income tax related interest and penalties, if applicable, are recorded as a component of the provision for income tax expense.
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated Financial Statements
Tax Receivable Agreements
In connection with the IPO, on January 17, 2018, the Company entered into two2 Tax Receivable Agreements (the “TRAs”) with the R/C Energy IV Direct Partnership, L.P. and the Legacy Ownerscertain legacy owners that continued to own Liberty LLC Units (each such person and any permitted transferee, a “Tax Receivable Agreement Holder” and together, the “Tax Receivable Agreement Holders”). The TRAs generally provide for the payment by the Company of 85% of the net cash savings, if any, in U.S. federal, state, and local income tax and franchise tax (computed using simplifying assumptions to address the impact of state and local taxes) that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the IPO as a result, as applicable to each Tax Receivable Agreement Holder, of (i) certain increases in tax basis that occur as a result of the Company’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such Tax Receivable Agreement Holder’s Liberty LLC Units in connection with the IPO or pursuant to the exercise of the right (the “Redemption Right”) or the Company’s right (the “Call Right”), (ii) any net operating losses available to the Company as a result of the Corporate Reorganization, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, any payments the Company makes under the TRAs.
With respect to obligations the Company expects to incur under the TRAs (except in cases where the Company elects to terminate the TRAs early, the TRAs are terminated early due to certain mergers, asset sales, or other changes of control or the Company has available cash but fails to make payments when due), generally the Company may elect to defer payments due under the TRAs if the Company does not have available cash to satisfy its payment obligations under the TRAs or if its contractual obligations limit its ability to make such payments. Any such deferred payments under the TRAs generally will accrue interest. In certain cases, payments under the TRAs may be accelerated and/or significantly exceed the actual benefits, if any, the Company realizes in respect of the tax attributes subject to the TRAs. The Company accounts for amounts payable under the TRAs in accordance with Accounting Standards Codification (“ASC”)ASC Topic 450, Contingencies.Contingencies.
If the Company experiences a change of control (as defined under the TRAs) or the TRAs otherwise terminate early, the Company’s obligations under the TRAs could have a substantial negative impact on its liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, or other forms of business combinations or changes of control.
Share Repurchases
The Company accounts for the purchase price of repurchased Class A Common Stock in excess of par value ($0.01 per share of Class A Common Stock) as a reduction of additional paid-in capital, and will continue to do so until additional paid-in capital is reduced to zero. Thereafter, any excess purchase price will be recorded as an increase to accumulated deficit.
Revenue Recognition
Effective January 1, 2018, the Company adopted a comprehensive new revenue recognition standard,Under ASC Topic 606-Revenue606-Revenue from Contracts with Customers. The details of the significant changes to accounting policies resulting from the adoption of the new standard are set out below. The Company adopted the standard using a modified retrospective method; accordingly, the comparative information for the years ended December 31, 2017 and 2016 has not been adjusted and continues to be reported under the previous revenue standard. The adoption of this standard did not have a material impact to the consolidated financial position, reported revenue, results of operations or cash flows as of and for the year ended December 31, 2018.
Under the new standard,Customers, revenue recognition is based on the transfer of control, or the customer’s ability to benefit from the services and products in an amount that reflects the consideration expected to be received in exchange for those services and products. In recognizing revenue for services and products, the transaction price is determined from sales orders or contracts with customers. Revenue is recognized at the completion of each fracturing stage, and in most cases the price at the end of each stage is fixed, however, in limited circumstances contracts may contain variable consideration.
Variable consideration typically may relate to discounts, price concessions and incentives. We estimateThe Company estimates variable consideration based on the amount of consideration we expect to receive. The Company accrues revenue on an ongoing basis to reflect updated information for variable consideration as performance obligations are met.
The Company also assesses customers’ ability and intention to pay, which is based on a variety of factors including historical payment experience and financial condition. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 45 days.
In connection with the adoption of ASC Topic 842, the Company determined that certain of its service revenue contracts contain a lease component. The Company elected to adopt a practical expedient available to lessors, which allows the Company to combine the lease and non-lease components and account for the combined component in accordance with the accounting treatment for the predominant component. Therefore, the Company combines the lease and service component for certain of the Company’s service contracts and continues to account for the combined component under ASC Topic 606, Revenue from Contracts with Customers.
Deferred Revenue
From time to time, the Company may require partial payment in advance from new customers to secure credit or from existing customers in order to secure additional hydraulic fracturing services. Initially, such payments are recorded in the accompanying consolidated and combined financial statements as deferred revenue, and upon performance of the agreed
services, the
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated and Combined Financial Statements
services, the Company recognizes revenue consistent with its revenue recognition policy described above. As of December 31, 2017,2021 and 2020, the Company had $9.2$4.6 million and $0.0 million recorded as deferred revenue, related to the unearned portion of a prepayment from an existing customer to secure additional services from a new fleet by the end of 2017. The new fleet commenced services in December 2017,respectively.
Transaction, Severance and Other Costs
During 2021, the Company applied the prepaymentincurred transaction and integration related costs in accordanceconnection with the customer agreement as services were performed. During the year ended December 31, 2018, the Company recognized $9.2 million of the prepayment to revenue.
Fleet Start-up Costs
The Company incurs start-up costs to commission a new fleet or district. TheseOneStim Acquisition (as defined below) and PropX Acquisition (as defined below). Such costs include hiringinvestment banking, legal, accounting and training of personnel,other professional services provided in connection with closing the transaction and acquisition of consumable parts and tools. Start-up costs are expensed as incurred and are reflected.
The Company incurred transaction costs in general and administrative expense in the consolidated and combined statement of operations. Start-up costs for the years ended December 31, 2018, 2017 and 2016, were $10.1 million, $14.0 million and $4.3 million, respectively. Start-up costs incurred during the years ended December 31, 2018, 2017 and 20162020 related to the establishmentOneStim Acquisition and severance and other costs related to the reduction in workforce in April 2020 and the commencement of three, nine, and two new fleets, respectively.
The terms and conditions of the Credit Facilities betweenfurlough schedules for remaining employees in May 2020. Payments made to employees leaving the Company, as well as benefits paid to employees while on furlough are recorded to transaction, severance and its lenders provides for the add-back ofother costs or expenses incurred in connection with the acquisition, deployment and opening of any new hydraulic fracturing fleet or district in the computationaccompanying consolidated statements of certain financial covenants. (See Note 5—Debt).
Recently Adopted Accounting Standards
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40),” which amends ASC 350-40 to address a customer's accounting for implementation costs incurred in a cloud computing arrangement (“CCA”) that is a service contract. ASU 2018-15 aligns the accounting for costs incurred to implement a CCA that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, ASU 2018-15 amends ASC 350-40 to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized. The update is effective for fiscal years beginning after December 15, 2019, and early adoption is permitted. The Company adopted this standard for the September 30, 2018 reporting period using the prospective approach. The adoption of this standard did not materially impact the consolidated financial statements as of andoperations for the year ended December 31, 2018.2020.
Foreign Currency Translation
The Company records foreign currency translation adjustments from the process of translating the functional currency of the financial statements of its foreign subsidiary into the U.S. dollar reporting currency. The Canadian dollar is the functional currency of the Company’s foreign subsidiary as it is the primary currency within the economic environment in which the subsidiary operates. Assets and liabilities of the subsidiary’s operations are translated into U.S. dollars at the rate of exchange in effect on the balance sheet date and income and expenses are translated at the average exchange rate in effect during the reporting period. Adjustments resulting from the translation of the subsidiary’s financial statements are reported in other comprehensive income.
Recently Adopted Accounting Standards
Simplification of Accounting for Income Taxes
In May 2014,December 2019, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)No. 2019-12, Simplification of Accounting for Income Taxes,” which outlines a single comprehensive model for entities to use insimplifies the accounting for revenue arising from contracts with customers. This ASU sets forth a five-step model for determining whenincome taxes by providing new guidance to reduce complexity and how revenue is recognized. Undereliminate certain exceptions to the model, an entity is requiredgeneral approach to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. Additional disclosures are required to describe the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts (see “Revenue Recognition” above).income tax accounting model. The Company adopted this standard onguidance effective January 1, 2018 using the modified retrospective method. The Company2021, which did not recordhave a cumulative effect adjustment tomaterial impact on the opening balance of retained earnings, as no adjustment was necessary. The adoption of this standard did not impact the Company’s reported revenue, net income or cash flows.accompanying consolidated financial statements.
Codification Improvements
In May 2017,October 2020, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718): ScopeNo. 2020-10, Codification Improvements, which clarifies various topics, including the addition of Modification Accounting”, which provides guidance to increase clarity and reduce both diversity in practice and cost and complexity when applying the existing accounting guidance on changesdisclosure requirements to the terms or conditions ofrelevant disclosure sections. This update does not change GAAP, and therefore, does not result in a share-based payment award. The amendmentssignificant change in ASU 2017-09 require an entity to account for the effects of a modification unless all the following conditions are met: (i) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; (ii) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (iii) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.Company’s accounting practices. The guidance in ASU 2017-09 is applied prospectively. The amendments in ASU 2017-09 are effective for annualfiscal periods beginning after December 15, 2017, including interim periods within those annual periods.2020, as the amendment pertains to disclosure items only. The Company’s adoption of this guidanceCompany adopted the new rules effective January 1, 2018,2021 and the adoption did not materiallyhave a material impact itson the accompanying consolidated and combined financial statements.
Reference Rate Reform
In January 2016,March 2020, the FASB issued ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): RecognitionNo. 2020-04, Reference Rate Reform, which provides temporary optional guidance to companies impacted by the transition away from the London Interbank Offered Rate (“LIBOR”). The guidance provides certain expedients and Measurementexceptions to applying GAAP in order to lessen the potential accounting burden when contracts, hedging relationships, and other transactions that reference LIBOR as a benchmark rate are modified. This guidance is effective upon issuance and expires on December 31, 2022. The Company is currently assessing the impact of Financialthe LIBOR transition and this ASU on the Company’s consolidated financial statements.
Business Combinations:Accounting for Contract Assets and FinancialContract Liabilities” from Contracts with Customers
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires equity investments (except those accountedchanges the accounting for the recognition and measurement of contract assets and contract liabilities acquired in a business combination in accordance with ASC 606. The update changes GAAP surrounding the recognition of contract assets and contract liabilities from fair value on the acquisition date to guidance under ASC 606. The guidance is effective for fiscal periods beginning after December 15, 2022. The Company adopted the equity methodnew rules upon issuance and the adoption did not have a material impact on the accompanying consolidated financial statements.
Reclassifications
Certain amounts in the prior period financial statements have been reclassified from general and administrative to transaction, severance and other costs in the accompanying consolidated statements of accounting, or those that result in consolidationoperation to conform to the presentation of the investee) to be measured at fair value with changes in fair value recognized incurrent period financial statements. These reclassifications had no effect on the previously reported net income requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial
or loss.
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated and Combined Financial Statements
Note 3—Acquisitions
instruments measured at amortized cost. The ASU is effectivePropX Acquisition
On October 26, 2021, the Company entered into the certain Master Transaction Agreement (the “Transaction Agreement”) with Proppant Express Investments, LLC to acquire the assets and liabilities of Proppant Express Solutions, LLC “PropX”, which provides last-mile proppant delivery solutions, including proppant handling equipment and logistics software across North America. PropX was acquired in exchange for annual periods beginning after December 15, 2017$11.9 million in cash and was prospectively adopted on January 1, 2018. The adoption3,405,526 shares of ASU 2016-01 did not have a material impactthe Company’s Class A Common Stock, par value $0.01 per share (the “Class A Common Stock”) and 2,441,010 shares of the Company’s Class B Common Stock, par value $0.01 per share (the “Class B Common Stock”, and together with the Class A Common Stock, the “Common Stock”), for total consideration of $103.0 million based on the consolidated financial statementsOctober 26, 2021 closing price of Class A Common Stock of $15.58. In connection with the issuance of 2,441,010 shares of Class B Common Stock, Liberty LLC also issued 2,441,010 Liberty LLC Units to the Company. The Liberty LLC Units are redeemable for an equivalent number of shares of Class A Common Stock at anytime, at the election of the Company.shareholder.
In August 2016,The Company accounted for the FASB issued ASU 2016-15, “StatementPropX Acquisition using the acquisition method of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017, with a full retrospective approachaccounting. The aggregate purchase price noted above was allocated to be used upon implementation and early adoption allowed. ASU 2016-15 provides guidance on eight different issues, intended to reduce diversity in practice on how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The adoption of ASU 2016-15 on January 1, 2018 did not have a material impact on the consolidated and combined financial statements of the Company.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which requires entities to recognize the tax consequences of intercompany asset transfers in the period in which the transfer takes place, with the exception of inventory transfers. The ASU is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017. Entities must adopt the standard using a modified retrospective approach with a cumulative effect adjustment to accumulated earnings as of the beginning of the period of adoption. The cumulative effect adjustments may include recognition of the income tax consequences of intra-entity transfersmajor categories of assets other than inventory that occur before the adoption date. Early adoption is permitted but only at the beginning of an annual period for which no financial statements (interim or annual) have already been issued or made available for issuance. The adoption of ASU 2016-16 on January 1, 2018 did not have a material impact on the consolidatedacquired and combined financial statements of the Company.
Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2019, with a modified-retrospective approach to be used for implementation. ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. Specifically, this new guidance requires using a forward looking, expected loss model for trade and other receivables, held-to-maturity debt securities, loans and other instruments. This will replace the currently used model and may result in an earlier recognition of allowance for losses. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated and combined financial statements.
In February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02, “Leases (Topic 842),” which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, “Land Easement Practical Expedient for Transition to Topic 842”; ASU No. 2018-10, “Codification Improvements to Topic 842, Leases”; and ASU No. 2018-11, “Targeted Improvements.” The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
The new standard is effective for the Company on January 1, 2019, with early adoption permitted. A modified retrospective transition approach is required, applying the new standard to all leases existingliabilities assumed based upon their estimated fair value at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginningacquisition. The estimated fair values of certain assets and liabilities require significant judgments and estimates. The majority of the earliest comparative period presentedmeasurements of assets acquired and liabilities assumed, are based on inputs that are not observable in the financial statementsmarket and thus represent Level 3 inputs.
In accordance with ASC Topic 805, an acquirer is allowed a period, referred to as the measurement period, in which to complete its accounting for the transaction. Such measurement period ends at the earliest date that the acquirer a) receives the information necessary or b) determines that it cannot obtain further information, and such period may not exceed one year. As the PropX Acquisition closed on October 26, 2021 the Company is in the process of completing the initial application. If an entity choosespurchase price allocation, particularly as it relates to current assets and current liabilities.
The following table summarizes the second option,fair value of the transition requirements for existing leases also applyconsideration transferred in the PropX Acquisition and the preliminary allocation of the purchase price to leases entered into betweenthe fair value of the assets acquired and liabilities assumed as of October 26, 2021, the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. The Company adopted the new standard on January 1, 2019 and used the effective date as the date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.
The modified retrospective approach includes several practical expedients that entities may elect to apply upon transition. The Company has determined it will elect the package of practical expedients permitted under the transition guidance within the new standard, which allows a lessee to carryforward their population of existing leases, the classification of each lease, as well as the treatment of initial direct costs asclosing of the PropX Acquisition:
| | | | | | | | |
| ($ in thousands) | | |
| Total Purchase Consideration: | | |
| Consideration | | $ | 103,023 | |
| | |
| Cash and cash equivalents | | $ | 53 | |
| Accounts receivable and unbilled revenue | | 4,089 | |
| Inventory | | 8 |
| Prepaid and other current assets | | 1,722 |
Property and equipment (1) | | 94,137 |
Intangible assets (included in other assets in the accompanying consolidated balance sheet as of December 31, 2021) (2) | | 7,100 |
| Total identifiable assets acquired | | 107,109 |
| Accounts payable | | 2,152 |
| Accrued liabilities | | 1,934 |
| Total liabilities assumed | | 4,086 |
| Total purchase consideration | | $ | 103,023 | |
(1) Useful lives average of 10 years, see Note 5—Property and Equipment
(2) Definite lived intangibles with an amortization period ranging from seven to 10 years
Transaction costs, costs associated with issuing additional equity and integration costs were recognized separately from the acquisition of adoption. In addition,assets and assumptions of liabilities in the Company will electPropX Acquisition. Transaction costs consist of legal and professional fees. Integration costs consist of expenses incurred to integrate PropX’s operations, aligning accounting processes and procedures, and integrating its enterprise resource planning system with those of the practical expedient relatedCompany. Merger and integration costs are expensed as incurred, and equity offering costs were recorded as a reduction to lease and non-lease components, as an accounting policy for all asset classes, which allows a lessee to not separate non-lease from lease components and instead account for considerationadditional paid in a contract as a single component. Furthermore, the Company has made the policy election to not recognize right-of-use assets and lease liabilities that arise from leases with an initial term of 12 months or less on the consolidated statements of financial position. Lastly, the Company has determined it will not elect the practical expedient related to hindsight in determining the lease term and in assessing impairment of right-of-use assets.
capital.
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated and Combined Financial Statements
The Company has executed a comprehensive approach to identify arrangements that may contain a lease, has performed completeness assessments over the identified lease populations, and has implemented system solutions and processes to appropriately account for the lease right-of-use assets and lease liabilities upon transition and an ongoing basis.
The Company expects that this standard will have a material effect on itsCompany’s consolidated statements of financial positionoperations for the year ended December 31, 2021 includes 66 days of PropX operations as the PropX Acquisition closed on October 26, 2021. The Company recognizes right-of-usedoes not present pro forma financial information for the periods prior to the PropX Acquisition as such information, after elimination of PropX’s historical transactions with the Company, is not materially different than the results presented in the accompanying Consolidated Statements of Operations for years ended December 31, 2021 and 2020.
OneStim Acquisition
On August 31, 2020 the Company and certain of its subsidiaries entered into the certain Master Transaction Agreement (the “Transaction Agreement”) with Schlumberger Technology Corporation and Schlumberger Canada Limited (collectively “Schlumberger”), pursuant to which the Company acquired certain assets and lease liabilities of Schlumberger’s OneStim® business, which provides hydraulic fracturing pressure pumping services in onshore United States and Canada (such entire business of Schlumberger “OneStim,” and the portion of OneStim acquired pursuant to the Transaction Agreement the “Transferred Business”) in exchange for 57,377,232 shares of Class A Common Stock and a non-interest bearing demand promissory note (the “Canadian Buyer Note” and such acquisition, the future minimum lease payments“OneStim Acquisition”). The Canadian Buyer Note was settled for 8,948,902 shares of Class A Common Stock, and a total of 66,326,134 shares of Class A Common Stock were issued in connection with the OneStim Acquisition. Effective December 31, 2020, Schlumberger owned approximately 37.0% of the Company’s existing operating leases,issued and outstanding shares of Common Stock. In connection with the exceptionissuance of those66,326,134 shares of Class A Common Stock, Liberty LLC also issued 66,326,134 Liberty LLC Units to the Company.
The OneStim Acquisition was completed for total consideration of approximately $683.8 million based on the value of the Canadian Buyer Note and the closing price of the Class A Common Stock on December 31, 2020. The Company accounted for the OneStim Acquisition using the acquisition method of accounting. The aggregate purchase price noted above was allocated to the major categories of assets acquired and liabilities assumed based upon their estimated fair value at the date of the acquisition. The estimated fair values of certain assets and liabilities, including accounts receivable, require significant judgments and estimates. The majority of the measurements of assets acquired and liabilities assumed, are based on inputs that are not observable in the market and thus represent Level 3 inputs.
In accordance with ASC Topic 805, an acquirer is allowed a term less than 12 months,period, referred to as the measurement period, in which to complete its accounting for the transaction. Such measurement period ends at the earliest date that the acquirer a) receives the information necessary or b) determines that it cannot obtain further information, and such period may not exceed one year. As the OneStim Acquisition closed on December 31, 2020 the Company completed the purchase price allocation, particularly as it relates to current assets and current liabilities, which were subject to certain minimum working capital contribution requirements under the Transaction Agreement during the year ended December 31, 2021.
The following table summarizes the fair value of the consideration transferred in the OneStim Acquisition and the allocation of the purchase price to the fair value of the assets acquired and liabilities assumed (which are included in Note 13—Commitments & Contingencieswithin the accompanying consolidated balance sheet as of December 31, 2018, adjusted2020) as of December 31, 2020, the date of the closing of the OneStim Acquisition: | | | | | | | | |
| ($ in thousands) | | |
| Total Purchase Consideration: | | |
| Consideration | | $ | 683,822 | |
| | |
| Accounts receivable and unbilled revenue | | $ | 128,602 | |
| Inventories | | 33,245 |
| Prepaid and other current assets | | 30,859 |
Property and equipment (1) | | 559,716 |
Intangible assets (included in other assets in the accompanying consolidated balance sheet as of December 31, 2020) (2) | | 54,000 |
| Total identifiable assets acquired | | 806,422 |
| Accounts payable | | 75,522 |
| Accrued liabilities | | 47,078 |
| Total liabilities assumed | | 122,600 |
| Total purchase consideration | | $ | 683,822 | |
(1) Useful lives ranging from two to greater than 25 years, see Note 5—Property and Equipment
(2) Definite lived intangibles with an average amortization period of five years
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated Financial Statements
Transaction costs, costs associated with issuing additional equity and integration costs were recognized separately from the acquisition of assets and assumptions of liabilities in the OneStim Acquisition. Transaction costs consist of legal and professional fees and pre-merger notification fees. Equity offering costs consist of expenses incurred related to the Special Meeting of Stockholders, including the costs to prepare the required filings associated with such meeting, held on November 3, 2020. Integration costs consist of expenses incurred to integrate OneStim’s operations, aligning accounting processes and procedures, and integrating its enterprise resource planning system with those of the Company. Merger and integration costs are expensed as incurred, and equity offering costs were recorded as a reduction to additional paid in capital.
The following combined pro forma information assumes the OneStim Acquisition occurred on January 1, 2019. The pro forma information presented below is for an applied incremental borrowing rate, determined to be appropriate for each lease. The Companyillustrative purposes only and does not anticipatereflect future events that occurred after December 31, 2020 or any operating efficiencies or inefficiencies that may result from the new standard willOneStim Acquisition. The information is not necessarily indicative of results that would have a significant impact onbeen achieved had the Company controlled OneStim during the periods presented. | | | | | | | | | | | | | | |
| | Years ended December 31, |
| (unaudited, in thousands) | | 2020 | | 2019 |
| Revenue | | $ | 2,191,894 | | | $ | 5,174,346 | |
| Net loss | | (1,052,807) | | (1,074,735) | |
| Less: Net loss attributable to non-controlling interests | | (196,020) | | (285,178) | |
| Net loss attributable to Liberty Oilfield Services Inc. stockholders | | $ | (856,787) | | | $ | (789,557) | |
| Net loss attributable to Liberty Oilfield Services Inc. stockholders per common share: | | | | |
| Basic | | $ | (5.65) | | | $ | (5.69) | |
| Diluted | | $ | (5.65) | | | $ | (5.69) | |
| Weighted average common shares outstanding: | | | | |
| Basic | | 151,568 | | | 138,660 | |
| Diluted | | 151,568 | | | 138,660 | |
The Company’s consolidated statements of operations or cash flows.for the year ended December 31, 2020 does not include any results from OneStim operations as the OneStim Acquisition closed on December 31, 2020.
Transaction and integration costs incurred related to both transactions were $13.6 million and $8.5 million, for the years ended December 31, 2021 and 2020, respectively, and are recorded as a component of transaction, severance and other costs in the accompanying consolidated statements of operations. Equity offering costs totaled $1.3 million and $1.6 million, for the years ended December 31, 2021 and 2020, respectively, and are recorded as a reduction to additional paid in capital in the accompanying consolidated balance sheets.
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated Financial Statements
Note 3—4—Inventories
Inventories consist of the following: | | | | | | | | | | | |
| December 31, |
| ($ in thousands) | 2021 | | 2020 |
| Proppants | $ | 23,413 | | | $ | 13,658 | |
| Chemicals | 17,996 | | | 16,434 | |
| Maintenance parts | 93,184 | | | 88,476 | |
| $ | 134,593 | | | $ | 118,568 | |
|
| | | | | | | |
| | December 31, |
| ($ in thousands) | 2018 | | 2017 |
| Proppants | $ | 22,038 |
| | $ | 30,523 |
|
| Chemicals | 10,781 |
| | 10,660 |
|
| Maintenance parts | 27,205 |
| | 14,341 |
|
| | $ | 60,024 |
| | $ | 55,524 |
|
The Company did not record any write-down to the inventory carrying value during the year ended December 31, 2021. During the year ended December 31, 2018,2020, the lower of cost or net realizable value analysis resulted in the Company recording a write-down to inventory carrying values of $3.4$1.1 million, which is included as a component in cost of services in the consolidated statementstatements of incomeoperations.
Note 5—Property and Equipment
Property and equipment consist of the following: | | | | | | | | | | | | | | | | | |
| Estimated
useful lives
(in years) | | December 31, |
| | 2021 | | 2020 |
| ($ in thousands) | | | | | |
| Land | N/A | | $ | 33,812 | | | $ | 38,346 | |
| Field services equipment | 2-7 | | 1,579,420 | | | 1,249,933 | |
| Vehicles | 4-7 | | 61,282 | | | 59,741 | |
| Lease Equipment | 10 | | 64,770 | | | — | |
| Buildings and facilities | 5-30 | | 148,555 | | | 156,109 | |
| Mineral reserves | >25 | | 76,823 | | | 78,793 | |
| Office equipment and furniture | 2-7 | | 8,218 | | | 6,840 | |
| | | 1,972,880 | | | 1,589,762 | |
| Less accumulated depreciation and amortization | | | (863,194) | | | (622,530) | |
| | | 1,109,686 | | | 967,232 | |
| Construction in-progress | N/A | | 89,601 | | | 153,718 | |
| | | $ | 1,199,287 | | | $ | 1,120,950 | |
During the years ended December 31, 2021, 2020, and 2019, the Company recognized depreciation expense of $243.0 million, $169.9 million, and $153.6 million, respectively. Depletion expense for the year ended December 31, 2018.2021 was $1.2 million.
During the year ended December 31, 2020, as a result of negative market indicators including the COVID-19 pandemic, the increased supply of low-priced oil, and customer cancellations, the Company concluded these triggering events could indicate possible impairment of property and equipment. The Company performed a quantitative and qualitative impairment analysis and determined that no impairment had occurred as of June 30, 2020. As of December 31, 2021, and 2020, the Company concluded that no additional triggering events occurred. Such analysis required management to make estimates and assumptions based on historical data and consideration of future market conditions. Given the uncertainty inherent in any projection, heightened by the possibility of unforeseen additional effects of COVID-19, actual results may differ from the estimates and assumptions used, or conditions may change, which could result in impairment charges in the future.
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated and Combined Financial Statements
Note 6—Leases
Note 4—PropertyLessee Arrangements
The Company has operating and Equipmentfinance leases primarily for vehicles, equipment, railcars, office space, and facilities. The terms and conditions for these leases vary by the type of underlying asset.
PropertyCertain leases include variable lease payments for items such as property taxes, insurance, maintenance, and equipment consistother operating expenses associated with leased assets. Payments that vary based on an index or rate are included in the measurement of lease assets and liabilities at the rate as of the following:commencement date. All other variable lease payments are excluded from the measurement of lease assets and liabilities, and are recognized in the period in which the obligation for those payments is incurred.
The components of lease expense for the years ended as of December 31, 2021, and 2020 were as follows: | | | | | | | | | | | | | | |
| ($ in thousands) | | 2021 | | 2020 |
| Finance lease cost: | | | | |
| Amortization of right-of-use assets | | $ | 5,490 | | | $ | 8,115 | |
| Interest on lease liabilities | | 1,598 | | | 1,770 | |
| Operating lease cost | | 40,365 | | | 25,817 | |
| Variable lease cost | | 4,183 | | | 2,935 | |
| Short-term lease cost | | 5,026 | | | — | |
| Sublease (income) | | — | | | (113) | |
| Total lease cost, net | | $ | 56,662 | | | $ | 38,524 | |
|
| | | | | | | | | |
| | Estimated
useful lives
(in years) | | December 31, |
| | | 2018 | | 2017 |
| ($ in thousands) | | | | | |
| Land | N/A | | $ | 5,400 |
| | $ | 4,495 |
|
| Field services equipment | 2-7 | | 778,423 |
| | 572,096 |
|
| Vehicles | 4-7 | | 59,807 |
| | 60,815 |
|
| Buildings and facilities | 5-30 | | 27,795 |
| | 24,260 |
|
| Office equipment and furniture | 2-7 | | 6,200 |
| | 5,879 |
|
| | | | 877,625 |
| | 667,545 |
|
| Less accumulated depreciation and amortization | | | (307,277 | ) | | (198,453 | ) |
| | | | 570,348 |
| | 469,092 |
|
| Construction in-progress | N/A | | 56,705 |
| | 25,684 |
|
| | | | $ | 627,053 |
| | $ | 494,776 |
|
Supplemental cash flow and other information related to leases as of December 31, 2021 and 2020 were as follows: | | | | | | | | | | | |
| ($ in thousands) | 2021 | | 2020 |
| Cash paid for amounts included in measurement of liabilities: | | | |
| Operating leases | $ | 37,121 | | $ | 23,612 | |
| Finance leases | 8,598 | | 13,433 | |
| Right-of-use assets obtained in exchange for new lease liabilities: | | | |
| Operating leases | 71,477 | | 29,663 | |
| Finance leases | 1,500 | | 10,921 | |
During the years ended December 31, 2018, 20172021 and 2016,2020, the Company amended certain finance leases, the change in terms of which caused the leases to be reclassified to operating leases. In connection with the amendments, the Company wrote-off finance lease right-of-use assets of $16.6 million and $22.5 million, respectively, and liabilities of $12.8 million and $19.0 million, respectively. Additionally, the Company recognized depreciation expenseoperating lease right-of-use assets of $124.9 million, 81.5$14.3 million and 41.4$18.6 million and liabilities of $10.7 million and $15.1 million, respectively. There was no gain or loss recognized as a result of these amendments.
In November 2018, one of the Company’s hydraulic frac fleets was involved in an accidental fire, which resulted in damage to a portion of the equipment in that fleet. The Company accrued $15.7 million of insurance proceeds for replacement cost of the damaged equipment, which is presented in prepaidLease terms and other current assets on the accompanying consolidated balance sheetsdiscount rates as of December 31, 2018. 2021 and 2020 were as follows: | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Weighted-average remaining lease term: | | | | |
| Operating leases | | 5.2 years | | 5.9 years |
| Finance leases | | 1.5 years | | 1.5 years |
| Weighted-average discount rate: | | | | |
| Operating leases | | 4.2 | % | | 4.8 | % |
| Finance leases | | 8.6 | % | | 5.8 | % |
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated Financial Statements
Future minimum lease commitments as of December 31, 2021 are as follows: | | | | | | | | | | | | | | |
| ($ in thousands) | | Finance | | Operating |
| 2022 | | $ | 9,464 | | | $ | 34,829 | |
| 2023 | | 5,051 | | | 24,928 | |
| 2024 | | — | | | 18,306 | |
| 2025 | | — | | | 15,975 | |
| 2026 | | — | | | 8,388 | |
| Thereafter | | — | | | 17,833 | |
| Total lease payments | | 14,515 | | | 120,259 | |
| Less imputed interest | | 1,327 | | | 12,264 | |
| Total | | $ | 13,188 | | | $ | 107,995 | |
The accrued insurance proceeds offsetCompany’s vehicle leases typically include a residual value guarantee. For the $4.3Company’s vehicle leases classified as operating leases, the total residual value guaranteed as of December 31, 2021 is $11.6 million; the payment is not probable and therefore has not been included in the measurement of the lease liability and right-of-use asset. For vehicle leases that are classified as finance leases, the Company includes the residual value guarantee, estimated in the lease agreement, in the financing lease liability.
Lessor Arrangements
The Company leases dry and wet sand containers and conveyor belts to customers through PropX. PropX leases to customers through operating leases, where the lessor for tax purposes is considered to be the owner of the equipment during the term of the lease. The lease agreements do not include options for the lessee to purchase the underlying asset at the end of the lease term for either a stated fixed price or fair market value. However, some of the leases contain a termination clause in which the customer can cancel the contract. The leases can be subject to variable lease payments if the customer requests more units than what is agreed upon in the lease. The Company does not record any lease assets or liabilities related to these variable items.
The carrying amount of equipment leased to others, included in property, plant and equipment, under operating leases as of December 31, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | |
| ($ in thousands) | | December 31, 2021 | | December 31, 2020 |
| Equipment leased to others - at original cost | | $ | 64,770 | | | $ | — | |
| Less: Accumulated depreciation | | (1,377) | | | — | |
| Equipment leased to others - net | | $ | 63,393 | | | $ | — | |
Future payments receivable for operating leases commenced and committed but not delivered as of December 31, 2021 are as follows:
| | | | | | | | |
| ($ in thousands) | | |
| 2022 | | $ | 10,209 | |
| 2023 | | 10,099 | |
| 2024 | | 4,197 | |
| 2025 | | 800 | |
| 2026 | | — | |
| Thereafter | | — | |
| Total | | $ | 25,305 | |
Revenues from operating leases for the years ended December 31, 2021 and 2020 were $3.2 million loss recognized on the damaged equipment.and $— million, respectively. The resulting net gain of $11.5 million was recognized in (gain) loss on disposal of assetsCompany had no lease revenue and no lease receivables with related parties for the year ended December 31, 2018 in the accompanying consolidated statements of operations.2021.
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated Financial Statements
Note 5—7—Accrued Liabilities
Accrued liabilities consist of the following: | | | | | | | | | | | | | | |
| ($ in thousands) | | December 31, 2021 | | December 31, 2020 |
| Accrued vendor invoices | | $ | 109,903 | | | $ | 61,210 | |
| Operations accruals | | 64,707 | | | 28,932 | |
| Accrued benefits and other | | 60,505 | | | 28,241 | |
| | $ | 235,115 | | | $ | 118,383 | |
Note 8—Debt
The following is a summaryDebt consists of debt:
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Term Loan Outstanding | $ | 111,715 |
| | $ | 174,562 |
|
| Revolving Line of Credit | — |
| | 30,000 |
|
| Deferred financing costs and original issue discount | (5,191 | ) | | (8,205 | ) |
| Total debt, net of deferred financing costs and original issue discount | $ | 106,524 |
| | $ | 196,357 |
|
| Current portion of long-term debt, net of discount | $ | 385 |
| | $ | 11 |
|
| Long-term debt, net of discount and current portion | 106,139 |
| | 196,346 |
|
| | $ | 106,524 |
| | $ | 196,357 |
|
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Term Loan Outstanding | $ | 106,465 | | | $ | 108,215 | |
| Revolving Line of Credit | 18,000 | | | — | |
| Deferred financing costs and original issue discount | (2,013) | | | (2,440) | |
| Total debt, net of deferred financing costs and original issue discount | $ | 122,452 | | | $ | 105,775 | |
| Current portion of long-term debt, net of discount | $ | 1,007 | | | $ | 364 | |
| Long-term debt, net of discount and current portion | 121,445 | | | 105,411 | |
| $ | 122,452 | | | $ | 105,775 | |
On September 19, 2017, the Company entered into two new2 credit agreements, for a revolving line of credit up to $250.0 million (the “ABL Facility”) and a $175.0 million term loan (the “Term Loan Facility”, and together with the ABL Facility the “Credit Facilities”).
On October 22, 2021, the Company entered into an amendment to the ABL Facility (the “Revolving Credit Agreement Amendment”). The Revolving Credit Agreement Amendment further amends the credit agreement and guaranty and security agreement originally entered into by the parties on September 19, 2017, which governs the Company’s ABL Facility. Along with other revisions, the Revolving Credit Agreement Amendment (i) expanded the definition of borrowing base to include certain eligible US investment grade accounts, Canadian accounts solely after a specified event, and both chemical and spare parts inventory; (ii) increased the maximum revolver amount from $250.0 million to $350.0 million (with the ability to request an increase in the size of the ABL Facility by $75.0 million); (iii) increased certain indebtedness baskets; (iv) provided additional flexibility for a potential future internal structuring; (v) added new lenders to the facility; and (vi) extended the maturity date to the earlier of (a) October 22, 2026 and (b) to the extent the debt under the Term Loan Facility remains outstanding 90 days prior to the final maturity of the Term Loan Facility. The ABL Facility was initially scheduled to mature on the earlier to occur of (i) September 19, 2022 and (ii) to the extent the debt under the Term Loan Facility remains outstanding, 90 days prior to the final maturity of the Term Loan Facility.
Additionally, on October 22, 2021, the Company entered into a Fifth Amendment to Credit Agreement, Second Amendment to Guaranty and Security Agreement and Termination of Right of First Offer Letter. The Term Loan Credit Agreement Amendment further amends the credit agreement and guaranty and security agreement and terminates the Right of First Offer Letter originally entered into by the parties on September 19, 2017, which governs the Company’s Term Loan Facility. Along with other revisions, the Term Loan Credit Agreement Amendment (i) increased certain indebtedness baskets; (ii) provided additional flexibility for a potential future internal structuring; (iii) extended the maturity date through September 19, 2024; and (iv) terminated a right of first offer in favor of the Term Loan Facility lenders. The Term Loan Facility was initially scheduled to mature on September 19, 2022.
The weighted average interest rate on all borrowings outstanding as of December 31, 2021 and December 31, 2020 was 7.9% and 8.6%, respectively.
ABL Facility
Under the terms of the ABL Facility, up to $250.0$350.0 million may be borrowed, subject to certain borrowing base limitations based on a percentage of eligible accounts receivable and inventory. As of December 31, 2018,2021, the borrowing base was calculated to be $224.6$269.0 million, and the Company had no borrowings$18.0 million outstanding except forin addition to a letter of credit in the amount of $0.3$1.5 million, with $224.3$249.5 million of remaining availability. Borrowings under the ABL Facility bear interest at LIBOR or a
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated Financial Statements
base rate, plus an applicable LIBOR margin of 1.5% to 2.0% or base rate margin of 0.5% to 1.0%, as defined in the ABL Facility credit agreement. The unused commitment is subject to an unused commitment fee of 0.375% to 0.5%. Interest and fees are payable in arrears at the end of each month, or, in the case of LIBOR loans, at the end of each interest period. The ABL Facility
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated and Combined Financial Statements
matures on the earlier of (i) September 19, 2022,October 22, 2026, and (ii) to the extent the debt under the Term Loan Facility remains outstanding, 90 days prior to the final maturity of the Term Loan Facility, which matures on September 19, 2022.2024. Borrowings under the ABL Facility are collateralized by accounts receivable and inventory, and further secured by the Company, Liberty LLC and R/C IV Non-U.S. LOS Corp., a Delaware corporation and a subsidiary of the Company, as parent guarantors.
Term Loan Facility
The Term Loan Facility provides for a $175.0 million term loan, of which 111.7$106.5 million remained outstanding as of December 31, 2018.2021. Amounts outstanding bear interest at LIBOR or a base rate, plus an applicable margin of 7.625% or 6.625%, respectively, and the weighted average rate on borrowings was 10.1% as of December 31, 2018.2021 incurred interest at a rate of 8.625%. The Company is required to make quarterly principal payments of 1% per annum of the outstanding principal balance, commencing on December 31, 2017, with final payment due at maturity on September 19, 2022.2024. The Term Loan Facility is collateralized by the fixed assets of LOS and its subsidiaries, and is further secured by the Company, Liberty LLC and R/C IV Non-U.S. LOS Corp., a Delaware corporation and a subsidiary of the Company, as parent guarantors.
The Credit Facilities include certain non-financial covenants, including but not limited to restrictions on incurring additional debt and certain distributions. Moreover, the ability of the Company to incur additional debt and to make distributions is dependent on maintaining a maximum leverage ratio. The Term Loan Facility requires mandatory prepayments upon certain dispositions of property or issuance of other indebtedness, as defined, and annually a percentage of excess cash flow (25% to 50%, depending on leverage ratio, of consolidated net income less capital expenditures and other permitted payments, commencing with the year ending December 31, 2018). Certain mandatory prepayments and optional prepayments are subject to a prepayment premium of 3% of the prepaid principal declining annually to 1% during the first three years of the term of the Term Loan Facility.
The Credit Facilities are not subject to financial covenants unless liquidity, as defined in the respective credit agreements, drops below a specified level. Under the ABL Facility, the Company is required to maintain a minimum fixed charge coverage ratio, as defined in the credit agreement governing the ABL Facility, of 1.0 to 1.0 for each period if excess availability is less than 10% of the borrowing base or $12.5 million, whichever is greater. Under the Term Loan Facility, the Company is required to maintain a minimum fixed charge coverage ratio, as defined, of 1.2 to 1.0 for each trailing twelve-month reportperiod if the Company’s liquidity, as defined, is less than $25.0 million for at least five consecutive business days.
The Company was in compliance with these covenants as of December 31, 2018.2021.
Maturities of debt are as follows: | | | | | |
| ($ in thousands) | |
| Years Ending December 31, | |
| 2022 | $ | 1,750 | |
| 2023 | 1,750 | |
| 2024 | 120,965 | |
| 2025 | — | |
| 2026 | — | |
| $ | 124,465 | |
|
| | | |
| ($ in thousands) | |
| Years Ending December 31, | |
| 2019 | $ | 1,750 |
|
| 2020 | 1,750 |
|
| 2021 | 1,750 |
|
| 2022 | 106,465 |
|
| 2023 | — |
|
| | $ | 111,715 |
|
Note 6—Redeemable Common Units
During February 2017, ACQI received $39.8 million in cash from Liberty Holdings in exchange for 40,000,000 Redeemable Common Units of ACQI which accrue a return of 8% per annum (the “Redeemable Common Units”). The Redeemable Common Units were redeemable at the option of the holder on the later of (A) the earlier of an initial public offering or March 23, 2020 and (B) the second business day after all principal and interest outstanding under the ABL Facility have been paid in full and commitments thereunder are terminated. In accordance with ASC 505, “Equity”, due to their conditional redemption feature, the Redeemable Common Units are classified as temporary equity in the accompanying combined balance sheet as of December 31, 2017.
The Redeemable Common Units were deemed extinguished and satisfied in full in connection with the Corporate Reorganization (see Note 1—Organization and Basis of Presentation).
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated and Combined Financial Statements
Note 7—9—Fair Value Measurements and Financial Instruments
The fair values of the Company’s assets and liabilities represent the amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly transaction at the reporting date. These fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company’s own judgments about the assumptions that market participants would use in pricing the asset or liability. The Company discloses the fair values of its assets and liabilities according to the quality of valuation inputs under the following hierarchy:
•Level 1 Inputs: Quoted prices (unadjusted) in an active market for identical assets or liabilities.
•Level 2 Inputs: Inputs other than quoted prices that are directly or indirectly observable.
•Level 3 Inputs: Unobservable inputs that are significant to the fair value of assets or liabilities.
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated Financial Statements
The classification of an asset or liability is based on the lowest level of input significant to its fair value. Those that are initially classified as Level 3 are subsequently reported as Level 2 when the fair value derived from unobservable inputs is inconsequential to the overall fair value, or if corroboratedcorroborating market data becomes available. Assets and liabilities that are initially reported as Level 2 are subsequently reported as Level 3 if corroborated market data is no longer available. Transfers occur at the end of the reporting period. There were no transfers into or out of Levels 1, 2, and 3 during the years ended December 31, 20182021 and 2017.2020.
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, notes receivable, accounts payable, accrued liabilities, long-term debt, and long-term debt.finance and operating lease obligations. These financial instruments do not require disclosure by level. The carrying values of all the Company’s financial instruments included in the accompanying balance sheets approximated or equaled their fair values at December 31, 20182021 and 2017.2020.
•The carrying values of cash and cash equivalents, accounts receivable and accounts payable (including accrued liabilities) approximated fair value at December 31, 20182021 and 2017,2020, due to their short-term nature.
•The carrying value of amounts outstanding under long-term debt agreements with variable rates approximated fair value at December 31, 20182021 and 2017,2020, as the effective interest rates approximated market rates.
Nonrecurring Measurements
Certain assets and liabilities are measured at fair value on a nonrecurring basis. These items are not measured at fair value on an ongoing basis but may be subject to fair value adjustments in certain circumstances. These assets and liabilities include those acquired through the PropX Acquisition and OneStim Acquisition, which are required to be measured at fair value on the acquisition date in accordance with ASC Topic 805. See Note 3 — Acquisitions.
Recurring Measurements
The fair values of the Company’s cash equivalents measured on a recurring basis pursuant to ASC 820-10 Fair Value Measurements and Disclosures are carried at estimated fair value. Cash equivalents consist of money market accounts which the Company has classified as Level 1 given the active market for these accounts. As of December 31, 2021 and 2020, the Company had cash equivalents, measured at fair value, of $0.3 million and $21.3 million, respectively.
Nonfinancial assets
The Company estimates fair value to perform impairment tests as required on long-lived assets. The inputs used to determine such fair value are primarily based upon internally developed cash flow models and would generally be classified within Level 3 in the event that such assets were required to be measured and recorded at fair value within the consolidated and combined financial statements. There wereAlthough a triggering event occurred during the year ended December 31, 2020 (see Note 5—Property and Equipment), no such measurements were required as of December 31, 20182021 and 2017.2020.
Credit Risk
The Company’s financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents, and trade receivables.
The Company’s cash balancesand cash equivalents balance on deposit with financial institutions total $103.3$20.0 million and $16.3$69.0 million as of December 31, 20182021 and 2017,2020, respectively, which as of certain dates, exceeded FDIC insured limits. The Company regularly monitors these institutions’ financial condition.
The majority of the Company’s customers have payment terms of 45 days or less.
As of December 31, 20182021 and 2017, two and one2020, the below customers accounted for 28% and 22%, respectively,the following percentages of totalthe Company's consolidated accounts receivable and unbilled revenue. revenue and consolidated revenues, respectively:
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Portion of total of consolidated accounts receivable and unbilled revenue as of December 31, | | Portion of consolidated revenues for the year ended December 31, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2019 |
| Customer A | | 12 | % | | — | % | | — | % | | — | % | | — | % |
| Customer B | | — | % | | 11 | % | | — | % | | 12 | % | | — | % |
| Customer C | | — | % | | 11 | % | | — | % | | 11 | % | | — | % |
| Customer D | | — | % | | — | % | | — | % | | 10 | % | | — | % |
| Customer E | | — | % | | — | % | | — | % | | 10 | % | | — | % |
The Company mitigates the associated credit risk by performing credit evaluations and monitoring the payment patterns of its customers. During the years December 31, 2018, 2017 and 2016, one, two and three customers accounted for 11%, 36% and 45% of total revenue, respectively.
As of December 31, 2018 and 2017,2021, the Company had no$0.9 million in allowance for credit losses and recorded a provision for doubtful accounts, and the balance asrelated to two entities inability to pay.
As of December 31, 2016 represented2020, the Company had $0.8 million in allowance for credit losses. Subsequent to the adoption of ASU 2016-13 (see “Accounts Receivable” within Note 2—Significant Accounting Policies—Recently Adopted Accounting Standards) on January 1, 2020, the Company recognized a $4.9 million allowance for credit losses, to the Company’s accounts receivables in consideration of both historic collection experience and the expected impact of deteriorating economic conditions for the oil and gas industry as of such date.
The Company applied historic loss factors to its receivable portfolio segments that were not expected to be further impacted by current economic developments, and an additional economic conditions factor to portfolio segments anticipated to experience greater losses in the current economic environment. While the Company has not experienced significant credit losses in the past and has not seen material changes to the payment patterns of its customers, the Company cannot predict with any certainty the degree to which the ongoing impacts of COVID-19, including the potential impact of periodically adjusted borrowing base limits, level of hedged production, or unforeseen well shut-ins may affect the ability of its customers to timely pay receivables when due. Accordingly, in future periods, the Company may revise its estimates of expected credit losses.
As of December 31, 2019 the Company recorded a provision related to one specific entity engaged in the business of oil and gas exploration and production that had filed for bankruptcy primarily as a result of the significant decline in the oil and gas industry.bankruptcy. | | | | | | | | | | | | | | | | | |
| ($ in thousands) | 2021 | | 2020 | | 2019 |
| Allowance for credit losses, beginning of year | $ | 773 | | | $ | 1,053 | | | $ | — | |
| Credit losses: | | | | | |
| Current period provision | 745 | | | 4,877 | | | 1,053 | |
| Amounts written off, net of recoveries | (634) | | | (5,157) | | | — | |
| Allowance for credit losses, end of year | $ | 884 | | | $ | 773 | | | $ | 1,053 | |
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated and Combined Financial Statements
|
| | | | | | | | | | |
| ($ in thousands) | 2018 | | 2017 | | 2016 |
| Allowance for doubtful accounts, beginning of year | $ | — |
| | $ | 497 |
| | 6,921 |
|
| Bad debt expense: | | | | | |
| Provision for doubtful accounts | — |
| | — |
| | — |
|
| Write off of uncollectible accounts against reserve | — |
| | (497 | ) | | (6,424 | ) |
| Allowance for doubtful accounts, end of year | $ | — |
| | $ | — |
| | 497 |
|
Note 8—10—Equity
Preferred Stock
As of December 31, 20182021 and 2020 the Company had 10,000 shares of preferred stock authorized, par value $0.01, with none issued and outstanding. If issued, each class or series of preferred stock will cover the number of shares and will have the powers, preferences, rights, qualifications, limitations and restrictions determined by the Company'sCompany’s board of directors, which may include, among others, dividend rights, liquidation preferences, voting rights, conversion rights, preemptive rights and redemption rights. Except as provided by law or in a preferred stock designation, the holders of preferred stock will not be entitled to vote at or receive notice of any meeting of shareholders.
Class A Common Stock
The Company had a total of 68,359,871183,385,111 and 157,952,213 shares of Class A Common Stock outstanding as of December 31, 2018,2021 and 2020, NaN of which includes 634,653 shares of restricted stock.were restricted. Holders of Class A Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders and are entitled to ratably receive dividends when and if declared by the Company’s board of directors.
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated Financial Statements
Class B Common Stock
The Company had a total 45,207,372of 2,632,347 and 21,550,282 shares of Class B Common Stock outstanding as of December 31, 2018.2021 and 2020, respectively. Holders of the Class B Common Stock are entitled to one vote per share on all matters to be voted upon by stockholders. Holders of Class A Common Stock and Class B Common Stock vote together as a single class on all matters presented to the Company’s stockholders for their vote or approval, except with respect to amendment of certain provisions of the Company’s certificate of incorporation that would alter or change the powers, preferences or special rights of the Class B Common Stock so as to affect them adversely, which amendments must be by a majority of the votes entitled to be cast by the holders of the shares affected by the amendment, voting as a separate class, or as otherwise required by applicable law.
Holders of Class B Common Stock do not have any right to receive dividends, unless the dividend consists of shares of Class B Common Stock or of rights, options, warrants or other securities convertible or exercisable into or exchangeable for shares of Class B Common Stock paid proportionally with respect to each outstanding share of Class B Common Stock and a dividend consisting of shares of Class A Common Stock or of rights, options, warrants or other securities convertible or exercisable into or exchangeable for shares of Class A Common Stock on the same terms is simultaneously paid to the holders of Class A Common Stock. Holders of Class B Common Stock do not have any right to receive a distribution upon liquidation or winding up of the Company.
Under the Second Amended and Restated Limited Liability Company Agreement of Liberty LLC (the “Liberty LLC Agreement”), each Liberty Unit Holder has, subject to certain limitations, the Redemption Right, which allows it to cause Liberty LLC to acquire all or a portion of its Liberty LLC Units, for, at Liberty LLC’s election, (i) shares of Class A Common Stock at a redemption ratio of one share of Class A Common Stock for each Liberty LLC Unit redeemed, subject to conversion rate adjustments for stock splits, stock dividends and reclassification and other similar transactions or (ii) an equivalent amount of cash. Alternatively, upon the exercise of the Redemption Right, the Company (instead of Liberty LLC) will have the Call Right, which allows it to, for administrative convenience, acquire each tendered Liberty LLC Unit directly from the redeeming Liberty Unit Holder for, at its election, (x) one share of Class A Common Stock or (y) an equivalent amount of cash. In addition, upon a change of control of the Company, the Company has the right to require each holder of Liberty LLC Units (other than the Company) to exercise its Redemption Right with respect to some or all of such unitholder’s Liberty LLC Units. In connection with any redemption of Liberty LLC Units pursuant to the Redemption Right or the Call Right, the corresponding number of shares of Class B Common Stock will be canceled.
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated and Combined Financial Statements
LLC Interest Issuance
Prior to the IPO and Corporate Reorganization, as described in Note 1, Liberty Holdings issued membership interests to investors in exchange for cash consideration. Total member contributions as of December 31, 2017 were $275.7 million, net of commitment and issuance fees. On January 17, 2018, in connection with the Corporate Reorganization, these membership interests were exchanged for Liberty LLC Units. See Note 1 for additional information regarding the Corporate Reorganization.
Unit-Based Compensation
Prior to the IPO and Corporate Reorganization, Liberty Holdings issued Class B units of Liberty Holdings (“Legacy Units”) to certain eligible employees of the Company. The Legacy Units were non-voting, except with respect to such matters that units are entitled to vote as a matter of law. In such cases, each Legacy Unit entitled the holder to 1/1000th of one vote. Certain Legacy Units granted to eligible participants had an assigned benchmark value and were subject to vesting in accordance with the terms of each award letter. Upon termination of the holder’s employment for any reason, Liberty Holdings had the right, but not the obligation, to repurchase from the recipient those vested Legacy Units at fair value.
The Company recognizes compensation expense for equity-based Legacy Units issued to employees based on the grant-date fair value of the awards and each award’s requisite service period. With the assistance from a third-party valuation expert, the Predecessor determined that the Legacy Units issued to employees were deemed to have a de minimis grant-date fair value based on their assigned benchmark values. In connection with the Corporate Reorganization, the unvested Legacy Units were exchanged for 1,258,514 shares of restricted stock with the same terms and requisite vesting conditions as the Legacy Units.
Restricted Stock Awards
Restricted stock awards are awards of Class A Common Stock that are subject to restrictions on transfer and to a risk of forfeitures if the award recipient is no longer an employee or director of the Company for any reason prior to the lapse of the restrictions.
The following table summarizes the Company’s unvested restricted stock activity for the year ended December 31, 2018:
|
| | | | | | |
| Number of Shares | | Grant Date Fair Value per Share (1) |
Shares of Restricted Stock Issued in Exchange for Legacy Units | 1,258,514 |
| | — |
|
Vested | (602,413 | ) | | — |
|
Forfeited | (21,448 | ) | | — |
|
Outstanding at December 31, 2018 | 634,653 |
| | $ | — |
|
(1) As discussed above, the shares of restricted stock retain the grant date fair value of the Legacy Units.
Long Term Incentive Plan
On January 11, 2018, the Company adopted the Long Term Incentive Plan (“LTIP”) to incentivize employees, officers, directors and other service providers of the Company and its affiliates. The LTIP provides for the grant, from time to time, at the discretion of the Company'sCompany’s board of directors or a committee thereof, of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, dividend equivalents, other stock-based awards, cash awards, substitute awards and performance awards. Subject to adjustment in the event of certain transaction or changes of capitalization in accordance with the LTIP, 12,908,734 shares of Class A Common Stock have been reserved for issuance pursuant to awards under the LTIP. Class A Common stockStock subject to an award that expires or is canceled, forfeited, exchanged, settled in cash or otherwise terminated without delivery of shares and shares withheld to pay the exercise price of, or to satisfy the withholding obligations with respect to, an award will again be available for delivery pursuant to other awards under the LTIP.
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated and Combined Financial Statements
Restricted Stock Units
Restricted stock units (“RSUs”) granted pursuant to the LTIP, if they vest, will be settled in shares of the Company’s Class A Common Stock. RSUs were granted with vesting terms up to five years. Changes in non-vested RSUs outstanding under the LTIP during the year ended December 31, 20182021 were as follows: | | | | | | | | | | | |
| Number of Units | | Weighted Average Grant Date Fair Value per Unit |
| Non-vested as of December 31, 2020 | 2,183,034 | | | $ | 10.90 | |
| Granted | 1,572,463 | | | 11.29 | |
| Vested | (959,356) | | | 12.47 | |
| Forfeited | (55,080) | | | 8.38 | |
| Outstanding at December 31, 2021 | 2,741,061 | | | $ | 10.62 | |
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated Financial Statements
|
| | | | | | |
| | Number of Units | | Weighted Average Grant Date Fair Value per Unit |
| Non-vested as of December 31, 2017 | — |
| | $ | — |
|
| Granted | 1,203,433 |
| | 19.25 |
|
| Vested | — |
| | — |
|
| Forfeited | (9,750 | ) | | 20.07 |
|
| Outstanding at December 31, 2018 | 1,193,683 |
| | $ | 19.24 |
|
Performance restricted stock units (“PSUs”) granted pursuant to the LTIP, if they vest, will be settled in shares of the Company’s Class A Common Stock. PSUs were granted with a three year cliff vesting schedule, subject to a performance target compared to an index of competitors’ results over a three year period as designated in the award. The Company records compensation expense based on the Company’s best estimate of the number of PSUs that will vest at the end of the performance period. If such performance targets are not met, or are not expected to be met, no compensation expense is recognized and any recognized compensation expense is reversed. Changes in non-vested PSUs outstanding under the LTIP during the year ended December 31, 2021 were as follows: | | | | | | | | | | | |
| Number of Units | | Weighted Average Grant Date Fair Value per Unit |
| Non-vested as of December 31, 2020 | 722,225 | | | $ | 12.04 | |
| Granted | 584,720 | | | 12.95 | |
| Vested | — | | | — | |
| Forfeited | — | | | — | |
| Outstanding at December 31, 2021 | 1,306,945 | | | $ | 12.45 | |
Stock-based compensation is included in cost of services and general and administrative expenses in the Company’s consolidated and combined statements of operations. The Company recognized stock based compensation expense of $5.4$19.9 million for the year ended December 31, 2018. The Company recognized no stock based compensation expense prior to2021 and $17.1 million for the Corporate Reorganization.year ended December 31, 2020. There was approximately $17.5$25.5 million of unrecognized compensation expense relating to outstanding RSUs and PSUs as of December 31, 2018.2021. The unrecognized compensation expense will be recognized on a straight-line basis over the weighted average remaining vesting period of 2.1two years.
Dividends
On April 2, 2020, the Company suspended future quarterly dividends until business conditions warrant reinstatement.
The Company paid quarterly cash dividends of $0.05 per share of Class A Common Stock on SeptemberMarch 20, and December 20, 20182020 to shareholdersstockholders of record as of SeptemberMarch 6, and December 6, 2018, respectively.2020. Liberty LLC paid distributionsa distribution of $11.6total of $5.6 million, or $0.05 per Liberty LLC Unit, to all Liberty LLC unitholdersunit holders as of the dates above, $7.0March 6, 2020, $4.1 million of which was paid to the Company. The Company used the proceeds of the distributionsdistribution to pay the dividendsdividend to all holders of shares of Class A Common Stock as of SeptemberMarch 6, and December 6, 2018,2020, which totaled $7.0$4.1 million. Additionally, as of December 31, 2021 and 2020, the Company accruedhad $0.2 million and $0.4 million of accrued dividends payable related to restricted stock and RSUs to be paid upon vesting.vesting, respectively. Dividends related to forfeited restricted stock and RSUs will be forfeited.
Share Repurchase Program
On September 10, 2018January 22, 2019, the Company'sCompany’s board of directors authorized aan additional $100.0 million under the share repurchase plan to repurchase up to $100.0 million of the Company's Class A Common Stock through September 30, 2019. January 31, 2021.
During the yearyears ended December 31, 2018, Liberty LLC redeemed2021 and retired 4,593,855 Liberty LLC Units from2020, no shares were repurchased under the Company for $82.9 million,share repurchase program and, the Company repurchased and retired 4,593,855 sharesas of Class A Common Stock for 82.9 million, or $18.05 average price per share including commissions. The total remainingDecember 31, 2021, 0 amounts remained authorized amount available for future repurchases of Class A Common Stock under the share repurchase program was $17.1 million as of December 31, 2018. Of the total amount of Class A Common Stock repurchased, 2,491,160 shares were repurchased pursuant to a Stock Purchase and Sale Agreement, dated as of September 14, 2018, by and among the Company, R/C Energy IV Direct Partnership, L.P., R/C IV Liberty Holdings, L.P. and Riverstone/Carlyle Energy Partners IV, L.P. (collectively, the “Riverstone Sellers”). For further details of this related party transaction see Note 12.program.
The Company accounts for the purchase price of repurchased common shares in excess of par value ($0.01 per share of Class A Common Stock) as a reduction of additional paid-in capital, and will continue to do so until additional paid-in capital is reduced to zero. Thereafter, any excess purchase price will be recorded as a reduction to retained earnings.
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated and Combined Financial Statements
Note 9—11—Net IncomeLoss per Share
Basic net incomeloss per share measures the performance of an entity over the reporting period. Diluted net incomeloss per share measures the performance of an entity over the reporting period while giving effect to all potentially dilutive common shares that were outstanding during the period. The Company uses the “if-converted” method to determine the potential dilutive effect of its Class B Common Stock and the treasury stock method to determine the potential dilutive effect of outstanding restricted stock and RSUs.
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated Financial Statements
The following table reflects the allocation of net incomeloss to common stockholders and net incomeloss per share computations for the periods indicated based on a weighted average number of common stock outstanding: | | | | | | | | | | | | | | |
| (In thousands, except per share data) | | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| Basic Net Loss Per Share | | | | |
| Numerator: | | | | |
| Net loss attributable to Liberty Oilfield Services Inc. Stockholders | | $ | (179,244) | | | $ | (115,583) | |
| Denominator: | | | | |
| Basic weighted average shares outstanding | | 174,019 | | | 85,242 | |
| Basic net loss per share attributable to Liberty Oilfield Services Inc. Stockholders | | $ | (1.03) | | | $ | (1.36) | |
| Diluted Net Loss Per Share | | | | |
| Numerator: | | | | |
| Net loss attributable to Liberty Oilfield Services Inc. Stockholders | | $ | (179,244) | | | $ | (115,583) | |
| Effect of exchange of the shares of Class B Common stock for shares of Class A Common Stock | | — | | | — | |
| Diluted net loss attributable to Liberty Oilfield Services Inc. Stockholders | | $ | (179,244) | | | $ | (115,583) | |
| Denominator: | | | | |
| Basic weighted average shares outstanding | | 174,019 | | | 85,242 | |
| Effect of dilutive securities: | | | | |
| | | | |
| Restricted stock units | | — | | | — | |
| Class B Common Stock | | — | | | — | |
| Diluted weighted average shares outstanding | | 174,019 | | | 85,242 | |
| Diluted net loss per share attributable to Liberty Oilfield Services Inc. Stockholders | | $ | (1.03) | | | $ | (1.36) | |
In accordance with GAAP, diluted weighted average common shares outstanding for the
period subsequent toyear ended December 31, 2021 exclude 7,052 weighted average shares of Class B Common Stock and 3,589 weighted average shares of restricted stock units. Additionally, diluted weighted average common shares outstanding for the
Corporate Reorganization on January 17, 2018:year ended December 31, 2020 exclude 27,427 weighted average shares of Class B Common Stock, 207 weighted average shares of restricted stock, and 2,460 weighted average shares of restricted stock units. |
| | | | |
| (In thousands, except per share data) | | Year Ended December 31, 2018 |
| Basic Net Income Per Share | | |
| Numerator: | | |
| Net income attributable to Liberty Oilfield Services Inc. Stockholders | | $ | 126,349 |
|
| Denominator: | | |
| Basic weighted average shares outstanding | | 68,838 |
|
| Basic net income per share attributable to Liberty Oilfield Services Inc. Stockholders | | $ | 1.84 |
|
| Diluted Net Income Per Share | | |
| Numerator: | | |
| Net income attributable to Liberty Oilfield Services Inc. Stockholders | | $ | 126,349 |
|
| Effect of exchange of the shares of Class B Common stock for shares of Class A Common Stock | | 86,577 |
|
| Diluted net income attributable to Liberty Oilfield Services Inc. Stockholders | | $ | 212,926 |
|
| Denominator: | | |
| Basic weighted average shares outstanding | | 68,838 |
|
| Effect of dilutive securities: | | |
| Restricted stock | | 906 |
|
| Restricted stock units | | 602 |
|
| Class B Common Stock | | 47,492 |
|
| Diluted weighted average shares outstanding | | 117,838 |
|
| Diluted net income per share attributable to Liberty Oilfield Services Inc. Stockholders | | $ | 1.81 |
|
Note 10—12—Income Taxes
Prior to the IPO, the Predecessor was treated as a partnership for U.S. federal, state and local income tax purposes. As such, any liability for federal income tax was the responsibility of the members of the Predecessor. Accordingly, no provision for U.S. federal, state and local income tax has been provided in the combined financial statements of the Company for periods ending prior to the IPO.
Following the IPO, theThe Company is a corporation and is subject to U.S. federal,taxation in the United States, Canada and various state, local and local income tax on its share of Liberty LLC’s taxable income.provincial jurisdictions. Liberty LLC is treated as a partnership, and its income is passed through to its owners for income tax purposes. Liberty LLC’s members, including the Company, are liable for federal, state and local income taxes based on their share of Liberty LLC’s pass-through taxable income. As of December 31, 2018,2021, tax reporting by the Company's PredecessorCompany for the years ended December 31, 2015, 2016,2018, 2019, and 20172020 is subject to examination by the tax authorities. With few exceptions, as
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated Financial Statements
of December 31, 2018,2021, the Company is no longer subject to U.S. federal, state or local examinations by tax authorities for tax years ended before December 31, 2015.2017.
The components of the Company’s income (loss) from continuing operations before income taxes on which the provision for income taxes was computed consisted of the following:
F- 19 | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| ($ in thousands) | | 2021 | | 2020 | | 2019 |
| United States | | (191,774) | | | (191,531) | | | 88,916 | |
| Foreign | | 13,986 | | | — | | | — | |
| Total | | $ | (177,788) | | | $ | (191,531) | | | $ | 88,916 | |
TableThe components of Contentsthe provision for incomes taxes from continuing operations are summarized as follows: | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| ($ in thousands) | | 2021 | | 2020 | | 2019 |
| Current: | | | | | | |
| Federal | | $ | — | | | $ | (5,541) | | | $ | (9,907) | |
| State | | 29 | | | 230 | | | 551 | |
| Foreign | | 4,108 | | | — | | | — | |
| Total Current | | $ | 4,137 | | | $ | (5,311) | | | $ | (9,356) | |
| | | | | | |
| Deferred: | | | | | | |
| Federal | | 6,125 | | | (23,103) | | | 23,419 | |
| State | | (439) | | | (2,443) | | | (11) | |
| Foreign | | $ | (607) | | | $ | — | | | — | |
| Total Deferred | | $ | 5,079 | | | $ | (25,546) | | | $ | 23,408 | |
| Income tax expense (benefit) | | $ | 9,216 | | | $ | (30,857) | | | $ | 14,052 | |
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated and Combined Financial Statements
Income tax expense reflected in(benefit) attributable to net loss before income taxes differed from the consolidated statement of operations consisted of:
|
| | | | |
| ($ in thousands) | | Year Ended December 31, 2018 |
| Current: | | |
| Federal | | 16,684 |
|
| State | | 3,213 |
|
| Total Current | | $ | 19,897 |
|
| | | |
| Deferred: | |
|
| Federal | | 19,063 |
|
| State | | 1,425 |
|
| Total Deferred | | $ | 20,488 |
|
| Income tax expense | | $ | 40,385 |
|
A reconciliation ofamounts computed by applying the statutory U.S. federal income tax rate of 21.0% to pre-tax income as a result of the Company's effective income tax rate is as follows:
|
| | | | |
| ($ in thousands) | | Year Ended December 31, 2018 |
| Federal income tax expense at statutory rate | | $ | 60,778 |
|
| State and local income tax expense, net | | 4,456 |
|
| Pre-IPO income before income taxes attributable to the Predecessor | | (1,958 | ) |
| Noncontrolling interest | | (24,606 | ) |
| Other | | 1,715 |
|
| Total income tax expense | | $ | 40,385 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| ($ in thousands) | | 2021 | | 2020 | | 2019 |
| Computed tax (benefit) expense at the statutory rate | | $ | (37,336) | | | $ | (40,222) | | | $ | 18,672 | |
| Increase (decrease) in tax expense resulting from: | | | | | | |
| State and local income tax (benefit) expense, net | | (5,204) | | | (2,212) | | | 1,525 | |
| Non-controlling interest | | 1,565 | | | 9,463 | | | (7,531) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Effect of foreign tax rates | | 478 | | | — | | | — | |
| Stock based compensation | | (535) | | | 2,157 | | | 227 | |
| Change in valuation allowance | | 50,111 | | | — | | | — | |
| Other, net | | 137 | | | (43) | | | 1,159 | |
| Total income tax expense (benefit) | | $ | 9,216 | | | $ | (30,857) | | | $ | 14,052 | |
The effective combined U.S. federal and state income tax rate applicable to the Company for the period commencing on January 17, 2018, the date of the Corporate Reorganization, throughyears ended December 31, 20182021, 2020, and 2019 was 14.0%.(5.2)%, 16.1%, and 15.8%, respectively.
The Company recognized income tax expensebenefit of $40.4$9.2 million forduring the period commencing on January 17, 2018, the date of the Corporate Reorganization, throughyear ended December 31, 2018.2021. The Company’s effective tax rate is significantly less than the statutory federal income tax rate of 21.0% because no taxes are payable bydue to the Company forrecording a valuation allowance on its U.S. net deferred tax assets as of December 31, 2020, due to entering into a three year cumulative pre-tax book loss position, primarily as a result of COVID-19 related losses. The Company’s effective tax rate is also less than the noncontrollingstatutory rate because of foreign operations and the non-controlling interest’s share of Liberty LLC’s pass-through incomeresults for federal, state and local income tax reporting, and due toupon which no taxes are payable by the shortened taxable period, as the Company was a pass-through entity prior to the IPO. During 2018, the noncontrolling interest effect resulted in a $24.6 million reduction in income tax expenses, while income before taxes and income attributable to the Predecessor resulted in a $2.0 million reduction in income tax expenses.
Company.
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated and Combined Financial Statements
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below: | | | | | | | | | | | | | | |
| ($ in thousands) | | December 31, 2021 | | December 31, 2020 |
| Deferred tax assets: | | | | |
| Federal net operating losses | | $ | 50,093 | | | $ | 15,632 | |
| State net operating losses | | 7,576 | | | 2,697 | |
| Realized tax benefit - TRAs | | 91,312 | | | 52,561 | |
| Intangibles | | 301 | | | — | |
| | | | |
| Other | | 219 | | | — | |
| Total deferred tax assets | | 149,501 | | | 70,890 | |
| Less valuation allowance | | (91,336) | | | — | |
| Net deferred tax assets | | 58,165 | | | 70,890 | |
| | | | |
| Deferred tax liabilities: | | | | |
| Investment in Liberty LLC | | $ | (57,461) | | | $ | (64,765) | |
| Property and equipment | | (97) | | | — | |
| Other | | (563) | | | (765) | |
| Total deferred tax liabilities | | (58,121) | | | (65,530) | |
| | | | |
| Net deferred tax asset | | $ | 44 | | | $ | 5,360 | |
|
| | | | |
| ($ in thousands) | | Year-Ended December 31, 2018 |
| Deferred tax assets: | | |
| Federal net operating losses | | $ | 1,638 |
|
| State net operating losses | | 160 |
|
| Realized tax benefit - TRAs | | 15,845 |
|
| Total deferred tax assets | | 17,643 |
|
| | | |
| Deferred tax liabilities: | |
|
|
| Investment in Liberty LLC | | $ | 50,325 |
|
| Other | | 312 |
|
| Total deferred tax liabilities | | 50,637 |
|
| | | |
| Net deferred tax liability | | $ | 32,994 |
|
During the quarter ended June 30, 2021 the Company established a valuation allowance resulting in the recognition of income tax expense on the Company’s beginning U.S. net deferred tax assets of $6.1 million. As of December 31, 2018,2021, the Company had significant deferred tax assets and liabilities. The deferred tax assets include U.S. federal and state net operating losses and the step upstep-up in basis of depreciable assets under Section 754 (“Section 754”) of the Internal Revenue Code of 1986, as amended. As a result ofamended, subject to the IPO and Corporate Reorganization,valuation allowance. In addition, the Company recorded a deferred tax asset and liability for the difference between the book value and the tax value of the Company's investment in Liberty LLC.LLC, in which a valuation allowance has been recorded against the net US deferred tax assets. The Company also has deferred tax assets have been recorded for foreign operations driven by net deductible reversing temporary differences related to differences between book and taxable income. Since the Company’s establishment of the valuation allowance, increased deferred tax attributes contributedbenefit and deferred tax assets related to the Company as partstep-up in basis of the Corporate Reorganization. Deferred tax liabilitiesdepreciation assets under Section 754 resulted in a change in valuation allowance of $29.3 million have been recorded in connection with the Liberty LLC Units acquired through reorganization. The initial deferred tax liability is recorded as a long term liability and additional paid in capital on the consolidated balance sheet as of December 31, 2018.$85.2 million.
As of December 31, 2018,2021, the Company has available U.S. federal net operating loss carryforwards to reduce future taxable income of $4.5$3.7 million expiring in 2027.2027, and $231.5 million with no expiration date. Per the Coronavirus Aid, Relief and Economic Security (“CARES”) Act enacted March 27, 2020, net operating losses (“NOL”) incurred in 2018, 2019, and 2020 may be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company has applied for and expects to receive a NOL carryback refund to recover $5.5 million of cash taxes paid by the Company in 2018. This amount has been reflected as a receivable in prepaids and other assets. The remaining deferred tax asset for net operating losses available for carryforward are presented net of the Company’s valuation allowance.
The Company may distribute cash from foreign subsidiaries to its U.S. parent as business needs arise. The Company has not provided for deferred income taxes on the undistributed earnings from certain foreign subsidiaries earnings as such earnings are considered to be indefinitely reinvested. If such earnings were to be distributed, any income and/or withholding tax would not be significant.
Uncertain Tax Positions
The Company records uncertain tax positions on the basis of a two-step process in which (1) the Company determines whether it is more likely than not the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions meeting the more likely than not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority.
The Company determined that no liability for unrecognized tax benefits for uncertain tax positions was required at December 31, 2018.2021. In addition, the Company does not believe that it has any tax positions for which it is reasonably possible that it will be required to record a significant liability for unrecognized tax benefits within the next twelve months. If
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated Financial Statements
the Company were to record an unrecognized tax benefit, the Company will recognize applicable interest and penalties related to income tax matters in income tax expense.
Tax Distributions
Liberty LLC is treated as a partnership for income tax purposes. Federal, state and local taxes resulting from the pass-through taxable income of Liberty LLC are obligations of its members. Net profits and losses are generally allocated to the members of Liberty LLC (including the Company) in accordance with the number of Liberty LLC Units held by each member for tax purposes. The amended and restated operating agreement of Liberty LLC Agreement provides for pro rata cash distributions, and in certain cases non-pro rata cash advances, to assist members (including the Company) in paying their income tax liabilities. The Liberty LLC paidAgreement requires any tax advances to noncontrollingbe proportionally repaid in connection with any redemption of Liberty LLC Units pursuant to the Redemption Right or the Call Right. Net advances received by Liberty LLC from non-controlling interest holders tax distributions and advances of $17.6were $1.4 million and $3.7$1.4 million, respectively, for the yearyears ended December 31, 2018.
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated2021 and Combined Financial Statements
2020.
Tax Receivable Agreements
The term of each TRA commenced on January 17, 2018, and will continue until all such tax benefits that are subject to such TRA have been utilized or expired, unless the Company experiences a change of control (as defined in the TRAs, which includes certain mergers, asset sales and other forms of business combinations) or the TRAs are terminated early (at the Company’s election or as a result of its breach), and the Company makes the termination payments specified in such TRA.
The amounts payable, as well as the timing of any payments, under the TRAs are dependent upon significant future events and assumptions, including the timing of the redemptions of Liberty LLC Units, the price of our Class A Common Stock at the time of each redemption, the extent to which such redemptions are taxable transactions, the amount of the redeeming unit holder’s tax basis in its Liberty LLC Units at the time of the relevant redemption, the characterization of the tax basis step-up, the depreciation and amortization periods that apply to the increase in tax basis, the amount of net operating losses available to the Company as a result of the Corporate Reorganization, the amount and timing of taxable income the Company generates in the future, the U.S. federal income tax rate then applicable, and the portion of the Company’s payments under the TRAs that constitute imputed interest or give rise to depreciable or amortizable tax basis.
Prior to the Corporate Reorganization, one of the Legacy Owners distributed a portion of its member interest in Liberty Holdings to R/C IV Non-U.S. LOS Corp. (“R/C IV”). Subsequently, in conjunction with the Corporate Reorganization, R/C IV was contributed to the Company. At the time of the contribution, R/C IV had net operating loss carryforwards totaling $10.9 million for federal income tax purposes and $10.9 million for certain state income tax purposes, which became available for the Company'sCompany’s use as a result of the contribution. As a result of the Company being in a net income position in 2018 and the expected utilization of deferred tax assets, the Company recognized a deferred tax asset of $2.6 million and a corresponding $2.3 million liability pursuant to the TRAs.
During Of the year ended December 31, 2018, exchangescontributed net operating loss carryforwards, $6.4 million for federal income tax purposes and $6.4 million of Liberty LLC Units and sharescertain state income tax purposes have been utilized. As a result, the Company has remaining $0.8 million of Class B Common Stock resulted in an increase of $14.5 million in amounts payable under the TRAs,deferred tax asset and a net increase of $17.1corresponding $0.7 million in deferred tax assets, all of which were recorded through equity. liability pursuant to the TRAs.
At December 31, 2018,2021, the Company’s liability under the TRATRAs was $16.8$37.6 million, all of which is presented as a component of long term liabilities, and the related deferred tax assets totaled $19.7 million.$91.3 million of which a valuation allowance on the net deferred tax asset has been recorded. The Company also remeasured the liability under the TRAs as of December 31, 2021 as it relates to the recording of a valuation allowance and recorded a gain on remeasurement of liabilities subject to the TRAs of $19.0 million recorded as part of continuing operations. The reduction in the liability under the TRA is primarily driven by current generated net operating losses and amortization of expected tax benefits that is subject to the valuation allowance and not expected to be realized in the foreseeable future.
During the year ended December 31, 2021, exchanges of Liberty LLC Units and shares of Class B Common Stock resulted in an increase of $58.5 million in amounts payable under the TRAs, and a net increase of $68.8 million in deferred tax assets, all of which are subject to the valuation allowance and remeasurement of TRA liability discussed above. The Company did not make any TRA payments for the year ended December 31, 2021. During the year ended December 31, 2020, exchanges of Liberty LLC Units and shares of Class B Common Stock resulted in an increase of $13.1 million in amounts payable under the TRAs, and a net increase of $15.5 million in deferred tax assets, all of which were recorded through equity. The Company also made TRA payments of $1.9 million and $5.5 million, totaling $7.4 million for the year ended December 31, 2020. The TRA payments were related to tax benefits realized in prior years and for the Company’s NOL carryback of 2019 NOL to 2018 taxable income under the CARES Act.
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated Financial Statements
Note 11—13—Defined Contribution Plan
The Company sponsors a 401(k) defined contribution retirement plan covering eligible employees. During 2020, in connection with other cost savings measures undertaken in response to declining demand for frac services as a result of the impacts of the COVID-19 pandemic, employer matching contributions were temporarily suspended from April 1, 2020 through December 31, 2020. The Company makes a matching contributions, which were temporarily suspended in May 2015, but were resumed in April 2017contribution at a rate of $1.00 for each $1.00 of employee contribution, subject to a cap of 3% of the employee’s salary. In October 2017, the cap on these contributions was increased to 6% of the employee’s base salary.salary and federal limits. Contributions made by the Company were $13.8$19.0 million, $5.1$4.2 million, and $0$15.7 million for the years ended December 31, 2018, 20172021, 2020 and 2016,2019, respectively.
Effective January 1, 2021 the Company restored its 6% matching contribution. Note 12—14—Related Party Transactions
During September 2018, the Company repurchased 2,491,160As of December 31, 2021 Schlumberger owns 56,826,134 shares of Class A Common Stock of the Company, or approximately 30.5% of the issued and outstanding shares of common stock of the Company, including Class A Common Stock and Class B Common Stock. Under the Transaction agreement, to the extent the net working capital, as defined in the Transaction Agreement, of the Transferred Business is less than $54.6 million, the difference shall be payable in cash to the Company. As of December 31, 2020, the Company recorded a receivable from Schlumberger of $24.7 million for the Riverstone Sellers,working capital settlement and an agreed upon $8.0 million true-up payment related to the estimated costs to bring certain assets to full working condition, which was collected during the three months ended March 31, 2021. During the three months ended September 30, 2021, the Company agreed on a working capital settlement from Schlumberger of $15.8 million, most of which was netted against transaction services costs and cash settlements during the transition services period. In conjunction with closing the OneStim Acquisition, the Company entered into a transition services agreement with Schlumberger, under which Schlumberger provides certain administrative and other transition services until the Company fully integrates the acquired business. During the year ended December 31, 2021, the Company incurred $5.7 million of fees for such transaction services. The Company does not expect to incur any additional transition services related fees in future periods.
During the year ended December 31, 2021, a subsidiary of the Company and Schlumberger entered into a property swap agreement under which the Company exchanged with Schlumberger a property acquired in the OneStim Acquisition and $4.9 million in cash for a separate property that the Company will utilize with its existing operations. The Company did not recognize any gain or loss on the transaction. In a separate transaction, the Company sold equipment to Schlumberger for $1.3 million and recognized a gain on the sale of equipment of $0.9 million.
Following the OneStim Acquisition, in the normal course of business, the Company purchases chemicals, proppant and other equipment and maintenance parts from Schlumberger and its subsidiaries. During the year ended December 31, 2021, total purchases from Schlumberger were approximately $28.2 million, and as of December 31, 2021 amounts due to Schlumberger were $2.7 million and $1.1 million included in accounts payable and accrued liabilities, respectively, in the consolidated balance sheet.
On June 7, 2021 R/C Energy IV Direct Partnership, L.P., a Delaware limited partnership (“R/C Direct”) and R/C Liberty entered into an underwriting agreement, dated as of June 7, 2021, by and among the Company, Liberty LLC, R/C Direct, R/C Liberty and Morgan Stanley & Co. LLC, pursuant to which R/C Direct sold 3,707,187 shares of Class A Common Stock and R/C Liberty sold 8,592,809 shares of Class A Common Stock, at a weighted average purchase price of $18.96$15.20 per share, pursuant to the share repurchase program (see Note 8—Equity - ShareRepurchase Programunderwriter (the “Sale”).
In connection with the Corporate Reorganization,Sale, 6,918,142 shares of Class B Common Stock held by R/C Liberty were redeemed by the Company engaged in transactions with affiliates (see Note 1—Organizationfor an equal amount of Class A Common Stock. On June 10, 2021, the Sale closed. Following the Sale, R/C Direct and BasisR/C Liberty no longer hold any Class A Common Stock or Class B Common Stock and are no longer considered related parties of Presentation) including entering into the TRAs with affiliates (see Note 10). Also in conjunction withCompany.
Prior to the Corporate Reorganization,Sale, R/C IV Liberty Holdings, contributed $2.1L.P. (“R/C Liberty”) exercised its redemption right and redeemed 10,269,457 shares of Class B Common Stock resulting in an increase in tax basis, as described under “Tax Receivable Agreements” in Note—12 Income Taxes, which was subsequently offset by an increase in valuation allowance during the year ended December 31, 2021. During the year ended December 31, 2020, R/C Liberty exercised its redemption right and redeemed 4,016,965 shares of Class B Common Stock resulting in the recognition of $6.1 million in amounts payable under the TRAs.
Effective on June 15, 2021, Audrey Robertson was appointed to the board of additional assets todirectors of Liberty Oilfield Services Inc. Ms. Robertson serves as the Chief Financial Officer of Franklin Mountain Energy, LLC and Redeemable Common Units(“Franklin Mountain”). During the year ended December 31, 2021 the Company performed hydraulic fracturing services for Franklin Mountain in the amount of $42.6$20.5 million or 0.8% of the Company’s revenues for such period. Receivables from Franklin Mountain as of December 31, 2021 were settled (see Note 6).$0.0 million.
In September 2011, Liberty Resources LLC, an oil and gas exploration and production company, and its successor entity (collectively, the “Affiliate”) and LOS, companies withhas certain common ownership and management entered into a services agreement (the “Services Agreement”) wherebywith the Affiliate is to provide certain administrative support functions to LOS and a master service agreement whereby LOS provides hydraulic fracturing services to the Affiliate at market service rates.Company. The amounts incurred underof the Services Agreement by LOS during the years ended December 31, 2018, 2017 and 2016, were $0.2 million, $0 and $0.1 million, respectively, and there was no outstanding balance for the respective periods. On June 14, 2018, the Services Agreement was formally terminated.
Company’s revenue
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated and Combined Financial Statements
The amounts of the Company’s revenue related to hydraulic fracturing services provided to the Affiliate for the years ended December 31, 2018, 20172021, 2020 and 2016,2019, were $23.1$2.8 million, $24.7$0.0 million and $13.1$18.3 million, respectively.
As of December 31, 20182021 and 2017, $15.1 million and $4.0 million, respectively, of2020, there were 0 receivables within the Company’s accounts receivable, and $0 and $0.1 million, respectively, ofreceivable—related party line item attributable to the Company’s unbilled revenue was withAffiliate. On June 24, 2019 (the “Agreement Date”), the Affiliate.
Liberty HoldingsCompany entered into an advisory agreement datedwith the Affiliate to amend payment terms for outstanding invoices due as of the Agreement Date to be due on July 31, 2020. On September 30, 2019, the agreement was amended to extend the due date of the remaining amounts outstanding to October 31, 2020. Amounts outstanding from the Affiliate as of the Agreement Date were $15.6 million. The amounts outstanding, including all accrued interest was paid in full in January 2020. As of December 30, 2011, with Riverstone/Carlyle Energy Partners IV, L.P. (“R/C”), in which R/C agreed to provide certain administrative advisory services to Liberty Holdings. The service fees incurred to R/C for31, 2021 and December 31, 2020, no amounts were outstanding under the amended payment terms from the Affiliate. During the years ended December 31, 2018, 20172021, 2020 and 2016 were approximately $0, $1.52019, interest income from the Affiliate was $0.0 million, $0.3 million and $0.5$1.8 million, respectively. The advisoryReceivables earned for services agreement was terminated pursuantperformed after the Agreement Date continue to an agreement effective as of January 11, 2018. On January 11, 2018, Liberty Holdings, R/C and other parties entered into a Master Reorganization Agreementbe subject to normal 30-day payment terms, provided that among other things, crystallized the “waterfall” provisions of Article VI of the Third Amended and Restated Limited Liability Agreement of Liberty Holdings, dated October 11, 2016 (the “Holdings LLC Agreement”) in connection with the initial public offering of shares of Class A Common Stock. As part of this crystallization, R/C and affiliated entities (collectively, the “R/C Affiliates”) received shares of Class A Common Stock, including 117,647 shares of Class A Common Stock (such 117,647 referredany amount unpaid after 60 days is subject to as the “Issued Shares”) to compensate R/C Affiliates for certain accrued preferred returns but which would not have been issued had the $2.0 million in fees owing under the advisory agreement been paid in cash. Had this fee been paid in cash on or prior to January 11, 2018, R/C and Liberty Holdings acknowledge that R/C Affiliates would not have received the Issued Shares in the crystallization pursuant to the provisions of the Holdings LLC Agreement. Subsequently, during the fourth quarter of 2018, R/C asserted that certain provisions of the termination of services agreement provided for R/C to receive $2.0 million in cash as payment of those accrued fees. To resolve this matter, the Company agreed to pay R/C Affiliates $2.0 million in cash in exchange for the purchase, at the IPO price, or return of the Issued Shares and $0.3 million for interest and the settlement of the matter. Accordingly, $2.3 million was recorded as accrued liabilities - related party in the accompanying consolidated balance sheet as of December 31, 2018 and subsequently paid in January 2019. The purchased and returned shares of Class A Common Stock were canceled and retired, and the Company does not expect to incur future expense related to the advisory agreement or termination thereof.13% interest.
During 2016, Liberty Holdings entered into a future commitment to invest and become a non-controlling minority member in Proppant Express Investments, LLC, (“PropX Investments”), the owner of Proppant Express Solutions, LLC (“PropX”), a provider of proppant logistics equipment. LOS is party to a services agreement (the “PropX Services Agreement”) whereby LOS is to provide certain administrative support functions to PropX, and LOS is to purchase and lease proppant logistics equipment from PropX. The PropX Services Agreement was terminated on May 29, 2018,2018; however, the Company continues to purchase and lease equipment from PropX. ForEffective October 26, 2021, the Company completed the purchase of all membership interest in PropX, refer to Note 3—Acquisitions for further discussion of the transaction. During the period from January 1, 2021 until October 26, 2021, the Company leased proppant logistics equipment from PropX for $7.3 million. During the years ended December 31, 20182020 and 20172019 the Company purchased proppant logistics equipment of $3.1 million and $9.9 million and leased proppant logistics equipment during the years ended December 31, 2018, 2017 and 2016from PropX for $4.4 million, $3.7$8.7 million and $0,$9.8 million, respectively. During the three months ended March 31, 2018, in exchange for a 5% discount, the Company made a prepayment to PropX for rented equipment in the amount of $5.4 million, all of which was recognized during the year ended December 31, 2018.
Receivables from PropX as of December 31, 2018 and 2017 were $0. Payables to PropX as of December 31, 20182020 were $1.5 million.
R/C IV Liberty Big Box Holdings, L.P., a Riverstone Holdings LLC (“Riverstone”) fund and 2017 were $0.2 milliona former significant stockholder of the Company, held a greater than 10% equity interest in PropX. Christopher Wright, the Chief Executive Officer, Michael Stock, the Chief Financial Officer and $0.7 million, respectively.Ron Gusek, the President of the Company, held a less than 5% equity interest in PropX through Big Box Proppant Investments LLC. Cary Steinbeck, a director of the Company, served on the PropX board of the directors and held a less than 5% indirect equity interest in PropX. In addition, Brett Staffieri, a Riverstone appointed director, served on the board of the directors of the Company until June 15, 2021 and on the PropX board of directors until the acquisition date. The PropX Acquisition was reviewed and approved by the disinterested members of the Board and pursuant to the Company’s related party transactions policy.
Note 13—15—Commitments & Contingencies
Operating Leases
The Company leases office space, facilities, equipment, and vehicles under non-cancelable operating leases. Rent expense for the years ended December 31, 2018 and 2017, was $40.9 million and $20.8 million, respectively.
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated and Combined Financial Statements
Future minimum lease payments are as follows:
|
| | | |
| ($ in thousands) | |
| Years Ending December 31, | |
| 2019 | $ | 42,717 |
|
| 2020 | 48,685 |
|
| 2021 | 32,390 |
|
| 2022 | 6,093 |
|
| 2023 | 4,303 |
|
| Thereafter | 19,742 |
|
| | 153,930 |
|
Purchase Commitments (tons per ton, gallons, per gallon and per rail car prices are not in thousands)
The Company enters into purchase and supply agreements to secure supply and pricing of proppants and chemicals. As of December 31, 20182021 and 2017,2020, the agreements commitprovide pricing and committed supply sources for the Company to purchase 11,266,00089,317 and 10,108,0001,580,750 tons, respectively, of proppant through December 31, 2021.June 30, 2022. Amounts above also include commitments to pay for transport fees on minimum amounts of proppants or railcars.proppants. Additionally, related proppant transload service commitments extend into 2023.
Future proppant, transload, equipment and mancamp commitments are as follows: | | | | | |
| ($ in thousands) | |
| 2022 | $ | 24,605 | |
| 2023 | 1,353 | |
| 2024 | — | |
| 2025 | — | |
| 2026 | — | |
| Thereafter | — | |
| $ | 25,958 | |
Certain proppant supply agreements contain a clause whereby in the event that the Company fails to purchase minimum volumes, as defined in the agreement, during a specific time period, a shortfall fee may apply. ThereIn circumstances where the Company does not make the minimum purchase required under the contract, the Company and its suppliers have a history of amending such minimum purchase contractual terms and in rare cases does the Company incur shortfall fees. If the Company were no shortfalls asunable to
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated Financial Statements
make any of the minimum purchases and the Company and its suppliers cannot come to an agreement to avoid such fees, the Company could incur shortfall fees in the amounts of $16.1 million and $1.4 million for the years ended 2022 and 2023 respectively. Based on forecasted levels of activity, the Company does not currently expect to incur significant shortfall fees.
Included in the commitments for the year ending December 31, 2018.2021 are approximately $8.5 million of payments expected to be made to Schlumberger, in conjunction with a permissive use agreement provided by Schlumberger, in the first quarter of 2022 for the use of certain light duty trucks, heavy tractors and field equipment used to various degrees in OneStim’s frac and wireline operations. The Company is in negotiations with the third party owner of such equipment to lease or purchase some or all of such aforementioned vehicles and equipment, subject to agreement on terms and conditions. No gain or loss is expected upon consummation of any such agreement.
AsLitigation
Securities Class Actions
On March 11, 2020, Marshall Cobb, on behalf of December 31, 2018himself and 2017,all other persons similarly situated, filed a putative class action lawsuit in the state District Court of Denver County, Colorado against the Company and certain officers and board members of the Company along with other defendants in connection with the IPO (the “Cobb Complaint”). The Cobb Complaint alleges that the Company and certain officers and board members of the Company violated Section 11 of the Securities Act of 1933 by virtue of inaccurate or misleading statements allegedly contained in the registration statement filed in connection with the IPO and requests unspecified damages and costs. The Cobb Plaintiffs also allege control person liability claims under Section 15 of the Securities Act of 1933 against certain officers and board members of the Company and other defendants.
On April 3, 2020, Marc Joseph, on behalf of himself and all other persons similarly situated, filed a putative class action lawsuit in the United States District Court in Denver, Colorado against the Company and certain officers and board members of the Company along with other defendants in connection with the IPO and requests unspecified damages and costs (the “Joseph Complaint,” and collectively with the Cobb Complaint, the “Securities Lawsuits”). The Joseph Complaint, which is based on similar factual allegations made in the Cobb Complaint, alleges that the defendants violated Sections 11 and 12(a)(2) of the Securities Act of 1933 by virtue of inaccurate or misleading statements allegedly contained in the registration statement and prospectus filed in connection with the IPO. The Joseph Complaint also alleges control person liability claims under Section 15 of the Securities Act of 1933 against certain officers and board members of the Company and other defendants.
The Company has commitmentshired counsel and plans to purchase 18,852,000 and 27,278,000 gallons of chemicals through December 31, 2020.vigorously defend against the allegations in the Securities Lawsuits.
Future proppant, chemical and rail car commitments are as follows:
|
| | | |
| Year ending December 31, | |
| 2019 | $ | 341,970 |
|
| 2020 | 247,989 |
|
| 2021 | 96,958 |
|
| 2022 | 3,945 |
|
| 2023 | — |
|
| | $ | 690,862 |
|
Other Litigation
FromIn addition to the matters described above, from time to time, the Company is subject to legal and administrative proceedings, settlements, investigations, claims and actions. The Company’s assessment of the likely outcome of litigation matters is based on its judgment of a number of factors including experience with similar matters, past history, precedents, relevant financial and other evidence and facts specific to the matter. Notwithstanding the uncertainty as to the final outcome, based upon the information currently available, management does not believe any matters in aggregate will have a material adverse effect on its financial position or results of operations.
On February 23, 2017, SandBox Logistics and Oren Technologies, LLC (collectively, “Sandbox”) filed suitThe Company cannot predict the ultimate outcome or duration of any lawsuit described in the Houston Divisionthis report.
Note 16—Subsequent Events
As of the U.S. District Court for the Southern Districtdate of Texas against PropX and LOS. SandBox alleged that LOS willfully infringed multiple U.S. patents and breached an agreement between SandBox and LOS by “directing, controlling, and funding” inter partes review requests before the U.S. Patent and Trademark Office. In July 2018, SandBox requested permission from the court to allege additional breach of contract claims against LOS, including alleged breaches of a confidentiality agreement and an exclusive purchasing covenant. The court denied these requests in September 2018. On December 19, 2018, the U.S. District Court for the Southern District of Texas entered an order dismissing the claims against LOS with prejudice.
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated and Combined Financial Statements
Note 14—Selected Quarterly Financial Data (unaudited)
The following table sets forth certain unaudited financial and operating information for each quarter of the years ended December 31, 2018 and 2017. The unaudited quarterly information includes all adjustments that, in the opinion of management, are necessary for the fair presentation of information presented. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full fiscal year.
|
| | | | | | | | | | | | | | | |
| ($ in thousands) | Year Ended December 31, 2018 |
| Selected Financial Data: | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Revenue | $ | 495,160 |
| | $ | 628,084 |
| | $ | 558,777 |
| | $ | 473,115 |
|
| Operating costs and expenses: |
| |
| |
| |
|
| Cost of services (exclusive of depreciation and amortization shown separately below) | 376,827 |
| | 455,469 |
| | 418,867 |
| | 377,590 |
|
| General and administrative | 21,677 |
| | 27,313 |
| | 24,659 |
| | 25,403 |
|
| Depreciation and amortization | 28,016 |
| | 30,606 |
| | 32,305 |
| | 34,183 |
|
| Loss (gain) on disposal of assets | 80 |
| | 485 |
| | 701 |
| | (5,608 | ) |
| Total operating costs and expenses | 426,600 |
| | 513,873 |
| | 476,532 |
| | 431,568 |
|
| Operating income | 68,560 |
| | 114,211 |
| | 82,245 |
| | 41,547 |
|
| Other expense: |
| |
| |
| |
|
| Interest expense | (6,494 | ) | | (3,540 | ) | | (3,648 | ) | | (3,463 | ) |
| Net income before income taxes | 62,066 |
| | 110,671 |
| | 78,597 |
| | 38,084 |
|
| Income tax expense | 8,079 |
| | 15,930 |
| | 12,229 |
| | 4,147 |
|
| Net income | 53,987 |
| | 94,741 |
| | 66,368 |
| | 33,937 |
|
| Less: Net income attributable to Predecessor, prior to Corporate Reorganization | 8,705 |
| | — |
| | — |
| | — |
|
| Less: Net income attributable to noncontrolling interests | 21,607 |
| | 45,146 |
| | 32,275 |
| | 14,951 |
|
| Net income attributable to Liberty Oilfield Services Inc. stockholders | $ | 23,675 |
| | $ | 49,595 |
| | $ | 34,093 |
| | $ | 18,986 |
|
|
| | | | | | | | | | | | | | | |
| ($ in thousands) | Year ended December 31, 2017 |
| Selected Financial Data: | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Revenue | $ | 252,394 |
| | $ | 346,725 |
| | $ | 441,853 |
| | $ | 448,883 |
|
| Operating costs and expenses: |
| |
| |
| |
|
| Cost of services (exclusive of depreciation and amortization shown separately below) | 211,633 |
| | 267,626 |
| | 328,434 |
| | 339,315 |
|
| General and administrative | 17,084 |
| | 20,022 |
| | 22,245 |
| | 20,738 |
|
| Depreciation and amortization | 14,146 |
| | 17,521 |
| | 24,164 |
| | 25,642 |
|
| Loss (gain) on disposal of assets | (43 | ) | | 10 |
| | 21 |
| | 160 |
|
| Total operating costs and expenses | 242,820 |
| | 305,179 |
| | 374,864 |
| | 385,855 |
|
| Operating income | 9,574 |
| | 41,546 |
| | 66,989 |
| | 63,028 |
|
| Other expense: |
| |
| |
| |
|
| Interest expense | (1,452 | ) | | (2,511 | ) | | (3,326 | ) | | (5,347 | ) |
| Net income | $ | 8,122 |
| | $ | 39,035 |
| | $ | 63,663 |
| | $ | 57,681 |
|
LIBERTY OILFIELD SERVICES INC.
Notes to Consolidated and Combined Financial Statements
Note 15—Subsequent Events
In the month ended January 31, 2019, Liberty LLC purchased and retired 1,185,356 Liberty LLC Units from the Company for 17.1 million, and the Company repurchased and retired 1,185,356 shares of Class A Common Stock for 17.1 million, or $14.42 average price per share. These repurchases completed the $100.0 million share repurchase plan previously announced on September 19, 2018.
On January 22, 2019, the Company announced that its Board of Directors has authorized the implementation of an additional share repurchase plan to repurchase shares of the Company’s Class A Common Stock, par value $0.01 per share, in an amount not to exceed $100.0 million through January 31, 2021.
Subsequent to December 31, 2018, certain holders of Class B Common Stock exercised their Redemption Right and exchanged 1,634,569 Liberty LLC Units and 1,634,569 shares of Class B Common Stock for 1,634,569 shares of Class A Common Stock. The exchanged shares of Class B Common Stock were canceled and retired.
Therestatements, there were no significant subsequent events requiring disclosure or recognition other than those disclosed in these notes to the consolidated financial statements and combined financial statements.
notes thereto.
