Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included within Part II, “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. For additional information related to forward looking statements or information related to the basis of presentation and comparability of financial information, please see “Cautionary Statement Regarding Forward-Looking Statements and Information” and “Basis of Presentation in this Annual Report on Form 10-K”, both of which immediately follow the table of contents of this Form 10-K.
Business Overview
NexTier Oilfield Solutions Inc. is a predominantly U.S. land oilfield 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 (i) our 2019 transaction with C&J, a publicly traded Delaware corporation, (ii) our 2021 acquisition of Alamo, a pressure pumper focused in the Permian, and (iii) our 2022 acquisition of last mile proppant logistics and wellsite storage assets from CIG Sellers. This history impacts the comparability of our operational results from year to year. See Part I, “Item 1. Business” of this Annual Report for an overview of our history, including additional information on certain of the acquisitions noted above, including the C&J Merger and the Alamo Acquisition, and business environment. Additional information on the Alamo Acquisition and the CIG Acquisition can also be found in Note (3) Acquisitions of Part II, “Item 8. Financial Statements and Supplemental Data.”
Industry Overview and Drivers in 2022
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, Haynesville and the Bakken/Rockies. The high density of our operations in the basins in which we are most active provides us the opportunity to leverage our fixed costs and to quickly respond with what we believe are highly efficient, integrated solutions that are best suited to address customer requirements.
Activity within our business segments is significantly impacted by spending on upstream exploration, development and production programs by our customers. Thus, our financial performance is affected by rig and well counts in North America, as well as oil and natural gas prices, which are summarized in the tables below. Also influencing our activity is the status of the global economy, which impacts oil and natural gas demand. Some of the more significant determinants of current and future spending levels of our customers are oil and natural gas prices, global oil supply, the world economy, the availability of credit, government regulation and global stability, which together drive worldwide drilling activity.
During 2022, global crude markets recovered further from the COVID-19 pandemic induced dual supply and demand shock that emerged in the first quarter of 2020. Additionally, the Russian invasion of Ukraine increased uncertainty of global supply given the supply of crude oil and natural gas that is exported from Russia, which along with the COVID-19 recoveries, drove crude prices to their peak in the first half of 2022, before retreating in the second half. For the year, crude prices were supportive of higher completions activity in 2022 relative to 2021. Crude oil prices have improved from their 2020 lows, which if maintained, we believe could drive a healthy level of investment and activity in U.S. shale.
There has been some attrition through consolidation and other events that have made some progress in realigning frac supply with demand. We believe frac supply utilization was very tight in 2022 and remains so at the beginning of 2023. Against this backdrop, pricing for our services has improved considering demand for our services has remained strong. Contributing to the tightness, horsepower intensity for each fleet continues to grow as our industry adopts more complex completion techniques; as horsepower demand returns, we believe existing supply will be fully utilized across fewer fleets.
The following table shows the average historical oil and natural gas prices for WTI and Henry Hub natural gas:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Oil price - WTI(1) | | $ | 94.90 | | | $ | 68.14 | | | $ | 39.23 | |
Natural gas price - Henry Hub(2) | | $ | 6.45 | | | $ | 3.89 | | | $ | 2.04 | |
(1) Oil price measured in dollars per barrel (2) Natural gas price measured in dollars per million British thermal units (Btu), or MMBtu |
The historical average U.S. rig counts based on the weekly Baker Hughes Incorporated rig count information were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
Product Type | | 2022 | | 2021 | | 2020 |
Oil | | 574 | | | 380 | | | 346 | |
Natural Gas | | 147 | | | 97 | | | 85 | |
Other | | 2 | | | 1 | | | 2 | |
Total | | 723 | | | 478 | | | 433 | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
Drilling Type | | 2022 | | 2021 | | 2020 |
Horizontal | | 659 | | | 431 | | | 384 | |
Vertical | | 25 | | | 22 | | | 20 | |
Directional | | 39 | | | 25 | | | 29 | |
Total | | 723 | | | 478 | | | 433 | |
As of January 2023, global liquids demand is expected to average 100.5 million barrels per day in 2023. The EIA anticipates continued growth in the long-term U.S. domestic demand for natural gas, supported by various factors, including (i) increased likelihood of favorable regulatory and legislative initiatives, (ii) increased acceptance of natural gas as a clean and abundant domestic fuel source and (iii) the emergence of low-cost natural gas shale developments. As of January 2023, natural gas demand in the United States is expected to average 86.74 billion cubic feet per day in 2023.
The regions in which we operate, including the Permian, Marcellus Shale / Utica Basins, Haynesville and Eagle Ford, among others, are expected to account for a majority of all new horizontal wells anticipated to be drilled through 2023. As of December 31, 2022, rigs in these basins accounted for approximately 70% of the total, and were up approximately 29% as compared to low total U.S. rig count noted on January 7, 2022.
The current U.S. administration has expressed support for alternative energy sources, reduction of greenhouse gas emissions, the use and dependence on fossil fuels, and efforts addressing climate change. There is also increased focus by our customers, investors and other stakeholders on climate change, sustainability, and energy transition matters. We have been transitioning to new technologies providing for dual fuel fleets capable of using natural gas, in furtherance of our low cost, low emissions commitment.
Operating Approach & Strategy
We believe that there 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 and electric fleet), to provide a service strategy targeted at achieving emissions reductions, both for us and our customers. NexTier has been developing and building its digital program for some time, and we have now applied our digital platform to all of our operating fleets. We launched our Power Solutions business in 2021, which provides a natural gas treatment and delivery service that will power NexTier’s fleet with field gas or compressed natural gas. This addition seeks to address 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 otherwise be fully realized. To address this situation, we developed an integrated natural gas treatment and delivery solution designed to provide gas sourcing, compression, transport, decompression, treatment, and distribution services for our fracing operations. This integrated strategy provides our customers with a streamlined approach to driving more sustainable, cost-effective operations at the wellsite. Additionally, as part of our wellsite integration strategy, in 2022, we acquired sand hauling, well storage, and last mile logistics assets from CIG Sellers and rebranded the entire last mile logistics operation as NexMile Logistics. The assets acquired were combined with the Company’s existing last mile logistics assets to create a leading player in the delivery and storage of proppant at the wellsite. We are committed to our Power Solutions, NexMile Logistics, and proppant management businesses and will look to further increase our investments in these services, in addition to the maintenance and investment in our core fracturing assets.
We believe our integrated approach and proven capabilities enable us to deliver cost-effective solutions for increasingly complex and technically demanding well completion requirements, which include longer lateral segments, higher pressure rates and proppant intensity and multiple fracturing stages in challenging high-pressure formations. In addition, our technical team and 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.
Our revenues are generated by providing services and equipment to customers who operate oil and gas properties and invest capital to drill new wells and enhance production or perform maintenance on existing wells. Our results of operations in our core service lines are driven primarily by five interrelated, fluctuating variables: (1) the drilling, completion and production activities of our customers, which is primarily driven by oil and natural gas prices and directly affects the demand for our services; (2) the price we are able to charge for our services and equipment, which is primarily driven by the level of demand for our services and the supply of equipment capacity in the market; (3) the cost of materials, supplies and labor involved in providing our services, and our ability to pass those costs on to our customers; (4) our activity, or deployed equipment “utilization” levels; and (5) the quality, safety and efficiency of our service execution.
Our operating strategy is focused on maintaining high utilization levels of deployed equipment to maximize revenue generation while controlling costs to gain a competitive advantage and drive returns. We believe that the quality and efficiency of our service execution and aligning with customers who recognize the value that we provide are central to our efforts to support equipment utilization and grow our business.
However, equipment utilization cannot be relied on as wholly indicative of our financial or operating performance due to variations in revenue and profitability from job to job, the type of service to be performed and the equipment, personnel and consumables required for the job, as well as competitive factors and market conditions in the region in which the services are performed. Given the volatile and cyclical nature of activity drivers in the U.S. onshore oilfield services industry, coupled with the varying prices we are able to charge for our services and the cost of providing those services, among other factors, operating margins can fluctuate widely depending on supply and demand at a given point in the cycle.
Historically, our utilization levels have been highly correlated to U.S. onshore spending by our customers. Generally, as capital spending by our customers increases, drilling, completion and production activity also increases, resulting in increased demand for our services, and therefore more days or hours worked (as the case may be). Conversely, when drilling, completion and production activity levels decline due to lower spending by our customers, we generally provide fewer services, which results in fewer days or hours worked (as the case may be). Additionally, during periods of decreased spending by our customers, we may be required to discount our rates or provide other pricing concessions to remain competitive and support deployed equipment utilization, which negatively impacts our revenue and operating margins. During periods of pricing weakness for our services, we may not be able to reduce our costs accordingly, and our ability to achieve any cost reductions from our suppliers typically lags behind the decline in pricing for our services, which could further adversely affect our results. Furthermore, when demand for our services increases following a period of low demand, our ability to capitalize on such increased demand may be delayed while we reengage and redeploy equipment and crews that have been idled
during a downturn. The mix of customers that we are working for, as well as limited periods of exposure to the spot market, also impacts our deployed equipment utilization.
Our Reportable Segments
Prior to the divestiture of our well support services business in March 2020, our business was organized into three reportable segments. Additional information on this transaction can be found in Note (21) Business Segments. We are organized into two reportable segments, described below. This history impacts the comparability of our operational results from 2020 to 2021.
•Completion Services, which consists of the following businesses and services lines: (1) hydraulic fracturing services; (2) wireline and pumping services; and (3) completion support services, which includes our Power Solutions natural gas fueling business, our proppant last mile logistics and storage business, and our R&T department.
•Well Construction and Intervention Services, which consists of our cementing services.
Completion Services
The core services provided through our Completion Services segment are hydraulic fracturing, wireline and pumpdown services. Our completion support services are focused on supporting the efficiency, reliability and quality of our operations. Our innovation centers provide in-house manufacturing capabilities that help to reduce operating cost and enable us to offer more technologically advanced and efficiency focused completion services, which we believe is a competitive differentiator. For example, through our innovation centers we manufacture the data control instruments used in our fracturing operations and assemble the perforating guns and addressable switches used in our wireline operations; some of these products are also available for sale to third-parties. The majority of revenue for this segment is generated by our fracturing business.
Well Construction and Intervention Services
The core services provided through our Well Construction and Intervention Services segment were cementing and previously coiled tubing services. After the sale of our coiled tubing assets to Gladiator Energy LLC on August 1, 2022, all of the revenue for this segment is generated by our cementing business.
Historical Segment: Well Support Services
On March 9, 2020, we completed a divestiture of the entities and assets comprising our Well Support Services. This segment had 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.
How we calculate utilization for each segment
Our management team monitors asset utilization, among other factors, for purposes of assessing our overall activity levels and customer demand. For our Completion Services segment, asset utilization levels for our own fleets is defined as the ratio of the average number of deployed fleets to the number of total fleets for a given time period. We define active fleets as fleets available for deployment; we consider one of our fleets deployed if the fleet has been put in service at least one day during the period for which we calculate utilization; and we define fully-utilized fleets per month as fleets that were deployed and working with our customers for a significant portion of a given month. As a result, as additional fleets are incrementally deployed, our utilization rate increases. We define industry utilization of fracturing assets as the ratio of the total industry demand of hydraulic horsepower to the total available capacity of hydraulic horsepower, in each case as reported by an independent industry source. Our method for calculating the utilization rate for our own fracturing fleets or the industry may differ from the method used by other companies or industry sources which could, for example, be based off a ratio of the total number of days a fleet is put in service to the total number of days in the relevant period. We believe that our measures of utilization, based on the number of deployed fleets, provide an accurate representation of existing, available capacity for additional revenue generating activity.
In our Well Construction and Intervention Services segment, we measure our asset utilization levels for our cementing business primarily by the total number of days that our asset base works on a monthly basis, based on the available working days per month. Prior to the sale on August 1, 2022, of our coiled tubing business, we measured certain asset utilization levels by the hour to better understand measures between daylight and 24-hour operations. Both the financial and operating performance of our coiled tubing and cement units can vary in revenue and profitability from job to job depending on the type of service to be performed and the equipment, personnel and consumables required for the job, as well as competitive factors and market conditions in the region in which the services are performed.
In our Well Support Services segment, prior to the 2020 divestiture of the segment, we measured asset utilization levels primarily by the number of hours our assets work on a monthly basis, based on the available working days per month.
RESULTS OF OPERATIONS
The following table sets forth our financial results for the year ended December 31, 2022 as compared to the year ended December 31, 2021.
A comparison of our financial results for the year ended December 31, 2021 and for the year ended December 31, 2020 can be found in the "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed on February 23, 2022.
Year Ended December 31, 2022 Compared with Year Ended December 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(Thousands of Dollars) | | | | | | As a % of Revenue | | Variance |
Description | | 2022 | | 2021 | | 2022 | | 2021 | | $ | | % |
Completion Services | | $ | 3,091,220 | | | $ | 1,324,888 | | | 95 | % | | 93 | % | | $ | 1,766,332 | | | 133 | % |
Well Construction and Intervention Services | | 153,602 | | | 98,553 | | | 5 | % | | 7 | % | | 55,049 | | | 56 | % |
| | | | | | | | | | | | |
Revenue | | 3,244,822 | | | 1,423,441 | | | 100 | % | | 100 | % | | 1,821,381 | | | 128 | % |
Completion Services | | 2,366,952 | | | 1,165,881 | | | 73 | % | | 82 | % | | 1,201,071 | | | 103 | % |
Well Construction and Intervention Services | | 123,143 | | | 89,440 | | | 4 | % | | 6 | % | | 33,703 | | | 38 | % |
| | | | | | | | | | | | |
Costs of services | | 2,490,095 | | | 1,255,321 | | | 77 | % | | 88 | % | | 1,234,774 | | | 98 | % |
Depreciation and amortization | | 229,259 | | | 184,164 | | | 7 | % | | 13 | % | | 45,095 | | | 24 | % |
Selling, general and administrative expenses | | 145,996 | | | 109,404 | | | 4 | % | | 8 | % | | 36,592 | | | 33 | % |
Merger and integration | | 63,435 | | | 8,709 | | | 2 | % | | 1 | % | | 54,726 | | | 628 | % |
Gain on disposal of assets | | (16,616) | | | (28,898) | | | (1 | %) | | (2 | %) | | 12,282 | | | (43 | %) |
| | | | | | | | | | | | |
Operating income (loss) | | 332,653 | | | (105,259) | | | 10 | % | | (7 | %) | | 437,912 | | | (416 | %) |
Other income, net | | 15,258 | | | 12,131 | | | 0 | % | | 1 | % | | 3,127 | | | 26 | % |
Interest expense, net | | (28,382) | | | (24,609) | | | (1 | %) | | (2 | %) | | (3,773) | | | 15 | % |
Total other expenses | | (13,124) | | | (12,478) | | | 0 | % | | (1 | %) | | (646) | | | 5 | % |
Income tax expense | | (4,560) | | | (1,686) | | | 0 | % | | 0 | % | | (2,874) | | | 170 | % |
Net income (loss) | | $ | 314,969 | | | $ | (119,423) | | | 10 | % | | (8 | %) | | $ | 434,392 | | | (364 | %) |
Revenue. Total revenue is comprised of revenue from our Completion Services and Well Construction and Intervention Services segments. Revenue in 2022 increased by $1.8 billion, or 128%, to $3.2 billion from $1.4 billion in 2021. This change in revenue by reportable segment is discussed below.
Completion Services: Completion Services segment revenue increased by $1.8 billion, or 133%, to $3.1 billion in 2022 from $1.3 billion in 2021. The segment revenue increase is primarily attributable to a strong increase in the number of deployed hydraulic fracturing fleets, additional well-site integration and commodities, including our Power Solutions natural gas fueling services, increases in wireline and pumpdown services, and a full year of legacy Alamo equipment compared to four months in 2021 . Improved market conditions and higher global commodity prices drove increased customer activity across all basins, and we realized strong pricing recovery in all services lines.
Well Construction and Intervention: Well Construction and Intervention Services segment revenue increased by $55.0 million, or 56%, to $153.6 million in 2022 from $98.6 million in 2021. The increase in revenue is
primarily due to higher customer activity, improved pricing, and increased utilization in our cementing and coil tubing services resulting from improved market conditions and higher global oil and gas commodity prices, offset by the reduction due to the sale of the coil tubing business in the third quarter of 2022.
Cost of services. Cost of services in 2022 increased by $1.2 billion, or 98%, to $2.5 billion from $1.3 billion in 2021. The increase is primarily due to significantly increased activity and utilization, as explained under the "Revenue" caption and its related segment sub-captions above. Pricing improvements coupled with operational efficiencies and process improvements to permanently drive costs out of the organization more than offset the impact of cost inflation, and led to overall costs increasing at a lower rate than revenue increased.
Equipment Utilization. Depreciation and amortization expense increased by $45.1 million, or 24%, to $229.3 million in 2022 from $184.2 million in 2021. The increase in depreciation and amortization is primarily due to additional equipment from the Alamo Acquisition in the third quarter of 2021, current year capital additions, and the CIG assets acquired in the third quarter of 2022. Gain on disposal of assets in 2022 decreased $12.3 million, to a gain of $16.6 million in 2022 compared to a gain of $28.9 million in 2021. This change was primarily driven by the Company’s higher levels of divesting in 2021 of diesel-powered frac equipment and other non-core assets to fund conversions of equipment to be powered by natural gas as compared to divestitures in 2022, which primarily consisted of the sale of our coiled tubing business in the third quarter of 2022.
Selling, general and administrative expense. Selling, general and administrative (“SG&A”) expense, which represents costs associated with managing and supporting our operations, increased by $36.6 million, or 33%, to $146.0 million in 2022 from $109.4 million in 2021, primarily due to the $24.9 million accrual reduction in 2021 related to the settlement of a regulatory audit matter, combined with increased stock compensation in first quarter of 2022 and increased activity as a result of the Alamo Acquisition in the third quarter of 2021.
Merger and integration expense. Merger and integration expense increased by $54.7 million, or 628%, to $63.4 million in 2022 from $8.7 million in 2021. The increase in merger and integration expense is primarily related to the Alamo Acquisition earnout, which was triggered by Alamo achieving certain EBITDA targets pursuant to the Purchase Agreement.
Other income, net. Other income, net, in 2022 increased by $3.1 million, or 26%, to $15.3 million in 2022 from $12.1 million in 2021. This change was primarily due to the gain on the sale of our equity security investment of $2.1 million recognized in other income (expense), net in the Consolidated Statements of Operations and Comprehensive Income (Loss).
Interest expense, net. Interest expense, net of interest income, increased by $3.8 million, or 15%, to $28.4 million in 2022 from $24.6 million in 2021. This change was primarily attributable to an increase in the Company’s finance leases acquired as part of the Alamo Acquisition in the third quarter of 2021.
Effective tax rate. Our effective tax rate on continuing operations in 2022 was 1.43% for $4.6 million of recorded income tax expense, as compared to (1.43)% for $1.7 million of income tax expense in 2021. For 2022, the difference between the effective tax rate and the U.S. federal statutory rate is due to state taxes, permanent differences and a change in valuation allowance. For 2021, the difference between the effective tax rate and the U.S. federal statutory rate is due to state taxes, foreign withholding taxes, permanent differences, and a change in valuation allowance. As of December 31, 2022, we continued to maintain a valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of this allowance. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. We continue to evaluate all available evidence to determine the
likelihood of utilizing our net deferred tax assets. The remaining tax impact not offset by a valuation allowance is related to indefinite-lived assets.
Material Changes to our Consolidated Balance Sheet
The following table presents the major indicators of our financial condition and liquidity. | | | | | | | | | | | | | | |
| | (Thousands of Dollars) |
| | December 31, 2022 | | December 31, 2021 |
Cash and cash equivalents | | $ | 218,476 | | | $ | 110,695 | |
Total current assets, excluding cash and cash equivalents | | 507,539 | | | 397,014 | |
Total current liabilities, excluding current maturities of long-term debt and leases | | 513,396 | | | 438,961 | |
Current maturities of long-term debt | | 14,004 | | | 13,384 | |
Long-term debt, net of deferred financing costs and debt discount, less current maturities | | $ | 347,425 | | | $ | 361,501 | |
Cash and cash equivalents was $218.5 million as of December 31, 2022, an increase of $107.8 million, or 97%, compared to $110.7 million as of December 31, 2021. The increase in cash and cash equivalents during the year ended December 31, 2022, was primarily driven by the improved profitability with strong cash collections, discipline on capital allocation due to market conditions, and higher global commodity prices that have increased customer activity across all basins and have enabled strong pricing recovery in all services lines. This was offset by cash flows used in investing activities including the purchases of property and equipment and the CIG Acquisition and cash flows used in financing activities including the payments on our debt obligations, finance lease, and our share repurchase program.
Total current assets, excluding cash and cash equivalents, was $507.5 million as of December 31, 2022, an increase of $110.5 million, or 28%, compared to $397.0 million as of December 31, 2021. Total current liabilities, excluding current maturities of long-term debt and leases, was $513.4 million as of December 31, 2022, an increase of $74.4 million, or 17%, compared to $439.0 million as of December 31, 2021. The increase in both total current assets, excluding cash and cash equivalents, and total current liabilities, excluding current maturities of long-term debt and leases, was due to increases in customer receivables, higher levels of inventories, increases in accounts payables and accrued expenses, and the increase in the Alamo earnout.
Long-term debt, net of deferred financing costs and debt discount, less current maturities was $347.4 million as of December 31, 2022, a decrease of $14.1 million, or 4%, as compared to $361.5 million as of December 31, 2021. The decrease in debt, net of deferred financing costs and debt discount was primarily driven by the principal payments made throughout the period.
Fiscal 2023 Strategy
We face many challenges and risks in the industry in which we operate. Although many factors contributing to these risks are beyond our ability to control, we continuously monitor these risks and have taken steps to mitigate them to the extent practicable. In addition, while we believe that we are well positioned to capitalize on available growth opportunities, we may not be able to achieve our business objectives and, consequently, our results of operations may be adversely affected. Please read the factors described in the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in Part I, Item 1A. of this Annual Report for additional information about the known material risks that we face.
Fiscal 2023 Objectives
With commodity prices continuing to be volatile, we intend to closely monitor the market and will adjust our approach as the situation develops. At this time, our principal business objective continues to be growing our business and safely providing best-in-class services in all of our operating segments, while delivering stockholder value and maintaining a disciplined capital deployment strategy.
We are committed to continuing to manage our business in line with demand for our services and make adjustments as necessary to effectively respond to changes in market conditions, customer activity levels, pricing for our services and equipment, and utilization of our deployed equipment and personnel. We take a measured approach to asset deployment, balancing our view of current and expected customer activity levels with a focus on generating positive returns for our stockholders. Our priorities remain to drive revenue by maximizing deployed equipment utilization, to improve margins through cost controls, to protect and grow our market share by focusing on the quality, safety and efficiency of our service execution, lower emissions, and to ensure that we are strategically positioned to capitalize on constructive market dynamics. We foresee the macroeconomics setup in 2023 to be just as strong for our industry as it was in 2022 and that the demand for fracturing fleets will likely continue to exceed the supply available in the market. Even during this strong macroeconomic environment in our industry, our strategy remains to lead the industry in disciplined behavior and use our returns to reward our shareholders.
Completion Services
In our Completion Services segment, our strategy remains focused on continuing to meet our customers’ demands while increasing the integration with more of our wireline and pumpdown units, Power Solutions services, and last mile logistics with our deployed fracturing fleets. We are focused on increasing our dedicated fracturing fleet count with efficient customers that allow us to achieve high equipment utilization, which should result in improved financial performance. As part of this effort, we continuously evaluate new technologies with enhanced capabilities and greater operating efficiency to replace aging equipment within our fracturing fleet as it becomes obsolete or retired. We also expect the delivery of our first electric fleet in the first half of the year, which will increase our investments in diesel substitution technologies. Additionally, we plan to continue to fund high return growth project that will increase the penetration of our wellsite integration strategy, mostly through additional investments in Power Solutions services and last mile logistics.
Furthermore, as discussed in Item 1. Business and Item 7. MD&A Overview, as part of our lower emissions initiatives, we are focused on optimizing gas substitution across our fleet, enabled by digital capabilities like NexHub and MDT controls, and the continued development of our Power Solutions business. We believe that natural gas-powered technologies and digital assisted logistics will be a key method of transitioning to lower emissions operations, which strategy we anticipate will be a key driver of returns.
Well Construction and Intervention Services
In our cementing business, we remain focused on providing high-quality, timely service and deploying more of our assets with efficient customers in our focused basins. We will stay focused on controlling costs and improving market share with an efficient customer base that plan to maintain stable drilling rig counts and levels of activity in 2023, while spending the necessary capital to maintain our equipment in optimal conditions.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity represents a company’s ability to adjust its future cash flows to meet needs and opportunities, both expected and unexpected.
| | | | | | | | | | | | | | |
| | (Thousands of Dollars) |
| | Year Ended December 31, |
| | 2022 | | 2021 |
Cash | | $ | 218,476 | | | $ | 110,695 | |
Debt, net of deferred financing costs and debt discount | | $ | 361,429 | | | $ | 374,885 | |
| | | | | | | | | | | | | | | | |
| | (Thousands of Dollars) |
| | Year Ended December 31, |
| | 2022 | | 2021 | | |
Net cash provided by (used in) operating activities | | $ | 454,391 | | | $ | (50,787) | | | |
Net cash used in investing activities | | $ | (186,234) | | | $ | (163,201) | | | |
Net cash (used in) provided by financing activities | | $ | (161,494) | | | $ | 48,286 | | | |
Significant sources and uses of cash during the year ended December 31, 2022
Sources of cash:
•Operating activities:
•Net cash provided by operating activities for the year ended December 31, 2022 was $454.4 million. This was primarily driven by improved profitability with strong cash collections, discipline on capital allocation, improved market conditions, and higher global commodity prices, which drove increased customer activity across all basins, as well as realized strong pricing recovery in all services lines. Pricing improvements, coupled with operational efficiencies, and process improvements to permanently drive costs out of the organization more than offset the impact of cost inflation and led to overall costs increasing at a lower rate than revenue.
Uses of cash:
•Investing activities:
•Net cash used in investing activities for the year ended December 31, 2022 was $186.2 million. The activity consists primarily of purchases of property and equipment of $215.4 million, advances of deposit on equipment of $4.9 million, asset acquisition of $26.7 million, and implementation of software of $4.8 million, offset by proceeds from disposal of assets of $50.2 million and proceeds from insurance recoveries of $15.4 million.
•Financing activities:
•Net cash used in financing activities during the year ended December 31, 2022 was $161.5 million. The activity consists primarily of payments made related to repayment of the 2018 Term Loan Facility and the Equipment Loan of $14.7 million, repayment of our finance leases of $13.9 million, repayment of our financing liabilities of $7.6 million, repayment of the contingent consideration liability related to the Alamo Acquisition earnout of $6.3 million, repurchase and retirement of shares related to stock-based compensation of $7.5 million, and repurchase and retirement of shares related to share repurchase program of $111.4 million.
Significant sources and uses of cash during the year ended December 31, 2021
Sources of cash:
•Financing activities:
•Net cash provided by financing activities for the year ended December 31, 2021 was $48.3 million, which was an increase of $58.1 million compared to the year ended December 31, 2020. This change was primarily due to the $43.2 million the Company received through our 2021 Equipment Loans and $17.8 million from financing liabilities.
Uses of cash:
•Operating activities:
•Net cash used in operating activities during the year ended December 31, 2021 was $50.8 million, which resulted in a change of $119.7 million compared to the year ended December 31, 2020. The change is primarily due to an increase in commodity prices, additional maintenance expenses related to startup costs required for fleet re-deployments, and inflation.
•Investing activities:
•Net cash used in investing activities for the year ended December 31, 2021 was $163.2 million, which resulted in increase of $125.4 million compared to the year ended December 31, 2020. The change is primarily due to an increase in purchase of property plant and equipment, deposits on equipment and implementation of software of $64.3 million, a $156.1 million change related to acquisition of business and payment of consideration liability, partially offset by an increase of $37.8 million in proceeds from disposal of assets, $34.4 million in cash received from the WSS notes and $22.9 million in proceeds from insurance recoveries.
Future sources and use of cash
Our primary sources of liquidity have historically included, and we have funded our capital expenditures with, cash flows from operations, issuance of our common stock for acquisitions, and borrowings under debt facilities. Our ability to generate future cash flows is subject to a number of variables, many of which are outside of our control, including the drilling, completion and production activity by our customers, which is highly dependent on oil and gas prices. See Part II, “Overview” for additional discussion of certain factors that impact our results and the market challenges within our industry.
Our primary uses of cash are for operating costs, capital expenditures, including acquisitions, our shareholder return program, and debt service.
In 2023, we expect capital expenditures to be approximately $350.0 million. We expect a higher spend in the first half of the year and declining in the second half due to the expected delivery of our first electric fleet, the front loaded investments in wellsite integration services including Power Solutions and last mile logistics, as well as further investments to increase our capitalized component spare parts.
Debt service for the year ended December 31, 2023 is projected to be $54.5 million, of which $13.2 million is related to finance leases. We anticipate our debt service will be funded by cash flows from operations.
As of December 31, 2022, we had $138.6 million remaining in the $250.0 million share repurchase program announced on October 25, 2022, which the Company expects to fully execute by December 31, 2023.
Other factors affecting liquidity
Financial position in current market. As of December 31, 2022, we had $218.5 million of cash and a total of $415.3 million available under our 2019 ABL Facility. We currently believe that our cash on hand, cash flow generated from operations and availability under our revolving credit facility will provide sufficient liquidity to cover our estimated short-term (i.e., the next 12 months) and long-term (i.e., beyond the next 12 months) funding needs, including for capital expenditures, debt service, working capital investments, and our shareholder return program.
Guarantee agreements. Under the 2019 ABL Facility $22.6 million of letters of credit were outstanding as of December 31, 2022.
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 or less. 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. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have a material adverse effect on our liquidity, consolidated results of operations and consolidated financial condition. We currently believe that the current strong macroeconomic environment for our industry will continue through 2023 and that we will not experience increased delays or failures of customers’ payments.
Contractual Obligations
In the normal course of business, we enter into various contractual obligations that impact or could impact our liquidity. The table below contains our known contractual commitments as of December 31, 2022.
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(Thousands of Dollars)
Contractual obligations | | Total | | 2023 | | 2024-2025 | | 2026-2027 | | 2028+ |
Long-term debt, including current portion(1) | | $ | 364,865 | | | $ | 15,429 | | | $ | 349,436 | | | $ | — | | | $ | — | |
Estimated interest payments(2) | | 52,694 | | | 22,734 | | | 29,960 | | | — | | | — | |
Finance lease obligations(3) | | 33,025 | | | 20,770 | | | 12,255 | | | — | | | — | |
Operating lease obligations(4) | | 22,487 | | | 6,811 | | | 7,715 | | | 3,985 | | | 3,976 | |
Purchase commitments(5) | | 291,619 | | | 271,415 | | | 20,204 | | | — | | | — | |
| | | | | | | | | | |
Legal contingency | | 374 | | | 374 | | | — | | | — | | | — | |
| | $ | 765,064 | | | $ | 337,533 | | | $ | 419,570 | | | $ | 3,985 | | | $ | 3,976 | |
(1)Long-term debt represents our obligations under our 2018 Term Loan Facility and Equipment Loan, exclusive of interest payments. In addition, these amounts exclude $3.4 million of unamortized debt discount and debt issuance costs associated with our 2018 Term Loan Facility and Equipment Loan.
(2)Estimated interest payments are based on debt balances outstanding as of December 31, 2022 and include interest related to the 2018 Term Loan Facility and the 2021 Equipment Loans. Interest rates used for variable rate debt are based on the prevailing current LIBOR. Pursuant to the Reference Rate Reform (Topic 848), the Company is currently working to transition from LIBOR to an alternate reference rate in 2023.
(3)Finance lease obligations primarily consist of obligations on our finance leases of light weight vehicles and frac equipment.
(4)Operating lease obligations are related to our real estate, rail cars, and light duty vehicles.
(5)Purchase commitments primarily relate to our agreements with vendors for sand purchases and deposits on equipment. The purchase commitments to sand suppliers represent our annual obligations to purchase a minimum amount of sand from vendors. If the minimum purchase requirement is not met, the shortfall at the end of the year is settled in cash or, in most cases, carried forward to the next year.
Principal Debt Agreements
Our principal debt arrangements continue to be the 2021 Equipment Loan, 2019 ABL Facility and the 2018 Term Loan Facility described below.
2021 Equipment Loans
Origination. On August 20, 2021, we entered into a Master Loan and Security Agreement (the “Master Agreement”) with Caterpillar Financial Services Corporation.
Structure. Our Master Agreement provides for secured equipment financing term loans in an aggregate amount of up to $46.5 million (the “2021 Equipment Loans”). The 2021 Equipment Loans may be drawn in multiple tranches, with each loan evidenced by a separate promissory note.
Maturity. All tranches under the Master Agreement mature on June 1, 2025.
Interest. Term notes entered into under the Master Agreement will bear interest at a rate of 5.25%.
2019 ABL Facility
Origination. On October 31, 2019, we, and certain of our other subsidiaries as additional borrowers and guarantors, entered into a Second Amended and Restated Asset-Based Revolving Credit Agreement (the “2019 ABL Facility”) to the original Asset-Based Revolving Credit Agreement, dated as of February 17, 2017, as amended December 22, 2017.
Structure. Our 2019 ABL Facility provides for 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. In addition, subject to approval by the applicable lenders and other customary conditions, the 2019 ABL Facility allows for an additional increase in commitments of up to $200.0 million. The 2019 ABL Facility is subject to customary fees, guarantees of subsidiaries, restrictions and covenants, including certain restricted payments.
Maturity. The loans arising under the initial commitments under the 2019 ABL Facility mature on October 31, 2024. The loans arising under any tranche of extended loans or additional commitments mature as specified in the applicable extension amendment or increase joinder, respectively.
Interest. Pursuant to the terms of the 2019 ABL Facility, amounts outstanding under the 2019 ABL Facility bear interest at a rate per annum equal to, at Keane Group Holdings, LLC’s option, (a) the base rate, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 0.75%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 0.50% or (z) if the average excess availability is greater than or equal to 66%, 0.25%, or (b) the adjusted LIBOR rate for such interest period, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 1.75%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 1.50% or (z) if the average excess availability is greater than or equal to 66%, 1.25%. Pursuant to the Reference Rate Reform (Topic 848), the Company is currently working to transition from LIBOR to an alternate reference rate in 2023.
Financial Covenants. The 2019 ABL Facility requires that, under certain circumstances, the consolidated fixed charge coverage ratio not be lower than 1.0:1.0 as of the last day of the most recently completed four consecutive fiscal quarters for which financial statements were required to have been delivered, including if excess availability (or liquidity if no loan or letter of credit, other than any letter of credit that has been cash collateralized, is outstanding) is less than the greater of (i) 10% of the loan cap and (ii) $30.0 million at any time. As of December 31, 2022, the Company was in compliance with all covenants and the circumstances that would require testing of the consolidated fixed charge coverage ratio had not occurred.
2018 Term Loan Facility
On May 25, 2018, Keane Group and the 2018 Term Loan Guarantors (as defined below) entered into 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 proceeds of the 2018 Term Loan Facility were used to refinance Keane Group’s then-existing term loan facility and to repay related fees and expenses, with the excess proceeds to fund general corporate purposes.
Structure. The 2018 Term Loan Facility provides for a term loan facility in an initial aggregate principal amount of $350.0 million (the loans incurred under the 2018 Term Loan Facility, the “2018 Term Loans”). As of December 31, 2022, there was $334.3 million principal amount of 2018 Term Loans outstanding. In addition, subject to certain customary conditions, the 2018 Term Loan Facility allows for additional incremental term loans to be incurred thereunder in an amount equal to the sum of (a) $200.0 million plus the aggregate principal amount of voluntary prepayments of 2018 Term Loans made on or prior to the date of determination (less amounts incurred in reliance on the capacity described in this subclause (a)), plus (b) an unlimited amount, subject to, (x) in the case of debt secured on a pari passu basis with the 2018 Term Loans, immediately after giving effect to the incurrence thereof, a first lien net leverage ratio being less than or equal to 2.00:1.00, (y) in the case of debt secured on a junior basis with the 2018 Term Loans, immediately after giving effect to the incurrence thereof, a secured net leverage ratio being less than or equal to 3.00:1.00 and (z) in the case of unsecured debt, immediately after giving effect to the incurrence thereof, a total net leverage ratio being less than or equal to 3.50:1.00.
Maturity. May 25, 2025 or, if earlier, the stated maturity date of any other term loans or term commitments.
Amortization. The 2018 Term Loans amortize in quarterly installments equal to 1.00% per annum of the aggregate principal amount of all initial term loans outstanding.
Interest. The 2018 Term Loans bear interest at a rate per annum equal to, at Keane Group’s option, (a) the base rate plus 2.75%, or (b) the adjusted LIBOR for such interest period (subject to a 1.00% floor) plus 3.75%, subject to, on and after the fiscal quarter ending September 30, 2018, a pricing grid with three 0.25% per annum step-ups and one 0.25% per annum step-down determined based on total net leverage for the relevant period. Following a payment event of default, the 2018 Term Loans bear interest at the rate otherwise applicable to such 2018 Term Loans at such time plus an additional 2.00% per annum during the continuance of such event of default. As of December 31, 2021, there was a $334.3 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%. 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 December 31, 2022, the Company was in compliance with all covenants. Pursuant to the Reference Rate Reform (Topic 848), the Company is currently working to transition from LIBOR to an alternate reference rate in 2023.
Prepayments. The 2018 Term Loan Facility is required to be prepaid with: (a) 100% of the net cash proceeds of certain asset sales, casualty events and other dispositions, subject to the terms of an intercreditor agreement between the agent for the 2018 Term Loan Facility and the agent for the 2019 ABL Facility and certain exceptions; (b) 100% of the net cash proceeds of debt incurrences or issuances (other than debt incurrences permitted under the 2018 Term Loan Facility, which exclusion is not applicable to permitted refinancing debt) and (c) 50% (subject to step-downs to 25% and 0%, upon and during achievement of certain total net leverage ratios) of excess cash flow in excess of a certain amount, minus certain voluntary prepayments made under the 2018 Term Loan Facility or other debt secured on a pari passu basis with the 2018 Term Loans and voluntary prepayments of loans under the 2019 ABL Facility to the extent the commitments under the 2019 ABL Facility are permanently reduced by such prepayments.
Guarantees. Subject to certain exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility, the amounts outstanding under the 2018 Term Loan Facility were originally guaranteed by the Company, Keane Frac, LP, KS Drilling, LLC, KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, and Keane Frac GP, LLC, and each subsidiary of the Company that have and will be required to execute and deliver a facility guaranty in the future pursuant to the terms of the 2018 Term Loan Facility (collectively, the “2018 Term Loan Guarantors”).
Security. Subject to certain exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility, the obligations under the 2018 Term Loan Facility are secured by (a) a first-priority security interest in and lien on substantially all of the assets of Keane Group and the 2018 Term Loan Guarantors to the extent not constituting ABL Facility Priority Collateral (as defined below) and (b) a second-priority security interest in and lien on substantially all of the accounts receivable, inventory, and frac iron equipment, and certain other assets and property related to the foregoing including certain chattel paper, investment property, documents, letter of credit rights, payment intangibles, general intangibles, commercial tort claims, books and records and supporting obligations of the borrowers and guarantors under the 2019 ABL Facility (the “ABL Facility Priority Collateral”).
Fees. Certain customary fees are payable to the lenders and the agents under the 2018 Term Loan Facility.
Restricted Payment Covenant. The 2018 Term Loan Facility includes a covenant restricting the ability of the Company and its restricted subsidiaries to pay dividends and make certain other restricted payments, subject to certain exceptions. The 2018 Term Loan Facility provides that the Company and its restricted subsidiaries may, among things, make cash dividends and other restricted payments in an aggregate amount during the life of the facility not to exceed (a) $100.0 million, plus (b) the amount of net proceeds received by Keane Group from the funding of the 2018 Term Loans in excess of the of such net proceeds required to finance the refinancing of the pre-existing term loan facility and pay fees and expenses related thereto and to the entry into the 2018 Term Loan Facility, plus (c) an unlimited amount so long as, after giving effect to such restricted payment, the total net leverage ratio would not exceed 2.00:1.00. In addition, the Company and its restricted subsidiaries may make restricted payments utilizing the Cumulative Credit (as defined below), subject to certain conditions including, if any portion of the Cumulative Credit utilized is comprised of amounts under clause (b) of the definition thereof below, the pro forma total net leverage ratio being no greater than 2.50:1.00.
“Cumulative Credit”, generally, is defined as an amount equal to (a) $25.0 million, (b) 50% of consolidated net income of the Company and its restricted subsidiaries on a cumulative basis from April 1, 2018 (which cumulative amount shall not be less than zero), plus (c) other customary additions, and reduced by the amount of Cumulative Credit used prior to such time (whether for restricted payments, junior debt payments or investments).
Affirmative and Negative Covenants. The 2018 Term Loan Facility contains various affirmative and negative covenants (in each case, subject to customary exceptions as set forth in the definitive documentation for the 2018 Term Loan Facility). The 2018 Term Loan Facility does not contain any financial maintenance covenants. As of December 31, 2022, the Company was in compliance with all covenants.
Events of Default. The 2018 Term Loan Facility contains customary events of default (subject to exceptions, thresholds and grace periods as set forth in the definitive documentation for the 2018 Term Loan Facility).
Related Party Transactions
Our board of directors has adopted a written policy and procedures (the “Related Party Policy”) for the review, approval and ratification of the related party transactions by the independent members of the audit and risk committee of our board of directors. For purposes of the Related Party Policy, a “Related Party Transaction” is (x) any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the Company or any of its subsidiaries is a participant, and (3) any Related Party (as defined below) has or will have a direct or indirect material interest, or (y) any transaction that would be required to be disclosed by the Company pursuant to Item 404(a) of Regulation S-K, as amended. All Related Party Transactions will be reviewed in accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Party’s interests in the transaction.
The Related Party Policy defines “Related Party” (x) as any person who is, or, at any time since the beginning of the Company’s last fiscal year for which the Company has filed an Annual Report on Form 10-K and
proxy statement (if applicable), was (1) an executive officer, director or nominee for election as a director of the Company or any of its subsidiaries, (2) a person with greater than five percent (5%) beneficial interest of any class of the Company’s voting securities, (3) an Immediate Family Member (as defined below) of any of the individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest of any class of the Company’s voting securities, or (y) any “related person” as defined in Item 404(a) of Regulation S-K, as amended. The Related Party defines “Immediate Family Members” to include a person’s spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone residing in such person’s home, other than a tenant or employee.
For further details about our transactions with Related Parties, see Note (19) Related Party Transactions of Part II, “Item 8. Financial Statements and Supplementary Data.”
Recently Issued Accounting Standards
For discussion on the impact of accounting standards issued but not yet adopted to our consolidated financial statements, see Note (22) New Accounting Pronouncements of Part II, “Item 8. Financial Statements and Supplementary Data.”
Critical Accounting Estimates
The preparation of our consolidated financial statements and related notes included within Part II, “Item 8. Financial Statements and Supplementary Data” 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. We believe the following are the critical accounting policies used in the preparation of our consolidated financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included within Part II, “Item 8. Financial Statements and Supplementary Data.”
Business combinations
We allocate the purchase price of businesses we acquire to the identifiable assets acquired and liabilities assumed based on their estimated fair values. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill. We use all available information to estimate fair values, including quoted market prices, the carrying value of acquired assets and assumed liabilities and valuation techniques such as discounted cash flows, multi-period excess earning or income-based-relief-from-royalty methods. We engage third-party appraisal firms to assist in the fair value determination of inventories, identifiable long-lived assets, identifiable intangible assets, as well as any contingent consideration or earn-out provisions that provide for additional consideration to be paid to the seller if certain future conditions are met. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our financial condition or results of operations. See Note (3) Acquisitions of Part II, “Item 8. Financial Statements and Supplementary Data” for further discussion of our completed acquisition during 2021.
Asset acquisitions
Asset acquisitions are measured based on their cost to us, including transaction costs incurred by us. An asset acquisition’s cost or the consideration transferred by us is assumed to be equal to the fair value of the net assets
acquired. If the consideration transferred is cash, measurement is based on the amount of cash we paid to the seller, as well as transaction costs incurred by us. Consideration given in the form of nonmonetary assets, liabilities incurred or equity interests issued is measured based on either the cost to us 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. We engage third-party appraisal firms to assist in the fair value determination of inventories, identifiable long-lived assets and identifiable intangible assets. Goodwill is not recognized in an asset acquisition. See Note (3) Acquisitions of Part II, “Item 8. Financial Statements and Supplementary Data” for further discussion of our recently completed asset acquisition during 2022.
Legal and environmental contingencies
From time to time, we are 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. Our assessment of the likely outcome of litigation matters is based on our 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. We accrue for contingencies when the occurrence of a material loss is probable and can be reasonably estimated, based on our best estimate of the expected liability. The estimate of probable costs related to a contingency is developed in consultation with internal and outside legal counsel representing us. The accuracy of these estimates is impacted by, among other things, the complexity of the issues and the amount of due diligence we have been able to perform. Differences between the actual settlement costs, final judgments or fines from our estimates could have a material adverse effect on our financial position or results of operations. See Note (18) Commitments and Contingencies of Part II, “Item 8. Financial Statements and Supplementary Data” for further discussion of our legal, environmental and other regulatory contingencies.
Valuation of long-lived assets, indefinite-lived assets and goodwill
We assess our long-lived assets, including definite-lived intangible assets and property and equipment, for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. We assess our goodwill and indefinite-lived assets for impairment annually, as of October 31, or whenever events or circumstances indicate that the carrying amount of goodwill or the indefinite-lived assets may not be recoverable. If the carrying value of an asset exceeds its fair value, we record an impairment charge that reduces our earnings.
We perform our qualitative assessments of the likelihood of impairment by considering qualitative factors relevant to each of our reporting units or asset groups, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value, and current operations, financial results, and historical projections. The expected future cash flows used for determination of recoverability and related fair value calculations are based on subjective, judgmental assessments of projected revenue growth, unit count, utilization, pricing, gross profit rates, SG&A rates, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. Many of these judgments are driven by crude oil prices. If the crude oil market declines and remains at low levels for a sustained period of time, we would expect to perform our impairment assessments more frequently and could record impairment charges.
See Note (2)(f) Long-Lived Assets with Definite Lives and (2)(h) Goodwill and Indefinite-Lived Intangible Assets of Part II, “Item 8. Financial Statements and Supplementary Data” for further discussion on our impairment assessments of our long-lived assets, indefinite-lived assets and goodwill for the years ended December 31, 2022, 2021 and 2020.
Income Taxes
We account for income taxes in accordance with Accounting Standards Codification (“ASC”) 740, “Income Taxes,” which requires an asset and liability approach for financial accounting and reporting of income taxes. Under ASC 740, income taxes are accounted for based upon the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss carry-forwards using enacted tax rates in effect in the year the differences are expected to reverse. We estimate our annual effective tax rate at each interim period based on the facts and circumstances available at that time, while the actual effective tax rate is calculated at year-end. Our effective tax rates will vary due to changes in estimates of our future taxable income or losses, fluctuations in the tax jurisdictions in which we operate and favorable or unfavorable adjustments to our estimated tax liabilities related to proposed or probable assessments. As a result, our effective tax rate may fluctuate significantly on a quarterly or annual basis.
In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In addition to our historical financial results, we consider forecasted market growth, earnings and taxable income, the mix of earnings in the jurisdictions in which we operate and the implementation of prudent and feasible tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage our underlying businesses. We establish a valuation allowance against the carrying value of deferred tax assets when we determine that it is more likely than not that the asset will not be realized through future taxable income. Such amounts are charged to earnings in the period in which we make such determination. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance.
We calculate our income tax liability based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Significant judgment is required in assessing, among other things, the timing and amounts of deductible and taxable items. Due to the complexity of some of these uncertainties, the ultimate resolution may result in payment that is materially different from our current estimate of our tax liabilities. These differences are reflected as increases or decreases to income tax expense in the period in which they are determined.
The amount of income tax we pay is subject to ongoing audits by federal and state tax authorities, which may result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current estimates. We recognize interest and penalties, if any, related to uncertain tax positions in income tax expense.
The Inflation Reduction Act ("IRA") was signed into law on August 16, 2022. Among other provisions, the IRA includes a 15% corporate alternative minimum tax (“CAMT”) applied to corporations with adjusted financial statement income over $1B and a 1% excise tax on corporate stock repurchases made by publicly traded companies after December 31, 2022. The IRA includes various energy tax credit provisions as well. The Company will not be an applicable corporation for purposes of the CAMT in 2023, but will be subject to the 1% excise tax on any stock repurchases starting in 2023. The Company will continue to monitor the impact of the IRA on its financial statements.
See Note (17) Income Taxes of Part II, “Item 8. Financial Statements and Supplementary Data” for further discussion on income taxes for the years ended December 31, 2022, 2021 and 2020.
Leases
Per ASU 2016-02, "Leases (Topic 842)," lessees can classify leases as finance leases or operating leases, while lessors can classify leases as sales-type, direct financing or operating leases. All leases, with the exception of short-term leases, are capitalized on the balance sheet by recording a lease liability, which represents our obligation to make lease payments arising from the lease, along with a corresponding right-of-use asset, which represents our right to use the underlying asset being leased. For leases in which we are the lessee, we use a collateralized incremental borrowing rate to calculate the lease liability, as in most cases we do not know the lessor's implicit rate
in the lease. Establishing our lease obligations on our consolidated balance sheets require judgmental assessments of the term lengths of each and the interest rate yield curve that best represents the collateralized incremental borrowing rate to apply to each lease. We engage third-party specialists to assist us in determining the collateralized incremental borrowing rate yield curve. Errors in determining the lease term lengths and/or selecting the best representative collateralized incremental borrowing rate can have a material adverse effect on our consolidated financial statements. For further details about our leases, see Note (16) Leases of Part II, “Item 8. Financial Statements and Supplementary Data”.
New Accounting Pronouncements
For discussion on the potential impact of new accounting pronouncements issued but not yet adopted and those adopted during the current year, see Note (22) New Accounting Pronouncements of Part II, “Item 8. Financial Statements and Supplementary Data.”
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
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NexTier Oilfield Solutions Inc. | |
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Audited Consolidated Financial Statements | |
Reports of Independent Registered Public Accounting Firm | |
Consolidated Balance Sheets | |
Consolidated Statements of Operations and Comprehensive Income (Loss) | |
Consolidated Statements of Changes in Stockholders’ Equity | |
Consolidated Statements of Cash Flows | |
Notes to Consolidated Financial Statements | |
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
NexTier Oilfield Solutions Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of NexTier Oilfield Solutions Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 16, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of long-lived assets for impairment triggering events
As discussed in Note 2(f) to the consolidated financial statements, the Company evaluates property and equipment and definite-lived intangible assets (collectively, long-lived assets) annually or upon the occurrence of events or changes in circumstances, referred to as triggering events, that indicate the carrying value of a long-lived asset may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount of a long-lived asset is not recoverable. As of December 31, 2022, the carrying value of property and equipment, net and definite-lived intangible assets, net was $679.5 million and $50.6 million, respectively.
We identified the evaluation of long-lived assets for impairment triggering events as a critical audit matter. A high degree of subjective auditor judgment was required in evaluating the Company’s assessment of current operations, financial results and historical projections, current industry and market conditions, and relevant industry data for impairment indicators.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process of identifying and assessing potential triggering events, including controls over the Company’s assessment of current operations, financial results and historical projections, current industry and market conditions, and relevant industry data. We evaluated the Company’s identification and assessment of triggering events by evaluating current period operations, financial results and historical projections, including consideration of current industry and market considerations. We compared relevant industry data used by the Company to external sources, including market index data and peer data. We evaluated the Company’s analysis over the factors and considered whether the Company omitted any significant internal or external elements in its evaluation.
/s/ KPMG LLP
We have served as the Company’s auditor since 2011.
Houston, Texas
February 16, 2023
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
NexTier Oilfield Solutions Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited NexTier Oilfield Solutions Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements), and our report dated February 16, 2023 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Houston, Texas
February 16, 2023
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands)
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 218,476 | | | $ | 110,695 | |
Trade and other accounts receivable, net | | 397,197 | | | 301,740 | |
Inventories, net | | 66,395 | | | 38,094 | |
Assets held for sale | | — | | | 1,555 | |
Prepaid and other current assets | | 43,947 | | | 55,625 | |
Total current assets | | 726,015 | | | 507,709 | |
Operating lease right-of-use assets | | 18,659 | | | 21,767 | |
Finance lease right-of-use assets | | 43,714 | | | 41,537 | |
Property and equipment, net | | 679,513 | | | 620,865 | |
Goodwill | | 192,780 | | | 192,780 | |
Intangible assets, net | | 50,586 | | | 64,961 | |
Other noncurrent assets | | 15,901 | | | 7,962 | |
Total assets | | $ | 1,727,168 | | | $ | 1,457,581 | |
Liabilities and Stockholders’ Equity | | | | |
Liabilities | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 202,936 | | | $ | 190,963 | |
Accrued expenses | | 281,715 | | | 213,923 | |
Customer contract liabilities | | 19,377 | | | 23,729 | |
Current maturities of long-term operating lease liabilities | | 6,083 | | | 7,452 | |
Current maturities of long-term finance lease liabilities | | 19,855 | | | 11,906 | |
Current maturities of long-term debt | | 14,004 | | | 13,384 | |
Other current liabilities | | 9,368 | | | 10,346 | |
Total current liabilities | | 553,338 | | | 471,703 | |
Long-term operating lease liabilities, less current maturities | | 13,267 | | | 20,446 | |
Long-term finance lease liabilities, less current maturities | | 11,925 | | | 26,873 | |
Long-term debt, net of deferred financing costs and debt discount, less current maturities | | 347,425 | | | 361,501 | |
Other noncurrent liabilities | | 11,294 | | | 30,041 | |
Total noncurrent liabilities | | 383,911 | | | 438,861 | |
Total liabilities | | 937,249 | | | 910,564 | |
| | | | |
Stockholders’ equity | | | | |
Common stock, par value $0.01 per share (500,000 shares authorized; 233,995 shares and 242,019 shares issued and outstanding, respectively) | | 2,340 | | | 2,420 | |
Paid-in capital in excess of par value | | 1,007,492 | | | 1,094,020 | |
Retained deficit | | (226,195) | | | (541,164) | |
Accumulated other Comprehensive Income (Loss) | | 6,282 | | | (8,259) | |
Total stockholders’ equity | | 789,919 | | | 547,017 | |
Total liabilities and stockholders’ equity | | $ | 1,727,168 | | | $ | 1,457,581 | |
See accompanying notes to the consolidated financial statements.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Amounts in thousands, except for per share amounts)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Revenue | | $ | 3,244,822 | | | $ | 1,423,441 | | | $ | 1,202,581 | |
Operating costs and expenses: | | | | | | |
Cost of services (1) | | 2,490,095 | | | 1,255,321 | | | 1,032,574 | |
Depreciation and amortization | | 229,259 | | | 184,164 | | | 302,051 | |
Selling, general and administrative expenses | | 145,996 | | | 109,404 | | | 144,147 | |
Merger and integration | | 63,435 | | | 8,709 | | | 32,539 | |
Gain on disposal of assets | | (16,616) | | | (28,898) | | | (14,461) | |
Impairment expense | | — | | | — | | | 37,008 | |
Total operating costs and expenses | | 2,912,169 | | | 1,528,700 | | | 1,533,858 | |
Operating income (loss) | | 332,653 | | | (105,259) | | | (331,277) | |
Other expense: | | | | | | |
Other income, net | | 15,258 | | | 12,131 | | | 6,516 | |
Interest expense, net | | (28,382) | | | (24,609) | | | (20,652) | |
Total other expenses | | (13,124) | | | (12,478) | | | (14,136) | |
Income (loss) before income taxes | | 319,529 | | | (117,737) | | | (345,413) | |
Income tax expense | | (4,560) | | | (1,686) | | | (1,470) | |
Net income (loss) | | 314,969 | | | (119,423) | | | (346,883) | |
Other Comprehensive Income (Loss), net of tax: | | | | | | |
Foreign currency translation adjustments | | 1,118 | | | 407 | | | (241) | |
Hedging activities | | 12,067 | | | 1,703 | | | (6,422) | |
Total Comprehensive Income (Loss) | | $ | 328,154 | | | $ | (117,313) | | | $ | (353,546) | |
| | | | | | |
Net income (loss) per share: | | | | | | |
Basic net income (loss) per share | | $ | 1.29 | | | $ | (0.53) | | | $ | (1.62) | |
Diluted net income (loss) per share | | $ | 1.26 | | | $ | (0.53) | | | $ | (1.62) | |
| | | | | | |
Weighted-average shares outstanding: basic | | 243,360 | | | 224,401 | | | 213,795 | |
Weighted-average shares outstanding: diluted | | 249,346 | | | 224,401 | | | 213,795 | |
(1) Cost of services during the years ended December 31, 2022, 2021, and 2020 excludes depreciation of $212.6 million, $166.4 million, and $283.8 million, respectively. Depreciation related to cost of services is presented within depreciation and amortization separately.
See accompanying notes to the consolidated financial statements.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
(Amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Common Stock | | Paid-in Capital in Excess of Par Value | | Retained Deficit | | Accumulated other comprehensive income (loss) | | Total |
| | | | | | | | | | | | |
Balance as of December 31, 2019 | | | | $ | 2,124 | | | $ | 966,762 | | | $ | (73,333) | | | $ | (8,781) | | | $ | 886,772 | |
Credit loss standard implementation | | | | — | | | — | | | (1,525) | | | — | | | (1,525) | |
Stock-based compensation | | | | 27 | | | 25,799 | | | — | | | — | | | 25,826 | |
Shares repurchased and retired related to stock-based compensation | | | | (7) | | | (2,566) | | | — | | | — | | | (2,573) | |
Other Comprehensive Income (Loss) | | | | — | | | — | | | — | | | (4,329) | | | (4,329) | |
Net loss | | | | — | | | — | | | (346,883) | | | — | | | (346,883) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Balance as of December 31, 2020 | | | | $ | 2,144 | | | $ | 989,995 | | | $ | (421,741) | | | $ | (13,110) | | | $ | 557,288 | |
Stock-based compensation | | | | 19 | | | 24,658 | | | — | | | — | | | 24,677 | |
Shares repurchased and retired related to stock-based compensation | | | | (3) | | | (2,696) | | | — | | | — | | | (2,699) | |
Equity issued in connection with Alamo Acquisition | | | | 260 | | | 82,063 | | | — | | | — | | | 82,323 | |
Other Comprehensive Income (Loss) | | | | — | | | — | | | — | | | 4,851 | | | 4,851 | |
Net loss | | | | — | | | — | | | (119,423) | | | — | | | (119,423) | |
Balance as of December 31, 2021 | | | | $ | 2,420 | | | $ | 1,094,020 | | | $ | (541,164) | | | $ | (8,259) | | | $ | 547,017 | |
| | | | | | | | | | | | |
Stock-based compensation | | | | 39 | | | 29,556 | | | — | | | — | | | 29,595 | |
Shares repurchased and retired related to stock-based compensation | | | | (9) | | | (7,491) | | | — | | | — | | | (7,500) | |
Equity issued in connection with CIG Acquisition | | | | 5 | | | 4,202 | | | — | | | — | | | 4,207 | |
Shares repurchased and retired related to stock repurchase program | | | | (115) | | | (112,795) | | | — | | | — | | | (112,910) | |
Other Comprehensive Income (Loss) | | | | — | | | — | | | — | | | 14,541 | | | 14,541 | |
Net income | | | | — | | | — | | | 314,969 | | | — | | | 314,969 | |
Balance as of December 31, 2022 | | | | $ | 2,340 | | | $ | 1,007,492 | | | $ | (226,195) | | | $ | 6,282 | | | $ | 789,919 | |
See accompanying notes to the consolidated financial statements.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Cash flows from operating activities: | | | | | | |
Net income (loss) | | $ | 314,969 | | | $ | (119,423) | | | $ | (346,883) | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities | | | | | | |
Depreciation and amortization | | 229,259 | | | 184,164 | | | 302,051 | |
Amortization of deferred financing fees | | 2,189 | | | 2,066 | | | 2,217 | |
Gain on disposal of assets | | (16,616) | | | (28,898) | | | (14,461) | |
Stock-based compensation | | 33,117 | | | 24,677 | | | 25,826 | |
| | | | | | |
| | | | | | |
| | | | | | |
Unrealized gain (loss) on derivative recognized in other comprehensive income (loss) | | — | | | 1,703 | | | (6,422) | |
(Gain) loss on financial instrument and derivatives, net | | (6,388) | | | 1,799 | | | (2,815) | |
Gain on insurance proceeds recognized in other income | | (8,564) | | | (10,409) | | | — | |
Loss on impairment of assets | | — | | | — | | | 37,008 | |
Payment of contingent consideration | | (27,014) | | | — | | | — | |
Changes in operating assets and liabilities | | | | | | |
(Increase) decrease in trade and other accounts receivable, net | | (95,477) | | | (128,535) | | | 183,083 | |
(Increase) decrease in inventories | | (36,253) | | | (9,978) | | | 19,167 | |
Decrease (increase) in prepaid and other current assets | | 23,769 | | | (10,894) | | | 5,160 | |
(Increase) decrease in other assets | | (8,962) | | | 24,807 | | | 25,306 | |
(Decrease) increase in accounts payable | | (34,260) | | | 18,693 | | | (61,658) | |
(Decrease) increase in customer contract liabilities | | (4,352) | | | (6,537) | | | 206 | |
Increase (decrease) in accrued expenses | | 99,667 | | | 34,860 | | | (84,129) | |
Decrease in other liabilities | | (10,693) | | | (28,882) | | | (14,771) | |
Net cash provided by (used in) operating activities | | 454,391 | | | (50,787) | | | 68,885 | |
Cash flows from investing activities | | | | | | |
Asset and business acquisitions | | (26,694) | | | (95,082) | | | 53,666 | |
Purchase of property and equipment | | (215,418) | | | (184,496) | | | (113,506) | |
Advances of deposit on equipment | | (4,854) | | | (961) | | | (1,908) | |
| | | | | | |
Implementation of software | | (4,846) | | | (3,021) | | | (8,813) | |
Proceeds from disposal of assets | | 50,227 | | | 70,432 | | | 32,659 | |
Proceeds from insurance recoveries | | 15,351 | | | 22,947 | | | 58 | |
Proceeds from settlement of WSS Notes and make-whole derivative | | — | | | 34,350 | | | — | |
Payment of consideration liability | | — | | | (7,370) | | | — | |
| | | | | | |
Net cash used in investing activities | | (186,234) | | | (163,201) | | | (37,844) | |
Cash flows from financing activities: | | | | | | |
Proceeds from the asset-based revolver and equipment loan | | — | | | 43,329 | | | 175,000 | |
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
| | | | | | | | | | | | | | | | | | | | |
Payments on the asset-based revolver, term loan facilities, and equipment loan | | (14,738) | | | (4,976) | | | (178,500) | |
Payments on finance leases | | (13,872) | | | (4,155) | | | (3,752) | |
Payment of debt issuance costs | | (110) | | | (277) | | | — | |
Payment of contingent consideration | | (6,343) | | | — | | | — | |
Shares repurchased and retired related to share repurchase program | | (111,365) | | | — | | | — | |
Shares repurchased and retired related to stock-based compensation | | (7,500) | | | (2,699) | | | (2,573) | |
Proceeds from financing liabilities | | — | | | 17,759 | | | — | |
Payments for financing liabilities | | (7,566) | | | (695) | | | — | |
Net cash (used in) provided by financing activities | | (161,494) | | | 48,286 | | | (9,825) | |
Non-cash effect of foreign translation adjustments | | 1,118 | | | 407 | | | (241) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | 107,781 | | | (165,295) | | | 20,975 | |
Cash, cash equivalents and restricted cash, beginning | | 110,695 | | | 275,990 | | | 255,015 | |
Cash, cash equivalents and restricted cash, ending | | $ | 218,476 | | | $ | 110,695 | | | $ | 275,990 | |
| | | | | | |
Supplemental disclosure of cash flow information: | | | | | | |
Cash paid during the period for: | | | | | | |
Interest | | $ | 26,332 | | | $ | 23,242 | | | $ | 21,114 | |
Income taxes | | 1,716 | | | 217 | | | 1,206 | |
| | | | | | |
Non-cash investing and financing activities: | | | | | | |
Change in accrued capital expenditures | | $ | (46,268) | | | $ | (71,897) | | | $ | (13,812) | |
Non-cash additions to equity security investment | | — | | | — | | | 5,263 | |
Non-cash additions to finance right-of use assets | | 7,115 | | | 42,592 | | | — | |
Non-cash additions to finance lease liabilities, including current maturities | | (6,874) | | | (42,592) | | | — | |
Non-cash additions to operating right-of-use assets | | 8,088 | | | 9,047 | | | 9,057 | |
Non-cash additions to operating lease liabilities, including current maturities | | (8,004) | | | (7,416) | | | (8,898) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
500,000 shares of NexTier common stock issued for CIG Acquisition | | $ | (4,207) | | | $ | — | | | $ | — | |
26,000,000 shares of NexTier common stock issued in exchange for Alamo ownership | | — | | | (82,323) | | | — | |
Total contingent consideration | | — | | | (45,944) | | | — | |
Non contingent consideration | | — | | | (7,370) | | | — | |
See accompanying notes to the consolidated financial statements.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(1) Basis of Presentation and Nature of Operations
The accompanying consolidated financial statements were prepared using United States (“U.S.”) Generally Accepted Accounting Principles (“GAAP”) and the instructions to Form 10-K and Regulation S-X and include all of the accounts of NexTier and its consolidated subsidiaries. All intercompany transactions and balances have been eliminated.
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; acquisition accounting; contingent liabilities; the valuation of property and equipment and intangible assets; income taxes; stock-based incentive plan awards; and derivatives.
Management believes the consolidated financial statements included herein contain all adjustments necessary to present fairly the Company’s financial position as of December 31, 2022 and 2021 and the results of its operations and cash flows for the years ended December 31, 2022, 2021 and 2020. Such adjustments are of a normal recurring nature.
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 (21) Business Segments.
On August 31, 2021, the Company completed its acquisition (“Alamo Acquisition”) of Alamo Pressure Pumping, LLC and its wholly owned subsidiaries (“Alamo”). Merger and integration related costs were recognized separately from the acquisition of assets and assumptions of liabilities in the Alamo Acquisition. Merger costs consist of legal and professional fees and pre-merger notification fees. Integration costs consist of expenses incurred to integrate Alamo’s operations, aligning accounting processes and procedures, integrating its enterprise resource planning system with those of the Company, and any Earnout Payments. All of these costs are recorded within merger and integration costs on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). For more details regarding the Alamo Acquisition, refer to Note (3) Acquisitions.
On August 1, 2022, the Company completed the sale of its coiled tubing assets to Gladiator Energy LLC (“Gladiator”). For more details regarding sale of the coiled tubing assets, refer to Note (21) Business Segments.
The 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.
(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. 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.
Asset acquisitions are measured based on their cost to the Company, including transaction costs. Asset acquisition costs, or the consideration transferred by the Company, are assumed to be equal to the fair value of the
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
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.
Refer to Note (3) Acquisitions for discussion of the acquisitions completed in 2022 and 2021.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company’s cash is invested in overnight interest-bearing demand deposit accounts with no set terms.
Net cash received from certain dispositions or casualty events of more than $25.0 million per single transaction or $50.0 million per series of related transactions, under the 2018 Term Loan Facility (as defined herein), and of more than $50.0 million, under the 2019 ABL Facility (as defined herein), is not considered to be restricted as long as the Company, at management’s discretion, reinvests any part of such proceeds in assets (other than current assets) to be used for its business (in the case of the 2018 Term Loan Facility) and for replacing or repairing the assets in respect of which such proceeds were received (in the case of the 2019 ABL Facility), in each case within 12 months from the receipt date of such proceeds. Otherwise, the proceeds are required to be applied as a prepayment of the 2018 Term Loan Facility or any outstanding commitments under the 2019 ABL Facility. The Company did not have any qualifying asset sale proceeds or insurance proceeds that exceeded the dollar thresholds described above for the years ended December 31, 2022 and 2021.
(c) Trade Accounts Receivable
Trade accounts receivable are generally recorded at the invoiced amount. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company evaluates its accounts receivable through a continuous process of assessing its portfolio on an individual customer and overall basis. This process consists of a thorough review of historical collection experience, current aging status of the customer accounts, and financial condition of customers. Based on our review of these factors, we establish or adjust allowances for specific customers. Trade accounts receivable were $398.6 million and $303.6 million at December 31, 2022 and 2021, respectively. As of December 31, 2022 and 2021, the Company had an allowance for credit losses of $1.4 million and $1.9 million, respectively.
(d) Inventories
Inventories are stated at the lower of cost or net realizable value. Costs of inventories include purchase, conversion and condition. As inventory is consumed, the expense is recorded in cost of services in the Consolidated Statements of Operations and Comprehensive Income (Loss) using the weighted average cost method for non-manufacturing inventory and standard cost method for manufacturing inventory.
The Company periodically reviews the nature and quantities of inventory on hand and evaluates the net realizable value of items based on historical usage patterns, known changes to equipment or processes and customer demand for specific products. Significant or unanticipated changes in business conditions could impact the magnitude and timing of impairment recognized. Provision for excess or obsolete inventories is determined based on historical usage of inventory on-hand, volume on-hand versus anticipated usage, technological advances and consideration of current market conditions. Inventories that have not turned over for more than a year are subject to a slow-moving reserve provision. In addition, inventories that have become obsolete due to technological advances, excess volume on-hand or no longer configured to operate with the Company’s equipment are written-off.
(e) Revenue Recognition
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Revenues are accounted for in accordance with Accounting Standards Codification 606 “Revenue from Contracts with Customers” (“ASC 606”), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers.
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.
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. The Company has identified one contract with a remaining term of more than one year, for which the Company had approximately $19.4 million of unsatisfied performance obligations as of December 31, 2022, 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
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 of December 31, 2022, the Company’s customer contract liability balance is related to the post close service agreement as a result of the Alamo Acquisition. Payment terms after invoicing are typically 30 to 60 days or less.
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 Consolidated Statements of Operations and Comprehensive Income (Loss) and net cash provided by operating activities in the consolidated statements of 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 (21) 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
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
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 Consolidated Statements of Operations and Comprehensive Income (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 Consolidated Statements of Operations and Comprehensive Income (Loss).
Once a stage has been completed or products and services have been provided, a field ticket is created that includes charges for the service performed and the chemicals, proppant, and compressed natural gas 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.
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.
Prior to the sale of the coiled tubing assets on August 1, 2022, the Company provided a range of coiled tubing services 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 were typically short-term in nature, lasting anywhere from a few hours to multiple days. Revenue was recognized upon completion of each day’s work based upon a completed field ticket. The field ticket included charges for the services performed and the consumables used during the course of service. The field ticket may have also included 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 would charge the customer for the services performed and resources provided on an hourly basis at agreed-upon spot market rates or pursuant to pricing agreements.
Historical Segment: Well Support Services
On March 9, 2020, the Company completed the divestiture of its Well Support Services segment. For additional information, see Note (21) Business Segments. Through its rig services line, the Company had provided workover and well servicing rigs that were primarily used for routine repair and maintenance of oil and gas wells, re-drilling operations and plug and abandonment operations. These 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.
Through its fluids management service line, the Company used 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 other special well site service line, the Company used to 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 basis 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.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Disaggregation of Revenue
Revenue activities during the years ended December 31, 2022, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 |
| | Completion Services | | WC&I | | Well Support Services | | Total |
| | (In thousands) |
Geography | | | | | | | | |
Northeast | | $ | 441,168 | | | $ | 29,464 | | | $ | — | | | $ | 470,632 | |
Central | | 590,444 | | | — | | | — | | | 590,444 | |
West Texas | | 1,881,561 | | | 118,726 | | | — | | | 2,000,287 | |
West | | 168,153 | | | 5,412 | | | — | | | 173,565 | |
International | | 9,894 | | | — | | | — | | | 9,894 | |
| | $ | 3,091,220 | | | $ | 153,602 | | | $ | — | | | $ | 3,244,822 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 |
| | Completion Services | | WC&I | | Well Support Services | | Total |
| | (In thousands) |
Geography | | | | | | | | |
Northeast | | $ | 248,652 | | | $ | 21,881 | | | $ | — | | | $ | 270,533 | |
Central | | 263,427 | | | — | | | — | | | 263,427 | |
West Texas | | 680,716 | | | 72,565 | | | — | | | 753,281 | |
West | | 95,072 | | | 4,107 | | | — | | | 99,179 | |
International | | 37,021 | | | — | | | — | | | 37,021 | |
| | | | | | | | |
| | $ | 1,324,888 | | | $ | 98,553 | | | $ | — | | | $ | 1,423,441 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 |
| | Completion Services | | WC&I | | Well Support Services | | Total |
| | (In thousands) |
Geography | | | | | | | | |
Northeast | | $ | 270,612 | | | $ | 21,290 | | | $ | — | | | $ | 291,902 | |
Central | | 131,833 | | | 7,478 | | | — | | | 139,311 | |
West Texas | | 477,758 | | | 58,111 | | | 8,373 | | | 544,242 | |
West | | 122,970 | | | 11,459 | | | 49,556 | | | 183,985 | |
International | | 43,141 | | | — | | | — | | | 43,141 | |
| | $ | 1,046,314 | | | $ | 98,338 | | | $ | 57,929 | | | $ | 1,202,581 | |
(f) Long-Lived Assets with Definite Lives
Property and equipment, inclusive of equipment under finance 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. Management determines the estimate of the
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
useful lives and salvage values of 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.
Gains and losses on disposal of property and equipment are determined 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 Consolidated Statements of Operations and Comprehensive Income (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 – 25 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, or its expected period of use. Depreciation methods, useful lives and residual values are reviewed annually.
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 income (loss) during the twelve months ended December 31, 2021 of $30.6 million, in the consolidated statement of operations and comprehensive income (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.
Property and equipment and definite-lived intangible assets (“Long-lived Assets”) are evaluated annually or upon the occurrence of events or changes in circumstances, referred to as triggering events, that indicate the carrying value of a Long-lived Asset may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount of a Long-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, research and technology, cementing, and coiled tubing, except for an entity level asset group for Long-lived Assets that do not have identifiable independent 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 asset groups, an impairment loss is determined by comparing the estimated fair value with the carrying value of the related asset groups. The impairment loss is then allocated across the asset group's major classifications.
The Company did not recognize any impairment charges related to the Company’s Long-Lived assets for the years ended December 31, 2022, 2021, or 2020.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(g) Major Maintenance Activities
The Company incurs maintenance costs on its major equipment. The determination of whether an expenditure should be capitalized or expensed requires management judgment in the application of how the costs benefit future periods, relative to the Company’s capitalization policy. Costs that either establish or materially increase the efficiency, productivity, functionality or life of a fixed asset are capitalized.
(h) Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of the purchase price of an acquired business over the estimated fair value of the identifiable assets acquired and liabilities assumed by the Company. For the purposes of goodwill impairment assessment, the Company evaluates goodwill for impairment annually, as of October 31, or more often as facts and circumstances warrant. When performing the impairment assessment, the Company evaluates factors, such as unexpected adverse economic conditions, competition and market changes. Goodwill is allocated across the Company’s Completions Services and Well Construction and Intervention.
Before employing detailed impairment testing methodologies, the Company may first evaluate the likelihood of impairment by considering qualitative factors relevant to each reporting unit, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. If the Company first utilizes a qualitative approach and determines that it is more likely than not that goodwill is impaired, detailed testing methodologies are then applied. Otherwise, the Company concludes that no impairment has occurred. The Company may also choose to bypass a qualitative approach and opt instead to employ detailed testing methodologies, regardless of a possible more likely than not outcome. The first step in the goodwill impairment test is to compare the fair value of each reporting unit to which goodwill has been assigned to the carrying amount of net assets, including goodwill, of the respective reporting unit. If the carrying amount of the reporting unit exceeds its fair value, the Company recognizes an impairment expense in an amount equal to the excess, limited to the total amount of goodwill allocated to the reporting unit.
The Company performs the qualitative analysis of the goodwill impairment assessment by reviewing relevant qualitative factors. In the first and third quarter of 2020, the Company determined there were triggering events that would indicate the carrying amount of its goodwill may not be recoverable, and as such, quantitative detail impairment testing was conducted.
As a result, the Company recognized $32.6 million in goodwill impairment expense during 2020, of which $32.2 million related to the Completions Service reporting unit and $0.4 million representing the entire goodwill balance for the Well Construction and Intervention reporting unit. No goodwill impairment expense was recognized during the years ended December 31, 2022 and 2021. See Note (5) Goodwill.
(i) Derivative Instruments and Hedging Activities
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 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) 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’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
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
income (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 income (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 income (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 reportable segments, see Note (10) Derivatives.
(j) Fair Value Measurement
Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date. The Company’s assets and liabilities that are measured at fair value at each reporting date are classified according to a hierarchy that prioritizes inputs and assumptions underlying the valuation techniques. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
•Level 1 Inputs: Quoted prices (unadjusted) in an active market for identical assets or liabilities.
•Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
•Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(k) Stock-based compensation
The Company recognizes compensation expense for restricted stock awards ("RSAs"), restricted stock units to be settled in common stock (“RSUs”), performance-based RSU awards (“PSUs”), non-qualified stock options (“stock options”), and performance unit awards (“PUs”) based on the fair value of the awards at the date of grant. The fair value of RSAs 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.
The PUs are settled in cash and therefore are recorded as liability-classified awards. The PUs are remeasured at fair value every reporting period and the Company recognizes compensation cost for the changes in fair value pro-rated for the portion of the requisite service period rendered.
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 cash flows resulting from any excess tax benefit will be classified as financing cash flows in the consolidated statements of 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 (12) Stock-Based Compensation.
(l) Taxes
A provision for U.S. federal income tax has been provided in the consolidated financial statements for the years ended December 31, 2022, 2021 and 2020.
As a result of the C&J Merger, the Company had foreign subsidiaries as of December 2020 in Canada, The Netherlands, Luxembourg and Ecuador. With the exception of the Canadian subsidiary, all other subsidiaries are dormant and had no active operations as of December 31, 2022 and 2021.
The Company is responsible for certain state income and franchise taxes in the states in which it operates, which include, but not limited to California, Colorado, Louisiana, Montana, New Mexico, North Dakota, Oklahoma, Pennsylvania, Texas, Utah and West Virginia. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforwards, if applicable.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.
The Company recognizes interest accrued related to unrecognized tax benefits, if any, in income tax expense.
See Note (17) Income Taxes for a detailed discussion of the Company’s taxes and activities thereof during the years ended December 31, 2022, 2021 and 2020.
(m) Commitments and Contingencies
The Company accrues for contingent liabilities when such contingencies are probable and reasonably estimable. The Company generally records losses related to these types of contingencies as direct operating expenses or general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss).
Legal costs associated with the Company’s loss contingencies are recognized immediately when incurred as general and administrative expenses in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).
(n) Leases
In accordance with Accounting Standards Codification 842 “Leases” (“ASC 842”), the Company 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 a right-of-use asset, which represents the Company'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 implicit 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 records this amortization in rent expense on the Consolidated Statements of Operations and Comprehensive Income (Loss). However, if the lease transfers ownership of the underlying asset to the Company or the Company is reasonably certain to exercise an option to purchase the underlying asset, the Company amortizes the right-of-of use asset to the end of the life of the underlying asset. The Company adjusts the lease liability to reflect lease payments made during the period and interest incurred on the lease liability using the effective interest method. The incurred interest expense is recorded in interest expense on the Consolidated Statements of Operations and Comprehensive Income (Loss).
For operating leases, the Company recognizes one single lease cost, comprised of the lease payments and amortization of any associated initial direct costs, within rent expense on the Consolidated Statements of Operations and Comprehensive Income (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.
In accordance with ASC 842, the Company has made the following elections for its lease accounting:
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
•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.
For additional information, see Note (16) Leases.
(o) Research and development costs
Research and development costs are expensed as incurred as general and administrative expenses in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). Research and development costs incurred directly by the Company were $3.6 million, $5.0 million and $4.8 million for the years ended December 31, 2022, 2021 and 2020, respectively.
(3) Acquisitions
(a) Asset Acquisition from Continental Intermodal Group LP
On August 3, 2022 the Company entered into and closed a definitive agreement to purchase substantially all assets (and assume certain lease liabilities) of the sand hauling, wellsite storage and last mile logistics businesses of Continental Intermodal Group LP (“CIG”) and its subsidiaries (the “CIG Acquisition”) from CIG, Continental Intermodal Group – Trucking, LLC (“Trucking”) and CIG Logistics LLC (together with Trucking and CIG, “CIG Sellers”).
The CIG Acquisition was completed for a purchase price of $31.3 million. At the time of close, the Company paid a total of $32.1 million, which included: (i) approximately $27.9 million in cash paid at closing to the CIG Sellers plus (ii) 500,000 shares of common stock. The $32.1 million transferred to CIG at the time of close included a deposit of $0.8 million for a transition services agreement for costs of services to be provided during the transition period. Accordingly, the purchase price of $31.3 million does not include the deposit of $0.8 million. The Company accounted for this acquisition as an asset acquisition pursuant to ASC 805. The purchase price of the acquisition was allocated amongst the acquired assets as the fair value of the acquired machinery and equipment assets represented substantially all of the fair value of the gross assets acquired. Additionally, the Company established a right of use asset and an operating lease liability of $0.9 million for the assumed lease liability. The Company incurred $0.9 million in transaction and integration costs related to the CIG Acquisition, which are presented in Merger and integration in the Consolidated Statements of Operations and Comprehensive Income (Loss).
(b) Alamo Acquisition
On August 31, 2021 (the “Alamo Acquisition Date”), the Company completed the Alamo Acquisition in accordance with the terms of the Purchase Agreement, dated as of August 4, 2021 (the “Purchase Agreement”), by and among the Company, NexTier Completion Solutions Inc., Alamo Frac Holdings, LLC, Alamo and the Owner Group identified therein. The Company acquired 100% of Alamo.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
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, $7.4 million of non-contingent consideration, and a net working capital settlement of $0.5 million that was finalized in the fourth quarter of 2021 and was paid to the Company in the first quarter of 2022. The contingent consideration included the Tier II Upgrade Payment, and the Earnout Payments, which were contingent upon the achievement of certain performance targets, as described in the Purchase Agreement. The earnout period ended in the fourth quarter of 2022, the performance targets were achieved, and the Company has agreed with Alamo Frac Holdings, LLC and the Owner Group to cumulative Earnout Payments of $73.8 million, of which $33.4 million has been paid as of December 31, 2022. The Company expects to pay the additional $40.4 million in 2023. The total increase in fair value of the Earnout Payments was $62.0 million and $2.4 million during the years ended December 31, 2022 and 2021, respectively.
The Company accounted for the Alamo Acquisition using the acquisition method of accounting. The aggregate purchase price noted above was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the acquisition. The measurements of some assets acquired and liabilities assumed, such 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 property and equipment were based on both available market date and a cost approach.
The following table summarizes the fair value of the consideration transferred in the Alamo Acquisition and the allocation of the purchase price to the fair values of the assets acquired and liabilities assumed at the Alamo Acquisition Date:
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
| | | | | | | | | | | | |
Total Purchase Consideration: | | | | | | |
| | | | | | Final Purchase Price Allocation |
(Thousands of Dollars) | | | | | | |
Cash consideration(1) | | | | | | $ | 100,000 | |
Equity consideration | | | | | | 82,323 | |
Post close services | | | | | | 30,000 | |
Contingent consideration | | | | | | 15,944 | |
Non contingent consideration | | | | | | 7,370 | |
Net working capital adjustment | | | | | | (482) | |
Total purchase consideration | | | | | | $ | 235,155 | |
| | | | | | |
Cash | | | | | | $ | 7,419 | |
Trade and accounts receivable | | | | | | 50,619 | |
Inventories | | | | | | 1,726 | |
Prepaid and other current assets | | | | | | 19,654 | |
Assets held for sale | | | | | | 3,282 | |
Property and equipment | | | | | | 113,889 | |
Intangible assets | | | | | | 27,113 | |
Finance lease right-of-use assets | | | | | | 35,345 | |
Other noncurrent assets | | | | | | 1,676 | |
Total identifiable assets acquired | | | | | | 260,723 | |
Accounts payable | | | | | | 39,101 | |
Accrued expenses | | | | | | 38,000 | |
Current maturities of long-term finance lease liabilities | | | | | | 10,125 | |
Long-term finance lease liabilities | | | | | | 25,220 | |
Non-current liabilities | | | | | | 971 | |
Total liabilities assumed | | | | | | 113,417 | |
Goodwill | | | | | | 87,849 | |
Total purchase consideration | | | | | | $ | 235,155 | |
(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:
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
| | | | | | | | | | | | | | |
| | | | (Thousands of Dollars) |
| | Weighted average remaining amortization period (Years) | | Gross Carrying Amounts |
Trademarks | | 1.5 | | $ | 2,409 | |
Non-compete agreements | | 3 | | 1,677 | |
Customer relationships | | 7.33 | | 23,027 | |
Total | | | | $ | 27,113 | |
For the valuation of the customer relationship intangible assets within the Completions Services segment, management used the income based multi-period excess earning method, which utilized contributory asset changes. 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 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 recognized $19.0 million in indemnification assets related to an ongoing sales and use tax audit and other indemnified liabilities under the Alamo Acquisition Purchase Agreement. During the year ended December 31, 2022, the Company obtained additional information that resulted in a reduction of the Company's accrual and offsetting indemnification receivable related to the sales and use tax audit by $2.9 million.
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 Consolidated Statements of Operations and Comprehensive Income (Loss).
| | | | | | | | | | | | | | | | |
| | | (Thousands of Dollars) |
Transaction Type | | | | Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
Merger | | | | $ | 62,009 | | | $ | 5,592 | |
Integration | | | | 401 | | | 3,117 | |
Total merger and integration costs | | | | $ | 62,410 | | | $ | 8,709 | |
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 December 31, 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 $6.9 million for the years ended December 31, 2021 and 2020, respectively.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
| | | | | | | | | | | | | | |
| | (unaudited, amounts in Thousands of Dollars) |
| | Year Ended December 31 |
| | 2021 | | 2020 |
Revenue | | $ | 1,633,866 | | | $ | 1,451,342 | |
Net loss | | (105,400) | | | (331,283) | |
| | | | |
Net loss per share (basic) | | (0.44) | | | (1.38) | |
Net loss per share (diluted) | | (0.44) | | | (1.38) | |
The Company’s condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2021 includes revenue of $172.1 million and net income of $20.0 million from the Alamo operations.
(4) Intangible Assets
The definite-lived intangible assets balance in the Company’s consolidated balance sheets represents the fair value measurement upon initial recognition, net of amortization, as applicable, related to the following:
| | | | | | | | | | | | | | | | | | | | | | |
| | | (Thousands of Dollars) |
| | | December 31, 2022 |
| | | | Gross Carrying Amounts | | Accumulated Amortization | | Net Carrying Amount |
Customer contracts | | | | $ | 90,627 | | | $ | (51,646) | | | $ | 38,981 | |
Non-compete agreements | | | | 2,377 | | | (1,294) | | | 1,083 | |
Trademarks | | | | 2,409 | | | (2,142) | | | 267 | |
Technology | | | | 37,216 | | | (26,961) | | | 10,255 | |
Total | | | | $ | 132,629 | | | $ | (82,043) | | | $ | 50,586 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | (Thousands of Dollars) |
| | | | December 31, 2021 |
| | | | Gross Carrying Amounts | | Accumulated Amortization | | Net Carrying Amount |
Customer contracts | | | | $ | 90,627 | | | $ | (44,063) | | | $ | 46,564 | |
Non-compete agreements | | | | 2,377 | | | (611) | | | 1,766 | |
Trademarks | | | | 2,409 | | | (157) | | | 2,252 | |
Technology | | | | 32,226 | | | (17,847) | | | 14,379 | |
Total | | | | $ | 127,639 | | | $ | (62,678) | | | $ | 64,961 | |
Amortization expense related to the intangible assets for the years ended December 31, 2022, 2021 and 2020 was $20.2 million, $16.4 million and $12.6 million, respectively.
Amortization for the Company’s definite-lived intangible assets, excluding in-process software, over the next five years, is as follows:
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
| | | | | | | | |
Year-end December 31, | | (Thousands of Dollars) |
2023 | | $ | (13,549) | |
2024 | | (11,000) | |
2025 | | (8,879) | |
2026 | | (5,633) | |
2027 | | (4,656) | |
(5) Goodwill
Goodwill is allocated across two reporting units: Completion Services and Well Construction and Intervention 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 COVID-19 pandemic and global supply and demand dynamics were deemed triggering events that led to a test for goodwill impairment. The impairment testing methodologies for the first quarter 2020 are discussed below.
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 Services 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 forward-looking selected market multiples for the guideline public company method were 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 forward-looking 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.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
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 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.
During the third quarter of 2020, the Company assessed and deemed 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, no impairment of goodwill was recorded.
During the Company’s annual testing as of October 31, 2022 and 2021, it was determined that there were no events that would indicate the carrying value of goodwill may not be recoverable or that a potential impairment exists.
The changes in the carrying amount of goodwill for the years ended December 31, 2021 and 2020 were as follows:
| | | | | |
| (Thousands of Dollars) |
Goodwill as of December 31, 2020 | $ | 104,198 | |
Completions Acquisition | 733 | |
Alamo Acquisition | 87,849 | |
Goodwill as of December 31, 2021 | $ | 192,780 | |
| |
| |
| |
| |
There were no changes in the carrying amount of goodwill for the year ended December 31, 2022. For additional information, see Note (3) (Acquisitions) and Note (21) (Business Segments).
(6) Inventories, net
Inventories, net, consisted of the following at December 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | |
| | (Thousands of Dollars) |
| | December 31, 2022 | | December 31, 2021 |
Sand, including freight | | $ | 15,901 | | | $ | 9,674 | |
Chemicals and consumables | | 6,854 | | | 4,204 | |
Materials and supplies | | 43,640 | | | 24,216 | |
| | | | |
Total inventory, net | | $ | 66,395 | | | $ | 38,094 | |
Inventories are reported net of obsolescence reserves of $3.4 million and $6.3 million as of December 31, 2022 and 2021, respectively. The Company recognized no obsolescence expense during the year ended December 31, 2022. The Company recognized $1.9 million and $2.6 million of obsolescence expense during the years ended December 31, 2021 and 2020, respectively.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(7) Property and Equipment, net
Property and Equipment, net consisted of the following at December 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | |
| | (Thousands of Dollars) |
| | December 31, 2022 | | December 31, 2021 |
Land | | $ | 13,699 | | | $ | 13,317 | |
Building and leasehold improvements | | 76,202 | | | 75,892 | |
Office furniture, fixtures and equipment | | 12,716 | | | 11,846 | |
Machinery and equipment | | 1,555,877 | | | 1,424,317 | |
| | 1,658,494 | | | 1,525,372 | |
Less accumulated depreciation | | (1,002,684) | | | (951,170) | |
Construction in progress | | 23,703 | | | 46,663 | |
Total property and equipment, net | | $ | 679,513 | | | $ | 620,865 | |
Casualty Loss
During the third quarter of 2022, one of the Company’s hydraulic frac fleets operating in the Permian Basin was involved in an accidental fire, which resulted in a loss of fracturing equipment; no parties were injured as a result of this incident. As of December 31, 2022, the Company received a total of $15.4 million in insurance proceeds offsetting the $6.8 million loss recognized related to the damaged equipment and the costs to remove the equipment. The resulting gain of $8.6 million was recognized in other income (expense), net in the Consolidated Statements of Operations and Comprehensive Income (Loss).
On May 9, 2021, one of the Company’s hydraulic 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. During the year ended December 31, 2021 the Company recognized a total of $22.9 million in insurance proceeds, partially offset by the $12.5 million loss recognized on the damaged equipment and costs to remove the equipment. The resulting $10.4 million gain was recognized in other income (expense), net in the consolidated Statements of Operations and Comprehensive Income (Loss).
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(8) Long-Term Debt
Long-term debt at December 31, 2022 and December 31, 2021 consisted of the following:
| | | | | | | | | | | | | | |
| | (Thousands of Dollars) |
| | December 31, 2022 | | December 31, 2021 |
2018 Term Loan Facility | | $ | 334,250 | | | $ | 337,750 | |
2021 Equipment Loans | | 30,342 | | | 41,321 | |
Other long-term debt | | 273 | | | 533 | |
Less: Unamortized debt discount and debt issuance costs | | (3,436) | | | (4,719) | |
Total debt, net of unamortized debt discount and debt issuance costs | | 361,429 | | | 374,885 | |
Less: Current portion | | (14,004) | | | (13,384) | |
Long-term debt, net of unamortized debt discount and debt issuance costs | | $ | 347,425 | | | $ | 361,501 | |
Below is a summary of the Company’s credit facilities outstanding as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | |
| | (Thousands of Dollars) |
| | 2021 Equipment Loans | | 2019 ABL Facility | | 2018 Term Loan Facility |
Original facility size | | $ | 46,500 | | | $ | 450,000 | | | $ | 350,000 | |
Outstanding balance | | $ | 30,342 | | | $ | — | | | $ | 334,250 | |
| | | | | | |
Letters of credit issued | | $ | — | | | $ | 22,550 | | | $ | — | |
Available borrowing base commitment | | n/a | | $ | 415,273 | | | 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, the 2021 Equipment Loans, and the other long-term debt for the next five years are presented below:
| | | | | | | | |
| | |
Year-end December 31, | | (Thousands of Dollars) |
2023 | | $ | 15,429 | |
2024 | | 15,790 | |
2025 | | 333,646 | |
2026 | | — | |
2027 | | — | |
| | |
| | |
| | $ | 364,865 | |
Deferred Charges and Other Costs
Deferred charges include deferred financing costs and debt discounts or debt premiums. Deferred charges related to the 2019 ABL Facility (defined below) are capitalized. Deferred charges related to the 2018 Term Loan Facility (defined below) and the 2021 Equipment Loans (defined below) are netted against the carrying amount of term debt. Deferred charges are amortized to interest expense using the effective interest method. Interest expense related to the deferred financing costs for the years ended December 31, 2022, 2021 and 2020 was $2.2 million, $2.1 million, and $2.2 million, respectively.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Equipment Loans
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. On December 30, 2021 the Company entered into a term note for $3.4 million for additional equipment financing. 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.
ABL Revolving Credit Facility
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 $1.5 million and $2.3 million as of December 31, 2022 and 2021, 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 as of the borrowing dates. 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.
Term Loan Facility
On May 25, 2018, the Company entered into a term loan facility (the “2018 Term Loan Facility”), the proceeds of which were used to repay the Company’s pre-existing term loan facility (the “2017 Term Loan Facility”). No prepayment penalties were incurred in connection with the Company’s early debt extinguishment of its 2017 Term Loan Facility. Deferred charges associated with the 2017 Term Loan Facility that were expensed upon repayment of the 2017 Term Loan Facility totaled $7.6 million. Deferred charges associated with the 2018 Term Loan Facility that were netted against the carrying amount of the term debt totaled $9.0 million. Unamortized deferred charges associated with the 2018 Term Loan Facility were $3.2 million and $4.5 million as of December 31, 2022 and 2021, respectively, and are recorded in long-term debt, net of deferred financing costs and debt discount, less current maturities on the consolidated balance sheets.
(9) Significant Risks and Uncertainties
Subsequent to the sale of the Well Support Services segment in the first quarter of 2020, the Company operates in two reportable segments: Completion Services and Well Construction and Intervention, with significant concentration in the Completion Services segment. During the years ended December 31, 2022, 2021 and 2020, sales to Completion Services customers represented 95%, 93% and 87% of the Company’s consolidated revenue, respectively.
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.
From the end of the fourth quarter of 2019 through mid-August 2020, the U.S. active rig count decreased by 70%, from 805 to 244 rigs before recovering to 351 rigs by the end of 2020. In 2021, the U.S. active rig count recovery continued, increasing 67% from 351 rigs at the end of 2020 to 586 rigs by the end of 2021. During 2022, activity growth continued, with the rig count growing another 33% during the year to close 2022 at 779 active rigs.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Significant customers are those that individually account for 10% or more of the Company's consolidated revenue or total accounts receivable. For the year ended December 31, 2022, one customer individually represented approximately 10% of the Company’s consolidated revenue. This customer represented $311.8 million of our consolidated revenue in the Completions Services revenue. For the year ended December 31, 2021, one customer individually represented approximately 14% of the Company’s consolidated revenue. This customer represented $193.4 million of our consolidated revenue in the Completions Services segment. For the year ended December 31, 2020, two customers individually represented more than 10% of the Company’s consolidated revenue. These two customers represented $188.6 million or 16% and $160.5 million or 13%, respectively, of our consolidated revenue in the Completions Services segment.
For the year ended December 31, 2022, there were no suppliers that individually represented more than 5% of the Company’s overall purchases. For the year ended December 31, 2021, one supplier individually represented approximately 5% of the Company’s overall purchases, and was primarily incurred within the Completion Services segment.
(10) 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 are accompanied by a make-whole guarantee at par value, which guarantees the payment of $34.4 million to NexTier after the WSS Notes are held to the one-year anniversary of March 9, 2021. The cash equivalent make-whole is issued under a fund guarantee by Ascribe III Investments LLC, 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 is 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. Unrealized gains and losses recognized in relation to the change in fair value of these instruments are recognized in net income (loss) in the Consolidated Statements of Operations and Comprehensive Income (Loss). The fair value of the WSS Notes and make-whole guarantee are recorded in Other Current Assets on the consolidated balance sheets. See Note (21) 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 Income (Loss).
On May 25, 2018, the Company, and certain subsidiaries of the Company as guarantors, entered into the 2018 Term Loan Facility. 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 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. The new interest rate swap was designated in a new cash flow hedge relationship.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the 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) |
| 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 December 31, 2022: | | | | | | | | | |
Other current asset | $ | 3,870 | | $ | — | | $ | 3,870 | | $ | — | | $ | 3,870 |
Other noncurrent asset | 2,816 | | — | | 2,816 | | — | | 2,816 |
| | | | | | | | | |
| | | | | | | | | |
As of December 31, 2021: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Other current liability | $ | (2,787) | | $ | — | | $ | (2,787) | | $ | — | | $ | (2,787) |
Other noncurrent liability | (3,747) | | — | | (3,747) | | — | | (3,747) |
| | | | | | | | | |
(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):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2022 | | 2021 | | 2020 | | Location |
Amount of gain (loss) recognized in other comprehensive income (loss) on derivative | | $ | 12,067 | | | $ | 1,703 | | | $ | (6,422) | | | OCI |
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into earnings | | (1,356) | | | (2,741) | | | (2,334) | | | Interest Expense |
| | | | | | | | |
The gain (loss) recognized in other comprehensive income (loss) for the derivative instrument is presented within the hedging activities line item in the consolidated statements of operations and comprehensive income (loss).
There were no gains or losses recognized in earnings as a result of excluding amounts from the assessment of hedge effectiveness. Based on recorded values at December 31, 2022, $3.2 million of net gains will be reclassified from accumulated other comprehensive income (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 $0.9 million for the year ended December 31, 2020 which is recorded within other income (expense) on the Consolidated Statements of Operations and Comprehensive Income (Loss).
See Note (11) Fair Value Measurements and Financial Information for further information related to the Company’s derivative instruments.
(11) 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. The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, derivative instruments, and long-term debt. As of December 31, 2022, and 2021, the carrying values of the Company’s financial instruments, included in its consolidated balance sheets, approximated or equaled their fair values.
Recurring Fair Value Measurement
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
As of December 31, 2022, the Company had one financial instrument measured at fair value on a recurring basis which is its interest rate derivative (see Note (10) Derivatives above). Additionally, during the year ended December 31, 2022, the Company held an equity security investment composed primarily of common equity shares and warrants in a publicly traded company, in addition to an immaterial balance related to contingent value rights ("CVRs"). As of December 31, 2022, the Company sold all of its common equity shares and warrants and its investment in the CVRs has matured and no longer holds any value. During the year ended December 31, 2022, the Company also measured the fair value of the Earnout Payments originating from the Alamo Acquisition on a recurring basis. The earnout period ended in the fourth quarter of 2022, the performance targets were achieved, and the Company has agreed with Alamo and the Owner Group to cumulative Earnout Payments of $73.8 million.
The financial instruments are presented in the consolidated balance sheets; the interest rate derivative is presented within other current assets and other noncurrent assets, the equity security investment was presented within other current assets, and the Earnout Payments are presented within accrued expenses. As of December 31, 2021, the Company had three financial instruments measured at fair value on a recurring basis, which was its interest rate derivative, the equity security investment, and the Earnout Payments.
The fair market value of the derivative financial instruments reflected on the consolidated balance sheets as of December 31, 2022, and 2021 was determined using industry-standard models that consider various assumptions, including current market and contractual rates for the underlying instruments, time value, implied volatilities, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace through the full term of the instrument and can be supported by observable data.
The fair value of the equity security investment was measured at the end of each reporting period. Gains and losses recognized in relation to the change in fair value of the equity security investment were recognized in other income (expense), net in the Consolidated Statements of Operations and Comprehensive Income (Loss). The Company sold all of its investment with a book value of $10.3 million during the year ended December 31, 2022 for $12.4 million, which resulted in a realized gain of $2.1 million. As of December 31, 2022, the remainder of the Company's investment, which consisted of the CVRs, matured and had no carrying value.
The fair value of the Earnout Payments was measured at the end of each reporting period through the end of the earnout period, which occurred in the fourth quarter of 2022. Gains and losses recognized in relation to the change in fair value of the Earnout Payments were recognized in Merger and integration in the Consolidated Statements of Operations and Comprehensive Income (Loss). See Note (3) Acquisitions for further discussion.
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 December 31, 2022, and 2021 (in thousands of dollars):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair value measurements at reporting date using |
| | December 31, 2022 | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | |
| | | | | | | | |
Interest rate derivative | | $ | 6,686 | | | $ | — | | $ | 6,686 | | | $ | — |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair value measurements at reporting date using |
| | December 31, 2021 | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Equity security investment | | $ | 7,743 | | $ | 7,743 | | $ | — | | $ | — |
Liabilities: | | | | | | | | |
Earnout Payments | | (11,795) | | | — | | | — | | | (11,795) | |
Interest rate derivatives | | $ | (6,534) | | | $ | — | | $ | (6,534) | | | $ | — |
Non-Routine Fair Value Measurement
The fair values of indefinite-lived assets and Long-Lived assets are determined with internal cash flow models based on significant unobservable inputs. The Company measures the fair value of its property, plant and
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
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.
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 $218.5 million and $110.7 million as of December 31, 2022 and 2021, respectively, which exceeded Federal Deposit Insurance Corporation insured limits. The Company regularly monitors these institutions’ financial condition.
The credit risk from the derivative contract 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 to 60 days or less. Significant customers are those that individually account for 10% or more of the Company’s consolidated revenue or total accounts receivable. As of December 31, 2022, trade receivables from two customers individually represented 11% and 10% or $30.9 million and $29.8 million of the Company’s total accounts receivable. As of December 31, 2021, trade receivables from one customer individually represented 17% or $42.2 million of the Company’s total accounts receivable.
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.
During the years ended December 31, 2022 and 2020, the Company had $0.1 million and $2.0 million, respectively, of recoveries from previously written-off receivables, net of bad debt expense. The Company recognized $2.0 million of bad debt expense, net of recoveries during the year ended December 31, 2021.
(12) Stock-Based Compensation
As of December 31, 2022, the Company had five types of stock-based compensation under its Equity Award Plans: (i) RSAs issued to independent directors and certain executives and employees, (ii) RSUs issued to executive officers and key management employees, (iii) non-qualified stock options issued to executive officers, and (iv) PSUs issued to executive officers and key management employees, and (v) and PUs issued to executive officers and key management employees. The Company has approximately 5,341,651 shares of its common stock reserved and available for grant under the NexTier Oilfield Solutions Inc. Equity and Incentive Award Plan (“Equity and Incentive Award Plan”).
For details on the Company’s accounting policies for determining stock-based compensation expense, see Note (2) Summary of Significant Accounting Policies: (k) Stock-based compensation. Non-cash stock compensation expense is generally presented within selling, general and administrative expense in the Consolidated Statements of Operations and Comprehensive Income (Loss). However, for the year ended December 31, 2020, the Company presented $2.7 million within merger and integration. These amounts primarily relate to the accelerated vesting of certain awards that contained pre-existing change in control provisions.
The following table summarizes stock-based compensation expense for the years ended December 31, 2022, 2021 and 2020 (in thousands of dollars):
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
Liability-classified awards | | | | | | |
Cash-settled awards | | $ | 3,522 | | | $ | — | | | $ | — | |
Equity-classified awards | | | | | | |
Restricted stock awards | | 1,248 | | | 1,364 | | | 1,589 | |
Restricted stock time-based unit awards | | 19,914 | | | 14,674 | | | 19,201 | |
Non-qualified stock options | | — | | | 76 | | | 894 | |
Restricted stock performance-based stock unit awards | | 8,433 | | | 8,563 | | | 4,142 | |
Stock-based compensation cost | | $ | 33,117 | | | $ | 24,677 | | | $ | 25,826 | |
Tax Benefit(1) | | (4,407) | | | (4,751) | | | (5,557) | |
Stock-based compensation cost, net of tax | | $ | 28,710 | | | $ | 19,926 | | | $ | 20,269 | |
(1) The Company is in a valuation allowance position and any tax benefit for stock-based compensation will be offset by the change in valuation allowance.
(a) Cash settled awards
During the first quarter of 2022, the Company issued 1,009,737 PUs to executive officers under its Equity and Incentive Awards Plan. These PUs will be settled in cash at the end of the performance period, December 31, 2024, and are classified as liability awards, which are remeasured at fair value at each reporting period. The fair value of the awards to be settled at the end of the performance period was $10.2 million as of December 31, 2022. The Company recognizes compensation cost for the changes in fair value pro-rated for the portion of the requisite service period rendered. During the year ended December 31, 2022, the Company recognized $3.5 million in compensation costs related to these awards.
(b) Restricted stock awards
For the years ended December 31, 2022, 2021, and 2020 the Company recognized $1.2 million, $1.4 million, and $1.6 million respectively, of non-cash stock compensation expense. As of December 31, 2022, total unamortized compensation cost related to unvested restricted stock awards was $0.5 million, which the Company expects to recognize over the remaining weighted-average period of 0.5 years.
Rollforward of restricted stock awards as of December 31, 2022 is as follows:
| | | | | | | | | | | | | | |
| | Number of Restricted Stock Awards (In thousands) | | Weighted average grant date fair value |
Total non-vested at December 31, 2021 | | 210 | | | $ | 5.67 | |
Shares issued | | 130 | | | 9.49 | |
Shares vested | | (123) | | | 5.67 | |
Shares forfeited | | — | | | — | |
Non-vested balance at December 31, 2022 | | 217 | | | $ | 7.96 | |
| | | | |
(c) Restricted stock units
For the years ended December 31, 2022, 2021 and 2020, the Company recognized $19.9 million, $14.7 million and $19.2 million, respectively, of non-cash stock compensation expense. As of December 31, 2022, total unamortized compensation cost related to unvested restricted stock units was $19.1 million, which the Company expects to recognize over the remaining weighted-average period of 1.63 years.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Rollforward of restricted stock units as of December 31, 2022 is as follows:
| | | | | | | | | | | | | | |
| | Number of Restricted Stock Units (In thousands) | | Weighted average grant date fair value |
Total non-vested at December 31, 2021 | | 7,589 | | | $ | 4.53 | |
Units issued | | 3,146 | | | 5.68 | |
Units vested | | (3,342) | | | 4.83 | |
Units forfeited | | (561) | | | 4.25 | |
Non-vested balance at December 31, 2022 | | 6,832 | | | $ | 4.94 | |
| | | | |
(d) Non-qualified stock options
For the year ended December 31, 2022, the Company did not recognize any non-cash stock compensation expense. For the years ended December 31, 2021 and 2020, the Company recognized $0.1 million and $0.9 million, respectively, of non-cash stock compensation expense. As of December 31, 2022, the Company did not have any unamortized compensation cost related to unvested stock options.
Rollforward of stock options as of December 31, 2022 is as follows:
| | | | | | | | | | | | | | |
| | Number of Stock Options (In thousands) | | Weighted average grant date fair value |
Total outstanding at December 31, 2021 | | 1,741 | | | $ | 4.86 | |
Options granted | | — | | | — | |
Options exercised | | — | | | — | |
Actual options forfeited | | (73) | | | 6.85 | |
Options expired | | — | | | — | |
Total outstanding at December 31, 2022 | | 1,668 | | | $ | 4.53 | |
There were 1.7 million stock options exercisable or vested at December 31, 2022.
Assumptions used in calculating the fair value of the stock options during the year granted are summarized below:
| | | | | | | | | | | | | |
| 2019 Options Granted | | 2018 Options Granted | | |
Valuation assumptions: | | | | | |
Expected dividend yield | 0 | % | | 0 | % | | |
Expected equity volatility | 49.6 | % | | 46.3 | % | | |
Expected term (years) | 7.3 - 8.1 | | 6 | | |
Risk-free interest rate | 1.7 | % | | 2.7 | % | | |
Weighted average: | | | | | |
Exercise price per stock option | $19.09 - $26.41 | | $ | 15.31 | | | |
Market price per share | $ | 4.55 | | | $ | 15.31 | | | |
Weighted average fair value per stock option | $ | 0.74 | | | $ | 7.28 | | | |
| | | | | |
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(e) Performance-based RSU awards
For the years ended December 31, 2022 and 2021, the Company issued under its Equity Award Plans to executive officers 289,708 and 2,024,635 of performance based RSUs, respectively. Using a Monte Carlo simulation method, the fair value of the awards issued for the years ended December 31, 2022 and 2021 was $2.7 million and $16.9 million, respectively. 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 0% to 200% 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 December 31, 2022, total unamortized compensation cost related to unvested performance-based RSUs was $7.9 million, which the Company expects to recognize over the weighted-average period of 1.21 years. For the years ended December 31, 2022, 2021 and 2020, the Company recognized $8.4 million, $8.6 million and $4.1 million, respectively, of compensation expense related to the performance-based RSU awards.
| | | | | | | | | | | | | | |
| | Number of Performance-based RSU’s (In thousands) | | Weighted average grant date fair value |
Total outstanding at December 31, 2021 | | 2,848 | | | $ | 8.56 | |
Performance-based RSU’s issued | | 290 | | | 9.18 | |
Performance-based RSU’s vested | | (453) | | | 8.52 | |
Performance-based RSU’s forfeited | | (71) | | | 5.89 | |
Total outstanding at December 31, 2022 | | 2,614 | | | $ | 8.71 | |
Assumptions used in calculating the fair value of the performance-based RSU’s granted are summarized below:
| | | | | | | | | | | | | |
| 2022 Performance based RSU’s Granted | | 2021 Performance based RSU’s Granted | | |
Valuation assumptions: | | | | | |
Expected dividend yield | 0 | % | | 0 | % | | |
Expected equity volatility, including peers | 57.8% - 131.2% | | 55.2% - 147.9% | | |
Expected term (years) | 3 | | 3 | | |
Risk-free interest rate | 0.1% - 2.0% | | 0.2% - 0.3% | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
(13) Stockholders’ Equity
(a) Vesting of Stock Awards
During the year ended December 31, 2022, 3,049,260 shares were issued, net of share settlements for payment of payroll taxes, upon the vesting of stock-based compensation awards. Shares withheld during the period were immediately retired by the Company.
(b) Alamo Acquisition
As described in Note (3) Acquisitions, the Company completed the Alamo Acquisition on August 31, 2021 for total consideration of approximately $235.6 million, consisting of equity consideration in the form of 26,000,000 shares of the Company’s common stock issued to Alamo Frac Holdings, LLC and the Owner Group with an estimated value of $82.3 million.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(c) Asset Acquisition from Continental Intermodal Group LP
As described in Note (3) Acquisitions, the Company completed the CIG Acquisition purchased on August 3, 2022. The aggregate consideration for the purchase consisted of approximately $32.1 million, which includes: (i) approximately $27.9 million in cash paid at closing to the CIG Sellers, plus (ii) 500,000 shares of the Company’s common stock.
(d) Share Repurchase Program
On October 25, 2022, the Company announced the board of directors approved a new share repurchase program for up to $250.0 million through December 31, 2023. The share repurchase program may be executed from time to time in open market transactions, through block trades, in privately negotiated transactions, through derivative transactions, through 10b5-1 plans, or by other means. The amount, timing and terms of any share repurchases will be determined based on prevailing market conditions and other factors, including applicable black-out periods. The share repurchase program does not obligate NexTier to purchase any shares of common stock during any period and the program may be modified or suspended at any time at NexTier’s discretion.
During the year ended December 31, 2022, the Company repurchased 11,471,591 shares of its common stock for $112,909,879 at an average price of $9.85. As of December 31, 2022, the Company has settled 11,303,522 of total share repurchases for $111,364,813.
(14) Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) in the equity section of the consolidated balance sheets includes the following:
| | | | | | | | | | | | | | | | | |
| (Thousands of Dollars) |
| Foreign currency items | | Interest rate contract | | AOCI |
December 31, 2021 | $ | 50 | | | $ | (8,309) | | | $ | (8,259) | |
Net income (loss) | — | | | 1,356 | | | 1,356 | |
Other comprehensive income (loss) | 1,118 | | | 12,067 | | | 13,185 | |
| | | | | |
December 31, 2022 | $ | 1,168 | | | $ | 5,114 | | | $ | 6,282 | |
The following table summarizes reclassifications out of accumulated other comprehensive income (loss) into earnings during years ended December 31, 2022, 2021 and 2020 (in thousands of dollars):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Affected line item in the consolidated statements of operations and comprehensive income (loss) |
| | 2022 | | 2021 | | 2020 | | |
Interest rate derivatives, hedging | | $ | (1,356) | | | $ | (2,741) | | | $ | (2,334) | | | Interest expense |
| | | | | | | | |
| | | | | | | | |
(15) Earnings per Share
Basic income or (loss) per share is based on the weighted average number of common shares outstanding during the period. Restricted stock awards and RSUs are not considered issued and outstanding for purposes of income or (loss) per share calculations until vested.
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 Company’s Equity and Incentive Award Plan, had been issued. Anti-dilutive securities represent potentially dilutive securities that are excluded from the computation of diluted income or (loss) per share as their impact would be anti-dilutive.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
A reconciliation of the numerators and denominators used for the basic and diluted net income or (loss) per share computations is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Numerator: | | | | | | |
Net income (loss) | | $ | 314,969 | | | $ | (119,423) | | | $ | (346,883) | |
| | | | | | |
Denominator: | | | | | | |
Basic weighted-average common shares outstanding(1) | | 243,360 | | | 224,401 | | | 213,795 | |
Dilutive effect of restricted stock awards granted to Board of Directors | | 136 | | | 145 | | | 199 | |
| | | | | | |
Dilutive effect of time-based restricted stock awards | | 4,604 | | | 1,140 | | | 39 | |
| | | | | | |
Dilutive effect of performance-based restricted stock awards | | 1,246 | | | 625 | | | 1,041 | |
Diluted weighted-average common shares outstanding (1) | | 249,346 | | | 226,311 | | | 215,074 | |
| | | | | | |
(1) As a result of the net loss incurred by the Company for the years ended December 31, 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.
(16) 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 finance leases for its light duty vehicles and frac pumps. The Company acquired the majority of its finance leases as part of the Alamo Acquisition and inherited Alamo’s lease classification as of the time of the acquisition.
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 to 8 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 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.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
The components of the Company's lease costs are as follows:
| | | | | | | | | | | | | | |
| | (Thousands of Dollars) |
| | Year ended December 31, 2022 | | Year ended December 31, 2021 |
Operating lease cost | | $ | 4,072 | | | $ | 19,607 | |
Finance lease cost: | | | | |
Amortization of right-of-use assets | | 5,414 | | | 1,418 | |
Interest on lease liabilities | | 1,954 | | 584 |
Total finance lease cost | | 7,368 | | | 2,002 | |
| | | | |
Short-term and Variable lease cost(1) | | 7,414 | | | 6,537 | |
| | | | |
| | | | |
Total lease cost | | $ | 18,854 | | | $ | 28,146 | |
| | | | |
(1)Cost from variable amounts excluded from determination of lease liability.
Supplemental cash flows related to leases are as follows:
| | | | | | | | | | | | | | |
| (Thousands of Dollars) | | |
| | Year ended December 31, 2022 | | Year ended December 31, 2021 |
| | | |
Cash paid for amounts included in the measurements of lease liabilities | | | | |
Operating cash flows from operating leases | | $ | 7,410 | | | $ | 14,507 | |
Operating cash flows from finance leases | | 1,954 | | 538 |
Financing cash flows from finance leases | | 13,872 | | 4,155 |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Weighted average remaining lease terms are as follows:
| | | | | | | | | | | |
| Year ended December 31, 2022 | | Year ended December 31, 2021 |
Operating leases | 4.80 years | | 6.98 years |
Finance leases | 2.46 years | | 2.98 years |
Weighted average discount rate on the Company's lease liabilities are as follows:
| | | | | | | | | | | |
| Year ended December 31, 2022 | | Year ended December 31, 2021 |
Operating leases | 6.18% | | 6.83% |
Finance leases | 4.04% | | 4.00% |
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Maturities of the Company's lease liabilities as of December 31, 2022, per ASU 2016-02, were as follows:
| | | | | | | | | | | |
| (Thousands of Dollars) |
Year ending December 31, | Operating leases | | Finance leases |
2023 | $ | 6,811 | | | $ | 20,770 | |
2024 | 4,904 | | | 10,943 | |
2025 | 2,811 | | | 1,312 | |
2026 | 2,116 | | | — | |
2027 | 1,869 | | | — | |
Thereafter | 3,976 | | | — | |
Total undiscounted remaining minimum lease payments | 22,487 | | | 33,025 | |
Less imputed interest | (3,137) | | | (1,245) | |
Total discounted remaining minimum lease payments | $ | 19,350 | | | $ | 31,780 | |
| | | |
During the year ended December 31, 2021, the Company entered into two separate agreements with a supplier to sell some diesel-fueled equipment in exchange for credits used to purchase Tier 4 DGB conversion and conversion kits. As part of the agreement, the Company would lease back the equipment for 18 months. The Company determined that the first agreement did not meet the criteria to be classified as a sale-leaseback transaction and was deemed a failed sale-leaseback. This resulted in the recognition of a finance liability of $15.8 million classified in other current liabilities and other non-current liabilities in the consolidated balance sheets. The second agreement met the criteria to be classified as a sale-leaseback transaction and resulted in the recognition of a right-of-use asset and a finance lease liability of $3.0 million and a finance liability of $1.9 million.
As of December 31, 2022, 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.
(17) Income Taxes
The following table summarizes the income (loss) from continuing operations before income taxes in the following jurisdictions:
| | | | | | | | | | | | | | | | | | | | |
| | (Thousands of Dollars) |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Domestic | | $ | 317,213 | | | $ | (157,713) | | | $ | (357,250) | |
Foreign | | 2,316 | | | 39,976 | | | 11,837 | |
| | $ | 319,529 | | | $ | (117,737) | | | $ | (345,413) | |
The components of the Company’s income tax provision are as follows:
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | |
| | (Thousands of Dollars) |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Current: | | | | | | |
| | | | | | |
State | | $ | 4,549 | | | $ | (54) | | | $ | (297) | |
Foreign | | — | | | 1,677 | | | 1,858 | |
Total current income tax provision | | $ | 4,549 | | | $ | 1,623 | | | $ | 1,561 | |
Deferred: | | | | | | |
Federal | | $ | 10 | | | $ | 55 | | | $ | (158) | |
State | | 1 | | | 8 | | | 53 | |
Foreign | | — | | | — | | | 14 | |
Total deferred income tax provision | | 11 | | | 63 | | | (91) | |
| | $ | 4,560 | | | $ | 1,686 | | | $ | 1,470 | |
The following table presents the reconciliation of the Company’s income taxes calculated at the statutory federal tax rate, currently 21%, to the income tax provision in its Consolidated Statements of Operations and Comprehensive Income (Loss). State income tax expense, net of federal benefit includes the current state income tax, return to accrual adjustments for filed returns and the state deferred tax impact before changes in valuation allowance which are stated separately. The Company’s effective tax rate for 2022 of 1.43% differs from the statutory rate, primarily due to state taxes, permanent differences and a change in the valuation allowance. The Company’s effective tax rate for 2021 was (1.43)%.
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| | (Thousands of Dollars) |
| | December 31, 2022 | | | December 31, 2021 | | | December 31, 2020 | |
Income tax provision computed at the statutory federal rate | | $ | 67,101 | | | | $ | (24,724) | | | | $ | (72,537) | | |
Reconciling items: | | | | | | | | | |
State income taxes, net of federal tax benefit | | 14,599 | | | | (1,959) | | | | (12,222) | | |
Deferred tax asset valuation adjustment | | (79,934) | | | | 25,306 | | | | 82,557 | | |
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Permanent differences | | 2,909 | | | | 2,796 | | | | 4,589 | | |
Foreign withholding taxes | | — | | | | 1,683 | | | | 1,870 | | |
Other | | (115) | | | | (1,416) | | | | (2,787) | | |
Income tax provision | | $ | 4,560 | | | | $ | 1,686 | | | | $ | 1,470 | | |
Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | |
| | (Thousands of Dollars) |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Deferred tax assets: | | | | | | |
Stock-based compensation | | $ | 6,722 | | | $ | 6,247 | | | $ | 4,972 | |
Net operating loss and other carry-forwards | | 278,983 | | | 364,882 | | | 284,151 | |
Accruals and other | | 20,059 | | | 14,472 | | | 15,535 | |
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Gross deferred tax assets | | 305,764 | | | 385,601 | | | 304,658 | |
Valuation allowance | | (235,213) | | | (318,260) | | | (294,101) | |
Total deferred tax assets | | $ | 70,551 | | | $ | 67,341 | | | $ | 10,557 | |
Deferred tax liability: | | | | | | |
PP&E and intangibles | | $ | (68,643) | | | $ | (65,163) | | | $ | (8,317) | |
Prepaids and other | | (1,982) | | | (2,241) | | | (2,240) | |
Total deferred tax liability | | (70,625) | | | (67,404) | | | (10,557) | |
Net deferred tax liability | | $ | (74) | | | $ | (63) | | | $ | — | |
The Company estimated $112.3 million of federal NOLs can be utilized to offset current year federal taxable income. As of December 31, 2022, NexTier had total U.S. federal tax net operating loss (“NOL”) carryforwards of $1.1 billion, of which, $267.9 million, if not utilized, will begin to expire in the year 2036. The remaining federal NOLs can be carried forward indefinitely. The total deferred tax asset for net operating loss and other carryforwards also includes approximately $36.7 million of interest expense carryovers with indefinite life. The Company has total state NOLs of $481.1 million, of which $172.8 million if not utilized, will expire in various years between 2024 and 2039. Additionally, the Company has $14.8 million of NOLs in foreign jurisdictions that, if not utilized, will begin to expire in the year 2036.
As a result of the C&J Merger on October 31, 2019, NexTier had a change in ownership for purposes of Section 382 of the Internal Revenue Code (“IRC”). As a result, the amount of pre-change NOLs and other tax attributes that are available to offset future taxable income are subject to an annual limitation. The annual limitation is based on the value of the Company as of the effective date of the C&J Merger. The Company’s Section 382 annual limitation is $8.5 million. In addition, this annual limitation is subject to adjustments from the realization of net unrealized built-in gain (“NUBIG”) during a five-year recognition period ending October 31, 2024. $112.3 million of the Company’s pre-change NOLs are expected to be utilized in the current year. As of December 31, 2022, it is expected that the $163.5 million of the Company’s $286.5 million remaining pre-change NOLs incurred prior to the C&J Merger will be available for use during the applicable carryforward period without becoming permanently lost by the Company due to expiration.
C&J Energy Services, Inc. had pre-change NOLs carry forward prior to the C&J Merger. As a result of the C&J Merger, such NOLs were carried over to the Company. These NOLs are also subject to an annual limitation under IRC Section 382. The Company’s annual limitation with respect to the C&J Energy NOLs is $8.6 million and is subject to adjustments from the realization of net unrealized built-in loss (“NUBIL”) during a five-year recognition period ending October 31, 2024. Due to this IRC Section 382 annual limitation, some of the NOLs carried over to the Company from C&J Energy Services, Inc. are expected to become permanently lost by the Company due to the expiration and will not be available for use by the Company during the applicable carryforward period. The Company has not reflected the NOLs expected to expire as a result of this limitation in its summary of deferred tax assets or in the NOLs disclosed within this paragraph. The pre-change NOLs carried over from C&J Energy Services, Inc. including built-in loss through December 31, 2022, total $443.3 million of which $104.4 million are subject to expiration, but are not expected to expire as a result of the IRC Section 382 limitation.
ASC 740, “Income Taxes,” requires the Company to reduce its deferred tax assets by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. As a result of the Company’s
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
evaluation of both the positive and negative evidence, the Company determined it does not believe it is more likely than not that its deferred tax assets will be utilized in the foreseeable future and has recorded a valuation allowance. The valuation allowance as of December 31, 2022 fully offsets the net deferred tax assets, excluding deferred tax liabilities related to certain indefinite-lived assets. The Company intends to continue maintaining a valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowance. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. The valuation allowances as of December 31, 2022, 2021, and 2020 were $235.2 million, $318.3 million and $294.1 million, respectively.
Changes in the valuation allowance for deferred tax assets were as follows:
| | | | | | | | |
| | (Thousands of Dollars) |
Valuation allowance as of the beginning of January 1, 2022 | | $ | 318,260 | |
| | |
Charge as (benefit) expense to income tax provision for current activities | | (79,934) | |
Changes to other comprehensive income (loss) | | (3,113) | |
Valuation allowance as of December 31, 2022 | | $ | 235,213 | |
The Company may be subject to the Global Intangible Low-Taxed Income (“GILTI”) as a result of its foreign operations. The Company accounts for any U.S. taxable income inclusion under GILTI as a permanent book/tax difference.
There were no unrecognized tax benefits nor any accrued interest or penalties associated with unrecognized tax benefits during the years ended December 31, 2022, 2021 and 2020. The Company believes it has appropriate support for the income tax positions taken and to be taken on the Company’s tax returns, and its accruals for tax liabilities are adequate for all open years based on our assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. The Company classifies interest and penalties within the provision for income taxes. The Company’s tax returns are open to audit under the statute of limitations for the years ended December 31, 2019 through December 31, 2021 for federal tax purposes and for the years ended December 31, 2018 through December 31, 2021 for state tax purposes.
(18) Commitments and Contingencies
As of December 31, 2022, and 2021, the Company had $4.9 million and $1.0 million of deposits on equipment, respectively. Outstanding purchase commitments on equipment were $225.5 million and $54.1 million, as of December 31, 2022, and 2021, respectively.
As of December 31, 2022, the Company has a letter of credit of $22.6 million under the 2019 ABL Facility.
In the normal course of operations, the Company enters into certain long-term raw material supply agreements for the supply of proppant to be used in hydraulic fracturing. As part of some of these agreements, the Company is subject to minimum tonnage purchase requirements and may pay penalties in the event of any shortfall. The Company purchased $208.4 million, $47.8 million and $77.6 million amounts of proppant under its take-or-pay agreements during the years ended December 31, 2022, 2021 and 2020.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Aggregate minimum commitments under long-term raw material supply agreements with payment penalties for minimum tonnage purchases for the next five years as of December 31, 2022 are listed below:
| | | | | |
| (Thousands of Dollars) |
Year-end December 31, | |
2023 | $ | 45,876 | |
2024 | 16,244 | |
2025 | 3,960 | |
2026 | — | |
2027 | — | |
| $ | 66,080 | |
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 and motor vehicle accidents. 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. 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 consolidated financial position, results of operations or liquidity.
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 indemnification.
Regulatory Audits
The Company is subject to routine audits by taxing authorities. As of December 31, 2020, the Company had recorded estimates of potential assessments for each audit totaling in the aggregate approximately $33.0 million. For one audit, in particular, the Company disagreed with many aspects of the state’s assessment and began to contest the state’s position through administrative procedures. The Company received a final settlement offer from Texas Attorney General Office on September 8, 2021 for $3.7 million, which resulted in a reduction to the accrual of $24.9 million during the year ended December 31, 2021. This aggregate reduction was recorded in selling, general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss) of 2021.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
As of December 31, 2022 and 2021, the Company had recorded estimates of potential assessments, the majority of which is related to an estimate of $14.8 million and $17.7 million, respectively, of potential assessment and exposures for all taxing jurisdictions related to the Alamo Acquisition. As of December 31, 2022 and 2021, the Company also has an offsetting indemnification receivable of $14.8 million and $17.7 million, respectively, from the Owner Group, recorded pursuant to the Purchase Agreement, in prepaids and other current assets in the Consolidated Balance Sheet. Both the estimated liability and indemnification receivable were recorded in the purchase price allocation at the time of the Alamo Acquisition in 2021. During the year ended December 31, 2022, the Company obtained additional information that resulted in a reduction of the Company's accrual and offsetting indemnification receivable related to this audit by $2.9 million.
(19) Related Party Transactions
Cerberus Operations and Advisory Company, 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 $0.5 million, $0.6 million and $2.2 million during the years ended December 31, 2022, 2021 and 2020, respectively.
In connection with the Company’s research and development initiatives, the Company engaged in transactions with its equity-method investee. As of December 31, 2020, the Company had purchased $1.7 million of shares in its equity-method investee. In the first quarter of 2020, the Company had enough evidence to believe that it would not be able to recover its $1.7 million investment in its equity-method investee and completely impaired it. The impairment is recorded in impairment expense in the Consolidated Statement of Operations and Comprehensive Income (Loss). For additional information, see Note (2) Summary of Significant Accounting Policies.
As part of the Purchase Agreement, the Company agreed to provide certain post-closing services to Alamo Frac Holdings, LLC valued at $30.0 million in the aggregate. During the year ended December 31, 2022, the Company provided services to Alamo Frac Holdings, LLC of $4.4 million as part of the Purchase Agreement. The Company has a remaining customer contract liability related to these services of $19.4 million as of December 31, 2022.
(20) Retirement Benefits and Nonretirement Postemployment Benefits
Defined Contribution Plan
The Company has sponsored two different 401(k) defined contribution retirement plans covering eligible employees at various times due to acquisition. These plans are the NexTier Oilfield Solutions 401(k) Plan and the Alamo Employee 401(k) Plan. As of June 1, 2022, the plans were consolidated into one plan. The Company made matching contributions of up to 3.5% of eligible compensation in the NexTier Oilfield Solutions 401(k) Plan in 2020 but suspended the Company matching contribution as of May 1, 2020. As of January 1, 2022, the Company reinstated the Company matching contribution in the NexTier Oilfield Solutions 401(k) Plan and increased the Company matching contributions to 4% of eligible compensation.
Eligible employees can make annual contributions to the plan for which they are eligible up to the maximum amount allowed by current federal regulations, as noted in the plan documents. Contributions made by the Company related to the years ended December 31, 2022, 2020, were $18.6 million, and $4.5 million, respectively. The company did not make any contributions during the year ended December 31, 2021.
Severance
The Company provides severance benefits to certain of its employees in connection with the termination of their employment. Severance benefits offered by the Company were $2.0 million, $2.1 million and $27.0 million for the years ended December 31, 2022, 2021 and 2020, respectively.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(21) Business Segments
In accordance with 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.
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) hydraulic fracturing services; (2) wireline and pumping services; and (3) completion support services, which includes our Power Solutions natural gas fueling business, our proppant last mile logistics and storage business, and our R&T department.
Well Construction and Intervention Services
Following the sale of the Company’s coiled tubing assets, the Company’s WC&I Services segment consists of the cementing services service line.
On August 1, 2022, the Company sold its coiled tubing assets to Gladiator Energy LLC for a cash purchase price of $21.6 million, which resulted in a gain on sale of assets of $11.6 million. The divestiture of non-core assets is consistent with the Company’s strategy to repurpose capital towards the highest return projects that fit the Company’s strategy around wellsite integration, while also strengthening liquidity.
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 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 Consolidated Statements of Operations and Comprehensive Income (Loss). Income per share for the three months ended March 31, 2020 attributable to the divested Well Support Services segment was less than $0.01. On July 29, 2020, the Company received the escrowed cash amount in final settlement for working capital reconciliation.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the 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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| | 2022 | | 2021 | | 2020 |
Operations by reportable segment | | | | | | |
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Adjusted gross profit (loss): | | | | | | |
Completion Services(1) | | $ | 724,268 | | | $ | 165,867 | | | $ | 168,276 | |
WC&I(1) | | 30,459 | | | 10,016 | | | 9,731 | |
Well Support Services(1) | | — | | | — | | | 12,338 | |
Total adjusted gross profit | | $ | 754,727 | | | $ | 175,883 | | | $ | 190,345 | |
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(1) Adjusted gross profit 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 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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| | Year ended December 31, 2022 |
| | Completion Services | | WC&I | | | | Total |
Revenue | | $ | 3,091,220 | | | $ | 153,602 | | | | | $ | 3,244,822 | |
Cost of Services | | 2,366,952 | | | 123,143 | | | | | 2,490,095 | |
Gross profit excluding depreciation and amortization | | 724,268 | | | 30,459 | | | | | 754,727 | |
Management adjustments associated with cost of services(1) | | — | | | — | | | | | — | |
Adjusted gross profit(2) | | $ | 724,268 | | | $ | 30,459 | | | | | $ | 754,727 | |
(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 of crude oil.
(2) Adjusted gross profit 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.
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| | Year ended December 31, 2021 |
| | Completion Services | | WC&I | | | | Total |
Revenue | | $ | 1,324,888 | | | $ | 98,553 | | | | | $ | 1,423,441 | |
Cost of Services | | 1,165,881 | | | 89,440 | | | | | 1,255,321 | |
Gross profit excluding depreciation and amortization | | 159,007 | | | 9,113 | | | | | 168,120 | |
Management adjustments associated with cost of services(1) | | 6,860 | | | 903 | | | | | 7,763 | |
Adjusted gross profit(2) | | $ | 165,867 | | | $ | 10,016 | | | | | $ | 175,883 | |
(1) 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.
(2) Adjusted gross profit 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.
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
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| | Year ended December 31, 2020 |
| | Completion Services | | WC&I | | Well Support Services | | Total |
Revenue | | $ | 1,046,314 | | | $ | 98,338 | | | $ | 57,929 | | | $ | 1,202,581 | |
Cost of Services | | 893,785 | | | 93,198 | | | 45,591 | | | 1,032,574 | |
Gross profit excluding depreciation and amortization | | 152,529 | | | 5,140 | | | 12,338 | | | 170,007 | |
Management adjustments associated with cost of services(1) | | 15,747 | | | 4,591 | | | — | | | 20,338 | |
Adjusted gross profit(2) | | $ | 168,276 | | | $ | 9,731 | | | $ | 12,338 | | | $ | 190,345 | |
(1) 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.
(2) Adjusted gross profit 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.
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| | (Thousands of Dollars) |
| | December 31, 2022 | | December 31, 2021 |
Total assets by segment: | | | | |
Completion Services | | $ | 1,404,557 | | | $ | 1,201,265 | |
WC&I | | 38,150 | | | 60,195 | |
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Corporate and Other | | 284,461 | | | 196,121 | |
Total assets | | $ | 1,727,168 | | | $ | 1,457,581 | |
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Completion Services | | $ | 192,780 | | | $ | 192,780 | |
WC&I | | — | | | — | |
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Corporate and Other | | — | | | — | |
Total goodwill | | $ | 192,780 | | | $ | 192,780 | |
NEXTIER OILFIELD SOLUTIONS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(22) New Accounting Pronouncements
(a) Recently Adopted Accounting Standards
In July 2021, the Financial Accounting Standards Board ("FASB") issued ASU 2021-05 "Leases (Topic 842) Lessors—Certain Leases with Variable Lease Payments" ("ASU 2021-05"). ASU 2021-05 allows a lessor to classify and account for a lease with variable lease payments that doesn't depend on an index or rate as an operating lease if both: a) The lease would’ve been classified as a sales-type lease or a direct-financing lease in accordance with the lease classification guidance in Topic 842; and b) The lessor would’ve otherwise recognized a day-one loss. This standard was effective for fiscal years beginning after December 15, 2021. The Company adopted this standard on January 1, 2022, and there was no material impact on the financial statements.
In August 2020, the FASB issued ASU 2020-06 “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”). ASU 2020-06 simplifies the guidance on the issuer's accounting for convertible debt instruments and convertible preferred stock. The Company adopted this standard on January 1, 2022, and there was no material impact on the financial statements.
(b) Recently Issued Accounting Standards
In December 2022, the Financial Accounting Standards Board ("FASB") issued ASU 2022-06 “Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of Topic 848. ASU 2022-06 provides optional expedients that permit an entity to not apply otherwise applicable US GAAP to contracts or transactions that are modified or otherwise affected due to reference rate reform. ASU defers the sunset date of ASC 848 from December 31,2022, which was previously addressed in ASU 2020-04 and ASU 2021-01, to December 31, 2024. Entities that apply ASC 848 can continue to do so until December 31,2024. The Company is currently working to transition from LIBOR to an alternate reference rate in 2023.
In October 2021, the FASB issued ASU 2021-08 “Business Combinations (Topic 805) Accounting for Contract Assets and Contract 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.