UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20202021
or
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____ to _____
Commission File Number 001-37988
NexTier Oilfield Solutions Inc.
(Exact Name of Registrant as Specified in its Charter)
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Delaware | | | 38-4016639 |
(State or Other Jurisdiction of Incorporation or Organization) | | | (I.R.S. Employer Identification No.) |
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3990 Rogerdale Rd. | Houston | Texas | 77042 |
(Address of Principal Executive Offices) | | | (Zip Code) |
(713) 325-6000
(Registrant's Telephone Number, Including Area Code)
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Securities registered pursuant to Section 12(b) of the Act: |
Title of Each Class | Trading Symbol | Name of Each Exchange On Which Registered |
Common Stock, $0.01, par value | NEX | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer | ☐ | Accelerated Filer | ☒ |
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Non-accelerated Filer | ☐ | Smaller Reporting Company | ☐ |
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| | Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 2, 2020,5, 2021, the registrant had 214,365,310241,968,848 shares of common stock outstanding.
TABLE OF CONTENTS
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PART I. | FINANCIAL INFORMATION | |
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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PART II. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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REFERENCES WITHIN THIS QUARTERLY REPORT
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to (i) the terms “Company,” “NexTier,” “we,” “us” and “our” refer to NexTier Oilfield Solutions Inc. and its consolidated subsidiaries; (ii) the term “Keane Group” refers to Keane Group Holdings, LLC and its consolidated subsidiaries; (iii) the term “Keane Investor” refers to Keane Investor Holdings LLC; (iv) the term “Cerberus” refers to Cerberus Capital Management, L.P. and its controlled affiliates and investment funds; (v) the term “C&J” refers to C&J Energy Services, Inc.; (vi) the term “C&J Merger” refers to the consummation of the transactions described in that certain Agreement and Plan of Merger, dated as of June 16, 2019 (the “Merger Agreement”), by and among the C&J, us and King Merger Sub Corp., one of our wholly owned subsidiaries; and (v) the term "Alamo" refers to Alamo Pressure Pumping, LLC and its consolidated subsidiaries. As used in this Quarterly Report on Form 10-Q, capacity in the hydraulic fracturing business refers to the total number of hydraulic horsepower, regardless of whether such hydraulic horsepower is active and deployed, active and not deployed or inactive. While the equipment and amount of hydraulic horsepower required for a customer project varies, we calculate our total number of fleets, as used in this Quarterly Report on Form 10-Q, by dividing our total hydraulic horsepower by approximately 48,00049,000 hydraulic horsepower.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future operating results and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. Our forward-looking statements are generally accompanied by words such as "may," "should," "expect," "believe," "plan," "anticipate," "could," "intend," "target," "goal," "project," "contemplate," "believe," "estimate," "predict," "potential," or "continue," or the negative of these terms or other similar expressions. Any forward-looking statements contained in this Quarterly Report on Form 10-Q speak only as of the date on which we make them and are based upon our historical performance and on current plans, estimates and expectations. Except as required by law, we have no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
•the impact of the current COVID-19 pandemic and the evolving response thereto, including the impact of social distancing, shelter-in-place, shutdowns of non-essential businesses, extended absences and similar measures imposed or undertaken by governments, private businesses or others;
•changing regional, national or global economic conditions, including oil and gas supply and demand;demand, trucking and logistics issues, labor market and inflation;
•our business strategy;
•our plans, objectives, expectations and intentions;
•the competitive nature of the industry in which we conduct our business, including pricing pressures;
•the impact of the consummation of the merger with C&J on relationships, including with employees, suppliers, customers, competitors, lenders and credit rating agencies;
•our future operating results;
•crude oil and natural gas commodity prices;
•demand for services in our industry;
•our ability to maintain the right level of commitments under our supply agreements;
•the market price and availability of materials or equipment, including loss of equipment due to age, maintenance downtime, casualty event or longer lead times (due to shipping delays, shortages of components, or other);
•the effect of a loss of, or interruption in operations of, one or more key suppliers;
•the impact of pipeline and storage capacity constraints;
•the impact of adverse weather conditions;
•the effects of government regulation;regulation and administrative or political policies;
•changes in tax laws;
•legal proceedings, liability claims and effect of external investigations;
•the effect of a loss of, or the financial distress of, one or more customers;
•our ability to obtain or renew customer contracts;
•the effect of a loss of, or interruption in operations of, one or more key suppliers;
•our ability to maintain the right level of commitments under our supply agreements;recover insurance proceeds, including those related to a casualty event;
•the market price and availability of materials or equipment;
•the impact of new technology;
•our ability to employ a sufficient number of skilled and qualified workers;workers, including any related wage inflation;
•our ability to obtain permits, approvals and authorizations from governmental and third parties;
•planned acquisitions, divestitures, and future capital expenditures;
•the impact of new technology;
•our ability to maintain effective information technology security systems;
•our ability to maintain an effective system of internal controls over financial reporting;
•our ability to service our debt obligations;
•financial strategy, liquidity or capital required for our ongoing operations and acquisitions, and our ability to raise additional capital;
•the market volatility of our stock;
•our ability or intention to pay dividends or to effectuate repurchases of our common stock;
•the impact of ownership by Cerberus (through Keane Investor and Cerberus;Investor); and
•the impact of our corporate governance structure.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section entitled Part I, "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2019, in subsequently filed Form 10-Qs and in the section entitled Part II, "Item 1A. Risk Factors" of this Quarterly Report on Form 10-Q.2020. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, circumstances, plans, intentions or expectations reflected in any forward-looking statements will be achieved or occur. Actual results, events or circumstances could differ materially from those described in such forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make, except as specifically set forth herein. This Quarterly Report on Form 10-Q includes market and industry data and certain other statistical information based on third-party sources including independent industry publications, government publications and other published independent sources. Although we believe these third-party sources are reliable as of their respective dates, we have not independently verified the accuracy or completeness of this information. Some data is also based on our own good faith estimates, which are supported by our management's knowledge of and experience in the markets and businesses in which we operate.
While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed above and in Part II,I, "Item 1A. Risk Factors" in this Quarterlyour Annual Report on Form 10-Q.10-K for the year ended December 31, 2020.
PART I
Item 1. Condensed Consolidated Financial Statements (Unaudited)
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in thousands)
| | | September 30, 2020 | | December 31, 2019 | | | September 30, 2021 | | December 31, 2020 | |
| | (Unaudited) | | | | | (Unaudited) | | | |
Assets | Assets | | | Assets | | |
Current assets: | Current assets: | | | Current assets: | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 305,212 | | | $ | 255,015 | | | Cash and cash equivalents | | $ | 135,525 | | | $ | 275,990 | | |
Trade and other accounts receivable, net | Trade and other accounts receivable, net | | 96,740 | | | 350,765 | | | Trade and other accounts receivable, net | | 265,388 | | | 122,584 | | |
Inventories, net | Inventories, net | | 30,199 | | | 61,641 | | | Inventories, net | | 38,108 | | | 30,068 | | |
Assets held for sale | Assets held for sale | | 0 | | | 141 | | | Assets held for sale | | 6,495 | | | 126 | | |
Prepaid and other current assets | Prepaid and other current assets | | 56,164 | | | 20,492 | | | Prepaid and other current assets | | 51,352 | | | 58,011 | | |
Total current assets | Total current assets | | 488,315 | | | 688,054 | | | Total current assets | | 496,868 | | | 486,779 | | |
Operating lease right-of-use assets | Operating lease right-of-use assets | | 42,165 | | | 54,503 | | | Operating lease right-of-use assets | | 22,980 | | | 37,157 | | |
Finance lease right-of-use assets | Finance lease right-of-use assets | | 2,396 | | | 9,511 | | | Finance lease right-of-use assets | | 35,746 | | | 1,132 | | |
Property and equipment (net of accumulated depreciation of $878,726 and $723,060) | | 514,264 | | | 709,404 | | | |
Property and equipment (net of accumulated depreciation of $964,005 and $929,290) | | Property and equipment (net of accumulated depreciation of $964,005 and $929,290) | | 592,112 | | | 470,711 | | |
Goodwill | Goodwill | | 104,198 | | | 137,458 | | | Goodwill | | 192,446 | | | 104,198 | | |
Intangible assets (net of accumulated amortization of $44,119 and $35,333) | | 52,945 | | | 55,021 | | | |
Intangible assets (net of accumulated amortization of $54,159 and $46,496) | | Intangible assets (net of accumulated amortization of $54,159 and $46,496) | | 69,527 | | | 51,182 | | |
Other noncurrent assets | Other noncurrent assets | | 6,895 | | | 10,956 | | | Other noncurrent assets | | 8,296 | | | 6,729 | | |
Total assets | Total assets | | $ | 1,211,178 | | | $ | 1,664,907 | | | Total assets | | $ | 1,417,975 | | | $ | 1,157,888 | | |
| Liabilities and Stockholders' Equity | Liabilities and Stockholders' Equity | | | | | | Liabilities and Stockholders' Equity | | | | | |
| Current liabilities: | Current liabilities: | | | Current liabilities: | | |
Accounts payable | Accounts payable | | $ | 52,598 | | | $ | 115,251 | | | Accounts payable | | $ | 179,203 | | | $ | 61,259 | | |
Accrued expenses | Accrued expenses | | 130,585 | | | 234,895 | | | Accrued expenses | | 222,720 | | | 134,230 | | |
Customer contract liabilities | Customer contract liabilities | | 745 | | | 60 | | | Customer contract liabilities | | 26,798 | | | 266 | | |
Current maturities of long-term operating lease liabilities | Current maturities of long-term operating lease liabilities | | 19,555 | | | 23,473 | | | Current maturities of long-term operating lease liabilities | | 8,725 | | | 18,551 | | |
Current maturities of long-term finance lease liabilities | Current maturities of long-term finance lease liabilities | | 1,549 | | | 4,594 | | | Current maturities of long-term finance lease liabilities | | 10,438 | | | 606 | | |
Current maturities of long-term debt | Current maturities of long-term debt | | 2,263 | | | 2,311 | | | Current maturities of long-term debt | | 11,186 | | | 2,252 | | |
Other current liabilities | Other current liabilities | | 2,672 | | | 5,610 | | | Other current liabilities | | 2,543 | | | 2,993 | | |
Total current liabilities | Total current liabilities | | 209,967 | | | 386,194 | | | Total current liabilities | | 461,613 | | | 220,157 | | |
Long-term operating lease liabilities, less current maturities | Long-term operating lease liabilities, less current maturities | | 28,999 | | | 35,123 | | | Long-term operating lease liabilities, less current maturities | | 20,580 | | | 24,232 | | |
Long-term finance lease liabilities, less current maturities | Long-term finance lease liabilities, less current maturities | | 1,167 | | | 4,844 | | | Long-term finance lease liabilities, less current maturities | | 25,053 | | | 504 | | |
Long-term debt, net of unamortized deferred financing costs and unamortized debt discount, less current maturities | Long-term debt, net of unamortized deferred financing costs and unamortized debt discount, less current maturities | | 333,844 | | | 335,312 | | | Long-term debt, net of unamortized deferred financing costs and unamortized debt discount, less current maturities | | 361,836 | | | 333,288 | | |
Other noncurrent liabilities | Other noncurrent liabilities | | 23,283 | | | 16,662 | | | Other noncurrent liabilities | | 20,722 | | | 22,419 | | |
Total noncurrent liabilities | Total noncurrent liabilities | | 387,293 | | | 391,941 | | | Total noncurrent liabilities | | 428,191 | | | 380,443 | | |
Total liabilities | Total liabilities | | 597,260 | | | 778,135 | | | Total liabilities | | 889,804 | | | 600,600 | | |
| Stockholders' equity | Stockholders' equity | | | Stockholders' equity | | |
| Common stock, par value $0.01 per share (authorized 500,000 shares, issued and outstanding 214,359 and 212,410 shares, respectively) | | 2,144 | | | 2,124 | | | |
Common stock, par value $0.01 per share (authorized 500,000 shares, issued and outstanding 241,963 and 214,440 shares, respectively) | | Common stock, par value $0.01 per share (authorized 500,000 shares, issued and outstanding 241,963 and 214,440 shares, respectively) | | 2,420 | | | 2,144 | | |
Paid-in capital in excess of par value | Paid-in capital in excess of par value | | 985,900 | | | 966,762 | | | Paid-in capital in excess of par value | | 1,087,618 | | | 989,995 | | |
Retained deficit | Retained deficit | | (361,535) | | | (73,333) | | | Retained deficit | | (552,018) | | | (421,741) | | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | | (12,591) | | | (8,781) | | | Accumulated other comprehensive loss | | (9,849) | | | (13,110) | | |
Total stockholders' equity | Total stockholders' equity | | 613,918 | | | 886,772 | | | Total stockholders' equity | | 528,171 | | | 557,288 | | |
Total liabilities and stockholders' equity | Total liabilities and stockholders' equity | | $ | 1,211,178 | | | $ | 1,664,907 | | | Total liabilities and stockholders' equity | | $ | 1,417,975 | | | $ | 1,157,888 | | |
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See accompanying notes to unaudited condensed consolidated financial statements.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)Loss
(Amounts in thousands, except for per share amounts)
(Unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | | 2021 | | 2020 |
Revenue | Revenue | | $ | 163,675 | | | $ | 443,953 | | | $ | 987,527 | | | $ | 1,293,340 | | | Revenue | | $ | 393,164 | | | $ | 163,675 | | | $ | 913,711 | | | $ | 987,527 | |
Operating costs and expenses: | Operating costs and expenses: | | | Operating costs and expenses: | |
Cost of services(1) | Cost of services(1) | | 150,066 | | | 333,438 | | | 841,063�� | | | 995,587 | | | Cost of services(1) | | 344,637 | | | 150,066 | | | 831,674 | | | 841,063 | |
Depreciation and amortization | Depreciation and amortization | | 73,570 | | | 68,708 | | | 234,651 | | | 210,069 | | | Depreciation and amortization | | 44,861 | | | 73,570 | | | 131,400 | | | 234,651 | |
Selling, general and administrative expenses | Selling, general and administrative expenses | | 25,521 | | | 26,579 | | | 120,429 | | | 80,978 | | | Selling, general and administrative expenses | | 37,453 | | | 25,521 | | | 74,256 | | | 120,429 | |
Merger and integration | Merger and integration | | 7,288 | | | 6,651 | | | 33,498 | | | 12,759 | | | Merger and integration | | 4,752 | | | 7,288 | | | 4,930 | | | 33,498 | |
(Gain) loss on disposal of assets | | (3,027) | | | 679 | | | (11,942) | | | 831 | | | |
Gain on disposal of assets | | Gain on disposal of assets | | (1,133) | | | (3,027) | | | (7,742) | | | (11,942) | |
Impairment expense | Impairment expense | | 2,681 | | | 0 | | | 37,008 | | | 0 | | | Impairment expense | | — | | | 2,681 | | | — | | | 37,008 | |
Total operating costs and expenses | Total operating costs and expenses | | 256,099 | | | 436,055 | | | 1,254,707 | | | 1,300,224 | | | Total operating costs and expenses | | 430,570 | | | 256,099 | | | 1,034,518 | | | 1,254,707 | |
Operating income (loss) | | (92,424) | | | 7,898 | | | (267,180) | | | (6,884) | | | |
Operating loss | | Operating loss | | (37,406) | | | (92,424) | | | (120,807) | | | (267,180) | |
Other income (expense): | Other income (expense): | | | | | | | | | | Other income (expense): | | | | | | | | |
Other income (expense), net | Other income (expense), net | | (3,978) | | | 55 | | | (1,303) | | | 460 | | | Other income (expense), net | | 585 | | | (3,978) | | | 9,113 | | | (1,303) | |
Interest expense, net | Interest expense, net | | (5,524) | | | (5,215) | | | (16,943) | | | (16,087) | | | Interest expense, net | | (6,701) | | | (5,524) | | | (16,633) | | | (16,943) | |
Total other expense | Total other expense | | (9,502) | | | (5,160) | | | (18,246) | | | (15,627) | | | Total other expense | | (6,116) | | | (9,502) | | | (7,520) | | | (18,246) | |
Income (loss) before income taxes | | (101,926) | | | 2,738 | | | (285,426) | | | (22,511) | | | |
Income tax (expense) benefit | | (507) | | | 820 | | | (1,251) | | | (718) | | | |
Net income (loss) | | (102,433) | | | 3,558 | | | (286,677) | | | (23,229) | | | |
Loss before income taxes | | Loss before income taxes | | (43,522) | | | (101,926) | | | (128,327) | | | (285,426) | |
Income tax expense | | Income tax expense | | (472) | | | (507) | | | (1,950) | | | (1,251) | |
Net loss | | Net loss | | (43,994) | | | (102,433) | | | (130,277) | | | (286,677) | |
Other comprehensive loss, net of tax: | Other comprehensive loss, net of tax: | | | Other comprehensive loss, net of tax: | |
Foreign currency translation adjustments | Foreign currency translation adjustments | | (157) | | | 0 | | | 596 | | | (29) | | | Foreign currency translation adjustments | | 531 | | | (157) | | | 433 | | | 596 | |
Hedging activities | Hedging activities | | (453) | | | (2,120) | | | (6,068) | | | (8,664) | | | Hedging activities | | (46) | | | (453) | | | 785 | | | (6,068) | |
Total comprehensive income (loss) | | $ | (103,043) | | | $ | 1,438 | | | $ | (292,149) | | | $ | (31,922) | | | |
Total comprehensive loss | | Total comprehensive loss | | $ | (43,509) | | | $ | (103,043) | | | $ | (129,059) | | | $ | (292,149) | |
| Net income (loss) per share: | | | |
Basic net income (loss) per share | | $ | (0.48) | | | $ | 0.03 | | | $ | (1.34) | | | $ | (0.22) | | | |
Diluted net income (loss) per share | | (0.48) | | | 0.03 | | | (1.34) | | | (0.22) | | | |
Net loss per share: | | Net loss per share: | |
Basic net loss per share | | Basic net loss per share | | $ | (0.20) | | | $ | (0.48) | | | $ | (0.60) | | | $ | (1.34) | |
Diluted net loss per share | | Diluted net loss per share | | (0.20) | | | (0.48) | | | (0.60) | | | (1.34) | |
| Weighted-average shares outstanding: basic | Weighted-average shares outstanding: basic | | 214,251 | | | 104,899 | | | 213,620 | | | 104,721 | | | Weighted-average shares outstanding: basic | | 224,481 | | | 214,251 | | | 218,499 | | | 213,620 | |
Weighted-average shares outstanding: diluted | Weighted-average shares outstanding: diluted | | 214,251 | | | 105,259 | | | 213,620 | | | 105,080 | | | Weighted-average shares outstanding: diluted | | 224,481 | | | 214,251 | | | 218,499 | | | 213,620 | |
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(1) Cost of services during the three and nine months ended September 30, 2020 exclude2021 excludes depreciation of $68.9$40.5 million and $220.9 million, respectively.$118.1 million. Cost of services during the three and nine months ended September 30, 2019 exclude2020 excludes depreciation of $65.2$68.9 million and $199.2$220.9 million, respectively.
See accompanying notes to unaudited condensed consolidated financial statements.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Amounts in thousands)
(Unaudited)
`
| | | | | Common stock | | Paid-in capital in excess of par value | | Retained deficit | | Accumulated other comprehensive loss | | Total | | | | Common stock | | Paid-in capital in excess of par value | | Retained deficit | | Accumulated other comprehensive loss | | Total |
Balance as of December 31, 2019 | | | $ | 2,124 | | | $ | 966,762 | | | $ | (73,333) | | | $ | (8,781) | | | $ | 886,772 | | |
Balance as of December 31, 2020 | | Balance as of December 31, 2020 | | | $ | 2,144 | | | $ | 989,995 | | | $ | (421,741) | | | $ | (13,110) | | | $ | 557,288 | |
| Stock-based compensation | Stock-based compensation | | | 11 | | | 6,869 | | | — | | | — | | | 6,880 | | Stock-based compensation | | | 10 | | | 5,193 | | | — | | | — | | | 5,203 | |
Shares repurchased and retired related to stock-based compensation | Shares repurchased and retired related to stock-based compensation | | | (2) | | | (1,149) | | | — | | | — | | | (1,151) | | Shares repurchased and retired related to stock-based compensation | | | (1) | | | (1,009) | | | — | | | — | | | (1,010) | |
Other comprehensive loss | | | — | | | — | | | — | | | (1,513) | | | (1,513) | | |
Credit losses standard implementation | | | — | | | — | | | (1,525) | | | — | | | (1,525) | | |
Other comprehensive income | | Other comprehensive income | | | — | | | — | | | — | | | 2,349 | | | 2,349 | |
Net loss | Net loss | | | — | | | — | | | (71,756) | | | — | | | (71,756) | | Net loss | | | — | | | — | | | (54,502) | | | — | | | (54,502) | |
Balance as of March 31, 2020 | | | $ | 2,133 | | | $ | 972,482 | | | $ | (146,614) | | | $ | (10,294) | | | $ | 817,707 | | |
Balance as of March 31, 2021 | | Balance as of March 31, 2021 | | | $ | 2,153 | | | $ | 994,179 | | | $ | (476,243) | | | $ | (10,761) | | | $ | 509,328 | |
Stock-based compensation | Stock-based compensation | | | 12 | | | 9,511 | | | — | | | — | | | 9,523 | | Stock-based compensation | | | 5 | | | 4,884 | | | — | | | — | | | 4,889 | |
Shares repurchased and retired related to stock-based compensation | Shares repurchased and retired related to stock-based compensation | | | (4) | | | (789) | | | — | | | — | | | (793) | | Shares repurchased and retired related to stock-based compensation | | | (1) | | | (435) | | | — | | | — | | | (436) | |
Other comprehensive loss | Other comprehensive loss | | | — | | | — | | | — | | | (2,360) | | | (2,360) | | Other comprehensive loss | | | — | | | — | | | — | | | (267) | | | (267) | |
Net loss | Net loss | | | — | | | — | | | (112,488) | | | — | | | (112,488) | | Net loss | | | — | | | — | | | (31,781) | | | — | | | (31,781) | |
Balance as of June 30, 2020 | | | $ | 2,141 | | | $ | 981,204 | | | $ | (259,102) | | | $ | (12,654) | | | $ | 711,589 | | |
Balance as of June 30, 2021 | | Balance as of June 30, 2021 | | | $ | 2,157 | | | $ | 998,628 | | | $ | (508,024) | | | $ | (11,028) | | | $ | 481,733 | |
Stock-based compensation | Stock-based compensation | | | 4 | | | 4,744 | | | — | | | — | | | 4,748 | | Stock-based compensation | | | 4 | | | 7,346 | | | — | | | — | | | 7,350 | |
Shares repurchased and retired related to stock-based compensation | Shares repurchased and retired related to stock-based compensation | | | (1) | | | (48) | | | — | | | — | | | (49) | | Shares repurchased and retired related to stock-based compensation | | | (1) | | | (419) | | | — | | | — | | | (420) | |
Equity issued in connection with Alamo Acquisition | | Equity issued in connection with Alamo Acquisition | | | 260 | | | 82,063 | | | — | | | — | | | 82,323 | |
Other comprehensive loss | Other comprehensive loss | | | — | | | — | | | — | | | 63 | | | 63 | | Other comprehensive loss | | | — | | | — | | | — | | | 1,179 | | | 1,179 | |
Net loss | Net loss | | | — | | | — | | | (102,433) | | | — | | | (102,433) | | Net loss | | | — | | | — | | | (43,994) | | | — | | | (43,994) | |
Balance as of September 30, 2020 | | | $ | 2,144 | | | $ | 985,900 | | | $ | (361,535) | | | $ | (12,591) | | | $ | 613,918 | | |
Balance as of September 30, 2021 | | Balance as of September 30, 2021 | | | $ | 2,420 | | | $ | 1,087,618 | | | $ | (552,018) | | | $ | (9,849) | | | $ | 528,171 | |
|
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Amounts in thousands)
(Unaudited)
| | | | | Common stock | | Paid-in capital in excess of par value | | Retained earnings | | Accumulated other comprehensive loss | | Total | | | | Common stock | | Paid-in capital in excess of par value | | Retained deficit | | Accumulated other comprehensive loss | | Total |
Balance as of December 31, 2018 | | | $ | 1,038 | | | $ | 455,447 | | | $ | 31,494 | | | $ | (798) | | | $ | 487,181 | | |
Balance as of December 31, 2019 | | Balance as of December 31, 2019 | | | $ | 2,124 | | | $ | 966,762 | | | $ | (73,333) | | | $ | (8,781) | | | $ | 886,772 | |
| Stock-based compensation(1) | | | 2 | | | 8,277 | | | — | | | — | | | 8,279 | | |
Stock-based compensation | | Stock-based compensation | | | 11 | | | 6,869 | | | — | | | — | | | 6,880 | |
Shares repurchased and retired related to stock-based compensation | Shares repurchased and retired related to stock-based compensation | | | — | | | (2,861) | | | — | | | — | | | (2,861) | | Shares repurchased and retired related to stock-based compensation | | | (2) | | | (1,149) | | | — | | | — | | | (1,151) | |
Other comprehensive loss | Other comprehensive loss | | | — | | | — | | | — | | | (3,139) | | | (3,139) | | Other comprehensive loss | | | — | | | — | | | — | | | (1,513) | | | (1,513) | |
New lease standard implementation | | | — | | | — | | | 1,330 | | | — | | | 1,330 | | |
Credit losses standard implementation | | Credit losses standard implementation | | | — | | | — | | | (1,525) | | | — | | | (1,525) | |
Net loss | Net loss | | | — | | | — | | | (21,806) | | | — | | | (21,806) | | Net loss | | | — | | | — | | | (71,756) | | | — | | | (71,756) | |
Balance as of March 31, 2019 | | | $ | 1,040 | | | $ | 460,863 | | | $ | 11,018 | | | $ | (3,937) | | | $ | 468,984 | | |
Stock-based compensation(1) | | | 0 | | | 5,637 | | | — | | | — | | | 5,637 | | |
Balance as of March 31, 2020 | | Balance as of March 31, 2020 | | | $ | 2,133 | | | $ | 972,482 | | | $ | (146,614) | | | $ | (10,294) | | | $ | 817,707 | |
Stock-based compensation | | Stock-based compensation | | | 12 | | | 9,511 | | | — | | | — | | | 9,523 | |
Shares repurchased and retired related to stock-based compensation | Shares repurchased and retired related to stock-based compensation | | | (1) | | | (505) | | | — | | | — | | | (506) | | Shares repurchased and retired related to stock-based compensation | | | (4) | | | (789) | | | — | | | — | | | (793) | |
Other comprehensive loss | Other comprehensive loss | | | — | | | — | | | — | | | (3,878) | | | (3,878) | | Other comprehensive loss | | | — | | | — | | | — | | | (2,360) | | | (2,360) | |
Net loss | Net loss | | | — | | | — | | | (4,981) | | | — | | | (4,981) | | Net loss | | | — | | | — | | | (112,488) | | | — | | | (112,488) | |
Balance as of June 30, 2019 | | | $ | 1,039 | | | $ | 465,995 | | | $ | 6,037 | | | $ | (7,815) | | | $ | 465,256 | | |
Balance as of June 30, 2020 | | Balance as of June 30, 2020 | | | $ | 2,141 | | | $ | 981,204 | | | $ | (259,102) | | | $ | (12,654) | | | $ | 711,589 | |
Stock-based compensation | Stock-based compensation | | | 0 | | | 5,488 | | | — | | | — | | | 5,488 | | Stock-based compensation | | | 4 | | | 4,744 | | | — | | | — | | | 4,748 | |
Shares repurchased and retired related to stock-based compensation | Shares repurchased and retired related to stock-based compensation | | | 0 | | | (122) | | | — | | | — | | | (122) | | Shares repurchased and retired related to stock-based compensation | | | (1) | | | (48) | | | — | | | — | | | (49) | |
Other comprehensive loss | Other comprehensive loss | | | — | | | — | | | — | | | (2,176) | | | (2,176) | | Other comprehensive loss | | | — | | | — | | | — | | | 63 | | | 63 | |
Net income | Net income | | | — | | | — | | | 3,558 | | | — | | | 3,558 | | Net income | | | — | | | — | | | (102,433) | | | — | | | (102,433) | |
Balance as of September 30, 2019 | | | $ | 1,039 | | | $ | 471,361 | | | $ | 9,595 | | | $ | (9,991) | | | $ | 472,004 | | |
Balance as of September 30, 2020 | | Balance as of September 30, 2020 | | | $ | 2,144 | | | $ | 985,900 | | | $ | (361,535) | | | $ | (12,591) | | | $ | 613,918 | |
|
(1) Stock-based compensation during the nine months ended September 30, 2019 includes stock-based compensation expense recognized during the period of $15.1 million and the vested deferred stock awards of $4.3 million.
See accompanying notes to unaudited condensed consolidated financial statements.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
| | | Nine Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2020 | | 2019 | | | 2021 | | 2020 | |
Cash flows from operating activities: | Cash flows from operating activities: | | | | | | Cash flows from operating activities: | | | | | |
Net loss | Net loss | | $ | (286,677) | | | $ | (23,229) | | | Net loss | | $ | (130,277) | | | $ | (286,677) | | |
Adjustments to reconcile net loss to net cash provided by operating activities | Adjustments to reconcile net loss to net cash provided by operating activities | | | Adjustments to reconcile net loss to net cash provided by operating activities | | |
Depreciation and amortization | Depreciation and amortization | | 234,651 | | | 210,069 | | | Depreciation and amortization | | 131,400 | | | 234,651 | | |
Amortization of deferred financing fees | Amortization of deferred financing fees | | 1,710 | | | 966 | | | Amortization of deferred financing fees | | 1,528 | | | 1,710 | | |
| (Gain) loss on disposal of assets | | (11,942) | | | 831 | | | |
Gain on disposal of assets | | Gain on disposal of assets | | (7,742) | | | (11,942) | | |
| Loss on impairment of assets | Loss on impairment of assets | | 37,008 | | | 0 | | | Loss on impairment of assets | | — | | | 37,008 | | |
Unrealized loss on derivative recognized in other comprehensive loss | | (6,068) | | | (8,664) | | | |
(Gain) loss on financial instrument and derivatives, net | | 4,109 | | | (500) | | | |
Unrealized (gain) loss on derivative recognized in other comprehensive loss | | Unrealized (gain) loss on derivative recognized in other comprehensive loss | | 785 | | | (6,068) | | |
Loss on financial instrument and derivatives, net | | Loss on financial instrument and derivatives, net | | 4,142 | | | 4,109 | | |
Stock-based compensation | Stock-based compensation | | 21,151 | | | 15,125 | | | Stock-based compensation | | 17,442 | | | 21,151 | | |
| Gain on insurance proceeds recognized in other income | | Gain on insurance proceeds recognized in other income | | (10,409) | | | — | | |
| Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | | Changes in operating assets and liabilities: | | |
Decrease in trade and other accounts receivable, net | | 208,924 | | | 14,477 | | | |
Decrease (increase) in trade and other accounts receivable, net | | Decrease (increase) in trade and other accounts receivable, net | | (92,184) | | | 208,924 | | |
| Decrease in inventories | | 20,690 | | | 14,084 | | | |
Decrease (increase) in inventories | | Decrease (increase) in inventories | | (9,046) | | | 20,690 | | |
Increase in prepaid and other current assets | Increase in prepaid and other current assets | | (607) | | | (626) | | | Increase in prepaid and other current assets | | (10,138) | | | (607) | | |
Decrease (increase) in other assets | | 20,108 | | | (41,891) | | | |
Decrease in other assets | | Decrease in other assets | | 14,203 | | | 20,108 | | |
Increase (decrease) in accounts payable | Increase (decrease) in accounts payable | | (65,149) | | | 15,803 | | | Increase (decrease) in accounts payable | | 59,072 | | | (65,149) | | |
Decrease in accrued expenses | | (87,736) | | | (22,284) | | | |
Increase in customer contract liabilities | | 685 | | | 411 | | | |
Increase (decrease) in other liabilities | | (8,181) | | | 51,007 | | | |
Net cash provided by operating activities | | 82,676 | | | 225,579 | | | |
Increase (decrease) in accrued expenses | | Increase (decrease) in accrued expenses | | 42,951 | | | (87,736) | | |
Increase (decrease) in customer contract liabilities | | Increase (decrease) in customer contract liabilities | | (3,468) | | | 685 | | |
Decrease in other liabilities | | Decrease in other liabilities | | (27,579) | | | (8,181) | | |
Net cash provided by (used in) operating activities | | Net cash provided by (used in) operating activities | | (19,320) | | | 82,676 | | |
Cash flows from investing activities: | Cash flows from investing activities: | | | | | | Cash flows from investing activities: | | | | | |
| Proceeds from sale of business | Proceeds from sale of business | | 53,666 | | | 0 | | | Proceeds from sale of business | | — | | | 53,666 | | |
Purchase of property and equipment | Purchase of property and equipment | | (96,649) | | | (154,107) | | | Purchase of property and equipment | | (132,057) | | | (96,649) | | |
Advances of deposit on equipment | Advances of deposit on equipment | | 0 | | | (5,049) | | | Advances of deposit on equipment | | (543) | | | — | | |
Implementation of software | Implementation of software | | (7,191) | | | (3,321) | | | Implementation of software | | (2,532) | | | (7,191) | | |
Proceeds from disposal of assets | Proceeds from disposal of assets | | 24,807 | | | 23,449 | | | Proceeds from disposal of assets | | 24,470 | | | 24,807 | | |
Acquisition of business | | Acquisition of business | | (95,082) | | | — | | |
| Payment of consideration liability | | Payment of consideration liability | | (6,671) | | | — | | |
Proceeds from settlement of WSS Notes and make-whole derivative | | Proceeds from settlement of WSS Notes and make-whole derivative | | 34,350 | | | — | | |
Proceeds from insurance recoveries | Proceeds from insurance recoveries | | 58 | | | 223 | | | Proceeds from insurance recoveries | | 22,947 | | | 58 | | |
| Net cash used in investing activities | Net cash used in investing activities | | (25,309) | | | (138,805) | | | Net cash used in investing activities | | (155,118) | | | (25,309) | | |
Cash flows from financing activities: | Cash flows from financing activities: | | | | | | Cash flows from financing activities: | | | | | |
| Proceeds from asset-based revolver | | 175,000 | | | 0 | | | |
Proceeds from asset-based revolver and equipment loan | | Proceeds from asset-based revolver and equipment loan | | 39,428 | | | 175,000 | | |
Payments on the term loan facility and asset-based revolver | Payments on the term loan facility and asset-based revolver | | (177,625) | | | (2,625) | | | Payments on the term loan facility and asset-based revolver | | (2,625) | | | (177,625) | | |
Payments on finance leases | Payments on finance leases | | (3,148) | | | (3,814) | | | Payments on finance leases | | (1,146) | | | (3,148) | | |
| Payment of debt issuance costs | | Payment of debt issuance costs | | (251) | | | — | | |
| Shares repurchased and retired related to stock-based compensation | Shares repurchased and retired related to stock-based compensation | | (1,993) | | | (3,487) | | | Shares repurchased and retired related to stock-based compensation | | (1,866) | | | (1,993) | | |
| Net cash used financing activities | | (7,766) | | | (9,926) | | | |
Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | | 33,540 | | | (7,766) | | |
Non-cash effect of foreign translation adjustments | Non-cash effect of foreign translation adjustments | | 596 | | | (29) | | | Non-cash effect of foreign translation adjustments | | 433 | | | 596 | | |
Net increase in cash, cash equivalents | | 50,197 | | | 76,819 | | | |
Net increase (decrease) in cash, cash equivalents | | Net increase (decrease) in cash, cash equivalents | | (140,465) | | | 50,197 | | |
Cash and cash equivalents, beginning | Cash and cash equivalents, beginning | | 255,015 | | | 80,206 | | | Cash and cash equivalents, beginning | | 275,990 | | | 255,015 | | |
Cash and cash equivalents, ending | Cash and cash equivalents, ending | | $ | 305,212 | | | $ | 157,025 | | | Cash and cash equivalents, ending | | $ | 135,525 | | | $ | 305,212 | | |
| Supplemental disclosure of cash flow information: | | | |
Cash paid during the period for: | | | |
Interest expense, net | | $ | 16,122 | | | $ | 15,847 | | | |
Income taxes | | 1,206 | | | 1,630 | | | |
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
| | Supplemental disclosure of cash flow information: | | Supplemental disclosure of cash flow information: | | |
Cash paid during the period for: | | Cash paid during the period for: | | |
Interest expense, net | | Interest expense, net | | $ | 16,469 | | | $ | 16,122 | | |
Income taxes | | Income taxes | | — | | | 1,206 | | |
Non-cash investing and financing activities: | Non-cash investing and financing activities: | | | Non-cash investing and financing activities: | | |
Change in accrued capital expenditures | Change in accrued capital expenditures | | $ | 8,643 | | | $ | (16,387) | | | Change in accrued capital expenditures | | $ | (19,763) | | | $ | 8,643 | | |
Non-cash additions to equity security investments | Non-cash additions to equity security investments | | 5,263 | | | 0 | | | Non-cash additions to equity security investments | | — | | | 5,263 | | |
Non-cash additions to finance right-of-use assets | Non-cash additions to finance right-of-use assets | | 0 | | | 6,029 | | | Non-cash additions to finance right-of-use assets | | 35,813 | | | — | | |
Non-cash additions to finance lease liabilities, including current maturities | Non-cash additions to finance lease liabilities, including current maturities | | 0 | | | 6,164 | | | Non-cash additions to finance lease liabilities, including current maturities | | (35,813) | | | — | | |
Non-cash additions to operating right-of-use assets | Non-cash additions to operating right-of-use assets | | 8,715 | | | 62,698 | | | Non-cash additions to operating right-of-use assets | | 3,352 | | | 8,715 | | |
Non-cash additions to operating lease liabilities, including current maturities | Non-cash additions to operating lease liabilities, including current maturities | | 8,676 | | | 62,444 | | | Non-cash additions to operating lease liabilities, including current maturities | | (512) | | | (8,676) | | |
| | 26,000,000 shares of NexTier common stock issued in exchange for Alamo ownership | | 26,000,000 shares of NexTier common stock issued in exchange for Alamo ownership | | (82,323) | | | — | | |
Total contingent consideration | | Total contingent consideration | | (45,944) | | | 0 | |
Non contingent consideration | | Non contingent consideration | | (7,370) | | | 0 | |
|
See accompanying notes to unaudited condensed consolidated financial statements.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
(1) Basis of Presentation and Nature of Operations
On October 13, 2016, NexTier Oilfield Solutions Inc. (the “Company” or “NexTier”) was formed as Keane Group, Inc. ("Keane"), a Delaware corporation to be a holding corporation for Keane Group Holdings, LLC and its subsidiaries (collectively referred to as “Keane Group”), for the purpose of facilitating the initial public offering (the “IPO”) of shares of common stock of the Company.
On October 31, 2019, the Company completed its merger (the “C&J Merger”) with C&J Energy Services, Inc. (“C&J”) and changed its name to "NexTier Oilfield Solutions Inc." For more details regarding the C&J Merger, refer to Note (3) C&J Merger. In addition, on March 9, 2020, the Company completed the divestiture of its Well Support Services Segment ("WSS Sale"). For more details regarding the WSS Sale, refer to Note (15) Business Segments. The condensed consolidated financial statements for the period from January 1, 2019 to September 30, 2019 reflect only the historical results of the Company prior to the completion of the C&J Merger.
The accompanying unaudited condensed consolidated financial statements were prepared using United States Generally Accepted Accounting Principles ("GAAP") and the instructions to Form 10-Q and Regulation S-X. Accordingly, these financial statements do not include all information or notes required by GAAP for annual financial statements and should be read together with the Company's Annual Report on Form 10-K for the year ended December 31, 2019,2020, filed with the Securities and Exchange Commission (the "SEC") on March 12, 2020.February 24, 2021. The Company’s accounting policies are in accordance with GAAP. The preparation of financial statements in conformity with these accounting principles requires the Company to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and (2) the reported amounts of revenue and expenses during the reporting period. Ultimate results could differ from the Company’s estimates. Significant items subject to such estimates and assumptions include the useful lives of property and equipment and intangible assets; allowances for doubtful accounts; inventory reserves; acquisition accounting; contingent liabilities; and the valuation of property and equipment, intangible assets, equity issued as consideration in an acquisition, income taxes, stock-based incentive plan awards and derivatives.
Management believes the unaudited condensed consolidated financial statements included herein contain all adjustments necessary to present fairly the Company's financial position as of September 30, 20202021 and the results of its operations and cash flows for the three and nine months ended September 30, 20202021 and 2019.2020. Such adjustments are of a normal recurring nature. All intercompany transactions and balances have been eliminated.
On October 31, 2019, the Company completed its merger (the “C&J Merger”) with C&J Energy Services, Inc. (“C&J”) and changed its name to "NexTier Oilfield Solutions Inc." Merger and integration related costs were recognized separately from the acquisition of assets and assumptions of liabilities in the C&J Merger. Merger costs consist of legal and professional fees and pre-merger notification fees. Integration costs consist of expenses incurred to integrate C&J’s operations, aligning accounting processes and procedures, and integrating its enterprise resource planning system with those of the Company. All of these costs are recorded within merger and integration costs on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss. See Note (3) Mergers and Acquisitions in Part I, "Item 8. Financial Statements and Supplementary" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 for further information.
In addition, on March 9, 2020, the Company completed the divestiture of its Well Support Services Segment ("WSS Sale"). For more details regarding the WSS Sale, refer to Note (14) Business Segments.
On August 31, 2021 the Company completed its acquisition (the “Alamo Acquisition”) of Alamo Pressure Pumping, LLC and its wholly owned subsidiaries ("Alamo"). The unaudited condensed consolidated financial statements for the period from January 1, 2020 to August 31, 2021 reflect only the historical results of the Company prior to the completion of the Alamo Acquisition.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
(2) Summary of Significant Accounting Policies
(a) Business Combinations and Asset Acquisitions
Business combinations are accounted for using the acquisition method of accounting in accordance with the Accounting Standards Codification (“ASC”) 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 820, using discounted cash flows and other applicable valuation techniques. Every reporting period, the Company reassess the value of any contingent consideration assumed as part of a business acquisition. 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 the Company’s results of operations from the date of acquisition.acquisition..
On October 31, 2019,Asset acquisitions are measured based on their cost to the Company, completed itsincluding transaction costs. Asset acquisition of C&J, for further discussion relatedcosts, or the consideration transferred by the Company, are assumed to be equal to the merger, see Note (3) C&J Merger.fair value of the net assets acquired. If the consideration transferred is cash, measurement is based on the amount of cash the Company paid to the seller, as well as transaction costs incurred. Consideration given in the form of non-monetary assets, liabilities incurred or equity interests issued is measured based on either the cost to the Company or the fair value of the assets or net assets acquired, whichever is more clearly evident. The cost of an asset acquisition is allocated to the assets acquired based on their estimated relative fair values. Goodwill is not recognized in an asset acquisition.
Since the acquisition date, Alamo has adopted all of the Company's accounting policies.
(b) Revenue Recognition
The Company adopted ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, effective January 1, 2018, using the modified retrospective method. Changes were made to the relevant business processes and the related control activities, including information systems, in order to monitor and maintain appropriate controls over financial reporting. There were no significant changes to the Company’s internal control over financial reporting due to the Company’s adoption of ASU 2014-09.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. To achieve this core principle, ASC 606 requires the Company to apply the following five steps: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to performance obligations in the contract, and (5) recognize revenue when or as the Company satisfies a performance obligation. The five-step model requires management to exercise judgment when evaluating contracts and recognizing revenue.
Identify the Contract and Determine Transaction Price
The Company typically provides its services (i) under term pricing agreements; (ii) under contracts that include dedicated fleet or unit arrangements; (iii) on a spot market basis; and (iv) under term contracts that include “take-or-pay” provisions.
Under term pricing agreements, the Company and customer agree to set pricing for a specified period of time. The agreed-upon pricing is subject to periodic review, as specifically defined in the agreement, and may be adjusted upon the agreement of both parties. These agreements typically do not feature provisions obligating either party to commit to a certain utilization level. Additionally, these agreements typically allow either party to terminate the agreement for its convenience without incurring a termination penalty.
Under dedicated unit arrangements, customers typically commit to targeted utilization levels based on a specified number of fracturing stages per calendar month or fulfilling the customer's requirements, in either instance at agreed-upon pricing. These agreements typically do not feature obligations to pay for services not used by the customer. In addition, the agreed-upon pricing is typically subject to periodic review, as specifically defined in the agreement, and may be adjusted upon the agreement of both parties. These contracts also typically allow for termination for either party's convenience with a brief notice period and may feature a termination penalty in the event the customer terminates the contract for its convenience.
Rates for services performed on a spot market basis are based on an agreed-upon spot market rate unique to each service line.
Under term contracts with “take-or-pay” provisions, the Company’s customers are typically obligated to pay on a monthly basis for a specified quantity of services, whether or not those services are actually utilized. To the extent customers use more than the specified contracted minimums, the Company will charge a pre-agreed amount for the provision of such additional services, which amounts are typically subject to periodic review. In addition, these contracts typically feature a termination penalty in the event the customer terminates the contract for its convenience.
"Take-or-pay" provisions are considered stand ready performance obligations. The Company recognizes "take-or-pay" revenues using a time-based measure of progress, as the Company cannot reasonably estimate if and when the customer will require the Company to provide the services; likewise, the customer benefits as the Company is standing by to provide such services.
Identify and Satisfy the Performance Obligations
The majority of the Company’s performance obligations are satisfied over time. The Company has determined this best represents the transfer of value from its services to the customer as performance by the Company helps to enhance a customer controlled asset (e.g., unplugging a well, enabling a well to produce oil or natural gas). Measurement of the satisfaction of the performance obligation is measured using the output method, which is typically evidenced by a field ticket. A field ticket includes items such as services performed, consumables used, and man hours incurred to complete the job for the customer. Each field ticket is used to invoice customers. Payment terms for invoices issued are in accordance with a master services agreement with each customer, which typically require payment within 30 to 60 days of the invoice issuance.
A portion of the Company’s contracts contain variable consideration; however, this variable consideration is typically unknown at the time of contract inception, and is not known until the job is complete, at which time the variability is resolved. Examples of variable consideration include the number of hours that will be incurred and the amount of consumables (such as chemicals and proppants) that will be used to complete a job.
In the course of providing services to its customers, the Company may use consumables; for example, in the Company’s fracturing business, chemicals and proppants are used in the fracturing service for the customer. ASC 606 requires that goods or services promised to a customer be identified separately when they are distinct within the contract. However, the consumables are used to complete the service for the customer and are not beneficial to the customer on their own. As such, the consumables are not a separate performance obligation, but instead are combined with the other services within the context of the contract and accounted for as a single performance obligation.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
Remaining Performance Obligations
The Company invoices its customers for the services provided at contractual rates multiplied by the applicable unit of measurement, including volume of consumables used and hours incurred. In accordance with ASC 606, the Company has elected the “Right to Invoice” practical expedient for all contracts, which allows the Company to invoice its customers in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date. With this election, the Company is not required to disclose information about the variable consideration related to its remaining performance obligations. The Company has also elected the practical expedient to expense immediately mobilization costs, as the amortization period would always be less than one year. As a result of electing these practical expedients, there was no material impact on the Company’s current revenue recognition processes and no retrospective adjustments were necessary. For those contracts with a term of more than one year, the Company had approximately $39.4$30.7 million of unsatisfied performance obligations as of September 30, 2020,2021, which will be recognized as services are performed over the remaining contractual terms.
The Company’s obligations for refunds as well as the warranties and related obligations stated in its contracts with its customers are standard to the industry and are related to the correction of any defectiveness in the execution of its performance obligations.
Contract Balances
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
In line with industry practice, the Company bills its customers for its services in arrears, typically when the stage or well is completed or at month-end. The majority of the Company’s jobs are completed in less than 30 days. Furthermore, it is currently not standard practice for the Company to execute contracts with prepayment features. As such, the Company’s contract liabilities are immaterial to its consolidated balance sheets. Payment terms after invoicing are typically 30 days or less.to 60 days.
The Company does not have any significant contract costs to obtain or fulfill contracts with customers; as such, no amounts are recognized on the consolidated balance sheet. Taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from revenues in the condensed consolidated statementsCondensed Consolidated Statements of operationsOperations and comprehensive income (loss)Comprehensive Loss and net cash provided by operating activities in the condensed consolidated statementsCondensed Consolidated Statements of cash flows.Cash Flows.
The following is a description of the Company’s core service lines separated by reportable segments from which the Company generates its revenue. For additional detailed information regarding reportable segments, see Note (15)(14) Business Segments.
Revenue from the Company’s Completion Services, Well Construction and Intervention (“WC&I”), and Well Support Services segments are recognized as follows:
Completion Services
The Company provides hydraulic fracturing, wireline and pumpdown services pursuant to contractual arrangements, such as term contracts and pricing agreements. Revenue from these services are earned as services are rendered, which is generally on a per stage or fixed monthly rate. All revenue is recognized when a contract with a customer exists, the performance obligations under the contract have been satisfied over time, the amount to which the Company has the right to invoice has been determined and collectability of amounts subject to invoice is probable. Contract fulfillment costs, such as mobilization costs and shipping and handling costs, are expensed as incurred and are recorded in cost of services in the condensed consolidated statementsCondensed Consolidated Statements of operationsOperations and comprehensive income (loss).Comprehensive Loss. To the extent fulfillment costs are considered separate performance obligations that are billable to the customer, the amounts billed are recorded as revenue in the condensed consolidated statementsCondensed Consolidated Statements of operationsOperations and comprehensive income (loss).Comprehensive Loss.
Once a stage has been completed, a field ticket is created that includes charges for the service performed and the chemicals and proppant consumed during the course of the service. The field ticket may also include charges for the mobilization of the equipment to the location, any additional equipment used on the job and other miscellaneous items. The field ticket represents the amounts to which the Company has the right to invoice and to recognize as revenue.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes toAll revenues from Alamo will be recognized in the Unaudited Condensed Consolidated Financial Statements
West Texas region of the Company's Completions segment.Well Construction and Intervention
The Company provides cementing services pursuant to contractual arrangements, such as term contracts, or on a spot market basis. Revenue is recognized upon the completion of each performance obligation, which for cementing services, represents the portion of the well cemented: surface casing, intermediate casing or production liner. The performance obligations are satisfied over time. Jobs for these services are typically short term in nature, with most jobs completed in a day. Once the well has been cemented, a field ticket is created that includes charges for the services performed and the consumables used during the course of service. The field ticket represents the amounts to which the Company has the right to invoice and to recognize as revenue.
The Company provides a range of coiled tubing services primarily used for fracturing plug drill-out during completion operations and for well workover and maintenance, primarily on a spot market basis. Jobs for these services are typically short-term in nature, lasting anywhere from a few hours to multiple days. Revenue is recognized upon completion of each day’s work based upon a completed field ticket. The field ticket includes charges for the services performed and the consumables used during the course of service. The field ticket may also include charges for the mobilization and set-up of equipment, the personnel on the job, any additional equipment used on the job, and other miscellaneous consumables. The Company typically charges the customer for the services performed and resources provided on an hourly basis at agreed-upon spot market rates, at times, or pursuant to pricing agreements.
DisaggregationHistorical Segment: Well Support Services Segment
On March 9, 2020, the Company completed the divestiture of Revenue
Revenue activities duringits Well Support Services Segment. For additional information, see Note (14) Business Segments. Through its rig services line, the threeCompany had provided workover and nine months ended September 30, 2020well servicing rigs that were primarily used for routine repair and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2020 | | Nine Months Ended September 30, 2020 |
| | (Thousands of Dollars) | | (Thousands of Dollars) |
| | Completion Services | | WC&I | | | | Well Support Services | | Total | | Completion Services | | WC&I | | Well Support Services | | Total |
Geography | | | | | | | | | | | | | | | | | | |
Northeast | | $ | 58,099 | | | $ | 3,704 | | | | | $ | 0 | | | $ | 61,803 | | | $ | 217,752 | | | $ | 16,728 | | | $ | 0 | | | $ | 234,480 | |
Central | | 20,139 | | | 0 | | | | | 0 | | | 20,139 | | | 100,654 | | | 7,478 | | | 0 | | | 108,132 | |
West Texas | | 55,416 | | | 5,094 | | | | | 0 | | | 60,510 | | | 388,413 | | | 48,830 | | | 8,373 | | | 445,616 | |
West | | 9,278 | | | 861 | | | | | 0 | | | 10,139 | | | 108,004 | | | 10,698 | | | 49,556 | | | 168,258 | |
International | | 11,084 | | | 0 | | | | | 0 | | | 11,084 | | | 31,041 | | | 0 | | | 0 | | | 31,041 | |
| | $ | 154,016 | | | $ | 9,659 | | | | | $ | 0 | | | $ | 163,675 | | | $ | 845,864 | | | $ | 83,734 | | | $ | 57,929 | | | $ | 987,527 | |
maintenance of oil and gas wells, re-drilling operations and plug and abandonment operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
| | (Thousands of Dollars) | | (Thousands of Dollars) |
| | Completion Services | | WC&I | | | | Well Support Services | | Total | | Completion Services | | WC&I | | | | Well Support Services | | Total |
Geography | | | | | | | | | | | | | | | | | | | | |
Northeast | | $ | 134,757 | | | $ | 0 | | | | | $ | 0 | | | $ | 134,757 | | | $ | 419,686 | | | $ | 0 | | | | | $ | 0 | | | $ | 419,686 | |
Central | | 14,844 | | | 0 | | | | | 0 | | | 14,844 | | | 50,835 | | | 0 | | | | | 0 | | | 50,835 | |
West Texas | | 213,917 | | | 0 | | | | | 0 | | | 213,917 | | | 594,356 | | | 3,943 | | | | | 0 | | | 598,299 | |
West | | 71,825 | | | 6,610 | | | | | 0 | | | 78,435 | | | 202,804 | | | 19,716 | | | | | 0 | | | 222,520 | |
| | | | | | | | | | | | | | | | | | | | |
International | | 2,000 | | | 0 | | | | | 0 | | | 2,000 | | | 2,000 | | | 0 | | | | | 0 | | | 2,000 | |
| | $ | 437,343 | | | $ | 6,610 | | | | | $ | 0 | | | $ | 443,953 | | | $ | 1,269,681 | | | $ | 23,659 | | | | | $ | 0 | | | $ | 1,293,340 | |
Contract Balances
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
InThese services were provided on an hourly basis at prices that approximate spot market rates. A field ticket was generated and revenue is recognized upon the earliest of the completion of a job or at the end of each day. A rig services job can last anywhere from a few hours to multiple days depending on the type of work being performed. The field ticket includes the base hourly rate charge and, if applicable, charges for additional personnel or equipment not contemplated in the base hourly rate. The field ticket may also include charges for the mobilization and set-up of equipment.
Through its fluids management service line, with industry practice, the Company billsused to provide storage, transportation and disposal services for fluids used in the drilling, completion and workover of oil and gas wells. Rates for these services vary and can be on a per job, per hour, or per load basis, or on the basis of quantities sold or disposed. Revenue is recognized upon the completion of each job or load, or delivered product, based on a completed field ticket.
Through its customers for its services in arrears, typically when the stage orother special well is completed or at month-end. The majority of the Company's jobs are completed in less than 30 days. Furthermore, it is currently not standard practice forsite service line, the Company used to execute contracts with prepayment features. As such,provide fishing, contract labor and tool rental services for completion and workover of oil and gas wells. Rates for these services vary and can be on a per job, per hour or on the Company's contract liabilities are immaterial to its unaudited condensed consolidated balance sheets. Payment terms after invoicing are typicallybasis of rental days per month. Revenue is recognized based on a field ticket issued upon the completion of each job or on a monthly billing for rental services provided.
Disaggregation of Revenue
Revenue activities during the three and nine months ended September 30, days or less.2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 |
| | (Thousands of Dollars) | | (Thousands of Dollars) |
| | Completion Services | | WC&I | | | | Well Support Services | | Total | | Completion Services | | WC&I | | Well Support Services | | Total |
Geography | | | | | | | | | | | | | | | | | | |
Northeast | | $ | 64,140 | | | $ | 4,859 | | | | | $ | — | | | $ | 68,999 | | | $ | 177,448 | | | $ | 16,978 | | | $ | — | | | $ | 194,426 | |
Central | | 72,861 | | | — | | | | | — | | | 72,861 | | | 162,410 | | | — | | | — | | | 162,410 | |
West Texas | | 168,176 | | | 20,902 | | | | | — | | | 189,078 | | | 407,643 | | | 49,511 | | | — | | | 457,154 | |
West | | 50,511 | | | 1,336 | | | | | — | | | 51,847 | | | 60,794 | | | 3,335 | | | — | | | 64,129 | |
International | | 10,379 | | | — | | | | | — | | | 10,379 | | | 35,592 | | | — | | | — | | | 35,592 | |
| | $ | 366,067 | | | $ | 27,097 | | | | | $ | — | | | $ | 393,164 | | | $ | 843,887 | | | $ | 69,824 | | | $ | — | | | $ | 913,711 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2020 | | Nine Months Ended September 30, 2020 |
| | (Thousands of Dollars) | | (Thousands of Dollars) |
| | Completion Services | | WC&I | | | | Well Support Services | | Total | | Completion Services | | WC&I | | Well Support Services | | | Total |
Geography | | | | | | | | | | | | | | | | | | | |
Northeast | | $ | 58,099 | | | $ | 3,704 | | | | | $ | — | | | $ | 61,803 | | | $ | 217,752 | | | $ | 16,728 | | | $ | — | | | | $ | 234,480 | |
Central | | 20,139 | | | — | | | | | — | | | 20,139 | | | 100,654 | | | 7,478 | | | — | | | | 108,132 | |
West Texas | | 55,416 | | | 5,094 | | | | | — | | | 60,510 | | | 388,413 | | | 48,830 | | | 8,373 | | | | 445,616 | |
West | | 9,278 | | | 861 | | | | | — | | | 10,139 | | | 108,004 | | | 10,698 | | | 49,556 | | | | 168,258 | |
| | | | | | | | | | | | | | | | | | | |
International | | 11,084 | | | — | | | | | — | | | 11,084 | | | 31,041 | | | — | | | 0 | | | 31,041 | |
| | $ | 154,016 | | | $ | 9,659 | | | | | $ | — | | | $ | 163,675 | | | $ | 845,864 | | | $ | 83,734 | | | $ | 57,929 | | | | $ | 987,527 | |
(c) Property and EquipmentLong-Lived Assets with Definite Lives
Property and equipment, inclusive of equipment under capitalfinance lease, are generally stated at cost.
Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from 13 months to 40 years. Property and equipment with an estimated useful life less than 13 months are expensed as incurred and are immaterial to the unaudited condensed consolidated financial statements. Management basesdetermines the estimate of the useful lives and salvage values of
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
property and equipment on expected utilization, technological change and effectiveness of its maintenance programs. Depreciation methods, useful lives and residual values are reviewed annually or as needed based on activities related to specific assets. When components of an item of property and equipment are identifiable and have different useful lives, they are accounted for separately as major components of property and equipment. Equipment held under finance leases
Gains and losses on disposal of property and equipment are generally amortized ondetermined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognized net within operating costs and expenses in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
Major classifications of property and equipment and their respective useful lives are as follows:
| | | | | |
Land | Indefinite life |
Building and leasehold improvements | 13 months – 40 years |
Machinery and equipment | 13 months – 10 years |
Office furniture, fixtures and equipment | 3 years – 5 years |
Leasehold improvements are assigned a straight-line basis over the shorter of the estimated useful life of the underlying asset andequal to the term of the related lease. Depreciation methods, useful lives and residual values are reviewed annually.
Leasehold improvements are assigned a useful life equal to the term of the related lease, or its expected period of use.
In the first quarter of 2021, the Company reassessed the estimated useful lives of select machinery and equipment, concluding that due to a decrease in service intensity for select machinery and equipment driven by operational parameters required to maximize natural gas substitution and longer major component lives attributable to equipment health monitoring and predictive maintenance from our proprietary digital NexHub platform and data science efforts, the useful lives of select machinery and equipment should be increased by 1-2 years depending on the specific asset class. In accordance with ASC 250, “Accounting Changes and Error Corrections,” the change in the estimated useful lives of the Company’s property and equipment was accounted for as a change in accounting estimate, on a prospective basis, effective January 1, 2021. This change resulted in a decrease in depreciation expense and decrease in net loss during the three and nine months ended September 30, 2021 of $7.5 million and 29.1 million, respectively, in the Consolidated Statement of Operations and Comprehensive Loss.
On May 9, 2021, one of the Company’s hydraulic frac fleets operating in the Permian Basin was involved in an accidental fire, which resulted in a complete loss of the equipment; no parties were injured as a result of this incident. In the second quarter of 2021, the Company recognized a $21.7 million receivable related to insurance proceeds in other current assets for replacement costs of the damaged equipment, which offset the $12.0 million loss recognized on the damaged equipment and costs to remove the equipment. The resulting gain of $9.7 million was recognized in the second quarter of 2021, in other income (expense), net in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
During the three months ended September 30, 2021 the Company has received an additional $1.2 million in insurance proceeds, offset by additional costs of $0.5 million. The resulting additional gain of $0.7 million was recognized in the third quarter of 2021 in other income (expense), net in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
Amortization on definite-lived intangible assets is calculated on the straight-line method over the estimated useful lives of the assets, which range from 2 to 15 years. The majority of the Company's definite lived intangible assets include customer contracts and technology.
Property and equipment and definite-lived intangible assets (“Long-lived assetsAssets”) are evaluated on a quarterly basis to identify events or changes in circumstances, (“referred to as triggering events”)events that indicate the carrying value of certain property and equipment may not be recoverable. Property and equipment are reviewed for impairmentrecoverable or upon the occurrence of a triggering event. An impairment loss is recorded in the period in which it is determined that the carrying amount of property and equipmentLong-lived Asset is not recoverable. The determination of recoverability is made based upon the estimated 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 with such cash flows to be realized over the estimated remaining useful life of the primary asset within the asset group. The Company determined the lowest level of identifiable cash flows that are independent of other asset groups to be primarily at the service line level. The Company's asset groups consist of fracturing services, wireline, cementing, and coiled tubing.tubing, except for an entity level asset group for Long-lived Assets that do not have identifiable independent
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
cash flows. Estimates of undiscounted future net cash flows of assets groups are projected based on estimates of projected revenue growth, unit count, utilization, pricing, gross profit rates, SG&A rates, working capital fluctuations and capital expenditures. Forecasted cash flows take into account known market conditions as of the assessment date, and management’s anticipated business outlook. A terminal period is used to reflect an estimate of stable, perpetual growth. If the estimated undiscounted future net cash flows for a given asset group is less than the carrying amount of the related assets,asset groups, an impairment loss is determined by comparing the estimated fair value with the carrying value of the related assets.asset groups. The impairment loss is then allocated across the asset group's major classifications.
During the first quarter of 2020, management determined the reductions in commodity prices driven by the potential impact of the novel COVID-19 viruspandemic and global supply and demand dynamics coupled with the sustained decrease in the Company’s share price were deemed triggering events. As a result of the triggering event, recoverability testing was performed and it was determined that the estimated undiscounted future net cash flow for all asset groups was greater than the carrying amount of their related assets and no impairment loss was recorded.
DuringThe Company did not recognize any impairment charges related to the third quarter of 2020, the Company assessed and determined the sustained reductions in commodity prices and continuing market economic disruptions as a triggering event. As a result of the triggering event, recoverability testing was performed; however, no impairment ofCompany’s long-lived assets was recorded.
Major classifications of propertyfor the three and equipment and their respective useful lives are as follows:
| | | | | |
Land | Indefinite life |
Building and leasehold improvements | 13 months – 40 years |
Machinery and equipment | 13 months – 10 years |
Office furniture, fixtures and equipment | 3 years – 5 years |
Leasehold improvements are assigned a useful life equal to the term of the related lease. Depreciation methods, useful lives and residual values are reviewed annually.nine months ended September 30, 2021 or 2020.
(d) Leases
Effective January 1, 2019,In accordance with ASU 2016-02, the Company adopted ASU 2016-02, "Leases (Topic 842),"considers any contract that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration to be a lease. The Company determines whether the contract into which it has entered is a lease at the lease commencement date. Rental arrangements with term lengths of one month or less are expensed as incurred, but not recognized as qualifying leases.
For lessees, leases can be classified as finance leases or operating leases, while for lessors, leases can be classified as sales-type leases, direct financing leases or operating leases. As lessee, all leases, with the exception of short-term leases, are capitalized on the balance sheet by recording a lease liability, which represents the Company's obligation to make lease payments arising from the lease and subsequently-issued related ASUs,a right-of-use asset, which set outrepresents the principlesCompany's right to use the underlying asset being leased.
For leases in which the Company is the lessee, the Company uses a collateralized incremental borrowing rate to calculate the lease liability, as for most leases, the recognition, measurement, presentationimplicit rate in the lease is unknown. The collateralized incremental borrowing rate is based on a yield curve over various term lengths that approximates the borrowing rate the Company would receive if it collateralized its lease arrangements with all of its assets. For leases in which the Company is the lessor, the Company uses the rate implicit in the lease.
For finance leases, the Company amortizes the right-of-use asset on a straight-line basis over the earlier of the useful life of the right-of-use asset or the end of the lease term and disclosurerecords this amortization in depreciation and amortization expense on the Condensed Consolidated Statements of Operations and Comprehensive Loss. For finance leases for both lesseeswhere the Company has determined it is reasonably certain to exercise a purchase option to acquire the underlying asset, the lessee amortizes the ROU asset to the later of the end of the underlying asset’s useful life or lease term and lessors,records this amortization in depreciation and amortization expense on the Condensed Consolidated Statements of Operations and Comprehensive Loss. The Company adjusts the lease liability to reflect lease payments made during the period and interest incurred on the lease liability using the modified retrospectiveeffective interest method. In connection withThe incurred interest expense is recorded in interest expense on the adoptionCondensed Consolidated Statements of these standards,Operations and Comprehensive Loss. For operating leases, the Company implemented internalrecognizes one single lease cost, comprised of the lease payments and amortization of any associated initial direct costs, within rent expense on the Condensed Consolidated Statements of Operations and Comprehensive Loss. Variable lease costs not included in the determination of the lease liability at the commencement of a lease are recognized in the period when the specified target that triggers the variable lease payments becomes probable.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
controls to ensure that the Company's contracts are properly evaluated to determine applicability under ASU 2016-02 and that the Company properly applies ASU 2016-02 in accounting for and reporting on all its qualifying leases.
In accordance with ASC 842, the Company has made the following elections for its lease accounting:
•all short-term leases with term lengths of 12 months or less will not be capitalized; the underlying class of assets to which the Company has applied this expedient is primarily its apartment leases;
•for non-revenue contracts containing both lease and non-lease components, both components will be combined and accounted for as one lease component and accounted for under ASC 842; and
•for revenue contracts containing both lease and non-lease components, both components will be combined and accounted for as one component and accounted for under ASC 606.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Company's adoption of ASU 2016-02, the Company elected to adopt the standard using the modified retrospective transition method and elected the practical expedient transition method package whereby the Company did not:Unaudited Condensed Consolidated Financial Statements
•reassess whether any expired or existing contracts contained leases;
•reassess the lease classification for any expired or existing leases; and
•reassess initial direct costs for any existing leases.
For additional information, see Note (12) Leases.
(e) Derivative Instruments and Hedging Activities
The Company is exposed to certain risks relating to its ongoing business operations. The Company utilizes interest rate derivatives to manage interest rate risk associated with its floating-rate borrowings. The Company recognizes all derivative instruments as either assets or liabilities on the condensed consolidated balance sheets at their respective fair values. For derivatives designated in hedging relationships, changes in the fair value are either offset through earnings against the change in fair value of the hedged item attributable to the risk being hedged or recognized in accumulated other comprehensive income (loss)loss until the hedged item affects earnings.
The Company only enters into derivative contracts that it intends to designate as hedges for the variability of cash flows to be received or paid related to a recognized asset or liability (i.e. cash flow hedge). For all hedging relationships, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged and how the hedging instrument'sinstrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the gain or loss on the derivative is reported as a component of other comprehensive income (loss)loss and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
The Company discontinues hedge accounting prospectively, when it determines that the derivative is no longer highly effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the originally forecasted transaction is no longer probable of occurring or if management decides to remove the designation of the cash flow hedge. The net derivative instrument gain or loss related to a discontinued cash flow hedge shall continue to be reported in accumulated other comprehensive loss and reclassified into earnings in the same period or periods during which the originally hedged transaction affects earnings, unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period. When it is probable that the originally forecasted transaction will not occur by the end of the originally specified time period, the Company recognizes immediately, in earnings, any gains and losses related to the hedging relationship that were recognized in accumulated other comprehensive loss. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the consolidated balance sheets and recognizes any subsequent changes in the derivative’s fair value in earnings.
In addition, we evaluate the terms of our operating agreements and other contracts, if any, to determine whether they contain embedded components that are required to be bifurcated and accounted for separately as derivative financial instruments.
For additional detailed information regarding derivatives, see Note
(8)
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
Derivatives.(f) Stock-based compensation
The Company recognizes compensation expense for restricted stock awards, restricted stock units to be settled in common stock (“RSUs”), performance basedperformance-based RSU award (“PSUs”), and non-qualified stock options (“stock options”) based on the fair value of the awards at the date of grant. The fair value of restricted stock awards and RSUs is determined based on the number of shares or RSUs granted and the closing price of the Company’s common stock on the date of grant. The fair value of stock options is determined by applying the Black-Scholes model to the grant-date market value of the underlying common shares of the Company. The fair value of PSUs with market conditions is determined using a Monte Carlo simulation method. The Company has elected to recognize forfeiture credits for these awards as they are incurred, as this method best reflects actual stock-based compensation expense.
Compensation expense from time-based restricted stock awards, RSUs, PSUs, and stock options is amortized on a straight-line basis over the requisite service period, which is generally the vesting period.
Deferred compensation expense associated with liability-based awards, such as deferred stock awards that are expected to settle with the issuance of a variable number of shares based on a fixed monetary amount at inception, is recognized at the fixed monetary amount at inception and is amortized on a straight-line basis over the requisite service period, which is generally the vesting period. Upon settlement, the holders receive an amount of common stock equal to the fixed monetary amount at inception, based on the closing price of the Company’s stock on the date of settlement.
Tax deductions on the stock-based compensation awards are not realized until the awards are vested or exercised. The Company recognizes deferred tax assets for stock-based compensation awards that will result in future deductions on its income tax returns, based on the amount of tax deduction for stock-based compensation recognized at the statutory tax rate in the jurisdiction in which the Company will receive a tax deduction. If the tax deduction for a stock-based award is greater than the cumulative GAAP compensation expense for that award upon realization of a tax deduction, an excess tax benefit will be recognized and recorded as a favorable impact on the effective tax rate. If the tax deduction for an award is less than the cumulative GAAP compensation expense for that award upon realization of the tax deduction, a tax shortfall will be recognized and recorded as an unfavorable impact on the effective tax rate. Any excess tax benefits or shortfalls will be recorded as discrete, adjustments in the period in which they occur. The
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
cash flows resulting from any excess tax benefit will be classified as financing cash flows in the condensed consolidated statementsCondensed Consolidated Statements of cash flows.Cash Flows.
The Company provides its employees with the option to settle income tax obligations arising from the vesting of their restricted or deferred stock-based compensation awards by withholding shares equal to such income tax obligations. Shares acquired from employees in connection with the settlement of the employees’ income tax obligations are accounted for as treasury shares that are subsequently retired. Restricted stock awards, RSUs, and PSUs are not considered issued and outstanding for purposes of earnings per share calculations until vested.
For additional information, see Note (10) Stock-Based Compensation.Compensation.
(3) C&J MergerAlamo Acquisition
On OctoberAugust 31, 20192021 (the “C&J“Alamo Acquisition Date”), the Company completed the C&J MergerAlamo Acquisition in accordance with the terms of the Purchase Agreement, and Plan of Merger, dated as of June 16, 2019August 4, 2021 (the "Merger Agreement"“Purchase Agreement”), by and among the Company, NexTier C&J and King Merger Sub Corp.Completion Solutions Inc., a wholly owned subsidiary of NexTier ("Merger Sub"), pursuant to which Merger Sub merged with and into C&J, with C&J surviving the merger as a wholly owned subsidiary of NexTier, and immediately following the C&J Merger, C&J was merged with and into King Merger Sub IIAlamo Frac Holdings, LLC, ("LLC Sub"), with LLC Sub continuing as the surviving entity as a wholly-owned subsidiary of NexTierAlamo and the successor in interest to C&J.“owner group” identified therein. The Company acquired 100% of Alamo.
The C&J MergerAlamo Acquisition was completed for totalcash consideration of approximately $485.1$100.0 million, consisting of (i) equity consideration in the form of 105.926 million shares of Keanethe Company's common stock issuedvalued at $82.3 million, post-closing services valued at $30 million, an estimated $15.9 million of contingent consideration, $7.4 million of non contingent consideration, and a net working capital settlement to C&J stockholders with a valuebe finalized in the fourth quarter of $481.9 million2021. The contingent consideration includes the Tier II Upgrade Payment and (ii) replacement share based compensation awards attributable to pre-merger services with a valuethe Earnout Payments, which are contingent upon the achievement of $3.2 million.certain performance targets, as described in the Purchase Agreement.
The Company accounted for the C&J MergerAlamo 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 values at the date of the acquisition. The majoritymeasurements of the measurements ofsome assets acquired and liabilities assumed, aresuch as intangible assets and the earnout were based on inputs that are not observable in the market and thus represent Level 3 inputs. The fair value of acquired inventory and property and equipment iswere based on both available market data and a cost approach.
The following table summarizes the fair value of the financialconsideration transferred in the Alamo Acquisition and the allocation of the purchase price to the fair values of the assets acquired includes trade receivables with a fair value of $312.6 million. The gross amount due underand liabilities assumed at the contracts is $322.8 million, of which $10.2 million was determined to beAlamo Acquisition Date:
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
uncollectible. A liability of $40.2 million has been recognized for legal reserves and sales and use tax assessments. As of September 30, 2020, there has been no change in the amount recognized for the liability or any change in the range of outcomes or assumptions used to develop the estimates on October 31, 2019.
The preliminary purchase price has been allocated to the net assets acquired and liabilities assumed based upon their estimated fair values. The estimated fair values of certain assets and liabilities, including accounts receivable, taxes (including uncertain tax positions), and contingencies require significant judgments and estimates. C&J is subject to the legal and regulatory requirements, including but not limited to those related to environmental matters and taxation. The Company has conducted a preliminary assessment of liabilities arising from these matters and has recognized provisional amounts in its initial accounting for the C&J Merger for all identified liabilities in accordance with the requirements of ASC Topic 805. Certain data necessary to complete the purchase price allocation is not yet available, including, but not limited to, valuation of pre-acquisition contingencies and final tax returns that provide underlying tax basis of assets acquired and liabilities assumed. However, the Company is continuing its review of these matters during the measurement period, and if new information obtained about facts and circumstances that existed at the acquisition date identifies adjustments to the liabilities initially recognized, as well as any additional liabilities that existed at the acquisition date, the acquisition accounting will be revised to reflect the resulting adjustments to the provisional amounts initially recognized. As a result, the provisional measurements below are preliminary and subject to change during the measurement period and such changes could be material. The Company will finalize the purchase price allocation during the 12-month period following the acquisition date, during which time the value of the assets and liabilities may be revised as appropriate. The Company continues to assess the fair values of the assets acquired and liabilities assumed.
The following table summarizes the fair value of the consideration transferred in the C&J Merger and the preliminary allocation of the purchase price to the fair values of the assets acquired and liabilities assumed at the C&J Merger Date:
| | | | | | | | | | | | | | | | |
Total Purchase Consideration: | | | | | | Purchase Price Allocation as of September 30, 2020 | | | | |
(Thousands of Dollars) | | | | | | | | | | |
Equity considerationTotal Purchase Consideration | | (Thousands of Dollars) |
| Cash consideration(1) | | $ | 481,912100,000 | | | | | |
Replacement awards attributable to pre-combinationEquity consideration | | 82,323 | |
Post close services | | | | | | 3,21230,000 | | | | | |
Less: Cash acquiredContingent consideration | | 15,944 | |
Non contingent consideration | | (68,807)7,370 | | | | | |
Total purchase consideration | | | | | | 416,317235,637 | | | | | |
| | |
Cash | | | | | | | |
| | | | | | | | | 7,419 | |
Trade and accounts receivable | | | | | | 312,62050,619 | | | | | |
Inventories | | | | | | 43,1421,726 | | | | | |
Prepaid and other current assets | | 19,654 | |
Assets held for sale | | 18,5123,282 | | | | | |
Property and equipment | | | | | | 311,886114,705 | | | | | |
Intangible assets | | | | | | 17,59027,113 | | | | | |
Right of useFinance lease right-of-use assets | | | | | | 24,31835,813 | | | | | |
Other noncurrent assets | | | | | | 4,4091,676 | | | | | |
Total identifiable assets acquired | | | | | | 732,477262,007 | | | | | |
Accounts payable | | | | | | 43,62039,101 | | | | | |
Accrued expenses | | | | | | 236,95938,000 | | | | | |
Current maturities of long-term finance lease liabilities | | | | | | | | | 10,125 | |
Short termLong-term finance lease liability | | | | liabilities | | 7,84225,688 | | | | | |
Long term lease liability | | | | | | 15,517 | | | | | |
Non-current liabilities | | | | | | 17,156971 | | | | | |
Total liabilities assumed | | | | | | 321,094113,885 | | | | | |
Goodwill | | | | | | 4,93487,515 | | | | | |
Total purchase consideration | | | | | | $ | 416,317235,637 | | | | | |
| | | | | | | | | | |
(1)Includes $32.3 million of payments for indebtedness on behalf of Alamo.
Goodwill is calculated as the excess of the consideration transferred over the fair value of the net assets acquired. All the goodwill recognized for the Alamo acquisition is recognized in the Completions segment and is tax deductible with an amortization period of 15 years. The goodwill in this acquisition was primarily attributable to Alamo's organized workforce and potential synergies.
Intangible assets related to the Alamo acquisition consisted of the following: | | | | | | | | | | | | | | |
| | (Thousands of Dollars) |
| | Weighted average remaining amortization period (Years) | | Gross Carrying Amounts |
Trademarks | | 1.5 | | $ | 2,409 | |
Non-compete agreements | | 3 | | 1,310 | |
Customer relationships | | 7.33 | | 23,394 | |
Total | | | | $ | 27,113 | |
For the valuation of the customer relationship intangible asset within the Completions Services segment, management used the income based multi-period excess earning method, which utilized contributory asset charges. Under this method, the Company calculated earnings derived from the existing customer relationships and then deducted portions of the earnings that could be attributed to supporting assets that contribute to the generation of said earnings. Estimated cash flows were discounted at the cost of equity based on the assumption that the intangible asset would be financed with 100% equity. For the valuation of the trademarks intangible asset
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
within the Completions Services segment, management used the relief from royalty method to reflect the after tax royalty savings attributable to owning the intangible asset. Management used the return on asset method to determine an implied royalty rate since a royalty rate was not available in the Company's industry. For the valuation of the non-compete agreements intangible asset within the Completions Services segment, management used the incremental cash flow (''with/without") method.
The Company has recognized $19.0 million in indemnification assets related to an ongoing sales & use tax audit and other indemnified liabilities under the Purchase Agreement.
The following transactions were recognized separately from the acquisition of assets and assumptions of liabilities in the Alamo Acquisition. Merger costs consist of legal and professional fees. Integration costs consist of expenses incurred to integrate Alamo's operations with that of the Company, including retention bonuses and severance payments. The expenses for all these transactions were expensed as incurred and are presented in Merger and integration in the condensed consolidated statements of operations and comprehensive loss. | | | | | | | | | | | | | | |
| | (Thousands of Dollars) |
Transaction Type | | Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 |
Merger | | $ | 4,552 | | | $ | 4,662 | |
Integration | | 200 | | | 268 | |
Total merger and integration costs | | $ | 4,752 | | | $ | 4,930 | |
The following combined pro forma information assumes the Alamo Acquisition occurred on January 1, 2020. The pro forma information presented below is for illustrative purposes only and does not reflect future events that occurred after September 30, 2021 or any operating efficiencies or inefficiencies that resulted from the Alamo Acquisition. The information is not necessarily indicative of results that would have been achieved had the Company controlled Alamo during the period presented. Pro forma adjustments related to the elimination of historical interest expense for debt paid off as part of the Alamo Acquisition were $2.7 million and $5.4 million for the nine months ended September 30, 2021 and 2020, respectively. | | | | | | | | | | | | | | |
| | (Thousands of Dollars) |
| | Unaudited |
| | Nine Months Ended September 30, |
| | 2021 | | 2020 |
Revenue | | $ | 1,124,136 | | | $ | 1,170,276 | |
Net income (loss) | | (116,291) | | | (266,435) | |
| | | | |
Net income (loss) per share (basic) | | (0.48) | | | (1.11) | |
Net income (loss) per share (diluted) | | (0.48) | | | (1.11) | |
| | | | |
| | | | |
| | | | |
The Company’s condensed consolidated statement of operations and comprehensive loss for the three months ended and nine months ended September 30, 2021 includes revenue of $34.8 million and net income of $3.0 million from the Alamo operations, from September 1, 2021 to September 30, 2021.
As of September 30, 2021, there have been no changes to the fair value of the contingent consideration compared to the Acquisition Date.
(4) Goodwill
Goodwill may beis allocated across 23 reporting units: Completion Services, and Well Construction and Intervention Services.Services and Well Support Services reporting units. At the reporting unit level, the Company tests goodwill for impairment on an annual basis as of October 31 of each year, or when events or changes in circumstances, referred to as triggering events, indicate the carrying value of goodwill may not be recoverable and that a potential impairment exists.
Judgment is used in assessing whether goodwill should be tested for impairment more frequently than annually. Factors such as unexpected adverse economic conditions, competition, market changes, and other external events may require more frequent assessments.
During the first quarter of 2020, a significant decline in the Company's share price, which resulted in the Company's market capitalization dropping below the book value of equity, as well as reductions in commodity prices driven by the potential impact of the
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
COVID-19 pandemic and global supply and demand dynamics were deemed triggering events that led to a test for goodwill impairment. The Step 1 impairment testing methodologies for the first quarter 2020 are discussed below.
During the third quarter of 2020, the Company assessed and determined the sustained reductions in commodity prices and continuing market economic disruptions as a triggering event. As a result of the triggering event, the Company performed a test for goodwill impairment using the same methodologies used in the first quarter of 2020; however, 0 impairment of goodwill was recorded.
Income approach
The income approach impairment testing methodology is based on a discounted cash flow model, which utilizes present values of cash flows to estimate fair value. For the Completions and Well Construction and Intervention reporting units, the future cash flows were projected based on estimates of projected revenue growth, unit count, utilization, pricing, gross profit rates, SG&A rates, working capital fluctuations and capital expenditures. Forecasted cash flows took into account known market conditions as of March 31, 2020, and management’s anticipated business outlook. A terminal period was used to reflect an estimate of stable, perpetual growth. The terminal period reflects a terminal growth rate of 2.5%. The future cash flows were discounted using a market-participant risk-adjusted weighted average cost of capital (“WACC”) of 19.9% for the Completions reporting unit and 22.4% for the Well Construction and Intervention reporting unit. These assumptions were derived from both observable and unobservable inputs and combined reflect management’s judgments and assumptions.
Market approach
The market approach impairment testing methodology is based upon the guideline public company method and the guideline transaction method. The application of the guideline public company method was based upon selected public companies operating within the same industry as the Company. Based on this set of comparable competitor data, operational multiples were derived for the reporting units weighted based on management’s assessment of reliability. The selected market multiples for the guideline public company method were forward-looking enterprise value to revenue and enterprise value to EBITDA multiples, with multiples ranging from 0.5x to 0.6x for revenues and from 3.3x to 6.2x for EBITDA. The application of the guideline transaction method was based upon valuation multiples derived from actual control transactions for comparable companies. Based on this, valuation multiples are derived from historical data of selected transactions, then evaluated and adjusted, if necessary, based on the strengths and weaknesses of the subject reporting unit relative to each acquired guideline company. The selected market multiples for the guideline transaction method were enterprise value to revenue and enterprise value to book value of invested capital, with multiples ranging from 0.7x to 2.1x for revenues and from 0.6x to 1.3x for book value of invested capital.
The fair value determined under the market approach is sensitive to these market multiples, and a decline in any of the multiples could reduce the estimated fair value of the reporting unit below its carrying value. Earnings estimates were derived from unobservable inputs that require significant estimates, judgments and assumptions as described in the income approach.
Reconciliation of value and goodwill impairment conclusion
The estimated fair value determined under the income approach was consistent with the estimated fair value determined under the market approach. The concluded fair value for both reporting units consisted of a weighted average, with a 40.0% weighted under the income approach and 60.0% weight under the market approach. Market data in support of the implied control premium were used in this reconciliation to corroborate the estimated reporting unit fair values with the Company's overall market-indicated value. The results of the Step 1 impairment testing for goodwill resulted in the Company recognizing an impairment expense of $32.6 million during the first quarter of 2020, consisting of $32.2 million related to the Completions Services reporting unit and $0.4 million representing the entire balance of goodwill for the Well Construction and Intervention reporting unit.
The Company assessed and determined there were not any triggering events in the first three quarters of 2021.
During the second quarter of 2021, the Company completed an acquisition for total cash consideration of $2.5 million. The transaction resulted in additional goodwill of $0.7 million recorded under the Completion Services reporting unit.
During the third quarter of 2021, the Company acquired Alamo for total transaction valuation of $235.6 million. The transaction resulted in additional goodwill of $87.5 millionrecorded under the Completion Services reporting unit.
| | | | | |
| (Thousands of Dollars) |
Goodwill as of December 31, 2020 | $ | 104,198 | |
Completions Acquisition | 733 | |
Alamo Acquisition | 87,515 | |
Goodwill as of September 30, 2021 | $ | 192,446 | |
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
(5) Inventories, net
Inventories, net, consisted of the following as of September 30, 2021 and December 31, 2020:
| | | | | | | | | | | | | | |
| | (Thousands of Dollars) |
| | September 30, 2021 | | December 31, 2020 |
Sand, including freight | | $ | 10,911 | | | $ | 5,096 | |
Chemicals and consumables | | 4,437 | | | 2,993 | |
Materials and supplies | | 22,760 | | | 21,979 | |
| | | | |
Total inventory, net | | $ | 38,108 | | | $ | 30,068 | |
Inventories are reported net of obsolescence reserves of $5.4 million and $4.4 million as of September 30, 2021 and December 31, 2020, respectively. The Company recognized $0.6 million and $0.1 million of obsolescence expense during the three months ended September 30, 2021 and 2020, respectively. The Company recognized $1.0 million and $3.8 million of obsolescence expense during the nine months ended September 30, 2021 and 2020. Additionally, during the three and nine months ended September 30, 2020, the Company recognized a $2.7 million write-down in inventory carrying value down to its net realizable value.
(6) Long-Term Debt
Long-term debt at September 30, 2021 and December 31, 2020 consisted of the following:
| | | | | | | | | | | | | | |
| | (Thousands of Dollars) |
| | September 30, 2021 | | December 31, 2020 |
2018 Term Loan Facility | | $ | 338,625 | | | $ | 341,250 | |
2021 Equipment Loan | | 39,428 | | | — | |
Less: Unamortized debt discount and debt issuance costs | | (5,031) | | | (5,710) | |
Total debt, net of unamortized debt discount and debt issuance costs | | 373,022 | | | 335,540 | |
Less: Current portion | | (11,186) | | | (2,252) | |
Long-term debt, net of unamortized debt discount and debt issuance costs | | $ | 361,836 | | | $ | 333,288 | |
Below is a summary of the Company’s credit facilities outstanding as of September 30, 2021:
| | | | | | | | | | | | | | | | | | | | |
| | | | (Thousands of Dollars) |
| | 2021 Equipment Loan | | 2019 ABL Facility | | 2018 Term Loan Facility |
Original facility size | | $ | 46,500 | | | $ | 450,000 | | | $ | 350,000 | |
Outstanding balance | | $ | 39,428 | | | $ | — | | | $ | 338,625 | |
Letters of credit issued | | $ | — | | | $ | 23,200 | | | $ | — | |
Available borrowing base commitment | | n/a | | $ | 154,131 | | | n/a |
Interest Rate(1) | | 5.25 | % | | LIBOR or base rate plus applicable margin | | LIBOR or base rate plus applicable margin |
Maturity Date | | June 1, 2025 | | October 31, 2024 | | May 25, 2025 |
(1) London Interbank Offer Rate (“LIBOR”) is subject to a 1.00% floor
Maturities of the 2018 Term Loan Facility and the 2021 Equipment Loan for the next five years are presented below:
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
The changes in the carrying amount of goodwill from December 31, 2019 to September 30, 2020 were as follows: | | | | | | | | |
(Thousands of Dollars) | | |
Year-end December 31, | | |
2021 | | $ | 2,351 | |
2022 | | 13,634 | |
2023 | | 14,187 | |
2024 | | 14,768 | |
2025 | | 333,113 | |
| | $ | 378,053 | |
| | | | | |
| (Thousands of Dollars) |
Goodwill as of December 31, 2019 | 137,458 | |
Disposition of Well Support Services reporting unit | (660) | |
Impairment expense | (32,600) | |
Goodwill as of September 30, 2020 | $ | 104,198 | |
(5) Inventories, net
Inventories, net, consisted of the following as of September 30, 2020 and December 31, 2019:
| | | | | | | | | | | | | | |
| | (Thousands of Dollars) |
| | September 30, 2020 | | December 31, 2019 |
Sand, including freight | | $ | 2,629 | | | $ | 4,405 | |
Chemicals and consumables | | 3,367 | | | 11,408 | |
Materials and supplies | | 24,203 | | | 45,828 | |
| | | | |
Total inventory, net | | $ | 30,199 | | | $ | 61,641 | |
Inventories are reported net of obsolescence reserves of $5.6 million and $1.8 million as of September 30, 2020 and December 31, 2019, respectively. The Company recognized $0.1 million and $0.2 million of obsolescence expense during the three months ended September 30, 2020 and 2019, respectively. The Company recognized $3.8 million and $0.6 million of obsolescence expense during the nine months ended September 30, 2020 and 2019, respectively. Additionally, during the three and nine months ended September 30, 2020, the Company recognized a$2.7 million write-down in inventory carrying value down to its net realizable value.
(6) Long-Term Debt
Long-term debt at September 30, 2020 and December 31, 2019 consisted of the following:
| | | | | | | | | | | | | | |
| | (Thousands of Dollars) |
| | September 30, 2020 | | December 31, 2019 |
2018 Term Loan Facility | | $ | 342,125 | | | $ | 344,750 | |
| | | | |
Less: Unamortized debt discount and debt issuance costs | | (6,018) | | | (7,127) | |
Total debt, net of unamortized debt discount and debt issuance costs | | 336,107 | | | 337,623 | |
Less: Current portion | | (2,263) | | | (2,311) | |
Long-term debt, net of unamortized debt discount and debt issuance costs | | $ | 333,844 | | | $ | 335,312 | |
Below is a summary of the Company’s credit facilities outstanding as of September 30, 2020:
| | | | | | | | | | | | | | |
| | (Thousands of Dollars) |
| | 2019 ABL Facility | | 2018 Term Loan Facility |
Original facility size | | $ | 450,000 | | | $ | 350,000 | |
Outstanding balance | | $ | 0 | | | $ | 342,125 | |
Letters of credit issued | | $ | 28,840 | | | $ | 0 | |
Available borrowing base commitment | | $ | 65,573 | | | n/a |
Interest Rate(1) | | LIBOR or base rate plus applicable margin | | LIBOR or base rate plus applicable margin |
Maturity Date | | October 31, 2024 | | May 25, 2025 |
(1) London Interbank Offer Rate (“LIBOR”) is subject to a 1.00% floor
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
Maturities of the 2018 Term LoanABL Revolving Credit Facility for the next five years are presented below:
| | | | | | | | |
(Thousands of Dollars) | | |
Year-end December 31, | | |
2020 | | $ | 875 | |
2021 | | 3,500 | |
2022 | | 3,500 | |
2023 | | 3,500 | |
2024 | | 3,500 | |
| | $ | 14,875 | |
On October 31, 2019, the Company entered into the Second Amended and Restated Asset-Based Revolving Credit Agreement (“2019 ABL Facility”), modifying the Company’s pre-existing asset-based revolving credit facility (“2017 ABL Facility”). Deferred charges associated with the 2019 ABL Facility were capitalized and totaled $1.2 million. In connection with the modification of the 2017 ABL Facility, the Company wrote off $0.5 million of deferred financing costs. The remaining deferred financing costs related to the 2017 ABL Facility will be amortized over the life of the 2019 ABL Facility. Unamortized deferred charges associated with the 2019 and 2017 ABL Facilities were $2.5 million and $3.1 million as of September 30, 2021 and December 31, 2020, respectively, and are recorded in other noncurrent assets on the consolidated balance sheets. During the first quarter of 2020, the Company provided notice to the lenders to borrow a total of $175 million under the 2019 ABL Facility. The interest rates for the $150.0 million LIBOR borrowing and $25.0 million Base Rate borrowing were 2.125% and 3.75%, respectively. During the second quarter of 2020, the Company repaid the $150.0 million LIBOR borrowing and the $25.0 million Base Rate borrowing and did not incur any penalties.
Equipment Loan
On August 20, 2021, the Company entered into the Master Loan and Security Agreement (the “Master Agreement”) with Caterpillar Financial Services Corporation. The Master Agreement provides for secured equipment financing term loans in an aggregate amount of up to $46.5 million (the “Equipment Loans”). The Equipment Loans may be drawn in multiple tranches, with each loan evidenced by a separate promissory note. On September 3, 2021 entered into a term note for $39.4 million (the “Note”) for an equipment financing loan. The Note will bear interest at a rate of 5.25% per annum and has a maturity date of June 1, 2025. The Company will amortize $0.2 million in debt issuance costs and debt discount over the life of the loan.
(7) Significant Risks and Uncertainties
Subsequent to the sale of the Well Support Services segment, the Company operates in 2 reportable segments: Completion Services and Well Construction and Intervention with significant concentration in the Completion Services segment. During the three months ended September 30, 20202021 and 2019,2020, sales to Completion Services customers represented 94%93% and 99%94% of the Company's consolidated revenue, respectively. During the nine months ended September 30, 20202021 and 2019,2020, sales to Completion Services customers represented 86%92% and 98%86% of the Company's consolidated revenue, respectively.revenue.
The Company depends on its customers' willingness to make operating and capital expenditures to explore for, develop and produce oil and natural gas onshore in the U.S. This activity is driven by many factors, including current and expected crude oil and natural gas prices. The U.S. energy industry experienced a significant downturn in the second half of 2014 through early 2016, driven primarily by global oversupply and a decline in commodity prices. From early 2016 through late 2018, the U.S. generally experienced some recovery in commodity prices and drilling and completion activity. Over this time frame, the U.S. active rig count increased from a trough of 404 rigs in May 2016 to a peak of 1,083 rigs in December 2018, driving significant demand for the Company's completion services. From December 28, 2018 through December 31, 2019, U.S. active rig count decreased by approximately 26% to 805 rigs, as market conditions tightened and competition within the completions industry increased.
In late 2019 and early 2020, and in response to the oversupply of hydraulic fracturing equipment, an increasing number of horsepower retirements were announced, removing a significant base of equipment from the market. Despite some of these announcements, the oversupply of hydraulic fracturing equipment persisted, resulting in a continuation of highly competitive market conditions into 2020.
In late first quarter of 2020, the industry faced sudden and unprecedented circumstances, including major shocks to both supply and demand. COVID-19 has resulted in significant demand destruction for oil products, driven by a significant slowdown in economic activity throughout the U.S. and abroad.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
This resulted in a rapid and significant decline in crude oil prices and an increasingly utilized storage network, limiting distribution outlets and optionality for production and further exacerbating price declines. U.S. exploration and production companies responded with drastic reductions in budgets and outright completion stoppages. FromAs a result, from the end of the fourthfirst quarter of 20192020 to the third quarter of 2020, the average U.S. active rig count decreased by approximately 68% to 254 rigs.
Commodity prices have recovered from the 2020 downturn, and oil and natural gas prices are both trading above pre-COVID-19 levels. The rig count averaged 496 in the third quarter of 2021, 95% higher than the third quarter of 2020. The rig count was 521 at the end of the third quarter of 2020, U.S. active rig count decreased by 68%, from 805 to 261 rigs.
This backdrop has drastically impacted the demand for U.S. completions services and resulted in increased uncertainty. While activity has modestly improved relative to the trough in activity experienced in late May / early June 2020, and supply / demand dynamics are improving, the market remains highly competitive. The magnitude, cadence and lasting power of activity improvement is uncertain and dependent on a range of factors including COVID-19 demand resolution.2021.
For the three months ended September 30, 2020 the Company had fourSignificant customers are those that individually accounted for 10% of more of the Company's consolidated revenue and collectively represented 59%. For the three months ended September 30, 2019, the
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
Company' had four customers that individually accountedaccount for 10% or more of the Company's consolidated revenue or total accounts receivable. For the three months ended September 30, 2021, revenue from one customer individually represented more than 10% of the Company's consolidated revenue. This customer represented 15% or $60.8 million of our consolidated revenue in the Completions Services segment. For the three months ended September 30, 2020, revenue from four customers individually represented more than 10% of the Company's consolidated revenue. These customers represented 19% or $30.6 million, 14% or $22.7 million, 13% or $22.2 million and collectively13% or $21.9 million, respectively, of our consolidated revenue in the Completions Services segment.
For the nine months ended September 30, 2021, revenue from one customer individually represented 59%.more than 10% of the Company's consolidated revenue. This customer represented 12% or $113.6 million of our consolidated revenue in the Completions Services segment. For the nine months ended September 30, 2020, the Company's hadrevenue from two customer thatcustomers individually accounted for 31%represented more than 10% of the Company's consolidated revenue. These customers represented 16% or $161.9 million and 15% and $142.7 million, respectively, of our consolidated revenue in the Completions Services segment.
For the three months ended September 30, 2021, purchases from the Company's top supplier represented approximately 5% of the Company's overall purchases, while for the nine months ended September 30, 2019,2021, the Company' had four individual customers that accounted for 10% or moreCompany's top supplier represented approximately 6% of the Company's consolidated revenue and collectively represented 60%.
overall purchases. For the three months ended September 30, 2020, purchases from the Company's top supplier represented approximately 7% of the Company's overall purchases. For the nine months ended September 30, 2020, purchases from the Company's top supplier represented approximately 5% of the Company's overall purchases. For the three and nine months ended September 30, 2019, purchases from the Company's top supplier represented approximately 5% of the Company's overall purchases.
(8) Derivatives
The Company uses interest-rate-related derivative instruments to manage its variability of cash flows associated with changes in interest rates on its variable-rate debt.
On March 9, 2020, the Company sold its Well Support Services segment to Basic Energy Services, Inc. (“Basic”) for $93.7 million of total proceeds, including $59.4 million in cash, before transaction costs, escrowed amounts, and subject to customary working capital adjustments, for a net of $53.3 million received at close, and $34.4 million of par value Senior Secured Notes, with 10.75% coupon rate, (“WSS Notes”) previously issued by Basic. On July 29, 2020, the Company agreed to use the escrowed amount in the final settlement of the working capital reconciliation. Under the terms of the agreement, the WSS Notes arewere accompanied by a make-whole guarantee at par value, which guaranteesguaranteed the payment of $34.4 million to NexTier after the WSS Notes arewere held to the one-year anniversary of March 9, 2021. The cash equivalent make-whole iswas issued under a fund guarantee by Ascribe III Investments LLC ("Ascribe"), a private equity investment firm with approximately $1.0 billion in assets under management. In the event of a Basic restructuring or a credit rating downgrade in conjunction with a change in control prior to the one-year anniversary, the make-whole guarantee accelerates the WSS Notes to par value of $34.4 million. NexTier iswas entitled to semi-annual interest payments on the WSS Notes based on the 10.75% annual coupon throughout the holding period. The Company identified the make-whole guarantee as an embedded derivative and bifurcated the valuation of the WSS Note and the make-whole guarantee. The Company elected the fair value option for the WSS Notes at the inception of the transaction. The fair value on the date of the transaction for the make-whole derivative and WSS Notes was $12.2 million and $22.2 million, respectively, and resulted in a gain on divestiture of $8.7 million. The fair value of the WSS Notes and the make-whole guarantee are measured at the end of each reporting period. Gains and losses recognized in relation to these instruments are recognized in net income. The fair value of the WSS Notes and make-whole guarantee arewere recorded in Other Current Assets. See Note (15)(14) Business Segments for further discussion.
On March 31, 2021, the Company received a $34.4 million cash payment from Ascribe in full settlement of the WSS Notes and the make-whole guarantee. At the time of the cash payment, the WSS Notes and make-whole guarantee had a fair value of $33.6 million, resulting in a realized gain on settlement of $0.8 million. This gain is recorded within other income (expense) on the Consolidated Statements of Operations and Comprehensive Loss.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
On May 25, 2018, the Company, and certain subsidiaries of the Company as guarantors, entered into a term loan facility (the "2018 Term Loan Facility") with each lender from time to time party thereto and Barclays Bank PLC, as administrative agent and collateral agent. The 2018 Term Loan Facility has an initial aggregate principal amount of $350.0 million and proceeds were used to repay the Company's pre-existing 2017 term loan facility. The 2018 Term Loan Facility has a variable interest rate based on the London Interbank Offer Rate ("LIBOR"), subject to a 1.0% floor. In June 2018, the Company executed a new off-market interest rate swap effective through March 31, 2025 to hedge 50% of its expected LIBOR exposure matching the swap to the 1-month LIBOR, 1% floor, of the 2018 Term Loan Facility, and terminated the pre-existing interest rate swaps. After completing all appropriate accounting treatment, including the $3.5 million of deferred gains in accumulated other comprehensive loss for the pre-existing interest rate, the new interest rate swap was designated in a new cash flow hedge relationship.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
The following tables present the fair value of the Company's derivative instruments on a gross and net basis as of the periods shown below:
| | | (Thousands of Dollars) | | (Thousands of Dollars) |
| | Derivatives designated as hedging instruments | | Derivatives not designated as hedging instruments | | Gross Amounts of Recognized Assets and Liabilities | | Gross Amounts Offset in the Balance Sheet(1) | | Net Amounts Presented in the Balance Sheet(2) | | Derivatives designated as hedging instruments | | Derivatives not designated as hedging instruments | | Gross Amounts of Recognized Assets and Liabilities | | Gross Amounts Offset in the Balance Sheet(1) | | Net Amounts Presented in the Balance Sheet(2) |
As of September 30, 2020: | | | | | | | | | | |
Other current asset | $ | 0 | | $ | 26,008 | | $ | 26,008 | | $ | 0 | | $ | 26,008 | |
As of September 30, 2021: | | As of September 30, 2021: | | | | | | | | | |
| Other current liability | Other current liability | (2,841) | | 0 | | (2,841) | | 0 | | (2,841) | Other current liability | $ | (2,865) | | $ | — | | $ | (2,865) | | $ | — | | $ | (2,865) |
Other noncurrent liability | Other noncurrent liability | (8,653) | | 0 | | (8,653) | | 0 | | (8,653) | Other noncurrent liability | (5,314) | | — | | (5,314) | | — | | (5,314) |
As of December 31, 2019: | | |
As of December 31, 2020: | | As of December 31, 2020: | |
| Other current asset | | Other current asset | $ | — | | $ | 27,243 | | $ | 27,243 | | $ | — | | $ | 27,243 |
Other current liability | Other current liability | $ | (1,729) | | $ | 0 | | $ | (1,729) | | $ | 0 | | $ | (1,729) | Other current liability | (2,861) | | — | | (2,861) | | — | | (2,861) |
Other noncurrent liability | Other noncurrent liability | (5,559) | | 0 | | (5,559) | | 0 | | (5,559) | Other noncurrent liability | (8,260) | | — | | (8,260) | | — | | (8,260) |
|
(1) Agreements are in place that allow for the financial right of offset for derivative assets and derivative liabilities at settlement or in the event of a default under the agreements.
(2) There are no amounts subject to an enforceable master netting arrangement that are not netted in these amounts. There are no amounts of related financial collateral received or pledged.
The following table presents gains and losses for the Company's interest rate derivatives designated as cash flow hedges (in thousands of dollars):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | |
| | 2020 | | 2019 | | | | 2020 | | 2019 | | | | | | Location |
Amount of loss recognized in total other comprehensive loss on derivative | | $ | (453) | | | $ | (2,120) | | | | | $ | (6,068) | | | $ | (8,664) | | | | | | | OCI |
Amount of gain (loss) reclassified from accumulated other comprehensive loss into earnings | | (673) | | | 56 | | | | | (1,662) | | | 500 | | | | | | | Interest Expense |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | |
| | 2021 | | 2020 | | 2021 | | 2020 | | Location |
Amount of gain (loss) recognized in total other comprehensive loss on derivative | | $ | (46) | | | $ | (453) | | | $ | 785 | | | $ | (6,068) | | | OCI |
Amount of loss reclassified from accumulated other comprehensive loss into earnings | | (694) | | | (673) | | | (2,043) | | | (1,662) | | | Interest Expense |
| | | | | | | | | | |
The gain (loss) recognized in other comprehensive loss for the derivative instrument is presented within hedging activities in the unaudited condensed consolidated statementsCondensed Consolidated Statements of operationsOperations and comprehensive loss.Comprehensive Loss.
There were 0no gains or losses recognized in earnings as a result of excluding amounts from the assessment of hedge effectiveness. Based on recorded values as of September 30, 2020, $2.72021, $2.9 million of net losses will be reclassified from accumulated other comprehensive loss into earnings within the next 12 months.
The Company recognized a loss on the change in fair market value of the WSS Notes and make-whole derivative of $3.8 millionand$1.5 million for the three and nine months ended September 30, 2020, respectively, which is recorded within other income (expense) on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
See Note (9) Fair Value Measurements and Financial Information for discussion on fair value measurements related to the Company's derivative instruments.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
(9) Fair Value Measurements and Financial Information
The Company discloses the required fair values of financial instruments in its assets and liabilities under the hierarchy guidelines, in accordance with GAAP. As of September 30, 2020,2021, the Company's financial instruments consisted of cash and cash equivalents, accounts receivable, equity security investments, accounts payable, accrued expenses, derivative instruments, long-term debt and lease obligations. As of September 30, 20202021 and December 31, 2019,2020, the carrying values of the Company's financial instruments, included in its condensed consolidated balance sheets, approximated or equaled their fair values.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
Recurring Fair Value Measurement
As of September 30, 20202021 the Company has 4 financial instruments measured at fair value on a recurring basis which are its interest rate derivative, make-whole derivative, WSS Notes, see Note (8) Derivatives above, andits equity security investment.investment, the Earnout Payments and Tier II Upgrade Payments related to the Alamo acquisition and as described in the Purchase Agreement. The equity security investment is composed primarily of common equity shares in a publicly traded company, acquired at a fair value of $5.3 million. During the three and nine months ended September 30, 2021, the Company recognized an unrealized loss of$0.5 million and an unrealized loss of $3.2 million, respectively, on its equity security investment, which is recorded within other income (expense) on the Condensed Consolidated Statements of Operations and Comprehensive Loss.
As of December 31, 2020, the Company had 4 financial instrument measured on a recurring basis which was its interest rate derivative, make-whole derivative, WSS Notes, see Note (8) Derivatives above, and equity security investment. The interest rate derivative, make-whole derivative, WSS Notes, and the equity security investment are presented within other current assets in the condensed consolidated balance sheets. As of December 31, 2019, the Company had 1 financial instrument measured on a recurring basis which was its interest rate derivative.
The fair market value of the financial instruments reflected on the condensed consolidated balance sheets as of September 30, 20202021 and December 31, 20192020 were determined using industry-standard models that consider various assumptions, including current market and contractual rates for the underlying instrument, time value, implied volatilities, nonperformance risk as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument and can be supported by observable data.
The following tables present the placement in the fair value hierarchy of assets and liabilities that were measured at fair value on a recurring basis at September 30, 20202021 and December 31, 20192020 (in thousands of dollars):
| | | Fair value measurements at reporting date using | | Fair value measurements at reporting date using |
| | September 30, 2020 | | Level 1 | | Level 2 | | Level 3 | | September 30, 2021 | | Level 1 | | Level 2 | | Level 3 |
Assets: | Assets: | | | | | | | | | Assets: | | | | | | | | |
Make-whole derivative | | $ | 26,008 | | $ | 0 | | $ | 26,008 | | $ | 0 | |
WSS Note | | 6,940 | | 0 | | 6,940 | | 0 | |
Equity security investment | Equity security investment | | 4,158 | | 4,158 | | 0 | | 0 | Equity security investment | | $ | 4,702 | | $ | 4,702 | | $ | — | | $ | — |
Liabilities: | Liabilities: | | Liabilities: | |
| Earnout Payments | | Earnout Payments | | $ | (9,424) | | $ | — | | $ | — | | | $ | (9,424) |
Tier II Upgrade Payment | | Tier II Upgrade Payment | | $ | (6,520) | | $ | — | | $ | (6,520) | | | $ | — |
Interest rate derivative | Interest rate derivative | | $ | (11,494) | | $ | 0 | | $ | (11,494) | | | $ | 0 | Interest rate derivative | | $ | (8,179) | | $ | — | | $ | (8,179) | | | $ | — |
| | | Fair value measurements at reporting date using | | Fair value measurements at reporting date using |
| | December 31, 2019 | | Level 1 | | Level 2 | | Level 3 | | December 31, 2020 | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | Assets: | | | | | | | | |
Make-whole derivative | | Make-whole derivative | | $ | 27,243 | | $ | — | | $ | 27,243 | | $ | — |
WSS Note | | WSS Note | | 6,322 | | — | | 6,322 | | — |
Equity security investment | | Equity security investment | | 11,263 | | 11,263 | | — | | — |
Liabilities: | Liabilities: | | | | | | | | | Liabilities: | |
| Interest rate derivative | Interest rate derivative | | $ | (7,288) | | $ | 0 | | $ | (7,288) | | $ | 0 | Interest rate derivative | | $ | (11,121) | | $ | — | | $ | (11,121) | | $ | — |
Non-Recurring Fair Value Measurement
The fair values of indefinite-lived assetsAt March 31, 2020 and long-lived assets areSeptember 30, 2020, the Company determined with internal cash flow models based on significant unobservable inputs. The Company measures the fair value of its property, plant and equipment using the discounted cash flow method, the fair value of its customer contracts using the multi-period excess earning method and income based "with and without" method, the fair value of its trade names and acquired technology using the "income-based relief-from-royalty" method and the fair value of its non-compete agreement using the "lost income" approach.
Given the unobservable nature of the inputs used in the Company's internal cash flow models, the cash flows models are deemed to use Level 3 inputs.
In the first quarter of 2020, the reductions in commodity prices driven by the potential impact of the novel COVID-19 virus and global supply and demand dynamics represented triggering events that may indicate that the
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
carrying value of the Company's indefinite-lived assets and long-lived assets may not be recoverable asrecoverable. After further evaluation, the Company recognized impairment expense of March 31, 2020. During$32.6 million and no impairment expense in the first and third quarter of 2020, therespectively. See Note (4) Goodwill. The Company assessed and determined there were no triggering events during the sustained reductionsother two quarters in commodity prices2020.
During each quarter of 2021, the Company has assessed and continuing market economic disruptions as adetermined there were no triggering event. See Noteevents.
(4) Goodwill.
Credit Risk
The Company's financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents, derivative contracts and trade receivables.
The Company's cash balances on deposit with financial institutions totaled $305.2$135.5 million and $255.0$276.0 million as of September 30, 20202021 and December 31, 2019,2020, respectively, which exceeded Federal Deposit Insurance Corporation insured limits. The Company regularly monitors these institutions' financial condition.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
The credit risk from the derivative contracts derives from the potential failure of the counterparty to perform under the terms of the derivative contracts. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties, whose Standard & Poor's credit rating is higher than BBB. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features.
The majority of the Company's trade receivables have payment terms of 30 days or less.to 60 days. Significant customers are those that individually account for 10% or more of the Company's consolidated revenue or total accounts receivable. As of September 30, 2020,2021, trade receivables from three customersone customer individually represented 10% or more and collectively represented 48%13% of the Company's total accounts receivable.trade receivables. As of December 31, 2019,2020, trade receivables from the Company's top customer individually represented 10%17% of the Company's total accounts receivable. trade receivables.
The Company mitigates the associated credit risk by performing credit evaluations and monitoring the payment patterns of its customers. The Company has a process in place to collect all receivables within 30 to 60 days of aging. As of September 30, 2020 and December 31, 2019,2021, the Company had $5.1$4.9 million in allowance for credit losses. As of December 31, 2020, the Company had $2.7 million in allowance for credit losses, including the increase resultingof $1.5 million from the adoption of ASU 2016-13,2016-13.
The Company recognized $0.9 million and $0.7$2.1 million in allowance for credit losses,of bad debts, net of recoveries during the three and nine months ended September 30, 2021, respectively. During the third quarter of 2020, the Company recovered $5.3 million of accounts receivable, which resulted in a net credit in bad debt expense of $4.6 million during the three months ended September 30, 2020 and $0.3 million of bad debt expense during the nine months ended September 30, 2020. The Company wrote-off $0.3 million and $0.7 million of bad debts during the three and nine months ended September 30, 2019, respectively
(10) Stock-Based Compensation
Effective as of October 31, 2019, the Company (i) amended and restated the Keane Group, Inc. Equity and Incentive Award Plan under the name NexTier Oilfield Solutions Inc. Equity and Incentive Award Plan (“Equity and Incentive Award Plan”), and (ii) assumed and amended and restated the C&J Energy Services, Inc. 2017 Management Incentive Plan under the name NexTier Oilfield Solutions Inc. (Former C&J Energy) Management Incentive Plan ( “Management Incentive Plan”, and collectively with the Equity and Incentive Award Plan, the “Equity Award Plans”). As part of the C&J Merger, the Company assumed the award agreements outstanding under the Management Incentive Plan on the terms set forth in the Merger agreement.
As of September 30, 2020,2021, the Company has 34 types of stock-based compensation outstanding under its Equity Award Plans: (i) restricted stock awards issued to independent directors and certain executives and employees, (ii) restricted stock units issued to executive officers and key management employees, and (iii) non-qualified stock options issued to executive officers.officers and (iv) performance-based stock units issued to executive officers and key management employees.
The following table summarizes stock-based compensation costs for the three and nine months ended September 30, 20202021 and 20192020 (in thousands of dollars):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | |
| | | | | | 2020 | | 2019 | | 2020 | | 2019 | | | | |
Restricted stock awards | | | | | | $ | 406 | | | $ | 238 | | | $ | 1,192 | | | $ | 859 | | | | | |
Restricted stock time-based unit awards | | | | | | 3,271 | | | 4,166 | | | 15,985 | | | 11,390 | | | | | |
Non-qualified stock options | | | | | | 100 | | | 670 | | | 804 | | | 2,025 | | | | | |
Restricted stock performance-based unit awards | | | | | | 971 | | | 414 | | | 3,170 | | | 851 | | | | | |
Equity-based compensation cost | | | | | | 4,748 | | | 5,488 | | | 21,151 | | | 15,125 | | | | | |
Tax Benefit | | | | | | (1,138) | | | (1,309) | | | (5,076) | | | (3,650) | | | | | |
Equity-based compensation cost, net of tax | | | | | | $ | 3,610 | | | $ | 4,179 | | | $ | 16,075 | | | $ | 11,475 | | | | | |
| | | | | | | | | | | | | | | | |
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | | | | 2021 | | 2020 | | 2021 | | 2020 |
Restricted stock awards | | | | | | $ | 300 | | | $ | 406 | | | $ | 1,065 | | | $ | 1,192 | |
Restricted stock time-based unit awards | | | | | | 4,100 | | | 3,271 | | | 10,318 | | | 15,985 | |
Non-qualified stock options | | | | | | — | | | 100 | | | 76 | | | 804 | |
Restricted stock performance-based unit awards | | | | | | 2,950 | | | 971 | | | 5,983 | | | 3,170 | |
Equity-based compensation cost | | | | | | 7,350 | | | 4,748 | | | 17,442 | | | 21,151 | |
Tax Benefit | | | | | | (1,151) | | | (1,138) | | | (3,573) | | | (5,076) | |
Equity-based compensation cost, net of tax | | | | | | $ | 6,199 | | | $ | 3,610 | | | $ | 13,869 | | | $ | 16,075 | |
Performance-based RSU awards
During the first and second quarter of 2020,2021, the Company issued 1,033,936550,899 and 1,473,736 of performance-basedperformance based RSUs to executive officers under its Equity Award Plans, which were fair valued at $8.5$3.2 million and $13.7 million using a Monte Carlo simulation method. 50% of the performance-based RSUs vest after two years (the "two-year performance-based RSUs"), while the remaining 50% vest after three years (the "three-year performance-based RSUs"). Each vesting is subject to a payout percentage based on the Company's annualized total stockholder return ranking relative to its total stockholder return peer group achieved during the performance period. The number of shares that may be earned at the end of the vesting period ranges from 50%0% to 200% of the target award amount, if the threshold performance criteria is met. These performance-based RSUs will be settled in the Company's common stock and are classified as equity awards. The compensation expense associated with these performance-based RSUs will be amortized into earnings on a straight-line basis. As of September 30, 2020, total unamortized compensation cost related to unvested performance-based RSUs was $5.1 million, which the Company expects to recognize over the weighted-average period of 2.25 years.
During the second quarter of 2020, the Company issued 405,541 of performance-based RSUs to executive officers under its Equity Award Plans, with an estimated value of $1.2 million, based on a 100% target value. The performance RSUs issued by the Company have service and performance conditions. The number of shares that may be earned at the end of the vesting period ranges from 0% to 150% of the target award amount, if the performance criteria is met. These performance-based RSUs will be settled in the Company's common stock and are classified as equity awards. The compensation expense associated with these performance-based RSUs will be amortized into earnings on a straight-line basis. As of September 30, 2020,2021, total unamortized compensation cost related to unvested performance-based RSUs was $1.0$14.6 million, which the Company expects to recognize over the weighted-average period of 1.252.25 years.
(11) Earnings per Share
Basic income or (loss) per share is based on the weighted average number of common shares outstanding during the period. Diluted income or (loss) per share includes additional common shares that would have been outstanding if potential common shares with a dilutive effect, such as stock awards from the Equity Awards Plans, had been issued. Anti-dilutive securities represent potentially dilutive securities which are excluded from the computation of diluted income or (loss) per share as their impact would be anti-dilutive.
A reconciliation of the numerators and denominators used for the basic and diluted net income (loss) per share computations is as follows:follows (in thousands of dollars):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | | 2021 | | 2020 |
Numerator: | Numerator: | | | | | | Numerator: | | | | | | | | |
Net income (loss) | | $ | (102,433) | | | $ | 3,558 | | | $ | (286,677) | | | $ | (23,229) | | | |
Net loss | | Net loss | | $ | (43,994) | | | $ | (102,433) | | | $ | (130,277) | | | $ | (286,677) | |
| Denominator: | Denominator: | | | Denominator: | |
Basic weighted-average common shares outstanding(1) | Basic weighted-average common shares outstanding(1) | | 214,251 | | | 104,899 | | | 213,620 | | | 104,721 | | | Basic weighted-average common shares outstanding(1) | | 224,481 | | | 214,251 | | | 218,499 | | | 213,620 | |
Dilutive effect of restricted stock awards granted to Board of Directors | Dilutive effect of restricted stock awards granted to Board of Directors | | 195 | | | 33 | | | 139 | | | 30 | | | Dilutive effect of restricted stock awards granted to Board of Directors | | — | | | 195 | | | 214 | | | 139 | |
Dilutive effect of time-based restricted stock awards granted under the Equity Plan | Dilutive effect of time-based restricted stock awards granted under the Equity Plan | | 14 | | | 0 | | | 16 | | | 2 | | | Dilutive effect of time-based restricted stock awards granted under the Equity Plan | | 1,166 | | | 14 | | | 957 | | | 16 | |
Dilutive effect of performance-based restricted stock awards granted under the Equity Plan | Dilutive effect of performance-based restricted stock awards granted under the Equity Plan | | 1,221 | | | 327 | | | 981 | | | 327 | | | Dilutive effect of performance-based restricted stock awards granted under the Equity Plan | | 511 | | | 1,221 | | | 321 | | | 981 | |
| Diluted weighted-average common shares outstanding(1) | Diluted weighted-average common shares outstanding(1) | | 215,681 | | | 105,259 | | | 214,756 | | | 105,080 | | | Diluted weighted-average common shares outstanding(1) | | 226,158 | | | 215,681 | | | 219,991 | | | 214,756 | |
|
(1)As a result of the net loss incurred by the Company for the three and nine months ended September 30, 2021 and 2020, the calculation of diluted net loss per share gives no consideration to the potentially anti-dilutive securities shown in the above reconciliation, and as such is the same as basic net loss per share.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
(12)Leases
The Company has operating leases for certain of its corporate offices, field shops, apartments, warehouses, rail cars, frac pumps, trailers, tractors and certain other equipment. The Company also has both operating and finance leases for its light duty vehicles.
The Company's leases have variable payments with annual escalations that are based on the proportion by which the consumer price index ("CPI") for all urban consumers increased over the CPI index for the prior comparative year. The Company's leases have remaining lease terms of less than 1 year to 14 years, some of which include extension and termination option. None of these extension and termination options were used to determine the Company's right-of-use assets ("ROU assets") and lease liabilities, as the Company has not determined it is probable that it will exercise any of these options. None of the Company's leases have residual value guarantees.
Weighted average remaining lease terms are as follows:
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
Operating leases | 4.59 years | | 5.14 years |
Finance leases | 1.98 years | | 2.51 years |
Weighted average discount rate on the Company's lease liabilities are as follows:
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
Operating leases | 8.79% | | 6.62% |
Finance leases | 5.87% | | 5.75% |
Maturities of the Company's lease liabilities as of September 30, 2020, per ASU 2016-02, were as follows:
| | | | | | | | | | | |
| (Thousands of Dollars) |
Year ending December 31, | Operating leases | | Finance leases |
2020 | 6,250 | | $ | 590 | |
2021 | 21,043 | | 1,375 | |
2022 | 10,230 | | 766 | |
2023 | 6,952 | | 125�� | |
2024 | 2,171 | | 0 | |
Thereafter | 10,921 | | 0 | |
Total undiscounted remaining minimum lease payments | 57,567 | | | 2,856 | |
Less imputed interest | (9,013) | | | (140) | |
Total discounted remaining minimum lease payments | $ | 48,554 | | | $ | 2,716 | |
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During the second quarter of 2020, the Company terminated the majority of its light duty vehicles resulting in a write-off of $4.1 million of ROU assets and lease liabilities. The company also wrote-off $0.7 million of ROU assets and lease liabilities as a result of lease contract negotiations. The Company also wrote-off a total of $2.8 million of ROU assets related to the abandonment of facilities, identified as synergies as a result of the Merger.
As of September 30, 2020, the Company does not have additional operating and finance leases that have not yet commenced, nor did the Company have any lease transactions with any of its related parties.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
(13) Commitments and Contingencies
As of September 30, 20202021 and December 31, 2019,2020, the Company had $2.9$0.5 million and $9.0$4.9 million of deposits on equipment, including deposits acquired through the C&J Merger, respectively. Outstanding purchase commitments on equipment were $23.7$60.3 million and $64.0$23.4 million, as of September 30, 20202021 and December 31, 2019,2020, respectively.
Aggregate minimum commitments under long-term raw material supply contracts for the next five years as of September 30, 20202021 are listed below:
| | | (Thousands of Dollars) | | (Thousands of Dollars) |
2020 | $ | 1,011 | | |
2021 | 2021 | 19,455 | | 2021 | $ | 4,204 | |
2022 | 2022 | 14,730 | | 2022 | 19,145 | |
2023 | 2023 | 4,400 | | 2023 | 5,280 | |
2024 | 2024 | 0 | | 2024 | 1,190 | |
2025 | | 2025 | — | |
| | $ | 39,596 | | | $ | 29,819 | |
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Litigation
From time to time, the Company is subject to legal and administrative proceedings, settlements, investigations, claims and actions, as is typical of the industry. These claims include, but are not limited to, contract claims, environmental claims, employment related claims, claims alleging injury or claims related to operational issues. 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 information and other evidence and facts specific to the matter. In accordance with GAAP, the Company accrues for contingencies where the occurrence of a material loss is probable and can be reasonably estimated, based on the Company's best estimate of the expected liability. The Company may increase or decrease its legal accruals in the future, on a matter-by-matter basis, to account for developments in such matters. Notwithstanding the uncertainty as to the final outcome and based upon the information currently available to it, the Company does not currently believe these matters in aggregate will have a material adverse effect on its financial position or results of operations.
Environmental
The Company is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for protection of the environment. The Company cannot predict the future impact of such standards and requirements, which are subject to change and can have retroactive effectiveness. The Company continues to monitor the status of these laws and regulations. Currently, the Company has not been fined, cited or notified of any environmental violations that would have a material adverse effect upon its financial position, liquidity or capital resources. However, management does recognize that by the very nature of the Company's business, material costs could be incurred in the near term to maintain compliance. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions which may be required, the determination of the Company's liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or through indemnification.
Regulatory Audits
Prior to the consummation of the C&J Merger, the Company and C&J had been notified by certain state taxing authorities that these taxing authorities would be conducting routine sales and use tax audits of certain wholly owned operating subsidiaries of the Company for tax periods ranging from January 2011 through December 2019. TheAs of December 31, 2020, the Company hashad recorded estimates of potential assessments for each audit totaling in the aggregate approximately $32.6$33.0 million. For one audit, in particular, the Company disagreesdisagreed with many aspects of the state’s assessment and has begunbegan to contest the state’s position through administrative procedures. TheDuring the first quarter of 2021, the Company will defend its position vigorously through all available procedures including litigation, if necessary. In addition,obtained additional information that resulted in a reduction of the Company's accrual related to this reserve does not taketax audit by $13.3 million. During the second quarter of 2021, the Company further reduced the accrual related to this tax audit by $8.8 million, after taking into account the potential foradditional information obtained, including refund claims relating to such periods that are also pending disposition.periods. The Company received a final settlement offer from Texas Attorney General Office on September 8, 2021 for $3.7 million, which resulted in an additional reduction to the accrual by $2.8 million. These reductions were recorded in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
Alamo is subject to regulatory audits by state taxing jurisdictions it operates in. There was an ongoing tax audit when the Alamo Acquisition was completed. The Company evaluated the potential assessment and exposures for all taxing jurisdictions and recorded an estimate of $17.7 million. The estimate is included in the purchase price allocation disclosed under Note (3) Alamo Acquisition.
(14)(13) Related Party Transactions
Cerberus Operations and Advisory Company, and Cerberus Capital Management, L.P., and Cerberus Technology Solutions LLC, affiliates of the Company's principal equity holder, provide certain consulting services to the Company. The Company paid $0.3$0.1 million and $1.0$0.3 million during the three months ended September 30, 20202021 and 2019,2020, respectively, for these services. The Company paid $2.1$0.3 million and $2.5$2.1 million during the nine months ended September 30, 20202021 and 2019,2020, respectively.
In connection withAs part of the Company's research and development initiatives,Purchase Agreement, the Company has engagedagreed to provide certain post-closing services to Alamo Frac Holdings, LLC valued at $30.0 million in transactions with its equity-method investee. In the first quarter of 2020,aggregate. During the three and nine months ended September 30, 2021, the Company had enough evidenceprovided services to believe that it would not be ableAlamo Frac Holdings, LLC of $3.2 million as part of the Purchase Agreement. The Company has a remaining customer contract liability related to recover its $1.7these services of $26.8 million investment in its equity-method investee completely impaired it. The impairment is recorded in impairment expense in the condensed and consolidated statementas of operations and comprehensive income (loss).September 30, 2021.
(15)(14) Business Segments
In accordance with Accounting Standard Codification (“ASC”) No. 280, Segment Reporting (“ASC 280”), the Company routinely evaluates whether its separate segments have changed. This determination is made based on the following factors: (1) the Company’s chief operating decision maker (“CODM”) is currently managing each operating segment as a separate business and evaluating the performance of each segment and making resource allocation decisions distinctly and expects to do so for the foreseeable future, and (2) discrete financial information for each operating segment is available.
In 2019, due to the transformative nature of the C&J Merger, the CODM changed the way in which the Company is managed, including the level at which to make performance evaluation and resource allocation decisions. Discrete financial information was created to provide the segment information necessary for the CODM to manage the Company under the revised operating segment structure. On March 9, 2020, the Company announced it had completed the divestiture of its Well Support Services segment. As a result of the changes to operating segments, the Company revised its reportable segments subsequent to the completion of the C&J Merger and Well Support Services segment divestiture. For the period from after the C&J merger and prior to the WSS divestiture, the Company’s revised reportable segments were: (i) Completion Services, (ii) Well Construction and Intervention (“WC&I”) and (iii) Well Support Services. Subsequent to the WSS divestiture, the Company's reportable segments were (i) Completion Services, and (ii) Well Construction and Intervention (“WC&I”) Services. This segment structure reflects the financial information and reports used by the Company’s management, specifically including its CODM, to make decisions regarding the Company’s business, including performance evaluation and resource allocation decisions. As a result of the revised reportable segment structure subsequent to the C&J merger, the Company has restated the corresponding items of segment information for all periods presented.
The following is a description of each reportable segment:
Completion Services
The Company’s Completion Services segment consists of the following businesses and service lines: (1) fracturing services; (2) wireline and pumpdown services; and (3) completion support services, which includes the Company's research and technology department.
All of Alamo's financial results are included in the Completions Services segment.
Well Construction and Intervention Services
The Company’s WC&I Services segment consists of the following businesses and service lines: (1) cementing services and (2) coiled tubing services.
Historical Segment:Well Support Services
The Company’s Well Support Services segment consisted of the following businesses and service lines: (1) rig services; (2) fluids management services; and (3) other specialty well site services. On March 9, 2020, the Company completed the divestiture of its Well Support Services segment for $93.7 million of total proceeds, including $59.4 million in cash, before transaction costs, escrowed
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
amounts, and subject to customary working capital adjustments, for a net of $53.3 million received at close, and $34.4 million of par value Senior Secured Notes, with 10.75% coupon rate, ("WSS Notes") previously issued by Basic. This resulted in a gain on divestiture of $8.7 million. The gain is recorded within (Gain) Loss on Disposal of Assets on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).Loss. Income per share for the three months ended March 31, 2020 attributable to the divested Well Support Services segment was less than 0. $0.01. On July 29, 2020, the Company received the escrowed cash amount in final settlement for working capital reconciliation.
On March 31, 2021 the Company received a $34.4 million cash payment from Ascribe in full settlement of the WSS Notes and the make-whole guarantee. At the time of the cash payment, the WSS Notes and make-whole guarantee had a fair value of $33.6 million, resulting in a realized gain on settlement of $0.8 million recorded in other income (expense) on the Consolidated Statements of Operations and Comprehensive Loss.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
The following tables present financial information with respect to the Company’s segments. Corporate and Other represents costs not directly associated with a segment, such as interest expense, income taxes and corporate overhead. Corporate assets include cash, deferred financing costs, derivatives and entity-level machinery equipment.
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| | 2020 | | 2019 | | 2020 | | 2019 | | | | | | | | |
Operations by business segment | | | | | | | | | | | | | | | | |
Revenue: | | | | | | | | | | | | | | | | |
Completion Services | | $ | 154,016 | | | $ | 437,343 | | | $ | 845,864 | | | $ | 1,269,681 | | | | | | | | | |
WC&I | | 9,659 | | | 6,610 | | | 83,734 | | | 23,659 | | | | | | | | | |
Well Support Services | | 0 | | | 0 | | | 57,929 | | | 0 | | | | | | | | | |
Total revenue | | $ | 163,675 | | | $ | 443,953 | | | $ | 987,527 | | | $ | 1,293,340 | | | | | | | | | |
Adjusted gross profit (loss): | | | | | | | | | | | | | | | | |
Completion Services(1) | | $ | 15,145 | | | $ | 109,314 | | | $ | 144,676 | | | $ | 296,749 | | | | | | | | | |
WC&I(1) | | (785) | | | 1,201 | | | 8,811 | | | 1,004 | | | | | | | | | |
Well Support Services(1) | | 0 | | | 0 | | | 12,338 | | | 0 | | | | | | | | | |
Total adjusted gross profit | | $ | 14,360 | | | $ | 110,515 | | | $ | 165,825 | | | $ | 297,753 | | | | | | | | | |
Operating income (loss): | | | | | | | | | | | | | | | | |
Completion Services | | $ | (50,929) | | | $ | 43,505 | | | $ | (110,949) | | | $ | 98,331 | | | | | | | | | |
WC&I | | (4,023) | | | 699 | | | (7,242) | | | (1,003) | | | | | | | | | |
Well Support Services | | 0 | | | 0 | | | 10,940 | | | 0 | | | | | | | | | |
Corporate and Other | | (37,472) | | | (36,306) | | | (159,929) | | | (104,211) | | | | | | | | | |
Total operating income (loss) | | $ | (92,424) | | | $ | 7,898 | | | $ | (267,180) | | | $ | (6,884) | | | | | | | | | |
Depreciation and amortization: | | | | | | | | | | | | | | | | |
Completion Services | | $ | 64,282 | | | $ | 64,735 | | | $ | 205,710 | | | $ | 197,152 | | | | | | | | | |
WC&I | | 4,591 | | | 502 | | | 13,682 | | | 2,007 | | | | | | | | | |
Well Support Services | | 0 | | | 0 | | | 1,527 | | | 0 | | | | | | | | | |
Corporate and Other | | 4,697 | | | 3,471 | | | 13,732 | | | 10,910 | | | | | | | | | |
Total depreciation and amortization | | $ | 73,570 | | | $ | 68,708 | | | $ | 234,651 | | | $ | 210,069 | | | | | | | | | |
Net income (loss): | | | | | | | | | | | | | | | | |
Completion Services | | $ | (50,929) | | | $ | 43,505 | | | $ | (110,949) | | | $ | 98,331 | | | | | | | | | |
WC&I | | (4,023) | | | 699 | | | (7,242) | | | (1,003) | | | | | | | | | |
Well Support Services | | 0 | | | 0 | | | 10,940 | | | 0 | | | | | | | | | |
Corporate and Other | | (47,481) | | | (40,646) | | | (179,426) | | | (120,557) | | | | | | | | | |
Total net income (loss) | | $ | (102,433) | | | $ | 3,558 | | | $ | (286,677) | | | $ | (23,229) | | | | | | | | | |
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| | (Thousands of Dollars) |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Operations by business segment | | | | | | | | |
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Completion Services(1) | | $ | 46,184 | | | $ | 15,145 | | | $ | 81,959 | | | $ | 144,676 | |
WC&I(1) | | 2,905 | | | (785) | | | 7,337 | | | 8,811 | |
Well Support Services(1) | | — | | | — | | | — | | | 12,338 | |
Total adjusted gross profit | | $ | 49,089 | | | $ | 14,360 | | | $ | 89,296 | | | $ | 165,825 | |
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(1) Adjusted gross profit (loss) at the segment level is not considered to be a non-GAAP financial measure as it is the Company's segment measure of profitability and is required to be disclosed under GAAP pursuant to ASC 280. Adjusted gross profit (loss) is defined as revenue less cost of services, further adjusted to eliminate items in cost of services that management does not consider in assessing ongoing performance.
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| | (Thousands of Dollars) |
| | Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 |
| | Completion Services | | WC&I | | Well Support Services | | Total | | Completion Services | | WC&I | | Well Support Services | | Total |
Revenue | | $ | 366,067 | | | $ | 27,097 | | | $ | — | | | $ | 393,164 | | | $ | 843,887 | | | $ | 69,824 | | | $ | — | | | $ | 913,711 | |
Cost of Services | | 320,297 | | | 24,340 | | | — | | | 344,637 | | | 768,562 | | | 63,112 | | | — | | | 831,674 | |
Gross profit excluding depreciation and amortization | | 45,770 | | | 2,757 | | | — | | | 48,527 | | | 75,325 | | | 6,712 | | | — | | | 82,037 | |
Management adjustments associated with cost of services(1) | | 414 | | | 148 | | | — | | | 562 | | | 6,634 | | | 625 | | | — | | | 7,259 | |
Adjusted gross profit | | $ | 46,184 | | | $ | 2,905 | | | $ | — | | | $ | 49,089 | | | $ | 81,959 | | | $ | 7,337 | | | $ | — | | | $ | 89,296 | |
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(1) Adjustments relate to market-driven severance, leased facility closures, and restructuring costs incurred as a result of significant declines in crude oil prices resulting from demand destruction from the COVID-19 pandemic and global oversupply.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
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| | Three Months Ended September 30, 2020 | | Nine Months Ended September 30, 2020 | | Three Months Ended September 30, 2020 | | Nine Months Ended September 30, 2020 |
| | Completion Services | | WC&I | | Well Support Services | | Total | | Completion Services | | WC&I | | Well Support Services | | Total | | Completion Services | | WC&I | | Well Support Services | | Total | | Completion Services | | WC&I | | Well Support Services | | Total |
Revenue | Revenue | | $ | 154,016 | | | $ | 9,659 | | | $ | 0 | | | $ | 163,675 | | | $ | 845,864 | | | $ | 83,734 | | | $ | 57,929 | | | $ | 987,527 | | Revenue | | $ | 154,016 | | | $ | 9,659 | | | $ | — | | | $ | 163,675 | | | $ | 845,864 | | | $ | 83,734 | | | $ | 57,929 | | | $ | 987,527 | |
Cost of Services | Cost of Services | | 139,477 | | | 10,589 | | | 0 | | | 150,066 | | | 716,008 | | | 79,464 | | | 45,591 | | | 841,063 | | Cost of Services | | 139,477 | | | 10,589 | | | — | | | 150,066 | | | 716,008 | | | 79,464 | | | 45,591 | | | 841,063 | |
Gross profit excluding depreciation and amortization | Gross profit excluding depreciation and amortization | | 14,539 | | | (930) | | | 0 | | | 13,609 | | | 129,856 | | | 4,270 | | | 12,338 | | | 146,464 | | Gross profit excluding depreciation and amortization | | 14,539 | | | (930) | | | — | | | 13,609 | | | 129,856 | | | 4,270 | | | 12,338 | | | 146,464 | |
Management adjustments associated with cost of services(1) | | 606 | | | 145 | | | 0 | | | 751 | | | 14,820 | | | 4,541 | | | 0 | | | 19,361 | | |
Management adjustments associated with cost of services(2) | | Management adjustments associated with cost of services(2) | | 606 | | | 145 | | | — | | | 751 | | | 14,820 | | | 4,541 | | | — | | | 19,361 | |
Adjusted gross profit | Adjusted gross profit | | $ | 15,145 | | | $ | (785) | | | $ | 0 | | | $ | 14,360 | | | $ | 144,676 | | | $ | 8,811 | | | $ | 12,338 | | | $ | 165,825 | | Adjusted gross profit | | $ | 15,145 | | | $ | (785) | | | $ | — | | | $ | 14,360 | | | $ | 144,676 | | | $ | 8,811 | | | $ | 12,338 | | | $ | 165,825 | |
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(1)(2) Adjustments relate to market-driven severance and restructuring costs incurred as a result of significant declines in crude oil prices resulting from demand destruction from the COVID-19 pandemic and global oversupply.
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| | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
| | Completion Services | | WC&I | | Well Support Services | | Total | | Completion Services | | WC&I | | Well Support Services | | Total |
Revenue | | $ | 437,343 | | | $ | 6,610 | | | $ | 0 | | | $ | 443,953 | | | $ | 1,269,681 | | | $ | 23,659 | | | $ | 0 | | | $ | 1,293,340 | |
Cost of Services | | 328,029 | | | 5,409 | | | 0 | | | 333,438 | | | 972,932 | | | 22,655 | | | 0 | | | 995,587 | |
Gross profit excluding depreciation and amortization | | 109,314 | | | 1,201 | | | 0 | | | 110,515 | | | 296,749 | | | 1,004 | | | 0 | | | 297,753 | |
Management adjustments associated with cost of services | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Adjusted gross profit | | $ | 109,314 | | | $ | 1,201 | | | $ | 0 | | | $ | 110,515 | | | $ | 296,749 | | | $ | 1,004 | | | $ | 0 | | | $ | 297,753 | |
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| | September 30, 2020 | | December 31, 2019 | | September 30, 2021 | | December 31, 2020 |
Total assets by segment: | Total assets by segment: | | | | | Total assets by segment: | | | | |
Completion Services | Completion Services | | $ | 708,770 | | | $ | 1,091,965 | | Completion Services | | $ | 1,112,324 | | | $ | 689,814 | |
WC&I | WC&I | | 63,782 | | | 106,493 | | WC&I | | 68,087 | | | 62,959 | |
Well Support Services | Well Support Services | | 0 | | | 109,792 | | Well Support Services | | — | | | — | |
Corporate and Other | Corporate and Other | | 438,626 | | | 356,657 | | Corporate and Other | | 237,564 | | | 405,115 | |
Total assets | Total assets | | $ | 1,211,178 | | | $ | 1,664,907 | | Total assets | | $ | 1,417,975 | | | $ | 1,157,888 | |
Goodwill by segment: | Goodwill by segment: | | | | | Goodwill by segment: | | | | |
Completion Services | Completion Services | | $ | 104,198 | | | $ | 136,425 | | Completion Services | | $ | 192,446 | | | $ | 104,198 | |
WC&I | WC&I | | 0 | | | 372 | | WC&I | | — | | | — | |
Well Support Services | Well Support Services | | 0 | | | 661 | | Well Support Services | | — | | | — | |
Corporate and Other | Corporate and Other | | 0 | | | 0 | | Corporate and Other | | — | | | — | |
Total goodwill | Total goodwill | | $ | 104,198 | | | $ | 137,458 | | Total goodwill | | $ | 192,446 | | | $ | 104,198 | |
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
(16)(15) New Accounting Pronouncements
(a) Recently Adopted Accounting Standards
In June 2016,December 2019, the FASBFinancial Accounting Standards Board issued ASU No. 2016-13, "Financial Instruments-Credit LossesNo 2019-12, “Income Taxes (Topic 326)740): Measurement of Credit Losses on Financial Instruments," which introduces a new impairment modelSimplifying the Accounting for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable and lease receivables. In November 2018, the FASB issued Income Taxes” (“ASU No. 2018-19, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses," which clarified that receivables arising from operating leases are not within the scope of ASC 326-20, "Financial Instruments-Credit Losses-Measured at Amortized Cost," and should be accounted for in accordance with ASC 842. In April 2019, the FASB issued2019-12”). ASU No. 2019-04, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments," which clarified2019-12 removes certain amendments related to ASU 2016-13. In May 2019, the FASB issued ASU No. 2019-05, "Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief," which clarifies certain aspects of the amendments in ASU 2016-13. In November 2019, the FASB issued ASU No. 2019-10, "Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) and ASU 2019-11 Codification Improvements to Topic 326, Financial Instruments—Credit Losses."
The Company adopted these new standards effective January 1, 2020 and analyzed its trade accounts receivable based on a risk assessed portfolio approach, incorporating current and forecasted economic conditions as of January 1, 2020 which resulted in the increase of $1.5 million of allowances for expected credit losses related to our accounts receivable through a cumulative effect offset to retained earnings.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changesexceptions to the Disclosure Requirements for Fair Value Measurement." This standard removed, modified and added disclosure requirements from ASC 820.general principles in Topic 740 in Generally Accepted Accounting Principles. ASU 2018-132019-12 is effective for annual periodspublic entities for fiscal years beginning after December 15, 2019.2020, with early adoption permitted. The Company adopted this standard on January 1, 2020 and there was no impact to its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract." The amendments in this standard aligned the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company adopted this standard on January 1, 20202021, and there was no impact on its consolidated financial statements.
In November 2018, the FASB issued ASU 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606." The amendments in this standard clarified that certain transactions should be accounted for under ASC 606 if one of the collaborative arrangement participants meets the definition of a customer and that transactions between collaborative participants not directly related to sales to third parties should not be recognized as revenue under Topic 606, if one of the collaborative arrangement participants is not a customer. The Company adopted this standard on January 1, 2020 and there was no impact on its consolidated financial statements.
In July 2019, the FASB issued ASU 2019-07, "Codification Updates to SEC Sections—Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates (SEC Update)". The Company adopted this standard on January 1, 2020 and there was no impact on its consolidated financial statements.
In August 2019, the FASB issued ASU 2019-08, "Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements - Share-Based Consideration Payable to a Customer". ASU 2019-08 expands the scope of ASC Topic 718 to provide guidance for share-based payment awards granted to a customer in conjunction with selling goods or services accounted for under Topic 606. The Company adopted this standard on January 1, 2020 and there was no impact on its consolidated financial statements, as the Company has only issued shares to employees or nonemployee directors and has previously recognized its nonemployee directors share-based payments in line with its recognition of share-based payments to employees, using the grant-date fair value of the equity instruments issued, amortized over the requisite service period.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
In March 2020, the FASB issued ASU 2020-03, "Codification Improvements to Financial Instruments," which improves and clarifies various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven different issues that describe the areas of improvement and the related amendments to GAAP, intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The amendments have different effective dates. The Company early adopted this new accounting guidance, and there was no additional impact on its consolidated financial statements.
(b) Recently Issued Accounting Standards
In October 2021, the FASB issued ASU 2021-08 “Business Combinations (Topic 805) Accounting for Contract Assets and Contact Liabilities from Contracts with Customers”. ASU 2021-08 requires acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. This standard is effective beginning on December 15, 2022. The Company does not expect ASU 2021-08 to have any impact on its consolidated financial statements.
In January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848)”. ASU 2021-01 expands on the US GAAP guidance on contract modifications and hedge accounting related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This standard is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.
In October 2020, the FASB issued ASU 2020-10 “Codification Improvements”. ASU 2020-10 improves the clarity and consistency of various provisions in the Codification. The Company does not expect ASU 2020-10 to have any impact on the its consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06 "Debt—“Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40) ("” (“ASU 2020-06"2020-06”). ASU 2020-06 simplifies the guidance on the issuer's accounting for convertible debt instruments and convertible preferred stock. The Company does not expect ASU 2020-06 to have any impact on the Company's consolidated financial statements.
In June 2020, the FASB issued ASU 2020-05, "Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities," which provides a limited deferral of the effective dates of "Revenue from Contracts with Customers (ASC 606)" and "Leases (ASC 842)" to provide immediate, near-term relief for certain entities for whom these updates are either currently effective or imminently effective. The Company does not expect ASU 2020-05 to have any impact on the Company's consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, "Reference“Reference Rate Reform (Topic 848)”," which is intended to provide temporary optional expedients and exceptions to the US GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This standard is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.
In January 2020, the FASB issued ASU 2020-01, "Investments—“Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)”," which clarifies the interaction between the accounting for investments in equity securities, investment in equity method and certain derivatives instruments. This standard is expected to reduce diversity in practice and increase comparability of the accounting for these interactions. This standard is effective for fiscal years beginning after December 15, 2021 and the adoption is not expected to have any impact on the Company's consolidated financial statements.
In December 2019,
(16) Subsequent Events
During the Financial Accounting Standards Board issued ASU No 2019-12, “Income Taxes (Topic 740): Simplifyingthird quarter of 2021, negotiations on a contract extension with National Energy Services Reunited Corp. ("NESR") regarding an unconventional fracturing fleet ended with both parties mutually agreeing not to extend the Accountingcontract for Income Taxes” (“ASU 2019-12”). ASU 2019-12 removes certain exceptionsequipment and consulting services. The Company has begun an orderly wind-down for this operation in early fourth quarter of 2021, while continuing to support NESR during the transition period. Additionally, during the fourth quarter of 2021, the Company and NESR signed an agreement for the sale and payment of equipment and accompanying parts inventory. The Company will continue to operate in the Middle East with NESR through a consulting service agreement on another fracturing fleet and will continue to pursue additional partnering opportunities in the Middle East North Africa region as mutually beneficial to the general principles in Topic 740 in Generally Accepted Accounting Principles. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company does not expect ASU 2019-12 to have a material effect on the Company’s current financial position, results of operations or financial statement disclosures.and NESR.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related condensed footnotes included within Part I, "Item 1. Condensed Consolidated Financial Statements (Unaudited)" in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2019.2020.
ORGANIZATIONAL OVERVIEW
NexTier Oilfield Solutions Inc. is an industry-leading U.S. land oilfield focused service company, with a diverse set of well completion and production services across a variety of active and demanding basins. We have a history of growth through acquisition, including the October 31, 2019 C&J Merger. After this business combination, we were organized into three reportable segments:
•Completion Services, which consists of the following businesses and services lines: (1) hydraulic fracturing; (2) wireline and pumpdown services; and (3) completion support services, which includes our innovation centers and activities.
•Well Construction and Intervention Services, which consists of the following businesses and service lines: (1) cementing services and (2) coiled tubing services.
•Well Support Services, which consists of the following businesses and service lines: (1) rig services; (2) fluids management; and (3) other special well site services.
M&A Activity
Our Well Support Services segment was divested in a transaction that closed on March 9, 2020. It focused on post-completion activities at the well site, including rig services, such as workover and plug and abandonment, fluids management services, and other specialty well site services. Subsequent to the Well Support Services divestiture, the Company's reportable segments were (i) Completion Services, and (ii) Well Construction and Intervention (“WC&I”) Services.
On August 31, 2021 the Company completed its acquisition (the “Alamo Acquisition”) of Alamo Pressure Pumping, LLC and its wholly owned subsidiaries (“Alamo”). The Alamo Acquisition was completed for cash consideration of $100.0 million, equity consideration of 26 million shares of the Company's common stock valued at $82.3 million, post-closing services valued at $30 million, an estimated $15.9 million of contingent consideration, and $7.4 million of non contingent consideration. The contingent consideration includes the Tier II Upgrade Payment and the Earnout Payments, which are contingent upon the achievement of certain performance targets, as described in the Purchase Agreement. Alamo's base of operations is in Midland, Texas, and it's pressure pumping business operates almost exclusively in the Permian Basin.
This history impacts the comparability of our operational results from year to year. Additional information on these transactions can be found in Note (15)(14) Business SegmentsandNote (3)Alamo Acquisition.
OPERATIONAL OVERVIEW
Market Trends and Influences
We provide our services in several of the most active basins in the United States, including the Permian, the Marcellus Shale/Utica, the Eagle Ford, Mid-Continental, and the Bakken/Rockies.
Total North America rig count during the third quarter of 20202021 averaged 254496 rigs, reflecting a decreasean increase of approximately 35%10% as compared to the second quarter 20202021 average of 392450 rigs, and 68% as compared tobut is still approximately 37% below the first quarter 2020 average of 785 rigs, driven by impacts associated with the COVID-19 demand destruction and the associated significant decline in crude oil prices.rigs. North America rig count exited the third quarter of 20202021 at 261 rigs, reflecting a 2% decline521 rigs. The increase as compared to the exit rate for the second quarter of 2020 and a 64% decline as compared to the exit rate for the first quarter of 2020.
The decrease2021 average was driven by an improvement in North America rig count reflects E&P companies significantly reducing 2020 capital budgets in response to increasing macro uncertainty related to the COVID-19 pandemic and significantly lower crude oil prices. We estimate the market reached a trough of 50 or fewer fully-utilized completions crews in late-May or early-June 2020. Beginning in June 2020, conditions began to improve, as shut-in production was brought back on-line. Producers continue to contemplate drilling and completions plans for the remainder of 2020 and into 2021. Rig and completions in the fourth quarter of 2020 are expected to remain highly uncertain and dependent on macro conditions, includingeconomic activity, supportive commodity prices, resolution of the COVID-19 pandemic, seasonality and potential lasting changes that a prolonged pandemic may have on supplymodest continued improvements in completions supply/demand dynamics. Crude prices entered and demand worldwide.
The Company's natural gas focused position in the Marcellus / Utica outperformed the total North American rig count duringexited the third quarter of 2020 as compared2021 at similar levels, but the exit rate at $75.03 was 21% higher than the intraquarter low of $62.14. Natural gas prices were up 61% from $3.65 on June 30, 2021 to the first quarter of 2020, where the average rig count decline was 36% as compared to the total North America average rig count decline of 68%.$5.87 on September 30, 2021.
Our financial performance is significantly affected by rig and well count in North America, as well as oil and natural gas prices. Activity within our business segments is significantly influenced by spending on upstream exploration, development and production programs by our customers. Also driving our activity is the status of the global economy, which is a major factor on oil and natural gas demand. Some of the more significant determinants of current and future spending levels of our customers are oil and natural gas prices, global oil supply and demand, the world economy, the availability of credit, government regulation and global stability, which together drive worldwide drilling activity.
In the third quarter of 2021, we continued to see disciplined increases in oil supply from the Organization of Petroleum Exporting Countries plus (OPEC+) and U.S. shale operators. U.S. onshore completion activity growth continued to trend higher in the third quarter, and we deployed two additional frac fleets during the quarter. With this increased revenue came some related startup inefficiencies, which impacted our results, particularly early in the quarter. Commodity prices have continued to improve, but the discipline of U.S. shale operators has tempered the levels of activity that we would have seen historically at these oil and natural gas prices. We believeexpect fourth quarter activity will continue along a similar trend of disciplined improvements in activity, subject to typical seasonality. Continued improvement in customer activity and utilization remains dependent on macro conditions, including commodity prices, changing political climate, response to the COVID-19 pandemic (including any resurgences in the
U.S. and abroad), seasonality and potential lasting changes that a prolonged or resurging pandemic may have on supply and demand worldwide.
In addition, we have continued to see some modest improvement in pricing, especially with our duel fuel equipment. But, overall economic conditions in the safety, qualitymarket, including contract structure, inflation and efficiencyabundant competition, continue to burden profitability of the fleet. We had adjusted our cost structure over the past year, but the current pricing is still below the levels at which we would expect to deploy significant additional horsepower.
Furthermore, as operators are looking for opportunities to improve well performance and lower costs through innovative techniques, we are seeing a rise in operator initiatives such as simulfrac techniques (we generally refer to these types of initiatives as increasing “frac intensity”). Simulfrac is a process of fracking two or more wells at the same time instead of a single well, for the purpose of increasing operational efficiencies and contributing to well cost savings. These techniques require multi-well pads and advanced complex completion designs, resulting in, among other things, adaption costs, an increase in the amount of equipment related to a particular job, an increase in commodities (such as proppant, logistics, and chemicals), and enhanced maintenance practices and procedures. The increasing complexity and resources required by evolving frac intensity, such as double simulfrac, results in the need to fine-tune our approach in the related commercial agreements, especially around sharing the value created and the commercial risks of these enhanced operations. We're continuing to work with our customers to utilize experiences on these operations to hone our commercial agreements going forward.
We are constantly assessing our approach to ensure that our team and our equipment meets the evolving demands. Customers are increasingly looking for ways to lower their carbon footprint by lower emissions associated with their drilling and completion activity. We have invested to upgrade a significant portion of our fleet to be able to operate using natural gas as a primary fuel source. These dual fuel fleets can be powered using both diesel and natural gas as a fuel source. In addition to lowering emissions, at current diesel and natural gas prices, using natural gas can lower the cost to operate a dual fuel fleet relative to a conventional diesel fleet.
As indicated previously, macro-economic factors are resulting in inflation of materials and other costs, such as employee compensation, contract services, commodity prices and communications expenses. While inflation increases our operating costs, the impact of commodity inflation on the Company to date has been significantly mitigated by the Company's ability to adjust pricing to pass the impact of inflation through to its customers. Additionally, we, our suppliers and contractors are facing a highly competitive domestic labor market. These labor market dynamics create wage inflation, increase recruiting costs due to elevated employee attrition and, with respect to driver shortages, may negatively impact or increase the cost of our logistics service executionfor our customers. The rate and scope of these various aspects of inflation may continue to impact our alignment with customers who recognizecosts, which may not be readily recoverable in the value thatprices of our services. At this time, we provideexpect this trend to continue through 2021 and likely into 2022. As such, its full financial impact on our business is impractical to quantify at this time.
Global market supply chain and logistics constraints have also impacted our suppliers. We have begun to see a more pronounced delay in lead times for certain components used in equipment, parts and supplies. Additionally, some shipments from overseas suppliers are centralexperiencing transportation delays due to a lack of available containers and a backlog at incoming ports of entry. These delays in shipments could impact our effortsavailability to support utilizationsecure parts and grow our business.inventory, although the ultimate impact is impractical to quantify at this time.
Utilization Tendencies
Historically, our utilization levels have been highly correlated to U.S. onshore spending by our customers, which is heavily driven by the price of oil and natural gas. Generally, as capital spending by our customers increases, drilling, completion and production activity also increases, resulting in increased demand for our services, and therefore more days or hours worked (as the case may be). Conversely, when drilling, completion and production activity levels decline due to lower spending by our customers, we generally provide fewer services, which results in fewer days or hours worked (as the case may be).
Given the volatile and cyclical nature of activity drivers in the U.S. onshore oilfield services industry, coupled with the varying prices we are able to charge for our services and the cost of providing those services, among other factors, operating margins can fluctuate
widely depending on supply and demand at a given point in the cycle. Additionally, during periods of decreased spending by our customers and/or high competition, we may be required to discount our rates or provide other pricing concessions to remain competitive and support deployed equipment utilization, which negatively impacts our revenue and operating margins. During periods of pricing weakness for our services, we may not be able to reduce our costs accordingly, and our ability to achieve any cost reductions from our suppliers typically lags behind the decline in pricing for our services, which could further adversely affect our results. Furthermore, when demand for our services increases following a period of low demand, our ability to capitalize on such increased demand may be delayed while we reengage and redeploy equipment and crews that have been idled during a downturn. The mix of customers that we are working for, as well as limited periods of exposure to the spot market, also impacts our deployed equipment utilization.
The dual supply and demand shock that emerged late in Some smaller operators may not have sufficient programs to support continuous operations or dedicated fleets. To the first quarter of 2020 had immediate negative impacts on commodity prices and market conditions, which has translated into lower completions activity. Crude oil pricesextent we have improved from their lows, with the price for a barrel of WTI crude oil at approximately $40 as of September 30, 2020, but remain below threshold levels necessary for driving significant rig activity growth. Against this backdrop, pricing for our services remains highly competitive, as excess frac capacity pursues limited new opportunities. We continued to see pricing pressure in the third quarter and do not expect pricing to return to normal levels in the near future. See Note (7) Significant Risks and Uncertainties of Part I, "Item 1. Condensed Consolidated Financial Statements (Unaudited)" and Part II "Item 1A. Risk Factors."
Following the dramatic pace and magnitude of this year’s downturn, there has been recent attrition through consolidation and other events that have made some progress in realigning frac supply with demand. However, even though well completion activity levels are improving, frac supply remains in excess of demand. In light of this, we intend to reduce our marketed fleet over time to a level that we believe is more in-line with long-term demand and that is that is more in-line with our strategy to harvest the investments made in our traditional fleets, while growing the portionpercentage of our fleet that offers better pricing fundamentals and aoperations servicing such smaller operators, we may experience lower emissions profile. We intend to reduce our marketed hydraulic fracturing fleet by approximately 400,000 horsepower and utilize the major components over time as part of our maintenance inventory. Once consumed, we intend to cut up the frames and permanently remove them from our marketed base of equipment.utilization.
Strategic Direction
We believe that our customers have begun to look beyond the core requirements of efficiency and safety to prefer suppliers that can providedthere is competitive value in providing integrated solutions that align the incentives of operators and service providers. We are pursuing opportunities to leverage our investment in our digital program and diesel substitution technologies (such as duel fuel capabilities), to provide a service strategy targeted at achieving emissions reductions, both for us and our customers. Our recent acquisition of Alamo added 9 hydraulic fracturing fleets, approximately 92% of which is Tier IV dual fuel capable. NexTier has been developing and building its digital program for some time, and we have now applied our digital platform has been applied to all of ourthe NexTier operating fleets, with the opportunity to add the digital platform to the Alamo fleets. We believe our digital program, alongare also working toward a natural gas treatment and delivery solution, including natural gas sourcing, compression, transport, decompression, and treatment services, that will power NexTier’s fleet with continued investment in diesel substitution (such as duel fuel capabilities), are importantfield gas or compressed natural gas. This service solution seeks to achieving emissions reductions initiatives, both for us and our customers.
However, ataddress wellsites where there is not a reliable nearby gas supply, and thus, the full benefit and value of dual fuel or other lower emissions technologies may not able tootherwise be fully realized. To address this situation, we are developing anOur integrated natural gas treatment and delivery solution designed to provide gas sourcing, compression, transport, decompression, treatment, and related services for our fracing operations.became operational in the second half of 2021. This integrated strategy willis designed to provide our customers with a streamlined approach to driving more sustainable, cost effective operations at the wellsite.
We believe our integrated approach and proven capabilities enable us to deliver cost-effective solutions for increasingly complex and technically demanding well completion requirements, which include longer lateral segments, higher pressure rates and proppant intensity and multiple fracturing stages in challenging high-pressure formations. In addition, our technical team and our innovation centers, provide us with the ability to supplement our service offerings with engineered solutions specifically tailored to address customers’ completion requirements and unique challenges. For example, utilizing a lateral science technique resulting in simulfrac stage pairing can reduce the operator’s cost per barrel by taking existing drilling data, analyzing the downhole rock properties, and matching the four or six wells across a simulfrac pad to create an optimized pair for every simulfrac stage. We believe utilization of this technique will ultimately improve injectivity of the frac treatments, improve the long-term production of the treated wells, and lower the equipment costs for each operation. Simulfrac stage pairing can help connect our simulfrac operational experience to real reservoir properties, thereby providing opportunity to deploy a more cost-effective solution that delivers higher production to the operator.
We recognizebelieve that the COVID-19 pandemicsafety, quality and responses thereto also impactefficiency of our suppliers. To date,service execution and our alignment with customers who recognize the value that we have generally been ableprovide are central to obtain the equipment, parts and supplies necessaryour efforts to support utilization and grow our operations on a timely basis. While we believe we will be able to make satisfactory alternative arrangements in the event of any interruption in the supply of these materials and/or products by one of our suppliers, this may not always be the case. In addition, certain materials for which we do not currently have long-term supply agreements could experience shortages and significant price increases in the future.business.
Response toOperating Effectively Through the COVID-19 Pandemic and Oil Price Collapse
In response to all of these developments, we We have implementedcontinued our measures to focusfocused on the safety of our partners, employees, and the communities in which we operate, while at the same time seeking to mitigate the impact on our financial position and operations. These measures include,In August the Company experienced higher levels of employee absenteeism as a result of the surge in COVID-19 cases associated with the Delta variant. While this trend improved as we exited the third quarter, it is possible that these negative effects will reoccur until infection rates decline. We continue to encourage our workforce to practice safe behaviors in the workplace and while away from work to help prevent community spread of COVID-19. In addition, a new federal mandate was implemented in November 2021 requiring companies with 100 or more employees to ensure that workers are either fully vaccinated or test negative for COVID-19 at least once per week. The extent of the impact of this and any other regulatory actions at the federal, state or local level is unclear and could have an adverse impact on the availability and cost related to labor.
Contingency plans remain in place in the event of significant impacts from COVID-19 infection resurgences, but there are not limited to,no guarantees that such plans will be sufficient. Additional information regarding the following:
Taking Careactions we've taken since the onset of our Partners and Employees.The safety of our partners and employees continues to be a primary focus. As the COVID-19 pandemic has developed, we have taken numerous stepsand the increased risks to help customers and employees comply with current health-expert recommendations, including limitation of social functions and non-essential travel, hygiene protocol education, telecommuting as job responsibilities permit, protocols and procedures focused on establishing a safe work environment, protocol for employees who test positive for COVID-19, and a response and mitigation monitoring process.
Expense Management.With the reduction in revenue, we implemented cost saving initiatives, including (i) adjusting active frac fleet count to align with changing demand; (ii) consolidating our footprint; (iii) delaying non-essential maintenance projects; (iv) reducing or suspending other discretionary spending; (v) restructuring our organization in a way that maximizes our managerial talent with a streamlined team; (vi) reductions of salaries or cash retainers, as applicable, by 20% for our directors and executive officers; and (vi) reducing employee-related costs, including furloughing personnel, pay reductions by 15-20%, and
moderating headcount. While many of these cost savings initiatives continue, with the increase in activity, we have been able to put most of our furloughed personnel back to work, and we have begun rolling out a portion of pay reinstatement, with the focus on field level personnel (no salary or fee reinstatement for executive officers or directors).
Balance Sheet, Cash Flow and Liquidity Management.We have taken actions to increase liquidity and strengthen our financial position. As a result of these actions, our cash and cash equivalents balance as of September 30, 2020 was $305.2 million. For additional information on our liquidity and capital resources, see "Liquidity and Capital Resources."
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act”) was enacted in responsebusiness related to the COVID-19 pandemic. The CARES Act, among other things, provides temporary reliefpandemic can be found in our Annual Report on Form 10-K for payment of certain payroll taxes. Payroll taxes generally would have been deductible for income tax purposes in the same tax year that they were expensed for book purposes in accordance with applicable U.S. federal tax rules and regulations. Should a company defer payment of its payroll taxes as allowable under the CARES Act, such accrued payroll taxes may not be deductible until the tax year in which they are actually paid. The temporary relief for payment of certain payroll taxes did not have an impact to the nine months ended September 30,December 31, 2020. We do not currently expect the CARES Act to have a material impact on our financial results, including on our annual estimated effective tax rate or on our liquidity. We will continue to monitor and assess the impact the CARES Act and similar legislation in other countries may have on our business and financial results.
RESULTS OF OPERATIONS IN 20202021 COMPARED TO 20192020
The following is a comparison of our results of operations for the three and nine months ended September 30, 20202021 compared to the three and nine months ended September 30, 2019. Results for the nine months ended September 30, 2020 include the financial and operating results of Well Support Services segment through March 8, 2020.
Three Months Ended September 30, 20202021 Compared with Three Months Ended September 30, 20192020
| | | Three Months Ended September 30, | | Three Months Ended September 30, |
(Thousands of Dollars) | (Thousands of Dollars) | | | As a % of Revenue | | Variance | (Thousands of Dollars) | | | As a % of Revenue | | Variance |
Description | Description | | 2020 | | 2019 | | 2020 | | 2019 | | $ | | % | Description | | 2021 | | 2020 | | 2021 | | 2020 | | $ | | % |
Completion Services | Completion Services | | $ | 154,016 | | | $ | 437,343 | | | 94 | % | | 99 | % | | $ | (283,327) | | | (65 | %) | Completion Services | | $ | 366,067 | | | $ | 154,016 | | | 93 | % | | 94 | % | | $ | 212,051 | | | 138 | % |
WC&I | WC&I | | 9,659 | | | 6,610 | | | 6 | % | | 1 | % | | 3,049 | | | 46 | % | WC&I | | 27,097 | | | 9,659 | | | 7 | % | | 6 | % | | 17,438 | | | 181 | % |
| Revenue | Revenue | | 163,675 | | | 443,953 | | | 100 | % | | 100 | % | | (280,278) | | | (63 | %) | Revenue | | 393,164 | | | 163,675 | | | 100 | % | | 100 | % | | 229,489 | | | 140 | % |
Completion Services | Completion Services | | 139,477 | | | 328,029 | | | 85 | % | | 74 | % | | (188,552) | | | (57 | %) | Completion Services | | 320,297 | | | 139,477 | | | 81 | % | | 85 | % | | 180,820 | | | 130 | % |
WC&I | WC&I | | 10,589 | | | 5,409 | | | 6 | % | | 1 | % | | 5,180 | | | 96 | % | WC&I | | 24,340 | | | 10,589 | | | 6 | % | | 6 | % | | 13,751 | | | 130 | % |
| Costs of services | Costs of services | | 150,066 | | | 333,438 | | | 92 | % | | 75 | % | | (183,372) | | | (55 | %) | Costs of services | | 344,637 | | | 150,066 | | | 88 | % | | 92 | % | | 194,571 | | | 130 | % |
Depreciation and amortization | Depreciation and amortization | | 73,570 | | | 68,708 | | | 45 | % | | 15 | % | | 4,862 | | | 7 | % | Depreciation and amortization | | 44,861 | | | 73,570 | | | 11 | % | | 45 | % | | (28,709) | | | (39 | %) |
Selling, general and administrative expenses | Selling, general and administrative expenses | | 25,521 | | | 26,579 | | | 16 | % | | 6 | % | | (1,058) | | | (4 | %) | Selling, general and administrative expenses | | 37,453 | | | 25,521 | | | 10 | % | | 16 | % | | 11,932 | | | 47 | % |
Merger and integration | Merger and integration | | 7,288 | | | 6,651 | | | 4 | % | | 1 | % | | 637 | | | 10 | % | Merger and integration | | 4,752 | | | 7,288 | | | 1 | % | | 4 | % | | (2,536) | | | (35 | %) |
(Gain) loss on disposal of assets | (Gain) loss on disposal of assets | | (3,027) | | | 679 | | | (2 | %) | | 0 | % | | (3,706) | | | (546 | %) | (Gain) loss on disposal of assets | | (1,133) | | | (3,027) | | | 0 | % | | (2 | %) | | 1,894 | | | (63 | %) |
Impairment | Impairment | | 2,681 | | | — | | | 2 | % | | 0 | % | | 2,681 | | | 0 | % | Impairment | | — | | | 2,681 | | | 0 | % | | 2 | % | | (2,681) | | | (100 | %) |
Operating income (loss) | Operating income (loss) | | (92,424) | | | 7,898 | | | (56 | %) | | 2 | % | | (100,322) | | | (1,270 | %) | Operating income (loss) | | (37,406) | | | (92,424) | | | (10 | %) | | (56 | %) | | 55,018 | | | (60 | %) |
Other income (expense), net | Other income (expense), net | | (3,978) | | | 55 | | | (2 | %) | | 0 | % | | (4,033) | | | (7,333 | %) | Other income (expense), net | | 585 | | | (3,978) | | | 0 | % | | (2 | %) | | 4,563 | | | (115 | %) |
Interest expense | Interest expense | | (5,524) | | | (5,215) | | | (3 | %) | | (1 | %) | | (309) | | | (6 | %) | Interest expense | | (6,701) | | | (5,524) | | | (2 | %) | | (3 | %) | | (1,177) | | | 21 | % |
Total other income (expense) | Total other income (expense) | | (9,502) | | | (5,160) | | | (6 | %) | | (1 | %) | | (4,342) | | | 84 | % | Total other income (expense) | | (6,116) | | | (9,502) | | | (2 | %) | | (6 | %) | | 3,386 | | | (36 | %) |
Income tax expense | Income tax expense | | (507) | | | 820 | | | 0 | % | | 0 | % | | (1,327) | | | (162 | %) | Income tax expense | | (472) | | | (507) | | | 0 | % | | 0 | % | | 35 | | | (7 | %) |
Net income (loss) | Net income (loss) | | $ | (102,433) | | | $ | 3,558 | | | (63 | %) | | 1 | % | | $ | (105,991) | | | (2,979 | %) | Net income (loss) | | $ | (43,994) | | | $ | (102,433) | | | (11 | %) | | (63 | %) | | $ | 58,439 | | | (57 | %) |
|
Revenue: Total revenue is comprised of revenue from our Completion Services and Well Construction and Intervention Services segments. Revenue duringduring the three months ended September 30, 2020 decreased2021 increased by $280.3229.5 million, or 63%140%, to $163.7393.2 million from $444.0$163.7 million during the three months ended September 30, 2019.2020. This change in revenue by reportable segment is discussed below.
Completion Services: Revenue for Completion Services during the three months ended September 30, 2020 decreased 2021 increased by $283.3212.1 million, or 65%138%, to $154.0366.1 million from $437.3$154.0 million during the three months ended September 30, 2019.2020. The segment revenue decreaseincrease is primarily attributable to a 52% decrease inmore than doubling the number of fully utilized hydraulic fracturing fleets, decreasesincreases in our wireline and pump down services, and the acquisition of Alamo on August 31, 2021. Higher global commodity prices led to increased customer activity and modest price reductions resultingimprovements in all operating basins as market conditions showed signs of improvement from lowerlow commodity prices and the COVID-19 pandemic. Fracturing Services decreasedincreased to 24 fully utilized fleets, including 3 fully utilized Alamo fleets, during the three months ended September 30, 2021 from 11 fully utilized fleets during the three months ended September 30, 2020 from 22 fully utilized fleets during the three months ended September 30, 2019. Improved stage efficiencies and strong operational execution partially offset lower net pricing.2020.
Well Construction and Intervention Services: Well Construction and Intervention Services segment revenue increased $3.017.4 million, or 46%181%, to $9.7 million during the three months ended September 30, 2020 from $6.6$27.1 million during the three months ended September 30, 2019.2021 from $9.7 million during the three months ended September 30, 2020. The increase in revenue is mostly attributableprimarily due to the C&J Merger. The WC&I segment was also negatively impacted by the challenging market conditionshigher activity, improved pricing, and COVID-19 pandemicincreased utilization in the third quarter of year 2020.our cementing and coil tubing services.
Cost of Services: Cost of services during the three months ended September 30, 2020 decreased2021 increased by $183.4$194.6 million, or 55%130%, to $150.1$344.6 million from $333.4$150.1 million during the three months ended September 30, 2019. This change was driven by several factors, partially attributable to the C&J Merger, but2020. The increase is primarily due to significantly lessincreased activity and utilization, as explained in Revenue above, partially offset by increased market driven facility closurein addition to input costs to reduce facility costs to be in line with reduced market activity.inflation.
Equipment Utilization: Depreciation and amortization expense increased $4.9decreased $28.7 million, or 7%39%, to $44.9 million during the three months ended September 30, 2021 from $73.6 million, during the three months ended September 30, 2020 from $68.72020. The decrease in depreciation and amortization is due to more equipment nearing the end of its useful lives in addition to the change in estimated useful life of equipment in the first quarter of 2021, which consisted mostly of increases to the expected life of our fracturing equipment. Gain on disposal of assets decreased $1.9 million, or 63%, to a gain of $1.1 million during the three months ended September 30, 2019. The increase in depreciation and amortization was primarily related to the assets acquired during the C&J Merger. Gain (loss) on disposal of assets had a variance of $3.7 million, or 546%, to a gain of $3.0 million during the three months ended September 30, 20202021 from a loss of $0.7$3.0 million during the three months ended September 30, 2019.2020.
Selling, general and administrative expense: Selling, general and administrative (“SG&A”) expense, which represents costs associated with managing and supporting our operations, decreasedincreased by $1.1$11.9 million, or 4%47%, to $37.5 million during the three months ended September 30, 2021 from $25.5 million during the three months ended September 30, 2020, from $26.6 million during the three months ended September 30, 2019, primarily due to the C&J Merger.contingent liability related to the Basic Energy Services bankruptcy filing, in addition to the increase in an accrual related to litigation costs.
Merger and integration expense: Merger and integration expense increaseddecreased by $0.6$2.5 million, or 10%35%, to $4.8 million during the three months ended September 30, 2021 from $7.3 million during the three months ended September 30, 2020 from $6.7 million during the three months ended September 30, 2019,due2020. The merger and integration costs related to the C&J Merger which was announced late inwere a lot more significant, even quarters after the second quarter of 2019transaction occurred, compared to the Alamo Acquisition merger and consisted primarily of professional services, severance costs, and facility consolidation.integration costs.
Effective tax rate: Our effective tax rate on continuing operations for the three months ended September 30, 20202021 was 0.5%(1.1)% for $0.5 million of recorded income tax expense. The difference between the effective tax rate and the U.S. federal statutory rate is due to foreign withholding taxes and change in valuation allowance. After considering all available positive and negative evidence, we determined that it is unlikely that we will utilize our net deferred tax assets in the foreseeable future and continued to maintain a full valuation allowance.
RESULTS OF OPERATIONS IN 2021 COMPARED TO2020
The following is a comparison of our results of operations for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.
Nine Months Ended September 30, 20202021 Compared with Nine Months Ended September 30, 20192020
| | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
(Thousands of Dollars) | (Thousands of Dollars) | | | As a % of Revenue | | Variance | (Thousands of Dollars) | | | As a % of Revenue | | Variance |
Description | Description | | 2020 | | 2019 | | 2020 | | 2019 | | $ | | % | Description | | 2021 | | 2020 | | 2021 | | 2020 | | $ | | % |
Completion Services | Completion Services | | $ | 845,864 | | | $ | 1,269,681 | | | 86 | % | | 98 | % | | $ | (423,817) | | | (33 | %) | Completion Services | | 843,887 | | | $ | 845,864 | | | 92 | % | | 86 | % | | $ | (1,977) | | | 0 | % |
WC&I | WC&I | | 83,734 | | | 23,659 | | | 8 | % | | 2 | % | | 60,075 | | | 254 | % | WC&I | | 69,824 | | | 83,734 | | | 8 | % | | 8 | % | | (13,910) | | | (17 | %) |
Well Support Services | Well Support Services | | 57,929 | | | — | | | 6 | % | | 0 | % | | 57,929 | | | 0 | % | Well Support Services | | — | | | 57,929 | | | 0 | % | | 6 | % | | (57,929) | | | (100 | %) |
Revenue | Revenue | | 987,527 | | | 1,293,340 | | | 100 | % | | 100 | % | | (305,813) | | | (24 | %) | Revenue | | 913,711 | | | 987,527 | | | 100 | % | | 100 | % | | (73,816) | | | (7 | %) |
Completion Services | Completion Services | | 716,008 | | | 972,932 | | | 73 | % | | 75 | % | | (256,924) | | | (26 | %) | Completion Services | | 768,562 | | | 716,008 | | | 84 | % | | 73 | % | | 52,554 | | | 7 | % |
WC&I | WC&I | | 79,464 | | | 22,655 | | | 8 | % | | 2 | % | | 56,809 | | | 251 | % | WC&I | | 63,112 | | | 79,464 | | | 7 | % | | 8 | % | | (16,352) | | | (21 | %) |
Well Support Services | Well Support Services | | 45,591 | | | — | | | 5 | % | | 0 | % | | 45,591 | | | 0 | % | Well Support Services | | — | | | 45,591 | | | 0 | % | | 5 | % | | (45,591) | | | (100 | %) |
Costs of services | Costs of services | | 841,063 | | | 995,587 | | | 85 | % | | 77 | % | | (154,524) | | | (16 | %) | Costs of services | | 831,674 | | | 841,063 | | | 91 | % | | 85 | % | | (9,389) | | | (1 | %) |
Depreciation and amortization | Depreciation and amortization | | 234,651 | | | 210,069 | | | 24 | % | | 16 | % | | 24,582 | | | 12 | % | Depreciation and amortization | | 131,400 | | | 234,651 | | | 14 | % | | 24 | % | | (103,251) | | | (44 | %) |
Selling, general and administrative expenses | Selling, general and administrative expenses | | 120,429 | | | 80,978 | | | 12 | % | | 6 | % | | 39,451 | | | 49 | % | Selling, general and administrative expenses | | 74,256 | | | 120,429 | | | 8 | % | | 12 | % | | (46,173) | | | (38 | %) |
Merger and integration | Merger and integration | | 33,498 | | | 12,759 | | | 3 | % | | 1 | % | | 20,739 | | | 163 | % | Merger and integration | | 4,930 | | | 33,498 | | | 1 | % | | 3 | % | | (28,568) | | | (85 | %) |
(Gain) Loss on disposal of assets | | (11,942) | | | 831 | | | (1 | %) | | 0 | % | | (12,773) | | | (1,537 | %) | |
(Gain) loss on disposal of assets | | (Gain) loss on disposal of assets | | (7,742) | | | (11,942) | | | (1 | %) | | (1 | %) | | 4,200 | | | (35 | %) |
Impairment | Impairment | | 37,008 | | | — | | | 4 | % | | 0 | % | | 37,008 | | | 0 | % | Impairment | | — | | | 37,008 | | | 0 | % | | 4 | % | | (37,008) | | | (100 | %) |
Operating loss | | (267,180) | | | (6,884) | | | (27 | %) | | (1 | %) | | (260,296) | | | 3,781 | % | |
Other income, net | | (1,303) | | | 460 | | | 0 | % | | 0 | % | | (1,763) | | | (383 | %) | |
Operating income (loss) | | Operating income (loss) | | (120,807) | | | (267,180) | | | (13 | %) | | (27 | %) | | 146,373 | | | (55 | %) |
Other income (expense), net | | Other income (expense), net | | 9,113 | | | (1,303) | | | 1 | % | | 0 | % | | 10,416 | | | (799 | %) |
Interest expense | Interest expense | | (16,943) | | | (16,087) | | | (2 | %) | | (1 | %) | | (856) | | | (5 | %) | Interest expense | | (16,633) | | | (16,943) | | | (2 | %) | | (2 | %) | | 310 | | | (2 | %) |
Total other income (expense) | Total other income (expense) | | (18,246) | | | (15,627) | | | (2 | %) | | (1 | %) | | (2,619) | | | 17 | % | Total other income (expense) | | (7,520) | | | (18,246) | | | (1 | %) | | (2 | %) | | 10,726 | | | (59 | %) |
Income tax expense | Income tax expense | | (1,251) | | | (718) | | | 0 | % | | 0 | % | | (533) | | | 74 | % | Income tax expense | | (1,950) | | | (1,251) | | | 0 | % | | 0 | % | | (699) | | | 56 | % |
Net loss | | $ | (286,677) | | | $ | (23,229) | | | (29 | %) | | (2 | %) | | $ | (263,448) | | | 1,134 | % | |
Net income (loss) | | Net income (loss) | | $ | (130,277) | | | $ | (286,677) | | | (14 | %) | | (29 | %) | | $ | 156,400 | | | (55 | %) |
|
Revenue: Total revenue is comprised of revenue from our Completion Services, Well Construction and Intervention Services, and Well Support Services segments. Revenue during the nine months ended September 30, 20202021 decreased by $305.8$73.8 million, or 24%7%, to$913.7 million from $987.5 million from $1.3 billion during the nine months ended September 30, 2019.2020. This change in revenue by reportable segment is discussed below.
Completion Services: Revenue for Completion Services during the nine months ended September 30, 20202021 decreased by $423.8$2.0 million, or 33%0%, to $845.9$843.9 million from $1.3 billion$845.9 million during the nine months ended September 30, 2019. 2020. The segment revenue decrease wasis primarily attributable to a 25%22% decrease in our average number of fully utilized fracturing fleets, combined with decreases in our wireline and pump down services.services from less activity and lower pricing, partially offset by an increase of 5% in fracturing services driven by increased logistics services and the acquisition of Alamo. Fracturing Services decreasedincreased to 18 fully utilized fleets, including Alamo, during the nine months ended September 30, 2021 from 16 fully utilized fleets during the nine months ended September 30, 2020 from 22 fully utilized fleets during the nine months ended September 30, 2019. The decreases in all service lines were driven by less activity and price reductions as a result of the continuing impacts from the unforeseen and sudden decline in commodity prices as well as the COVID-19 pandemic that began to impact operations in late first quarter of 2020. Price reductions were slightly offset by efficiency gains delivered at the well site.
Well Construction and Intervention Services: Well Construction and Intervention Services segment revenue increased $60.1decreased $13.9 million, or 254%17%, to $69.8 million during the nine months ended September 30, 2021 from $83.7 million during the nine months ended September 30, 2020 from $23.7 million during the nine months ended September 30, 2019. This increase2020. The decrease in revenue is primarilymostly attributable to the C&J Merger, partially offset by less activity, lower utilization, and price reductions givenin both our cementing and coil tubing services resulting from lower customer demand as a result of continuing negative impacts from unprecedented declines in the market and the COVID-19 pandemic that began to impact operations in late first quarter 2020.
Well Support Services: Well Support Services segment revenue was $57.9 million during the nine months ended September 30, 2020, with no comparison for the same period in 2019.and weakened market conditions.
Cost of Services: Cost of services during the nine months ended September 30, 20202021 decreased by $154.5$9.4 million, or 16%1%, to $841.1$831.7 million from $995.6$841.1 million during the nine months ended September 30, 2019. This change was driven by several factors including decreased overall2020. The reduction is primarily due to significantly less activity and fleetlower utilization, as discussedexplained in Revenue above, under Revenue, combined with higher sand and freight
costs as a result of increased market driven severancelogistics services in our Completions Segment, and facility closureincreased repair and maintenance expenses related to startup costs resulting from a suppressed market environment and COVID-19 pandemic impact that beganof fleet re-deployments, in addition to impact operations in late first quarter of 2020.input costs inflation.
Equipment Utilization: Depreciation and amortization expense increased $24.6decreased $103.3 million, or 12%44%, to $131.4 million during the nine months ended September 30, 2021 from $234.7 million, during the nine months ended September 30, 2020 from $210.12020. The decrease in depreciation and amortization is due to more equipment nearing the end of its useful lives in addition to the change in estimated useful life of equipment in the first quarter of 2021, which consisted mostly of increases to the expected life of our fracturing equipment. Gain on disposal of assets decreased $4.2 million, or 35%, to $7.7 million during the nine months ended September 30, 2019. The change in depreciation and amortization was primarily related to the assets acquired during the C&J Merger. (Gain) loss on disposal of assets had a variance of $12.8 million, or 1,537%, to2021 from a gain of $11.9 million during the nine months ended September 30, 2020 from a loss of $0.8 million during the nine months ended September 30, 2019.2020.
Selling, general and administrative expense: Selling, general and administrative (“SG&A”) expense, which represents costs associated with managing and supporting our operations, increaseddecreased by $39.5$46.2 million, or 49%38%, to $74.3 million during the nine months ended September 30, 2021 from $120.4 million during the nine months ended September 30, 2020, from $81.0primarily due to the $24.9 million during the nine months ended September 30, 2019 as a result of the Merger.accrual reduction for our regulatory audit estimate and our business transformation results to structurally drive out costs and increase efficiencies in our support function processes.
Merger and integration expense: Merger and integration expense increaseddecreased by $20.7$28.6 million, or 163%85%, to $4.9 million during the nine months ended September 30, 2021 from $33.5 million during the nine months ended September 30, 2020 from $12.8 million during the nine months ended September 30, 2019,primarily due to the C&J Merger, which was announced latemerger and integration related expenses in the second quarterearlier part of 20192020, which were larger in comparison to the Alamo Acquisition merger and which consisted primarily of professional services, severance costs, and facility consolidation.integration related expenses.
Effective tax rate: Our effective tax rate on continuing operations for the nine months ended September 30, 20202021 was 0.4%(1.5)% for $1.3$(2.0) million of recorded income tax expense. The difference between the effective tax rate and the U.S. federal statutory rate is due to foreign withholding taxes, and change in valuation allowance.allowance and discrete tax effect related to indefinite-lived assets. After considering all available positive and negative evidence, we determined that it is unlikely that we will utilize our net deferred tax assets in the foreseeable future and continued to maintain a full valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity represents a company's ability to adjust its future cash flows to meet its needs and opportunities, both expected and unexpected.
| | | (Thousands of Dollars) | | (Thousands of Dollars) |
| | September 30, 2020 | | December 31, 2019 | | September 30, 2021 | | December 31, 2020 |
Cash and cash equivalents | Cash and cash equivalents | | $ | 305,212 | | | $ | 255,015 | | Cash and cash equivalents | | $ | 135,525 | | | $ | 275,990 | |
Debt, net of unamortized deferred financing costs and unamortized debt discount | Debt, net of unamortized deferred financing costs and unamortized debt discount | | 336,107 | | | 337,623 | | Debt, net of unamortized deferred financing costs and unamortized debt discount | | 373,022 | | | 335,540 | |
| | | | | | | | | | | | | | |
| | (Thousands of Dollars) |
| | Nine Months Ended September 30, |
| | 2020 | | 2019 |
Net cash provided by operating activities | | $ | 82,676 | | | $ | 225,579 | |
Net cash used in investing activities | | (25,309) | | | (138,805) | |
Net cash used in financing activities | | (7,766) | | | (9,926) | |
| | | | | | | | | | | | | | |
| | (Thousands of Dollars) |
| | Nine Months Ended September 30, |
| | 2021 | | 2020 |
Net cash provided by (used in) operating activities | | $ | (19,320) | | | $ | 82,676 | |
Net cash used in investing activities | | (155,118) | | | (25,309) | |
Net cash provided by (used in) financing activities | | 33,540 | | | (7,766) | |
Significant sources and uses of cash during the nine months ended September 30, 2021
Uses of cash:
•Operating activities:
–Net cash used in operating activities during the nine months ended September 30, 2021 was $19.3 million which was down $102.0 million from the nine months ended September 30, 2020. The change is primarily due to a decrease in activity and pricing for our wireline and pump down services, an increase in commodity prices, additional maintenance expenses related to startup costs required for fleet re-deployments, and inflation. For further discussion, see Part I, "Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations" .
•Investing activities:
–Net cash used in investing activities during the nine months ended September 30, 2021 of $155.1 million, consisting primarily of capital expenditures, $101.8 million related to acquisition of business and payment of consideration liability, net of $34.4 million in cash received from the WSS notes and $24.5 million in proceeds from disposal of assets.
•Financing activities:
–Proceeds from the Equipment Loan for the nine months ended September 30, 2021 totaled $39.4 million.
–Cash used to repay our debt facilities, excluding leases and interest, during the nine months ended September 30, 2021 was $2.6 million.
–Cash used to repay our finance leases during the nine months ended September 30, 2021 was $1.1 million.
–Shares repurchased and retired related to payroll tax withholdings on our share-based compensation for the nine months ended September 30, 2021 totaled $1.9 million.
Significant sources and uses of cash during the nine months ended September 30, 2020
Sources of cash:
•Operating activities:
–Net cash generated by operating activities during the nine months ended September 30, 2020 of $82.7 million was athe result of our thoroughness in receiving collections from our customers and controlling costscosts.
Uses of cash:
•Investing activities:
–Net cash used in investing activities for the nine months ended September 30, 2020 of $25.3 million, consisting primarily of capital expenditures, net of the cash received as part of the sale of the Wells Support Services business segment, .segment.
•Financing activities:
–Cash used to repay our debt facilities, excluding leases and interest, during the nine months ended September 30, 2020 was $2.6 million.
–In the first quarter of 2020, the Company drew down $175 million on the 2019 ABL Facility (defined below). This borrowing was to provide the Company better flexibility while managing its cash position during the ongoing COVID-19 pandemic. The borrowing on the 2019 ABL Facility was repaid in full during the second quarter of 2020.
–Cash used to repay our finance leases during the nine months ended September 30, 2020 was $3.1 million.
–Shares repurchased and retired related to payroll tax withholdings on our share-based compensation for the nine months ended September 30, 2020 totaled $2.0 million.
Significant sources and uses of cash during the nine months ended September 30, 2019
Sources of cash:
•Operating activities:
–Net cash generated by operating activities during the nine months ended September 30, 2019 of $225.6 million was the result of our thoroughness in receiving collections from our customers and controlling costs. We continue to focus on maintaining operational and spend efficiencies resulting in positive working capital and net operating cash to support our capital expenditures and other investing activities.
Uses of cash:
•Investing activities:
–Net cash used in investing activities for the nine months ended September 30, 2019 of $138.8 million, consisting primarily of capital expenditures. This activity primarily related to our Completion Services segment.
•Financing activities:
–Cash used to repay our debt facilities, excluding leases and interest, during the nine months ended September 30, 2019 was $2.6 million.
–Cash used to repay our finance leases during the nine months ended September 30, 2019 was $3.8 million.
–Shares repurchased and retired related to stock-based compensation during the nine months ended September 30, 2019 totaled 3.5 million.
Future sources and use of cash
The Company is refining its 2020 totalcurrently expects fourth quarter capital expenditures which it now expects to total between $120of approximately $50 million, and $130 million, subject to market conditions, driven by strategic innovation investments andcomprised of maintenance capital expenditures.expenditures across all product and service lines, as well as strategic investments in additional dual fuel conversions, and the continued deployment of capital for our new Power Solutions business. The Company remains committed to disciplined growth through the coming cycle. While the Company believes it is idlingtoo early to provide a portion of its previously active hydraulic fracturing fleet in-line2022 capital expenditures guidance, we expect a significant year-over-year capital expenditures decline, even with the developing market outlook while focusing its innovation and technology investmentsinclusion of a full year of Alamo, as additional fleet upgrades will be more limited relative to focus on strategic investments discussed in the Operational Overview section of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.2021.
Debt service for the year ended December 31, 20202021 is projected to be $26.6$25.5 million, of which $2.0$4.8 million is related to finance leases, excluding buyout payments. We anticipate our debt service will be funded by cash flows from operations. Our leverage ratio, as calculated pursuant to the terms of our debt agreement, is 0.40x5.80x for the twelve rolling months ended September 30, 2020.2021.
In addition, depending upon Alamo's performance during the performance period, we may be using cash to perform our obligations under the Earnout Agreement related to the Alamo Acquisition. We anticipate our debt servicethat any payments due under the Earnout Agreement will be funded by cash flows from operations.
Other factors affecting liquidity
Financial position in current market. As of September 30, 2020,2021, we had $305.2$135.5 million of cash and a total of $65.6$154.1 million available under our revolving credit facility. As of September 30, 2020,2021, we were compliant with all financial and non-financial covenants in our bank agreements. Furthermore, our debt maturities extend over a long period of time. Despite the current uncertainty in global markets resulting from the COVID-19 pandemic, we currently believe that our cash on hand, cash flow generated from operations and availability under our revolving credit facility will provide sufficient liquidity for at least the next 12 months, including for capital expenditures, debt service, working capital investments, and contingent liabilities.
Guarantee agreements. In the normal course of business, we have agreements with financial institutions as part of our 2019 ABL Facility under which $28.8$23.2 million of letters of credit were outstanding as of September 30, 2020.2021.
Customer receivables. In line with industry practice, we bill our customers for our services in arrears and are, therefore, subject to our customers delaying or failing to pay our invoices. The majority of our trade receivables have payment terms of 30 to 60 days. In weak economic environments, we may experience increased delays and failures to pay our invoices due to, among other reasons, a reduction in our customers' cash flow from operations and their access to the credit markets. The economic impact of the COVID-19 pandemic and the resulting actions taken to control the further spread of the virus may exacerbate these delays or failures to pay in the future. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have an adverse effect on our liquidity, consolidated results of operations and consolidated financial condition.
Purchase Commitments. In the normal course of business, we enter into various contractual obligations that impact or could impact our liquidity. The Company has a number of purchase commitments that primarily relate to our agreements with vendors for sand purchases, other commodities/services and deposits on equipment. The purchase commitments to these vendors include obligations to purchase a minimum amount of product/services; provided that, if the minimum purchase requirement is not met, the shortfall at the end of the applicable period is settled in cash or, in some cases, carried forward to the next period. We also have a variety of operating lease obligations related to our real estate, rail cars, and light duty vehicles. In light of the COVID-19 pandemic and its direct impact on exploration/completion activity, for certain of these commitments, we have addressed or are working with our vendors to address our to near-term obligations. See Part II, "Item 1A. Risk Factors." for additional information on the risks related to these purchase commitments.
PrincipalLong-Term Debt AgreementsArrangements
2019 ABL Facility
We, and certain of our other subsidiaries as additional borrowers and guarantors, are parties to a Second Amended and Restated Asset-Based Revolving Credit Agreement (the “2019 ABL Facility”) that matures on October 31, 2024. This facility provides for, among other things, a $450.0 million revolving credit facility (with a $100.0 million subfacility for letters of credit), subject to a borrowing base in accordance with the terms agreed between us and the lenders. As of September 30, 2020,2021, we had no outstanding principal amounts under the 2019 ABL Facility.
The 2019 ABL Facility is subject to customary fees, guarantees of subsidiaries, events of default, restrictions and covenants, including certain restricted payments and a consolidated fixed charge coverage ratio test. As of September 30, 2020,2021, the Company was in compliance with all covenants.
2018 Term Loan Facility
We are party to a term loan facility and certain of our subsidiaries are guarantors (the "2018 Term Loan Facility") that matures on May 25, 2025. As of September 30, 2020,2021, there was $342.1$338.6 million principal amount of term loans outstanding (the "2018
Term Loans") at an interest rate of LIBOR plus an applicable margin, which is currently at 3.50%4.00%. The 2018 Term Loan Facility is subject to customary fees, guarantees of subsidiaries, events of default, restrictions and covenants, including certain restricted payments. As of September 30, 2020,2021, the Company was in compliance with all covenants.
Equipment Loan
On August 20, 2021, the Company entered into the Master Loan and Security Agreement (the “Master Agreement”) with Caterpillar Financial Services Corporation. The Master Agreement provides the backdrop for the Company to enter into secured equipment financing term loans from time to time in an aggregate amount of up to $46.5 million (the “Equipment Loans”). The Equipment Loans may be drawn in multiple tranches, with each loan evidenced by a separate promissory note. On September 3, 2021, we entered into a term note for $39.4 million (the “Note”) for an equipment financing loan. The Note will bear interest at a rate of 5.25% per annum and will mature no later than June 1, 2025. The Master Agreement and the Note contain customary affirmative and negative covenants, including limitations on further encumbrance of the collateral subject to the applicable loans under the Master Agreement. As of September 30, 2021, the Company was in compliance with all covenants.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet financing arrangements, transactions or special purpose entities.
Significant Accounting Policies and Estimates
The preparation of our unaudited condensed consolidated financial statements and related notes to the unaudited condensed consolidated financial statements included within Part I, "Item 1. Condensed Consolidated Financial Statements (Unaudited)" requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.
A critical accounting estimate is one that requires a high level of subjective judgment by management and has a material impact to our financial condition or results of operations. This discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes included within Part I, "Item 1. Condensed Consolidated Financial Statements (Unaudited)" of this Quarterly Report on Form 10-Q, as well as our consolidated and combined financial statements and related notes included in Part II, "Item 8. Financial Statements and Supplementary Data" and Part II, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K Report on Form 10-K for the year ended December 31, 2019.2020. We believe the following is a new critical accounting policy used in the preparation of our unaudited condensed consolidated financial statements.
(a) Credit Loss Standard
The Company adopted this new standard effective January 1, 2020 and analyzed its trade accounts receivable based on a risk assessed portfolio approach, incorporating current and forecasted economic conditions as of January 1, 2020 which resulted in the increase of $1.5 million of allowances for expected credit losses related to our accounts receivable through a cumulative effect offset to retained earnings.
(b) New Accounting Pronouncements
For discussion on the potential impact of new accounting pronouncements issued but not yet adopted, see Note (16) (15) New Accounting Pronouncements of Part I, "Item 1. Condensed Consolidated Financial Statements (Unaudited)."
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk. As of September 30, 2020,March 31, 2021, we had variable-rate debt outstanding, the exposure to which we manage with our interest-rate-related derivative instrument. We held no derivative instruments that increased our exposure to market risks for foreign currency rates, commodity prices or other market price risks. We are exposed to changes in interest rates on our floating rate borrowings under our 2019 ABL Facility and 2018 Term Loan. As of September 30, 2020,2021, we had $342.1$338.6 million aggregate principal amount outstanding under the 2018 Term Loan. The impact of a 1.0% increase in interest rates under the terms of the 2018 Term Loan would have a $0.9 million and $2.6 million impact on interest expense for the three and nine months endingended September 30, 2020,2021, respectively.
Commodity Price Risk. Our material and fuel purchases expose us to commodity price risk. Our material costs primarily include the cost of inventory consumed while performing our stimulation services such as proppant, chemicals and guar. Our fuel costs consist primarily of diesel fuel used by our various trucks and other motorized equipment. The prices for fuel and the raw materials (particularly guar and proppant) in our inventory are volatile and are impacted by changes in supply and demand, as well as market uncertainty and regional shortages. Depending on market conditions, we have generally been able to pass along price increases to our customers; however, we may be unable to do so in the future. We generally do not engage in commodity price hedging activities. However, we have purchase commitments with certain vendors to supply a majority of the proppant used in our operations. Some of these agreements are take-or-pay agreements with minimum purchase obligations. As a result of future decreases in the market price of proppants, we could be required to purchase goods and pay prices in excess of market prices at the time of purchase. For further quantitative disclosure about our market risk related to our variable-rate debt, interest-rate-related derivative instrument and purchase commitments, see Part I, "Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations".
Credit Risk. Financial instruments that potentially subject us to concentrations of credit risk are trade receivables. We extend credit to customers and other parties in the normal course of business. As a result of the COVID-19 pandemic, we have seen an increase in collection time related to trade receivables. We have established various procedures to manage our credit exposure, including credit evaluations and maintaining an allowance for doubtful accounts. For certain additional information regarding credit risk related to derivative instruments we hold, see Note (8) DerivativesDerivatives of Part I, "Item 1. Condensed Consolidated Financial Statements (Unaudited)."
COVID-19 Risks and Uncertainties. Refer to Item 1A. Risk Factors within this Quarterly Report on Form 10-Q to locate additional information related to current and potential risks of the COVID-19 pandemic on our business and financial performance.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Principal Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's (the "SEC") rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.
ChangesAs disclosed in Internal Control Over Financial Reporting
Effective January 1, 2020, we adopted ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which resultedNote (3) Alamo Acquisition in the increaseNotes to Consolidated Financial Statements, we acquired Alamo on August 31, 2021, and its total revenues constituted approximately 9% of $1.5 milliontotal revenues as shown on our consolidated financial statements for the three months ended September 30, 2021. Alamo’s total assets constituted approximately 27% of allowances for expected credit losses related tototal assets as shown on our accounts receivable through a cumulative effect offset to retained earnings. In connection with the adoptionconsolidated financial statements as of this standard, we implemented internalSeptember 30, 2021. We excluded Alamo’s disclosure controls to ensure we properly evaluate our financial assets for applicability.
On October 31, 2019, we completed the C&J Merger, which resulted in changes to internal controls over the consolidation and reporting of our financial results. In the second quarter of 2020, the Company completed the implementation of a single ERP system. We also continue to further simplify, harmonize and automate processes and migrate data, including from ancillary systems. In connection with the implementation, harmonization, and migrations and the resulting business process changes, we have reviewed and continue to execute, where appropriate, the re-design and documentation of ourprocedures that are subsumed by its internal control over financial reporting processes to maintain effectivefrom the scope of management's assessment of the effectiveness of our disclosure controls over our financial reporting. These transitions have not materially affected, and we do not expect them to materially affect, ourprocedures. This exclusion is in accordance with the guidance issued by the Staff of the Securities and Exchange Commission that an assessment of recent business combinations may be omitted from management's assessment of internal controlscontrol over financial reporting.reporting for one year following the acquisition. As part of the Company’s ongoing integration activities, the Company’s financial reporting controls and procedures are in the process of being implemented at Alamo. The two companies will maintain separate accounting systems through December 31, 2021. The condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q includewere prepared using information obtained from these separate accounting systems.
Changes in Internal Control Over Financial Reporting
Except as described above, there were no other changes to our internal control over financial reporting that occurred during the quarter ended September 30, 20202021 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
Item 1. Legal Proceedings
As is typical of the industry, the Company is, from time to time and in the ordinary course of business, involved in routine litigation or subject to disputes or claims related to its business activities. It is the Company's opinion that although the amount of liability with respect to certain of these known legal proceedings and claims cannot be ascertained at this time, any resulting liability will not have a material adverse effect individually or in the aggregate on the Company's financial condition, cash flows or results of operations; however, there can be no assurance as to the ultimate outcome of these matters.
Litigation Related to the Merger
In connection with the Merger Agreement and the transactions contemplated thereby the following complaints have been filed: (i) one putative class action complaint was filed in the United States District Court for the District of Colorado by a purported C&J stockholder on behalf of himself and all other C&J stockholders (excluding defendants and related or affiliated persons) against C&J and members of the C&J board of directors, (ii) two putative class action complaints were filed in the United States District Court for the District of Delaware by a purported C&J stockholder on behalf of himself and all other C&J stockholders (excluding defendants and related or affiliated persons) against C&J, members of the C&J board of directors, the Company and Merger Sub, (iii) one putative class action complaint was filed in the United States District Court for the Southern District of Texas by a purported stockholder of the Company on behalf of himself and all other stockholders of the Company (excluding defendants and related or affiliated persons) against the Company and members of its board of directors, and (iv) one putative class action was filed in the Delaware Chancery Court by a purported stockholder of the Company on behalf of himself and all other stockholders of the Company (excluding defendants and related or affiliated persons) against members of the Company's board of directors. The five stockholder actions are captioned as follows: Palumbos v. C&J Energy Services, Inc., et al., Case No. 1:19-cv-02386 (D. Colo.), Wuollet v. C&J Energy Services, Inc., et al., Case No. 1:19-cv-01411 (D. Del.), Plumley v. C&J Energy Services, Inc., et al., Case No. 1:19-cv-01446 (D. Del.), Bushansky v. Keane Group, Inc. et al., Case No. 4:19-cb-02924 (S.D. Tex) and Woods v. Keane Group, Inc., et al., Case No. 2019-0590 (Del. Chan.) (collectively, the "Stockholder Actions").
In general, the Stockholder Actions allege that the defendants violated Sections 14(a) and 20(a) of the Exchange Act, or aided and abetted in such alleged violations, because the Registration Statement on Form S-4 filed with the SEC on July 16, 2019 in connection with the proposed C&J Merger allegedly omitted or misstated material information. The Stockholder Actions seek, among other things, injunctive relief preventing the consummation of the C&J Merger, unspecified damages and attorneys' fees. C&J, the Company and the other named defendants believe that no supplemental disclosures were required under applicable laws; however, to avoid the risk of the Stockholder Actions delaying the C&J Merger and to minimize the expense of defending the Stockholder Actions, and without admitting any liability or wrongdoing, C&J and the Company filed a Form 8-K on October 11, 2019 making certain supplemental disclosures in connection with the C&J Merger. Following those supplemental disclosures, plaintiffs in the Woods, Bushansky and Palumbos actions voluntarily dismissed their claims as moot on October 16, 2019, October 29, 2019 and November 20, 2019, respectively. Neither of the remaining Stockholder Actions have been served or otherwise necessitate further response, but the Company continues to believe that the allegations therein lack merit and no supplemental disclosures were required under applicable law, and intends to defend itself vigorously should service be sought and the claims become active.
Item 1A. Risk Factors
The statements in this section describe the known material risks to our business and should be considered carefully. There have been no material changes from the risk factors previously disclosed in Part I, "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, except as set forth below.2020. The COVID-19 pandemic has significantly reduced demand for our services and adversely impacted our financial condition, results of operations and cash flows.
The effects of the COVID-19 pandemic, including actions taken by businesses and governments, have resulted in a significant and swift reduction in international and U.S. economic activity. These effects have adversely affected the demand for oil
and natural gas, which has resulted in a reduction in demand for our services. This demand reduction has had, and is expected to continue to have for the duration of such reduced demand for our services, an adverse impact on our revenue, which may be material.
While the full impact of the COVID-19 pandemic is not yet known, we are closely monitoring the effects of the pandemic on commodity demands, our customers, our suppliers, and on our operations and employees. These effects have included, and may continue to include, adverse revenue effects; disruptions to our operations; customer shutdowns of oil and gas exploration and production; employee impacts from illness, school closures and other community response measures; and temporary closures of our facilities or the facilities of our customers and suppliers.
Because we operate in a very competitive industry, the commodity price volatility, reduction in demand and increased supply of oil has resulted in a very challenging pricing environment. We may not be able to price our services at a rate that is sufficient to offset costs. In addition, we may be unable to replace dedicated contracts that were terminated early, extend expiring contracts or obtain new contracts in the spot market, and the rates and other material terms under any new or extended contracts may be on substantially less favorable rates and terms. These pricing factors could have a material adverse effect on our business, financial condition, cash flows and results of operations.
We have seen an increase in the time accounts receivable are outstanding since the onset of the COVID-19 pandemic, and the effects of the COVID-19 pandemic also may have a material adverse impact on the ability of the Company to collect its accounts receivable in a timely manner, or at all, as customers face higher liquidity and solvency risks and may be unable to continue to operate as a going concern in the future.
We also have a number of purchase commitments, some of which have obligations to purchase a minimum amount of product/services. We may not be able to reduce, extend, eliminate or otherwise address near-term obligations to our satisfaction, which could result in an adverse effect on our financial condition.
Disruption caused by business responses to the COVID-19 pandemic, including working remote arrangements, may create increased vulnerability to cybersecurity incidents, including breaches of information systems security, which could damage our reputation and commercial relationships, disrupt operations, increase costs and/or decrease revenues, and expose us to claims from customers, suppliers, financial institutions, regulators, employees and others, which, individually or in the aggregate could have a material adverse effect on our financial condition and results of operations.
The COVID-19 pandemic could have a material adverse effect on our business, results of operations and financial condition, as the extent to which the COVID-19 pandemic will continue to affect our business, results of operations and financial condition will depend on various factors and future developments beyond our control, which are highly uncertain and cannot be predicted at this time. Such developments include the geographic spread, severity and duration of the COVID-19 pandemic, the extent and duration of the impact on the U.S. and global economy (including the resulting economic downturn and recession), the actions that have been and may be taken by businesses and governments in response to the COVID-19 pandemic, the speed and effectiveness of responses to combat the COVID-19 virus and the response of citizens to any such actions now or in the future.
The COVID-19 pandemic, and the volatile regional and global economic conditions stemming from it, could also exacerbate other risk factors that we identify in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. We may also continue to see an increase in the volume of litigation, including contract claims (some of which may result from force majeure claims) and employment related claims.
The COVID-19 pandemic could also have a material adverse effect on our business, results of operations and financial condition in a manner that is not currently known to us or that we do not currently believe presents significant risks to our operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Sales of Equity Securities
None.
(b) Use of Proceeds
None.
(c) Purchases of Equity Securities
| Issuer Purchases of Equity Securities | Issuer Purchases of Equity Securities | Issuer Purchases of Equity Securities |
Settlement Period | Settlement Period | | (a) Total Number of Shares Purchased(2) | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | (d) Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs(1) | Settlement Period | | (a) Total Number of Shares Purchased(1) | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | (d) Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs(1) |
July 1, 2020 through July 31, 2020 | | 747 | | $2.37 | | — | | $50,000,000 | |
August 1, 2020 through August 31, 2020 | | 19,987 | | $2.55 | | — | | $50,000,000 | |
September 1, 2020 through September 30, 2020 | | — | | $— | | — | | $50,000,000 | |
July 1, 2021 through July 31, 2021 | | July 1, 2021 through July 31, 2021 | | 44,130 | | $3.98 | | — | | $— |
August 1, 2021 through August 31, 2021 | | August 1, 2021 through August 31, 2021 | | 88,780 | | $3.56 | | — | | $— |
September 1, 2021 through September 30, 2021 | | September 1, 2021 through September 30, 2021 | | 7,715 | | $3.77 | | — | | $— |
Total | Total | | 20,734 | | $2.54 | | — | | $50,000,000 | Total | | 140,625 | | $3.70 | | — | | $— |
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(1)On December 11, 2019, the Company announced that the board of directors approved a new share repurchase program for up to $50.0 million through December 2020.
(2) Consists of shares that were withheld by us to satisfy tax withholding obligations of employees that arose upon the vesting of restricted shares. The value of such shares is based on the closing price of our common shares on the vesting date.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The documents listed in the Exhibit Index of this Quarterly Report on Form 10-Q are incorporated by reference or are filed with this Quarterly Report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).
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Exhibit Number | | Exhibit Description |
3.110.1 | | |
10.2 | | |
10.3 | | |
10.4 | | |
10.5*† | | |
31.1* | | |
31.2* | | |
32.1** | | |
101.INS* | | XBRL Instance Document - The Instance Document does not appear in the Interactive Data Files because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH*
| | XBRL Taxonomy Extension Schema Document. |
101.CAL*
| | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.LAB*
| | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE*
| | XBRL Taxonomy Extension Presentation Linkbase Document. |
101.DEF*
| | XBRL Taxonomy Extension Definition Linkbase Document. |
104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document). |
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* Filed herewith.
** Furnished herewith.
† Indicates a management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements 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 on November 4, 2020.9, 2021.
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| NexTier Oilfield Solutions Inc. (Registrant) |
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| By: | /s/ Phung Ngo-Burns |
| | Phung Ngo-Burns |
| | Principal Accounting Officer and Duly Authorized Officer |
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