NEXTIER OILFIELD SOLUTIONS INC. - Annual Report: 2017 (Form 10-K)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 |
FORM 10-K |
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____ to _____
Commission File Number 001-37988
Keane Group, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 38-4016639 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2121 Sage Road, Suite 370, Houston, TX | 77056 |
(Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code: (713) 960-0381
Title of Each Class | Name of Each Exchange On Which Registered |
Common Stock, $0.01, par value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
_______________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ |
Non-accelerated filer | x (do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Emerging Growth Company | ¨ | ||
If an emerging growth company, indicate by check mark if the registrant has elected to not use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant, computed by reference to the price at which the common stock was last sold on June 30, 2017, was approximately $492.4 million.
As of February 26, 2018, the registrant had 112,243,769 shares of common stock outstanding.
TABLE OF CONTENTS
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION
This Annual Report on Form 10-K contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future operating results and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. Our forward-looking statements are generally accompanied by words such as “may,” “should,” “expect,” “believe,” “plan,” “anticipate,” “could,” “intend,” “target,” “goal,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other similar expressions. Any forward-looking statements contained in this Annual Report on Form 10-K speak only as of the date on which we make them and are based upon our historical performance and on current plans, estimates and expectations. Except as required by law, we have no obligation to update any forward-looking statements. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements about:
• our business strategy;
• our plans, objectives, expectations and intentions;
• our future operating results;
• the competitive nature of the industry in which we conduct our business, including pricing pressures;
• crude oil and natural gas commodity prices;
• demand for services in our industry;
• legal proceedings and effect of external investigations;
• the effect of a loss of, or the financial distress of, one or more key customers;
• our ability to obtain or renew customer contracts;
• the effect of a loss of, or interruption in operations of, one or more key suppliers;
• the market price and availability of materials or equipment;
• technology;
• | our ability to obtain permits, approvals and authorizations from governmental and third parties and the effects of government regulation; |
• planned acquisitions and future capital expenditures;
• our ability to successfully integrate RockPile;
• our ability to service our debt obligations;
• | financial strategy, liquidity or capital required for our ongoing operations and acquisitions and our ability to raise additional capital; |
• increased costs as a result of being a public company;
• our status as a controlled company; and
• our ability or intention to pay dividends or to effectuate repurchases of our common stock.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and
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prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section entitled Part I, “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report on Form 10-K. We cannot assure you that the results, events and circumstances reflected in any forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in such forward-looking statements. The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
This Annual Report on Form 10-K includes market and industry data and certain other statistical information based on third-party sources including independent industry publications, government publications and other published independent sources, such as content and estimates provided by Coras Research, LLC as of December 2017. Coras Research, LLC is not a member of the FINRA or the SIPC and is not a registered broker dealer or investment advisor. Although we believe these third-party sources are reliable as of their respective dates, we have not independently verified the accuracy or completeness of this information. Some data is also based on our own good faith estimates, which are supported by our management’s knowledge of and experience in the markets and businesses in which we operate.
While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed above and in Part 1, “Item 1A. Risk Factors” in this Annual Report on Form 10-K.
This Annual Report on Form 10-K includes references to utilization of hydraulic fracturing assets. Utilization for our own fleets, as used in this Annual Report on Form 10-K, is defined as the ratio of the average number of deployed fleets to the number of total fleets for a given time period. For the purposes of this Annual Report on Form 10-K, 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. Furthermore, we define active fleets as fleets available for deployment and commissioning fleets as idle hydraulic horsepower being converted to active fleets. As a result, as additional fleets are incrementally deployed, our utilization rate increases.
We define industry utilization 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 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.
As used in this Annual Report on Form 10-K, capacity in the hydraulic fracturing business refers to the total number of hydraulic horsepower, regardless of whether such hydraulic horsepower is active and deployed, active and not deployed or inactive. While the equipment and amount of hydraulic horsepower required for a customer project varies, we calculate our total number of fleets, as used in this Annual Report on Form 10-K, by dividing our total hydraulic horsepower by 45,000 hydraulic horsepower.
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.
As used in this Annual Report on Form 10-K, references to cannibalization of parked equipment refer to the removal of parts and components (such as the engine or transmission of a fracturing pump) from an idle hydraulic fracturing fleet in order to service an active hydraulic fracturing fleet.
BASIS OF PRESENTATION IN THIS ANNUAL REPORT ON FORM 10-K
On January 25, 2017, we consummated an initial public offering (“IPO”). Our business prior to the IPO was conducted through Keane Group Holdings, LLC and its consolidated subsidiaries (“Keane Group”). To effectuate the IPO, we completed a series of transactions that resulted in a reorganization of our business, resulting in Keane Group, Inc. as a
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holding company with no material assets other than its ownership of Keane Group. For further details, see Note (1) Basis of Presentation and Nature of Operations of Part II, “Item 8. Financial Statements and Supplemental Data.”
Unless otherwise indicated, or the context otherwise requires, for periods prior to the completion of the IPO, (i) the historical financial data in this Annual Report on Form 10-K and (ii) the operating and other non-financial data disclosed in Part II, “Item 6. Selected Financial Data” and Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” (collectively, the “Financial Statement Sections”) reflect the consolidated business and operations of Keane Group. Financial results for 2016 are the financial results of Keane Group, Inc. and Keane Group Holdings, LLC, the Company's predecessor for accounting purposes, as there was no activity under Keane Group, Inc. in 2016.
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PART I
References Within This Annual Report
As used in Part I of this Annual Report on Form 10-K, unless the context otherwise requires, references to (i) the terms “Company,” “Keane,” “we,” “us” and “our” refer to Keane Group Holdings, LLC and its consolidated subsidiaries for periods prior to our IPO, and, for periods as of and following the IPO, Keane Group, Inc. and its consolidated subsidiaries; (ii) the term “Keane Group” refers to Keane Group Holdings, LLC and its consolidated subsidiaries; (iii) the term “Trican Parent” refers to Trican Well Service Ltd. and, where appropriate, its subsidiaries; (iv) the term “Trican U.S.” refers to Trican Well Service L.P.; (v) the term “Trican” refers to Trican Parent and Trican U.S., collectively; (vi) the term "RockPile" refers to RockPile Energy Services, LLC and its consolidated subsidiaries; (vii) the term "Keane Investor" refers to Keane Investor Holdings LLC and (viii) the terms “Sponsor” or “Cerberus” refer to Cerberus Capital Management, L.P. and its controlled affiliates and investment funds.
Item 1. Business
General description of the business
Founded in 1973, Keane Group, Inc. is one of the largest pure-play providers of integrated well completion services in the U.S., with a focus on complex, technically demanding completion solutions. We provide our services in conjunction with onshore well development, in addition to stimulation operations on existing wells, to exploration and production (“E&P”) customers with some of the highest quality and safety standards in the industry. Through organic growth and four opportunistic acquisitions between 2013 and 2017, we operate in the most active unconventional oil and natural gas basins in the U.S., including the Permian Basin, the Marcellus Shale/Utica Shale, the Eagle Ford Formation and the Bakken Formation, with approximately 1.2 million hydraulic horsepower spread across 26 hydraulic fracturing fleets, 31 wireline trucks, 24 cementing pumps and other ancillary assets. The five cornerstones of our operating principles and culture continue to be focus on health, safety and environment; efficiency and operational excellence; our partnership with our customers; transparency in our value creation; and our responsibilities to our stakeholders.
In April 2013, we acquired the wireline technologies division of Calmena Energy Services, which provided us with a platform to commence wireline operations in the U.S. In December 2013, we acquired the assets of Ultra Tech Frac Services to establish a presence in the Permian Basin. In March 2016, we acquired the majority of the U.S. assets and assumed certain liabilities of Trican Well Service, L.P. (the “Acquired Trican Operations"), resulting in the expansion of our hydraulic fracturing operations to include approximately 950,000 hydraulic horsepower, increased scale in key operating basins, an expansion in our customer base and significant cost reduction opportunities. The Trican transaction also enhanced our access to proprietary technology and engineering capabilities that have improved our ability to provide engineering solutions. In July 2017, we acquired RockPile Energy Services, LLC, resulting in an increase in our pumping capacity by more than 25% and our expanded presence in the Permian Basin and Bakken Formation. We also acquired a high-quality customer base, expanded our service offerings and capabilities within our Other Services segment and integrated certain members of RockPile’s high caliber management team. We ended 2017 with having placed orders for an aggregate of approximately 150,000 newbuild hydraulic horsepower, representing three additional hydraulic fracturing fleets, that will increase our total hydraulic horsepower to more than 1.3 million upon expected delivery during the second and third quarters of 2018.
We are organized into two reportable segments, consisting of Completion Services, including our hydraulic fracturing and wireline divisions; and Other Services, including our cementing and drilling divisions. Our Completion Services segment accounted for 99%, 98%, and 99% of consolidated revenue during the years ended December 31, 2017, 2016 and 2015, respectively. For further discussion on financial information about our segments, see Note (22) Business Segments of Part II, “Item 8. Financial Statements and Supplementary Data.”
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Completion Services segment
Our completion services are designed in partnership with our customers to enhance both initial production rates and estimated ultimate recovery from new and existing wells.
Hydraulic Fracturing. Hydraulic fracturing services are performed to enhance production of oil and natural gas from formations with low permeability and restricted flow of hydrocarbons. The process of hydraulic fracturing involves pumping a highly viscous, pressurized fracturing fluid -typically a mixture of water, chemicals and proppant into a well casing or tubing in order to fracture underground mineral formations. These fractures release trapped hydrocarbon particles and free a channel for the oil or natural gas to flow freely to the wellbore for collection. Fracturing fluid mixtures include proppant which become lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons upward through the well.
Wireline Technologies. Our wireline services involve the use of a single truck equipped with a spool of wireline that is unwound and lowered into oil and natural gas wells to convey specialized tools or equipment for well completion, well intervention, pipe recovery and reservoir evaluation purposes. We typically provide our wireline services in conjunction with our hydraulic fracturing services in “plug-and-perf” well completions to maximize efficiency for our customers. “Plug-and-perf” is a multi-stage well completion technique for cased-hole wells that consists of pumping a plug and perforating guns to a specified depth. Once the plug is set, the zone is perforated and the tools are removed from the well, a ball is pumped down to isolate the zones below the plug and the hydraulic fracturing treatment is applied.
Other Services segment
Cementing. Our cementing services incorporate custom engineered mixing and blending equipment to ensure precision and accuracy in providing annual isolation and hydraulic seal, while protecting fresh water zones of our customers’ zone of interest. Our cement division has the expertise to cement shallow to complex high temperature high pressure wells. We also offer engineering software and technical guidance for remedial cementing applications and acidizing to optimize the performance of our customers' wells.
Drilling. We are equipped to provide top-hole air drilling services. Our drilling services were idled in May 2015.
Business strategy
Our principal business objective is to increase shareholder value by profitably growing our business, while providing best-in-class completion services, with a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. We expect to achieve this objective through:
• | capitalizing efficiently on industry recovery; |
• | developing and expanding our relationships with existing and new customers; |
• | continuing our industry leading safety performance and focus on the environment; |
• | investing further in our robust maintenance program; |
• | maintaining a conservative balance sheet to preserve operational and strategic flexibility; and |
• | continuing to evaluate potential consolidation opportunities that strengthen our capabilities and create value. |
For further discussion on the business strategies we plan to continue executing in 2018, see Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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Customers
Our customers primarily include major integrated and large independent oil and natural gas E&P companies. For the year ended December 31, 2017, no customer represented more than 10% of our consolidated revenue. For the year ended December 31, 2016, three customers, Shell Exploration & Production, XTO Energy and Seneca Resources Corporation, individually represented more than 10% of our consolidated revenue. For the year ended December 31, 2015, four customers, EQT Production Company, XTO Energy, Shell Exploration & Production and Southwestern Energy Company, individually represented more than 10% of our consolidated revenue.
Competition
The markets in which we operate are highly competitive. We provide services in various geographic regions across the U.S., and our competitors include many large and small oilfield service providers, including some of the largest integrated service companies. In addition, the business segments in which we compete are highly fragmented. Our integrated hydraulic fracturing and wireline services compete with large, integrated oilfield service companies such as Halliburton Company, Schlumberger Limited, Weatherford International plc and Baker Hughes Incorporated, as well as other companies such as RPC, Inc., Superior Energy Services, Inc., C&J Energy Services, Inc., Basic Energy Services, Inc. and FTS International, Inc. Our hydraulic fracturing services also compete with Calfrac Well Services Ltd., U.S. Well Services, Patterson-UTI Energy, Inc., ProPetro Services, Inc. and Liberty Oilfield Services. We also compete regionally with a significant number of smaller service providers.
We believe the principal competitive factors in the markets we serve are our multi-basin service capability and close proximity to our customers, our technical expertise, our equipment capacity, our work force competency, our efficiency, our safety record, our reputation, our experience and our prices. Additionally, projects are often awarded on a bid basis, which tends to create a highly competitive environment. While we seek to be competitive in our pricing, we believe many of our customers elect to work with us based on our customer-tailored approach, our safety record, the performance and quality of our crews, our equipment and our services. We seek to differentiate ourselves from our competitors by delivering the highest-quality services and equipment possible, coupled with superior execution and operating efficiency in a safe working environment.
Raw materials
We purchase a wide variety of raw materials, parts and components that are manufactured and supplied for our operations. We are not dependent on any single source of supply for those parts, supplies or materials. To date, we have generally been able to obtain the equipment, parts and supplies necessary to support our operations on a timely basis. While we believe we will be able to make satisfactory alternative arrangements in the event of any interruption in the supply of these materials and/or products by one of our suppliers, this may not always be the case. In addition, certain materials for which we do not currently have long-term supply agreements, such as guar (which experienced a shortage and significant price increase in 2012), could experience shortages and significant price increases in the future.
In March 2016, in connection with the acquisition of the Acquired Trican Operations, Keane received the right to use certain Trican proprietary fracking-related fluids as of the closing date of the Trican transaction, such as MVP Frac™ and TriVert™ (the “Fracking Fluids”), for Keane’s pressure pumping services to its customers. The license does not allow Keane to manufacture the Fracking Fluids, but allows Keane to purchase the Fracking Fluids from Trican’s suppliers.
The industry continues to face strain in sand supply, driven by weather-induced rail congestion, combined with mine-related issues due to rail-related output constraints, flooding impacts, delays on local mine start-ups and continued growth in demand. We are proactively managing these transitory issues facing the entire industry to limit the impact to our customers and business.
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Research and Development costs
Our engineering and technology efforts are focused on providing cost-effective solutions to the challenges our customers face when fracturing and stimulating wells. We believe our Engineered Solutions Center, located in The Woodlands, Texas, enables us to support our customers’ technical specifications, by offering flexible, cost-effective design solutions that package our services with new and existing product offerings. Our Engineered Solutions Center is focused on providing (i) economical and effective fracture designs, (ii) enhanced fracture stimulation methods, (iii) next-generation fluids and technologically advanced diverting agents, such as MVP Frac™ and TriVert™, which we received the right to use as part of the Trican transaction, (iv) dust control technologies and (v) customized solutions to individual customer and reservoir requirements.
We incurred research and development costs of $3.7 million, $2.2 million and nil for the years ended December 31, 2017, 2016 and 2015, respectively.
Intellectual property
In connection with the acquisition of the Acquired Trican Operations, we acquired ownership of substantially all intellectual property relating primarily to Trican’s U.S. oilfield services business, which includes know-how, trade secrets, formulas, processes, customer lists and other non-registered intellectual property primarily used in connection with that business. Keane also entered into two fully paid-up, perpetual, non-exclusive licenses to certain intellectual property owned by Trican or its affiliates. See Part III, “Item 13. Certain Relationships and Related-Party Transactions and Director Independence-Trican Transaction” for more information. We believe the proprietary technology and engineering capabilities acquired in the Trican transaction have enhanced our integrated services solutions and better positioned our company to meet our customers’ technical demands.
We believe the information regarding our customer and supplier relationships are also valuable proprietary assets. We have pending applications and registered trademarks for various names under which our entities conduct business or provide products or services. Except for the foregoing, we do not own or license any patents, trademarks or other intellectual property that we believe to be material to the success of our business.
Seasonality
Weather conditions affect the demand for, and prices of, oil and natural gas and, as a result, demand for our services. Demand for oil and natural gas is typically higher in the fourth and first quarters resulting in higher prices. Due to these seasonal fluctuations, results of operations for individual quarterly periods may not be indicative of the results that may be realized on an annual basis.
Employees
As of December 31, 2017, we employed 2,748 people, of which approximately 80% were compensated on an hourly basis. Our employees are not covered by collective bargaining agreements, nor are they members of labor unions. While we consider our relationship with our employees to be satisfactory, disputes may arise over certain classifications of employees that are customary in the oilfield services industry. We are not aware of any other potentially adverse matters involving our employment practices.
Environmental regulation
Our operations are subject to stringent federal, state and local laws, rules and regulations relating to the oil and natural gas industry, including the discharge of materials into the environment or otherwise relating to health and safety or the protection of the environment. Numerous governmental agencies, such as the Environmental Protection Agency (the “EPA”), issue regulations to implement and enforce these laws, which often require costly compliance measures. Failure to comply with these laws and regulations may result in the assessment of substantial administrative, civil and criminal penalties, expenditures associated with exposure to hazardous materials, remediation of contamination, property damage and personal injuries, imposition of bond requirements, as well as the issuance of injunctions limiting or prohibiting our activities. In addition, some laws and regulations relating to
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protection of the environment may, in certain circumstances, impose strict liability for environmental contamination, rendering a person liable for environmental damages and clean-up costs without regard to negligence or fault on the part of that person. Strict adherence with these regulatory requirements increases our cost of doing business and consequently affects our profitability. However, environmental laws and regulations have been subject to frequent changes over the years, and the imposition of more stringent requirements, including those that result in any limitation, suspension or moratorium on the services we provide, whether or not short-term in nature, by federal, state, regional or local governmental authority, could have a material adverse effect on our business, financial condition and results of operations.
The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or the “Superfund law”), and comparable state laws impose liability on certain classes of persons that are considered to be responsible for the release of hazardous or other state-regulated substances into the environment. These persons include the current or former owner or operator of the site where the release occurred and the parties that disposed or arranged for the disposal or treatment of hazardous or other state-regulated substances that have been released at the site. Under CERCLA, these persons may be subject to strict liability, joint and several liability, or both, for the costs of investigating and cleaning up hazardous substances that have been released into the environment, damages to natural resources and health studies without regard to fault. In addition, companies that incur a CERCLA liability frequently confront claims by neighboring landowners and other third parties for personal injury and property damage allegedly caused by the release of hazardous or other regulated substances or pollutants into the environment.
The federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, (“RCRA”) and analogous state law generally excludes oil and gas exploration and production wastes (e.g., drilling fluids, produced waters) from regulation as hazardous wastes. However, these wastes remain subject to potential regulation as solid wastes under RCRA and as hazardous waste under other state and local laws. Moreover, wastes from some of our operations (such as, but not limited to, our chemical development, blending and distribution operations, as well as some maintenance and manufacturing operations) are or may be regulated under RCRA and analogous state law under certain circumstances. Further, any exemption or regulation under RCRA does not alter treatment of the substance under CERCLA.
From time to time, releases of materials or wastes have occurred at locations we own or at which we have operations. These properties and the materials or wastes released thereon may be subject to CERCLA, RCRA, the federal Clean Water Act, the Safe Drinking Water Act (the “SDWA”) and analogous state laws. Under these laws or other laws and regulations, we have been and may be required to remove or remediate these materials or wastes and make expenditures associated with personal injury or property damage. At this time, with respect to any properties where materials or wastes may have been released, it is not possible to estimate the potential costs that may arise from unknown, latent liability risks.
There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. Companion bills entitled the Fracturing Responsibility and Awareness Chemicals Act (“FRAC Act”) were reintroduced in the House of Representatives in May 2013 and in the United States Senate in June 2013. If the FRAC Act and other similar legislation pass, the legislation could significantly alter regulatory oversight of hydraulic fracturing. Currently, unless the fracturing fluid used in the hydraulic fracturing process contains diesel fuel, hydraulic fracturing operations are exempt from permitting under the Underground Injection Control (“UIC”) program in the SDWA. The FRAC Act would remove this exemption and subject hydraulic fracturing operations to permitting requirements under the UIC program. The FRAC Act and other similar bills propose to also require persons conducting hydraulic fracturing to disclose the chemical constituents of their fracturing fluids to a regulatory agency, although they would not require the disclosure of the proprietary formulas except in cases of emergency. Currently, several states already require public disclosure of non-proprietary chemicals on FracFocus.org and other equivalent Internet sites. Disclosure of our proprietary chemical formulas to third parties or to the public, even if inadvertent, could diminish the value of those formulas and could result in
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competitive harm to our business. At this time, it is not clear what action, if any, the United States Congress will take on the FRAC Act or other related federal and state bills, or the ultimate impact of any such legislation.
If the FRAC Act or similar legislation becomes law, or the Department of the Interior or another federal agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, additional regulatory requirements could be established at the federal level that could lead to operational delays or increased operating costs, making it more difficult to perform hydraulic fracturing and increasing the costs of compliance and doing business for us and our customers. States in which we operate have considered and may again consider legislation that could impose additional regulations and/or restrictions on hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing.
In addition, at the direction of Congress, the EPA undertook a study of the potential impacts of hydraulic fracturing on drinking water and groundwater and issued its report in December 2016. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking resources under some circumstances and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Similarly, other federal and state studies, such as those currently being conducted by, for example, the Secretary of Energy’s Advisory Board and the New York Department of Environmental Conservation, may recommend additional requirements or restrictions on hydraulic fracturing operations.
The federal Clean Air Act and comparable state laws regulate emissions of various air pollutants through air emissions permitting programs and the imposition of other requirements. In addition, the EPA has developed and continues to develop stringent regulations governing emissions of toxic air pollutants from specified sources. We are or may be required to obtain federal and state permits in connection with certain operations of our manufacturing and maintenance facilities. These permits impose certain conditions and restrictions on our operations, some of which require significant expenditures for filtering or other emissions control devices at each of our manufacturing and maintenance facilities. Changes in these requirements, or in the permits we operate under, could increase our costs or limit certain activities. Additionally, the EPA’s Transition Program for Equipment Manufacturers regulations apply to certain off-road diesel engines used by us to power equipment in the field. Under these regulations, we are subject to certain requirements with respect to retrofitting or retiring certain engines, and we are limited in the number of new non-compliant off-road diesel engines we can purchase. Engines that are compliant with the current emissions standards can be costlier and can be subject to limited availability. It is possible that these regulations could limit our ability to acquire a sufficient number of diesel engines to expand our fleet and/or upgrade our existing equipment by replacing older engines as they are taken out of service.
Exploration and production activities on federal lands may be subject to the National Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the Department of Interior, to evaluate major agency actions that have the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an environmental assessment of the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed environmental impact statement that may be made available for public review and comment. All of our activities and our customers’ current E&P activities, as well as proposed exploration and development plans, on federal lands require governmental permits that are subject to the requirements of NEPA. This process has the potential to delay the development of oil and natural gas projects.
Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds, wetlands and natural resources. These statutes include the Endangered Species Act, the Migratory Bird Treaty Act, the Clean Water Act and CERCLA. Government entities or private parties may act to prevent oil and gas exploration activities or seek damages where harm to species, habitat or natural resources may result from the filling of jurisdictional streams or wetlands or the construction or release of oil, wastes, hazardous substances or other regulated materials. At this time, it is not possible to estimate the potential impact on our business of these speculative federal, state or private actions or the enactment of additional federal or state legislation or regulations with respect to these matters.
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The EPA has proposed and finalized a number of rules requiring various industry sectors to track and report, and, in some cases, control greenhouse gas emissions. The EPA’s Mandatory Reporting of Greenhouse Gases Rule was published in October 2009. This rule requires large sources and suppliers in the U.S. to track and report greenhouse gas emissions. In June 2010, the EPA’s Greenhouse Gas Tailoring Rule became effective. For this rule to apply initially, the source must already be subject to the Clean Air Act Prevention of Significant Deterioration program or Title V permit program; we are not currently subject to either Clean Air Act program. On November 8, 2010, the EPA finalized a rule that sets forth reporting requirements for the petroleum and natural gas industry. Among other things, this final rule requires persons that hold state permits for onshore oil and gas exploration and production and that emit 25,000 metric tons or more of carbon dioxide equivalent per year to annually report carbon dioxide, methane and nitrous oxide combustion emissions from (i) stationary and portable equipment and (ii) flaring. Under the final rule, our customers may be required to include calculated emissions from our hydraulic fracturing equipment located on their well sites in their emission inventory.
The trajectory of future greenhouse regulations remains unsettled. In March 2014, the White House announced its intention to consider further regulation of methane emissions from the oil and gas sector. It is unclear whether Congress will take further action on greenhouse gases, for example, to further regulate greenhouse gas emissions or alternatively to statutorily limit the EPA’s authority over greenhouse gases. Even without federal legislation or regulation of greenhouse gas emissions, states may pursue the issue either directly or indirectly. Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect the oil and natural gas industry and, therefore, could reduce the demand for our products and services.
Climate change regulation may also impact our business positively by increasing demand for natural gas for use in producing electricity and as a transportation fuel. Currently, our operations are not materially adversely impacted by existing state and local climate change initiatives. At this time, we cannot accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business.
We seek to minimize the possibility of a pollution event through equipment and job design, as well as through training employees. We also maintain a pollution risk management program in the event a pollution event occurs. This program includes an internal emergency response plan that provides specific procedures for our employees to follow in the event of a chemical release or spill. In addition, we have contracted with several third-party emergency responders in our various operating areas that are available on a 24-hour basis to handle the remediation and clean-up of any chemical release or spill. We carry insurance designed to respond to foreseeable environmental pollution events. This insurance portfolio has been structured in an effort to address pollution incidents that result in bodily injury or property damage and any ensuing clean up required at our owned facilities, as a result of the mobilization and utilization of our fleets, as well as any environmental claims resulting from our operations.
We also seek to manage environmental liability risks through provisions in our contracts with our customers that generally allocate risks relating to surface activities associated with the fracturing process, other than water disposal, to us and risks relating to “down-hole” liabilities to our customers. Our customers are responsible for the disposal of the fracturing fluid that flows back out of the well as waste water, for which they use a controlled flow-back process. We are not involved in that process or the disposal of the fluid. Our contracts generally require our customers to indemnify us against pollution and environmental damages originating below the surface of the ground or arising out of water disposal, or otherwise caused by the customer, other contractors or other third parties. In turn, we generally indemnify our customers for pollution and environmental damages originating at or above the surface caused solely by us. We seek to maintain consistent risk-allocation and indemnification provisions in our customer agreements to the extent possible. Some of our contracts, however, contain less explicit indemnification provisions, which typically provide that each party will indemnify the other against liabilities to third parties resulting from the indemnifying party’s actions, except to the extent such liability results from the indemnified party’s gross negligence, willful misconduct or intentional act.
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Safety and health regulation
Safety is our highest priority, and we believe we are among the safest service providers in the industry. For example, we achieve a total recordable incident rate, which we believe is a reliable measure of safety performance, that is substantially less than the industry average from 2013 to 2016. We believe we have an industry leading behavior-based safety program to ensure each employee understands the importance of safety.
We are subject to the requirements of the federal Occupational Safety and Health Act, which is administered and enforced by the Occupational Safety and Health Administration, commonly referred to as OSHA, and comparable state laws that regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires that information be maintained about hazardous materials used or produced in operations and that this information be provided to employees, state and local government authorities and the public. We believe that our operations are in substantial compliance with the OSHA requirements, including general industry standards, record keeping requirements and monitoring of occupational exposure to regulated substances. OSHA continues to evaluate worker safety and to propose new regulations, such as but not limited to, the proposed new rule regarding respirable silica sand. Although it is not possible to estimate the financial and compliance impact of the proposed respirable silica sand rule or any other proposed rule, the imposition of more stringent requirements could have a material adverse effect on our business, financial condition and results of operations.
Insurance
Our operations are subject to hazards inherent in the oil and natural gas industry, including accidents, blowouts, explosions, craterings, fires, oil spills and hazardous materials spills. These conditions can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment and wildlife, and interruption or suspension of operations, among other adverse effects. In addition, claims for loss of oil and natural gas production and damage to formations can occur in the well services industry. If a serious accident were to occur at a location where our equipment and services are being used, it could result in our being named as a defendant to a lawsuit asserting significant claims.
Despite our efforts to maintain high safety standards, we from time to time have suffered accidents in the past and we anticipate that we could experience accidents in the future. In addition to the property and personal losses from these accidents, the frequency and severity of these incidents affect our operating costs and insurability, as well as our relationships with customers, employees and regulatory agencies. Any significant increase in the frequency or severity of these incidents, or the general level of compensation awards, could adversely affect the cost of, or our ability to obtain, workers’ compensation and other forms of insurance, and could have other adverse effects on our financial condition and results of operations.
We carry a variety of insurance coverages for our operations, and we are partially self-insured for certain claims, in amounts that we believe to be customary and reasonable. However, our insurance may not be sufficient to cover any particular loss or may not cover all losses. Historically, insurance rates have been subject to various market fluctuations that may result in less coverage, increased premium costs, or higher deductibles or self-insured retentions.
Availability of filings
Our Annual reports on Form 10-K, Quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available free of charge on our internet web site at www.keanegrp.com, as soon as reasonably practicable after we have electronically filed the material with, or furnished it to, the Securities and Exchange Commission (the “SEC”). The public may read and copy any materials we have filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains our reports, proxy and information statements, and our other SEC filings. The address of that web site is https://www.sec.gov/.
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We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website at https://investors.keanegrp.com/. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases and blogs as part of our investor relations website. We have used, and intend to continue to use, our investor relations website as means of disclosing material information and for complying with our disclosure obligations under Regulation Fair Disclosure. Further corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters and code of business conduct and ethics, is also available on our investor relations website under the heading “Corporate Governance.” The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
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Item 1A. Risk Factors
RISK FACTORS
Described below are certain risks that we believe apply to our business and the industry in which we operate. You should carefully consider each of the following risk factors in conjunction with other information provided in this Annual Report on Form 10-K and in our other public disclosures. The risks described below highlight potential events, trends or other circumstances that could adversely affect our business, financial condition, results of operations, cash flows, liquidity or access to sources of financing, and consequently, the market value of our common stock. These risks could cause our future results to differ materially from historical results and from guidance we may provide regarding our expectations of future financial performance. The risks described below are those that we have identified as material and is not an exhaustive list of all the risks we face. There may be others that we have not identified or that we have deemed to be immaterial. All forward-looking statements made by us or on our behalf are qualified by the risks described below.
Risks Related to Our Business and Industry
Our business is cyclical and depends on spending and well completions by the onshore oil and natural gas industry in the U.S., and the level of such activity is volatile. Our business has been, and may continue to be, adversely affected by industry conditions that are beyond our control.
Our business is cyclical, and we depend on the willingness of our customers to make expenditures to explore for, develop and produce oil and natural gas from onshore unconventional resources in the U.S. The willingness of our customers to undertake these activities depends largely upon prevailing industry conditions that are influenced by numerous factors over which we have no control, including:
• | prices, and expectations about future prices, for oil and natural gas; |
• | domestic and foreign supply of, and demand for, oil and natural gas and related products; |
• | the level of global and domestic oil and natural gas inventories; |
• | the supply of and demand for hydraulic fracturing and other oilfield services and equipment in the United States; |
• | the cost of exploring for, developing, producing and delivering oil and natural gas; |
• | available pipeline, storage and other transportation capacity; |
• | lead times associated with acquiring equipment and products and availability of qualified personnel; |
• | the discovery rates of new oil and natural gas reserves; |
• | federal, state and local regulation of hydraulic fracturing and other oilfield service activities, as well as exploration and production activities, including public pressure on governmental bodies and regulatory agencies to regulate our industry; |
• | the availability of water resources, suitable proppant and chemicals in sufficient quantities for use in hydraulic fracturing fluids; |
• | geopolitical developments and political instability in oil and natural gas producing countries; |
• | actions of the Organization of the Petroleum Exporting Countries (“OPEC”), its members and other state-controlled oil companies relating to oil price and production controls; |
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• | advances in exploration, development and production technologies or in technologies affecting energy consumption; |
• | the price and availability of alternative fuels and energy sources; |
• | disruptions due to natural disasters, unexpected weather conditions, etc.; |
• | uncertainty in capital and commodities markets and the ability of oil and natural gas producers to raise equity capital and debt financing; and |
• | U.S. federal, state and local and non-U.S. governmental regulations and taxes. |
The volatility of the oil and natural gas industry and the resulting impact on exploration and production activity could adversely impact the level of drilling and completion activity by some of our customers. This volatility may result in a decline in the demand for our services or adversely affect the price of our services. In addition, material declines in oil and natural gas prices, or drilling or completion activity in the U.S. oil and natural gas shale regions, could have a material adverse effect on our business, financial condition, prospects, results of operations and cash flows. In addition, a decrease in the development of oil and natural gas reserves in our market areas may also have an adverse impact on our business, even in an environment of strong oil and natural gas prices.
A decline in or substantial volatility of crude oil and natural gas commodity prices could adversely affect the demand for our services.
The demand for our services is substantially influenced by current and anticipated crude oil and natural gas commodity prices and the related level of drilling and completion activity and general production spending in the areas in which we have operations. Volatility or weakness in crude oil and natural gas commodity prices (or the perception that crude oil and natural gas commodity prices will decrease) affects the spending patterns of our customers and the products and services we provide are, to a substantial extent, deferrable in the event oil and natural gas companies reduce capital expenditures. As a result, we may experience lower utilization of, and may be forced to lower our rates for, our equipment and services.
Historical prices for crude oil and natural gas have been extremely volatile and are expected to continue to be volatile. For example, since 1999, oil prices have ranged from as low as approximately $10 per barrel to over $100 per barrel. In recent years, oil and natural gas prices and, therefore, the level of exploration, development and production activity, experienced a sustained decline from the highs in the latter half of 2014 as a result of an increasing global supply of oil and a decision by OPEC to sustain its production levels in spite of the decline in oil prices and slowing economic growth in the Eurozone and China. From late 2014 to second half of 2016, prices
for U.S. oil weakened in response to continued high levels of production by OPEC, a buildup in inventories and lower global demand. OPEC’s recent agreement to reduce its oil production has provided upward momentum for oil and natural gas prices, but member nations may opt to not follow this agreement. Although beginning in late 2016 oil prices and natural gas prices have recovered to $60.46 per barrel and $3.69 per MMbtu, respectively, as of December 29, 2017, the volatility of our industry persists.
As a result of the significant decline in the price of oil, beginning in late 2014, E&P companies moved to significantly cut costs, both by decreasing drilling and completion activity and by demanding price concessions from their service providers, including providers of hydraulic fracturing services. In turn, service providers, including hydraulic fracturing service providers, were forced to lower their operating costs and capital expenditures, while continuing to operate their businesses in an extremely competitive environment. Prolonged periods of price instability in the oil and natural gas industry will adversely affect the demand for our products and services and our financial condition, prospects and results of operations.
Additionally, the commercial development of economically viable alternative energy sources (such as wind, solar geothermal, tidal, fuel cells and biofuels) and fuel conservation measures could reduce demand for our services and create downward pressure on the revenue we are able to derive from such services, as they are dependent on oil and natural gas commodity prices.
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Our operations are subject to hazards inherent in the energy services industry.
Risks inherent to our industry can cause personal injury, loss of life, suspension of or impact upon operations, damage to geological formations, damage to facilities, business interruption and damage to, or destruction of, property, equipment and the environment. Such risks may include, but are not limited to:
• | equipment defects; |
• | vehicle accidents; |
• | explosions and uncontrollable flows of gas or well fluids; |
• | unusual or unexpected geological formations or pressures and industrial accidents; |
• | blowouts; |
• | cratering; |
• | loss of well control; |
• | collapse of the borehole; and |
• | damaged or lost drilling equipment. |
In addition, our hydraulic fracturing and well completion services could become a source of spills or releases of fluids, including chemicals used during hydraulic fracturing activities, at the site where such services are performed, or could result in the discharge of such fluids into underground formations that were not targeted for fracturing or well completion activities, such as potable aquifers. These risks could expose us to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution and other environmental damages and could result in a variety of claims, losses and remedial obligations that could have an adverse effect on our business and results of operations. The existence, frequency and severity of such incidents could affect operating costs, insurability and relationships with customers, employees and regulators. In particular, our customers may elect not to purchase our services if they view our safety record as unacceptable, which could cause us to lose customers and substantial revenue, and any litigation or claims, even if fully indemnified or insured, could negatively affect our reputation with our customers and the public and make it more difficult for us to compete effectively or obtain adequate insurance in the future.
We may be subject to claims for personal injury and property damage, which could materially adversely affect our financial condition, prospects and results of operations.
Our services are subject to inherent risks that can cause personal injury or loss of life, damage to or destruction of property, equipment or the environment or the suspension of our operations. Our operations are subject to, and exposed to, employee/employer liabilities and risks such as wrongful termination, discrimination, labor organizing, retaliation claims and general human resource related matters. Litigation arising from operations where our facilities are located, or our services are provided, may cause us to be named as a defendant in lawsuits asserting potentially large claims including claims for exemplary damages. We maintain what we believe is customary and reasonable insurance to protect our business against these potential losses, but such insurance may not be adequate to cover our liabilities, and we are not fully insured against all risks. Further, our insurance has deductibles or self-insured retentions and contains certain coverage exclusions. The current trend in the insurance industry is towards larger deductibles and self-insured retentions. In addition, insurance may not be available in the future at rates that we consider reasonable and commercially justifiable, compelling us to have larger deductibles or self-insured retentions to effectively manage expenses. As a result, we could become subject to material uninsured liabilities or situations where we have high deductibles or self-insured retentions that expose us to liabilities that could have a material adverse effect on our business, financial condition, prospects or results of operations.
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Litigation and other proceedings could have a negative impact on our business.
The nature of our business makes us susceptible to legal proceedings and governmental audits and investigations from time to time. In addition, during periods of depressed market conditions, we may be subject to an increased risk of our customers, vendors, current and former employees and others initiating legal proceedings against us could have a material adverse effect on our business, financial condition and results of operations. Similarly, any legal proceedings or claims, even if fully indemnified or insured, could negatively impact our reputation among our customers and the public, and make it more difficult for us to compete effectively or obtain adequate insurance in the future. See Note (18) Commitments and Contingencies of Part II, "Item 8. Financial Statements and Supplementary Data" for further discussion of our legal and environmental contingencies for the years ended December 31, 2017, 2016 and 2015.
Competition within the oilfield services industry may adversely affect our ability to market our services.
The oilfield services industry is highly competitive and fragmented and includes several large companies that compete in many of the markets we serve, as well as numerous small companies that compete with us on a local basis. Our larger competitors’ greater resources could allow them to better withstand industry downturns and to compete more effectively on the basis of technology, geographic scope and retained skilled personnel. We believe the principal competitive factors in the market areas we serve are multi-basin service capability, proximity to customers, technical expertise, equipment capacity, work force competency, efficiency, safety records, reputation experience and price. Our operations may be adversely affected if our current competitors or new market entrants introduce new products or services with better features, performance, prices or other characteristics than our products and services or expand into service areas where we operate. Competitive pressures or other factors may also result in significant price competition, particularly during industry downturns, which could have a material adverse effect on our results of operations, financial condition and prospects. Significant increases in overall market capacity have previously caused price competition and led to lower pricing and utilization levels for our services.
The competitive environment has intensified since late 2014 as a result of the industry downturn and oversupply of oilfield services. We have seen substantial reductions in the prices we can charge for our services based on reduced demand and resulting overcapacity. Any significant future increase in overall market capacity for completion services could adversely affect our business and results of operations.
Our assets require significant amounts of capital for maintenance, upgrades and refurbishment and may require significant capital expenditures for new equipment.
Our hydraulic fracturing fleets and other completion service-related equipment require significant capital investment in maintenance, upgrades and refurbishment to maintain their competitiveness. For example, from April 1, 2016 through December 31, 2017, we commissioned 14 hydraulic fracturing fleets to service customers at a total cost to deploy of $29.0 million, including capital expenditures. Our fleets and other equipment typically do not generate revenue while they are undergoing maintenance, refurbishment or upgrades. Any maintenance, upgrade or refurbishment project for our assets could increase our indebtedness or reduce cash available for other opportunities. Further, such projects may require proportionally greater capital investments as a percentage of total asset value, which may make such projects difficult to finance on acceptable terms. To the extent we are unable to fund such projects, we may have less equipment available for service or our equipment may not be attractive to potential or current customers. Additionally, increased demand, competition or advances in technology within our industry may require us to update or replace existing fleets or build or acquire new fleets. For example, between December 8, 2017 and December 10, 2017, we placed orders for an aggregate of approximately 150,000 newbuild hydraulic horsepower representing three additional hydraulic fracturing fleets, with anticipated capital expenditures for the three fleets of approximately $115.0 million. Such demands on our capital or reductions in demand for our hydraulic fracturing fleets and other completion service related equipment and the increase in cost to maintain labor necessary for such maintenance and improvement, in each case, could have a material adverse effect on our business, liquidity position, financial condition, prospects and results of operations and may increase the cost to make our inactive fleets operational.
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Until recently, we were dependent on a few customers in a single industry. The loss of one or more significant customers could adversely affect our financial condition, prospects and results of operations.
Our customers are engaged in the oil and natural gas E&P business in the U.S. Historically, we have been dependent upon a few customers for a significant portion of our revenues. For the year ended December 31, 2017, no customer represented more than 10% of our consolidated revenue. For the year ended December 31, 2016, three customers, Shell Exploration & Production, XTO Energy and Seneca Resources Corporation, individually represented more than 10% of our consolidated revenue. For the year ended December 31, 2015, four customers, EQT Production Company, XTO Energy, Shell Exploration & Production and Southwestern Energy Company, individually represented more than 10% of our consolidated revenue.
Our business, financial condition, prospects and results of operations could be materially adversely affected if one or more of our significant customers ceases to engage us for our services on favorable terms or at all or fails to pay or delays in paying us significant amounts of our outstanding receivables. Although we do have contracts for multiple projects with certain of our customers, most of our services are provided on a project-by-project basis.
Additionally, the E&P industry is characterized by frequent consolidation activity. Changes in ownership of our customers may result in the loss of, or reduction in, business from those customers, which could materially and adversely affect our business, financial condition, prospects and results of operations.
We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our financial results.
We are subject to the risk of loss resulting from nonpayment or nonperformance by our customers, many of whose operations are concentrated solely in the domestic E&P industry which, as described above, is subject to volatility and, therefore, credit risk. Our credit procedures and policies may not be adequate to fully reduce customer credit risk. If we are unable to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re-market or otherwise use our equipment could have a material adverse effect on our business, financial condition, prospects and/or results of operations.
Our commitments under supply agreements could exceed our requirements, and our reliance on suppliers exposes us to risks including price, timing of delivery and quality of products and services upon which our business relies.
We have purchase commitments with certain vendors to supply a majority of the proppant used in our operations. Some of these agreements are take-or-pay agreements with minimum purchase obligations. If demand for our hydraulic fracturing services decreases from current levels, demand for the raw materials and products we supply as part of these services will also decrease. If demand decreases enough, we could have contractual minimum commitments that exceed the required amount of goods we need to supply to our customers. In this instance, we could be required to purchase goods that we do not have a present need for, pay for goods that we do not take delivery of or pay prices in excess of market prices at the time of purchase. Additionally, our reliance on outside suppliers for some of the key materials and equipment we use in providing our services involves risks, including limited control over the price, timely delivery availability and quality of such materials or equipment. In addition to continued growth and demand for sand, some transitory factors that also can potentially affect timely delivery and availability of sand include inclement weather, flooding impacts, rail-related output constraints and delays on opening new mine sources.
Unexpected and immediate changes in the availability and pricing of raw materials, or the loss of or interruption in operations of one or more of our suppliers, could have a material adverse effect on our results of operations, prospects and financial condition.
Raw materials essential to our business are normally readily available. However, high levels of demand for raw materials, such as gels, guar, proppant and hydrochloric acid, have triggered constraints in the supply chain of those raw materials and could dramatically increase the prices of such raw materials. For example, during 2012,
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companies in our industry experienced a shortage of guar, which is a key ingredient in fracturing fluids. This shortage resulted in an unexpected and immediate increase in the price of guar. During 2008, our industry faced sporadic proppant shortages requiring work stoppages, which adversely impacted the operating results of several competitors. An increase in the cost of proppant as a result of increased demand or a decrease in the number of proppant providers could increase our cost of an essential raw material in hydraulic stimulation and have a material adverse effect on our business, operations, prospects and financial condition. We may not be able to mitigate any future shortages of raw materials.
New technology may cause us to become less competitive.
The oilfield services industry is subject to the introduction of new drilling and completion techniques and services using new technologies, some of which may be subject to patent or other intellectual property protections. Although we believe our equipment and processes currently give us a competitive advantage, as competitors and others use or develop new or comparable technologies in the future, we may lose market share or be placed at a competitive disadvantage. Further, we may face competitive pressure to develop, implement or acquire certain new technologies at a substantial cost. Some of our competitors have greater financial, technical and personnel resources that may allow them to enjoy technological advantages and develop and implement new products on a timely basis or at an acceptable cost. We cannot be certain that we will be able to develop and implement new technologies or products on a timely basis or at an acceptable cost. Limits on our ability to develop, effectively use and implement new and emerging technologies may have a material adverse effect on our business, financial condition, prospects or results of operations.
Competition among oilfield service and equipment providers is affected by each provider’s reputation for safety and quality.
Our activities are subject to a wide range of national, state and local occupational health and safety laws and regulations. In addition, customers maintain their own compliance and reporting requirements. Failure to comply with these health and safety laws and regulations, or failure to comply with our customers’ compliance or reporting requirements, could tarnish our reputation for safety and quality and have a material adverse effect on our competitive position.
Oilfield anti-indemnity provisions enacted by many states may restrict or prohibit a party’s indemnification of us.
We typically enter into agreements with our customers governing the provision of our services, which usually include certain indemnification provisions for losses resulting from operations. Such agreements may require each party to indemnify the other against certain claims regardless of the negligence or other fault of the indemnified party; however, many states place limitations on contractual indemnity agreements, particularly agreements that indemnify a party against the consequences of its own negligence. Furthermore, certain states, including Louisiana, New Mexico, Texas and Wyoming, have enacted statutes generally referred to as “oilfield anti-indemnity acts” expressly prohibiting certain indemnity agreements contained in or related to oilfield services agreements. Such oilfield anti-indemnity acts may restrict or void a party’s indemnification of us, which could have a material adverse effect on our business, financial condition, prospects and results of operations.
We are subject to federal, state and local laws and regulations regarding issues of health, safety and protection of the environment. Under these laws and regulations, we may become liable for penalties, damages or costs of remediation or other corrective measures. Any changes in laws or government regulations could increase our costs of doing business.
Our operations are subject to stringent federal, state, local and tribal laws and regulations relating to, among other things, protection of natural resources, clean air and drinking water, wetlands, endangered species, greenhouse gasses, nonattainment areas, the environment, health and safety, chemical use and storage, waste management, waste disposal and transportation of waste and other hazardous and nonhazardous materials. Our operations involve risks of environmental liability, including leakage from an operator’s casing during our operations or accidental spills onto or into surface or subsurface soils, surface water or groundwater. Some environmental laws and regulations
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may impose strict liability, joint and several liability, or both. In some situations, we could be exposed to liability as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, third parties without regard to whether we caused or contributed to the conditions. Additionally, environmental concerns, including clean air, drinking water contamination and seismic activity, have prompted investigations that could lead to the enactment of regulations, limitations, restrictions or moratoria that could potentially have a material adverse impact on our business. Actions arising under these laws and regulations could result in the shutdown of our operations, fines and penalties (administrative, civil or criminal), revocations of permits to conduct business, expenditures for remediation or other corrective measures and/or claims for liability for property damage, exposure to hazardous materials, exposure to hazardous waste, nuisance or personal injuries. Sanctions for noncompliance with applicable environmental laws and regulations may also include the assessment of administrative, civil or criminal penalties, revocation of permits and temporary or permanent cessation of operations in a particular location and issuance of corrective action orders. Such claims or sanctions and related costs could cause us to incur substantial costs or losses and could have a material adverse effect on our business, financial condition, prospects and results of operations. Additionally, an increase in regulatory requirements, limitations, restrictions or moratoria on oil and natural gas exploration and completion activities at a federal, state or local level could significantly delay or interrupt our operations, limit the amount of work we can perform, increase our costs of compliance, or increase the cost of our services, thereby possibly having a material adverse impact on our financial condition.
If we do not perform in accordance with government, industry, customer or our own health, safety and environmental standards, we could lose business from our customers, many of whom have an increased focus on environmental and safety issues.
We are subject to the EPA, U.S. Department of Transportation, U.S. Nuclear Regulation Commission, OSHA and state regulatory agencies that regulate operations to prevent air, soil and water pollution. The energy extraction sector is one of the sectors designated for increased enforcement by the EPA, which will continue to regulate our industry in the years to come, potentially resulting in additional regulations that could have a material adverse impact on our business, prospects or financial condition.
The EPA regulates air emissions from all engines, including off-road diesel engines that are used by us to power equipment in the field. Under these U.S. emission control regulations, we could be limited in the number of certain off-road diesel engines we can purchase. Further, the emission control and fuel quality regulations could result in increased costs.
Laws and regulations protecting the environment generally have become more stringent over time, and we expect them to continue to do so. This could lead to material increases in our costs, and liability exposure, for future environmental compliance and remediation. Additionally, if we expand the size or scope of our operations, we could be subject to existing regulations that are more stringent than the requirements under which we are currently allowed to operate or require additional authorizations to continue operations. Compliance with this additional regulatory burden could increase our operating or other costs.
Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing could prohibit, restrict or limit hydraulic fracturing operations, could increase our operating costs or could result in the disclosure of proprietary information resulting in competitive harm.
During recent sessions of the U.S. Congress, several pieces of legislation were introduced in the U.S. Senate and House of Representatives for the purpose of amending environmental laws such as the Clean Air Act, the SDWA and the Toxic Substance Control Act with respect to activities associated with extraction and energy production industries, especially the oil and gas industry. Furthermore, various items of legislation and rulemaking have been proposed that would regulate or prevent federal regulation of hydraulic fracturing on federally owned land. Proposed rulemaking from the EPA and OSHA, such as the proposed regulation relating to respirable silica sand, could increase our regulatory requirements, which could increase our costs of compliance or increase the costs of our services, thereby possibly having a material adverse impact on our business and results of operations.
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If the EPA or another federal or state-level agency asserts jurisdiction over certain aspects of hydraulic fracturing operations, an additional level of regulation established at the federal or state level could lead to operational delays and increase our costs. The EPA recently issued a study of the potential impacts of hydraulic fracturing on drinking water and groundwater. The EPA report states that there is scientific evidence that hydraulic fracturing activities can impact drinking resources under some circumstances, and identifies certain conditions in which the EPA believes the impact of such activities on drinking water and groundwater can be more frequent or severe. The EPA study could spur further initiatives to regulate hydraulic fracturing under the SDWA or otherwise. Many regulatory and legislative bodies routinely evaluate the adequacy and effectiveness of laws and regulations affecting the oil and gas industry. As a result, state legislatures, state regulatory agencies and local municipalities may consider legislation, regulations or ordinances, respectively, that could affect all aspects of the oil and natural gas industry and occasionally take action to restrict or further regulate hydraulic fracturing operations. At this time, it is not possible to estimate the potential impact on our business of these state and municipal actions or the enactment of additional federal or state legislation or regulations affecting hydraulic fracturing. Compliance, stricter regulations or the consequences of any failure to comply by us could have a material adverse effect on our business, financial condition, prospects and results of operations.
Many states in which we operate require the disclosure of some or all of the chemicals used in our hydraulic fracturing operations. Certain aspects of one or more of these chemicals may be considered proprietary by us or our chemical suppliers. Disclosure of our proprietary chemical information to third parties or to the public, even if inadvertent, could diminish the value of our trade secrets or those of our chemical suppliers and could result in competitive harm to us, which could have an adverse impact on our business, financial condition, prospects and results of operations.
We are also aware that some states, counties and municipalities have enacted or are considering moratoria on hydraulic fracturing. For example, New York and Vermont have banned or are in the process of banning the use of high volume hydraulic fracturing. Alternatively, some municipalities are or have considered zoning and other ordinances, the conditions of which could impose a de facto ban on drilling and/or hydraulic fracturing operations. Further, some states, counties and municipalities are closely examining water use issues, such as permit and disposal options for processed water, which could have a material adverse impact on our financial condition, prospects and results of operations if such additional permitting requirements are imposed upon our industry. Additionally, our business could be affected by a moratorium or increased regulation of companies in our supply chain, such as sand mining by our proppant suppliers, which could limit our access to supplies and increase the costs of our raw materials. At this time, it is not possible to estimate how these various restrictions could affect our ongoing operations. For more information, see “Item 1. Business—Environmental regulation.”
Existing or future laws and regulations related to greenhouse gases and climate change could have a negative impact on our business and may result in additional compliance obligations with respect to the release, capture and use of carbon dioxide that could have a material adverse effect on our business, results of operations, prospects and financial condition.
Changes in environmental requirements related to greenhouse gases and climate change may negatively impact demand for our services. For example, oil and natural gas exploration and production may decline as a result of environmental requirements, including land use policies responsive to environmental concerns. Federal, state and local agencies have been evaluating climate-related legislation and other regulatory initiatives that would restrict emissions of greenhouse gases in areas in which we conduct business. Because our business depends on the level of activity in the oil and natural gas industry, existing or future laws and regulations related to greenhouse gases and climate change, including incentives to conserve energy or use alternative energy sources, could have a negative impact on our business if such laws or regulations reduce demand for oil and natural gas. Likewise, such restrictions may result in additional compliance obligations with respect to the release, capture, sequestration and use of carbon dioxide that could have a material adverse effect on our business, results of operations, prospects and financial condition.
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Comprehensive tax reform bills could adversely affect our business and financial condition.
The U.S. government has enacted comprehensive tax legislation that includes significant changes to the taxation of business entities. These changes include, among others, a permanent reduction to the corporate income tax rate, additional limitations on the tax deductibility of interest, immediate deductions for certain new investments instead of deductions for depreciation expense over time and modification or repeal of many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of this tax reform is uncertain, and our business and financial condition could be adversely affected.
We use intellectual property relating to hydraulic fracturing fluids and electronic pump control which is subject to non-exclusive license arrangements and may be licensed to our competitors, which could adversely affect our business.
Trican has licensed our use of certain of its hydraulic fracturing fluids and electronic pump control technology under non-exclusive agreements. Accordingly, Trican has the right to license the same technologies and fracturing fluids that we use in our operations to our competitors, which could adversely affect our business. The rights obtained under this license may be shared with others who have been granted a similar non-exclusive license. As a result, the non-exclusive nature of this license may lead to conflicts between us and others granted similar rights.
If we are unable to fully protect our intellectual property rights, we may suffer a loss in our competitive advantage or market share.
We do not have patents or patent applications relating to many of our key processes and technology. If we are not able to maintain the confidentiality of our trade secrets, or if our competitors are able to replicate our technology or services, our competitive advantage would be diminished. We also cannot assure you that any patents we may obtain in the future would provide us with any significant commercial benefit or would allow us to prevent our competitors from employing comparable technologies or processes.
We may be subject to interruptions or failures in our information technology systems.
We rely on sophisticated information technology systems and infrastructure to support our business, including process control technology. Any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, usage errors by employees, computer viruses, cyber-attacks or other security breaches, or similar events. The failure of any of our information technology systems may cause disruptions in our operations, which could adversely affect our sales and profitability.
Changes in transportation regulations may increase our costs and negatively impact our results of operations.
We are subject to various transportation regulations including as a motor carrier by the U.S. Department of Transportation and by various federal, state and tribal agencies, whose regulations include certain permit requirements of highway and safety authorities. These regulatory authorities exercise broad powers over our trucking operations, generally governing such matters as the authorization to engage in motor carrier operations, safety, equipment testing, driver requirements and specifications and insurance requirements. The trucking industry is subject to possible regulatory and legislative changes that may impact our operations, such as changes in fuel emissions limits, hours of service regulations that govern the amount of time a driver may drive or work in any specific period and limits on vehicle weight and size. As the federal government continues to develop and propose regulations relating to fuel quality, engine efficiency and greenhouse gas emissions, we may experience an increase in costs related to truck purchases and maintenance, impairment of equipment productivity, a decrease in the residual value of vehicles, unpredictable fluctuations in fuel prices and an increase in operating expenses. Increased truck traffic may contribute to deteriorating road conditions in some areas where our operations are performed. Our operations, including routing and weight restrictions, could be affected by road construction, road repairs, detours and state and local regulations and ordinances restricting access to certain roads. Proposals to increase federal, state or local taxes, including taxes on motor fuels, are also made from time to time, and any such increase would increase our operating costs. Also, state and local regulation of permitted routes and times on specific roadways could
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adversely affect our operations. We cannot predict whether, or in what form, any legislative or regulatory changes or municipal ordinances applicable to our logistics operations will be enacted and to what extent any such legislation or regulations could increase our costs or otherwise adversely affect our business or operations.
We may be unable to employ a sufficient number of key employees, technical personnel and other skilled or qualified workers.
The delivery of our services and products requires personnel with specialized skills and experience who can perform physically demanding work. As a result of the volatility in the energy service industry and the demanding nature of the work, workers may choose to pursue employment with our competitors or in fields that offer a more desirable work environment. Furthermore, we require full compliance with the Immigration Reform and Control Act of 1986 and other laws concerning immigration and the hiring of legally documented workers. We recognize that foreign nationals may be a valuable source of talent, but that not all foreign nationals are authorized to work for U.S. companies immediately, without first obtaining a required work authorization from the U.S. Department of Homeland Security or similar government agency. Our ability to be productive and profitable will depend upon our ability to employ and retain skilled workers. In addition, our ability to further expand our operations according to geographic demand for our services depends in part on our ability to relocate or increase the size of our skilled labor force. The demand for skilled workers in our areas of operations can be high, the supply may be limited and we may be unable to relocate our employees from areas of lower utilization to areas of higher demand. A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we must pay, or both. Further, a significant decrease in the wages paid by us or our competitors as a result of reduced industry demand could result in a reduction of the available skilled labor force, and there is no assurance that the availability of skilled labor will improve following a subsequent increase in demand for our services or an increase in wage rates. If any of these events were to occur, our capacity and profitability could be diminished and our growth potential could be impaired.
We depend heavily on the efforts of executive officers, managers and other key employees to manage our operations. The unexpected loss or unavailability of key members of management or technical personnel may have a material adverse effect on our business, financial condition, prospects or results of operations.
Adverse weather conditions could impact demand for our services or materially impact our costs.
Our business could be materially adversely affected by adverse weather conditions. For example, unusually warm winters could adversely affect the demand for our services by decreasing the demand for natural gas. In addition, unusually cold winters and other weather conditions could adversely affect our ability to perform our services due to delays in the delivery of products that we need to provide our services. For example, recent weather-induced rail congestion, combined with flooding impacts at suppliers’ mines, has contributed to a reduction in the availability of sands used in our operations. Our operations in arid regions can also be affected by droughts and limited access to water used in our hydraulic fracturing operations. Adverse weather can also directly impede our own operations. Repercussions of adverse weather conditions may include:
• | curtailment of services; |
• | weather-related damage to facilities and equipment, resulting in delays in operations; |
• | inability to deliver equipment, personnel and products to job sites in accordance with contract schedules; and |
• | loss of productivity. |
Delays in obtaining, or inability to obtain or renew, permits or authorizations by our customers for their operations or by us for our operations could impair our business.
In most states, our customers are required to obtain permits or authorizations from one or more governmental agencies or other third parties to perform drilling and completion activities, including hydraulic
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fracturing. Such permits or approvals are typically required by state agencies, but can also be required by federal and local governmental agencies or other third parties. The requirements for such permits or authorizations vary depending on the location where such drilling and completion activities will be conducted. As with most permitting and authorization processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit or approval to be issued and the conditions which may be imposed in connection with the granting of the permit. In some jurisdictions, such as New York State and within the jurisdiction of the Delaware River Basin Commission, certain regulatory authorities have delayed or suspended the issuance of permits or authorizations while the potential environmental impacts associated with issuing such permits can be studied and appropriate mitigation measures evaluated. In Texas, rural water districts have begun to impose restrictions on water use and may require permits for water used in drilling and completion activities. Permitting, authorization or renewal delays, the inability to obtain new permits or the revocation of current permits could cause a loss of revenue and potentially have a materially adverse effect on our business, financial condition, prospects or results of operations.
We are also required to obtain federal, state, local and/or third-party permits and authorizations in some jurisdictions in connection with our wireline services. These permits, when required, impose certain conditions on our operations. Any changes in these requirements could have a material adverse effect on our business, financial condition, prospects and results of operations.
We may not be successful in identifying and making acquisitions.
Part of our strategy to expand our geographic scope and customer relationships, increase our access to technology and to grow our business is dependent on our ability to make acquisitions that result in accretive revenues and earnings. We may be unable to make accretive acquisitions or realize expected benefits of any acquisitions for any of the following reasons:
• | failure to identify attractive targets; |
• | incorrect assumptions regarding the future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized as a result of acquiring operations or assets; |
• | failure to obtain financing on acceptable terms or at all; |
• | restrictions in our debt agreements; |
• | failure to successfully integrate the operations or management of any acquired operations or assets; |
• | failure to retain or attract key employees; and |
• | diversion of management’s attention from existing operations or other priorities. |
Our acquisition strategy requires that we successfully integrate acquired companies into our business practices as well as our procurement, management and enterprise-wide information technology systems. We may not be successful in implementing our business practices at acquired companies, and our acquisitions could face difficulty in transitioning from their previous information technology systems to our own. Furthermore, unexpected costs and challenges may arise whenever businesses with different operations of management are combined. Any such difficulties, or increased costs associated with such integration, could affect our business, financial performance and operations.
If we are unable to identify, complete and integrate acquisitions, it could have a material adverse effect on our growth strategy, business, financial condition, prospects and results of operations.
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Integrating acquisitions may be time-consuming and create costs that could reduce our net income and cash flows.
Part of our strategy includes pursuing acquisitions that we believe will be accretive to our business. If we consummate an acquisition, the process of integrating the acquired business may be complex and time consuming, may be disruptive to the business and may cause an interruption of, or a distraction of management’s attention from, the business as a result of a number of obstacles, including, but not limited to:
• | a failure of our due diligence process to identify significant risks or issues; |
• | the loss of customers of the acquired company or our company; |
• | negative impact on the brands or banners of the acquired company or our company; |
• | a failure to maintain or improve the quality of customer service; |
• | difficulties assimilating the operations and personnel of the acquired company; |
• | our inability to retain key personnel of the acquired company; |
• | the incurrence of unexpected expenses and working capital requirements; |
• | our inability to achieve the financial and strategic goals, including synergies, for the combined businesses; |
• | difficulty in maintaining internal controls, procedures and policies; |
• | mistaken assumptions about the overall costs of equity or debt; and |
• | unforeseen difficulties operating in new product areas or new geographic areas. |
Any of the foregoing obstacles, or a combination of them, could decrease gross profit margins or increase selling, general and administrative expenses in absolute terms and/or as a percentage of net sales, which could in turn negatively impact our net income and cash flows.
We may not be able to consummate acquisitions in the future on terms acceptable to us, or at all. In addition, future acquisitions are accompanied by the risk that the obligations and liabilities of an acquired company may not be adequately reflected in the historical financial statements of that company and the risk that those historical financial statements may be based on assumptions which are incorrect or inconsistent with our assumptions or approach to accounting policies. Any of these material obligations, liabilities or incorrect or inconsistent assumptions could adversely impact our results of operations, prospects and financial condition.
Our historical financial statements may not be indicative of future performance.
In light of the Trican transaction completed in March 2016 and the RockPile Acquisition completed in July 2017, our operating results only reflect the impact of the acquisition for dates after the closing of the transaction, and, therefore, comparisons with prior periods are difficult. As a result, our limited historical financial performance as the owner of the Acquired Trican Operations and RockPile may make it difficult for stockholders to evaluate our business and results of operations to date and to assess our future prospects and viability.
Furthermore, as a result of the implementation of new business initiatives and strategies following the completion of the Trican and RockPile transactions, our historical results of operations are not necessarily indicative of our ongoing operations and the operating results to be expected in the future.
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Risks Related to Owning Our Indebtedness
Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our indebtedness.
We have a significant amount of indebtedness. As of December 31, 2017, we had $275.1 million of debt outstanding, net of discounts and deferred financing costs (not including capital lease obligations). After giving effect to our borrowing base, we had approximately $199.7 million of availability under our 2017 ABL Facility.
Our substantial indebtedness could have important consequences to you. For example, it could:
• | adversely affect the market price of our common stock; |
• | increase our vulnerability to interest rate increases and general adverse economic and industry conditions; |
• | require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes, including acquisitions; |
• | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
• | limit our ability to obtain additional financing on satisfactory terms to fund our working capital requirements, capital expenditures, acquisitions, investments, debt service requirements and other general corporate requirements; and |
• | place us at a competitive disadvantage compared to our competitors that have less debt. |
In addition, we cannot assure you that we will be able to refinance any of our debt or that we will be able to refinance our debt on commercially reasonable terms. If we were unable to make payments or refinance our debt or obtain new financing under these circumstances, we would have to consider other options, such as:
• | sales of assets; |
• | sales of equity; or |
• | negotiations with our lenders to restructure the applicable debt. |
Our debt instruments may restrict, or market or business conditions may limit, our ability to use some of our options.
Despite our significant indebtedness levels, we may still be able to incur additional debt, which could further exacerbate the risks associated with our substantial leverage.
We and our subsidiaries may be able to incur additional indebtedness in the future. The terms of the credit agreements that govern the 2017 ABL Facility (as defined herein) and the 2017 Term Loan Facility (as defined herein and, together with the 2017 ABL Facility, the “Senior Secured Debt Facilities”) permit us to incur additional indebtedness, subject to certain limitations. If new indebtedness is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face would intensify. See Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations–Principal Debt Agreements” for further details.
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The agreements governing our indebtedness contain operating covenants and restrictions that limit our operations and could lead to adverse consequences if we fail to comply with them.
The agreements governing our indebtedness contain certain operating covenants and other restrictions relating to, among other things, limitations on indebtedness (including guarantees of additional indebtedness) and liens, mergers, consolidations and dissolutions, sales of assets, investments and acquisitions, dividends and other restricted payments, repurchase of shares of capital stock and options to purchase shares of capital stock and certain transactions with affiliates. In addition, our Senior Secured Debt Facilities include certain financial covenants.
The restrictions in the agreements governing our indebtedness may prevent us from taking actions that we believe would be in the best interest of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. We may also incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility.
Failure to comply with these financial and operating covenants could result from, among other things, changes in our results of operations, the incurrence of additional indebtedness, the pricing of our products, our success at implementing cost reduction initiatives, our ability to successfully implement our overall business strategy or changes in general economic conditions, which may be beyond our control. The breach of any of these covenants or restrictions could result in a default under the agreements that govern these facilities that would permit the lenders to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest. If we are unable to repay such amounts, lenders having secured obligations could proceed against the collateral securing these obligations. The collateral includes the capital stock of our domestic subsidiaries and substantially all of our and our subsidiaries’ other tangible and intangible assets, subject in each case to certain exceptions. This could have serious consequences on our financial condition and results of operations and could cause us to become bankrupt or otherwise insolvent. In addition, these covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our business and stockholders.
See Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations–Principal Debt Agreements” for further details.
Substantially all of our debt is variable rate and increases in interest rates could negatively affect our financing costs and our ability to access capital.
We have exposure to future interest rates based on the variable rate debt under the Senior Secured Debt Facilities and to the extent we raise additional debt in the capital markets to meet maturing debt obligations, to fund our capital expenditures and working capital needs and to finance future acquisitions. Daily working capital requirements are typically financed with operational cash flow and through borrowings under our 2017 ABL Facility, if needed. The interest rate on these borrowing arrangements is generally determined from the inter-bank offering rate at the borrowing date plus a pre-set margin. Although we employ risk management techniques to hedge against interest rate volatility, significant and sustained increases in market interest rates could materially increase our financing costs and negatively impact our reported results.
Risks Related to Owning Our Common Stock
The price of our common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the public offering price.
The market price for our common stock is volatile. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including
• | the failure of securities analysts to cover, or continue to cover, our common stock, or changes in financial estimates by analysts; |
• | changes in, or investors’ perception of, the hydraulic fracturing industry; |
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• | the activities of competitors; |
• | future issuances and sales of our common stock, including in connection with acquisitions; |
• | our quarterly or annual earnings or those of other companies in our industry; |
• | the public’s reaction to our press releases, our other public announcements and our filings with the SEC; |
• | regulatory or legal developments in the United States; |
• | litigation involving us, our industry, or both; and |
• | general economic conditions. |
As a result of these factors, you may not be able to resell your shares of our common stock at or above the offering price. In addition, the stock market often experiences extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of a particular company. These broad market fluctuations and industry factors may materially reduce the market price of our common stock, regardless of our operating performance.
Keane Investor and our Sponsor control us and may have conflicts of interest with other stockholders in the future.
Keane Investor controls approximately 50.7% of our common stock. As a result, Keane Investor is able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. Seven of our 12 directors are employees of, appointees of, or advisors to, members of Cerberus, as described under Part III, “Item 10. Directors, Officers and Corporate Governance.” Cerberus, through Keane Investor, will also have sufficient voting power to amend our organizational documents. The interests of Cerberus may not coincide with the interests of other holders of our common stock. Additionally, Cerberus is in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Cerberus may also pursue, for its own members’ accounts, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as Cerberus continues to own a significant amount of the outstanding shares of our common stock through Keane Investor, Cerberus will continue to be able to strongly influence or effectively control our decisions, including potential mergers or acquisitions, asset sales and other significant corporate transactions.
We are restricted from competing with Trican in the oilfield services business in Canada, which may adversely affect our access to, or our ability to expand within, the Canadian market.
We agreed to a non-competition provision with Trican as part our acquisition of the Acquired Trican Operations, pursuant to which, subject to certain limited exceptions, we may not compete, directly or indirectly, with Trican in Canada in the oilfield services business through March 16, 2018. Subject to certain limited exceptions, we also may not own an interest in any entity that competes directly or indirectly with Trican in Canada, other than with respect to any industrial services or completion tools business or certain interests in companies with limited revenues derived from Canadian operations. These restrictions may adversely affect our access to or ability to expand within the Canadian market. Additionally, Trican has an ownership interest in Keane Investor, and conflicts of interest may therefore arise between Trican and our other shareholders relating to opportunities to enter into or expand within the Canadian oilfield business.
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We will continue to incur increased costs as a result of becoming a publicly traded company.
As a newly public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, as amended, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the rules and regulations of the New York Stock Exchange (“NYSE”). Being subject to these rules and regulations will result in additional legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly and may also place significant strain on management, systems and resources.
These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory actions and potentially civil litigation.
We are a “controlled company” within the meaning of the NYSE rules and, as a result, qualify for, and intend to rely on, exemptions from certain corporate governance requirements. Our stockholders will not have the same protections afforded to stockholders of companies that are subject to such requirements.
Keane Investor controls a majority of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the NYSE rules. Under the NYSE rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:
• the requirement that a majority of the board of directors consist of independent directors;
• the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
• the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.
We currently utilize, and intend to continue to utilize these exemptions. As a result, we do not have a majority of independent directors nor do our nominating and corporate governance and compensation committees consist entirely of independent directors. Accordingly, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.
Provisions in our charter documents, certain agreements governing our indebtedness, our Stockholders’ Agreement and Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.
Provisions in our certificate of incorporation and our bylaws, may discourage, delay or prevent a merger, acquisition or other change in control that some stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares of our common stock. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, possibly depressing the market price of our common stock.
In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace members of our management team. Examples of such provisions are as follows:
• from and after such date that Keane Investor and its respective Affiliates (as defined in Rule 12b-2 of the Exchange Act, or any person who is an express assignee or designee of Keane Investor’s respective rights under our
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certificate of incorporation (and such assignee’s or designee’s Affiliates) (of these entities, the entity that is the beneficial owner of the largest number of shares is referred to as the “Designated Controlling Stockholder”) ceases to own, in the aggregate, at least 50% of the then-outstanding shares of our common stock (the “50% Trigger Date”), the authorized number of our directors may be increased or decreased only by the affirmative vote of two-thirds of the then-outstanding shares of our common stock or by resolution of our board of directors;
• prior to the 50% Trigger Date, only our board of directors and the Designated Controlling Stockholder are expressly authorized to make, alter or repeal our bylaws and, from and after the 50% Trigger Date, our stockholders may only amend our bylaws with the approval of at least two-thirds of all of the outstanding shares of our capital stock entitled to vote;
• from and after the 50% Trigger Date, the manner in which stockholders can remove directors from the board will be limited;
• from and after the 50% Trigger Date, stockholder actions must be effected at a duly called stockholder meeting and actions by our stockholders by written consent will be prohibited;
• from and after such date that Keane Investor and its respective Affiliates (or any person who is an express assignee or designee of Keane Investor’s respective rights under our certificate of incorporation (and such assignee’s or designee’s Affiliates)) ceases to own, in the aggregate, at least 35% of the then-outstanding shares of our common stock (the “35% Trigger Date”), advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors will be established;
• limits on who may call stockholder meetings;
• requirements on any stockholder (or group of stockholders acting in concert), other than, prior to the 35% Trigger Date, the Designated Controlling Stockholder, who seeks to transact business at a meeting or nominate directors for election to submit a list of derivative interests in any of our company’s securities, including any short interests and synthetic equity interests held by such proposing stockholder;
• requirements on any stockholder (or group of stockholders acting in concert) who seeks to nominate directors for election to submit a list of “related party transactions” with the proposed nominee(s) (as if such nominating person were a registrant pursuant to Item 404 of Regulation S-K, and the proposed nominee was an executive officer or director of the “registrant”); and
• our board of directors is authorized to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors.
Our certificate of incorporation authorizes our board of directors to issue up to 50,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined by our board of directors at the time of issuance or fixed by resolution without further action by the stockholders. These terms may include voting rights, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of preferred stock could diminish the rights of holders of our common stock, and, therefore, could reduce the value of our common stock. In addition, specific rights granted to holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could delay, discourage, prevent or make it more difficult or costly to acquire or effect a change in control, thereby preserving the current stockholders’ control.
In addition, under the agreements governing the Senior Secured Debt Facilities, a change in control may lead the lenders and/or holders to exercise remedies such as acceleration of the obligations thereunder, termination of their commitments to fund additional advances and collection against the collateral securing such obligations.
Pursuant to a limited liability company agreement entered into by Cerberus and certain other entities and individuals who agreed to co-invest with Cerberus through Keane Investor (the “Keane Investor LLC Agreement”),
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such appointees shall be selected by Keane Investor’s board of managers so long as Keane is a controlled company under the applicable rules of the NYSE. See Part III, “Item 13. Certain Relationships and Related-Party Transactions and Director Independence—Keane Investor Limited Liability Company Agreement.”
Our Stockholders’ Agreement (as defined herein) provides that, except as otherwise required by applicable law, from the date on which (a) Keane is no longer a controlled company under the applicable rules of the NYSE but prior to the 35% Trigger Date, Keane Investor has the right to designate a number of individuals who satisfy the Director Requirements (as defined herein) equal to one director fewer than 50% of our board of directors at any time and shall cause its directors appointed to our board of directors to vote in favor of maintaining an 11-person board of directors unless the management board of Keane Investor otherwise agrees by the affirmative vote of 80% of the management board of Keane Investor; (b) a Holder (as defined herein) has beneficial ownership of at least 20% but less than 35% of our outstanding common stock, the Holder will have the right to designate a number of individuals who satisfy the Director Requirements equal to the greater of three or 25% of the size of our board of directors at any time (rounded up to the next whole number); (c) a Holder has beneficial ownership of at least 15% but less than 20% of our outstanding common stock, the Holder will have the right to designate the greater of two or 15% of the size of our board of directors at any time (rounded up to the next whole number); and (d) a Holder has beneficial ownership of at least 10% but less than 15% of our outstanding common stock, it will have the right to designate one individual who satisfies the Director Requirements. The ability of Keane Investor or a Holder to appoint one or more directors could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.
Our certificate of incorporation and bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.
Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the exclusive forum for: (a) any derivative action or proceeding brought on our behalf; (b) any action asserting a claim for breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders; (c) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”), our certificate of incorporation or our bylaws; or (d) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds more favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition, prospects or results of operations.
If a substantial number of shares becomes available for sale and are sold in a short period of time, the market price of our common stock could decline and our stockholders may be diluted.
If Keane Investor, WDE RockPile Aggregate, LLC and three other individuals who acquired shares of our common stock in the RockPile acquisition (together with WDE RockPile Aggregate, LLC, the “RockPile Holders”) sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease. The perception in the public market that Keane Investor or the RockPile Holders might sell shares of common stock could also create a perceived overhang and depress our market price. 112,243,769 shares of common stock are outstanding of which 65,579,625 shares are held by Keane Investor and the RockPile Holders.
Keane Investor and our executive officers and directors, but not the RockPile Holders, have previously agreed with certain underwriters to a “lock-up” period, meaning that such parties may not, subject to certain exceptions, sell any of their existing shares of our common stock without the prior written consent of representatives of the underwriters until at least April 17, 2018. When the lock-up agreements expire, these shares will become
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eligible for sale, The market price for shares of our common stock may drop when the restrictions on resale by Keane Investor lapse.
In addition, Keane Investor and the RockPile Holders have substantial demand and incidental registration rights, as described in Part III, “Item 13. Certain Relationships and Related Party Transactions—Stockholders’ Agreement.”
We may be required to make payments under our contingent value rights agreement with the RockPile Holders.
Subject to the terms and conditions of the Contingent Value Rights Agreement (the "CVR Agreement") by and among the Company, the Principal Seller and Permitted Holders (as defined in the CVR Agreement, the "RockPile Holders") entered into upon consummation of the RockPile acquisition, the RockPile Holders received non-transferable contingent value rights, which collectively entitle the RockPile Holders to receive from the Company, in certain circumstances, an aggregate payment amount of up to $20.0 million. The aggregate payment amount is contingent upon the difference between $19.00 and the trading price of Keane’s common stock in a 30-trading day period prior to April 3, 2018, the nine-month maturity date of the contingent value rights, with such amount to be reduced, in certain circumstances, to the extent the Company shares acquired by the RockPile Holder's in the RockPile acquisition are resold by the RockPile Holders prior to the maturity date. To the extent we are required to make a payment to the RockPile Holders under the CVR Agreement upon maturity, our liquidity may be adversely affected. For additional information on our obligations under the CVR Agreement, see Note (3) Acquisitions of Part II, "Item 8. Financial Statements and Supplemental Data."
If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common shares, the market price of our common stock could decline.
The trading market for our common shares likely will be influenced by the research and reports that equity and debt research analysts publish about the industry, us and our business. The market price of our common stock could decline if one or more securities analysts fail to cover our securities, if those analysts downgrade our shares or if those analysts issue a sell recommendation or other unfavorable commentary or cease publishing reports about us or our business. If one or more of the analysts who elect to cover us downgrade our shares, the market price of our common stock would likely decline
Because we do not currently intend to pay dividends, our stockholders may not receive any return on investment unless they sell their common stock for a price greater than that which they paid for it.
We do not currently intend to pay dividends, and our stockholders will not be guaranteed, or have contractual or other rights, to receive dividends. Our board of directors may, in its discretion, modify or repeal our dividend policy. The declaration and payment of dividends depends on various factors, including: our net income, financial condition, cash requirements, future prospects and other factors deemed relevant by our board of directors.
In addition, we are a holding company that does not conduct any business operations of our own. As a result, we are dependent upon cash dividends and distributions and other transfers from our subsidiaries to make dividend payments. Our subsidiaries’ ability to pay dividends is restricted by agreements governing their debt instruments, and may be restricted by agreements governing any of our subsidiaries’ future indebtedness. Furthermore, our subsidiaries are permitted under the terms of their debt agreements to incur additional indebtedness that may severely restrict or prohibit the payment of dividends. See Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations–Liquidity and Capital Resources.”
Under the DGCL, our board of directors may not authorize payment of a dividend unless it is either paid out of our surplus, as calculated in accordance with the DGCL, or if we do not have a surplus, it is paid out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
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Our stockholders may be diluted by the future issuance of additional common stock in connection with our equity incentive plans, acquisitions or otherwise.
We have 387,756,231 shares of common stock authorized but unissued under our certificate of incorporation. We will be authorized to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for consideration and on terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved 7,734,601 shares of our common stock for awards that may be issued under our Equity and Incentive Award Plan. Any common stock that we issue, including under our Equity and Incentive Award Plan or other equity incentive plans that we may adopt in the future, may result in additional dilution to our stockholders.
In the future, we may also issue our securities, including shares of our common stock, in connection with investments or acquisitions. We regularly evaluate potential acquisition opportunities, including ones that would be significant to us, and we are currently participating in processes regarding several potential acquisition opportunities, including ones that would be significant to us. We cannot predict the timing of any contemplated transactions, and none are currently probable, but any pending transaction could be entered into as soon as shortly after the filing of this Annual Report on Form 10-K. The number of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to our stockholders.
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Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
Properties
Our principal properties include our corporate headquarters, district offices, sales offices and our engineering and technology facility, as well as the hydraulic fracturing units and other equipment and vehicles operating out of these facilities. We believe our facilities are in good condition and suitable for our current operations. Below is a table detailing our properties in the United States as of December 31, 2017:
Location | Own/ Lease | Purpose | Service | Active/ Idle | Size (sqft/acres) |
Denver, CO | Lease | Executive / Finance | N/A | Active | 19,706 sqft |
Houston, TX | Lease | Executive / Finance | N/A | Active | 27,700 sqft |
Houston, TX | Lease | Executive / Finance | N/A | Active | 2,414 sqft |
Pittsburgh, PA | Lease | Sales Office | Sales | Active | 2,300 sqft |
The Woodlands, TX | Lease | Engineering & Technology | N/A | Active | 23,040 sqft |
Dickinson, ND | Own | Field Operations | Hydraulic Fracturing | Active | 21,772 sqft/34.9 acres |
Shawnee, OK | Own | Field Operations | Hydraulic Fracturing | Active | 39,100 sqft/56.1 acres |
Mansfield, PA | Own | Field Operations | Hydraulic Fracturing, Wireline | Active | 30,200 sqft/77.0 acres |
Odessa, TX | Own | Field Operations | Hydraulic Fracturing, Wireline, Cementing | Active | 97,006 sqft/40.0 acres |
Springtown, TX | Own | Field Operations | Hydraulic Fracturing | Active | 29,855 sqft/14.7 acres |
Dickinson, ND | Lease | Field Operations | Hydraulic Fracturing | Active | 33,375 sqft/9.7 acres |
Williston, ND | Lease | Field Operations | Hydraulic Fracturing | Active | 16,825 sqft/5.71 acres |
Williston, ND | Lease | Field Operations | Hydraulic Fracturing, Wireline | Active | 43,375 sqft |
Mill Hall, PA | Lease | Field Operations | Hydraulic Fracturing, Wireline | Active | 64,000 sqft/8.2 acres |
New Stanton, PA | Lease | Field Operations | Hydraulic Fracturing, Wireline | Active | 20,126 sqft/7.5 Acres |
Pleasanton, TX | Lease | Field Operations | Hydraulic Fracturing | Active | 10,488 acres |
Alexander, ND | Lease | Field Maintenance and Storage Facility | Hydraulic Fracturing | Active | 6,500 sqft/16.3 acres |
Roanoke, TX | Lease | Warehouse | Hydraulic Fracturing, Wireline, Cementing | Active | 49,500 sqft |
Lewis Run, PA | Own | Abandoned | N/A | Idle | 2,500 sqft |
Mathis, TX | Own | Abandoned | Hydraulic Fracturing | Idle | 66,725 sqft/47.4 acres |
Oklahoma City, OK | Lease | Abandoned | Sales | Idle | 3,366 sqft |
Monessen, PA | Lease | Abandoned | Hydraulic Fracturing | Idle | 78,220 sqft/7.9 Acres |
Houston, TX | Lease | Abandoned | N/A | Idle | 9,998 sqft |
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Item 3. Legal Proceedings
Legal Proceedings
Due to the nature of our business, we are, from time to time and in the ordinary course of business, involved in routine litigation or subject to disputes or claims related to our business activities. It is our management’s opinion that although the amount of liability with respect to certain of the matters described herein cannot be ascertained at this time, any resulting liability will not have a material adverse effect individually or in the aggregate on our financial condition, cash flows or results of operations; however, there can be no assurance as to the ultimate outcome of these matters.
On December 27, 2016, two former employees filed a complaint for a proposed collective action in United States District Court for the Southern District of Texas entitled Hickson and Villa v. Keane Group Holdings, LLC, et al., alleging certain field professionals were not properly classified under the Fair Labor Standards Act ("FLSA") and Pennsylvania law. The parties agreed to settle the claims in the first quarter of 2018 for $4.2 million. Settlement of this collective action is subject to court approval. Additionally, we are involved in a commercial dispute whereby a former customer has commenced an arbitration proceeding, captioned Halcon Operating Co., Inc. and Halcon Energy Properties, Inc. v. Keane Frac LP and Keane Frac GP, LLC, and on December 15, 2017, made a claim for contractual damages of approximately $4.0 million. The Company intends to vigorously dispute the merits of this asserted claim and plans to assert affirmative counterclaims for unpaid bills and other damages. Other than amounts previously accrued and disclosed, we are currently unable to estimate the range of loss, if any, that may result from these matters.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
References Within This Annual Report
As used in Part II of this Annual Report on Form 10-K, unless the context otherwise requires, references to (i) the terms “Company,” “Keane,” “we,” “us” and “our” refer to Keane Group Holdings, LLC and its consolidated subsidiaries for periods prior to our initial public offering (“IPO”), and, for periods as of and following the IPO, Keane Group, Inc. and its consolidated subsidiaries; (ii) the term “Keane Group” refers to Keane Group Holdings, LLC and its consolidated subsidiaries; (iii) the term “Trican Parent” refers to Trican Well Service Ltd. and, where appropriate, its subsidiaries; (iv) the term “Trican U.S.” refers to Trican Well Service L.P.; (v) the term “Trican” refers to Trican Parent and Trican U.S., collectively; (vi) the term "RockPile" refers to RockPile Energy Services, LLC and its consolidated subsidiaries; (vii) the term "Keane Investor" refers to Keane Investor Holdings LLC and (viii) the terms “Sponsor” or “Cerberus” refer to Cerberus Capital Management, L.P. and its controlled affiliates and investment funds.
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information
On January 25, 2017, we consummated an initial public offering of our common stock at a price of $19.00 per share. Our common stock is traded on the New York Stock Exchange under the symbol “FRAC.” Prior to that time, there was no public market for our stock. As a result, we have not set forth quarterly information with respect to the high and low prices for our common stock for periods prior to January 20, 2017, the first day our common stock traded on the NYSE.
2017 | ||||||||
High | Low | |||||||
First Quarter (January 25, 2017 - March 31, 2017) | $ | 22.93 | $ | 13.68 | ||||
Second Quarter | $ | 16.81 | $ | 12.42 | ||||
Third Quarter | $ | 16.92 | $ | 12.51 | ||||
Fourth Quarter | $ | 19.13 | $ | 13.63 | ||||
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Comparative Stock Performance Graph
The information contained in this Comparative Stock Performance Graph section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act.
The graph below compares the cumulative total shareholder return on our common stock, the cumulative total return on the Standard & Poor's 500 Stock Index, the Standard & Poor's MidCap Index, the Oilfield Service Index and a composite average of publicly traded peer companies (C&J Energy Services, Inc., Patterson-UTI Energy, Inc., RPC, Inc., Superior Energy Services, Inc. and Weatherford International plc), since January 20, 2017, the first day our common stock traded on the NYSE.
The graph assumes $100 was invested on January 20, 2017, the first day our stock was traded on the NYSE, in our common stock, the Standard & Poor's 500 Stock Index, the Standard & Poor's MidCap Index, the Oilfield Service Index and a composite of publicly traded peer companies. The cumulative total return assumes the reinvestment of all dividends. We elected to include the stock performance of a composite of our publicly traded peers as we believe it is an appropriate benchmark for our line of business/industry.
Holders
As of February 23, 2018, there were 10 shareholders of record of our common stock. The number of record holders does not include persons who held shares of our common stock in nominee or “street name” accounts through brokers.
Dividends
We do not currently intend to pay dividends. We are not required to pay dividends, and our stockholders will not be guaranteed, or have contractual or other rights to receive, dividends. The declaration and payment of any future dividends will be at the sole discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends and other considerations that our board of directors deems relevant. Our board of directors
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may decide, in its discretion, at any time, to modify or repeal the dividend policy or discontinue entirely the payment of dividends.
The ability of our board of directors to declare a dividend is also subject to limits imposed by Delaware corporate law. Under Delaware law, our board of directors and the boards of directors of our corporate subsidiaries incorporated in Delaware may declare dividends only to the extent of our “surplus,” which is defined as total assets at fair market value minus total liabilities, minus statutory capital, or if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
On February 26, 2018, we announced that our Board of Directors has authorized a stock repurchase program of up to $100 million of the Company’s outstanding common stock, with the intent of returning value to our shareholders as we continue to expect further growth and profitability. The duration of the stock buy-back program will be 12 months. The program does not obligate us to purchase any particular number of shares of common stock during any period, and the program may be modified or suspended at any time at our discretion.
Securities Authorized for Issuance Under Equity Compensation Plans
See Part II, "Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters" for information regarding securities authorized for issuance and Issuer Purchases of Equity Securities.
No shares of our common stock were repurchased during the three months ended December 31, 2017.
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Item 6. Selected Financial Data
The selected financial data for periods was derived from the audited consolidated and combined financial statements of Keane and should be read in conjunction with Part I, “Item 1A. Risk Factors,” Part II, “Item 7. Management’s Discussion and Analysis of Financial and Results of Operations” and our audited consolidated and combined financial statements included in Part II, “Item 8. Financial Statements and Supplementary Data."
Year ended December 31, 2017(1) | Year ended December 31, 2016(2) | Year Ended December 31, 2015 | ||||||||||
(in thousands of dollars, except per share amounts) | ||||||||||||
Statement of Operations Data: | ||||||||||||
Revenue | $ | 1,542,081 | $ | 420,570 | $ | 366,157 | ||||||
Cost of services(3) | 1,282,561 | 416,342 | 306,596 | |||||||||
Depreciation and amortization | 159,280 | 100,979 | 69,547 | |||||||||
Selling, general and administrative expenses | 93,526 | 53,155 | 26,081 | |||||||||
Gain on disposal of assets | (2,555 | ) | (387 | ) | (270 | ) | ||||||
Impairment | — | 185 | 3,914 | |||||||||
Total operating costs and expenses | 1,532,812 | 570,274 | 405,868 | |||||||||
Operating income (loss) | 9,269 | (149,704 | ) | (39,711 | ) | |||||||
Other expense (income), net | 13,963 | 916 | (1,481 | ) | ||||||||
Interest expense(4) | (59,223 | ) | (38,299 | ) | (23,450 | ) | ||||||
Total other expenses | (45,260 | ) | (37,383 | ) | (24,931 | ) | ||||||
Loss before income taxes | $ | (35,991 | ) | $ | (187,087 | ) | $ | (64,642 | ) | |||
Income tax expense | $ | (150 | ) | $ | — | $ | — | |||||
Net loss | $ | (36,141 | ) | $ | (187,087 | ) | $ | (64,642 | ) | |||
Per Share Data(5) | ||||||||||||
Net loss per share - basic and diluted | $ | (0.34 | ) | $ | (2.14 | ) | $ | (0.74 | ) | |||
Weighted average number of shares - basic and diluted | 106,321 | 87,313 | 87,313 | |||||||||
Statement of Cash Flows Data: | ||||||||||||
Cash flows from operating activities | $ | 79,691 | $ | (54,054 | ) | $ | 37,521 | |||||
Cash flows from investing activities | (250,776 | ) | (227,161 | ) | (26,038 | ) | ||||||
Cash flows from financing activities | 218,122 | 276,633 | (10,518 | ) | ||||||||
Other Financial Data: | ||||||||||||
Capital expenditures(6) | $ | 189,629 | $ | 23,545 | $ | 27,246 | ||||||
Adjusted EBITDA(8) | 214,525 | 1,921 | 41,885 | |||||||||
Balance Sheet Data (at end of period): | ||||||||||||
Total assets | $ | 1,043,116 | $ | 536,940 | $ | 324,795 | ||||||
Long-term debt (including current portion) (7) | 275,055 | 269,750 | 207,067 | |||||||||
Total liabilities | 530,024 | 374,688 | 244,635 | |||||||||
Total members’ equity | 513,092 | 162,252 | 80,160 | |||||||||
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(1) | Commencing on July 3, 2017, our consolidated and combined financial statements also include the financial position, results of operations and cash flows of RockPile. |
(2) | Commencing on March 16, 2016, our consolidated and combined financial statements also include the financial position, results of operations and cash flows of the Acquired Trican Operations (as defined herein). |
(3) | Excludes depreciation and amortization, shown separately. |
(4) | Interest expense during the year ended December 31, 2017 includes $15.8 million of prepayment penalties and $15.3 million in write-offs of deferred financing costs, incurred in connection with the refinancing by the Company (as defined herein) of its 2016 ABL Facility (as defined herein) and the Company's early debt extinguishment of its 2016 Term Loan Facility (as defined herein) and Senior Secured Notes (as defined herein). |
(5) | The pro forma earnings per unit amounts have been computed to give effect to the Organizational Transactions, including the limited liability company agreement of Keane Investor to, among other things, exchange all of our Existing Owners’ membership interests for the newly-created ownership interests. The computations of earnings per unit do not consider the 15,700,000 shares of common stock newly-issued by the Company to investors in the IPO. |
(6) | Capital expenditures do not include, for the year ended December 31, 2017, $116.6 million of capital expenditures related to the acquisition of RockPile and, for the year ended December 31, 2016, $205.4 million of capital expenditures related to the acquisition of the Acquired Trican Operations. |
(7) | Long-term debt includes $8.1 million, $18.4 million and $8.9 million of unamortized debt discount and debt issuance costs for 2017, 2016 and 2015, respectively, and excludes capital lease obligations. |
(8) | Adjusted EBITDA and Adjusted Gross Profit are Non-GAAP Measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other generally accepted accounting principles (“GAAP”) measures such as net income, operating income and gross profit. These non-GAAP financial measures exclude the financial impact of items we do not consider in assessing our ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different capital structures, and comparability to our results of operations may be impacted by the effects of acquisition accounting on its depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe Adjusted EBITDA and Adjusted Gross Profit provide helpful information to analysts and investors to facilitate a comparison of its operating performance to that of other companies. |
Adjusted EBITDA is defined as net income (loss) adjusted to eliminate the impact of interest, income taxes, depreciation and amortization, along with certain items management does not consider in assessing ongoing performance. Adjusted Gross Profit is defined as Adjusted EBITDA, further adjusted to eliminate the impact of all activities in the Corporate segment, such as selling, general and administrative expenses, along with cost of services that management does not consider in assessing ongoing performance.
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Set forth below is a reconciliation of net loss to Adjusted EBITDA and Adjusted Gross Profit:
(Thousands of Dollars) Year Ended December 31, | |||||||||||||
2017 | 2016 | 2015 | |||||||||||
Net loss | $ | (36,141 | ) | $ | (187,087 | ) | $ | (64,642 | ) | ||||
Depreciation and amortization | 159,280 | 100,979 | 69,547 | ||||||||||
Interest expense, net | 59,223 | 38,299 | 23,450 | ||||||||||
Income tax (benefit) expense(a) | 150 | (114 | ) | 793 | |||||||||
EBITDA | $ | 182,512 | $ | (47,923 | ) | $ | 29,148 | ||||||
Acquisition, integration and expansion(b) | (4,674 | ) | 35,630 | 6,272 | |||||||||
Offering-related expenses(c) | 7,069 | 1,672 | — | ||||||||||
Commissioning costs | 12,565 | 9,998 | — | ||||||||||
Impairment of assets(d) | — | 185 | 3,914 | ||||||||||
Non-cash stock compensation(e) | 10,578 | 1,985 | 312 | ||||||||||
Other(f) | 6,475 | 374 | 2,239 | ||||||||||
Adjusted EBITDA | $ | 214,525 | $ | 1,921 | $ | 41,885 | |||||||
Other income (expense) | (13,963 | ) | (916 | ) | $ | 1,481 | |||||||
Selling, general and administrative(a) | 93,526 | 53,271 | $ | 25,288 | |||||||||
Management Adjustments not associated with Cost of Services | (19,128 | ) | (26,451 | ) | $ | (7,740 | ) | ||||||
Adjusted gross profit | $ | 274,960 | $ | 27,825 | $ | 60,914 | |||||||
(a) | Income tax (benefit) expense as presented in the consolidated and combined statement of operations does not include the provision for Texas margin tax for 2016 and the provisions for Texas margin tax and Canadian federal tax for 2015. |
(b) | Represents professional fees, integration and divestiture costs, earn-outs, lease-termination costs, severance, start-up and other costs associated with the acquisition of RockPile and the Acquired Trican Operations, organic growth initiatives and wind-down of our Canadian operations. For the year ended December 31, 2017, $1.7 million was recorded in costs of services, $10.7 million was recorded in selling, general and administrative expense, $3.3 million gain was recorded in gain on disposal of assets and $13.8 million of income was recorded in other expense, net. For the year ended December 31, 2016, $13.9 million was recorded in costs of services, $23.2 million was recorded in selling, general and administrative expenses and $0.3 million was recorded in other expense, net. For the year ended December 31, 2015, $1.1 million was recorded in costs of services, $3.5 million was recorded in selling, general and administrative expenses and $1.7 million was recorded in other expense, net. |
(c) | Represents professional fees and other miscellaneous expenses related to the Organizational Transactions (defined herein), the Company's initial public offering and the sale of the Company's stock by a selling stockholder in January 2018. For the year ended December 31, 2017, $1.3 million was recorded in cost of services and $5.8 million was recorded in selling, general and administrative expense. For the year ended December 31, 2016, $1.7 million was recorded in selling, general and administrative expenses. |
(d) | Represents non-cash impairment charges with respect to our long-lived assets and intangible assets. |
(e) | In 2017, represents non-cash amortization of equity awards issued under Keane Group, Inc.’s Equity and Incentive Award Plan (the "Plan"). According to the Plan, the Compensation Committee of the Board of Directors can approve awards in the form of restricted stock, restricted stock units, and/or other deferred compensation. In 2016 and 2015, represents adjustments to the non-cash profit interests related to Keane Group Holdings, LLC. In all three years, these costs were recorded in selling, general and administrative expenses. |
(f) | Represents contingency accruals related to certain litigation claims, readiness costs associated with Keane's initial internal controls design documentation for Sarbanes-Oxley compliance, using COSO 2013 framework, net gains on disposal of assets, forfeiture of deposit on hydraulic fracturing equipment purchase orders and other miscellaneous charges. For the year ended December 31, 2017, $0.8 million was recorded in gain on disposal of assets and $5.8 million was recorded in selling, general and administrative expenses. For the year ended December 31, 2016, $0.4 million was recorded in other expense, net. For the year ended December 31, 2015, $0.2 million was recorded in costs of services and $2.0 million was recorded in other expense, net. |
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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 financial statements and related notes included within Part II, “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
On January 25, 2017, we consummated an IPO of 30,774,000 shares of our common stock, of which 15,700,000 shares were offered by us and 15,074,000 shares were offered by the selling stockholder. To effectuate the IPO, we effected a series of transactions that resulted in a reorganization of our business. Specifically, among other transactions, we effected the Organizational Transactions described within Note (1) Basis of Presentation and Nature of Operations of Part II, “Item 8. Financial Statements and Supplemental Data.”
The information in this “Management’s Discussion of Analysis of Financial Condition and Results of Operations” reflects the following: (1) as it pertains to periods prior to the completion of the IPO, the accounts of Keane Group; and (2) as it pertains to the periods subsequent to the completion of the IPO, the accounts of Keane.
This section and other parts of this Annual Report on Form 10-K contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “may,” “can,” “will,” “would,” “could,” “should,” the negatives thereof and other similar expressions. Forward-looking statements are not guarantees of future performance and actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, “Item 1A. Risk Factors” of this Annual Report on Form 10-K under the heading “Risk Factors,” which are incorporated herein by reference. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Part II, “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years. We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by law.
EXECUTIVE OVERVIEW
Organization
We are one of the largest pure-play providers of integrated well completion services in the U.S., with a focus on complex, technically demanding completion solutions. Our primary service offerings include horizontal and vertical fracturing, wireline perforation and logging and engineered solutions, as well as other value-added service offerings. Our total capacity includes approximately 1.2 million hydraulic horsepower. From our 26 currently deployable hydraulic fracturing fleets (“fleets”), 31 wireline trucks, 24 cementing pumps and other ancillary assets located in the Permian Basin, the Marcellus Shale/Utica Shale, the Eagle Ford Formation, the Bakken Formation and other active oil and gas basins, we pride ourselves on providing industry-leading completion services with a strict focus on health, safety and environmental stewardship and cost-effective customer-centric solutions. We distinguish ourselves through our partnerships with our customers, our transparency concerning value creation and our responsibilities to employees and customers.
In December 2017, we placed orders for an aggregate of approximately 150,000 newbuild hydraulic horsepower representing three additional hydraulic fracturing fleets, with anticipated capital expenditures for the three fleets of approximately $115.0 million, expected to be delivered in the second and third quarters of 2018.
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We provide our services in conjunction with onshore well development, in addition to stimulation operations on existing wells, to well-capitalized oil and gas exploration and production customers, with some of the highest quality and safety standards in the industry and long-term development programs that enable us to maximize operational efficiencies and the return on our assets. We believe our integrated approach and proven capabilities enable us to deliver cost-effective solutions for increasingly complex and technically demanding well completion requirements, which include longer lateral segments, higher pressure rates and proppant intensity, and multiple fracturing stages in challenging high-pressure formations. In addition, our technical team and engineering center, which is located in The Woodlands, Texas, provides us the ability to supplement our service offerings with engineered solutions specifically tailored to address customers’ completion requirements and unique challenges.
We are organized into two reportable segments, consisting of Completion Services, which includes our hydraulic fracturing and wireline divisions and ancillary services; and Other Services, which includes our cementing and drilling divisions. We evaluate the performance of these segments based on equipment utilization, revenue, segment gross profit and gross margin. Segment gross profit is a key metric that we use to evaluate segment operating performance and to determine resource allocation between segments. We define segment gross profit as segment revenue less segment direct and indirect cost of services, excluding depreciation and amortization. Additionally, our operations management make rapid and informed decisions, including price adjustments to offset commodity inflation and align with market, decisions to strategically deploy our existing and new fleets and real-time supply chain management decisions, by utilizing top line revenue, as well as individual direct and indirect costs on a per stage and per fleet basis.
Acquisition of RockPile
On July 3, 2017, the Company acquired 100% of the outstanding equity interests of RockPile. RockPile was a multi-basin provider of integrated well completion services in the United States, whose primary service offerings included hydraulic fracturing, wireline perforation and workover rigs. The acquisition of RockPile was completed for cash consideration of $116.6 million, subject to post-closing adjustments, 8,684,210 shares of the Company’s common stock and contingent value rights (“CVR”) granted pursuant to the CVR Agreement, as further described in Note (3) Acquisitions) of Part II, “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K and in the Company's Current Report on Form 8-K filed on July 3, 2017.
Through this acquisition, we expanded our existing presence in the Permian Basin and Bakken Formation by increasing our pumping capacity by more than 25%, further strengthening our position as one of the largest pure-play providers of integrated well completion services in the United States. We acquired 245,000 hydraulic horsepower at newbuild economics, eight wireline trucks, 10 cementing units and 12 workover rigs. We also acquired a high-quality customer base, with minimal overlap to our existing customer base and expanded certain service offerings and capabilities within our Other Services segment.
Subsequent to the acquisition, we sold the twelve acquired workover rigs during the third and fourth quarters of 2017.
Financial results
Revenue in 2017 totaled $1.5 billion, an increase of 267% compared to revenue in 2016 of $420.6 million. Our strong revenue growth in 2017 was driven by the following factors, (i) completion of the acquisition of RockPile, which added 245,000 hydraulic horsepower, the largest contributor to year over year growth, (ii) continued deployment of available horsepower with seven fleets commissioned and deployed in 2017 and (iii) continued execution of our pricing strategy of aligning pricing with our clients under dedicated agreements with periodic re-openers priced at market rate. We exited 2016 with 13 operating fleets and exited 2017 with 26 operating, with six fleets, including one newbuild fleet, acquired through the acquisition of RockPile. On an average basis, we operated 21.1 fleets during 2017 compared to 9.8 fleets during 2016. The revenue growth drivers for 2017 had a favorable impact on operating margins, which is calculated by dividing operating income (loss) by revenue, but headwinds in input cost inflation persisted, particularly with sand, trucking, labor, and chemicals. Consistent
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with our efforts to maintain and grow the supply of key commodities and skilled workforce, as influenced by market capacity, we continued to secure key contracts with suppliers, as well as position labor rates to facilitate retaining skilled employees and attracting new talent. We reported operating income of $9.3 million in 2017, as compared to an operating loss of $149.7 million in 2016.
We reported net loss of $36.1 million, or $0.34 per basic and diluted share, in 2017, compared to net loss of $187.1 million, or $2.14 per basic and diluted share, in 2016. Net income in 2017 includes $15.4 million of management adjustments to cost of services to arrive at Adjusted Gross Profit. Approximately $12.4 million of this amount was driven by costs for the re-commissioning of seven previously idled fleet, $1.7 million by acquisition and integration costs incurred for the acquisition of RockPile and $1.3 million by bonuses paid out to key operational employees in connection with our IPO. Approximately $34.5 million of management adjustments to selling, general and administrative expenses to arrive at Adjusted EBITDA during 2017 were driven by $10.7 million of transaction costs primarily incurred for the acquisition of RockPile, $10.6 million of non-cash compensation expense for the restricted stock units and stock options awarded to certain of our employees in connection with our IPO, $5.8 million of organizational restructuring costs and bonuses to key personnel in connection with our IPO, as well as transaction costs related to our secondary offering in 2018, $7.2 million primarily related to litigation contingencies and $0.2 million in commissioning costs. Approximately $4.1 million of management adjustments to (gain) loss on disposal of assets to arrive at Adjusted EBITDA during 2017 were related to the sale of our coiled tubing units and ancillary coiled tubing equipment, our air compressor units and idle property in Woodward, Oklahoma and Searcy, Arkansas. See Note (7) Property and Equipment, net of Part II,"Item 8. Financial Statements and Supplementary Data" for further details on these asset sales. Approximately $13.8 million of management adjustments to other income to arrive at Adjusted EBITDA during 2017 was primarily driven by $7.8 million of gain on indemnification settlements with Trican, $0.7 million due to the negotiated settlement of assumed liabilities with a certain vendor from a prior acquisition and a $5.3 million mark-to-market valuation adjustment of the CVR associated with the acquisition of RockPile.
Business outlook
Commodity prices improved significantly throughout 2017, following a period of depressed prices and activity throughout the industry downturn of 2015 and 2016. West Texas Intermediate (“WTI”) crude oil prices averaged $50.88 per barrel in 2017, compared to a low of $26.19 per barrel in February 2016. Henry Hub Natural Gas prices averaged $2.99 per MMBtu in 2017, compared to a low of $1.49 per MMBtu in March 2016. The general rebound in commodity prices has led to an increase in drilling activity across the industry, with total U.S. land rig count averaging 856 rigs in 2017, compared to an average of 486 rigs in 2016.
The increase in drilling rigs and activity, combined with the completion of previously drilled wells, has led to a significant growth in the demand for U.S. completions services. We continue to expect improvements in demand and higher leading-edge pricing for our services across our diversified footprint, as the availability of high-quality hydraulic fracturing equipment remains tight, capital expenditure for drilling and completions in the U.S. stabilizes at a higher level of activity and customers place increased focus on partnering with well-capitalized, safe and efficient service providers.
Given the energy industry's outlook for 2018 activity levels, we expect further increases in the demand for our services over the next several quarters, driven by supportive industry fundamentals, including higher commodity prices and increases in completions intensity. Across the industry, exploration and production companies are executing completion designs with greater intensity, including longer laterals, more stages per well, tighter well spacing and increased proppant loadings. We believe the availability and supply of completions services is impacted by increases in completions intensity, resulting in increases in the amount of equipment that must be utilized per job and acceleration of maintenance cycles, both of which have a tightening effect on available supply. Furthermore, given the fragmented nature of the completions services industry, combined with varying levels of asset readiness and capital availability, we expect further consolidation in the industry.
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Oil and natural gas prices are significant drivers behind the pace and location of our customer activity. We actively monitor the trends in oil and natural gas prices and focus on maintaining flexibility. While commodity prices have improved throughout 2017 and into 2018, we expect volatility and uncertainty to remain in place throughout the year. This backdrop, combined with asset attrition and newbuild lead-times, should support an environment for attractive cash generation on our fleets throughout 2018.
The industry continues to face strain in sand supply, driven by weather-induced rail congestion, combined with mine-related issues due to rail-related output constraints, flooding impacts, delays on local mine start-ups and continued growth in demand. We are proactively managing these transitory issues facing the entire industry to limit the impact to our customers and business. In addition, continued tightening of the labor market could result in higher wage rates, as well as increased recruiting, hiring, onboarding and training costs.
We continue to believe in the strength of the near-term and long-term fundamentals of our business, including our high-quality, fit-for-purpose and well-maintained equipment, our financial strength and discipline and the scale and flexibility of our supply chain.
Fiscal 2017 Highlights
• | IPO: completed initial public offering and listing of common stock on NYSE |
• | Utilization: deployed all idle fleets at attractive cost with full utilization |
• | Newbuild: placed preemptive and strategic order for three newbuild fleets |
• | Profitability: continued to increase annualized Adjusted Gross Profit per fleet |
• | Mergers and acquisition: executed strategic acquisition of RockPile |
• | Balance sheet: maintained and improved conservative balance sheet and liquidity |
• | Portfolio optimization: sold workover rigs acquired in the acquisition of RockPile and coiled tubing assets acquired in the acquisition of the Acquired Trican Operations |
Fiscal 2018 Outlook
In 2018, our principal business objective continues to be growing our business and safely providing best-in-class services in other Completion Services and Other Services segments. We expect to achieve our objective through:
• | partner and grow with customers who focus their efforts on high-efficiency completions jobs under dedicated agreements; |
• | allocate our assets to maximize utilization and returns, including diversification of geography and commodity; |
• | improve profitability of fully-utilized fleets through increased leading-edge pricing and efficiencies; |
• | leverage our flexible and scalable logistics infrastructure to provide assurance of timely supply at lowest landed cost; |
• | leverage our platform to identify, retain and promote talent to sustain growth and support operational excellence; |
• | pursue expansion opportunities for our cementing assets; |
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• | maintain agreements with our existing strategic suppliers and identify and develop relationships with additional strategic suppliers to ensure continuity of supply; |
• | maintain our conservative and flexible capital position, supporting continued growth and maintenance of active equipment; and |
• | explore potential opportunities for mergers or acquisitions, focused on portfolio expansion and market opportunities. |
Our operating performance and business outlook are described in more detail in “Business Environment and Results of Operations” herein.
Financial markets, liquidity, and capital resources
On January 25, 2017, the Company completed the IPO of 30,774,000 shares of its common stock at the public offering price of $19.00 per share, which included 15,700,000 shares offered by the Company and 15,074,000 shares offered by the selling stockholder, including 4,014,000 shares sold as a result of the underwriters’ exercise of their overallotment option. The IPO proceeds to the Company, net of underwriters’ fees and capitalized cash payments of $4.8 million for professional services and other direct IPO related activities, was $255.5 million. The net proceeds were used to fully repay KGH Intermediate Holdco II, LLC (“Holdco II”)’s 2016 Term Loan Facility balance of $99.0 million and the associated prepayment premium of $13.8 million, and to repay $50.0 million of its 12% secured notes due 2019 (“Senior Secured Notes”) and the associated prepayment premium of approximately $0.5 million. The remaining proceeds were used for general corporate purposes, including capital expenditures, working capital and potential acquisitions and strategic transactions. Upon completion of the IPO and the reorganization, the Company had 103,128,019 shares of common stock outstanding.
On February 17, 2017, we also obtained a $150.0 million asset-based revolving credit facility ("2017 ABL Facility"), replacing our pre-existing $100.0 million asset-based revolving credit facility. On December 22, 2017, our 2017 ABL Facility was amended to increase the commitments thereunder by $150.0 million, for total commitments of $300.0 million.
On March 15, 2017, we obtained a $150.0 million term loan facility (the “2017 Term Loan Facility”). We used the proceeds from our 2017 Term Loan Facility to fully repay our Senior Secured Notes. On July 3, 2017, we secured $135.0 million in incremental term loans under an incremental term loan facility (the “Incremental Term Loan Facility” and together with the 2017 Term Loan Facility, the “New Term Loan Facility”), which are subject to substantially the same terms as the outstanding initial term loans under the 2017 Term Loan Facility. The majority of the proceeds from the incremental term loans was used to fund our acquisition of 100% of the outstanding equity interests of RockPile. As a result of entering into the Incremental Term Loan Facility, we expect our average annualized interest expense to increase from $12.4 million to $23.6 million.
At December 31, 2017, we had approximately $96.1 million of cash available. We also had $199.7 million available under our asset-based revolving credit facility as of December 31, 2017, which, with our cash balance, we believe provides us with sufficient liquidity for at least the next 12 months, including for capital expenditures and working capital investments.
On January 17, 2018, our Registration Statement on Form S-1 (File No. 333-222500) was declared effective by the SEC for an offering of shares of our common stock on behalf of Keane Investor (the "selling stockholder"), pursuant to which 15,320,015 were registered and sold by the selling stockholder (including 1,998,262 shares sold pursuant to the exercise of the underwriters' over-allotment option), at a price to the public of $18.25 per share. We did not sell any common stock in, and did not receive any of the proceeds from, the secondary offering. Following completion of the secondary offering, Keane Investor owns approximately 50.7% of the Company's outstanding common stock. We incurred $1.2 million of transaction costs related to the secondary offering in 2017, which were included under selling, general and administrative expenses within the consolidated
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and combined statement of operations. We anticipate we will incur approximately $12.9 million of transactions costs related to the secondary offering in 2018, primarily related to the payment of underwriting discounts and commissions payable by the Company.
For additional information on market conditions and our liquidity and capital resources, see “Liquidity and Capital Resources,” and “Business Environment and Results of Operations” herein.
BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS
We provide our services in several of the most active basins in the U.S., including the Permian Basin, the Marcellus Shale/Utica Shale, the Eagle Ford Formation and the Bakken Formation. These regions are expected to account for approximately 70% of all new horizontal wells anticipated to be drilled during 2018 and 2019. In addition, the high density of our operations in the basins in which we are most active provides us the opportunity to leverage our fixed costs and to quickly respond with what we believe are highly efficient, integrated solutions that are best suited to address customer requirements.
In particular, we are one of the largest providers in the Permian Basin, Eagle Ford Basin and the Marcellus Shale/Utica Shale, the most prolific and cost-competitive oil and natural gas basins in the United States. According to Spears & Associates, the Permian Basin, Eagle Ford Basin and the Marcellus Shale/Utica Shale are expected to account for 61% of total active rigs in the U.S. during 2018 through 2022 based on forecasted rig counts. These basins have experienced a recovery in activity since the spring of 2016, with an 166% increase in rig count from their combined May 2016 low of 194 to 516 as of December 31, 2017.
Activity within our business segments is significantly impacted by spending on upstream exploration, development, and production programs by our customers. Also impacting our activity is the status of the global economy, which impacts oil and natural gas consumption.
Some of the more significant determinants of current and future spending levels of our customers are oil and natural gas prices, global oil supply, the world economy, the availability of credit, government regulation and global stability, which together drive worldwide drilling activity. Our financial performance is significantly affected by rig and well count in North America, as well as oil and natural gas prices, which are summarized in the tables below.
The following table shows the average oil and natural gas prices for WTI and Henry Hub natural gas:
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Oil price - WTI(1) | $ | 50.88 | $ | 43.14 | $ | 48.69 | ||||||
Natural gas price - Henry Hub(2) | 2.99 | 2.52 | 2.63 | |||||||||
(1) Oil price measured in dollars per barrel (2) Natural gas price measured in dollars per million British thermal units (Btu), or MMBtu | ||||||||||||
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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 | 2017 | 2016 | 2015 | ||||||
Oil | 703 | 408 | 750 | ||||||
Natural Gas | 172 | 100 | 227 | ||||||
Other | 1 | 1 | 1 | ||||||
Total | 876 | 509 | 978 | ||||||
Year Ended December 31, | |||||||||
Drilling Type | 2017 | 2016 | 2015 | ||||||
Horizontal | 736 | 400 | 744 | ||||||
Vertical | 70 | 60 | 139 | ||||||
Directional | 70 | 49 | 95 | ||||||
Total | 876 | 509 | 978 | ||||||
Our customers’ cash flows, in most instances, depend upon the revenue they generate from the sale of oil and natural gas. Lower oil and natural gas prices usually translate into lower exploration and production budgets.
Following a trough in early 2016, oil prices and natural gas prices have recovered to $60.46 and $3.69, respectively, or approximately 131% and 148%, respectively, as of December 29, 2017, from their lows in early 2016 of $26.19 and $1.49, respectively. The US Energy Information Administration (the “EIA”) projects WTI spot prices to average $56.0 and $57.0 and Henry Hub natural gas prices to average $2.88 and $2.92 in 2018 and 2019, respectively.
With the rebound in commodity prices from their lows in early 2016, drilling and completion activity has continued to increase in 2017, with U.S. active rig count in December 2017 more than doubling the trough in the active rig count registered in May 2016. The significant growth in production resulting from increased drilling activity has contributed to increased uncertainty concerning the direction of oil and gas prices over the near and immediate term, and market volatility has continued to persist. Despite this market volatility, we continue to experience increased demand for our services and believe we are in a more stable demand environment than existed during the above-mentioned market decline.
The EIA projects that the average WTI spot price will increase through 2040 from growing demand and the development of more costly oil resources. Global liquids demand is expected to increase by approximately 1.0 million barrels per day from 2017 to 2018. The EIA anticipates continued growth in the long-term U.S. domestic demand for natural gas, supported by various factors, including (i) expectations of continued growth in the U.S. gross domestic product; (ii) an increased likelihood that regulatory and legislative initiatives regarding domestic carbon emissions policy will drive greater demand for cleaner burning fuels such as natural gas; (iii) increased acceptance of natural gas as a clean and abundant domestic fuel source that can lead to greater energy independence of the U.S. by reducing its dependence on imported petroleum; (iv) the emergence of low-cost natural gas shale developments; and (v) continued growth in electricity generation from intermittent renewable energy sources, primarily wind and solar energy, for which natural-gas-fired generation is a logical back-up power supply source. Natural gas demand in North America is expected to increase by approximately 6.9 billion cubic feet per day from 2017 to 2018.
Across the industry, customers are executing well designs with increased sand tonnage pumped to help supersize their wells to increase well productivity. This increase in sand tonnage pumped has led to a significant
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tightening in the market for sand and sand transportation. Coras Research, LLC forecasts that average proppant pumped per horizontal well will increase 18% to 14.4 million pounds by 2019 from an estimated 12.2 million pounds in 2017.
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RESULTS OF OPERATIONS IN 2017 COMPARED TO 2016
Year Ended December 31, 2017 Compared with Year Ended December 31, 2016
Year Ended December 31, | |||||||||||||||||||||
(Thousands of Dollars) | As a % of Revenue | Variance | |||||||||||||||||||
Description | 2017 | 2016 | 2017 | 2016 | $ | % | |||||||||||||||
Completion Services | $ | 1,527,287 | $ | 410,854 | 99 | % | 98 | % | $ | 1,116,433 | 272 | % | |||||||||
Other Services | 14,794 | 9,716 | 1 | % | 2 | % | 5,078 | 52 | % | ||||||||||||
Revenue | 1,542,081 | 420,570 | 100 | % | 100 | % | 1,121,511 | 267 | % | ||||||||||||
Completion Services | 1,269,263 | 401,891 | 82 | % | 96 | % | 867,372 | 216 | % | ||||||||||||
Other Services | 13,298 | 14,451 | 1 | % | 3 | % | (1,153 | ) | (8 | %) | |||||||||||
Costs of services (excluding depreciation and amortization, shown separately) | 1,282,561 | 416,342 | 83 | % | 99 | % | 866,219 | 208 | % | ||||||||||||
Completion Services | 258,024 | 8,963 | 17 | % | 2 | % | 249,061 | 2,779 | % | ||||||||||||
Other Services | 1,496 | (4,735 | ) | 0 | % | (1 | %) | 6,231 | (132 | %) | |||||||||||
Gross profit | 259,520 | 4,228 | 17 | % | 1 | % | 255,292 | 6,038 | % | ||||||||||||
Depreciation and amortization | 159,280 | 100,979 | 10 | % | 24 | % | 58,301 | 58 | % | ||||||||||||
Selling, general and administrative expenses | 93,526 | 53,155 | 6 | % | 13 | % | 40,371 | 76 | % | ||||||||||||
(Gain) on disposal of assets | (2,555 | ) | (387 | ) | 0 | % | 0 | % | (2,168 | ) | 560 | % | |||||||||
Impairment | — | 185 | 0 | % | 0 | % | (185 | ) | (100 | %) | |||||||||||
Operating income (loss) | 9,269 | (149,704 | ) | 1 | % | (36 | %) | 158,973 | (106 | %) | |||||||||||
Other income, net | 13,963 | 916 | 1 | % | 0 | % | 13,047 | 1,424 | % | ||||||||||||
Interest expense | (59,223 | ) | (38,299 | ) | (4 | %) | (9 | %) | (20,924 | ) | 55 | % | |||||||||
Total other expenses | (45,260 | ) | (37,383 | ) | (3 | %) | (9 | %) | (7,877 | ) | 21 | % | |||||||||
Income tax expense | (150 | ) | — | 0 | % | 0 | % | (150 | ) | 0 | % | ||||||||||
Net income (loss) | $ | (36,141 | ) | $ | (187,087 | ) | (2 | %) | (44 | %) | $ | 150,946 | (81 | %) | |||||||
Revenue. Total revenue is comprised of revenue from Completion Services and Other Services. Revenue in 2017 increased by $1.1 billion, or 267%, to $1.5 billion from $420.6 million in 2016. This change in revenue by reportable segment is discussed below.
Completion Services: Completion Services segment revenue increased by $1.1 billion, or 272%, to $1.5 billion in 2017 from $410.9 million in 2016. This change was primarily attributable to a 105% growth in our average number of deployed fleets, as a result of increased utilization of our combined asset base following our acquisition of RockPile and our acquisition of the majority of the U.S. assets and assumptions of certain liabilities of Trican Well Service, L.P. (the “Acquired Trican Operations”), as well as increased stage count and efficiency from both our existing and newly-deployed recommissioned fleets. In addition, annualized revenue per deployed fleet increased 81%.
Other Services: Other Services segment revenue increased by $5.1 million, or 52%, to $14.8 million in 2017 from $9.7 million in 2016. This change in revenue was primarily attributable to the acquisition of Other Services divisions from RockPile. Revenue in 2017 was earned in our cementing and workover divisions and revenue in 2016 was earned in our cementing and coiled tubing divisions. We idled our coiled tubing division in
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December 2016 and divested of our coiled tubing assets during the fourth quarter of 2017. We divested of our workover assets during the third and fourth quarters of 2017.
Cost of services. Cost of services in 2017 increased by $866.2 million, or 208%, to $1.3 billion from $416.3 million in 2016. This change was driven by several factors including (i) higher activity in the Completion Services segment (as discussed above under Revenue), (ii) price inflation in our key input costs, including labor, sand and sand trucking, (iii) increased maintenance costs associated with increased service intensity stemming from larger sand volumes and well configurations, such as zipper designs, (iv) an increase in fleets working twenty-four hour operations and (v) rapid deployment and commissioning of our idle fleets. In 2017, we incurred $12.4 million of fleet commissioning costs, $1.7 million of acquisition and integration costs associated with the acquisition of RockPile and $1.3 million for bonuses paid out to key operational employees in connection with our IPO. In 2016, we had management adjustments of $13.9 million primarily related to acquisition and integration costs associated with the acquisition of the Acquired Trican Operations and $10.0 million primarily related to commissioning of our idle fleets. Cost of services as a percentage of total revenue in 2017 was 83%, which represented a decrease of 16% from 99% in 2016. Excluding the above-mentioned management adjustments, total cost of services was $1.27 billion and $392.4 million in 2017 and 2016 or 82% and 93% of revenue, respectively, a decrease as a percentage of revenue of 11%.
Cost of services, as a percentage of total revenue is presented below:
Year Ended December 31, | |||||||||
Description | 2017 | 2016 | % Change | ||||||
Segment cost of services as a percentage of segment revenue: | |||||||||
Completion Services | 83 | % | 98 | % | (15 | )% | |||
Other Services | 90 | % | 149 | % | (59 | )% | |||
Total cost of services as a percentage of total revenue | 83 | % | 99 | % | (16 | )% | |||
The change in cost of services by reportable segment is further discussed below.
Completion Services: Completion Services segment cost of services increased by $867.4 million, or 216%, to $1.3 billion in 2017 from $401.9 million in 2016. As a percentage of segment revenue, total cost of services was 83% and 98%, in 2017 and 2016, respectively, a decrease as a percentage of revenue of 15%. This change in cost of services was driven by (i) higher activity (as discussed above under Revenue), (ii) price inflation in our key input costs, including sand and trucking, (iii) increased maintenance costs associated with increased service intensity and higher-pressure jobs and (iv) rapid deployment and commissioning of our idle fleets. In 2017, we incurred $11.6 million of fleet commissioning costs, $1.7 million of acquisition and integration costs associated with the acquisition of RockPile and $1.3 million for bonuses paid out to key operational employees in connection with our IPO. In 2016, we had management adjustments of $13.5 million primarily related to acquisition and integration costs associated with the acquisition of the Acquired Trican Operations and $9.3 million primarily related to commissioning of our idle fleets. Excluding the above-mentioned management adjustments, Completion Services segment cost of services were $1.25 billion and $379.1 million in 2017 and 2016, or 82% and 92% of segment revenue, respectively, a decrease as a percentage of revenue of 10%.
Other Services: Other Services segment cost of services decreased by $1.2 million, or 8%, to $13.3 million in 2017 from $14.5 million in 2016. This change in cost of services was primarily attributable to the idling of our cementing and coiled tubing divisions in April 2016 and December 2016, respectively, partially offset by the acquisition of Other Services divisions from RockPile. In 2017, we incurred management adjustments of $0.8 million of commissioning costs related to ramping our idle cementing assets in response to increased customer demand and $0.05 million of acquisition and integration costs associated with the acquisition of RockPile. In 2016, we incurred management adjustments of $0.7 million in commissioning costs and $0.4 million in acquisition and integration costs associated with the Acquired Trican Operations. Excluding the above-mentioned management
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adjustments, Other Services segment cost of services was $12.4 million and $13.4 million in 2017 and 2016, or 84% and 138% of segment revenue, respectively, a decrease as a percentage of revenue of 54%.
Depreciation and amortization. Depreciation and amortization expense increased by $58.3 million, or 58%, to $159.3 million in 2017 from $101.0 million in 2016. This change was primarily attributable to depreciation of additional equipment purchased in 2017 to recondition existing fleets and the acquisition of the RockPile assets.
Selling, general and administrative expense. Selling, general and administrative (“SG&A”) expense, which represents costs associated with managing and supporting our operations, increased by $40.4 million, or 76%, to $93.5 million in 2017 from $53.2 million in 2016. This change in SG&A was primarily related to non-cash amortization expense of equity awards issued under our Equity and Incentive Award Plan in 2017 and transactions driving overall company growth associated with the acquisition of RockPile. SG&A as a percentage of total revenue was 6% in 2017 compared with 13% in 2016. Total management adjustments were $34.5 million in 2017, driven by $10.7 million of transaction costs primarily incurred for the acquisition of RockPile, $10.6 million of non-cash compensation expense for the restricted stock units and stock options awarded to certain of our employees in connection with our IPO, $5.8 million of organizational restructuring costs and bonuses to key personnel in connection with our IPO, as well as transaction costs related to our secondary offering in 2018, $7.2 million primarily related to litigation contingencies and $0.2 million related to acquisition and integration costs associated with the acquisition of RockPile. Management adjustments in 2016 were $26.9 million, primarily driven by $23.2 million of transaction costs and lease exit costs related to the integration of the Acquired Trican Operations, $2.0 million in non-cash compensation expense of our unit-based awards and $1.7 million in IPO-readiness costs. Excluding these management adjustments, SG&A expense was $59.0 million and $26.3 million in 2017 and 2016, respectively, which represents an increase of 124%.
Gain on disposal of assets. Gain on disposal of assets in 2017 increased by $2.2 million, or 560%, to a gain of $2.6 million in 2017 from a gain of $0.4 million in 2016. This change was primarily attributable to the sale of our coiled tubing units and ancillary coiled tubing equipment, our air compressor units and idle property in Woodward, Oklahoma and Searcy, Arkansas.
Other income (expense), net. Other income (expense), net, in 2017 increased by $13.0 million, or 1,424%, to income of $14.0 million in 2017 from income of $0.9 million in 2016. This change is primarily due to $7.8 million of gain on indemnification settlements with Trican, $0.7 million due to the negotiated settlement of assumed liabilities with a certain vendor from a prior acquisition and a $5.3 million mark-to-market valuation adjustment of the contingent value rights granted by the Company in connection with the acquisition of RockPile.
Interest expense, net. Interest expense, net of interest income, increased by $20.9 million, or 55%, to $59.2 million in 2017 from $38.3 million in 2016. This change was primarily attributable to prepayment premiums of $15.8 million and write-offs of deferred financing costs of $15.3 million, incurred in connection with the refinancing of our asset-based revolving credit facility and debt extinguishment of our 2016 Term Loan Facility and Senior Secured Notes. This increase was offset by lower interest expense under our New Term Loan Facility, which replaced our 2016 Term Loan Facility and Senior Secured Notes that bore higher interest rates.
Effective tax rate. Upon consummation of the IPO, the Company became a corporation subject to federal income taxes. Our effective tax rate on continuing operations in 2017 was (0.53)%. The effective rate is primarily made up of a tax benefit derived from the current period operating income offset by a valuation allowance. As a result of market conditions and their corresponding impact on our business outlook, we determined that a valuation allowance was appropriate as it is not more likely than not that we will utilize our net deferred tax assets. The remaining tax impact not offset by a valuation allowance is related to tax amortization on our indefinite-lived intangible assets.
Net loss. Net loss was $36.1 million in 2017, as compared with net loss of $187.1 million in 2016. The decrease from the net loss in 2016 is due to the changes in revenue and expenses discussed above.
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Year Ended December 31, 2016 Compared with Year Ended December 31, 2015
Year Ended December 31, | |||||||||||||||||||||
(Thousands of Dollars) | As a % of Revenue | Variance | |||||||||||||||||||
Description | 2016 | 2015 | 2016 | 2015 | $ | % | |||||||||||||||
Completion Services | $ | 410,854 | $ | 363,820 | 98 | % | 99 | % | $ | 47,034 | 13 | % | |||||||||
Other Services | 9,716 | 2,337 | 2 | % | 1 | % | 7,379 | 316 | % | ||||||||||||
Revenue | 420,570 | 366,157 | 100 | % | 100 | % | 54,413 | 15 | % | ||||||||||||
Completion Services | 401,891 | 305,036 | 96 | % | 83 | % | 96,855 | 32 | % | ||||||||||||
Other Services | 14,451 | 1,560 | 3 | % | 0 | % | 12,891 | 826 | % | ||||||||||||
Cost of services (excluding depreciation and amortization, shown separately) | 416,342 | 306,596 | 99 | % | 84 | % | 109,746 | 36 | % | ||||||||||||
Completion Services | 8,963 | 58,784 | 2 | % | 16 | % | (49,821 | ) | (85 | %) | |||||||||||
Other Services | (4,735 | ) | 777 | (1 | %) | 0 | % | (5,512 | ) | (709 | %) | ||||||||||
Gross profit | 4,228 | 59,561 | 1 | % | 16 | % | (55,333 | ) | (93 | %) | |||||||||||
Depreciation and amortization | 100,979 | 69,547 | 24 | % | 19 | % | 31,432 | 45 | % | ||||||||||||
Selling, general and administrative expenses | 53,155 | 26,081 | 13 | % | 7 | % | 27,074 | 104 | % | ||||||||||||
(Gain) on disposal of assets | (387 | ) | (270 | ) | 0 | % | 0 | % | (117 | ) | 43 | % | |||||||||
Impairment | 185 | 3,914 | 0 | % | 1 | % | (3,729 | ) | (95 | %) | |||||||||||
Operating loss | (149,704 | ) | (39,711 | ) | (36 | %) | (11 | %) | (109,993 | ) | 277 | % | |||||||||
Other income, net | 916 | (1,481 | ) | 0 | % | 0 | % | 2,397 | (162 | %) | |||||||||||
Interest expense | (38,299 | ) | (23,450 | ) | (9 | %) | (6 | %) | (14,849 | ) | 63 | % | |||||||||
Total other expenses | (37,383 | ) | (24,931 | ) | (9 | %) | (7 | %) | (12,452 | ) | 50 | % | |||||||||
Income tax expense | — | — | 0 | % | 0 | % | — | — | % | ||||||||||||
Net loss | $ | (187,087 | ) | $ | (64,642 | ) | (44 | %) | (18 | %) | $ | (122,445 | ) | 189 | % | ||||||
Revenue. Total revenue is comprised of revenue from Completion Services and Other Services. Revenue in 2016 increased by $54.4 million, or 15%, to $420.6 million from $366.2 million in 2015. This change in revenue by reportable segment is discussed below.
Completion Services: Completion Services segment revenue increased by $47.0 million, or 13%, to $410.9 million in 2016 from $363.8 million in 2015. This change was primarily attributable to a 100% growth in the number of deployed hydraulic fracturing fleets, as a result of increased utilization of our combined asset base following our acquisition of the Acquired Trican Operations. This increase was offset by a 43% decrease in the revenue per deployed hydraulic fracturing fleet as a result of competitive pricing driven by current market conditions.
Other Services: Other Services segment revenue increased by $7.4 million, or 316%, to $9.7 million in 2016 from $2.3 million in 2015. The change was primarily attributable to revenues from the coiled tubing and cementing divisions acquired in connection with the Acquired Trican Operations in 2016. This increase was offset by a $2.3 million reduction in revenues from the drilling division, which was idled in May 2015, as a result of the significant decrease in rig count.
Cost of services. Cost of services in 2016 increased by $109.7 million, or 36%, to 416.3 million from $306.6 million in 2015. This increase was driven by higher activity in the Completion Services segment, increased
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costs in connection with a prolonged completion timeline driven by customer completion delays and increased maintenance costs associated with higher-pressure jobs. In addition, in 2016, we had one-time costs of $23.9 million, consisting of acquisition and integration costs of approximately $13.9 million associated with the Acquired Trican Operations and commissioning costs of approximately $10.0 million, including labor and maintenance, to deploy idle hydraulic fracturing fleets and coiled tubing units acquired from Trican. These increases were partially offset by our cost saving initiatives as described below. Costs of services as a percentage of total revenue for in 2016 was 99%, which represented an increase of 15% from 2015. Excluding one-time costs of $23.9 million (described above) and $1.4 million in 2016 and 2015, respectively, total costs of services was $392.4 million and $305.2 million in 2016 and 2015, or 93% and 83% of revenue, respectively, an increase as a percentage of revenue of 10%.
Cost of services, as a percentage of total revenue is presented below:
Year Ended December 31, | |||||||||
Description | 2016 | 2015 | % Change | ||||||
Segment cost of services as a percentage of segment revenue: | |||||||||
Completion Services | 98 | % | 84 | % | 14 | % | |||
Other Services | 149 | % | 67 | % | 82 | % | |||
Total cost of services as a percentage of total revenue | 99 | % | 84 | % | 15 | % | |||
The change in cost of services by reportable segment is further discussed below.
Completion Services: Completion Services segment cost of services increased by $96.9 million, or 32%, to $401.9 million in 2016 from $305.0 million in 2015. As a percentage of segment revenue, total cost of services was 99% and 84%, in 2016 and 2015, respectively, an increase as a percentage of revenue of 15%. The increase in segment cost of services was driven by higher activity coupled with longer lateral segments and increased proppant volume and increased maintenance costs associated with higher-pressure jobs. In addition, in 2016, we had one-time costs of $22.8 million, consisting of acquisition and integration costs of approximately $13.5 million associated with the Acquired Trican Operations and commissioning costs of approximately $9.3 million, including labor and maintenance, to deploy idle hydraulic fracturing fleets acquired from Trican. These increases were partially offset by cost saving initiatives to drive down supply and material costs through negotiated price concessions from vendors, management of labor costs and our fixed cost structure through facility consolidation and other cost saving initiatives related to shipping and equipment costs. Excluding one-time costs of $22.8 million and $0.9 million in 2016 and 2015, respectively, Completion Services segment costs of services was $379.1 million and $304.2 million in 2016 and 2015, or 92% and 84% of segment revenue, respectively, an increase as a percentage of revenue of 8%.
Other Services: Other Services segment cost of services increased by $12.9 million, or 826%, to $14.5 million in 2016 from $1.6 million in 2015. The increase was primarily attributable to cost of services in connection with the deployment of, and increased headcount related to, our coiled tubing and cementing operations acquired from Trican, which included one-time integration and commissioning costs of $1.1 million. This increase was partially offset by the $0.6 million decrease of cost of services related to the idling of our drilling services in May 2015. We idled our cementing services and coiled tubing division in April 2016 and December 2016, respectively. All associated overhead has been re-allocated to the Completion Services segment or eliminated. Excluding one-time costs of $1.1 million in 2016 described above, and $0.5 million in 2015, Other Services segment costs of services was $13.3 million and $1.1 million in 2016 and 2015, or 137% and 46% of segment revenue, respectively, which is an increase as a percentage of segment revenue of 91%. This increase was a result of unfavorable absorption of fixed costs on low revenue as coiled tubing was a new division acquired as part of the Acquired Trican Operations.
Depreciation and amortization. Depreciation and amortization expense increased by $31.4 million, or 45%, to $101.0 million in 2016 from $69.5 million in 2015. This increase was primarily attributable to additional
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depreciation and amortization expense of $42.1 million related to the property and equipment included in the Acquired Trican Operations. This increase was partially offset by a decrease in depreciation expense of Keane’s existing equipment due to some assets becoming fully depreciated and reduced capital expenditures in 2016.
Selling, general and administrative expense. SG&A expense increased by $27.1 million, or 104%, to $53.2 million in 2016 from $26.1 million in 2015. The increase in SG&A expense is related to increased headcount, property taxes and insurance associated with a larger asset base as a result of the Acquired Trican Operations. SG&A as a percentage of total revenue was 13% in 2016 compared with 7% in 2015. Total one-time charges were $26.9 million in 2016 and $3.8 million in 2015, which were primarily related to the acquisition and integration of the Acquired Trican Operations and professional fees incurred in connection with the IPO. These costs were partially offset by a decrease in SG&A expenses of our Canadian subsidiary due to $2.5 million of wind-down costs incurred during 2015, which were no longer recurring during 2016. Excluding one-time costs of $26.9 million and $3.8 million described above, SG&A expense was $26.3 million and $22.3 million in 2016 and 2015, respectively, which represents an increase of 18% primarily driven by the acquisition of the Acquired Trican Operations.
Gain on disposal of assets. Gain on disposal of assets, in 2016 increased by $0.1 million, or 43%, to a gain of $0.4 million in 2016 from gain of $0.3 million in 2015.
Impairment. In 2016, we recognized impairment expense of $0.2 million as a result of our non-compete agreement relating to the drilling business within our Other Services segment, due to the fact that this non-compete was no longer expected to generate any future cash flows. In 2015, we recognized impairment expense of $3.9 million, which was comprised of a $2.4 million impairment on indefinite-lived intangible assets in our Completion Services segment as a result of the loss of certain customer relationships related to our acquisition of Ultra Tech Frac Services, LLC (the “UTFS Acquisition”), a $1.2 million impairment on the trade name of our drilling business in our Other Services segment and a $0.3 million impairment on our drilling rig fleet in our Other Services segment.
Other income (expense), net. Other income (expense), net, in 2016 increased by $2.4 million, or 162%, to income of $0.9 million in 2016 from expense of $1.5 million in 2015. This increase in was primarily driven by an expense recognized in 2015 related to the forfeiture of a $1.7 million deposit due to the cancellation of a hydraulic fracturing equipment purchase order, which was no longer recurring during 2016.
Interest expense, net. Interest expense, net of interest income, increased by $14.8 million, or 63%, to $38.3 million in 2016 from $23.5 million in 2015. This increase was primarily attributable to a $4.9 million increase in interest expense on our Senior Secured Notes due to an increase in the interest rate in accordance with the modified terms of the agreement governing the Senior Secured Notes; $7.0 million interest expense incurred on the 2016 Term Loan Facility in connection with the Trican acquisition; $1.8 million of unrealized and realized losses related to an interest rate swap derivative with all changes in its fair value being recognized within other expenses starting from March 2016, which is the date when hedge accounting was discontinued; and a $3.1 million increase in amortization of debt issuance costs and higher commitment fees incurred on the 2016 ABL Facility. These increases were partially offset by $1.7 million decrease in interest expense as a result of the forgiveness of interest on a $20 million related party loan with KG Fracing Acquisition Corp. and S&K Management Services, LLC, on March 16, 2016.
Net loss. Net loss was $187.1 million in 2016, as compared with net loss of $64.6 million in 2015. This increase in net loss is due to the changes in revenue and expenses discussed above.
ENVIRONMENTAL MATTERS
We are subject to numerous environmental, legal and regulatory requirements related to our operations worldwide. For information related to environmental matters, see Note (18) (Commitments and Contingencies) to the consolidated and combined financial statements.
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity represents a company's ability to adjust its future cash flows to meet needs and opportunities, both expected and unexpected.
As of December 31, 2017, we had $96.1 million of cash and $278.5 million of debt, compared to $48.9 million of cash and $272.7 million of debt as of December 31, 2016. In 2017, 2016 and 2015, we had capital expenditures of $189.6 million, $23.5 million and $27.2 million, respectively, exclusive of the cash payment attributable to the acquisition of RockPile on July 3, 2017 of $116.6 million or the Acquired Trican Operations on March 16, 2016 of $203.9 million.
(Thousands of Dollars) | ||||||||||||
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Net cash provided by (used) in operating activities | $ | 79,691 | $ | (54,054 | ) | $ | 37,521 | |||||
Net cash used in investing activities | $ | (250,776 | ) | $ | (227,161 | ) | $ | (26,038 | ) | |||
Net cash provided by (used in) financing activities | $ | 218,122 | $ | 276,633 | $ | (10,518 | ) | |||||
Significant sources and uses of cash during 2017
Sources of cash:
• | Operating activities: |
– | Net cash generated by operating activities in 2017 of $79.7 million was primarily driven by higher utilization of our combined asset base and increased gross profit in our Completion Services segment. We also had proceeds of $2.1 million and $4.2 million from the indemnification settlement with Trican and our insurance company related to the acquisition of the Acquired Trican Operations. See Note (18) (Commitments and Contingencies) of Part II, "Item 8. Financial Statements and Supplementary Data" to the consolidated and combined financial statements. |
• | Investing activities: |
– | Total proceeds of $30.6 million from the sale of assets relating to our facilities in Woodward, Oklahoma and Searcy, Arkansas, certain air compressor units, coiled tubing assets and the twelve workover rigs acquired in the acquisition of RockPile. See Note (7) (Property and Equipment, net) of Part II, "Item 8. Financial Statements and Supplementary Data" to the consolidated and combined financial statements. |
• | Financing activities: |
– | Cash provided from IPO proceeds, $255.5 million. See Note (1)(a) Initial Public Offering of Part II, "Item 8. Financial Statements and Supplementary Data" to the consolidated and combined financial statements. |
– | The 2017 Term Loan Facility, entered into on March 15, 2017, provided for $145.0 million, net of associated origination and other transactions fees. Proceeds received were primarily used to fully repay our Senior Secured Notes. See Note (8) Long-Term Debt of Part II, "Item 8. Financial Statements and Supplementary Data" to the consolidated and combined financial statements. |
– | The Incremental Term Loan Facility, entered into on July 3, 2017, provided for $131.1 million, net of associated origination and other transaction fees. Proceeds received were |
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primarily used to fund the acquisition of RockPile. See Note (8) (Long-Term Debt) of Part II, "Item 8. Financial Statements and Supplementary Data" to the consolidated and combined financial statements.
Uses of cash:
• | Investing activities: |
– | Cash consideration of $116.6 million associated with the acquisition of RockPile, inclusive of a $7.8 million net working capital settlement. |
– | Cash used for capital expenditures of $164.4 million, associated with maintenance capital spend on active fleets, commissioning costs associated with the deployment of our idle fleets, the newbuild acquired as part of the acquisition of RockPile and deposits on new equipment. This activity primarily related to our Completion Services segment. |
• | Financing activities: Cash used to repay our debt facilities, including capital leases but excluding interest, in 2017 was $310.8 million. We used a portion of our IPO proceeds and the proceeds of the 2017 Term Loan Facility to repay our 2016 Term Loan Facility and Senior Secured Notes. |
Significant sources and uses of cash during the twelve months ended December 31, 2016
Sources of cash:
• | Investing activities: Total net proceeds of $0.7 million primarily related to the sale of assets from our idled drilling division within our Other Services segment. |
• | Financing activities: Net cash provided from a capital contribution from shareholders of $200.0 million and the net proceeds from our 2016 Term Loan Facility of $91.2 million. See Note (8) (Long-Term Debt) of Part II, "Item 8. Financial Statements and Supplementary Data" to the consolidated and combined financial statements. |
Uses of cash:
• | Operating activities: Net cash used in operating activities of $54.1 million was primarily attributable to competitive pricing pressure as a result of market conditions, combined with the acquisition, integration and commissioning costs of approximately $47.3 million associated with the acquisition of the Acquired Trican Operations. |
• | Investing activities: |
– | Cash consideration of $205.4 million associated with the acquisition of the Acquired Trican Operations. |
– | Cash used for capital expenditures of $23.5 associated with maintenance capital spend on active fleets, commissioning costs associated with the deployment of our idle fleets. |
• | Financing activities: Cash used to repay and service our debt facilities, including prepayment penalties and capital leases but excluding interest, in 2016 was $8.8 million. |
Significant sources and uses of cash during the twelve months ended December 31, 2015
Sources of cash:
• | Operating activities: Net cash provided by operating activities of $37.5 million was primarily attributable to positive operating results generated by our Completion Services segment, as well as cash generated by working capital changes. |
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• | Investing activities: Total net proceeds of $1.3 million primarily related to the sale of assets from our idled drilling division within our Other Services segment. |
Uses of cash:
• | Investing activities: Net cash used for investing activities of $27.2 million was primarily related to final payments upon delivery for our newbuild fleet, coupled with maintenance capital expenditures to support our active fleets. |
• | Financing activities: Net cash used in financing activities was primarily related to repay and service our debt facilities, including capital leases but excluding interest, of $6.9 million and a final contingent consideration payment of $2.5 million made in February 2015 in connection with the acquisition of Ultra Tech Frac Services, LLC. |
Future sources and use of cash
Capital expenditures for 2018 will be related to maintenance capital spend to support our existing active fleets and the completion of the three newbuild hydraulic fracturing fleets of approximately 150,000 hydraulic horsepower and three wireline spreads, which are anticipated to be delivered in the second and third quarters of 2018. We anticipate our capital expenditures will be funded by cash flows from operations. We currently estimate that our capital expenditures for 2018 will range between $230.0 million and $240.0 million.
Debt service for the twelve months period ended December 31, 2018 is projected to be $31.5 million. We anticipate our debt service will be funded by cash flows from operations.
On February 26, 2018, we announced that our Board of Directors has authorized a stock repurchase program of up to $100.0 million of the Company’s outstanding common stock, with the intent of returning value to our shareholders as we continue to expect further growth and profitability. The duration of the stock buy-back program will be 12 months. The program does not obligate us to purchase any particular number of shares of common stock during any period, and the program may be modified or suspended at any time at our discretion.
Other factors affecting liquidity
Financial position in current market. As of December 31, 2017, we had $96.1 million of cash and a total of $199.7 million available under our revolving credit facility. Furthermore, we have no material adverse change provisions in our bank agreements, and our debt maturities extend over a long period of time. We currently believe that our cash on hand, cash flow generated from operations and availability under our revolving credit facility will provide sufficient liquidity for at least the next 12 months, including for capital expenditures, debt service, working capital investments, contingent liabilities and stock repurchase.
Guarantee agreements. In the normal course of business, we have agreements with a financial institution under which $2.0 million of letters of credit were outstanding as of December 31, 2017.
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 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, as well as unsettled political conditions. 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.
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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, 2017.
(Thousands of Dollars) Contractual obligations | Total | 2018 | 2019-2021 | 2022-2024 | 2025+ | |||||||||||||||
Long-term debt, including current portion(1) | $ | 283,200 | $ | 2,850 | $ | 8,550 | $ | 271,800 | $ | — | ||||||||||
Estimated interest payments(2) | 108,841 | 23,559 | 70,726 | 14,556 | — | |||||||||||||||
Capital lease obligations(3) | 8,518 | 3,633 | 4,885 | — | — | |||||||||||||||
Operating lease obligations(4) | 47,572 | 16,173 | 26,608 | 4,791 | — | |||||||||||||||
Purchase commitments(5) | 211,957 | 133,070 | 78,887 | — | — | |||||||||||||||
Equity method investment | 1,138 | 1,138 | — | — | — | |||||||||||||||
Legal contingency | 4,250 | 4,250 | — | — | — | |||||||||||||||
$ | 665,476 | $ | 184,673 | $ | 189,656 | $ | 291,147 | $ | — | |||||||||||
(1) | Long-term debt excludes interest payments on each obligation and represents our obligations under our New Term Loan Facility. In addition, these amounts exclude $8.1 million of unamortized debt discount and debt issuance costs. |
(2) | Estimated interest payments are based on debt balances outstanding as of December 31, 2017 and include interest related to the New Term Loan Facility. Interest rates used for variable rate debt are based on the prevailing current London Interbank Offer Rate (“LIBOR”). |
(3) | Capital lease obligations consist of obligations on our capital leases of hydraulic fracturing equipment with CIT Finance LLC and light weight vehicles with ARI Financial Services Inc and includes interest payments. |
(4) | Operating lease obligations are related to our real estate, rail cars and light duty vehicles with ARI Financial Services Inc, Enterprise FM Trust, PNC Bank, Anderson Rail Group, CIT Bank, Compass Rail VIII, SMBC Rail Services and Trinity Industries Leasing Company. |
(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 some cases, carried forward to the next year. |
Principal Debt Agreements
2017 ABL Facility
On February 17, 2017, Keane Group Holdings, LLC, Keane Frac, LP and KS Drilling, LLC (together with Keane Group Holdings, LLC, Keane Frac, LP and each other person that becomes an ABL Borrower under the 2017 ABL Facility (as defined herein) in accordance with the terms thereof, collectively, the “ABL Borrowers”) and the ABL Guarantors (as defined below) entered into an asset-based revolving credit agreement (the “February 2017 ABL Facility”) with each lender from time to time party thereto (the “2017 ABL Lenders”) and Bank of America, N.A., as administrative agent and collateral agent. The following is a summary of the material provisions of the 2017 ABL Facility. It does not include all of the provisions of the 2017 ABL Facility, does not purport to be complete and is qualified in its entirety by reference to the 2017 ABL Facility described.
Structure. As of September 30, 2017, the February 2017 ABL Facility provided for a $150.0 million revolving credit facility (with a $20.0 million sub-facility for letters of credit), subject to a borrowing base (as described below). On December 22, 2017, we entered into an amended and restated February 2017 ABL Facility (the “Amended 2017 ABL Facility and, together with the February 2017 ABL Facility, the “2017 ABL Facility”). The Amended 2017 ABL Facility among other things, increased the total amount of aggregate commitments by an additional $150.0 million. As a result, the 2017 ABL Facility provided for a $300.0 million revolving credit facility (with a $20.0 million subfacility for letters of credit), subject to a borrowing base (as described below). In addition, subject to approval by the applicable lenders and other customary conditions, the 2017 ABL Facility allows for an additional increase in commitments of up to $150.0 million.
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Maturity. The loans arising under the initial commitments under the 2017 ABL Facility mature on December 22, 2022. The loans arising under any tranche of extended loans or additional commitments mature as specified in the applicable extension amendment or increase joinder, respectively.
Borrowing Base. Pursuant to the terms of the 2017 ABL Facility, the amount of loans and letters of credit available under the 2017 ABL Facility is limited to, at any time of calculation, an amount equal to (a) 85% multiplied by the amount of eligible billed accounts; plus (b) 80% multiplied by the amount of eligible unbilled accounts; provided, that the amount attributable to clause (b) may not exceed 20% of the borrowing base (after giving effect to any reserve, this limitation and the limitation set forth in the proviso in clause (c)); plus (c) the lesser of (i) 70% of the cost and (ii) 85% of the appraised value of eligible inventory and eligible frac iron; provided, that the amount attributable to clause (c) may not exceed 15% of the borrowing base (after giving effect to any reserve, this limitation and the limitation set forth in the proviso in clause (b)); minus (d) the then applicable amount of all reserves.
Interest. Pursuant to the terms of the 2017 ABL Facility, amounts outstanding under the 2017 ABL Facility bear interest at a rate per annum equal to, at Keane Group’s option, (a) the base rate, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 1.00%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 0.75% or (z) if the average excess availability is greater than or equal to 66%, 0.50%, or (b) the adjusted London Interbank Offered Rate (“LIBOR”) rate for such interest period, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 2.00%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 1.75% or (z) if the average excess availability is greater than or equal to 66%, 1.50%. The average excess availability is set on the first day of each full fiscal quarter ending after December, 22, 2017. On or after June 22, 2018, at any time when Consolidated EBITDA (as defined herein) as of the then most recently ended four fiscal quarters for which financial statements are required to be delivered is greater than or equal to $250.0 million, the applicable margin will be reduced by 0.25%; provided that if Consolidated EBITDA is less than $250.0 million as of a later four consecutive fiscal quarters, the applicable margin will revert to the levels set forth above.
Guarantees. Subject to certain exceptions as set forth in the definitive documentation for the 2017 ABL Facility, the amounts outstanding under the 2017 ABL Facility are guaranteed by KGI, KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, Keane Frac GP, LLC, each ABL Borrower (other than with respect to its own obligations) and each subsidiary of KGI that will be required to execute and deliver a facility guaranty after February 17, 2017 (collectively, the “ABL Guarantors”).
Security. Subject to certain exceptions as set forth in the definitive documentation for the 2017 ABL Facility, the obligations under the 2017 ABL Facility are (a) secured by a first-priority security interest in and lien on substantially all of the accounts receivable, inventory and frac iron equipment; certain other assets and property thereto, including chattel paper, instruments, certain investment property, documents, letter of credit rights, payment intangibles, general intangibles, commercial tort claims, books and records and supporting obligations of the Company and its subsidiaries that are ABL Borrowers or ABL Guarantors under the 2017 ABL Facility (collectively, the “2017 ABL Facility Priority Collateral”) and (b) subject to certain exceptions, secured on a second-priority security interest in and lien on substantially all of the assets of KGI and the ABL Guarantors to the extent not constituting 2017 ABL Facility Priority Collateral.
Fees. Certain customary fees are payable to the lenders and the agents under the 2017 ABL Facility.
Restricted Payment Covenant. The 2017 ABL Facility includes a covenant restricting our ability to pay dividends and make certain other restricted payments, subject to certain exceptions. The 2017 ABL Facility provides that KGI may make cash dividends and other restricted payments in an aggregate amount not to exceed $25.0 million in any four consecutive fiscal quarter period, and to the extent Consolidated EBITDA in any four consecutive fiscal quarter period equals or exceeds $350.0 million, such amount is increased to $50.0 million for so long as Consolidated EBITDA continues to equal or exceed such threshold. Additionally, KGI may make additional cash dividends and other restricted payments to the extent no event of default exists or results therefrom and either (x) excess availability under the 2017 ABL Facility equals or exceeds the greater of (i) 17.5% of the lesser of the
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aggregate commitments and the borrowing base and (ii) $30.0 million, before and after the making of any cash dividend or other restricted payment, and on a pro forma basis for the preceding 45 calendar day period, and the Consolidated Fixed Charge Coverage Ratio (as defined herein) is at least 1.0 to 1.0, or (y) excess availability equals or exceeds the greater of (i) 20% of the lesser of the aggregate commitments and the borrowing base and (ii) $35.0 million, before and after the making of any cash dividend or other restricted payment, and on a pro forma basis for the preceding 45 calendar day period.
“Consolidated EBITDA”, generally, is defined as net income plus reductions to net income attributable to interest, taxes, depreciation and amortization and certain other non-cash charges, including, subject to certain limitations, the addition of run-rate cost savings, operating expense reductions, restructuring charges and expenses and cost saving synergies, and acquisition, integration and divestiture costs and fleet commissioning costs.
“Consolidated Fixed Charge Coverage Ratio”, generally is defined as the ratio of (a) Consolidated EBITDA for the applicable period, minus certain capital expenditures and income taxes paid in cash during such period to (b) interest charges paid or required to be paid in cash, plus scheduled principal payments on certain indebtedness required to be made in cash, plus certain regularly scheduled restricted payments paid in cash, plus restricted payments made using the general restricted payments basket during such period.
Affirmative and Negative Covenants. The 2017 ABL Facility contains various other affirmative and negative covenants (in each case, subject to customary exceptions as set forth in the definitive documentation for the 2017 ABL Facility).
Financial Covenants. Pursuant to the terms of the 2017 ABL Facility, the 2017 ABL Facility requires that 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 The Consolidated Fixed Charge Coverage Ratio will only be tested upon the occurrence of an event or default or 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) $20.0 million at any time.
Events of Default. The 2017 ABL Facility contains customary events of default (subject to exceptions, thresholds and grace periods as set forth in the definitive documentation for the 2017 ABL Facility).
New Term Loan Facility
On March 15, 2017, Keane Group, Keane Frac, LP and KS Drilling, LLC (together with Keane Group, Keane Frac, LP and each other person that becomes a New Term Loan Borrower under the New Term Loan Facility in accordance with the terms thereof, collectively, the “New Term Loan Borrowers”) and the New Term Loan Guarantors (as defined below) entered into a term loan facility (the “2017 Term Loan Facility”) with each lender from time to time party thereto and Owl Rock, as administrative agent and collateral agent. On the RockPile Closing Date, the New Term Loan Borrowers and the New Term Loan Guarantors (as defined below) entered in an incremental term loan facility (the “Incremental Term Loan Facility” and, together with the 2017 Term Loan Facility, collectively, the “New Term Loan Facility”) with each of the incremental lenders party thereto, each of the existing lenders party thereto and Owl Rock, as administrative agent and collateral agent. The following is a summary of the material provisions of the New Term Loan Facility. It does not include all of the provisions of the New Term Loan Facility, does not purport to be complete and is qualified in its entirety by reference to the New Term Loan Facility described.
Structure. The 2017 Term Loan Facility provides for a $150.0 million initial term loan facility and the Incremental Term Loan Facility provides for a $135.0 million incremental term loan facility (collectively, the “Term Loans”). In addition, subject to certain customary conditions, as of July 3, 2017, the New Term Loan Facility allows for additional incremental term loans in an amount equal to the sum of (a) $50.0 million (less certain amounts in connection with permitted notes and subordinated indebtedness), plus (b) an unlimited amount, subject to, in the case of subclause (b), immediately after giving effect thereto, the total net leverage ratio being less than 1.75:1.00.
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Maturity. August 18, 2022 or, if earlier, the stated maturity date of any other term loans or term commitments.
Amortization. The loans under the 2017 Term Loan Facility amortize in quarterly installments equal to 1.00% per annum of the aggregate principal amount of all initial term loans outstanding, commencing with June 30, 2017. The loans under the Incremental Term Loan Facility amortize in quarterly installments equal to (a) the aggregate original principal amount of the loans under the Incremental Term Loan Facility, times (b) the ratio of (x) the amount of all loans under the 2017 Term Loan Facility that are being repaid on such date to (y) the total aggregate principal amount of all loans under the 2017 Term Loan Facility that remained outstanding as of the RockPile Closing Date, but giving pro forma effect to the amortization payment to be made on June 30, 2017, commencing with September 30, 2017.
Interest. The Term Loans bear interest at a rate per annum equal to, at Keane Group’s option, (a) the base rate plus 6.25%, or (b) the adjusted LIBOR rate for such interest period (subject to a 1.00% floor) plus 7.25%. Following an event of default, the Term Loans bear interest at the rate otherwise applicable to such Term Loans at such time plus an additional 2.00% per annum during the continuance of such event of default.
Prepayments. The New 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 New Term Loan Facility and the agent for the 2017 ABL Facility and certain exceptions; (b) 100% of the net cash proceeds of debt incurrences or issuances (other than debt incurrences permitted under the New Term Loan Agreement) and (c) 50% (subject to step-downs to zero, in accordance with the Total Net Leverage Ratio (as defined below) of excess cash flow minus certain voluntary prepayments made under the New Term Loan Facility and all voluntary prepayments of loans under the 2017 ABL Facility to the extent the commitments under the 2017 ABL Facility are permanently reduced by such prepayments.
Guarantees. Subject to certain exceptions as set forth in the definitive documentation for the New Term Loan Facility, the amounts outstanding under the New Term Loan Facility are guaranteed by KGI, KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, Keane Frac GP, LLC, each New Term Loan Borrower (other than with respect to its own obligations) and each subsidiary of KGI that will be required to execute and deliver a facility guaranty after March 15, 2017 (collectively, the “New Term Loan Guarantors”).
Security. Subject to certain exceptions as set forth in the definitive documentation for the New Term Loan Facility, the obligations under the New Term Loan Facility are secured by (a) a first-priority security interest in and lien on substantially all of the assets of the New Term Loan Borrowers and the New Term Loan Guarantors to the extent not constituting 2017 ABL Facility Priority Collateral and (b) a second-priority security interest in and lien on the 2017 ABL Facility Priority Collateral.
Fees. Certain customary fees are payable to the lenders and the agents under the New Term Loan Facility.
Restricted Payment Covenant. The New Term Loan Facility includes a covenant restricting our ability to pay dividends and make certain other restricted payments, subject to certain exceptions. The New Term Loan Facility provides that KGI may make cash dividends and other restricted payments in an aggregate amount not to exceed $25.0 million (subject to reduction based on certain outstanding investments and prepayments of indebtedness) during the term of the facility. If the pro forma Total Net Leverage Ratio (as defined below) is no greater than 3.0 to 1.0 after giving effect to such restricted payment, we can also pay dividends or make other restricted payments up to the amount of the Cumulative Credit (as defined below). Both of these exceptions are also subject to the requirements that there is no event of default and that we have unrestricted cash plus loan availability under the 2017 ABL Facility of at least $35.0 million after the making of any cash dividend or other restricted payment.
“Total Net Leverage Ratio”, generally, is defined as the ratio of (a) the aggregate principal amount of indebtedness in an amount that would be reflected on our balance sheet in accordance with GAAP (but hedging
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exposure is included only for amounts exceeding $5.0 million) minus cash and cash equivalents not to exceed $100.0 million to (b) Consolidated EBITDA (calculated in substantially the same manner as in the 2017 ABL Facility).
“Cumulative Credit”, generally, is defined as an amount equal to the excess cash flow not required to repay the Term Loans plus other customary additions reduced by the amount of Cumulative Credit used prior to such time. However, for so long as the Total Net Leverage Ratio is less than 1.75:1:00 after giving effect to any proposed restricted payments, the amount of Cumulative Credit is unlimited.
Affirmative and Negative Covenants. The New 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 New Term Loan Facility).
Financial Covenant. The New Term Loan Facility provides that, as of the last day of any month, the sum of (a) unrestricted cash and cash equivalents of the New Term Loan Borrowers and the New Term Loan Guarantors that are deposited in blocked accounts (to the extent required to be subject to blocked account agreements under the New Term Loan Facility) and (b) the aggregate principal amount that is available for borrowing under the 2017 ABL Facility, may not be less than $35.0 million.
Events of Default. The New Term Loan Facility contains customary events of default (subject to exceptions, thresholds and grace periods as set forth in the definitive documentation for the New Term Loan Facility).
Off-Balance Sheet Arrangements
Except for our normal operating leases, we do not have any material off-balance sheet financing arrangements, transactions or special purpose entities.
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 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 herein) has or will have a direct or indirect material interest. 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” as any person who is, or, at any time since the beginning of the company’s last fiscal year, 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 in the company, (3) an immediate family member 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. Immediate family members (each, a “Family Member”) includes 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" and Item 13. "Certain Relationships and Related-Party Transactions and Director Independence."
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Critical Accounting Policies and Estimates
The preparation of our consolidated and combined financial statements and related notes to the consolidated and combined financial statements 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 and combined 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 consolidation and combined 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. These estimates are reviewed during the 12-month measurement period and adjusted based on actual results. 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 on our recently completed acquisitions during the years ended December 31, 2017 and 2016.
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 where 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 for the years ended December 31, 2017, 2016 and 2015.
Valuation of long-lived assets, indefinite-lived assets and goodwill
We assess our long-lived assets, such as definite-lived intangible assets and property and equipment, for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable.
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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 segments, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. The expected future cash flows used for impairment reviews and related fair value calculations are based on subjective, judgmental assessments of projected revenue growth, fleet count, utilization, gross margin 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)(j) Goodwill and Indefinite-Lived Intangible Assets and (2)(k) Long-Lived 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, 2017, 2016 and 2015.
Income Taxes
We account for income taxes in accordance with 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 the Company’s 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 will 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 its 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
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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.
On December 22, 2017, new tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act was signed into law. We evaluated the provisions of the Tax Cuts and Jobs Act and determined only the reduced corporate tax rate from 35% to 21% would have an impact on the consolidated financial statements as of December 31, 2017. Accordingly, we recorded a provision to income taxes for our assessment of the tax impact of the Tax Cuts and Jobs Act on ending deferred tax assets and liabilities and the corresponding valuation allowance. The effects of other provisions of the Tax Cuts and Job Act are not expected to have an adverse impact on our consolidated financial statements. We will continue to analyze the impacts of the Tax Cuts and Jobs Act on the Company and refine our estimates in 2018.
New Accounting Pronouncements
For discussion on the potential impact of new accounting pronouncements issued but not yet adopted, see Note (24) New Accounting Pronouncements of Part II, "Item 8. Financial Statements and Supplementary Data."
NON-GAAP FINANCIAL MEASURES
From time to time in our financial reports, we will use certain non-GAAP financial measures to provide supplemental information that we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income and gross profit. These non-GAAP measures exclude the financial impact of items management does not consider in assessing Keane's ongoing operating performance, and thereby facilitates review of Keane's operating performance on a period-to-period basis. Other companies may have different capital structures, and comparability to Keane's results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe Adjusted EBITDA and Adjusted Gross Profit provide helpful information to analysts and investors to facilitate a comparison of Keane's operating performance to that of other companies.
Adjusted EBITDA is defined as net income (loss) adjusted to eliminate the impact of interest, income taxes, depreciation and amortization, along with certain items management does not consider in assessing ongoing performance. Adjusted Gross Profit is defined as Adjusted EBITDA, further adjusted to eliminate the impact of all activities in the Corporate segment, such as selling, general and administrative expenses, along with cost of services that management does not consider in assessing ongoing performance.
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Item 7A. Quantitative and Qualitative Disclosure About Market Risk
At December 31, 2017, we held no significant derivative instruments that materially increased our exposure to market risks for interest rates, foreign currency rates, commodity prices or other market price risks.
Our material and fuel purchases expose us to commodity price risk. Our material costs primarily include the cost of inventory consumed while performing our stimulation services such as proppant, chemicals and guar. Our fuel costs consist primarily of diesel fuel used by our various trucks and other motorized equipment. The prices for fuel and the raw materials (particularly guar and proppant) in our inventory are volatile and are impacted by changes in supply and demand, as well as market uncertainty and regional shortages. Depending on market conditions, we have generally been able to pass along price increases to our customers, however, we may be unable to do so in the future. We generally do not engage in commodity price hedging activities. However, we have purchase commitments with certain vendors to supply a majority of the proppant used in our operations. Some of these agreements are take-or-pay agreements with minimum purchase obligations. As a result of future decreases in the market price of proppants, we could be required to purchase goods and pay prices in excess of market prices at the time of purchase. Refer to Part II, “Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations” for the contractual commitments and obligations table as of December 31, 2017.
Our operations are currently conducted entirely within the U.S.; therefore, we had no significant exposure to foreign currency exchange rate risk.
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Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Keane Group, Inc. | |
Audited Consolidated and Combined Financial Statements | |
Report of Independent Registered Public Accounting Firm | |
Consolidated and Combined Balance Sheets | |
Consolidated and Combined Statements of Operations and Comprehensive (Loss) | |
Consolidated and Combined Statements of Changes in Owners’ Equity | |
Consolidated and Combined Statements of Cash Flows | |
Notes to Consolidated and Combined Financial Statements | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Keane Group, Inc.:
Opinion on the Consolidated and Combined Financial Statements
We have audited the accompanying consolidated and combined balance sheets of Keane Group, Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated and combined statements of operations and comprehensive income (loss), changes in owners’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2017, and the related notes (collectively, the consolidated and combined financial statements). In our opinion, the consolidated and combined financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated and combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated and combined financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (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 and combined 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 and combined 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 and combined 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 and combined financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2011.
Houston, Texas
February 28, 2018
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KEANE GROUP, INC. AND SUBSIDIARIES
Consolidated and Combined Balance Sheets
(Amounts in thousands)
December 31, 2017 | December 31, 2016 | ||||||||
Assets | |||||||||
Current assets: | |||||||||
Cash and cash equivalents | $ | 96,120 | $ | 48,920 | |||||
Trade and other accounts receivable, net | 238,018 | 66,277 | |||||||
Inventories, net | 33,437 | 15,891 | |||||||
Prepaid and other current assets | 8,519 | 14,618 | |||||||
Total current assets | 376,094 | 145,706 | |||||||
Property and equipment, net | 468,000 | 294,209 | |||||||
Goodwill | 134,967 | 50,478 | |||||||
Intangible assets | 57,280 | 44,015 | |||||||
Other noncurrent assets | 6,775 | 2,532 | |||||||
Total assets | $ | 1,043,116 | $ | 536,940 | |||||
Liabilities and Owners' Equity | |||||||||
Liabilities | |||||||||
Current liabilities: | |||||||||
Accounts payable | $ | 92,348 | $ | 48,484 | |||||
Accrued expenses | 135,175 | 42,892 | |||||||
Current maturities of capital lease obligations | 3,097 | 2,633 | |||||||
Current maturities of long-term debt | 1,339 | 2,512 | |||||||
Stock based compensation - current | 4,281 | — | |||||||
Deferred revenue | 5,000 | — | |||||||
Other current liabilities | 914 | 3,171 | |||||||
Total current liabilities | 242,154 | 99,692 | |||||||
Capital lease obligations, less current maturities | 4,796 | 5,442 | |||||||
Long-term debt, net of unamortized deferred financing costs and unamortized debt discount, less current maturities | 273,715 | 267,238 | |||||||
Stock based compensation - noncurrent | 4,281 | — | |||||||
Other noncurrent liabilities | 5,078 | 2,316 | |||||||
Total noncurrent liabilities | 287,870 | 274,996 | |||||||
Total liabilities | 530,024 | 374,688 | |||||||
Owners’ equity | |||||||||
Members' equity | — | 453,810 | |||||||
Common stock, par value $0.01 per share (authorized 500,000 shares, issued 111,831 shares) | 1,118 | — | |||||||
Paid-in capital in excess of par value | 541,074 | — | |||||||
Retained deficit | (27,372 | ) | (288,771 | ) | |||||
Accumulated other comprehensive (loss) | (1,728 | ) | (2,787 | ) | |||||
Total owners’ equity | 513,092 | 162,252 | |||||||
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Total liabilities and owners’ equity | $ | 1,043,116 | $ | 536,940 | |||||
See accompanying notes to consolidated and combined financial statements.
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KEANE GROUP, INC. AND SUBSIDIARIES
Consolidated and Combined Statements of Operations and Comprehensive Income (Loss)
(Amounts in thousands, except for per unit amounts)
Twelve Months Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Revenue | $ | 1,542,081 | $ | 420,570 | $ | 366,157 | ||||||
Operating costs and expenses: | ||||||||||||
Cost of services (1) | 1,282,561 | 416,342 | 306,596 | |||||||||
Depreciation and amortization | 159,280 | 100,979 | 69,547 | |||||||||
Selling, general and administrative expenses | 93,526 | 53,155 | 26,081 | |||||||||
Gain on disposal of assets | (2,555 | ) | (387 | ) | (270 | ) | ||||||
Impairment | — | 185 | 3,914 | |||||||||
Total operating costs and expenses | 1,532,812 | 570,274 | 405,868 | |||||||||
Operating income (loss) | 9,269 | (149,704 | ) | (39,711 | ) | |||||||
Other income (expense): | ||||||||||||
Other income (expense), net | 13,963 | 916 | (1,481 | ) | ||||||||
Interest expense(2) | (59,223 | ) | (38,299 | ) | (23,450 | ) | ||||||
Total other expenses | (45,260 | ) | (37,383 | ) | (24,931 | ) | ||||||
Loss before income taxes | (35,991 | ) | (187,087 | ) | (64,642 | ) | ||||||
Income tax expense(3) | (150 | ) | — | — | ||||||||
Net loss | (36,141 | ) | (187,087 | ) | (64,642 | ) | ||||||
Net loss attributable to predecessor | (7,918 | ) | — | — | ||||||||
Net loss attributable to Keane Group, Inc. | (28,223 | ) | (187,087 | ) | (64,642 | ) | ||||||
Other comprehensive income (loss), net of tax: | ||||||||||||
Foreign currency translation adjustments | 96 | 22 | (741 | ) | ||||||||
Hedging activities | 791 | 1,857 | (1,187 | ) | ||||||||
Total comprehensive loss | $ | (35,254 | ) | $ | (185,208 | ) | $ | (66,570 | ) | |||
Net loss per share(4): | ||||||||||||
Basic net loss per share | $ | (0.34 | ) | $ | (2.14 | ) | $ | (0.74 | ) | |||
Diluted net loss per share | $ | (0.34 | ) | $ | (2.14 | ) | $ | (0.74 | ) | |||
Weighted-average shares outstanding: basic(3) | 106,321 | 87,313 | 87,313 | |||||||||
Weighted-average shares outstanding: diluted(3) | 106,321 | 87,313 | 87,313 | |||||||||
(1) | Cost of services during the years ended December 31, 2017, 2016, and 2015 excludes depreciation of $150.6 million, $94.7 million, and $64.3 million, respectively. Depreciation related to cost of services is presented within depreciation and amortization separately disclosed. |
(2) | Interest expense during the year ended December 31, 2017 includes $15.8 million of prepayment penalties and $15.3 million in write-offs of deferred financing costs, incurred in connection with the refinancing by the Company (as defined herein) of its 2016 ABL Facility (as defined herein) and the Company's early debt extinguishment of its 2016 Term Loan Facility (as defined herein) and Senior Secured Notes (as defined herein). |
(3) Income tax provision as presented in the consolidated and combined statement of operations does not include the provision for Texas margin tax for 2016 and the provisions for Texas margin tax and Canadian federal tax for 2015.
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(4) | The pro forma earnings per share amounts have been computed to give effect to the Organizational Transactions (as defined herein), including the limited liability company agreement of Keane Investor (as defined herein) to, among other things, exchange all of the Existing Owners' (as defined herein) membership interests for the newly-created ownership interests. |
See accompanying notes to consolidated and combined financial statements.
73
KEANE GROUP, INC. AND SUBSIDIARIES
Consolidated and Combined Statements of Changes in Owners' Equity
(Amounts in thousands)
Members’ equity | Common Stock | Paid-in Capital in Excess of Par Value | Retained Earnings (deficit) | Accumulated other comprehensive income (loss) | Total | |||||||||||||||||||
Balance as of December 31, 2014 | $ | 186,420 | $ | — | $ | — | $ | (37,042 | ) | $ | (2,738 | ) | $ | 146,640 | ||||||||||
Distributions | (222 | ) | — | — | — | — | (222 | ) | ||||||||||||||||
Unit awards amortization | 312 | — | — | — | — | 312 | ||||||||||||||||||
Other comprehensive loss | — | — | — | — | (1,928 | ) | (1,928 | ) | ||||||||||||||||
Net loss | — | — | — | (64,642 | ) | — | (64,642 | ) | ||||||||||||||||
Balance as of December 31, 2015 | $ | 186,510 | $ | — | $ | — | $ | (101,684 | ) | $ | (4,666 | ) | $ | 80,160 | ||||||||||
Contribution of equity | 222,646 | — | — | — | — | 222,646 | ||||||||||||||||||
Issuance of Class A and Class C Units | 42,669 | — | — | — | — | 42,669 | ||||||||||||||||||
Unit awards amortization | 1,985 | — | — | — | — | 1,985 | ||||||||||||||||||
Other comprehensive income | — | — | — | — | 1,879 | 1,879 | ||||||||||||||||||
Net loss | — | — | — | (187,087 | ) | — | (187,087 | ) | ||||||||||||||||
Balance as of December 31, 2016 | $ | 453,810 | $ | — | $ | — | $ | (288,771 | ) | $ | (2,787 | ) | $ | 162,252 | ||||||||||
Net loss prior to the Organizational Transactions | — | — | — | (7,918 | ) | — | (7,918 | ) | ||||||||||||||||
Effect of the Organizational Transactions | (453,810 | ) | — | 156,270 | 297,540 | — | — | |||||||||||||||||
Issuance of common stock sold in initial public offering, net of offering costs and deferred stock awards for executives | — | 1,031 | 245,902 | — | — | 246,933 | ||||||||||||||||||
Equity-based compensation recognized subsequent to the Organizational Transactions | — | — | 10,578 | — | — | 10,578 | ||||||||||||||||||
Effect of RockPile acquisition | — | 87 | 130,203 | — | — | 130,290 | ||||||||||||||||||
Other comprehensive income | — | — | — | — | 1,059 | 1,059 | ||||||||||||||||||
Deferred tax adjustment | — | — | (1,879 | ) | — | — | (1,879 | ) | ||||||||||||||||
Net loss subsequent to Organizational Transactions | — | — | — | (28,223 | ) | — | (28,223 | ) | ||||||||||||||||
Balance as of December 31, 2017 | $ | — | $ | 1,118 | $ | 541,074 | $ | (27,372 | ) | $ | (1,728 | ) | $ | 513,092 | ||||||||||
See accompanying notes to consolidated and combined financial statements.
74
KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated and Combined Statements of Cash Flows
(Amounts in thousands)
Twelve Months Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net loss | $ | (36,141 | ) | $ | (187,087 | ) | $ | (64,642 | ) | |||
Adjustments to reconcile net loss to net cash provided by operating activities | ||||||||||||
Depreciation and amortization | 159,280 | 100,979 | 69,547 | |||||||||
Amortization of deferred financing fees | 5,241 | 4,152 | 2,112 | |||||||||
Loss on debt extinguishment, including prepayment premiums | 31,084 | — | — | |||||||||
Gain on disposal of assets | (2,555 | ) | (387 | ) | (270 | ) | ||||||
Unrealized loss on de-designation of a derivative | 963 | 3,038 | — | |||||||||
Accrued interest on loan—related party | — | 471 | 2,174 | |||||||||
Loss on impairment of assets | — | 185 | 3,914 | |||||||||
Equity-based compensation | 10,578 | 1,985 | 312 | |||||||||
Other non-cash (expense) | (322 | ) | — | — | ||||||||
Changes in operating assets and liabilities | ||||||||||||
Decrease (increase) in trade and other accounts receivable, net | (113,047 | ) | (13,027 | ) | 36,933 | |||||||
Decrease (increase) in inventories | (15,475 | ) | 8,485 | 11,841 | ||||||||
Decrease (increase) in prepaid and other current assets | 20,294 | (5,994 | ) | 105 | ||||||||
Decrease (increase) in other assets | (336 | ) | 32 | 1,047 | ||||||||
Increase (decrease) in accounts payable | (141 | ) | 14,214 | (12,650 | ) | |||||||
Increase (decrease) in accrued expenses | 41,446 | 19,735 | (13,185 | ) | ||||||||
Increase (decrease) in other liabilities | (21,178 | ) | (835 | ) | 283 | |||||||
Net cash provided by (used) in operating activities | 79,691 | (54,054 | ) | 37,521 | ||||||||
Cash flows from investing activities | ||||||||||||
Acquisition of business | (116,576 | ) | (203,900 | ) | — | |||||||
Purchase of property and equipment | (141,340 | ) | (23,126 | ) | (26,086 | ) | ||||||
Advances of deposit on equipment | (23,096 | ) | (420 | ) | (1,114 | ) | ||||||
Implementation of software | (687 | ) | (453 | ) | (69 | ) | ||||||
Proceeds from sale of assets | 30,565 | 711 | 1,278 | |||||||||
Payments for leasehold improvements | (157 | ) | — | (46 | ) | |||||||
Proceeds from insurance recoveries | 515 | 22 | — | |||||||||
Payments received (advances) on note receivable | — | 5 | (1 | ) | ||||||||
Net cash used in investing activities | (250,776 | ) | (227,161 | ) | (26,038 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from issuance of common stock | 255,494 | — | — | |||||||||
Proceeds from the secured notes and term loan facility | 285,000 | 100,000 | — | |||||||||
Payments on the secured notes and term loan facility | (289,902 | ) | (5,647 | ) | (5,000 | ) | ||||||
Payments on capital leases | (2,861 | ) | (2,668 | ) | (1,661 | ) | ||||||
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KEANE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated and Combined Statements of Cash Flows
(Amounts in thousands)
Prepayment premiums on early debt extinguishment | (15,817 | ) | — | — | ||||||||
Payment of debt issuance costs | (13,792 | ) | (15,052 | ) | (1,135 | ) | ||||||
Payments on contingent consideration liability | — | — | (2,500 | ) | ||||||||
Contributions (distributions) | — | 200,000 | (222 | ) | ||||||||
Net cash provided by (used in) financing activities | 218,122 | 276,633 | (10,518 | ) | ||||||||
Non-cash effect of foreign translation adjustments | 163 | 80 | 250 | |||||||||
Net increase in cash, cash equivalents and restricted cash | 47,200 | (4,502 | ) | 1,215 | ||||||||
Cash, cash equivalents and restricted cash, beginning | 48,920 | 53,422 | 52,207 | |||||||||
Cash, cash equivalents and restricted cash, ending | $ | 96,120 | $ | 48,920 | $ | 53,422 | ||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid during the period for: | ||||||||||||
Interest expense, net | $ | 30,104 | $ | 25,516 | $ | 19,157 | ||||||
Income taxes | — | — | 220 | |||||||||
Non-cash investing and financing activities: | ||||||||||||
Non-cash purchases of property and equipment | $ | 25,193 | $ | 9,364 | $ | 3,138 | ||||||
Non-cash forgiveness of related party loan | — | 22,646 | — | |||||||||
Non-cash issuance of acquisition shares | 130,290 | — | — | |||||||||
Non-cash issuance of Class A and C Units | — | 42,669 | — | |||||||||
Non-cash reduction in capital lease obligations | 20 | 1,281 | — | |||||||||
Non-cash additions to capital lease obligations | 2,739 | — | — | |||||||||
See accompanying notes to consolidated and combined financial statements.
76
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(1) Basis of Presentation and Nature of Operations
Keane Group, Inc. (the “Company”, “KGI” or “Keane”) was formed on October 13, 2016 as a Delaware corporation to be a holding corporation for Keane Group Holdings, LLC and its subsidiaries (collectively referred to as “Keane Group”), for the purpose of facilitating the initial public offering (the “IPO”) of shares of common stock of the Company.
The accompanying consolidated and combined financial statements were prepared using United States Generally Accepted Accounting Principles (“GAAP”) and the instructions to Form 10-K and Regulation S-X.
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.
Management believes the consolidated and combined financial statements included herein contain all adjustments necessary to present fairly the Company's financial position as of December 31, 2017, the results of its operations and its cash flows for the years ended December 31, 2017, 2016, and 2015. Such adjustments are of a normal recurring nature.
The consolidated and combined financial statements include the accounts of Keane Group, Inc. and Keane Group, each together with their consolidated subsidiaries.
The consolidated financial statements for the period from January 1, 2016 to March 15, 2016 reflect only the historical results of the Company prior to the completion of the Company's acquisition of the Acquired Trican Operations (as defined herein). The consolidated and combined financial statements for the period from January 1, 2017 to July 2, 2017 reflect only the historical results of the Company prior to the completion of the Company's acquisition of RockPile.
Earnings per share and weighted-average shares outstanding for the years ended December 31, 2017, 2016, and 2015 have been presented giving pro forma effect to the Organizational Transactions (as defined herein) as if they had occurred on January 1, 2016. Financial results for the years ended December 31, 2017, 2016, and 2015 are the financial results of Keane Group, Inc. and Keane Group Holdings, LLC, the Company's predecessor for accounting purposes, as there was no activity under Keane Group, Inc. prior to 2017.
(a) Initial Public Offering
On January 25, 2017, the Company completed the IPO of 30,774,000 shares of its common stock at the public offering price of $19.00 per share, which included 15,700,000 shares offered by the Company and 15,074,000 shares offered by the selling stockholder, including 4,014,000 shares sold as a result of the underwriters’ exercise of their overallotment option. The IPO proceeds to the Company, net of underwriters’ fees and capitalized cash payments of $4.8 million for professional services and other direct IPO related activities, was $255.5 million. The net proceeds were used to fully repay KGH Intermediate Holdco II, LLC (“Holdco II”)’s term loan balance of $99.0 million and the associated prepayment premium of $13.8 million, and to repay $50.0 million of its 12% secured notes due 2019 (“Senior Secured Notes”) and the associated prepayment premium of approximately $0.5 million. The remaining proceeds were used for general corporate purposes, including capital expenditures, working capital and potential acquisitions and strategic transactions. Upon completion of the IPO and the reorganization, the Company had 103,128,019 shares of common stock outstanding.
All underwriting discounts and commissions and other specific costs directly attributable to the IPO were deferred and netted against the gross proceeds of the offering through paid-in capital in excess of par value.
77
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(b) Organizational Transactions
In connection with the IPO, the Company completed a series of organizational transactions (the “Organizational Transactions”), including the following:
• | Certain entities affiliated with Cerberus Capital Management, L.P., certain members of the Keane family, Trican Well Service Ltd. (“Trican”) and certain members of the Company's management team (collectively, the “Existing Owners”) contributed all of their direct and indirect equity interests in Keane Group to Keane Investor Holdings LLC (“Keane Investor”); |
• | Keane Investor contributed all of its equity interests in Keane Group to the Company in exchange for common stock of the Company; and |
• | The Company's independent directors received grants of restricted stock of the Company in substitution for their interests in Keane Group. |
The Organizational Transactions represented a transaction between entities under common control and were accounted for similarly to pooling of interests in a business combination. The common stock of the Company issued to Keane Investor in exchange for its equity interests in Keane Group was recognized by the Company at the carrying value of the equity interests in Keane Group. In addition, the Company became the successor and Keane Group the predecessor for the purposes of financial reporting. The financial statements for the periods prior to the IPO and Organizational Transactions have been adjusted to combine and consolidate the previously separate entities for presentation purposes.
As a result of the Organizational Transactions and the IPO, (i) the Company is a holding company with no material assets other than its ownership of Keane Group, (ii) an aggregate of 72,354,019 shares of the Company's common stock were owned by Keane Investor and certain of the Company's independent directors, and Keane Investor entered into a Stockholders’ Agreement with the Company, (iii) the Existing Owners became holders of equity interests in the Company's controlling stockholder, Keane Investor (and holders of Keane Group’s Class B and Class C Units became holders of Class B and Class C Units in Keane Investor) and (iv) the capital stock of the Company consists of (x) common stock, entitled to one vote per share on all matters submitted to a vote of stockholders and (y) undesignated and unissued preferred stock.
(2) Summary of Significant Accounting Policies
(a) Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain amounts reported in the consolidated financial statements. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of property and equipment and intangible assets; allowances for doubtful accounts; inventory reserves; acquisition accounting; contingent liabilities; and the valuation of property and equipment, intangible assets, equity issued as a consideration in the acquisition, unit-based incentive plan awards and derivatives.
(b) Principles of Consolidation
The accompanying consolidated and combined financial statements have been prepared in accordance with U.S. GAAP and include the accounts of Keane Group, Inc. and its consolidated subsidiaries: Keane Group Holdings, LLC, KGH Intermediate Holdco I, LLC, KGH Intermediate Holdco II, LLC, Keane Frac, LP, Keane Frac TX, LLC, Keane Frac ND, LLC, Keane Frac GP, LLC, KS Drilling, LLC and Keane Completions CN Corp.
All intercompany transactions and balances have been eliminated.
78
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(c) Business Combinations
Business combinations are accounted for using the acquisition method of accounting in accordance with ASC 805, “Business Combinations”. The purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Fair value of the acquired assets and liabilities is measured in accordance with the guidance of ASC 850, “Fair Value Measurements”, using discounted cash flows and other applicable valuation techniques. Any acquisition related costs incurred by the Company are expensed as incurred. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill. Fair value of the acquired assets and liabilities is measured in accordance with the guidance of ASC 850, “Fair Value Measurements” using discounted cash flows and other applicable valuation techniques. Operating results of an acquired business are included in our results of operations from the date of acquisition. Refer to Note (3) Acquisitions for discussion of the acquisitions completed during 2017 and 2016.
(d) 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 repurchase agreements and certificates of deposit with an initial term of less than three months.
Net cash received from qualifying asset sale proceeds and insurance recoveries, excluding asset sales related to certain permitted dispositions, of more than $10.0 million, under the New Term Loan Facility (as defined herein), and of more than $25.0 million, under the 2017 ABL Facility (as defined herein), is considered to be restricted. The Company may, at management’s discretion, reinvest any part of such proceeds in assets (other than current assets) useful for its business (in the case of the New Term Loan Facility) and for replacing or repairing the assets in respect of which such proceeds were received (in the case of the 2017 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 New Term Loan Facility or the 2017 ABL Facility.
The Company did not have any qualifying asset sale proceeds that exceeded the dollar thresholds described above for the year ended December 31, 2017. The Company had a qualifying insurance recovery of $0.5 million under the New Term Loan Facility for the year ended December 31,2017. The Company had a qualifying insurance recover of $0.02 million under the 2016 Term Loan Facility for the year ended December 31, 2016 and had qualifying asset sale proceeds of $0.2 million for the year ended December 31, 2015. The Company did not have any restricted cash as of December 31, 2017 and 2016.
(e) Trade Accounts Receivable
Trade accounts receivable are 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 analyzes the need for an allowance for doubtful accounts for estimated losses related to potentially uncollectible accounts receivable on a case by case basis throughout the year. In establishing the required allowance, management considers historical losses, adjusted to take into account current market conditions and the Company’s customers’ financial condition, the amount of receivables in dispute, the current receivables aging and current payment patterns. The Company reserves amounts based on specific identification. Account balances are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Trade accounts receivable were $235.8 million and $65.4 million at December 31, 2017 and December 31, 2016, respectively. As of December 31, 2017 and December 31, 2016, the Company had an allowance for doubtful accounts of $0.5 million and nil, respectively.
79
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(f) Inventories
Inventories are stated at the lower of cost or market (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 and combined statements of operations using the weighted average cost method for all inventories.
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 our 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 not fitting our equipment are written-off.
(g) Revenue Recognition
Revenue from the Company’s Completion Services and Other Services segments are earned and recognized as services are rendered, which is generally on a per stage, daily or hourly rate. All revenue is recognized when persuasive evidence of an arrangement exists, the service is complete, the amount is determinable and collectability is reasonably assured. Contract acquisition and origination costs are expensed as incurred, and are recorded in selling, general and administrative expenses in the consolidated and combined statements of operations. Shipping and handling costs related to customer contracts are charged to cost of services in the consolidated and combined statements of operations. To the extent such costs are billable to the customer, the amounts are recorded as revenue. 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 and combined statements of operations and net cash provided by operating activities in the consolidated and combined statements of cash flows.
Revenue from the Company’s Completion Services and Other Services are recognized as follows:
Completion Services
The Company provides hydraulic fracturing and wireline services pursuant to contractual arrangements, such as term contracts and pricing agreements, or on a spot market basis. Revenue is recognized upon the completion of each job. Once a job has been completed to the customer’s satisfaction, a field ticket is created that includes charges for the service performed and the chemicals and proppant consumed during the course of the service. The field ticket may also include charges for the mobilization of the equipment to the location, which is recognized at the beginning of the job upon arriving on location, additional equipment used on the job, if any, and other miscellaneous items. This field ticket is used to create an invoice, which is sent to the customer upon the completion of each job.
Other Services
The Company provides certain complementary services such as cementing and drilling pursuant to contractual arrangements, such as term contracts. The Company typically charges the customer for the services performed and resources provided on a daily, hourly or per job basis. Jobs for these services are typically short term in nature, lasting anywhere from a few hours to several days. Revenue is recognized upon completion of each day’s work, based upon a completed field ticket. The field ticket includes charges for the services performed and the consumables used during the course of service. The field ticket may also include charges for the mobilization and set-up of equipment, the personnel on the job, any additional equipment used on the job, and other miscellaneous items. The Company typically charges the customer for the services performed and resources provided on a daily basis at agreed-upon spot market rates.
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
We will adopt a new revenue recognition standard effective January 1, 2018 that will supersede existing revenue recognition guidance.
(h) Property and Equipment
Property and equipment, inclusive of equipment under capital 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 bases the estimate of the useful life and salvage value of property and equipment on expected utilization, technological change and effectiveness of maintenance programs. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. Equipment held under capital leases are generally amortized on a straight-line basis over the shorter of the estimated useful life of the asset and the term of the lease.
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.
Major classifications of property and equipment and their respective useful lives are as follows:
Land | Indefinite life |
Building and leasehold improvements | 16 months – 40 years |
Machinery and equipment | 13 months – 10 years |
Office furniture, fixtures and equipment | 3 years – 5 years |
Leasehold improvements are assigned a useful life equal to the term of the related lease.
Depreciation methods, useful lives and residual values are reviewed annually.
(i) 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 increase the efficiency, productivity, functionality or life of a fixed asset by greater than 12 months are capitalized.
(j) Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of the purchase price of a business over the estimated fair value of the identifiable assets acquired and liabilities assumed by the Company. For the purposes of goodwill impairment analysis, the Company evaluates goodwill for impairment annually, as of October 31, or more often as facts and circumstances warrant. When performing impairment assessment, the Company evaluates factors, such as unexpected adverse economic conditions, competition and market changes. Goodwill is allocated to one reporting unit, Completion Services.
In 2016, the Company reassessed its reporting units and performed its goodwill impairment assessment as of October 31, 2016 based on two updated reporting units: Completion Services and Other Services. This is consistent with the Company’s reportable segments, which were reassessed effective January 1, 2016. Completion Services comprises hydraulic fracturing and wireline services, and Other Services segment comprises cementing and drilling services. In 2015, the Company performed its goodwill impairment assessment based on the then applicable reporting units: hydraulic fracturing, wireline and drilling.
81
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Before employing detailed impairment testing methodologies, the Company may first evaluate the likelihood of impairment by considering qualitative factors relevant to each reporting segment, 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. The Company’s goodwill is allocated solely to its Completion Services segment. If the carrying amount of the reportable segment exceeds its fair value, step two in the goodwill impairment test requires goodwill to be written down to its implied fair value through a charge to operating expense based on a hypothetical purchase price allocation method.
In 2017, the Company performed Step 0 of the goodwill impairment assessment for the goodwill associated with the Completion Services reporting unit, by reviewing relevant qualitative factors. The Company determined there were no events that would indicate the carrying amount of its goodwill may not be recoverable, and as such, no impairment charge was recognized. The Company's assessment was based on the following factors: commodity prices have stabilized, the Company continued to experience strong growth throughout 2017 in both revenue and EBITDA, the performance of the Company's stock price subsequent to its IPO, the enactment of the "Tax Relief for Individuals and Families" tax reform legislation and improved market conditions, as evidenced by growth in the U.S. gross domestic product, growth in the average annual return for the S&P 500 and Dow Jones indexes, production cuts by members of the Organization of the Petroleum Exporting Countries ("OPEC") and non-OPEC members and positive trends and forecasts for the oil and gas industry,
No goodwill impairment has been recognized since inception in 2013.
The Company’s indefinite-lived assets consist of the Company’s trade names. The Company assesses its indefinite-lived intangible assets for impairment annually, as of October 31, or whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable.
There was no indefinite-lived asset impairment recognized during 2017, 2016 or 2015.
(k) Long-Lived Assets
The Company assesses its long-lived assets, such as definite-lived intangible assets and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is assessed using undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets. For the Company’s property and equipment, the Company determined the lowest level of identifiable cash flows that are independent of other asset groups to be at the service line level, hydraulic fracturing, wireline, drilling, coiled tubing and cementing, as well as an entity level asset group for assets that do not have identifiable independent cash flows. For the Company’s definite-lived intangible assets, the Company determined each intangible asset that generates identifiable cash flows independent of one another and independent of the other assets in the operating segment with which they are associated. As such, the Company concluded that each intangible asset should be individually assessed for impairment.
Impairments exist when the carrying amount of an asset group exceeds estimates of the undiscounted cash flows expected to result from the use and eventual disposition of the asset group. When alternative courses of action to recover the carrying amount of the asset are under consideration, estimates of future undiscounted cash flows take into account possible outcomes and probabilities of their occurrence. If the carrying amount of the asset is not recoverable based on the estimated future undiscounted cash flows, the impairment loss is measured as the excess of the asset group’s carrying amount over its estimated fair value, such that the asset group’s carrying amount is adjusted to its estimated fair value, with an offsetting charge to operating expense.
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The Company measures the fair value of its property and equipment using the discounted cash flow method or the market approach, 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 acquired fracking fluid software technology using the “income based relief-from-royalty” method and the fair value of its non-compete agreement using “lost income” approach. The expected future cash flows used for impairment reviews and related fair value calculations are based on judgmental assessments of projected revenue growth, fleet count, utilization, gross margin rates, SG&A rates, working capital fluctuations, capital expenditures, discount rates and terminal growth rates.
In 2017, for the Company’s property and equipment and definite-lived intangible assets, the Company determined there were no events that would indicate the carrying amount of these assets may not be recoverable, and as such, no impairment charge was recognized. For the property and equipment and definite-lived intangible assets in each of the asset groups within the Company’s Completion Services segment, the Company’s assessment was based on the following factors: commodity prices have stabilized, market conditions have improved as evidenced by an increase in overall demand and pricing power for the Company’s hydraulic fracturing and wireline services, and the Company experienced strong revenue growth throughout 2017. For the property and equipment and definite-lived intangible asset in each of the asset groups within the Company’s Other Services segment, the Company’s assessment was based on the following factors: at October 31, 2017, the fair values of the drilling services’ property and equipment and cementing services’ property and equipment, acquired as a result of the acquisition of Trican’s U.S. Operations, were reflective of the deteriorated market conditions experienced from late 2014 through the first quarter of 2016. From the second quarter of 2016, oil and natural gas prices and rig count estimates have improved significantly, a trend which Management believes will continue throughout 2018. Also at October 31, 2017, the fair values of the cementing services' property and equipment and definite-lived customer contract, acquired as a result of the acquisition of RockPile, were recorded at appraised fair market only four months prior to the Company's impairment analysis, and the Company has plans to ramp up its idle cementing assets in 2018, in response to strong customer demand.
In 2016, for the Company’s definite-lived assets, the Company recorded a $0.2 million of impairment charge relating to a non-compete agreement in the Other Services segment, because there were insufficient forecasted cash flows to support this intangible asset.
In 2015, the continued fall in commodity prices was deemed a triggering event, and the Company tested its long-lived assets for impairment as of October 31, 2015. The Company recorded a $2.4 million impairment on its definite-lived customer contracts, as a result of the loss of certain customer relationships related to the Company’s acquisition of Ultra Tech Frac Services, LLC (“UTFS”). The Company recorded a $1.2 million impairment, on its trade name, under the Other Services segment, as it was determined the fair value of the trade name based on the net present value of future cash flows was less than the net book value as of the period then ended. The Company also recorded a $0.3 million impairment on its drilling rig fleet, as the continued fall in commodity prices resulted in a decline in the anticipated utilization rates for the drilling rig fleet, indicating these long-lived assets may not be recoverable.
See Note (4) Intangible Assets and Note for further details on the Company's impairment of its intangible assets.
Amortization on definite-lived intangible assets is calculated on the straight-line method over the estimated useful lives of the assets.
(l) Derivative Instruments and Hedging Activities
The Company is exposed to certain risks relating to its ongoing business operations. The Company utilizes interest rate derivatives to manage interest rate risk associated with its floating-rate borrowings. The Company recognizes all derivative instruments as either assets or liabilities on the balance sheet at their respective fair values. For derivatives designated in hedging relationships, changes in the fair value are either offset through earnings
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
against the change in fair value of the hedged item attributable to the risk being hedged or recognized in accumulated other comprehensive income 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 (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 income 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 effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the cash flow hedge is de-designated because a forecasted transaction is not probable of occurring or management determines to remove the designation of the cash flow hedge. 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 balance sheet and recognizes any subsequent changes in its fair value in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and recognizes immediately in earnings gains and losses related to the hedging relationship that were accumulated in other comprehensive income.
(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 loss.
(n) Fair Value Measurement
Fair value represents the price that would be received to sell the asset or paid to transfer the 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:
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
• | 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.
(o) Employee Benefits and Postemployment Benefits
Contractual termination benefits are payable when employment is terminated due to an event specified in the provisions of a social/labor plan, state or federal law. Accordingly, in situations where minimum statutory termination benefits must be paid to the affected employees, the Company records employee severance costs associated with these activities in accordance with ASC 712, Compensation—Nonretirement Post-Employment Benefits. In all other situations where the Company pays termination benefits, including supplemental benefits paid in excess of statutory minimum amounts and benefits offered to affected employees based on management’s discretion, the Company records these termination costs in accordance with ASC 420, Exit or Disposal Cost Obligations. A liability is recognized for one time termination benefits when the Company is committed to i) make payments and the number of affected employees and the benefits received are known to both parties, and ii) terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal and can reasonably estimate such amount.
(p) Stock-based compensation
The Company recognizes compensation expense for restricted stock awards, restricted stock units to be settled in common stock (“RSUs”) and non-qualified stock options (“stock options”) based on the fair value of the awards at the date of grant. The fair value of restricted stock awards and RSUs is determined based on the number of shares or RSUs granted and the closing price of the Company's common stock on the date of grant. The fair value of stock options is determined by applying the Black-Scholes model to the grant date market value of the underlying common shares of the Company. As a newly established public company, the Company's attrition rate for key management personnel is insignificant. The Company has elected to recognize forfeiture credits for these awards as they are incurred, as this method better reflects actual stock-based compensation expense. Restricted stock awards and RSUs are not considered issued and outstanding for purposes of earnings per share calculations until vested.
Compensation expense from time-based restricted stock awards, RSUs and stock options is amortized on a straight-line basis over the requisite service period, which is generally the vesting period.
Deferred compensation expense associated with liability based awards, such as deferred stock awards that are expected to settle with the issuance of a variable number of shares based on a fixed monetary amount at inception, is recognized at the fixed monetary amount at inception and is amortized on a straight-line basis over the requisite service period, which is generally the vesting period. Upon settlement, the holders receive an amount of common stock equal to the fixed monetary amount at inception, based on the closing price of the Company's stock on the date of settlement.
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Tax deductions on the stock-based compensation awards will not be 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 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 discretely in the period in which they occur. The cash flows resulting from any excess tax benefit will be classified as financing cash flows.
The Company provides its employees with the election to settle the income tax obligations arising from the vesting of their restricted or deferred stock-based compensation awards by the Company 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.
For additional information, see Note (12) (Equity-Based Compensation).
(q) Leases
The Company leases certain facilities and equipment used in its operations. The Company evaluates and classifies its leases as operating or capital leases for financial reporting purposes. Assets held under capital leases are included in property and equipment. Operating lease expense is recorded on a straight-line basis over the lease term. Landlord incentives are recorded as deferred rent and amortized as reductions to lease expense on a straight-line basis over the life of the applicable lease.
(r) Research and development costs
Research and development costs are expensed as incurred. Research and development costs incurred directly by the Company were $3.7 million, $2.2 million and nil for the years ended December 31, 2017, 2016 and 2015, respectively.
(s) Taxes
Upon consummation of the Organizational Transactions and the IPO, the Company became subject to U.S. federal income taxes. A provision for U.S. federal income tax has been provided in the consolidated and combined financial statements for the year ended December 31, 2017.
See Note (17) (Income Taxes) for a detailed discussion of the Company's taxes and activities thereof during the year ended December 31, 2017.
In addition, the Company has a Canadian subsidiary, which is treated as a corporation for Canadian federal and provincial tax purposes. For Canadian tax purposes, the Company is subject to foreign income tax.
The Company is responsible for certain state income and franchise taxes, which include Pennsylvania, Texas and New York. These amounts are reflected as selling, general and administrative expense in the consolidated financial statements of the Company.
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. 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 income in the period that includes the enactment date.
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(t) Equity-method investments
Investments in non-controlled entities over which the Company has the ability to exercise significant influence over the non-controlled entities' operating and financial policies are accounted for under the equity-method. Under the equity-method, the investment in the non-controlled entity is initially recognized at cost and subsequently adjusted to reflect the Company's share of the entity's income (losses), any dividends received by the Company and any other-than-temporary impairments. Investments accounted for under the equity-method are presented within other noncurrent assets in the consolidated and combined balance sheets.
As of December 31, 2017, the Company has recognized $0.6 million for its only equity-method investment.
(u) Pro-forma earnings per unit
The earnings per unit amounts have been computed to give effect to the Organizational Transactions, as if they had occurred at the beginning of the earliest period presented, including the limited liability company agreement of Keane Investor to, among other things, exchange all of the pre-existing membership interests of the Company for the newly-created ownership interests for common stock of KGI. The computations of earnings per unit do not consider the 15,700,000 shares of common stock newly-issued by KGI to investors in the IPO.
(3) Acquisitions
(a) Trican
On March 16, 2016, the Company acquired the majority of the U.S. assets and assumed certain liabilities of Trican Well Service, L.P. (the “Acquired Trican Operations”), for total consideration of $248.1 million, comprised of $199.4 million in cash, $6.0 million in adjustments pursuant to terms of the acquisition agreement to Trican and $42.7 million in Class A and C Units in the Company (the “Trican Transaction”).
The Company accounted for the acquisition of the Acquired Trican Operations using the acquisition method of accounting. Assets acquired and liabilities assumed in connection with the acquisition have been recorded based on their fair values. The Company finalized the purchase price allocation in March 2017 and recorded certain measurement period adjustments during the quarter ended March 31, 2017.
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The following table summarizes the fair value of the consideration transferred for the acquisition of the Acquired Trican Operations and the final allocation of the purchase price to the fair values of the assets acquired and liabilities assumed at the acquisition date:
Total Purchase Consideration: | ||||||||||||
(Thousands of Dollars) | ||||||||||||
Preliminary Purchase Price Allocation | Adjustments | Final Purchase Price Allocation | ||||||||||
Cash consideration | $ | 199,400 | $ | — | $ | 199,400 | ||||||
Net working capital purchase price adjustment | 6,000 | — | 6,000 | |||||||||
Class A and C Units issued | 42,669 | — | 42,669 | |||||||||
Total consideration | $ | 248,069 | $ | — | $ | 248,069 | ||||||
Accounts receivable | $ | 37,377 | $ | — | $ | 37,377 | ||||||
Inventories | 20,006 | (202 | ) | 19,804 | ||||||||
Prepaid expenses | 7,170 | — | 7,170 | |||||||||
Property and equipment | 205,546 | (413 | ) | 205,133 | ||||||||
Intangible assets | 3,880 | — | 3,880 | |||||||||
Total identifiable assets acquired | 273,979 | (615 | ) | 273,364 | ||||||||
Accounts payable | (12,630 | ) | 469 | (12,161 | ) | |||||||
Accrued expenses | (9,524 | ) | (9,524 | ) | ||||||||
Current maturities of capital lease obligations | (1,594 | ) | — | (1,594 | ) | |||||||
Capital lease obligations, less current maturities | (2,386 | ) | — | (2,386 | ) | |||||||
Other non-current liabilities | (1,372 | ) | — | (1,372 | ) | |||||||
Total liabilities assumed | (27,506 | ) | 469 | (27,037 | ) | |||||||
Goodwill | 1,596 | 146 | 1,742 | |||||||||
Total purchase price consideration | $ | 248,069 | $ | — | $ | 248,069 | ||||||
Goodwill is calculated as the excess of the consideration transferred over the fair value of the net assets acquired. The goodwill is primarily attributable to expected synergies and the assembled workforce. The entire amount of the goodwill was allocated to the Completion Services segment for the purposes of evaluating future goodwill impairment. A portion of the Goodwill is tax deductible.
Intangible assets related to the acquisition of Trican’s U.S. Operations consisted of the following:
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Estimated useful life (in Years) | Fair value (Thousands of Dollars) | |||||
Customer contracts | 1.8 | $ | 3,500 | |||
Non-compete agreements | 2.0 | 50 | ||||
Fracking Fluids | 4.8 | 330 | ||||
Total intangible assets | $ | 3,880 | ||||
Weighted average life of finite-lived intangibles | 2.1 | |||||
For the valuation of the customer relationship intangible asset, management used the income based “with and without” method, which is a specific application of the discounted cash flow method. Under this method, the Company calculated the present value of the after-tax cash flows expected to be generated by the business with and without the customer relationships. The forecasted cash flows in the “without” scenario included the cost of reestablishing customer relationships and were discounted at the Company’s cost of equity.
The non-compete agreements intangible asset was valued using the “lost income” approach including the probability of competing. Estimated cash flows were discounted at the weighted average cost of capital due to the low risk profile of this contract. The term of the non-compete agreement is two years from the closing date of the Trican Transaction.
As part of the acquisition of Trican’s U.S. Operations, the Company obtained the right to use certain proprietary fracking-related fluids, including MVP FracTM and TriVertTM (the “Fracking Fluids”), for its own pressure pumping services to its customers. The Fracking Fluids were valued using the “income-based relief-from-royalty” method. Under this method, revenues expected to be generated by the technology are multiplied by a selected royalty rate. The estimated after-tax royalty revenue stream is then discounted to present value using the Company’s cost of equity.
The determination of the useful lives was based upon consideration of market participant assumptions and transaction specific factors.
The remaining amount of working capital purchase adjustment of $1.5 million, which was recorded as a payable on the date of acquisition, was reversed into income on the consolidated and combined statements of operations as part of the gain on the Trican indemnification settlement. This did not result in any adjustment to the purchase accounting, as the settlement occurred after the twelve-month measurement period was completed. See Note (18) (Commitments and Contingencies) for further details.
The following unaudited pro forma information assumes the acquisition of the Acquired Trican Operations occurred on January 1, 2015. The pro forma information presented below is for illustrative purposes only and does not reflect future events that occurred after December 31, 2016, or any operating efficiencies or inefficiencies that resulted from the acquisition of the Acquired Trican Operations. The information is not necessarily indicative of the results that would have been achieved had the Company controlled the Acquired Trican Operations during the period presented. The pro forma information does not include any integration or transactions costs that the Company incurred related to the acquisition in the periods following the period presented.
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(Thousands of Dollars) | |||||
Unaudited | |||||
Year Ended December 31, 2016 | |||||
Revenue | $ | 464,036 | |||
Net Income | $ | (217,313 | ) | ||
The Company’s consolidated and combined statement of operations and comprehensive income (loss) include revenue (unaudited) of $191.0 million and gross profit (unaudited) of $10.4 million from the Acquired Trican Operations from the date of acquisition on March 16, 2016 to December 31, 2016.
(b) RockPile
On July 3, 2017 (the “RockPile Closing Date” or the “RockPile Acquisition Date”), the Company acquired 100% of the outstanding equity interests of RockPile Energy Services, LLC and its subsidiaries (“RockPile”) from RockPile Energy Holdings, LLC (the “Principal Seller”). RockPile was a multi-basin provider of integrated well completion services in the United States, whose primary service offerings included hydraulic fracturing, wireline perforation and workover rigs. Through this acquisition, the Company deepened its existing presence in the Permian Basin and Bakken Formation and further solidified its position as one of the largest pure-play providers of integrated well completion services in the United States. This acquisition also enabled the Company to expand certain service offerings and capabilities within its Other Services segment.
The acquisition of RockPile was completed for cash consideration of $116.6 million, subject to post-closing adjustments, 8,684,210 shares of the Company’s common stock (the “Acquisition Shares”) and contingent value rights, as described below. The fair value of the Acquisition Shares, which is recorded in owners' equity in the consolidated and combined balance sheet, was calculated using the closing price of the Company's common stock on July 3, 2017, of $16.29, discounted by 7.9% to reflect the lack of marketability resulting from the 180-day lock-up period during which resale of the Acquisition Shares is restricted.
Subject to the terms and conditions of the Contingent Value Rights Agreement (the “CVR Agreement”) by and among the Company, the Principal Seller and Permitted Holders (as defined in the CVR Agreement and, together with the Principal Seller, the “RockPile Holders”), the Company agreed to pay contingent consideration (the “Aggregate CVR Payment Amount”), which would equal the product of the Acquisition Shares held by RockPile on April 10, 2018 and the CVR Payment Amount, provided that the CVR Payment Amount does not exceed $2.30. The CVR Payment Amount is the difference between (a) $19.00 and (b) the arithmetic average of the dollar volume weighted average price of the Company’s common stock on each trading day for twenty (20) trading days randomly selected by the Company during the thirty (30) trading day period immediately preceding the last business day prior to April 3, 2018 (the “Twenty-Day VWAP”). The Aggregate CVR Payment Amount shall be reduced on a dollar for dollar basis if the sum of the following exceeds $165.0 million:
• | (i) the aggregate gross proceeds received in connection with the resale of any Acquisition Shares, plus |
• | (ii) the product of the number of Acquisition Shares held by the RockPile Holders on April 10, 2018 and the Twenty-Day VWAP, plus |
• | (iii) the Aggregate CVR Payment Amount. |
As of December 31, 2017, the Company has recognized a liability of $6.7 million for the Aggregate CVR Payment Amount, which is recorded in current liabilities in the consolidated and combined balance sheet. This estimate is sensitive to change based on the historical and implied volatility in the price of the Company's common stock.
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
On August 31, 2017, the Company delivered to the Principal Seller a closing statement with its determination of the final closing cash purchase price. This determination included the Company's calculation of working capital deficit, as compared to the Principal Seller's estimated working capital deficit used in determining the cash consideration paid on the RockPile Closing Date. Resolution of the differences between the Company's calculation and the Principal Seller's calculation of the working capital deficit has been completed and recorded as adjustments to our preliminary purchase accounting allocation, with no adverse impact on the Company's financial position.
The Company accounted for the acquisition of RockPile using the acquisition method of accounting. Assets acquired, liabilities assumed and equity issued in connection with the acquisition were recorded based on their fair values. The purchase accounting is subject to the twelve-month measurement adjustment period to reflect any new information that may be obtained in the future about facts and circumstances that existed as of the RockPile Acquisition Date that, if known, would have affected the measurement of the amounts recognized as of that date.
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The following tables summarize the fair value of the consideration transferred for the acquisition of RockPile and the preliminary allocation of the purchase price to the fair values of the assets acquired, liabilities assumed and equity consideration at the RockPile Acquisition Date:
Total Purchase Consideration: | Preliminary Purchase Price Allocation | Adjustments | Purchase Price Allocation as of December 31, 2017 | |||||||||
(Thousands of Dollars) | ||||||||||||
Cash consideration | $ | 123,293 | $ | (6,717 | ) | $ | 116,576 | |||||
Equity consideration | 130,290 | — | 130,290 | |||||||||
Contingent consideration | 11,962 | — | 11,962 | |||||||||
Less: Cash acquired | (20,379 | ) | 20,379 | — | ||||||||
Total purchase consideration, less cash acquired | $ | 245,166 | $ | 13,662 | $ | 258,828 | ||||||
Trade and other accounts receivable | $ | 57,117 | $ | 1,588 | $ | 58,705 | ||||||
Inventories, net | 2,853 | 138 | 2,991 | |||||||||
Prepaid and other current assets | 13,630 | (717 | ) | 12,913 | ||||||||
Property and equipment, net | 157,654 | 8,653 | 166,307 | |||||||||
Intangible assets | 20,967 | (1,267 | ) | 19,700 | ||||||||
Notes receivable | 250 | (250 | ) | — | ||||||||
Other noncurrent assets | 363 | (57 | ) | 306 | ||||||||
Total identifiable assets acquired | 252,834 | 8,088 | 260,922 | |||||||||
Accounts payable | (38,999 | ) | 16,242 | (22,757 | ) | |||||||
Accrued expenses | (22,161 | ) | (15,924 | ) | (38,085 | ) | ||||||
Deferred revenue | (23,053 | ) | 698 | (22,355 | ) | |||||||
Other non-current liabilities | (827 | ) | (2,412 | ) | (3,239 | ) | ||||||
Total liabilities assumed | (85,040 | ) | (1,396 | ) | (86,436 | ) | ||||||
Goodwill | 77,372 | 6,970 | 84,342 | |||||||||
Total purchase price consideration | $ | 245,166 | $ | 13,662 | $ | 258,828 | ||||||
Goodwill is calculated as the excess of the consideration transferred over the fair value of the net assets acquired. The goodwill in this acquisition is primarily attributable to expected synergies and new customer relationships and was allocated to the Completions segment. All the goodwill recognized for the acquisition of RockPile is tax deductible with an amortization period of 15 years.
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Intangible assets related to the acquisition of RockPile consisted of the following:
(Thousands of Dollars) | ||||||
Weighted average remaining amortization period (Years) | Gross Carrying Amounts | |||||
Customer contracts | 10.8 | $ | 19,700 | |||
Total | $ | 19,700 | ||||
For the valuation of the customer relationship intangible asset within the Completions Services segment, management used the income based multi-period excess earning method, which utilized contributory asset charges. Under this method, the Company calculated cash flows derived from the customer relationships and then deducted portions of the cash flow that could be attributed to supporting assets that contribute to the generation of said cash flows. Estimated cash flows were discounted at the weighted average cost of capital, adjusted for an intangible asset risk component. This premium reflects increased risk related to the specific intangible asset as compared to the Company as a whole.
For the valuation of the customer relationship intangible asset within the Other Services segment, management used the income based “with and without” method, which is a specific application of the discounted cash flow method. Under this method, the Company calculated the present value of the after-tax cash flows expected to be generated by the business with and without the customer relationships. The forecasted cash flows in the “without” scenario included the cost of reestablishing customer relationships and were discounted at the Company’s weighted average cost of capital, adjusted for an intangible asset risk component.
The following transactions were recognized separately from the acquisition of assets and assumptions of liabilities in the acquisition of RockPile. Deal costs consist of legal and professional fees and pre-merger notification fees. Integration costs consist of expenses incurred to integrate RockPile's operations with that of the Company, including retention bonuses and severance payments. Harmonization costs consist of expenses incurred in connection with aligning RockPile's accounting processes and procedures and integrating its enterprise resource planning system with those of the Company. The expenses for all these transactions were expensed as incurred.
(Thousands of Dollars) | ||||||
Transaction Type | Year Ended December 31, 2017 | Location | ||||
Deal costs | $ | 513 | Cost of services | |||
Deal costs | 6,166 | Selling, general and administrative expenses | ||||
Integration | 214 | Cost of services | ||||
Integration | 1,124 | Selling, general and administrative expenses | ||||
Harmonization | 656 | Selling, general and administrative expenses | ||||
$ | 8,673 | |||||
The following combined pro forma information assumes the acquisition of RockPile occurred on January 1, 2016. The pro forma information presented below is for illustrative purposes only and does not reflect future events that may occur after July 2, 2017 or any operating efficiencies or inefficiencies that may result from the acquisition of RockPile. The information is not necessarily indicative of results that would have been achieved had the Company controlled RockPile during the periods presented or the results that the Company will experience going forward. Pro forma net loss for the twelve months ended December 31, 2016 includes $0.8 million of non-recurring
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
retention bonuses associated with the acquisition,which were incurred after the closing and $1.8 million of compensation costs associated with the executives of RockPile whom the Company retained. In addition, the Company incurred $2.2 million of transaction costs that were not reflected in this pro forma financial information, since they were incurred prior to the closing. The pro forma information does not include any remaining future integration costs or transaction costs that the Company may incur related to the acquisition.
(Thousands of Dollars) | ||||||||
Unaudited | ||||||||
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Revenue | $ | 1,732,279 | $ | 543,966 | ||||
Net income (loss) | (49,584 | ) | (206,417 | ) | ||||
Net loss per share (basic and diluted) | $ | (0.44 | ) | $ | (2.36 | ) | ||
Weighted-average shares outstanding | ||||||||
Basic | 111,735 | 87,313 | ||||||
Diluted | 111,735 | 87,313 | ||||||
The Company’s consolidated and combined statement of operations and comprehensive income (loss) includes revenue (unaudited) of $192.2 million and gross profit (unaudited) of $29.8 million, from the RockPile operations, from the date of acquisition on July 3, 2017 to December 31, 2017.
(4) Intangible Assets
The intangible assets balance in the Company’s consolidated and combined balance sheets represents the fair value, net of amortization, as applicable, related to the following:
(Thousands of Dollars) | ||||||||||||||
December 31, 2017 | ||||||||||||||
Weighted average remaining amortization period (Years) | Gross Carrying Amounts | Accumulated Amortization | Net Carrying Amount | |||||||||||
Customer contracts | 9.1 | $ | 68,600 | $ | (23,049 | ) | $ | 45,551 | ||||||
Non-compete agreements | 8.1 | 750 | (360 | ) | 390 | |||||||||
Trade name | Indefinite life | 10,200 | — | 10,200 | ||||||||||
Technology | 2.1 | 3,023 | (1,884 | ) | 1,139 | |||||||||
Total | $ | 82,573 | $ | (25,293 | ) | $ | 57,280 | |||||||
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(Thousands of Dollars) | ||||||||||||||
December 31, 2016 | ||||||||||||||
Weighted average remaining amortization period (Years) | Gross Carrying Amounts | Accumulated Amortization | Net Carrying Amount | |||||||||||
Customer contracts | 8.8 | $ | 52,400 | $ | (20,336 | ) | $ | 32,064 | ||||||
Non-compete agreements | 8.7 | 750 | (288 | ) | 462 | |||||||||
Trade name | 0.9 - Indefinite life | 11,090 | (686 | ) | 10,404 | |||||||||
Technology | 2.3 | 2,324 | (1,239 | ) | 1,085 | |||||||||
Total | $ | 66,564 | $ | (22,549 | ) | $ | 44,015 | |||||||
Amortization expense related to the intangible assets for the years ended December 31, 2017, 2016 and 2015 was $7.1 million, $5.7 million and $4.9 million, respectively.
Amortization for the intangible assets excluding trade name of $10.2 million with indefinite useful life and in process software, over the next five years, is as follows:
Year-end December 31, | (Thousands of Dollars) | |||
2018 | $ | 6,010 | ||
2019 | 5,128 | |||
2020 | 5,041 | |||
2021 | 4,973 | |||
2022 | 4,973 | |||
(5) Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2017, 2016 and 2015 were as follows:
(Thousands of Dollars) | |||
Goodwill as of December 31, 2015 | $ | 48,882 | |
Acquisition of Trican's U.S. Operations | 1,596 | ||
Goodwill as of December 31, 2016 | 50,478 | ||
Acquisitions | 84,489 | ||
Goodwill as of December 31, 2017 | $ | 134,967 | |
The changes in the carrying amount of goodwill for the year ended December 31, 2017 consisted of $0.2 million of purchase price adjustments related to the acquisition of the Acquired Trican Operation and $84.3 million recognized in connection with the acquisition of RockPile. These additions to goodwill were allocated to the Completion Services segment. Goodwill recognized in connection with the acquisition of Trican's U.S. Operations was allocated to the Completion Services segment. For additional information, see Note (3) (Acquisitions). There were no triggering events identified and no impairment recorded since inception and for the years ended December 31, 2017, 2016 and 2015.
95
(6) Inventories, net
Inventories, net, consisted of the following at December 31, 2017 and December 31, 2016:
(Thousands of Dollars) | ||||||||
December 31, 2017 | December 31, 2016 | |||||||
Sand, including freight | $ | 11,551 | $ | 6,520 | ||||
Chemicals and consumables | 7,940 | 4,774 | ||||||
Materials and supplies | 13,946 | 4,597 | ||||||
Total inventory, net | $ | 33,437 | $ | 15,891 | ||||
Inventories are reported net of obsolescence reserves of $0.3 million and $0.1 million as of December 31, 2017 and 2016 , respectively. The Company recognized $0.3 million, $0.02 million and $0.05 million of obsolescence expense during the years ended December 31, 2017, 2016 and 2015.
(7) Property and Equipment, net
Property and Equipment, net consisted of the following at December 31, 2017 and December 31, 2016:
(Thousands of Dollars) | ||||||||
December 31, 2017 | December 31, 2016 | |||||||
Land | $ | 5,186 | $ | 5,166 | ||||
Building and leasehold improvements | 30,322 | 30,750 | ||||||
Office furniture, fixtures and equipment | 6,338 | 4,780 | ||||||
Machinery and equipment | 773,516 | 514,017 | ||||||
815,362 | 554,713 | |||||||
Less accumulated depreciation | (372,617 | ) | (261,292 | ) | ||||
Construction in progress | 25,255 | 788 | ||||||
Total property and equipment, net | $ | 468,000 | $ | 294,209 | ||||
The machinery and equipment balance as of December 31, 2017 and 2016 included $10.1 million of hydraulic fracturing equipment under capital lease. The machinery and equipment balance as of December 31, 2017 and 2016 also included approximately $5.1 million and $2.4 million, respectively, of vehicles under capital leases. Accumulated depreciation for the hydraulic fracturing equipment under capital leases was $8.3 million and $5.7 million as of December 31, 2017 and 2016, respectively. Accumulated depreciation for the vehicles under capital leases was $1.6 million and $0.6 million as of December 31, 2017 and 2016, respectively.
All (gains) and losses are presented within (gain) loss on disposal of assets in the consolidated and combined statements of operations. The following summarizes the proceeds received and (gains) losses recognized on the disposal of certain assets the years ended December 31, 2017, 2016 and 2015:
During the year ended December 31, 2017, the Company divested the following assets:
• | Idle facility in Searcy, Arkansas, acquired in the acquisition of the Acquired Trican Operations, divested for net proceeds of $0.5 million and a net loss of $0.6 million, within the Corporate segment; |
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
• | Idle facility in Woodward, Oklahoma, acquired in the acquisition of the Acquired Trican Operations, divested for net proceeds of $2.4 million and a net gain of $0.5 million, within the Completion Services segment; |
• | Air compressor units, divested for net proceeds of $0.9 million and a net gain of $0.9 million, within the Other Services segment; |
• | Twelve workover rigs acquired in the acquisition of RockPile, divested for net proceeds of $16.7 million with no (gain) or loss, within the Other Services segment; |
• | Hydraulic fracturing operating equipment, divested for a net loss of $0.6 million, within the Completions segment; and |
• | Idle coiled tubing assets, divested for net proceeds of $10.0 million and a net gain of $3.5 million, within the Other Services segment. |
During the year ended December 31, 2016, the Company also divested various immaterial assets for net proceeds of $0.7 million and a net gain of $0.4 million, primarily within the Completions Services segment.
During the year ended December 31, 2015, the Company divested of certain drilling assets and vehicles for net proceeds of $1.3 million and a net gain of $0.3 million, primarily within the Other Services segment.
(8) Long-Term Debt
Long-term debt at December 31, 2017 and December 31, 2016 consisted of the following:
(Thousands of Dollars) | ||||||||
December 31, 2017 | December 31, 2016 | |||||||
New Term Loan Facility | $ | 283,202 | $ | — | ||||
Senior Secured Notes | — | 190,000 | ||||||
2016 Term Loan Facility | — | 98,103 | ||||||
Capital leases | 7,918 | 8,075 | ||||||
Less: Unamortized debt discount and debt issuance costs | (8,173 | ) | (18,353 | ) | ||||
Total debt, net of unamortized debt discount and debt issuance costs | 282,947 | 277,825 | ||||||
Less: Current portion | (4,436 | ) | (5,145 | ) | ||||
Long-term debt, net of unamortized debt discount and debt issuance costs, including capital leases | $ | 278,511 | $ | 272,680 | ||||
2016 ABL Facility
On March 16, 2016, KGH Intermediate Holdco I, LLC, Holdco II, Keane Frac, LP, KS Drilling, LLC, Keane Frac ND, LLC, Keane Frac TX, LLC and Keane Frac GP, LLC entered into an amendment which modified their existing revolving credit and security agreement (as amended, the “2016 ABL Facility”) with certain financial institutions (collectively, the “2016 ABL Lenders”) and PNC Bank, National Association (“PNC Bank”), as agent for the 2016 ABL Lenders.
On February 17, 2017, the Company replaced its 2016 ABL Facility with the 2017 ABL Facility (as described below).
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The Company expensed $0.3 million in deferred financing costs related to the proportionate decrease in the borrowing capacity with PNC Bank under the new 2017 ABL Facility. The remaining $1.0 million in deferred financing costs related to the 2016 ABL Facility is being amortized over the life of the 2017 ABL Facility.
2017 ABL Facility
On February 17, 2017, Keane Group Holdings, LLC, Keane Frac, LP and KS Drilling, LLC (together with Keane Group Holdings, LLC, Keane Frac, LP and each other person that becomes an ABL Borrower under the 2017 ABL Facility in accordance with the terms thereof, collectively, the “ABL Borrowers”) and the ABL Guarantors (as defined below) entered into an asset-based revolving credit agreement (the “February 2017 ABL Facility”) with each lender from time to time party thereto (the “2017 ABL Lenders”) and Bank of America, N.A., as administrative agent and collateral agent. The 2017 ABL Facility replaced the 2016 ABL Facility, which agreement was terminated in connection with the effectiveness of the 2017 ABL Facility. No early termination fees were incurred by the Company in connection with such termination. On December 22, 2017, KGI and certain of its subsidiaries amended and restated the asset-based revolving credit agreement governing the February 2017 ABL Facility (the "Amended 2017 ABL Facility" and together with the February 2017 ABL Facility, the "2017 ABL Facility") to, among other things, increase by $150.0 million the total amount of aggregate commitments by the lenders party thereto.
The 2017 ABL Facility provides for a $300.0 million revolving credit facility (with a $20.0 million subfacility for letters of credit), subject to a Borrowing Base (as defined below). In addition, subject to approval by the applicable lenders and other customary conditions, the 2017 ABL Facility allows for an increase in commitments of up to $150.0 million. Loans arising under the initial commitments of the 2017 ABL Facility, unless extended, mature on December 22, 2022. The loans arising under any tranche of extended loans or additional commitments mature as specified in the applicable extension amendment or increase joinder, respectively.
Amounts outstanding under the 2017 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%, 1.00%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 0.75% or (z) if the average excess availability is greater than or equal to 66%, 0.50%, or (b) the adjusted London Interbank Offered Rate (“LIBOR”) rate for such interest period, plus an applicable margin equal to (x) if the average excess availability is less than 33%, 2.00%, (y) if the average excess availability is greater than or equal to 33% but less than 66%, 1.75% or (z) if the average excess availability is greater than or equal to 66%, 1.50%. The average excess availability is set on the first day of each full fiscal quarter ending after December, 22, 2017. On or after June 22, 2018, at any time when Consolidated EBITDA (as defined herein) as of the then most recently ended four fiscal quarters for which financial statements are required to be delivered is greater than or equal to $250.0 million, the applicable margin will be reduced by 0.25%; provided that if Consolidated EBITDA is less than $250.0 million as of a later four consecutive fiscal quarters, the applicable margin will revert to the levels set forth above. “Consolidated EBITDA,” generally, is defined as net income plus reductions to net income attributable to interest, taxes, depreciation and amortization and certain other non-cash charges, including, subject to certain limitations, the addition of run-rate cost savings, operating expense reductions, restructuring charges and expenses and cost saving synergies, and acquisition, integration and divestiture costs and fleet commissioning costs. Following an event of default, the 2017 ABL Facility bears interest at the rate otherwise applicable to such loans at such time plus an additional 2.00% per annum during the continuance of such event of default, and the letter of credit fees increase by 2.00%.
The amount of loans and letters of credit available under the 2017 ABL Facility is limited to, at any time of calculation, a borrowing base (the “Borrowing Base”) in an amount equal to (a) 85% multiplied by the amount of eligible billed accounts; plus (b) 80% multiplied by the amount of eligible unbilled accounts; provided, that the amount attributable to clause (b) may not exceed 20% of the borrowing base (after giving effect to any reserve, this limitation and the limitation set forth in the proviso in clause (c)); plus (c) the lesser of (i) 70% of the cost and (ii) 85% of the appraised value of eligible inventory and eligible frac iron; provided, that the amount attributable to
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
clause (c) may not exceed 15% of the borrowing base (after giving effect to any reserve, this limitation and the limitation set forth in the proviso in clause (b)); minus (d) the then applicable amount of all reserves.
Subject to certain exceptions, as set forth in the definitive documentation for the 2017 ABL Facility, the obligations under the 2017 ABL Facility are (a) secured by a first-priority security interest in and lien on substantially all of the accounts receivable, inventory, and frac iron equipment; certain other assets and property related thereto, including chattel paper, certain investment property, documents, letter of credit rights, payment intangibles, general intangibles, commercial tort claims, books and records and supporting obligations of the Company and its subsidiaries that are ABL Borrowers or ABL Guarantors under the 2017 ABL Facility (collectively, the “2017 ABL Facility Priority Collateral”) and (b) subject to certain exceptions, secured on a second-priority security interest in and lien on substantially all of the assets of KGI and the ABL Guarantors to the extent not constituting 2017 ABL Facility Priority Collateral.
Subject to certain exceptions as set forth in the definitive documentation for the 2017 ABL Facility, the amounts outstanding under the 2017 ABL Facility are guaranteed by KGI, KGH Intermediate Holdco I, LLC, Holdco II, Keane Frac GP, LLC, each ABL Borrower (other than with respect to its own obligations) and each subsidiary of Keane Group, Inc. that will be required to execute and deliver a facility guaranty after February 17, 2017 (collectively, the “ABL Guarantors”).
The 2017 ABL Facility contains various affirmative and negative covenants (in each case, subject to customary exceptions as set forth in the definitive documentation for the 2017 ABL Facility), including a financial covenant, which provides that (a) if any event of default is occurring and continuing, (b) if no loan or letter of credit (other than any letter of credit that has been cash collateralized) is outstanding, liquidity is less than the greater of (i) 10% of the lesser of (x) the commitments of the 2017 ABL Lenders, which as of December 31, 2017 was $300.0 million, and (y) the Borrowing Base, at any time of determination (the “Loan Cap”) and (ii) $20.0 million at any time or (c) if any loan or letter of credit (other than any letter of credit that has been cash collateralized) is outstanding, excess availability is less than the greater of (i) 10% of the Loan Cap and (ii) $20.0 million at any time, then the consolidated fixed charge coverage ratio, as of the last day of the most recently completed four consecutive fiscal quarters for which financial statements were required to have been delivered, may not be lower than 1.0:1.0. This financial covenant will remain in effect until the thirtieth consecutive day that all such triggers no longer exist.
In connection with the February 2017 ABL Facility and the Amended 2017 ABL Facility in December 2017, the Company incurred $4.7 million of debt issuance costs during the year ended December 31, 2017. See “Deferred Financing Costs” below for discussion of unamortized debt issuance costs as of December 31, 2017.
There were no amounts outstanding under the 2017 ABL Facility as of December 31, 2017. The Company's availability under the 2017 ABL Facility was $199.7 million as of December 31, 2017.
2016 Term Loan Facility
On March 16, 2016, KGH Intermediate Holdco I, LLC, Holdco II and Keane Frac, LP, entered into a credit agreement (as amended, the “2016 Term Loan Facility”) with certain financial institutions (collectively, the “2016 Term Lenders”) and CLMG Corp., as administrative agent for the 2016 Term Lenders. The 2016 Term Loan Facility provided for a $100.0 million term loan. The 2016 Term Loan Facility was prepaid in full on January 25, 2017, in connection with the IPO. The Company paid a prepayment premium of $13.8 million.
The Company accounted for this transaction as an early debt extinguishment and expensed $8.2 million in deferred financing costs associated with the 2016 Term Loan Facility.
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
New Term Loan Facility
On March 15, 2017, Keane Group Holdings, LLC, Keane Frac, LP and KS Drilling, LLC (together with Keane Group Holdings, LLC, Keane Frac, LP and each other person that becomes a 2017 Term Loan Borrower under the 2017 Term Loan Facility in accordance with the terms thereof, collectively, the “2017 Term Loan Borrowers”) and the 2017 Term Loan Guarantors (as defined below) entered into a term loan agreement (the “2017 Term Loan Facility”) with each lender from time to time party thereto and Owl Rock Capital Corporation (“Owl Rock”), as administrative agent and collateral agent.
On July 3, 2017, the 2017 Term Loan Borrowers and the 2017 Term Loan Guarantors entered into an incremental term loan facility (the “2017 Incremental Term Loan Facility” and, together with the 2017 Term Loan Facility, collectively, the “New Term Loan Facility”) with each of the incremental lenders party thereto, each of the existing lenders party thereto and Owl Rock, as administrative agent and collateral agent.
The 2017 Term Loan Facility provides for a $150.0 million initial term loan facility, and the 2017 Incremental Term Loan Facility provides for a $135.0 million term loan facility (collectively, the “Term Loans”). In addition, subject to certain customary conditions, as of July 3, 2017, the New Term Loan Facility allows for additional incremental term loans in an amount equal to the sum of (a) $50.0 million (less certain amounts in connection with permitted notes and subordinated indebtedness), plus (b) an unlimited amount, subject to, in the case of subclause (b), immediately after giving effect thereto, the total net leverage ratio being less than 1.75:1.00.
The Term Loans bear interest at a rate per annum equal to, at Keane Group Holdings, LLC's option, (a) the base rate plus 6.25%, or (b) the adjusted LIBOR rate for such interest period (subject to a 1.00% floor) plus 7.25%. Following an event of default, the Term Loans bear interest at the rate otherwise applicable to such Term Loans at such time plus an additional 2.00% per annum during the continuance of such event of default. The Term Loans mature on August 18, 2022 or, if earlier, the stated maturity date of any other term loans or term commitments. Subject to certain exceptions as set forth in the definitive documentation for the New Term Loan Facility, the obligations under the New Term Loan Facility are secured by (a) a first-priority security interest in and lien on substantially all of the assets of the 2017 Term Loan Borrowers and the 2017 Term Loan Guarantors to the extent not constituting 2017 ABL Facility Priority Collateral and (b) a second-priority security interest in and lien on the 2017 ABL Facility Priority Collateral.
Subject to certain exceptions as set forth in the definitive documentation for the New Term Loan Facility, the amounts outstanding under the New Term Loan Facility are guaranteed by KGI, KGH Intermediate Holdco I, LLC, Holdco II, Keane Frac GP, LLC, each 2017 Term Loan Borrower (other than with respect to its own obligations) and each subsidiary of Keane Group, Inc. that will be required to execute and deliver a facility guaranty after March 15, 2017 (collectively, the “2017 Term Loan Guarantors”).
The New 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 New Term Loan Facility), including a financial covenant, which provides that, as of the last day of any month, the sum of (a) unrestricted cash and cash equivalents of the 2017 Term Loan Borrowers and 2017 Term Loan Guarantors that are deposited in blocked accounts (to the extent required to be subject to blocked account agreements under the New Term Loan Facility) and (b) the aggregate principal amount that is available for borrowing under the 2017 ABL Facility, may not be less than $35.0 million. The Company was in compliance with all covenants under the New Term Loan Facility as of December 31, 2017.
In connection with the initial borrowings under the 2017 Term Loan Facility, the Company incurred $5.0 million of debt issuance costs during the quarter ended March 31, 2017. In connection with the borrowings under the 2017 Incremental Term Loan Facility, the Company incurred $4.1 million of debt issuance costs during the year ended December 31, 2017. The Company recorded both Term Loans on the balance sheet at their outstanding principal amounts, net of the unamortized debt issuance costs. See “Deferred Financing Costs” below for discussion of unamortized debt issuance costs as of December 31, 2017.
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Maturities of the Term Loans for the next five years are presented below:
(Thousands of Dollars) | ||||
Year-end December 31, | ||||
2018 | 2,850 | |||
2019 | 2,850 | |||
2020 | 2,850 | |||
2021 | 2,850 | |||
2022 | 271,800 | |||
$ | 283,200 | |||
Any prepayment of the Term Loans will not result in a prepayment penalty.
Senior Secured Notes
The Company retired its existing note purchase agreement (the “NPA”) with certain financial institutions (collectively, the “Purchasers”) and U.S. Bank National Association, as agent for the Purchasers, in connection with the IPO and execution of the 2017 Term Loan Facility. In connection with the IPO, $50.0 million of the NPA was repaid on January 25, 2017. The remaining outstanding balance of $138.7 million was repaid in full on March 15, 2017, upon execution of the 2017 Term Loan Facility. The Company paid a prepayment premium of $1.9 million related to both repayments.
The Company accounted for this transaction as an early debt extinguishment and expensed $6.8 million in deferred financing costs associated with the NPA.
Deferred Financing Costs
Costs incurred to obtain financing are capitalized and amortized using the effective interest method and netted against the carrying amount of the related borrowing. The amortization is recorded in interest expense on the consolidated and combined statements of operations and comprehensive income (loss). Amortization expense related to the capitalized deferred financing costs for the years ended December 31, 2017, 2016 and 2015 was $5.2 million, $4.2 million and $2.1 million, respectively.
Unamortized deferred financing costs associated with the 2016 ABL Facility and the 2017 ABL Facility were $5.0 million and $1.5 million as of December 31, 2017 and 2016, respectively, and are recorded in other noncurrent assets on the consolidated and combined balance sheets.
Capital Leases
The Company leases certain machinery, equipment and vehicles under capital leases that expire between 2018 and 2021. The capital lease obligation for fracturing equipment obtained through a capital lease with CIT has a lease term of 60 months and interest rate of 4.73% per annum. Total remaining principal balance outstanding on the CIT lease as of December 31, 2017 and 2016 was $4.5 million and $6.3 million, respectively. Total interest expense incurred on this lease was $0.3 million, $0.3 million and $0.4 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The Company leases certain machinery and equipment under a capital lease with FNB that expires in 2018. Total remaining principal balance outstanding on this lease as of December 31, 2017 and 2016 was $0.02 million and $0.04 million, respectively. Total interest expense incurred on this lease was less than $0.01 million for the years ended December 31, 2017 and 2016, respectively.
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
As part of the acquisition of Trican’s U.S. Operations, the Company assumed capital leases for light weight vehicles with ARI Financial Services Inc. The lease terms on the vehicles range from 36 to 60 months and interest rates range from 2.25% to 3.75%. In 2017, the Company leased additional light weight vehicles with ARI Financial Services, Inc. The new vehicle leases have terms of 48 months and interest rates ranging from 3.60% and 3.98%. The total outstanding capital lease obligation on the vehicles leased from ARI as of December 31, 2017 and 2016 was $3.0 million and $1.7 million, respectively. Total interest expense incurred on these leases was $0.04 million and $0.01 million for the years ended December 31, 2017 and 2016, respectively.
In 2017, the Company entered into capital leases for light weight vehicles with Enterprise Fleet Trust. The vehicle leases have terms of 48 months and an interest rate of 8.5%. The total outstanding capital lease obligation for the vehicles leased from Enterprise Fleet Trust as of December 31, 2017 was $0.3 million, and total interest incurred for the year ended December 31, 2017 was $0.01 million.
Depreciation of assets held under capital leases is included within depreciation expense. See Note (7) Property and Equipment, net for further details.
Future annual capital lease commitments, including the interest component as of December 31, 2017 for the next five years are listed below:
Year-end December 31, | (Thousands of Dollars) | |||
2018 | $ | 3,633 | ||
2019 | 3,600 | |||
2020 | 758 | |||
2021 | 527 | |||
2022 | — | |||
Subtotal | 8,518 | |||
Less amount representing interest | (600) | |||
$ | 7,918 | |||
(9) Significant Risks and Uncertainties
The Company operates in two reportable segments: Completion Services and Other Services, with significant concentration in the Completion Services segment. During the years ended December 31, 2017, 2016 and 2015, sales to Completion Services customers represented 99%, 98%, and 99% of the Company’s consolidated revenue, respectively. During the years ended December 31, 2017, 2016 and 2015, sales to Completion Services customers represented 99%, 212%, and 99% of the Company's consolidated gross profit, respectively.
The Company depends on its customers’ willingness to make operating and capital expenditures to explore for, develop and produce oil and natural gas in North America, which in turn, is affected by current and expected levels of oil and natural gas prices. Oil and natural gas prices began to decline drastically beginning late in the second half of 2014 and remained low through early 2016. This decline, sustained by global oversupply of oil and natural gas, drove the industry into a downturn. Recent events have provided upward momentum for energy prices. With the rebound in commodity prices from their lows in early 2016, drilling and completion activity has continued to increase in 2017, with U.S. active rig count in December 2017 more than doubling the trough in the active rig count registered in May 2016. The significant growth in production resulting from increased drilling activity has contributed to increased uncertainty concerning the direction of oil and gas prices over the near and immediate term, and market volatility has continued to persist. Despite this market volatility, the Company continues to experience increased demand for its services and believes it is in a more stable demand environment than existed during the above-mentioned market decline.
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
For the year ended December 31, 2017, no customer represented more than 10% of the Company's consolidated revenue. For the year ended December 31, 2016, revenue from the Company's top three customers individually represented 18%, 15% and 15% of the Company's consolidated revenue, respectively. For the year ended December 31, 2015, revenue from the Company's top two customers represented 38% and 21% of the Company's consolidated revenue, respectively. Revenue is earned from each of these customers within the Completion Services segment.
For the years ended December 31, 2017, 2016 and 2015, purchases from two suppliers, one supplier and four suppliers represented approximately 5% to 10% of the Company’s overall purchases, respectively. The costs for each of these suppliers were incurred within the Completion Services segment.
(10) Derivatives
Holdco II uses interest-rate-related derivative instruments to manage its variability of cash flows associated with changes in interest rates on its variable-rate debt.
In September 2017, Holdco II amended an existing interest rate swap and entered into a new forward starting interest rate swap to protect against volatility of future cash flows and hedge a portion of the variable interest payments on the New Term Loan Facility.
The amended swap, which is effective through September 30, 2019, is designated as a cash flow hedge. Under the terms of the interest rate swap, Holdco II receives 3-month LIBOR based variable interest rate payments, subject to a 1% floor, and makes payments based on a fixed rate of 2.055%; thereby hedging the variability of cash flows associated with changes in the benchmark LIBOR interest rate above 1.0%. As of December 31, 2017, the notional amount of the interest rate swap was $136.9 million, decreasing quarterly by $0.9 million.
In conjunction with the amendment of the existing interest rate swap, Holdco II executed a new forward starting interest rate swap effective September 30, 2019 through August 18, 2022, which was designated as a cash flow hedge. Under the terms of the interest rate swap, Holdco II receives 3-month LIBOR based variable interest rate payments, subject to a 1% floor, and makes payments based on a fixed rate of 2.345%; thereby hedging the variability of cash flows associated with changes in the benchmark LIBOR interest rate above 1.0%. The notional amount for the first quarterly reset period effective September 30, 2019 is $130.3 million, decreasing quarterly by $0.9 million.
Additionally, on September 28, 2017, the Company terminated two interest rate swaps that were not designated as hedges for a cash payment of $0.8 million.
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined 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, 2017: | |||||||||||||||||||
Other current asset | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||
Other noncurrent asset | 324 | — | 324 | — | 324 | ||||||||||||||
Other current liability | (254 | ) | — | (254 | ) | — | (254 | ) | |||||||||||
Other noncurrent liability | — | — | — | — | — | ||||||||||||||
As of December 31, 2016: | |||||||||||||||||||
Other current asset | $ | — | $ | 342 | $ | 342 | $ | (342 | ) | $ | — | ||||||||
Other noncurrent asset | 129 | — | 129 | (129 | ) | — | |||||||||||||
Other current liability | (313 | ) | (959 | ) | (1,272 | ) | 342 | (930 | ) | ||||||||||
Other noncurrent liability | — | (1,473 | ) | (1,473 | ) | 129 | (1,344 | ) | |||||||||||
(1) | With all of the Company’s financial trading counterparties, 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, | ||||||||||||||
2017 | 2016 | 2015 | Location | |||||||||||
Amount of gain (loss) recognized in other comprehensive income ("OCI") on derivative | $ | 791 | $ | (1,784 | ) | $ | (2,765 | ) | OCI | |||||
Amount of loss reclassified from AOCI into income | (72 | ) | (603 | ) | (1,578 | ) | Interest Expense | |||||||
Amount of loss reclassified from AOCI into income as a result of originally forecasted transaction becoming probable of not occurring | (100 | ) | (3,038 | ) | — | Interest Expense | ||||||||
The loss recognized in other comprehensive income for the derivative instrument is presented within the hedging activities line item in the consolidated and combined statements of operations and comprehensive income (loss).
There were no gains or losses recognized in income as a result of excluding amounts from the assessment of hedge effectiveness. Based on recorded values at December 31, 2017, $0.3 million of net gains will be reclassified from accumulated other comprehensive income into earnings within the next 12 months.
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The following table presents gains and losses for the Company’s interest rate derivatives not designated in a hedge relationship under the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 815, “Derivative Financial Instruments,” (in thousands of dollars):
Year Ended December 31, | ||||||||||||||
Description | Location | 2017 | 2016 | 2015 | ||||||||||
Gains (loss) on interest contracts | Interest expense | $ | (367 | ) | $ | 240 | $ | — | ||||||
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, long-term debt, capital lease obligations and contingent liability. As of December 31, 2017 and 2016, the carrying values of the Company's financial instruments, included in its consolidated and combined balance sheets, approximated or equaled their fair values. There were no transfers into or out of Levels 1, 2 and 3 during the years ended December 31, 2017 and 2016.
Recurring Fair Value Measurement
At December 31, 2017 and 2016, the two financial instruments measured by the Company at fair value on a recurring basis were its interest rate derivatives and the Aggregate CVR Payment Amount related to the Acquisition of RockPile.
The fair market value of the derivative financial instrument reflected on the balance sheet as of December 31, 2017 and 2016 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 market value of the Aggregate CVR Payment Amount reflected on the balance sheet as of December 31, 2017 was determined using a Monte Carlo option pricing model that considers various assumptions, including the Company's stock price, the length of the holding period and discount for volatility. The Aggregate CVR Payment Amount was not outstanding at December 31, 2016. This estimate is sensitive to change based on the historical and implied volatility in the price of the Company's common stock.
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, 2017 and 2016 (in thousands of dollars):
Fair value measurements at reporting date using | ||||||||||||||||
December 31, 2017 | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: | ||||||||||||||||
Interest rate derivative | $ | 70 | $ | — | $ | 70 | $ | — | ||||||||
Aggregate CVR Payment | — | — | — | — | ||||||||||||
Liabilities: | ||||||||||||||||
Interest rate derivatives | — | — | — | — | ||||||||||||
Aggregate CVR Payment | 6,665 | — | 6,665 | — | ||||||||||||
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Fair value measurements at reporting date using | ||||||||||||
December 31, 2016 | Level 1 | Level 2 | Level 3 | |||||||||
Assets: | ||||||||||||
Interest rate derivative | — | — | — | — | ||||||||
Liabilities: | ||||||||||||
Interest rate derivatives | 2,274 | — | 2,274 | — | ||||||||
Non-Recurring 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 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. Assets acquired as a result of the acquisition of the Acquired Trican Operations and RockPile were recorded at their fair values on the date of acquisition. See Note (3) Acquisitions for further details.
Given the unobservable nature of the inputs used in the Company’s internal cash flow models, the cash flows models are deemed to use Level 3 inputs.
In 2017, the Company determined there were no events that would indicate the carrying amount of its indefinite-lived assets and long-lived assets may not be recoverable, and as such, no impairment charge was recognized.
In 2016, the Company recorded an impairment charge of $0.2 million associated with the non-compete agreement related to its Other Services segment.
In 2015, the Company recorded a $2.4 million impairment on its definite-lived intangible assets, within its Completion Services segment, as a result of the loss of certain customer relationships related to the Company’s acquisition of Ultra Tech Frac Services, LLC (“UTFS”), a $1.2 million impairment on its trade name, within the Other Services segment, as it was determined the fair value of the trade name based on the net present value of future cash flows was less than the net book value as of December 31, 2015 and a $0.3 million impairment on its drilling rig fleet, as the continued fall in commodity prices resulted in a decline in the anticipated utilization rates for the drilling rig fleet, indicating these long-lived assets may not be recoverable.
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 $96.1 million and $48.9 million as of December 31, 2017 and 2016, 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.
106
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The majority of the Company’s trade receivables have payment terms of 30 days or less. As of December 31, 2017, trade receivables from the Company's top customer represented 17% of total accounts receivable. As of December 31, 2016, trade receivables from the top four customers individually represented 15%, 14%, 13% and 12% of 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 not had to write-off any bad debts for its customers as of December 31, 2017 and 2016 and has a process in place to collect all receivables within 30 to 60 days of aging.
(12) Equity-Based Compensation
Under the Company's Equity and Incentive Award Plan, compensation expense for restricted stock awards, RSUs, non-qualified stock options and deferred compensation awards to be settled in shares of the Company's common stock is determined based on the fair value of the awards at the date of grant. The fair value of these awards 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 Company has elected to recognize forfeiture credits for these awards as they are incurred, as this method better reflects actual stock-based compensation expense.
Compensation expense from time-based restricted stock awards, RSUs and non-qualified stock options is recognized on a straight-line basis over the requisite service period, which is generally the vesting period. Compensation expense associated with liability based awards, such as deferred compensation awards with a fixed monetary amount to be settled in shares of the Company's common stock at the closing price of the Company's stock on the vesting date, is recognized based on the fixed monetary amount agreed upon at the grant date and is amortized on a straight-line basis over the requisite service period, which is generally the vesting period.
As of December 31, 2017, the Company has four types of equity-based compensation under the Equity and Incentive Award Plan: (i) deferred stock awards for three executive officers, (ii) restricted stock awards issued to independent directors, (iii) restricted stock units issued to executive officers and key management employees, and (iv) non-qualified stock options issued to executive officers. The Company has reserved 7,734,601 shares of its common stock for awards that may be issued under the Equity and Incentive Award Plan.
The following table summarizes equity-based compensation costs for the years ended December 31, 2017, 2016 and 2015 (in thousands of dollars):
Twelve Months Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Class C Interests | $ | — | $ | — | $ | 313 | ||||||
Class B Interests | — | 1,984 | — | |||||||||
Deferred stock awards | 4,280 | — | — | |||||||||
Restricted stock awards | 399 | — | — | |||||||||
Restricted stock units | 4,766 | — | — | |||||||||
Non-qualified stock options | 1,133 | — | $ | — | ||||||||
Equity-based compensation cost | $ | 10,578 | $ | 1,984 | $ | 313 | ||||||
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(a) Class C Interests
Prior to the completion of the Trican Transaction, the Company sponsored its Class C Management Incentive Plan (the “Class C Plan”) to grant Class C units to management. Under the Class C Plan, a maximum of 149,425 Class C units were authorized, of which 113,283 were outstanding as of December 31, 2015. The Class C units granted under the Class C Plan vested based on the participants continued employment with the Company (“Time-Based Units”) and based on the achievement of performance objectives as determined by the Compensation Committee (“Performance-Based Units”). Generally, the Time-Based Units vested one-third on each of the first three anniversary dates of the grant date, subject to the participant’s continued employment. The Performance-Based Units vested over the same periods, subject to the attainment of certain performance objectives. As of March 16, 2016, of the total outstanding Class C units issued under the Class C Plan, 97,305 were fully vested and 4,408 were unvested.
The Company determined the fair value of the Class C unit awards with the assistance from a third-party valuation expert. The fair value of each Class C unit award was estimated on the date of grant using a Monte Carlo option pricing model. A significant input of the option pricing method was the enterprise value of Keane Group Holding, LLC. The Company estimated the enterprise value utilizing a combination of the income and market approaches. Additional significant inputs used in the option pricing method included the length of holding period, discount for lack of marketability and volatility.
The Company granted 8,815 Class C units in 2015. During 2015, 28,650 Class C units were bought back, respectively. The total amount paid during the year ended December 31, 2015 for Class C unit buy backs was $0.2 million. Furthermore, the Company recognized $0.2 million relating to withholding taxes on settlements for the year ended December 31, 2015.
Non-cash compensation cost related to Time-Based Units recognized in operating results during the year ended December 31, 2015 was $0.2 million. At December 31, 2015, there was $0.2 million of total unrecognized compensation cost related to unvested Time-Based Units under the Class C Plan.
Non-cash compensation cost with respect to the vested portion of the Performance-Based Units recognized in operating results during the year ended December 31, 2015 was $0.2 million. The awards for Performance-Based Units were accounted for at fair value. With respect to the remaining unvested portion of the Performance-Based Units, no compensation cost had been recognized as of December 31, 2015, because the performance criteria had not been defined.
(b) 2016 Class B Interests - Management Incentive Plan
On March 16, 2016, the Company canceled all outstanding Class C units issued under its Class C Management Incentive Plan (the “Class C Plan”) and issued Class B units under the Keane Management Holdings LLC Management Incentive Plan (“Class B Plan”). Using an applicable conversion ratio specific to each participant the Company issued 83,529 Class B units to former participants in the Class C Plan, of which 80,784 were fully vested upon issuance. The remaining 2,745 were subject to vesting based on the same time-based schedule that applied under a participant’s canceled Class C award agreement, subject to the participant’s continued employment, without regard to the achievement of any performance objectives that applied under the Class C units (see “Class C Plan” below). In addition, on March 16, 2016, the Company also issued 2,353 Class B units to a member of the Company’s management. These Class B units vested in three equal installments on each of the first three anniversaries of the grant date subject to continued service with the Company. The grant date fair value of the Class B units issued on March 16, 2016 was $98.97.
The Company accounted for the exchange of Class C units for Class B units as a modification. In accordance with the requirements of ASC 718, the Company calculated incremental fair value on the difference between the fair value of the modified award and the fair value of the original award immediately prior to the modification. The incremental fair value related to vested units was recognized immediately as compensation
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KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
expense. The incremental fair value of unvested units and any remaining unrecognized compensation of the original awards will be recognized as compensation expense over the remaining vesting period.
During the second quarter of 2016, the Company issued 1,177 Class B units to a member of the Company’s management. These Class B units vested in three equal installments on each of the first three anniversaries of the grant date subject to continued service with the Company. The fair value on the grant date was $98.97 per Class B unit on the date of grant.
During the fourth quarter of 2016, the Company issued 6,471 Class B units to members of the Board of Directors of the Company and 7,647 to other management personnel. These Class B units vested in three equal installments on each of the first three anniversaries of the grant date subject to continued service with the Company. The fair value on the grant date was $73.20 per Class B unit on the date of grant.
The Company used the Option-Pricing Method to value Class B units. Since the Company’s equity was not publicly traded, expected volatility was estimated based on the volatility of similar entities with publicly traded equity. The risk-free rate for the expected term of the units was based upon the observed yields of U.S. Treasury financial instruments interpolated to match the expected time to liquidity. The Company also calculated the discount for lack of marketability using the Finnerty protective put model. The time to liquidity was based upon the expected time to a successful liquidity event
As described in Note (1) (Basis of Presentation and Nature of Operations), in order to effectuate the IPO, the Company completed the Organizational Transactions, which resulted in the Existing Owners contributing all of their direct and indirect equity interests in Keane Group to Keane Investor.
During the years ended December 31, 2017 and 2016, the Company recognized nil and $2.0 million, respectively, of non-cash compensation expense into income related to the Company’s Management Incentive Plan. As all vested and unvested membership units were contributed to Keane Investor, which is not a subsidiary of the Company, on January 20, 2017, the Company will not recognize any additional non-cash compensation expense associated with unvested membership units in the future.
(c) Deferred stock awards
Upon consummation of the IPO, the executive officers of the Company identified in the table below, became eligible for retention payments, the first on January 1, 2018 and the second on January 1, 2019, in the bonus amounts set forth in the table below. On March 16, 2017, the compensation committee (the "Compensation Committee") of the board of directors of the Company (the "Board of Directors") approved, and each executive officer agreed, that in lieu of the executive officer's cash retention payments, the executive officer was granted a deferred stock award under the Equity and Incentive Award Plan. Each executive officer’s deferred stock award provides that, subject to the executive officer remaining employed through the applicable vesting date and complying with the restrictive covenants imposed on him under his employment agreement with the Company, the executive officer will be entitled to receive payment of a stock bonus equal to the variable number of shares of the Company's common stock having a fair market value on the payment date equal to the bonus amount set forth in the table below:
Bonus Amounts | ||||||||
First | Second | |||||||
James C. Stewart | $ | 1,975,706 | $ | 1,975,706 | ||||
Gregory L. Powell | $ | 1,646,422 | $ | 1,646,422 | ||||
M. Paul DeBonis Jr. | $ | 658,569 | $ | 658,569 | ||||
109
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The Company accounted for these deferred stock awards as liability classified awards and recorded them at fair value based on the fixed monetary value on the date of grant. The Company recognized $8.6 million as a deferred compensation expense liability and contra-equity during the first quarter of 2017.
The first stock bonuses vested on January 1, 2018 and were paid on February 15, 2018, and the second stock bonus will vest on January 1, 2019 to be paid on February 15, 2019. For the year ended December 31, 2017, the Company recognized $4.3 million of non-cash stock compensation expense into income, which is presented within selling, general and administrative expense in the consolidated and combined statements of operations and comprehensive income (loss). As of December 31, 2017, total unamortized compensation cost related to unvested deferred stock awards was $4.3 million, which the Company expects to recognize over the remaining weighted-average period of 1 year.
(d) Restricted stock awards
On January 20, 2017, upon consummation of the IPO, the Class B units issued to the independent members of the Board of Directors under the Company’s Management Incentive Plan were converted into 114,580 restricted shares of the Company's common stock. These restricted stock awards vest with respect to 33.33% of the shares beginning on October 1, 2017, and with respect to an additional 33.33% of the shares on the next two anniversaries, provided that the participant does not incur a termination before the applicable vesting date. Restricted stock awards are not considered issued and outstanding for purposes of earnings per share calculations until vested.
This exchange of Class B units for restricted stock was treated as a modification of awards classified as equity under ASC 718, “Compensation - Stock Compensation,” as the Company viewed the transaction as an exchange of the original award for a new award. To measure the compensation cost associated with the modification of the equity-classified awards, the Company calculated the incremental fair value based on the difference between the fair value of the modified award and the fair value of the original award immediately before it was modified. The incremental fair value immediately following the modification was $0.3 million, which will be expensed as non-cash stock compensation expense into income over the vesting period.
On May 15, 2017, an independent member of the Board of Directors received 18,947 restricted shares of the Company’s common stock. This restricted stock award will vest with respect to 33.33% of the shares on May 15, 2018, and with respect to an additional 33.33% of the shares on the next two anniversaries, provided that the participant does not incur a termination before the applicable vesting date.
For the three and twelve months ended December 31, 2017, the Company recognized $0.4 million of non-cash stock compensation expense into income, which is presented within selling, general and administrative expense in the consolidated and combined statements of operations and comprehensive income (loss). As of December 31, 2017, total unamortized compensation cost related to unvested restricted stock awards was $0.7 million, which the Company expects to recognize over the remaining weighted-average period of 1.94 years.
Rollforward of restricted stock awards as of December 31, 2017 is as follows:
Number of Restricted Stock Awards | Weighted average grant date fair value | ||||||
Total non-vested at January 20, 2017 | 114,580 | $ | 22.00 | ||||
Shares issued | 18,947 | 14.49 | |||||
Shares vested | (38,192 | ) | 22.00 | ||||
Shares forfeited | — | — | |||||
Non-vested balance at December 31, 2017 | 95,335 | $ | 20.51 | ||||
110
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(e) Restricted stock units
During the year ended December 31, 2017, executive officers and key management personnel received, in total, 1,238,127 RSUs under the Equity and Incentive Award Plan. 1,104,208 of these RSU awards vest with respect to 33.33% beginning on January 20, 2018 and 133,919 of these RSU awards vest with respect to 33.33% beginning on the first anniversary of the date of grant. The remaining RSU awards vest with respect to an additional 33.33% on the next two anniversaries, provided that the participant does not incur a termination before the applicable vesting date. RSUs are not considered issued and outstanding for purposes of earnings per share calculations until vested.
The Company recognized these RSUs at fair value based on the closing price of the Company's common stock on the date of grant. The compensation expense associated with these RSUs will be amortized into income on a straight-line basis over the vesting period. For the year ended December 31, 2017, the Company recognized $4.8 million of non-cash stock compensation expense into income, which is presented within selling, general and administrative expense in the consolidated and combined statements of operations and comprehensive income (loss). As of December 31, 2017, total unamortized compensation cost related to unvested restricted stock units was $11.3 million, which the Company expects to recognize over the remaining weighted-average period of 2.11 years.
On April 3, 2017, an executive officer of the Company awarded 23,263 RSUs to an officer of the Company pursuant to an authority delegated by the Compensation Committee. It was subsequently determined that such grant required approval from the Compensation Committee, and on September 13, 2017, the Compensation Committee ratified the action.
Rollforward of restricted stock units as of December 31, 2017 is as follows:
Number of Restricted Stock Units | Weighted average grant date fair value | ||||||
Total non-vested at December 31, 2016 | — | $ | — | ||||
Units issued | 1,238,127 | 14.66 | |||||
Units vested | — | — | |||||
Actual units forfeited | (138,507 | ) | 14.95 | ||||
Non-vested balance at December 31, 2017 | 1,099,620 | $ | 14.62 | ||||
(f) Non-qualified stock options
On April 3, 2017, certain executive officers received, in total, 605,766 of non-qualified stock options under the Equity and Incentive Award Plan. These stock options vest with respect to 33.33% of the stock options on January 20, 2018 and with respect to an additional 33.33% of the stock options on the next two anniversaries. Additional non-qualified stock options were granted on July 3, 2017 and subsequently forfeited in September 2017. As the stock options vest, the award recipients can thereafter exercise their stock options up to the expiration date of the options, which is the date of the six year anniversary of the grant date.
The Company recognized these stock options at fair value determined by applying the Black-Scholes model to the grant date market value of the underlying common shares of the Company. The compensation expense associated with these stock options will be amortized into income on a straight-line basis over the vesting period. For the year ended December 31, 2017, the Company recognized $1.1 million of non-cash stock compensation expense into income, which is presented within selling, general and administrative expense in the consolidated and combined statements of operations and comprehensive income (loss). As of December 31, 2017, total unamortized compensation cost related to unvested stock options was $2.5 million, which the Company expects to recognize over the remaining weighted-average period of 2.05 years.
111
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Rollforward of stock options as of December 31, 2017 is as follows:
Number of Stock Options | Weighted average grant date fair value | ||||||
Total outstanding at December 31, 2016 | — | $ | — | ||||
Options granted | 640,854 | 6.16 | |||||
Options exercised | — | — | |||||
Actual options forfeited | (50,877 | ) | 6.16 | ||||
Options expired | — | — | |||||
Total outstanding at December 31, 2017 | 589,977 | $ | 6.16 | ||||
There were no stock options exercisable or vested at December 31, 2017.
Assumptions used in calculating the fair value of the stock options granted during the year are summarized below:
Weighted Average as of December 31, 2017 | ||||
Valuation assumptions: | ||||
Expected dividend yield | 0 | % | ||
Expected equity volatility | 51.5 | % | ||
Expected term (years) | 6 | |||
Risk-free interest rate | 1.6 | % | ||
Exercise price per stock option | $ | 19.00 | ||
Market price per share | $ | 14.49 | ||
Weighted average fair value per stock option | $ | 6.16 | ||
(13) Owners’ Equity
(a) Certificate of Incorporation
The Company was formed as a Delaware corporation on October 13, 2016. The Company's certificate of incorporation provides for (i) the authorization of 500,000,000 shares of common stock with a par value of $0.01 per share and (ii) the authorization of 50,000,000 shares of undesignated preferred stock with a par value of $0.01 per share that may be issued from time to time by the Board of Directors in one or more series.
Each holder of the Company's common stock is entitled to one vote per share and is entitled to receive dividends and any distributions upon the liquidation, dissolution or winding-up of the Company. The Company's common stock has no preemptive rights, no cumulative voting rights and no redemption, sinking fund or conversion provisions.
112
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(b) Keane Group Holdings Recapitalization
As described in Note (1) (Basis of Presentation and Nature of Operations), the Company completed Organizational Transactions to effect the IPO that resulted in all equity interests in Keane Group, which consisted of 1,000,000 class A units, 176,471 class B units and 294,118 class C units, being converted to an aggregate of 87,428,019 shares of the Company's common stock on January 20, 2017. The Organizational Transactions represented a transaction between entities under common control and was accounted for similar to pooling of interests. In accordance with the requirements of ASC 805, the Company recognized the aggregate 87,428,019 shares of common stock at the carrying amount of the equity interests in Keane Group on January 20, 2017, which totaled $453.8 million. The Company recorded $0.9 million of par value common stock and the remaining $452.9 million as paid-in capital in excess of par value. Furthermore, as the Organizational Transactions resulted in a change in the reporting entity from Keane Group Holdings, LLC to Keane Group, Inc., paid-in capital in excess of par value for Keane Group, Inc. was reduced by Keane Group's retained deficit as of January 20, 2017 of $296.7 million.
(c) Initial Public Offering
As described in Note (1) (Basis of Presentation and Nature of Operations), on January 25, 2017, the Company completed the IPO of 30,774,000 shares of its common stock at the public offering price of $19.00 per share, which included 15,700,000 shares offered by the Company and 15,074,000 shares offered by the selling stockholder, including 4,014,000 shares sold as a result of the underwriters' exercise of their overallotment option. The net proceeds of the IPO to the Company was $255.5 million, which were used to fully repay Holdco II’s term loan balance of $99.0 million and the associated prepayment penalty of $13.8 million, and repay $50.0 million of its 12% secured notes due 2019 and the associated prepayment penalty of approximately $0.5 million. The remaining net proceeds were used for general corporate purposes, including capital expenditures, working capital and potential acquisitions and strategic transactions. Upon completion of the IPO and the reorganization, the Company had 103,128,019 shares of common stock outstanding.
All underwriting discounts and commissions and other specific costs directly attributable to the IPO were deferred and applied to the gross proceeds of the offering through paid-in capital in excess of par value.
(d) RockPile Acquisition
As described in Note (3) (Acquisitions), the Company completed its acquisition of RockPile on July 3, 2017 for cash consideration of $116.6 million, subject to post-closing adjustments, 8,684,210 shares of the Company’s common stock and contingent value rights, as described in Note (3) (Acquisitions). The fair value of the Acquisition Shares was calculated using the closing price of the Company's common stock on July 3, 2017, of $16.29, discounted to reflect the lack of marketability resulting from the 180-day lock-up period during which resale of the Acquisition Shares is restricted. Upon completion of the acquisition of RockPile, the Company had 111,831,176 shares of common stock outstanding.
113
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(14) Accumulated Other Comprehensive (Loss)
Accumulated other comprehensive (loss) in the equity section of the consolidated and combined balance sheets includes the following:
(Thousands of Dollars) | |||||||||||
Foreign currency items | Interest rate contract | AOCI | |||||||||
December 31, 2016 | $ | (2,603 | ) | $ | (184 | ) | $ | (2,787 | ) | ||
Other comprehensive income, before tax | 96 | 963 | 1,059 | ||||||||
Income tax expense(1) | — | — | — | ||||||||
December 31, 2017 | $ | (2,507 | ) | $ | 779 | $ | (1,728 | ) | |||
(1) The deferred tax liability created by other comprehensive income was netted against the Company's deferred tax asset, which was offset by a valuation allowance.
The following table summarizes reclassifications out of accumulated other comprehensive (loss) during years ended December 31, 2017, 2016 and 2015 (in thousands of dollars):
Affected line item in the consolidated and combined statements of operations and comprehensive income (loss) | ||||||||||||||
Year Ended December 31, | ||||||||||||||
2017 | 2016 | 2015 | ||||||||||||
Interest rate derivatives, hedging | $ | (172 | ) | $ | (3,641 | ) | $ | (1,578 | ) | Interest expense | ||||
Foreign currency items | — | — | — | Other income | ||||||||||
Total reclassifications | $ | (172 | ) | $ | (3,641 | ) | $ | (1,578 | ) | |||||
(15) Earnings per Share
Basic income or (loss) per share is based on the weighted average number of common shares outstanding during the period. Diluted income or (loss) per share includes additional common shares that would have been outstanding if potential common shares with a dilutive effect, such as stock awards from the Company's Equity and Incentive Award Plan, had been issued. Anti-dilutive securities represent potentially dilutive securities which are excluded from the computation of diluted income or (loss) per share as their impact would be anti-dilutive.
114
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
A reconciliation of the numerators and denominators used for the basic and diluted net loss per share computations is as follows:
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Numerator: | ||||||||||||
Net income (loss) | $ | (36,141 | ) | $ | (187,087 | ) | $ | (64,642 | ) | |||
Denominator: | ||||||||||||
Basic weighted-average common shares outstanding(1) | 106,321 | 87,313 | 87,313 | |||||||||
Dilutive effect of restricted stock awards granted to Board of Directors | 36 | — | — | |||||||||
Dilutive effect of deferred stock award granted to NEOs | — | — | — | |||||||||
Dilutive effect of RSUs granted under stock incentive plans | 135 | — | — | |||||||||
Dilutive effect of options granted under stock incentive plans | — | — | — | |||||||||
Diluted weighted-average common shares outstanding(2) | 106,492 | 87,313 | 87,313 | |||||||||
(1) | The basic weighted-average common shares outstanding have been computed to give effect to the Organizational Transactions, including the limited liability company agreement of Keane Investor (as defined herein) to, among other things, exchange all of the Company's Existing Owners' membership interests for the newly-created ownership interests. |
(2) | As a result of the net loss incurred by the Company for the years ended December 31, 2017, 2016 and 2015, 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) Operating Leases
The Company has certain non-cancelable operating leases for various equipment and office facilities. Certain leases include escalation clauses for adjusting rental payments to reflect changes in price indices. There are no significant restrictions imposed on the Company by the leasing agreements with regard to asset dispositions or borrowing ability. Some lease arrangements include renewal and purchase options or escalation clauses. In addition, certain lease contracts acquired from Trican Well Service, L.P. include rent holidays, rent concessions and leasehold improvement incentives. Leasehold improvements made at the inception of a lease or during the lease term are amortized over the remaining period of 10 months to 35 years.
Rental expense for operations, excluding daily rentals and reimbursable rentals, was $11.8 million, $9.2 million and $6.3 million for the years ended December 31, 2017, 2016 and 2015, respectively. During the year ended December 31, 2017, the company recognized $0.6 million of rental expense related to non-cancelable sale-leasebacks on 68 Peterbilt tractors acquired from the RockPile acquisition that expire in 2020. Future minimum lease payments include $3.4 million related to the sale leasebacks.
Sublease proceeds were $0.3 million, $0.3 million and $0.05 million for the years ended December 31, 2017, 2016 and 2015, respectively, all of which related to the subleased properties of the Company's Canadian operations. These sublease proceeds were recorded as a reduction of the Company's Canadian operations’ exit costs liability.
115
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Minimum lease commitments remaining under operating leases for the next five years are $45.4 million, as listed below:
Year-end December 31, | (Thousands of Dollars) | |||
2018 | $ | 16,173 | ||
2019 | 14,408 | |||
2020 | 8,210 | |||
2021 | 3,990 | |||
2022 | 2,606 | |||
Total | $ | 45,387 | ||
The Company has three long-term operating leases in Canada that expire in 2018. The Company contracted sub-tenants for one of the leased properties during the fourth quarter of 2015 and for the other two properties in the second and fourth quarters of 2016, respectively. As of December 31, 2017, the total minimum sublease payments to be received in the future under the active subleases is $0.01 million in 2018. The Company's subleases terminate after 2018.
The Company assumed several real estate operating leases in connection with the acquisition of the Acquired Trican Operations. In an effort to consolidate its facilities and to reduce costs, the Company vacated eight of the combined properties and recorded a cease-use liability for the total amount of $8.1 million. Subsequent to the recording of the liability, the Company successfully negotiated exit agreements for four of the properties, resulting in net payments of $2.6 million. In December 2016, due to immediate need for office space, the Company decided to re-enter one of the leases acquired from Trican Well Service, L.P. and renegotiated its terms. As a result, the amendment to the lease was accounted for as a new lease, and the cease-use liability associated with the lease in the amount of $2.4 million was reversed through the same line item in the statement of operations where it was previously recognized. In 2017, the Company vacated the outgrown facility and moved into the renegotiated office space, and recorded a cease-use liability of $0.5 million. During the third quarter of 2017, the Company assumed additional real estate operating leases in connection with the acquisition of Rockpile. As part of a further consolidation of operations, the Company vacated one of these facilities and recorded a cease-use liability of $0.7 million. Exit costs, including accretion expense, are presented within selling, general and administrative expense in the consolidated and combined statements of operations and comprehensive income (loss).
The following table presents the roll forward of the cease-use liability:
(Thousands of Dollars) | ||||
Beginning balance at January 1, 2017 | $ | 1,670 | ||
Exit costs | 1,164 | |||
Cash buyout of lease | (702 | ) | ||
Lease amortization and other adjustments | (862 | ) | ||
Ending balance at December 31, 2017 | $ | 1,270 | ||
116
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
(17) Income Taxes
Keane Group Holdings, LLC was originally organized as a limited liability company and treated as a flow-through entity for federal and most state income tax purposes. As such, taxable income and any related tax credits were passed through to its members and included in their tax returns. As a result of the IPO and related Organizational Transactions, Keane Group, Inc. was formed as a corporation to hold all of the operational assets of Keane Group. Because Keane Group, Inc. is a taxable entity, the Company established a provision for deferred income taxes as of January 20, 2017. Accordingly, a provision for federal and state corporate income taxes has been made only for the operations of Keane Group, Inc. from January 20, 2017 through December 31, 2017 in the accompanying consolidated and combined financial statements.
The following table summarizes the income from continuing operations before income taxes in the following jurisdictions:
(Thousands of Dollars) | ||||||||||||
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Domestic | $ | (35,904 | ) | $ | (187,308 | ) | $ | (64,470 | ) | |||
Foreign | (87 | ) | 221 | (172 | ) | |||||||
(35,991 | ) | (187,087 | ) | (64,642 | ) | |||||||
The components of our income tax provision are as follows:
(Thousands of Dollars) | ||||||||||||
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Current: | ||||||||||||
Federal | $ | — | $ | — | $ | — | ||||||
State | 614 | — | — | |||||||||
Foreign | — | — | (197 | ) | ||||||||
Total current income tax provision | 614 | — | (197 | ) | ||||||||
Deferred: | ||||||||||||
Federal | (536 | ) | — | — | ||||||||
State | 72 | (114 | ) | — | ||||||||
Foreign | — | — | 990 | |||||||||
Total deferred income tax provision | (464 | ) | (114 | ) | 990 | |||||||
$ | 150 | $ | (114 | ) | $ | 793 | ||||||
117
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The following table presents the reconciliation of our income taxes calculated at the statutory federal tax rate, currently 35%, to the income tax provision in our financial statements. The Company’s effective tax rate for 2017 of (0.53)% differs from the statutory rate, primarily due to state taxes, a valuation allowance and a reduction of the corporate income tax rate from 35% to 21%, due to the enactment of the Tax Cuts and Jobs Act in December 2017. The Company's effective tax rate for 2016 and 2015 was 0.06% and (1.23)%, respectively.
(Thousands of Dollars) | ||||||||||||||||||
December 31, 2017 | % of Income Before Income Taxes | December 31, 2016 | % of Income Before Income Taxes | December 31, 2015 | % of Income Before Income Taxes | |||||||||||||
Income tax provision computed at the statutory federal rate | $ | (9,795 | ) | 35.00 | % | $ | (65,480 | ) | 35.00 | % | $ | (22,625 | ) | 35.00 | % | |||
Reconciling items: | ||||||||||||||||||
State income taxes, net of federal tax benefit | (334 | ) | 1.19 | % | (114 | ) | 0.06 | % | — | — | % | |||||||
Deferred tax asset valuation adjustment | (32,593 | ) | 116.46 | % | — | — | % | — | — | % | ||||||||
Tax rate change | 41,591 | (148.61 | )% | — | — | % | — | — | % | |||||||||
Other | 1,281 | (4.57 | )% | — | — | % | — | — | % | |||||||||
Flow through income not taxable | — | — | % | 65,480 | (35.00 | )% | 22,625 | (35.00 | )% | |||||||||
Foreign taxes | — | — | % | — | — | % | 793 | (1.23 | )% | |||||||||
Income tax provision | $ | 150 | (0.53 | )% | $ | (114 | ) | 0.06 | % | $ | 793 | (1.23 | )% | |||||
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. The Company adopted ASU 2015-17, "Balance Sheet Classification of Deferred Taxes", during 2017, and thus has classified all deferred tax assets and liabilities as noncurrent.
(Thousands of Dollars) | ||||||||||||
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Deferred tax assets: | ||||||||||||
Stock-based compensation | $ | 2,467 | $ | — | $ | — | ||||||
Net operating loss carry-forwards | 70,745 | — | — | |||||||||
Accruals and other | 3,994 | — | — | |||||||||
Intangibles | — | 231 | 139 | |||||||||
Gross deferred tax assets | 77,206 | 231 | 139 | |||||||||
Valuation allowance | (65,347 | ) | (139 | ) | (139 | ) | ||||||
Total deferred tax assets | 11,859 | 92 | — | |||||||||
Deferred tax liability: | ||||||||||||
PP&E and intangibles | (11,319 | ) | — | (22 | ) | |||||||
Prepaids and other | (1,954 | ) | — | — | ||||||||
Total deferred tax liability | (13,273 | ) | — | (22 | ) | |||||||
Net deferred tax liability | $ | (1,414 | ) | $ | 92 | $ | (22 | ) | ||||
118
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
As of December 31, 2017, the Company had total U.S. federal tax net operating loss (“NOL”) carryforwards of $320.0 million. Of this amount, $85.6 million related to the Company’s current year federal tax loss, and the remaining $234.4 million was generated prior to the IPO transaction. As part of the IPO transaction (immediately before), the existing owners of Keane Group contributed all of their direct and indirect equity interests in Keane Group to Keane Investor Holdings LLC, who then contributed those interests to the Company in exchange for common stock of the Company. This event constituted 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 acquisition. As of December 31, 2017, it is expected that the NOLs subject to IRC Section 382 will be available for use during the applicable carryforward period without becoming permanently lost by the Company. The Company’s Section 382 annual limitation is $19.2 million. This annual limitation is available to be carried forward to the following year if not utilized. As the Company realized a taxable loss for the year ended December 31, 2017, the current year limitation of $19.2 million will be available for use in 2018. As such, the total annual limitation available for use in 2018 will be $38.4 million. The Company’s total NOL Carryforward available to reduce federal taxable income in 2018 is $124.0 million. These carryforwards will begin to expire in 2031.
Included in the Company’s recording of its initial deferred taxes, pursuant to the Organizational Transactions, are deferred tax liabilities related to certain of the Company's indefinite-lived intangible assets. The deferred tax liability related to these indefinite-lived intangible assets will only reverse at the time of ultimate sale or impairment. Due to the uncertain timing of this reversal, the temporary differences associated with these indefinite-lived intangibles cannot be considered a source of future taxable income for purposes of determining a valuation allowance. As such, the deferred tax liability cannot be used to support an equal amount of the deferred tax asset. This is often referred to as a “naked credit.” The Company recognized a deferred tax liability of $1.9 million associated with this naked credit upon the IPO. This is presented within other noncurrent liabilities in the audited consolidated and combined balance sheet. This amount will increase as additional tax amortization is recognized, but will only decrease if the indefinite-lived intangibles are sold, impaired or if the Company establishes indefinite-lived deferred tax assets such as NOLs with an indefinite life under the newly passed Tax Cuts and Jobs Act legislation.
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 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, 2017 fully offsets the impact of the initial benefit recorded related to the formation of Keane Group, Inc., excluding deferred tax liabilities related to certain indefinite lived intangibles. This initial deferred impact was recorded as an adjustment to equity due to a transaction between entities under common control. The valuation allowance as of December 31, 2017 was $65.3 million. The valuation allowance for foreign deferred tax assets as of December 31, 2016 and 2015 of $0.1 million was related to the Company's tax basis in certain assets located in Canada.
119
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Changes in the valuation allowance for deferred tax assets were as follows:
(Thousands of Dollars) | ||||
Valuation allowance as of the beginning of January 1, 2017 | $ | 139 | ||
Charge as debit to equity | 97,801 | |||
Charge as (benefit) expense to income tax provision for current year activity | 8,032 | |||
Charge as (benefit) expense to income tax provision for change in deferred tax rate | (40,625 | ) | ||
Changes to other comprehensive income | — | |||
Valuation allowance as of December 31, 2017 | $ | 65,347 | ||
In December 2017, the Tax Cuts and Jobs Act legislation was enacted. The Tax Cuts and Jobs Act includes significant changes to the U.S. corporate tax system, including a U.S. federal corporate income tax rate reduction from 35% to 21% as well as many other changes. ASC 740 requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation was enacted. As a result, the Company recorded a $41.6 million expense related to the re-measurement of the deferred tax assets and liabilities from 35% to the new 21% tax rate in December 2017. Additionally, the Company recorded a $40.6 million benefit related to the re-measurement of the ending valuation allowance from 35% to the new 21%. The effects of other provisions of the Act are not expected to have an adverse impact on our consolidated and combined financial statements. The Company will continue to analyze the impacts of the Tax Cuts and Jobs Act on the Company and refine its estimates as necessary in 2018.
There were no unrecognized tax benefits nor any accrued interest or penalties associated with unrecognized tax benefits during the years ended December 31, 2017, 2016 and 2015. 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's tax returns are open to audit under the statute of limitations for the years ended December 31, 2014 through December 31, 2016 for federal tax purposes and for the years ended December 31, 2013 through December 31, 2016 for state tax purposes.
(18) Commitments and Contingencies
As of December 31, 2017 and 2016, the Company had $19.8 million and $0.1 million of deposits on equipment, respectively. Outstanding purchase commitments on equipment were $82.5 million and nil, as of December 31, 2017 and 2016, respectively.
As of December 31, 2017, the Company anticipates committing $4.2 million to research and development with its equity-method investee, that is expected to generate economic benefits in 2019.
As of December 31, 2017 and 2016, the Company had issued letters of credit of $2.0 million under the 2017 ABL Facility and 2016 ABL Facility, respectively, which secured performance obligations related to the Company's CIT capital lease.
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 these agreements, the Company is subject to minimum tonnage purchase requirements and may pay penalties in the event of any shortfall.
120
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Aggregate minimum commitments under long-term raw material supply contracts for the next five years as of December 31, 2017 are listed below:
(Thousands of Dollars) | |||
Year-end December 31, | |||
2018 | $ | 45,942 | |
2019 | 42,717 | ||
2020 | 26,087 | ||
2021 | 10,083 | ||
2022 | — | ||
$ | 124,829 | ||
Trican Indemnification Settlement
As part of the asset purchase agreement (the “APA”) executed for the acquisition of the Acquired Trican Operations, certain representations and warranties were provided to the Company relating to the condition of the acquired machinery and equipment. The material maintenance expenditures the Company incurred to bring all of the acquired machinery and equipment into proper working order exceeded the representations made in the APA. On June 12, 2017, the Company and Trican reached a settlement that resulted in proceeds of $2.1 million and net gain on settlement of $3.6 million. This gain is presented within other income in the consolidated and combined statements of operations and comprehensive income (loss).
The Company made a claim with its insurance company to recover additional funds under the representation and warranty policy associated with this acquisition. In October 2017, the Company reached an agreement with the insurance company to settle for $4.2 million.
Litigation
From time to time, the Company is subject to legal and administrative proceedings, settlements, investigations, claims and actions, as is typical of the industry. These claims include, but are not limited to, contract claims, environmental claims, employment related claims, claims alleging injury or claims related to operational issues. The Company’s assessment of the likely outcome of litigation matters is based on its judgment of a number of factors, including experience with similar matters, past history, precedents, relevant financial information and other evidence and facts specific to the matter. In accordance with GAAP, the Company accrues for contingencies where the occurrence of a material loss is probable and can be reasonably estimated, based on the Company's best estimate of the expected liability. The Company may increase or decrease its legal accruals in the future, on a matter-by-matter basis, to account for developments in such matters. Notwithstanding the uncertainty as to the final outcome and based upon the information currently available to it, the Company does not currently believe these matters in aggregate will have a material adverse effect on its financial position or results of operations.
The Company has been served with class and collective action claims alleging that the Company failed to pay a nationwide class of workers overtime in compliance with the Fair Labor Standards Act ("FLSA") and state laws. On December 27, 2016, two former employees filed a complaint for a proposed collective action in United States District Court for the Southern District of Texas entitled Hickson and Villa v. Keane Group Holdings, LLC, et al., alleging certain field professionals were not properly classified under the FLSA and Pennsylvania law. The parties agreed to settle the claims in the first quarter of 2018 for $4.2 million. Settlement of this collective action is subject to court approval. In accordance with GAAP, the Company recognized an estimated liability of $4.2 million as of December 31, 2017, as the occurrence of a loss was probable and reasonably estimable on this 2016 claim, based on events that occurred prior to the filing of the Company's 2017 Annual Report on Form 10-K.
121
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
Additionally, the Company is involved in a commercial dispute whereby a former customer has commenced an arbitration proceeding, captioned Halcon Operating Co., Inc. and Halcon Energy Properties, Inc. v. Keane Frac LP and Keane Frac GP, LLC, and on December 15, 2017, made a claim for contractual damages of approximately $4.0 million. The Company intends to vigorously dispute the merits of this asserted claim and plans to assert affirmative counterclaims for unpaid bills and other damages. The Company is currently unable to estimate the range of loss, if any, that may result from this matter.
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
In 2017, the Company was notified by the Texas Comptroller of Public Accounts that it will conduct a routine audit of Keane Frac TX, LLC's direct payment sales tax for the periods of January 2014 through May 2017. The audit is expected to commence in March 2018. The Company is currently unable to estimate the range of loss, if any, that may result from this matter.
(19) Related Party Transactions
Cerberus Operations and Advisory Company, an affiliate of the Company’s principal equity holder, provides certain consulting services to the Company. The Company paid $0.3 million, $1.0 million and $0.7 million during the years ended December 31, 2017, 2016 and 2015, respectively.
In connection with the Company's reorganization, the Company engaged in transactions with affiliates. See Note (1) (Basis of Presentation and Nature of Operations) and Note (13) (Owners’ Equity) for a description of these transactions.
In connection with the Company's research and development initiatives, the Company has engaged in transactions with its equity-method investee. See Note (18) Commitments and Contingencies for a description of these commitments. As of December 31, 2017, the Company has purchased $0.6 million of shares in its equity-method investee.
As part of the APA executed for our acquisition of the Acquired Trican Operations, certain representations and warranties were provided to the Company relating to the condition of the acquired machinery and equipment. The material maintenance expenditures incurred by the Company to bring all of the acquired machinery and equipment into proper working order exceeded the representations made in the APA. On June 12, 2017, the Company and Trican reached a settlement that resulted in proceeds to the Company of $2.1 million and net gain on settlement to the Company of $3.6 million. Trican, pursuant to its conditional rights under the Company's Stockholders' Agreement entered into in connection with the IPO, has appointed its President and Chief Executive Officer to serve as a member of the Board of Directors.
122
In December 2017, we sold our dormant coiled tubing assets, including seven coiled tubing units and ancillary equipment related thereto, to Patriot Well Solutions LLC, an affiliate of WDE RockPile Aggregate, LLC, for a purchase price of $10.0 million.
On January 17, 2018, the Company's Registration Statement on Form S-1 (File No. 333-222500) was declared effective by the SEC for an offering on behalf of Keane Investor Holdings LLC (the "selling stockholder"), pursuant to which 15,320,015 shares were sold by the selling stockholder (including 1,998,262 shares sold pursuant to the exercise of the underwriters' over-allotment option), at a price to the public of $18.25 per share. The Company did not sell any common stock in, and did not receive any of the proceeds from, the offering. Upon completion of the offering, Keane Investor Holdings LLC controlled 50.9% of the Company's outstanding common stock. Upon vesting of certain of the Company's RSUs on January 20, 2018, Keane Investor controls 50.7% of the Company's outstanding common stock. The Company incurred $1.2 million of transaction costs on behalf of the selling stockholder related to the offering in 2017, which were included under selling, general and administrative expenses within the consolidated and combined statement of operations. The Company anticipates it will incur approximately $12.9 million of transactions costs related to the offering in 2018. Transaction costs consist of the underwriters' fees, other offering fees and expenses for professional services rendered specifically in connection with the offering.
(20) Defined Contribution Plan
The Company sponsors a 401(k) defined contribution retirement plan covering eligible employees. The Company makes matching contributions of up to 3.5% of compensation. Contributions made by the Company were $4.9 million, $1.4 million and $0.9 million for the years ended December 31, 2017, 2016 and 2015, respectively.
(21) Wind-down of a Foreign Subsidiary
During the first quarter of 2015, the Company’s Canadian operations lost an open bid for the renewal of a customer contract that had been material to the foreign operations in prior years. Due to the loss of this contract, coupled with the unfavorable market conditions driven by low oil prices, management decided to exit wireline operations in Canada and implemented an exit strategy to dispose of the assets of the Canadian operations in multiple phases.
The phases were as follows:
• | Phase 1 included completing the remainder of the customer contract during the first quarter of 2015. |
• | Phase 2 included disposing of the physical assets of the Canadian operations by selling them to third parties or transferring them to Keane Frac, LP during the second quarter of 2015. |
• | Phase 3 included repatriating $8.0 million CAD ($6.7 million USD) of cash from Keane Completions CN Corp. |
• | Phase 4 included settlement of the outstanding obligations of the Canadian operations. The Company has three long-term operating leases still in effect. These leases and any trailing costs are settled on an ad hoc basis. The Company contracted sub-tenants for one of the leased properties during the fourth quarter of 2015 and for the other two properties in the second and fourth quarters of 2016. |
• | Phase 5 included transitioning the $4.7 million CAD of goodwill related to the Completion Services segment from Keane Completions CN Corp. to Holdco II as of December 31, 2015. |
As of this time, Management has no formal plan to substantially liquidate its Canadian subsidiary.
123
As of December 31, 2017, all material costs associated with the wind-down of the Canadian subsidiary were identified, and we do not expect to incur any additional significant costs associated with the wind-down of the Canadian subsidiary. Exit costs were incurred within the Company’s Completion Services reportable segment. The Company did not incur any Canadian subsidiary exit related costs during the years ended December 31, 2017 or December 31, 2016.
Exit costs incurred during the year ended December 31, 2015 and the line items where they appear on the consolidated statements of operations and comprehensive loss were as follows:
(Thousands of Dollars) | ||||
Location in consolidated statements of operations and comprehensive loss | Description | Year ended December 31, 2015 | ||
Costs of services | ||||
Severance pay | $ | 208 | ||
Selling, general and administrative expenses | ||||
Severance pay | $ | 267 | ||
Consulting and legal fees | 39 | |||
Retention pay | 187 | |||
Asset sales and disposals costs | 525 | |||
Lease exit costs | 1,375 | |||
Other costs | 121 | |||
$ | 2,514 | |||
The activity in the exit liabilities related to lease and contract obligations recognized in connection with the wind-down of the Canadian operations, which are presented as accrued liabilities on the consolidated balance sheets, were as follows for the year ended December 31, 2017:
(Thousands of Dollars) | ||||||||
2017 | 2016 | |||||||
Beginning balance at January 1, | $ | 233 | $ | 759 | ||||
Charges incurred | — | — | ||||||
Cash payments net of cash receipts | (214 | ) | (290 | ) | ||||
Currency lease accretion and other adjustments | 30 | (236 | ) | |||||
Total lease obligations, ending balance | $ | 49 | $ | 233 | ||||
(22) Business Segments
Management operates the Company in two reporting segments: Completion Services and Other Services. Management evaluates the performance of these segments based on equipment utilization, revenue, segment gross profit and gross margin. All inter-segment transactions are eliminated in consolidation.
124
KEANE GROUP, INC. AND SUBSIDIARIES
Notes to the Consolidated and Combined Financial Statements
The following tables present financial information with respect to the Company’s segments. Corporate and Other represents costs not directly associated with an operating segment, such as interest expense, income taxes and corporate overhead. Corporate assets include cash, deferred financing costs, derivatives and entity-level machinery equipment.
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Operations by business segment | ||||||||||||
Revenue: | ||||||||||||
Completion Services | $ | 1,527,287 | $ | 410,854 | $ | 363,820 | ||||||
Other Services | 14,794 | 9,716 | 2,337 | |||||||||
Total revenue | $ | 1,542,081 | $ | 420,570 | $ | 366,157 | ||||||
Gross profit (loss): | ||||||||||||
Completion Services | $ | 258,024 | $ | 8,963 | $ | 58,784 | ||||||
Other Services | 1,496 | (4,735 | ) | 777 | ||||||||
Total gross profit | $ | 259,520 | $ | 4,228 | $ | 59,561 | ||||||
Operating income (loss): | ||||||||||||
Completion Services | $ | 115,691 | $ | (80,563 | ) | $ | (11,260 | ) | ||||
Other Services | (197 | ) | (10,156 | ) | (3,864 | ) | ||||||
Corporate and Other | (106,225 | ) | (58,985 | ) | (24,587 | ) | ||||||
Total operating income (loss) | $ | 9,269 | $ | (149,704 | ) | $ | (39,711 | ) | ||||
Depreciation and amortization: | ||||||||||||
Completion Services | $ | 141,385 | $ | 89,432 | $ | 65,114 | ||||||
Other Services | 5,757 | 5,087 | 3,169 | |||||||||
Corporate and Other | 12,138 | 6,460 | 1,264 | |||||||||
Total depreciation and amortization | $ | 159,280 | $ | 100,979 | $ | 69,547 | ||||||
(Gain) loss on disposal of assets | ||||||||||||
Completion Services | $ | 948 | $ | (538 | ) | $ | 357 | |||||
Other Services | (4,064 | ) | (44 | ) | (651 | ) | ||||||
Corporate and Other | 561 | 195 | 24 | |||||||||
Total (gain) on disposal of assets | $ | (2,555 | ) | $ | (387 | ) | $ | (270 | ) | |||
Impairment: | ||||||||||||
Completion Services | $ | — | $ | — | $ | 2,443 | ||||||
Other Services | — | 185 | 1,471 | |||||||||
Corporate and Other | — | — | — | |||||||||
Total impairment | $ | — | $ | 185 | $ | 3,914 | ||||||
Exit Costs: | ||||||||||||
Completion Services | $ | — | $ | — | $ | 2,722 | ||||||
Other Services | — | — | — | |||||||||
Corporate and Other | $ | 1,221 | $ | 5,696 | $ | — | ||||||
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Notes to the Consolidated and Combined Financial Statements
Total exit costs | $ | 1,221 | $ | 5,696 | $ | 2,722 | ||||||
Income tax provision(1): | ||||||||||||
Completion Services | $ | — | $ | — | $ | — | ||||||
Corporate and Other | $ | (150 | ) | $ | — | $ | — | |||||
Total income tax: | $ | (150 | ) | $ | — | $ | — | |||||
Net income (loss): | ||||||||||||
Completion Services | $ | 115,691 | $ | (80,563 | ) | $ | (11,260 | ) | ||||
Other Services | (197 | ) | (10,156 | ) | (3,864 | ) | ||||||
Corporate and Other | (151,635 | ) | (96,368 | ) | (49,518 | ) | ||||||
Total net loss | $ | (36,141 | ) | $ | (187,087 | ) | $ | (64,642 | ) | |||
Capital expenditures(2): | ||||||||||||
Completion Services | $ | 185,329 | $ | 21,736 | $ | 27,228 | ||||||
Other Services | 1,718 | 487 | 8 | |||||||||
Corporate and Other | 2,582 | 1,322 | 10 | |||||||||
Total capital expenditures | $ | 189,629 | $ | 23,545 | $ | 27,246 | ||||||
(1) Income tax provision as presented in the consolidated and combined statement of operations does not include the provision for Texas margin tax for 2016 and the provisions for Texas margin tax and Canadian federal tax for 2015.
(2) | Capital expenditures do not include net assets from the acquisition of RockPile on July 3, 2017 of $116.6 million or the Acquired Trican Operations on March 16, 2016 of $205.5 million. |
(Thousands of Dollars) | ||||||||
December 31, 2017 | December 31, 2016 | |||||||
Total assets by segment: | ||||||||
Completion Services | $ | 863,419 | $ | 412,947 | ||||
Other Services | 21,877 | 18,485 | ||||||
Corporate and Other | 157,820 | 105,508 | ||||||
Total assets | $ | 1,043,116 | $ | 536,940 | ||||
Total assets by geography: | ||||||||
United States | $ | 1,041,596 | $ | 535,395 | ||||
Canada | 1,520 | 1,545 | ||||||
Total assets | $ | 1,043,116 | $ | 536,940 | ||||
Goodwill by segment: | ||||||||
Completion Services | $ | 134,967 | $ | 50,478 | ||||
Total goodwill | $ | 134,967 | $ | 50,478 | ||||
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Notes to the Consolidated and Combined Financial Statements
(23) Selected Quarterly Financial Data
The following table sets forth certain unaudited financial and operating information for each quarter of the years ended December 31, 2017 and 2016. The unaudited quarterly information includes all adjustments that, in the opinion of management, are necessary for the fair presentation of the information presented. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year.
Year Ended December 31, 2017 | ||||||||||||||||
(Unaudited) | ||||||||||||||||
Selected Financial Data: | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
Revenue | $ | 240,153 | $ | 323,136 | $ | 477,302 | $ | 501,490 | ||||||||
Costs of services (excluding depreciation and amortization, shown separately) | 223,992 | 278,384 | 391,089 | 389,096 | ||||||||||||
Depreciation and amortization | 30,373 | 32,739 | 46,204 | 49,964 | ||||||||||||
Selling, general and administrative expenses | 17,986 | 22,337 | 28,592 | 24,611 | ||||||||||||
(Gain) loss on disposal of assets | (434 | ) | (5 | ) | 302 | (2,418 | ) | |||||||||
Total operating costs and expenses | 271,917 | 333,455 | 466,187 | 461,253 | ||||||||||||
Operating income (loss) | (31,764 | ) | (10,319 | ) | 11,115 | 40,237 | ||||||||||
Other income, net | 4 | 3,701 | 942 | 9,316 | ||||||||||||
Interest expense | (40,361 | ) | (4,349 | ) | (7,195 | ) | (7,318 | ) | ||||||||
Total other expenses | (40,357 | ) | (648 | ) | (6,253 | ) | 1,998 | |||||||||
Income tax income (expense) | (134 | ) | (931 | ) | (797 | ) | 1,712 | |||||||||
Net income (loss) | $ | (72,255 | ) | $ | (11,898 | ) | $ | 4,065 | $ | 43,947 | ||||||
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Notes to the Consolidated and Combined Financial Statements
Year Ended December 31, 2016 | ||||||||||||||||
(Unaudited) | ||||||||||||||||
Selected Financial Data: | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
Revenue | $ | 61,195 | $ | 91,589 | $ | 116,753 | $ | 151,033 | ||||||||
Costs of services (excluding depreciation and amortization, shown separately) | 67,845 | 85,039 | 120,480 | 142,978 | ||||||||||||
Depreciation and amortization | 13,968 | 27,723 | 30,256 | 29,032 | ||||||||||||
Selling, general and administrative expenses | 20,168 | 15,820 | 9,218 | 7,949 | ||||||||||||
(Gain) loss on disposal of assets | (8 | ) | (464 | ) | 176 | (91 | ) | |||||||||
Impairment | — | — | — | 185 | ||||||||||||
Total operating costs and expenses | 101,973 | 128,118 | 160,130 | 180,053 | ||||||||||||
Operating loss | (40,778 | ) | (36,529 | ) | (43,377 | ) | (29,020 | ) | ||||||||
Other expense (income), net | (133 | ) | (874 | ) | 470 | (379 | ) | |||||||||
Interest expense | 8,408 | 10,037 | 9,963 | 9,891 | ||||||||||||
Total other expenses | 8,275 | 9,163 | 10,433 | 9,512 | ||||||||||||
Net loss | $ | (49,053 | ) | $ | (45,692 | ) | $ | (53,810 | ) | $ | (38,532 | ) | ||||
(24) New Accounting Pronouncements
(a) Recently Adopted Accounting Standards
In July 2015, the FASB issued ASU 2015-11, “Inventory, Simplifying the Measurement of Inventory,” which requires that an entity should measure inventory at the lower of cost and net realizable value. The realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The Company adopted this standard as of January 1, 2017. The adoption of this standard did not have a material impact on the Company's consolidated and combined financial statements.
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which amends existing guidance on income taxes to require the classification of all deferred tax assets and liabilities as noncurrent on the balance sheet. The Company adopted this standard as of January 1, 2017, retrospectively. The adoption of this standard did not have a material impact on the Company's consolidated and combined financial statements for prior periods.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting (Topic 718),” which is effective for fiscal years and interim periods within fiscal years beginning after December 31, 2016, with a cumulative-effect and prospective approach to be used for implementation. ASU 2016-09 changes several aspects of the accounting for share-based payment award transactions, including accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, minimum statutory tax withholding requirements and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes. The Company adopted this standard as of January 1, 2017. The adoption of this standard did not have an adverse impact to the Company's financial condition or results of operations.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which is effective for fiscal years and interim periods within fiscal years beginning after December 15,
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Notes to the Consolidated and Combined Financial Statements
2017, with a full retrospective approach to be used upon implementation and early adoption allowed. ASU 2016-15 provides guidance on eight different issues intended to reduce diversity in practice on how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The Company adopted this standard effective January 1, 2017, which impacted the presentation of its cash payments for prepayment penalties incurred in connection with the early termination of its 2016 ABL Facility, 2016 Term Facility and Senior Secured Notes. The Company presented the cash payments for the prepayment penalties as cash used in financing activities.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230), Restricted Cash,” which stipulates that the amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-the period and end-of-period total amounts shown on the statement of cash flows. The amendments to this update do not provide a definition of restricted cash or restricted cash equivalents. The Company early adopted this standard effective January 1, 2017. The adoption of this standard did not have any impact on the Company's consolidated and combined financial statements, as it does not have any restricted cash.
In December 2016, the FASB issued ASU 2016-19, “Technical Corrections and Improvements”, which provides technical corrections, clarifications and improvements on a wide range of topics in the ASC. The amendments in this ASU generally fall into one of four categories: (i) amendments related to differences between original guidance and the ASC, (ii) guidance clarification and reference corrections, (iii) simplification and (iv) minor improvements. Transition guidance varies based on the amendments in the ASUs. The amendments that require transition guidance are effective for fiscal years and interim periods beginning after December 15, 2016. The adoption of this standard did not have any impact on the Company's consolidated and combined financial statements.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates Step 2 of the goodwill impairment test with the goodwill impairment amount calculated as the amount by which the carrying value of the reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. This update is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2019, with early adoption permitted prospectively for any impairment tests performed after January 1, 2017. The Company early adopted this standard, prospectively, as of January 1, 2017 and applied this standard to its annual goodwill impairment assessment.
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,” which clarifies what constitutes a modification of a share-based payment award. This update is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017, with early adoption permitted. The Company early adopted this standard effective January 1, 2017, which impacted the accounting for the equity-based awards, issued under the Equity and Incentive Award Plan, in its consolidated and combined financial statements. The Company applied this standard to determine that its conversion of the Class B units issued to the independent members of the Board of Directors into restricted shares required the Company to apply modification accounting.
In August 2017, the FASB issued ASC 2017-12, “Targeted Improvements to Accounting for Hedging Activities,” which expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. ASU 2017-12 simplifies the hedge documentation and effectiveness assessment requirements, eliminates the need to separately measure and report hedge ineffectiveness and requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. The Company early adopted this standard effective September 28, 2017, in conjunction with its hedge designation of two interest rate swaps, to benefit from the ability to perform ongoing hedge effectiveness assessments on a qualitative basis and the removal of the requirement to separately measure and report hedge ineffectiveness. There were no active hedge relationships upon adoption. Accordingly, the adoption did not impact
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Notes to the Consolidated and Combined Financial Statements
the opening balance of accumulated other comprehensive income or net assets in the Company's consolidated and combined financial statements.
(b) Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU 2014-09 supersedes the revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. ASU 2014-09 sets forth a five-step model for determining when and how revenue is recognized. Under the model, an entity will be required to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. Additional disclosures will be required to describe the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers,” which deferred the effective date of ASU 2014-09 for all entities by one year and is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017. The Company has completed its evaluation of the impact of the adoption of this ASU on its various revenue streams and established processes and determined the adoption of this ASU will not have a material impact on the Company's current revenue recognition processes.
During 2016, FASB issued ASU 2016-08, “Principal versus Agent,” ASU 2016-10, “Licenses of Intellectual Property (IP) and Identification of Performance Obligations” and ASU 2016-12, “Narrow Scope Improvements and Practical Expedients”. During 2017, FASB issued ASC 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”. All these ASUs are designed to address various issues raised by the constituents to the Transition Resource Group and help minimize diversity in practice in applying ASU 2014-09. The Company will adopt these standards utilizing the modified retrospective method concurrently with the adoption of ASU 2014-09.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which (i) requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, (ii) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (iii) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset and (iv) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. ASU 2016-01 is effective for annual periods beginning after December 15, 2018. The Company will implement the provisions of ASU 2016-01 effective January 1, 2018. The Company does not anticipate the adoption of this standard will have a material impact on its consolidated and combined financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a purchase financed by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months, regardless of their classification. Leases with a term of 12 months or less may be accounted for similarly to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The Company anticipates the adoption of this standard will result in a significant increase in its assets and liabilities, as the Company has certain operating and real property lease arrangements for which it is the lessee. The standard is effective for the Company beginning on January 1, 2019.
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Notes to the Consolidated and Combined Financial Statements
In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Asset Other Than Inventory,” which requires entities to recognize the tax consequences of intercompany asset transfers in the period in which the transfer takes place, with the exception of inventory transfers. ASU 2016-16 is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017. Entities must adopt the standard using a modified retrospective approach with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The cumulative effect adjustments will include recognition of the income tax consequences of intra-entity transfers of assets, other than inventory, that occur before the adoption date. Early adoption is permitted, but only at the beginning of an annual period for which no financial statements (interim or annual) have already been issued or made available for issuance. The Company does not expect the adoption of this standard to have a material impact on its consolidated and combined financial statements, as the Company has minimal intra-entity transfers of qualifying assets.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business,” which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or business. This update is effective for fiscal years and interim periods within fiscal years beginning after December 15, 2017 and should be applied prospectively. Early adoption is allowed for transactions that occurred before the issuance date or effective date of the amendments only when the transaction has not been reported in the financial statements previously issued. The Company does not expect the adoption of this standard to have a material impact on its consolidated and combined financial statements.
In February 2017, the FASB issued ASU 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20: Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Asset”. Subtopic 610-20 was issued as part of the new revenue recognition standard and provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. ASU 2017-05 (i) clarifies the definition of “in substance nonfinancial assets,” (ii) unifies guidance related to partial sales of nonfinancial assets, (iii) eliminates rules specifically addressing sales of real estate, (iv) removes exceptions to the financial asset derecognition model and (v) clarifies the accounting for contributions of nonfinancial assets to joint ventures. The Company will adopt this standard utilizing the modified retrospective method concurrently with the adoption of ASU 2014-09. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated and combined financial statements.
(25) Subsequent Events
Secondary Common Stock Offering
On January 17, 2018, the Company's Registration Statement on Form S-1 (File No. 333-222500) was declared effective by the SEC for an offering on behalf of Keane Investor Holdings LLC (the "selling stockholder"), pursuant to which 15,320,015 shares were sold by the selling shareholder (including 1,998,262 shares sold pursuant to the exercise of the underwriters' over-allotment option), at a price to the public of $18.25 per share. The Company did not sell any common stock in, and did not receive any of the proceeds from, the offering. Upon completion of the offering, Keane Investor Holdings LLC controlled 50.9% of the Company's outstanding common stock. Upon vesting of certain of the Company's RSUs on January 20, 2018, Keane Investor Holdings LLC controls 50.7% of the Company's outstanding common stock. The Company incurred $1.2 million of transaction costs on behalf of the selling stockholder related to the offering in 2017, which were included under selling, general and administrative expenses within the consolidated and combined statement of operations. The Company anticipates it will incur approximately $12.9 million of transactions costs related to the offering in 2018. Transaction costs consist of the underwriters' fees, other offering fees and expenses for professional services rendered specifically in connection with the offering.
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Notes to the Consolidated and Combined Financial Statements
Stock Repurchase Program
On February 26, 2018, the Company announced that its Board of Directors has authorized a stock repurchase program of up to $100.0 million of the Company’s outstanding common stock, with the intent of returning value to its shareholders as management continues to expect further growth and profitability. The duration of the stock buy-back program will be 12 months. The program does not obligate the Company to purchase any particular number of shares of common stock during any period, and the program may be modified or suspended at any time at the Company's discretion.
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Item 9. Changes in and Disagreements With Accountant on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting due to a transition period established by the SEC for newly public companies.
In addition, because we were an “emerging growth company” for fiscal year 2017, under the JOBS Act, our independent registered public accounting firm was not required to attest to the effectiveness of our internal control over financial reporting for fiscal year 2017. As of January 1, 2018, we no longer qualify as an emerging growth company.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financing reporting that occurred during the quarter ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
On February 26, 2018, Mr. James E. Geisler voluntarily resigned as a member of the Board of Directors of Keane Group, Inc. (the "Company"), and ceased to be a member of any committee of the Company’s Board of Directors, effective immediately. Mr. Geisler’s resignation was not the result of any disagreements with the Company or the Board of Directors.
In connection with Mr. Geisler’s resignation, the Company’s Board of Directors has determined that authorized number of directors on the Board of Directors be decreased to 11 directors. In addition, Mr. Shawn Keane was appointed to the Compliance Committee in satisfaction of its membership requirements.
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PART III
References Within This Annual Report
As used in Part III of this Annual Report on Form 10-K, unless the context otherwise requires, references to (i) the terms “Company,” “Keane,” “we,” “us” and “our” refer to Keane Group Holdings, LLC and its consolidated subsidiaries for periods prior to our IPO, and, for periods as of and following the IPO, Keane Group, Inc. and its consolidated subsidiaries; (ii) the term “Keane Group” refers to Keane Group Holdings, LLC and its consolidated subsidiaries; (iii) the term “Trican Parent” refers to Trican Well Service Ltd. and, where appropriate, its subsidiaries; (iv) the term “Trican U.S.” refers to Trican Well Service L.P.; (v) the term “Trican” refers to Trican Parent and Trican U.S., collectively; (vi) the term "RockPile" refers to RockPile Energy Services, LLC and its consolidated subsidiaries; (vii) the term "Keane Investor" refers to Keane Investor Holdings LLC and (viii) the terms “Sponsor” or “Cerberus” refer to Cerberus Capital Management, L.P. and its controlled affiliates and investment funds.
Item 10. Directors, Executive Officers and Corporate Governance
Executive Officers and Directors
The following table sets forth information regarding our board of directors and executive officers:
Name | Age† | Position | ||
James C. Stewart | 55 | Chairman and Chief Executive Officer | ||
Gregory L. Powell | 43 | President and Chief Financial Officer | ||
M. Paul DeBonis Jr. | 58 | Chief Operating Officer | ||
Kevin M. McDonald | 51 | Executive Vice President, General Counsel & Secretary | ||
Phung Ngo-Burns | 52 | Chief Accounting Officer | ||
Ian J. Henkes | 46 | Vice President & General Manager, South Region and National Wireline | ||
Marc G. R. Edwards*(a)(b)(d) | 57 | Lead Director | ||
Lucas N. Batzer(c) | 34 | Director | ||
Dale M. Dusterhoft(b)(d) | 57 | Director | ||
Christian A. Garcia*(a) | 54 | Director | ||
Lisa A. Gray(c)(d) | 62 | Director | ||
Gary M. Halverson*(a)(d) | 59 | Director | ||
Shawn Keane(b)(c) | 52 | Director | ||
Elmer D. Reed*(c) | 69 | Director | ||
Lenard B. Tessler | 65 | Director | ||
Scott Wille(b) | 37 | Director | ||
† | As of December 31, 2017 |
* | Independent Director |
(a) | Member, Audit and Risk Committee |
(b) | Member, Compensation Committee |
(c) | Member, Compliance Committee |
(d) | Member, Nominating and Corporate Governance Committee |
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Executive Officer and Director Biographies
James C. Stewart, Chairman and Chief Executive Officer. Mr. Stewart became the Chairman and Chief Executive Officer of Keane in March 2011. Prior to joining Keane, from 2007 to 2009, he served as the President and Chief Executive Officer of a privately held international drilling company. From 2006 to 2007, Mr. Stewart served as Vice President of Integrated Drilling Services for Weatherford International plc, based in London and Dubai, where he created and managed a global business unit that included a 50-rig international land contract drilling group and a global project management team. Mr. Stewart began his career with Schlumberger Limited, where he held senior leadership positions across the globe over the span of 22 years. Mr. Stewart’s qualifications to serve as Chairman and Chief Executive Officer include his broad leadership experience with oilfield services, as well as his long tenure and successes in the oil and natural gas market.
Gregory L. Powell, President and Chief Financial Officer. Mr. Powell has served as Chief Financial Officer of Keane since March 2011. He previously held the title of Vice President between March 2011 and July 2015, when he became President. Prior to joining Keane, Mr. Powell served as an Operations Executive for Cerberus from 2006 to March 2011. During his tenure at Cerberus, he was responsible for evaluating new investments and partnering with portfolio companies to maximize value creation. Mr. Powell previously served on the board of directors and audit committee of Tower International, Inc., a manufacturer of engineered structural metal components and assemblies. Prior to joining Cerberus, Mr. Powell spent ten years with General Electric, starting with global leadership training and growing into various leadership roles in Finance and Mergers and Acquisitions, with his last role being Chief Financial Officer for GE Aviation—Military Systems.
M. Paul DeBonis Jr., Chief Operating Officer. Mr. DeBonis has served as Chief Operating Officer of Keane since May 2011. Prior to joining Keane, he served as President of Big Country Energy Services USA LP from May 2010 to May 2011 and as President of Pure Energy Services (USA), Inc. from June 2005 to May 2010. He previously served as Oilfield Services Marketing Manager at Schlumberger Limited. Mr. DeBonis started his oil and gas career with Dowell Services in the fracturing and cementing departments. He has worked in several basins throughout the United States and Canada. Mr. DeBonis was a Schlumberger Field Engineer Graduate in 1985. Mr. DeBonis has authored and published two papers related to hydraulic fracturing for the Society of Petroleum Engineers.
Kevin M. McDonald, Executive Vice President, General Counsel & Secretary. Mr. McDonald has served as Keane’s Executive Vice President, General Counsel & Secretary since November 2016. Prior to joining Keane, he served in leadership roles at Marathon Oil Corporation from 2012 to 2016, including as Deputy General Counsel of Corporate Legal Services and Government Relations, Deputy General Counsel of Governance, Compliance & Corporate Services and Assistant General Counsel. He practiced as a partner at the international law firm Fulbright & Jaworski LLP (now Norton Rose Fulbright LLP) in 2012. Mr. McDonald previously held various counsel positions, including President & Chief Executive Officer and acting General Counsel at Arms of Hope, a non-profit organization, from 2008 to 2012, Senior Vice President, General Counsel & Chief Compliance Officer at Cooper Industries between from 2006 to 2008, Associate General Counsel at Anadarko Petroleum from 2006 to 2008 and Managing Counsel (Litigation) at Valero Energy from 2002 to 2004. Mr McDonald began his career as an associate at Norton Rose Fulbright LLP between 1992 and 2001.
Phung Ngo-Burns, Chief Accounting Officer. Mrs. Ngo-Burns has served as Keane's Chief Accounting Officer since March 2017. Prior to joining Keane, Ms. Ngo-Burns served as Senior Director with Alvarez and Marsal since 2012. From 2002 to 2012, Ms. Ngo-Burns served as Chief Financial Officer of Ability Holdings, Inc. and held several executive roles in the finance department of ExpressJet Holdings, Inc., including as Executive Vice President and Chief Financial Officer. Ms. Ngo-Burns brings nearly 30 years of accounting experience to the Keane and holds an M.B.A. from the University of Houston and a B.S. in Business and Accounting from Oklahoma State University.
Ian J. Henkes, Vice President & General Manager, South Region and National Wireline. Mr. Henkes joined Keane as Vice President for Human Resources in February 2016 and was promoted to his current position in July 2017. Prior to joining Keane, he served as Human Resources Manager for Schlumberger’s Drilling &
135
Measurements global businesses from August 2014 to February 2016, as Vice President for North America at Pathfinder Energy Services from January 2013 to September 2014 and as Personnel Manager at Pathfinder Energy Services from September 2012 to December 2012. Prior to joining Pathfinder Energy Services, Mr. Henkes served in various roles at Schlumberger from 1994 to 2012.
Marc G. R. Edwards, Lead Director. Mr. Edwards has served as President and Chief Executive Officer and as a member of the board of directors of Diamond Offshore Drilling, Inc., a deepwater water drilling contractor, since 2014. He previously spent 30 years at Halliburton Company, where he worked in various roles, most recently as Senior Vice President of the Completion and Production Division. Mr. Edwards developed an extensive background in the global energy industry during his tenure at Halliburton, which enables him to provide important contributions and a new perspective to our board of directors. His day-to-day leadership experience gives him invaluable insight regarding the operations of an oilfield services company.
Lucas N. Batzer, Director. Mr. Batzer has served as a member of Keane’s board of directors since March 2016. He currently serves as a Managing Director of Private Equity at Cerberus, which he joined in August 2009. Prior to joining Cerberus, Mr. Batzer worked as an analyst at The Blackstone Group from 2007 to 2009. He has served on the boards of directors of ABC Group and Reydel Automotive, two automotive component suppliers, since June 2016 and November 2014, respectively. Mr. Batzer’s experience in the private equity industry, board experience and comprehensive knowledge of our business and operational strategy, positions him as an important resource on our board of directors.
Dale M. Dusterhoft, Director. Mr. Dusterhoft has served as a member of Keane’s board of directors since March 2016 and currently serves as Chief Executive Officer and as a director of Trican, which he joined at its inception in 1996. He has served on the board of directors of Trican since August 2009. Prior to becoming Chief Executive Officer of Trican, Mr. Dusterhoft was the Company’s Senior Vice President of Technical Services. Before joining Trican, Mr. Dusterhoft worked for 12 years with a major Canadian pressure pumping company, where he held management positions in Operations, Sales and Engineering. Mr. Dusterhoft serves on the board of the Alberta Children’s Hospital Foundation and the Calgary Petroleum Club. In addition, Mr. Dusterhoft is a past President of the Canadian Association of Drilling Engineers, the Canadian Section of the Society of Petroleum Engineers and a past member of the Industry Advisory Board of the Schulich School of Engineering at the University of Calgary. Mr. Dusterhoft’s years of leadership and operational experience in large, successful enterprises in the oil industry is valuable to our board of directors’ understanding of the industry.
Christian A. Garcia, Director. Mr. Garcia currently serves as Executive Vice President and Chief Financial Officer of Visteon Corporation, a role he has held since October 2016. Previously, Mr. Garcia served in various executive and leadership roles at Halliburton Company, including as Senior Vice President and Acting Chief Financial Officer. Mr. Garcia has a Bachelor of Science in Business Economics from the University of the Philippines and a Master of Science in Management in Finance from Purdue University, and brings over 30 years of financial experience to the Company.
Lisa A. Gray, Director. Ms. Gray has served as a member of Keane’s board of directors since March 2011. Ms. Gray has served as Vice Chairman of COAC since May 2015, and has served as General Counsel of COAC since 2004. Prior to joining Cerberus, she served as Chief Operating Executive and General Counsel for WAM!NET Inc. from 1996 to 2004. Prior to that, she was a partner at the law firm of Larkin, Hoffman, Daly & Lindgren, Ltd from 1990 to 1996. Prior to that, she was active in several non-profit corporations. Ms. Gray has over 25 years of experience in the areas of mergers and acquisitions, corporate debt restructuring and corporate governance. Ms. Gray serves as Vice Chairman and General Counsel of COAC, an affiliate of our largest beneficial owner, and has extensive experience and familiarity with us. In addition, Ms. Gray has extensive legal and corporate governance skills, which broaden the scope of our board of directors’ experience.
Gary M. Halverson, Independent Director. Mr. Halverson has served as a member of Keane’s board of directors since September 2016. In 2016, Mr. Halverson became a Senior Advisor at First Reserve, a private equity firm that focuses on energy investments, and a Partner at 360 Development Partners, a commercial real estate firm. Mr. Halverson was formerly Group President of Drilling and Production Systems and Senior Vice President at
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Cameron International Corporation from 2014 to 2016 prior to its sale to Schlumberger in 2016. He has over 38 years of industry experience with Cameron, where he worked in various roles across the U.S., Latin America and Asia, including President of Surface Systems between 2005 and 2014, Vice President and General Manager for Western Hemisphere between 2002 and 2006, General Manager of Latin America between 2001 and 2002 and Director of Sales and Marketing for Asia/Pacific/Middle East between 1993 and 2001. Mr. Halverson formerly served as Chairman of the Board of Directors of the Petroleum Equipment Suppliers Association, as a director on the board of the General Committee of Special Programs of the American Petroleum Institute, as a director on the board of the Well Control Institute and was the U.S. delegate to the World Petroleum Congress. Mr. Halverson’s extensive involvement in the oilfield service industry brings a valuable perspective to our Board.
Shawn Keane, Director. Mr. Keane has served as a member of Keane’s board of directors since March 2011. Mr. Keane served as President of Keane from 2008 to 2011 and helped transition the company into the hydraulic fracturing industry in the Marcellus/Utica Shale. Previously, he served as Keane’s Vice President between 2000 and 2008, and in various management positions from 1983 to 2000, when he began his employment with Keane & Sons Drilling, Inc., a predecessor entity of Keane. Mr. Keane’s knowledge of our company’s operational history and experience in the oilfield services industry is valuable to our board of directors’ understanding of our business and financial performance.
Lenard B. Tessler, Director. Mr. Tessler has served as a member of Keane’s board of directors since October 2012. Mr. Tessler is currently Vice Chairman and Senior Managing Director at Cerberus, which he joined in 2001. Prior to joining Cerberus, Mr. Tessler served as Managing Partner of TGV Partners, a private equity firm that he founded, from 1990 to 2001. From 1987 to 1990, he was a founding partner of Levine, Tessler, Leichtman & Co. From 1982 to 1987, he was a founder, Director and Executive Vice President of Walker Energy Partners. Mr. Tessler is a member of the Cerberus Capital Management Investment Committee. He is a member of the Board of Directors of Albertsons Companies, a food and drug retailer, where he serves as Lead Director, and a Trustee of the New York-Presbyterian Hospital, where he also serves as member of the Investment Committee and the Budget and Finance Committee. Mr. Tessler’s leadership roles at our largest beneficial owner, his board service, his extensive experience in financing and private equity investments and his in-depth knowledge of our company and its acquisition strategy, provide critical skills for our board of directors to oversee our strategic planning and operations.
Elmer D. Reed, Independent Director. Mr. Reed has served as a member of Keane’s board of directors since April 2011. Prior to joining our board of directors, Mr. Reed served as Vice President, Executive Sales for Select Energy Services from 2010 to 2015 and in various management positions for BJ Services Company from 2003 to 2010, Newpark Drilling Fluids from 2001 to 2003 and Halliburton Energy Services from 1971 to 1999. Mr. Reed has over 45 years of oilfield service and operational experience. He served as a member of the board of directors of Circle Star Energy, an E&P company, in 2012. Mr. Reed has been active in the Independent Petroleum Association of America and is a lifetime member of the Society of Petroleum Engineers. He is also a member of Houston Livestock Show and Rodeo and Houston Farm and Ranch, and regularly assists with infrastructure development projects in South America. Mr. Reed strengthens our board of directors with decades of experience in the oilfield service industry.
Scott Wille, Director. Mr. Wille has served as a member of Keane’s board of directors since March 2011. Mr. Wille is currently Co-Head of North American Private Equity and Senior Managing Director at Cerberus, which he joined in 2006. Prior to joining Cerberus, Mr. Wille worked in the leveraged finance group at Deutsche Bank Securities Inc. from 2004 to 2006. Mr. Wille has served as a director of Remington Outdoor Company, Inc., a designer, manufacturer and marketer of firearms, ammunition and related products, since February 2014 and Albertsons Companies since 2015. Mr. Wille previously served as a director of Tower International, Inc., a manufacturer of engineered structural metal components and assemblies, from September 2010 to October 2012. Mr. Wille’s experience in the financial and private equity industries, together with his in-depth knowledge of our company and its acquisition strategy, are valuable to our board of directors’ understanding of our business and financial performance.
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Board of Directors
Family Relationships
None of our officers or directors has any family relationship with any director or other officer. “Family relationship” for this purpose means any relationship by blood, marriage or adoption, not more remote than first cousin.
Board Composition
Our business and affairs are currently managed under the board of directors of Keane. Our board of directors has 11 members, comprised of 7 directors affiliated with Keane Investor (including one executive officer) and four independent directors. Members of the board of directors will be elected at our annual meeting of stockholders to serve for a term of one year or until their successors have been elected and qualified, subject to prior death, resignation, retirement or removal from office.
Director Independence
Our board of directors has affirmatively determined that Marc G. R. Edwards, Christian A. Garcia, Gary M. Halverson and Elmer D. Reed are independent directors under the applicable rules of the NYSE and as such term is defined in Rule 10A-3(b)(1) under the Exchange Act.
Controlled Company
Keane Investor controls a majority of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the NYSE corporate governance standards. Under NYSE rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain NYSE corporate governance requirements, including:
•the requirement that a majority of the board of directors consist of independent directors;
•the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
•the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.
We currently utilize, and intend to continue to utilize these exemptions. As a result, we will not have a majority of independent directors nor will our nominating and corporate governance and compensation committees consist entirely of independent directors. Accordingly, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.
In the event that we cease to be a controlled company within the meaning of these rules, we will be required to comply with these provisions after specified transition periods.
More specifically, if we cease to be a controlled company within the meaning of these rules, we will be required to (i) satisfy the majority independent board requirement within one year of our status change, and (ii) have (a) at least one independent member on each of our nominating and corporate governance committee and compensation committee by the date of our status change, (b) at least a majority of independent members on each committee within 90 days of the date of our status change and (c) fully independent committees within one year of the date of our status change.
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Board Leadership Structure
Our board of directors does not have a formal policy on whether the roles of Chief Executive Officer and Chairman of the board of directors should be separate. However, James C. Stewart currently serves as both Chief Executive Officer and Chairman. Our board of directors has considered its leadership structure and believes at this time that our company and its stockholders are best served by having one person serve in both positions. Combining the roles fosters accountability, effective decision-making and alignment between interests of our board of directors and management. Mr. Stewart also is able to use the in-depth focus and perspective gained in his executive function to assist our board of directors in addressing both internal and external issues affecting the company.
Our corporate governance guidelines provide for the election of one of our directors to serve as Lead Director when the Chairman of the board of directors is also the Chief Executive Officer. Marc G. R. Edwards currently serves as our Lead Director, and is responsible for serving as a liaison between the Chairman and the non-management directors, approving meeting agendas and schedules for our board and presiding at executive sessions of the non-management directors and any other board meetings at which the Chairman is not present, among other responsibilities.
Our board of directors expects to periodically review its leadership structure to ensure that it continues to meet the company’s needs.
Role of Board in Risk Oversight
While the full board of directors has the ultimate oversight responsibility for the risk management process, its committees oversee risk in certain specified areas. In particular, our audit and risk committee oversees management of enterprise risks as well as financial risks. Our compensation committee is responsible for overseeing the management of risks relating to our executive compensation plans and arrangements and the incentives created by the compensation awards it administers. Our compliance committee is responsible for overseeing the management of compliance and regulatory risks facing our company and risks associated with business conduct and ethics. Our nominating and corporate governance committee oversees risks associated with corporate governance. Pursuant to our board of directors’ instruction, management regularly reports on applicable risks to the relevant committee or the full board of directors, as appropriate, with additional review or reporting on risks conducted as needed or as requested by our board of directors and its committees.
Board Committees
Our board of directors has assigned certain of its responsibilities to permanent committees consisting of board members appointed by it.
Audit and Risk Committee
Our audit and risk committee consists of Marc G. R. Edwards, Christian A. Garcia and Gary M. Halverson, with Mr. Garcia serving as chair of the committee. The committee assists the board in its oversight responsibilities relating to the integrity of our financial statements, our compliance with legal and regulatory requirements (to the extent not otherwise handled by our compliance committee), our independent auditor’s qualifications and independence, and the establishment and performance of our internal audit function and the performance of the independent auditor. Each of Messrs. Garcia, Edwards and Halverson qualify as independent directors under the corporate governance standards of the rules of the NYSE and the independence requirements of Rule 10A-3 of the Exchange Act. Our board of directors has determined that Mr. Garcia qualifies as an “audit committee financial expert” as such term is currently defined in Item 407(d)(5) of Regulation S-K. Each member of the audit and risk committee is able to read and understand fundamental financial statements, including our balance sheet, statement of operations and cash flows statements.
Our board of directors has adopted a written charter under which the audit and risk committee operates. A copy of the audit and risk committee charter, which satisfies the applicable standards of the SEC and the NYSE, is available on our website.
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Compensation Committee
Our compensation committee consists of Dale M. Dusterhoft, Marc G. R. Edwards, Shawn Keane and Scott Wille, with Scott Wille serving as chair of the committee. The compensation committee of the board of directors is authorized to review our compensation and benefits plans to ensure they meet our corporate objectives, approve the compensation structure of our executive officers and evaluate our executive officers’ performance and advise on salary, bonus and other incentive and equity compensation. A copy of the compensation committee charter is available on our website.
Compliance Committee
Our compliance committee consists of Lucas N. Batzer, Lisa A. Gray, Shawn Keane and Elmer D. Reed, with Lisa A. Gray serving as chair of the committee. The purpose of the compliance committee is to assist the board in implementing and overseeing our compliance programs, policies and procedures that are designed to respond to the various compliance and regulatory risks facing our company, and monitor our performance with respect to such programs, policies and procedures. A copy of the charter for the compliance committee is available on our website.
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee consists of Dale M. Dusterhoft, Marc G. R. Edwards, Lisa A. Gray and Gary M. Halverson, with Marc G. R. Edwards serving as chair of the committee. The nominating and corporate governance committee is primarily concerned with identifying individuals qualified to become members of our board of directors, selecting the director nominees for the next annual meeting of the stockholders, selection of the director candidates to fill any vacancies on our board of directors and the development of our corporate governance guidelines and principles. A copy of the nominating and corporate governance committee charter is available on our website.
Section 16(a) Beneficial Ownership Reporting Compliance
All of our directors, executive officers and greater than 10% shareholders are required to file initial statements and reports of changes of ownership of our common stock on Forms 3, 4 and 5 with the SEC.
We have reviewed these reports, including any amendments there to and written representations from the directors and executive officers. Based upon this review, we believe that all 2017 filing requirements were met for each of our directors and executive officers subject to Section 16(a).
Code of Business Conduct and Ethics
We have adopted a written code of business conduct and ethics (“Code of Business Conduct and Ethics”) that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. In addition, our senior financial officers, including our principal executive officer and principal financial officer, are subject to a written code of ethics for senior financial officers. We have made a current copy of both codes available on our website, www.keanegrp.com and both are available in print and without charge to any person who sends a written request to our Corporate Secretary at 2121 Sage Road, Suite 370, Houston, TX 77056. In addition, we intend to post on our website all disclosures that are required by law or the New York Stock Exchange listing standards concerning any amendments to, or waives from, any provision of either code.
Shareholder Recommendation of Director Nominees
We do not have formal procedures in place by which shareholders may recommend nominees to our board of directors.
Corporate Governance Guidelines
We have adopted corporate governance guidelines in accordance with the corporate governance rules of the NYSE, as applicable, that serve as a flexible framework within which our board of directors and its committees
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operate. These guidelines cover a number of areas, including the size and composition of the board, board membership criteria and director qualifications, director responsibilities, board agenda, roles of the Chairman and Chief Executive Officer, executive sessions, standing board committees, board member access to management and independent advisors, director communications with third parties, director compensation, director orientation and continuing education, evaluation of senior management and management succession planning. A copy of our corporate governance guidelines are posted on our website.
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Item 11. Executive Compensation
EXECUTIVE COMPENSATION
Compensation Discussion & Analysis
This Compensation Discussion & Analysis (“CD&A”) explains our executive compensation program for our named executive officers (“NEOs”) listed below. This CD&A also describes the compensation committee’s process for making pay decisions, as well as its rationale for specific decisions related to the fiscal year ended December 31, 2017 (“fiscal year 2017”).
NEO | Title | |
James C. Stewart | Chairman and Chief Executive Officer ("CEO") | |
Gregory L. Powell | President and Chief Financial Officer ("CFO") | |
M. Paul DeBonis Jr. | Chief Operating Officer | |
Kevin M. McDonald | Executive Vice President, General Counsel & Secretary | |
Ian J. Henkes | Vice President & General Manager, South Region and National Wireline (1) | |
R. Curt Dacar | Former Chief Commercial Officer (2) | |
________________ | ||
(1) | Mr. Henkes served in the position of Vice President of Human Resources through June 30, 2017. Effective as of July 1, 2017, he was promoted to the position of Vice President & General Manager, South Region and National Wireline. |
(2) | Mr. Dacar separated from service with the Company on September 1, 2017. |
Executive Summary
Compensation Practices & Policies
The following practices and policies in our program promote sound compensation governance and are in the best interests of our stockholders and executives:
• | We link a significant portion of compensation to our annual financial performance or long-term stock price performance |
• | We use an independent compensation consultant |
• | We have a clawback policy covering cash and equity compensation |
• | We have a prohibition on option repricing without stockholder approval |
• | We have a prohibition on hedging of Company securities by our executive officers |
• | We provide no single-trigger change-of-control cash severance payments |
• | We provide no excise tax gross-ups |
2017 Compensation Actions At-A-Glance
The compensation committee took the following compensation-related actions for fiscal year 2017:
• | Compensation Adjustments: |
• | Starting on March 4, 2015, each of Messrs. Stewart, Powell and DeBonis participated in a cost reduction program that included a 20% reduction to each such NEO’s base salary. Due to the Company’s improved economic conditions and financial performance, effective July 1, 2017, the compensation committee approved the restoration of the base salaries of each of Messrs. Stewart, Powell and DeBonis to the level provided for in the NEO’s Executive Employment Agreement (as discussed below). |
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• | In connection with our IPO, the compensation committee approved an increase in Mr. Henkes’ severance entitlement from six months to twelve months of his base salary. Further, due to his increased responsibilities in connection with his promotion from Vice President of Human Resources to Vice President & General Manager, South Region and National Wireline, effective as of July 2017, the compensation committee approved an increase of Mr. Henkes’ annual base salary from $245,000 to $300,000, and of his target annual bonus from 75% to 100% of base salary. |
• | In connection with the annual review of Mr. McDonald’s compensation, taking into account his achievements, his future potential contributions, the scope of his responsibilities and experiences and following a review of the compensation paid to the chief legal officers in our peer group, effective as of December 1, 2017, the compensation committee approved an increase of Mr. McDonald’s annual base salary from $335,000 to $400,000, and his target annual bonus from 75% to 100% of base salary. |
• | Retention Bonuses/ Deferred Stock Awards: In 2016, in connection with our IPO, the compensation committee approved cash retention bonuses to each of Messrs. Stewart, Powell, DeBonis and Henkes to incentivize successful completion of the IPO and their continued service with the Company. To further align the interests of our senior management team with our stockholders, on March 16, 2017, the compensation committee and each of Messrs. Stewart, Powell and DeBonis agreed that in lieu of cash retention payments, such NEOs would be granted Deferred Stock Awards as further described below. |
• | Annual Incentives: The compensation committee adopted an annual bonus program for fiscal year 2017, based on the achievement of specific Company performance objectives. Based on our level of achievement, our compensation committee has determined that each of our currently employed NEOs is eligible to receive an amount under the 2017 Executive Bonus Program equal to 200% of the NEO’s target bonus. |
• | Long-Term Incentives: A significant amount of the compensation delivered to the NEOs is in the form of equity. In addition to the Deferred Stock Awards granted to Messrs. Stewart, Powell and DeBonis, the NEOs were awarded long-term incentives consisting of a mixture of restricted stock unit awards and stock options. The compensation committee believes the use of these equity vehicles creates strong alignment with the Company’s stockholders by linking NEO compensation closely to stock performance. For the stock options granted to the NEOs in fiscal year 2017, the exercise price was set at $19.00 per share, our IPO price. This resulted in a premium of approximately 30% above the closing price of our common stock on the grant date with respect to the stock options granted to the NEOs other than Mr. Dacar, and a premium of approximately 17% above the closing price of our common stock on the grant date with respect to the stock options granted to Mr. Dacar. |
What Guides Our Program
Our Compensation Philosophy
Our compensation philosophy is driven by the following guiding principles:
• | A significant portion of an executive’s total compensation should be variable (“at-risk”) and linked to the achievement of specific short- and long-term performance objectives. |
• | Executives should be compensated through pay elements (base salaries, short and long-term incentives) designed to enhance stockholder value by incentivizing our executives to work towards goals that drive a suitable rate of return on stockholder investment. |
• | Target compensation should be competitive with that being offered to individuals in comparable roles at other companies with which we compete for talent to ensure we employ the best people to lead the successful implementation of our business plans and to attract the caliber of executive we need to support the long-term growth of our enterprise. |
• | Decisions about compensation should be guided by best-practice governance standards and rigorous processes that encourage prudent decision-making. |
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The Principal Elements of Pay
Our compensation philosophy is supported by the following principal elements of pay:
Pay Element | How it's Paid | Purpose |
Base Salary | Cash (Fixed) | Provide a competitive base salary rate relative to similar positions in the market and enable the Company to attract and retain critical executive talent |
Annual Incentives | Cash (Variable) | Reward executives for delivering on annual financial and strategic objectives that contribute to stockholder value creation |
Long-Term Incentives | Equity (Variable) | Provide incentives for executives to execute on longer-term financial and strategic goals that drive stockholder value creation and support the Company’s retention strategy |
Retention Rewards | Cash or Equity (Fixed) | Provide incentive for executives to remain employed with the Company following our IPO to continue to drive stockholder value creation and support the Company’s retention strategy. |
Pay Mix
A majority of NEO total direct compensation for fiscal year 2017 was variable, at approximately 93% for our CEO, and approximately of 91% for our other NEOs (excluding Mr. Dacar). The following charts illustrate the total direct compensation mix for our CEO and our other NEOs for fiscal year 2017:
93% Variable | 91% Variable |
Our Decision Making Process
The Role of the Compensation Committee
The compensation committee oversees the executive compensation program for our NEOs. The compensation committee is comprised of members of our board of directors. As a “controlled company,” the company is not required to comply with the NYSE corporate governance requirement that the compensation committee be composed entirely of independent directors. The compensation committee works very closely with its independent consultant and management to examine the effectiveness of the Company’s executive compensation program throughout the year. The compensation committee evaluates, determines and approves the compensation of our CEO and other executive officers, and to recommend the compensation of our outside directors. The compensation committee administers the Company’s equity plans and has overall responsibility for monitoring of the Company’s executive compensation policies, plans and programs. The compensation committee may delegate its authority relating to non-employee director compensation to a subcommittee consisting of one or more members, when appropriate. Details of the compensation committee’s authority
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and responsibilities are specified in the committee’s charter which is available on the Company’s website at www.keanegrp.com.
The Role of Management
Compensation committee meetings are regularly attended by our CEO, CFO and General Counsel. Each of the management attendees provides the compensation committee with his specific expertise and the business and financial context necessary to understand and properly target financial and performance metrics. None of the members of management are present during the compensation committee’s deliberations regarding their own compensation adjustments, but the Company’s independent compensation consultant may participate in those discussions.
The Role of the Independent Consultant
The compensation committee has the full authority to engage compensation consultants and other advisors to assist it in the performance of its responsibilities. Prior to retaining, or seeking advice from, a compensation consultant or other advisor, the compensation committee must consider the independence of such compensation consultant or other advisor. The independent compensation consultant retained by the compensation committee reports directly to the compensation committee.
In 2017, the compensation committee engaged Pearl Meyer & Partners, LLC (“Pearl Meyer”) as its independent compensation consultant. The compensation committee assessed the independence of Pearl Meyer and determined that its work for the compensation committee has not raised any conflict of interest. In 2017, Pearl Meyer provided services to the compensation committee, including (i) a refreshed compensation review for the executive officers of the Company, including the NEOs, (ii) an assessment of the Company’s compensation components compared to survey and peer group data; and (iii) recommendations for total compensation opportunity guidelines (i.e., base salary and annual and long-term incentive targets). Pearl Meyer does not provide any services to the Company or any of its subsidiaries other than the services provided to the compensation committee.
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The Role of the Peer Group
The compensation committee strives to set a competitive level of total compensation for each NEO as compared with executives in similar positions at peer companies. For purposes of setting fiscal year 2017 compensation levels, in conjunction with the recommendation of Pearl Meyer, the compensation committee took into account publicly-available data from industry compensation surveys and proxy statements from the group of peer companies listed below.
Peer Companies | |
C&J Energy Services | Patterson-UTI Energy, Inc. |
Ensco, Plc. | Pioneer Energy Services Corp. |
Forum Energy Technologies | Precision Drilling Corporation |
Helmerich & Payne, Inc. | ProPetro Holding Corp. |
Nabors Industries, Ltd. | Rowan Companies, Plc. |
Noble Corporation, Plc. | RPC, Inc. |
Oil States International, Inc. | Superior Energy Services, Inc. |
Parker Drilling Company | |
________________ | |
Peer Group Data Summary | Revenue* | Market Cap** | ||||||||
$ Millions | ||||||||||
Percentile | ||||||||||
25th | $ | 775 | $ | 1,139 | ||||||
50th | $ | 1,338 | $ | 1,559 | ||||||
75th | $ | 1,768 | $ | 2,165 | ||||||
FRAC | $ | 1,561 | $ | 1,673 | ||||||
Percentile Rank | 56th | 55th | ||||||||
* | Projected 2017—Source Standard & Poor’s Capital IQ; |
** | As of November 30, 2017—Source Standard & Poor’s Capital IQ |
This market data is not the sole determinant in setting executive pay levels. The compensation committee also considers Company and individual performance, the nature of an individual’s role within the Company, and his or her experience and contributions to his or her current role when making its compensation-related decisions.
The 2017 Executive Compensation Program in Detail
Base Salary
We provide each of our NEOs with a competitive fixed annual base salary. The base salaries for our NEOs are set forth in employment agreements between the Company and each NEO (the “Executive Employment Agreements”) and are reviewed annually by the compensation committee by taking into account the results achieved by each executive, his future potential contributions, scope of responsibilities and experience, and competitive pay practices. See the section titled “—Executive Employment Agreements” below for a further discussion regarding the Executive Employment Agreements.
Pursuant to the Executive Employment Agreements with each of Messrs. Stewart, Powell and DeBonis, each such NEO’s base salary was subject to the across-the-board 20% payroll reduction approved by the compensation committee on March 4, 2015 (the “Payroll Reduction Initiative”). Due to the Company’s improved economic conditions and financial performance, the compensation committee rescinded the Payroll Reduction Initiative effective July 1, 2017
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(the “Rescission Date”). The following table sets forth the annual rate of base salary that each of Messrs. Stewart, Powell and DeBonis was entitled to receive prior to the Rescission Date and the annual rate of base salary each such NEO became entitled to receive on the Rescission Date:
Base Salary Prior to Rescission Date | Base Salary Following Rescission Date | |||||||
James C. Stewart | $ | 800,000 | $ | 1,000,000 | ||||
Gregory L. Powell | $ | 450,000 | $ | 800,000 | ||||
M. Paul DeBonis Jr. | $ | 300,000 | $ | 350,000 | ||||
Pursuant to the Executive Employment Agreements with each of Messrs. McDonald and Henkes, for fiscal year 2017 such NEOs were initially entitled to an annual base salary of $335,000 and $245,000, respectively. In connection with the annual review of Mr. McDonald’s compensation, taking into account his achievements, his future potential contributions, the scope of his responsibilities and experience, and following a review of the base salaries paid to the chief legal officers in our peer group, effective as of December 1, 2017, the compensation committee approved a 19% market-based adjustment of Mr. McDonald’s annual base salary to $400,000. In connection with the increased responsibilities assumed by Mr. Henkes in connection with his promotion, effective as of July 2017, the compensation committee approved a 22% adjustment of Mr. Henkes’ annual base salary to $300,000.
Pursuant to the Executive Employment Agreements entered into with Mr. Dacar as of May 18, 2017, Mr. Dacar was entitled to an annual base salary of $440,000. The compensation package provided to Mr. Dacar was intended to incentivize him to remain with the Company and assist in the integration of the RockPile business into the Company’s operations.
Special Bonuses, Payments and Awards
Trican Transaction Retention Payments
Effective upon the consummation of the Trican transaction, our board of directors approved the payment of monthly retention bonuses to Messrs. Stewart, Powell and DeBonis, in the amounts set forth in the table below (the “Retention Payments”), to be paid through the month prior to the month in which the Payroll Reduction Initiative was rescinded. The Retention Payments were reflected in the Executive Employment Agreements with each of Messrs. Stewart, Powell and DeBonis. The intent of the Retention Payments was to provide additional compensation to Messrs. Stewart, Powell and DeBonis during the Payroll Reduction Initiative in recognition of their managing a larger entity following the consummation of the Trican transaction. Due to the Company’s improved economic conditions and financial performance, the compensation committee rescinded the Payroll Reduction Initiative on the Rescission Date and thereafter Messrs. Stewart, Powell and DeBonis ceased to be eligible to receive the Retention Payments.
Monthly Retention Payment Prior to Rescission Date | ||||
James C. Stewart | $ | 13,333 | ||
Gregory L. Powell | $ | 23,333 | ||
M. Paul DeBonis Jr. | $ | 3,333 | ||
IPO Bonus and Deferred Stock Awards
In 2016, our board of directors approved a cash bonus pool to be allocated to employees who services were deemed necessary for the consummation of an initial public offering of our stock, including Messrs. Stewart, Powell, DeBonis and Henkes (“IPO Bonuses”). Subject to the consummation of an initial public offering of our stock, participants in the bonus pool would become eligible to receive two IPO Bonus payments, the first on January 1, 2018 and the second on January 1, 2019, subject to continued service through the payment date. Accordingly, upon the consummation of the IPO, Messrs. Stewart, Powell, DeBonis and Henkes each became eligible to receive two IPO Bonus payments in the amounts set forth in the table below, the first on January 1, 2018 and the second on January 1, 2019. The Executive Employment Agreements with each of Messrs. Stewart, Powell and DeBonis, were amended to reflect these IPO Bonus payments.
On March 16, 2017, to further align the interests of Messrs. Stewart, Powell and DeBonis with those of our stockholders, our board of directors approved, and each such NEO agreed, that in lieu of such cash IPO Bonus payments,
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the NEO was granted a deferred stock award under our Equity and Incentive Award Plan. Each deferred stock award provides that, subject to the NEO remaining employed through the applicable vesting date and complying with the restrictive covenants imposed on him under his Executive Employment Agreement, the first stock bonus became vested on January 1, 2018 and be paid on February 15, 2018, and the second stock bonus will become vested on January 1, 2019 and be paid on February 15, 2019. If we incur a change of control or if the NEO’s employment is terminated by us without Cause or, in the case of Mr. Stewart or Mr. Powell, by him for Good Reason (such terms are discussed below), the NEO will be entitled to receive payment of any unpaid stock bonus. Each stock bonus will be paid in that number of shares of our common stock having a fair market value on the payment date equal to the bonus amount set forth in the table below:
Bonus Amounts | |||||||
First Bonus | Second Bonus | ||||||
James C. Stewart | $ | 1,975,706 | $ | 1,975,706 | |||
Gregory L. Powell | $ | 1,646,422 | $ | 1,646,422 | |||
M. Paul DeBonis Jr. | $ | 658,569 | $ | 658,569 | |||
Ian J. Henkes | $ | 43,897 | $ | 43,897 | |||
RockPile Transaction Bonus Award
In connection with the RockPile Transaction, we agreed to provide Mr. Dacar with three separate cash retention bonuses subject to his continued employment: $630,000 if he remained employed by RockPile through the closing date of the RockPile Transaction; $315,000 on the first anniversary of the closing date of the RockPile Transaction; and $315,000 on the second anniversary of the closing date of the RockPile Transaction (the “RockPile Bonuses”). The first RockPile Bonus was paid to Mr. Dacar in connection with the closing of the RockPile Transaction. Pursuant to the Dacar Separation Agreement (as defined below), the Company has agreed that following his separation from service, Mr. Dacar remains eligible to receive the remaining RockPile Bonus payments when otherwise payable.
Value Creation Plan
Effective upon the consummation of the Trican transaction, each of Messrs. Stewart, Powell and DeBonis became eligible to participate in our Value Creation Plan (the “Value Creation Plan”). Pursuant to the Value Creation Plan, each such NEO was eligible to receive up to three bonus payments, each in the amount of $666,667 for Messrs. Stewart and Powell and in the amount of $166,667 for Mr. DeBonis. Each bonus payment was payable upon our achievement of a financial or other milestone and the NEO remaining continuously employed through the payment date.
The first bonus was paid to the NEOs in June 2016 upon our achievement of over $66 million of demonstrated synergies as outlined in our Trican underwriting plan. The second bonus was paid upon the consummation of the IPO. The third bonus payment was payable if we generated at least $135 million of Adjusted EBITDA in fiscal year 2017. Subject to confirmation and approval by the compensation committee, this milestone was achieved and the third bonus was earned in fiscal year 2017 and will be paid in 2018.
2017 Annual Incentives
Each Executive Employment Agreement provides that the NEO is eligible for an annual bonus. The Executive Employment Agreements with Messrs. Stewart, Powell and DeBonis each provide, and the Executive Employment agreement with Dacar provided, for a target annual bonus at 100% of base salary for the applicable year and the Executive Employment Agreements with Messrs. McDonald and Henkes each provided for a target annual bonus at 75% of base salary for the applicable year. In connection with the increased responsibilities assumed by Mr. Henkes in connection with his promotion, effective as of July 2017, the compensation committee approved an increase of Mr. Henkes’ target annual bonus to 100% of base salary. In connection with the annual review of Mr. McDonald’s compensation, taking into account his achievements, his future potential contributions, the scope of his responsibilities and experience, and following a review of the compensation paid to the chief legal officers in our peer group, effective as of December 1, 2017, the compensation committee approved an increase of Mr. McDonald’s target annual bonus to 100% of base salary. The actual annual bonuses payable to Messrs. Henkes and McDonald will be determined by applying 75% to the base salary paid for the period prior to the increase in their target bonuses, and 100% to the base salary paid for the period following the increase in their target bonuses.
The compensation committee adopted the Annual Executive Bonus Program for Fiscal Year 2017 (the “2017 Executive Bonus Program”) under the terms of the Company’s Executive Incentive Bonus Plan. Initially, the 2017
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Executive Bonus Program provided that each NEO was eligible to receive an annual bonus for fiscal year 2017 calculated by multiplying the NEO’s target bonus by the achieved “Funding Level” based on the Company’s achievement of the following metrics:
Performance Objectives | 2017 Performance Metrics | Weighting | ||
Corporate Financial Results | Cash Flow | 50% | ||
Corporate Financial Results | Adjusted EBITDA | 50% | ||
The funding amount was to be determined as set forth in the table below:
Achievement Level | Performance Hurdle | Funding Level | ||
Threshold | Cash Flow: $0 Adjusted EBITDA: $73.6M | 50% | ||
Target | Cash Flow: $16M Adjusted EBITDA: $92M | 100% | ||
Stretch Level 1 | Cash Flow: $31M Adjusted EBITDA: $115M | 150% | ||
Stretch Level 2 | Cash Flow: $50M Adjusted EBITDA: $138M | 200% | ||
Stretch Level 3 | Cash Flow: >$50M Adjusted EBITDA: >$138M | Linear incremental bonus increase up to the maximum bonus award provided under the Company's Executive Incentive Bonus Plan. | ||
The Funding Level would increase on a linear basis between the Threshold, Target and stretch performance hurdles.
The compensation committee chose to utilize cash flow from operating activities and Adjusted EBITDA as they are pure measures of our profitability and how well our management team is operating the Company on a day-to-day basis.
In October 2017, in consultation with its compensation consultant Pearl Meyer, the compensation committee determined that:
• | as a result of favorable market conditions and the Company’s ability to deploy additional fleets, and the resultant increase in working capital, cash flow became less of an indicator of management or the Company’s performance; |
• | market conditions resulted in Adjusted EBITDA having an increased importance as a performance metric; |
• | the successful integration of the RockPile business had become a priority for management for fiscal year 2017; and |
• | the initial Adjusted EBITDA “Performance Hurdle” metrics, which were based on our IPO performance modeling, required updating following the RockPile Transaction to reflect the resulting additional Adjusted EBITDA reflected in the disclosed transaction forecast model used in connection with the RockPile Transaction. |
Therefore, the compensation committee determined that the metrics under the 2017 Executive Bonus Plan should be adjusted to provide that the “Funding Level” would be based on the Company’s achievement of the following metrics:
Performance Objectives | 2017 Performance Metrics | Weighting | ||
Corporate Financial Results | Adjusted EBITDA | 70% | ||
Strategic Achievements | The successful completion of, and execution of the integration plan for, the RockPile Transaction ("RockPile Integration") | 30% | ||
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The funding of the Adjusted EBITDA metric was further adjusted as follows:
Achievement Level | Performance Hurdle | Funding Level | ||
Threshold | $98.8M | 50% | ||
Target | $123.5M | 100% | ||
Stretch Level 1 | $154.4M | 150% | ||
Stretch Level 2 | $185.3M | 200% | ||
Stretch Level 3 | >$185.3M | Linear incremental bonus increase up to the maximum bonus award provided under the Company's Executive Incentive Bonus Plan. | ||
The Funding Level would increase on a linear basis between the Threshold, Target and stretch performance hurdles.
For fiscal year 2017 we achieved a level of Adjusted EBITDA of $214.5 million and our compensation committee determined that the RockPile Integration has substantially been achieved. Based on such achievements, our compensation committee approved a Funding Level equal to 200% of the target bonus for each participant in the 2017 Executive Bonus Program. As result, our currently employed NEOs becoming eligible to receive the payments set forth in the table below:
2017 Annual Bonus | |||
James C. Stewart | $ | 2,000,000 | |
Gregory L. Powell | $ | 1,600,000 | |
M. Paul DeBonis Jr. | $ | 700,000 | |
Kevin M. McDonald | $ | 527,768 | |
Ian J. Henkes | $ | 484,706 | |
2017 Long-Term Incentives
Long-term equity awards provide a strong link between executive pay and stockholder interests. Our NEOs are eligible to receive long-term equity awards under the stockholder approved Equity and Incentive Award Plan. For fiscal year 2017, equity awards were granted as a combination of stock options and restricted stock unit awards.
• | Stock options are performance-based awards that provide meaningful incentives for management to execute on the longer-term financial and strategic growth goals that drive stockholder value creation. This is because they only provide value to the NEOs if the price of the Company’s stock appreciates over time. Specifically, the value of the award depends on the price of our common stock in the future as compared to the exercise price of the options granted. There can be no assurance that any value will actually be realized under the stock options. As discussed below, for the stock options granted to the NEOs in fiscal year 2017, the exercise price was set at $19.00 per share, our IPO price, which resulted in a premium above the closing price of our common stock on the applicable grant date. |
• | Restricted stock unit awards are intended to provide the NEOs with the economic equivalent of a direct ownership interest in the Company during the vesting period and provide the Company with significant retention security regardless of post-grant stock price volatility. |
For fiscal year 2017, in conjunction with our IPO, the compensation committee consulted with Pearl Meyer and reviewed long-term incentive awards granted by other companies that had recently consummated initial public offerings and emerging companies. The compensation committee approved grants at levels higher than it intends to grant in future years to recognize the achievement of our NEOs in growing the business and positioning the Company for success following our IPO, to provide a market-based forward-looking retention and performance incentive for our NEOs, and to help ensure a meaningful initial ownership stake for each of our NEOs as a basis for sustained share ownership and direct stockholder alignment. In part to achieve these goals, the compensation committee determined that the initial awards granted to our senior management team for fiscal year 2017 would be calculated based on a value of $19.00 per share, our
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IPO price. Pearl Meyer provided the compensation committee with benchmark award levels, which the compensation committee reduced with respect to Messrs. Stewart, Powell and DeBonis after taking into consideration the Deferred Stock Awards granted to such NEOs. To further align such awards with our success following the IPO, the exercise price for the stock options granted to the NEOs in fiscal year 2017 (including to Mr. Dacar), was set at $19.00 per share, our IPO price. This resulted in a premium of approximately 30% above the closing price of our common stock on the grant date with respect to the stock options granted to the NEOs other than Mr. Dacar, and a premium of approximately 17% above the closing price of our common stock on the grant date with respect to the stock options granted to Mr. Dacar.
With respect to Mr. Dacar, the compensation committee approved grants to him in connection with his agreement to join the Company following the RockPile Transaction at a level intended to incentivize him to remain with the Company and assist in the integration of the RockPile business into the Company’s operations. Mr. Dacar forfeited his Stock options and restricted stock units upon his separation of service from the Company on September 1, 2017.
The table below shows the number of long-term incentive awards granted for fiscal year for each of the NEOs:
NEO | Stock Option Awards | Restricted Stock Unit Awards | Total Grant Date Value ($)(1) | |||||
James C. Stewart | 214,888 | 214,888 | 4,438,356 | |||||
Gregory L. Powell | 174,775 | 174,775 | 3,609,852 | |||||
M. Paul DeBonis Jr. | 56,454 | 56,454 | 1,166,016 | |||||
Kevin M. McDonald | 80,702 | 80,702 | 1,666,842 | |||||
Ian J. Henkes | 31,579 | 31,579 | 652,242 | |||||
R. Curt Dacar | 35,088 | 35,088 | 787,876 | |||||
(1)Reflects the grant date fair value calculated in accordance with ASC 718.
The stock options and restricted stock units granted to the NEOs in fiscal year 2017 will vest in one-third increments on January 20 of each of 2018, 2019 and 2020, contingent upon the continued employment of the NEO through each vesting date. The stock options and restricted stock units will become fully vested in the event that the NEO’s employment is terminated without Cause, or other than in the case of Mr. DeBonis, for Good Reason, within twelve months following a change in control.
Executive Employment Agreements
Each currently employed NEO has entered into Executive Employment Agreements with the Company (which, in connection with the IPO, assumed the obligations under the Executive Employment Agreements from KGH Intermediate Holdco II, LLC with respect to Messrs. Stewart, Powell and DeBonis, and from Keane Group Holdings, LLC with respect to Messrs. McDonald and Henkes). The Executive Employment Agreements each provide for an initial term that will expire on March 16, 2019 with respect to Messrs. Stewart, Powell and DeBonis, November 7, 2019 with respect to Mr. McDonald, and February 1, 2018 with respect to Mr. Henkes. The Executive Employment Agreement will automatically renew for additional one-year periods unless either party provides written notice at least 90 days prior to the end of the then term and, as a result, Mr. Henkes’ Executive Employment Agreement has been renewed for an additional year.
Pursuant to the Executive Employment Agreements with the currently employed NEOs, in the event of a termination of the NEO’s employment by us without Cause or due to our non-renewal of the applicable Executive Employment Agreement, or by Messrs. Stewart, Powell, McDonald or Henkes for Good Reason, subject to the execution of a release, the NEO will be entitled to the following severance benefits:
• | severance payments equal to: |
– | for Mr. Stewart, two times the sum of his annual base salary, and the lesser of the average of the annual bonuses he received during the two years prior to termination and his target bonus; |
– | for Mr. Powell, two times his annual base salary; and |
– | for Messrs. DeBonis, McDonald and Henkes, his annual base salary |
• | for Messrs. Stewart and Powell, a pro rata annual bonus for the year of termination; |
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• | for Mr. Powell (upon any termination other than death or voluntarily without Good Reason), and Messrs. McDonald and Henkes, reimbursement of the cost of continuation coverage of group health coverage for, in the cases of Messrs. Powell and McDonald up to twelve months following termination, and in the case of Mr. Henkes, up to six months following termination. |
In addition, pursuant to the Executive Employment Agreements with Mr. Stewart and Mr. Powell, in the event of his termination of employment due to death or disability, subject to the execution of a release, he or his estate, as applicable, will be entitled to:
• | severance payments equal to three months of base salary paid for the three-month period following the date of termination; and |
• | a pro rata annual bonus for the year of termination. |
As an additional incentive to Mr. McDonald to accept employment with the Company, his Executive Employment Agreement provided that if a change in control had been consummated on or prior to December 31, 2017, in lieu of such amount he would have been entitled to a severance payment in the amount of $1,750,000.
For purposes of the Executive Employment Agreements, “Cause” generally means:
• | indictment, conviction or plea of no contest to a felony or any crime involving dishonesty or theft; |
• | conduct in connection with employment duties or responsibilities that is fraudulent or unlawful; |
• | conduct in connection with employment duties or responsibilities that is grossly negligent and which has a materially adverse effect on us or our business; |
• | willful misconduct or contravention of specific lawful directions related to a material duty or responsibility directed to be undertaken from our board of directors; |
• | material breach of obligations under the applicable Executive Employment Agreement; |
• | any acts of dishonesty resulting or intending to result in personal gain or enrichment at our expense; |
• | failure to comply with a material policy; or |
• | for Mr. Powell, his failure to maintain primary residence in the Houston, Texas metropolitan area. |
For purposes of the Executive Employment Agreements, as applicable, “Good Reason” generally means:
• | our failure to cure a material breach of our obligations under the applicable Executive Employment Agreement; |
• | a material diminution of duties, position or title (in the case of Mr. Stewart, other than any diminution in connection with the appointment of a new Chairman or Chief Executive Officer if following such appointment Mr. Stewart remains as either Chairman or Chief Executive Officer); |
• | a material reduction in base salary (and in the case of Mr. McDonald, his target bonus); or |
• | a change in office location that increases the NEO’s commute from his principal residence by more than 50 miles. |
Dacar Agreements
Mr. Dacar entered into an Executive Employment Agreement with the Company, dated May 18, 2017, which became effective on July 3, 2017, the closing date of the RockPile Transaction. The Executive Employment Agreement with Mr. Dacar provided for an initial term through July 3, 2020, with automatic renewals for additional one-year periods unless either party provided written notice at least 90 days prior to the end of the then term.
In connection with his separation from service with the Company, Mr. Dacar and the Company entered into a Separation Agreement and General Release dated as of September 1, 2017 (the “Dacar Separation Agreement"). Pursuant to the Dacar Separation Agreement, Mr. Dacar agreed to a release of claims against the Company and became eligible to receive the following severance benefits under his Executive Employment Agreement: (i) severance payments in the amount of $880,000, which amount is equal to two-years of his base salary, that will be paid in monthly installments for a
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period of two years from his separation date, and (ii) reimbursement of his cost for continuation coverage for group health coverage in the amount of $1,153 per month, for up to twelve months from his separation date. In addition, the Company agreed that Mr. Dacar would remain eligible to receive the remaining RockPile Bonus payments owed to him when otherwise payable, as discussed above.
Benefits & Perquisites
Our NEOs also generally participate in other benefit plans on the same terms as all of our other employees. These plans include employee benefit plans maintained by the Company, including the 401(k) program, the medical insurance and reimbursement program, the group term life insurance program, and the group disability program.
Our NEOs also receive an automobile allowance in the amount of $21,000 per year for Messrs. Stewart, Powell and DeBonis, and $20,400 per year for Messrs. McDonald and Henkes. During his employment, the Company paid the premiums for Mr. Dacar’s welfare benefits under an executive benefit plan assumed by the Company in connection with the RockPile Transaction (which program ended on December 31, 2017), and provided Mr. Dacar with a weekly phone allowance.
Other Compensation Practices, Policies and Guidelines
Claw Back Policy
On February 23, 2017, our board of directors adopted the Company’s Compensation Recovery Policy (the “Claw Back Policy”). Pursuant to the Claw Back Policy, in the event of a revision and reissuance of a financial statement previously issued by the Company (an “Accounting Restatement”), our board of directors in its discretion may determine that the officer will be required to repay all or a portion of the amount of incentive-based compensation received by an officer of the Company that exceeds the amount of such compensation that such officer otherwise would been received determined based upon the Accounting Restatement. In the event that any such Accounting Restatement is required due to material non-compliance by the Company with any financial reporting requirement under the securities laws, then an executive officer of the Company will be obligated to repay the amount of incentive-based compensation received by such executive officer that exceeds the amount of such compensation that the executive officer otherwise would have received determined based upon the Accounting Restatement. The Claw Back Policy applies to any incentive-based compensation received by an officer of the Company during the three completed fiscal years of the Company immediately preceding the date of the applicable Accounting Restatement. For purposes of the Claw Back Policy, “incentive-based compensation” means any compensation (whether in cash, common stock, or otherwise) to an officer of the Company, that is granted, earned, vested or for which the amount is determined, wholly or in part, on the attainment by the Company of (i) any measure that is determined and presented in accordance with the accounting principles used in preparing the Company’s financial statements, (ii) any measure that is derived wholly or in part from such measures, or (iii) the Company’s stock price and total shareholder return.
Anti-Hedging Policy
We prohibit the NEOs and other executives from engaging in transactions designed to insulate them from changes in the Company’s stock price. Therefore, the Company has an anti-hedging policy that prohibits our NEOs from entering into transactions that include (without limitation) equity swaps or short sales of our securities, margin accounts or pledges of our securities, and hedges or monetization transactions involving our securities that are designed to hedge or offset any decrease in the market value of the Company’s securities. In addition, the purchase or sale of puts, calls, options, or other derivative securities based on the Company’s securities is prohibited under this policy, and borrowing against any account in which our securities are held is prohibited.
2017 Risk Assessment
Each year, the Company performs a detailed risk analysis of each of its compensation programs. If warranted, the compensation committee will recommend changes to address concerns or considerations raised in the risk review process. Changes may be recommended for the program design or its oversight and administration in order to mitigate unreasonable risk, if any is determined to exist. The compensation committee has concluded that the Company’s compensation arrangements do not encourage any employees to take unnecessary and excessive risks. We do not believe that any risks arising from our compensation policies and practices are reasonably likely to have a material adverse effect on the Company.
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Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee is or has at any time during the past year been an officer or employee of ours. None of our executive officers serves as a member of the compensation committee or board of directors of any other entity that has an executive officer serving as a member of our board of directors or compensation committee.
Impact of Tax and Accounting
We regularly consider the various tax and accounting implications of our compensation plans. When determining the amount of long-term incentives and equity grants to executives and employees, the compensation costs associated with the grants are reviewed, as required by FASB ASC Topic 718.
For 2017, Section 162(m) of the Code generally prohibited any publicly held corporation from taking a federal income tax deduction for compensation paid in excess of $1 million in any taxable year to the CEO and the next three highest compensated officers for such year, other than the CFO. The deduction limit under Section 162(m) of the Code did not apply to the Company in 2017 because, in general, Section 162(m) of the Code allowed for a three-year transition period after a company becomes publicly traded in connection with an initial public offering. Commencing in 2018, Section 162(m) of the Code has been revised to generally prohibit any publicly held corporation from taking a federal income tax deduction for compensation paid in excess of $1 million in any taxable year to the CEO and the next four highest compensated officers for such year, including the CFO, and any employee who was covered under Section 162(m) of the Code in a prior year. In addition, commencing in 2018, Section 162(m) of the Code has been amended to remove an exception for qualified performance-based compensation. The compensation committee believes that it is important for it to retain maximum flexibility in designing compensation programs that are in the best interest of the Company and its stockholders. Therefore, the compensation committee, while considering tax deductibility as a factor in determining compensation, may not limit compensation to $1 million in any taxable year if it believes that the compensation is commensurate with the performance of the covered employee.
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Compensation Committee Report
The compensation committee has reviewed and discussed this CD&A with the Company’s management. Based on the review and discussions, the compensation committee has recommended to our board of directors that this CD&A be included in this Annual Report on Form 10-K.
The Compensation Committee
Scott Wille, Chair
Dale M. Dusterhoft
Marc G.R. Edwards
Shawn Keane
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Summary Compensation Table
Name and Principal Position | Year | Salary ($) | Bonus ($)(1) | Stock Awards ($)(2) | Option Awards ($)(3) | Non- Equity Incentive Plan Compensation ($)(4) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($)(5) | Total ($) | |||||||||||||||
(a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | |||||||||||||||
James C. Stewart | 2017 | 813,077 | 80,000 | 7,065,139 | 1,324,629 | 3,333,334 | — | 45,000 | 12,661,179 | |||||||||||||||
Chairman and Chief Executive Officer | 2016 | 640,000 | 133,333 | — | — | 1,466,667 | — | 30,742 | 2,270,742 | |||||||||||||||
2015 | 692,308 | — | — | — | 1,160,000 | — | 45,404 | 1,897,712 | ||||||||||||||||
Gregory L. Powell | 2017 | 571,539 | 140,000 | 5,825,334 | 1,077,362 | 2,933,334 | — | 39,000 | 10,586,569 | |||||||||||||||
President and Chief Financial Officer | 2016 | 360,000 | 233,333 | — | — | 1,306,667 | — | 29,673 | 1,929,673 | |||||||||||||||
2015 | 389,423 | — | — | — | 740,000 | — | 30,679 | 1,160,102 | ||||||||||||||||
M. Paul DeBonis Jr. | 2017 | 292,885 | 20,000 | 2,135,156 | 347,998 | 1,033,334 | — | 45,000 | 3,874,373 | |||||||||||||||
Chief Operating Officer | 2016 | 240,000 | 33,333 | — | — | 466,667 | — | 29,223 | 769,223 | |||||||||||||||
2015 | 259,615 | — | — | — | 460,000 | — | 34,385 | 754,000 | ||||||||||||||||
Kevin M. McDonald | 2017 | 338,750 | — | 1,169,372 | 497,470 | 527,768 | — | 38,719 | 2,572,079 | |||||||||||||||
Executive Vice President, Legal Counsel & Secretary | ||||||||||||||||||||||||
Ian J. Henkes | 2017 | 271,154 | — | 457,580 | 194,662 | 484,706 | — | 38,400 | 1,446,502 | |||||||||||||||
Vice President, Operations South & National Wireline GM | ||||||||||||||||||||||||
Robert Dacar | 2017 | 76,155 | 1,260,000 | 571,584 | 216,292 | 0 | — | 76,000 | 2,200,031 | |||||||||||||||
Former Chief Commercial Officer(6) | ||||||||||||||||||||||||
________________ | ||||||||||||||||||||||||
(1) | Reflects a monthly retention payment to each of Messrs. Stewart, Powell and DeBonis through June 2017. Reflects cash bonuses payable to Mr. Dacar in connection with the RockPile Transaction, of which $630,000 was paid to Mr. Dacar in fiscal year 2017. Pursuant to the Dacar Separation Agreement, he will receive payments in the amount of $315,000 on each of the first and second anniversaries of the closing date of the RockPile Transaction, which amounts are deemed earned in fiscal year 2017 for the purposes of this Summary Compensation Table. |
(2) | Reflects the grant date fair value calculated in accordance with ASC 718 of the restricted stock units granted to the NEOs in fiscal year 2017 and of the deferred stock awards granted to each of Messrs. Stewart, Powell and DeBonis in fiscal year 2017. See Note 12—Stock- Based Compensation in our audited consolidated and combined financial statements included in this Annual Report on Form 10-K for a discussion of the assumptions used in the valuation of such awards. Mr. Dacar forfeited his restricted stock units upon his resignation on September 1, 2017. |
(3) | Reflects the grant date fair value calculated in accordance with ASC 718 of the stock option granted to the NEOs in fiscal year 2017. See Note 12—Stock-Based Compensation in our audited consolidated and combined financial statements included in this Annual Report on Form 10-K for a discussion of the assumptions used in the valuation of such awards. Mr. Dacar forfeited his stock options upon his resignation on September 1, 2017. |
(4) | For fiscal year 2017, these amounts reflect (a) bonus payments earned in fiscal year 2017 under our Value Creation Plan to Messrs. Stewart, Powell and DeBonis and (b) an amount equal to 200% of the annual target bonus for each NEO (other than Mr. Dacar) payable under our 2017 Executive Bonus Program. For the fiscal year ended December 31, 2016, these amounts reflect (a) bonus payments earned in fiscal year 2016 under our Value Creation Plan and (b) amounts paid to the NEOs under our annual bonus plan for such fiscal year. For the fiscal year ended December 31, 2015, reflects amounts paid to the NEOs under our annual bonus plan for such fiscal year. |
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(5) | A detailed breakdown of “All Other Compensation” is provided in the table below: |
Name | Year | Automobile Allowance ($) | 401(k) Plan Company Contribution ($) | Severance ($) | Expenses ($) (a) | Total ($) | |||||||
James C. Stewart | 2017 | 21,000 | 24,000 | — | — | 45,000 | |||||||
2016 | 21,000 | 9,742 | — | — | 30,742 | ||||||||
2015 | 21,404 | 24,000 | — | — | 45,404 | ||||||||
Gregory L. Powell | 2017 | 21,000 | 18,000 | — | — | 39,000 | |||||||
2016 | 21,000 | 8,673 | — | — | 29,673 | ||||||||
2015 | 21,404 | 9,275 | — | — | 30,679 | ||||||||
M. Paul DeBonis Jr. | 2017 | 21,000 | 24,000 | — | — | 45,000 | |||||||
2016 | 21,000 | 8,223 | — | — | 29,223 | ||||||||
2015 | 21,404 | 12,981 | — | — | 34,385 | ||||||||
Kevin M. McDonald | 2017 | 20,400 | 18,319 | — | — | 38,719 | |||||||
Ian J. Henkes | 2017 | 20,400 | 18,000 | — | — | 38,400 | |||||||
Robert Dacar | 2017 | — | 1,290 | 73,333 | 1,377 | 76,000 | |||||||
(a) | Reflects (i) payments in the amount of $1,197 made by the Company for Mr. Dacar’s welfare benefits pursuant to a RockPile executive benefit plan assumed by the Company in connection with the RockPile Transaction (which program ended on December 31, 2017), and (ii) a $180 phone allowance provided to Mr. Dacar. |
(6) | Mr. Dacar joined the Company and was appointed as our Chief Commercial Officer on July 3, 2017, the closing date of the RockPile Transaction. Mr. Dacar resigned from the Company on September 1, 2017. |
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Grants of Plan Based Awards in Fiscal Year 2017
Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1) | Estimated Future Payouts Under Equity Incentive Plan Awards(4) | All Other Stock Awards: Number of Shares of Stock or Units (#)(5) | All Other Option Awards: Number of Securities Underlying Options (#)(6) | Exercise or Base Price of Option Awards ($/Share) | Grant Date Fair Value of Stock and Option Awards ($)(7) | |||||||||||||||||||||||
Name | Grant Date | Threshold ($)(2) | Target ($)(2) | Maximum ($)(3) | Threshold ($)(2) | Target ($)(2) | Maximum ($)(3) | |||||||||||||||||||||
James C. Stewart | 500,000 | 1,000,000 | 5,000,000 | — | — | — | — | — | — | — | ||||||||||||||||||
3/16/2017 | — | — | — | — | 3,951,412 | — | — | — | — | — | ||||||||||||||||||
4/3/2017 | — | — | — | — | — | — | 214,888 | — | — | 3,113,727 | ||||||||||||||||||
4/3/2017 | — | — | — | — | — | — | — | 214,888 | 19.00 | 1,324,629 | ||||||||||||||||||
Gregory L. Powell | 400,000 | 800,000 | 5,000,000 | — | — | — | — | — | — | — | ||||||||||||||||||
3/16/2017 | — | — | — | — | 3,292,844 | — | — | — | — | — | ||||||||||||||||||
4/3/2017 | — | — | — | — | — | — | 174,775 | — | — | 2,532,490 | ||||||||||||||||||
4/3/2017 | — | — | — | — | — | — | — | 174,775 | 19.00 | 1,077,362 | ||||||||||||||||||
M. Paul DeBonis Jr. | 175,000 | 350,000 | 5,000,000 | — | — | — | — | — | — | — | ||||||||||||||||||
3/16/2017 | — | — | — | — | 1,317,138 | — | — | — | — | — | ||||||||||||||||||
4/3/2017 | — | — | — | — | — | — | 56,454 | — | — | 818,018 | ||||||||||||||||||
4/3/2017 | — | — | — | — | — | — | — | 56,454 | 19.00 | 347,998 | ||||||||||||||||||
Kevin M. McDonald | 191,942 | 263,884 | 5,000,000 | — | — | — | — | — | — | — | ||||||||||||||||||
4/3/2017 | — | — | — | — | — | — | 80,702 | — | — | 1,169,372 | ||||||||||||||||||
4/3/2017 | — | — | — | — | — | — | — | 80,702 | 19.00 | 497,470 | ||||||||||||||||||
Ian J. Henkes | 121,177 | 242,353 | 5,000,000 | — | — | — | — | — | — | — | ||||||||||||||||||
4/3/2017 | — | — | — | — | — | — | 31,579 | — | — | 457,580 | ||||||||||||||||||
4/3/2017 | — | — | — | — | — | — | — | 31,579 | 19.00 | 194,662 | ||||||||||||||||||
Robert Dacar | 109,096 | 218,192 | 5,000,000 | — | — | — | — | — | — | — | ||||||||||||||||||
7/3/2017 | — | — | — | — | — | — | 35,088 | — | — | 571,583 | ||||||||||||||||||
7/3/2017 | — | — | — | — | — | — | — | 35,088 | 19.00 | 216,292 | ||||||||||||||||||
_______________ | ||||||||||||||||||||||||||||
(1) | Amounts represent the range of annual cash incentive awards the NEO was potentially entitled to receive based on the achievement of performance goals for fiscal year 2017 under the 2017 Executive Bonus Program as more fully described in “—Compensation Discussion and Analysis—2017 Annual Incentives.” The amounts actually paid are reported in the Non-Equity Incentive Plan column of the Summary Compensation table. Pursuant to the 2017 Executive Bonus Plan, performance below a specific threshold will result in no payment with respect to that performance goal. |
(2) | For Mr. McDonald, reflects pro-rated threshold and target level amounts based on an annual base salary rate of $335,000 and target bonus of 75% of base salary through November 30, 2017, and an annual base salary rate of $400,000 and target bonus of 100% of base salary from December 1, 2017 through December 31, 2017. For Mr. Henkes, reflects pro-rated threshold and target level amounts based on an annual base salary rate of $245,000 and target bonus of 75% of base salary through June 30, 2017, and an annual base salary rate of $300,000 and target bonus of 100% of base salary from July 1, 2017 through December 31, 2017. For Mr. Dacar, reflects a pro-rated annual bonus for the period from July 3, 2017, the date he commenced employment with the Company, through December 31, 2017. Mr. Dacar forfeited his eligibility to receive an annual bonus upon his resignation from the Company. |
(3) | Reflects the maximum bonus payable to any executive under the Company’s Executive Incentive Bonus Plan. |
(4) | Reflects the aggregate value of the stock bonuses that may be issued in shares of our common stock under the Deferred Stock Awards granted to Messrs. Stewart, Powell and DeBonis. |
(5) | Represents restricted stock units granted to the NEOs, as described in “—Compensation Discussion and Analysis—2017 Long-Term Incentives.” |
(6) | Represent stock options granted to the NEOs, as described in “—Compensation Discussion and Analysis—2017 Long-Term Incentives.” |
(7) | Reflects the grant date fair value as calculated in accordance with ASC 718. Assumptions used in the valuation of equity based awards are discussed in “Note 12—Stock-Based Compensation” in our audited consolidated and combined financial statements included in this Annual Report on Form 10-K. |
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Outstanding Equity Awards at Fiscal Year End 2017
Option Awards | Stock Unit Awards | ||||||||||||||||||||||||||
Name | Number of securities underlying unexercised options (#) exercisable | Number of securities underlying unexercised options (#) unexercisable (1) | Equity incentive plan awards: number of securities underlying unexercised unearned options (#) | Option exercise price ($) | Option expiration date | Number of shares or units of stock that have not vested (#) | Market value of shares or units of stock that have not vested ($) | Equity incentive plan awards: number of unearned shares, units or other rights that have not vested (#) | Equity incentive plan awards: market or payout value of unearned shares, units or other rights that have not vested ($) | ||||||||||||||||||
(a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | ||||||||||||||||||
James C. Stewart | — | 214,888 | — | 19.00 | 4/3/2023 | — | — | — | — | ||||||||||||||||||
— | — | — | — | — | 214,888 | (2) | 4,085,021 | (4) | — | 3,951,412 | (5) | ||||||||||||||||
Gregory L. Powell | — | 174,775 | — | 19.00 | 4/3/2023 | — | — | — | — | ||||||||||||||||||
— | — | — | — | — | 174,775 | (2) | 3,322,473 | (4) | — | 3,292,844 | (5) | ||||||||||||||||
M. Paul DeBonis Jr. | — | 56,454 | — | 19.00 | 4/3/2023 | — | — | — | — | ||||||||||||||||||
— | — | — | — | — | 56,454 | (2) | 1,073,191 | (4) | — | 1,317,138 | (5) | ||||||||||||||||
Kevin M. McDonald | — | 80,702 | — | 19.00 | 4/3/2023 | — | — | — | — | ||||||||||||||||||
— | — | — | — | — | 80,702 | (2) | 1,534,145 | (4) | — | — | |||||||||||||||||
— | 3,529 | (3) | — | — | (6) | — | (7) | — | — | — | — | ||||||||||||||||
Ian J. Henkes | — | 31,579 | — | 19.00 | 4/3/2023 | — | — | — | — | ||||||||||||||||||
— | — | — | — | — | 31,579 | (2) | 600,317 | ($) | — | — | |||||||||||||||||
— | 3,529 | (3) | — | — | (6) | — | (7) | — | — | — | — | ||||||||||||||||
Robert Dacar | — | — | — | — | — | — | — | — | — | ||||||||||||||||||
_______________ | |||||||||||||||||||||||||||
(1) | Reflects the number of unvested stock options held by the NEO. These stock options will become vested and exercisable in equal portions on January 20 of each of 2018, 2019 and 2020, and will become fully vested and exercisable in the event that the NEO’s employment terminates without cause or for good reason within twelve months following a change in control. |
(2) | Reflects the number of unvested restricted stock units held by the NEO. These restricted stock units will become vested in equal portions on January 20 of each of 2018, 2019 and 2020, and will become fully vested in the event that the NEO’s employment terminates without cause or for good reason within twelve months following a change in control. |
(3) | Reflects the number of Class B Units of Keane Investor held by the NEO. The Class B Units were granted to the NEOs prior to consummation of the IPO under a unit-based management compensation program sponsored by the company prior to the IPO called the Keane Management Holdings LLC Management Incentive Plan (the “Class B Plan”). In connection with the IPO, the Class B Plan was assigned to and assumed by Keane Investor. The Class B Units represent profit interests in Keane Investor that are solely obligations of Keane Investor. The units held by Mr. McDonald will vest in equal portions on November 7, 2018 and November 7, 2019. The units held by Mr. Henkes will vest in equal portions on March 15, 2018 and March 15, 2019. If the NEO’s service is terminated without cause, all unvested units that would have vested on the next vesting date following termination will vest upon such termination, and the remaining unvested units will remain outstanding for a period of 90 days following termination and will vest if a change in control occurs during such 90-day period. |
(4) | Based on the closing price per share of our common stock on December 29, 2017 of $19.01. |
(5) | Reflects the aggregate value of the stock bonuses that may be issued in shares of common stock under the Deferred Stock Awards granted to Messrs. Stewart, Powell and DeBonis. Such amounts became vested 50% on January 1, 2018 and will be paid in a number of shares of our common stock with a fair market value equal to such amount on February 15, 2018, and will become vested 50% on January 1, 2019 and paid in a number of shares of our common stock with a fair market value equal to such amount on February 15, 2019. Such amounts will become fully vested and paid in a number of shares of our common stock with a fair market value equal to such amount upon a change in control or a termination of employment without cause, or in the case of Messrs. Stewart and Powell, for good reason. |
(6) | Class B Units have no exercise price. Instead, Mr. Henkes may be entitled to certain cash distributions from Keane Investor following the distribution of $468,000,000 to holders of Class A Units in Keane Investor, and Mr. McDonald may be entitled to certain cash distributions from Keane Investor following the distribution of $1,200,000,000 to holders of Class A Units and other Class B Units in Keane Investor. |
(7) | Class B Units have no expiration date. |
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Option Exercises and Stock Vested in Fiscal Year 2017
No stock options were exercised and no restricted stock unit awards or deferred stock unit awards vested during fiscal year 2017.
Potential Payments Upon Termination or Change in Control
The tables below describe and estimate the amounts and benefits that our NEOs would have been entitled to receive upon a termination of their employment in certain circumstances or, if applicable, upon a change in control, assuming such events occurred as of December 31, 2017, the last day of fiscal year 2017. The estimated payments are not necessarily indicative of the actual amounts any of our NEOs would have received in such circumstances. The tables exclude compensation amounts accrued through December 31, 2017 that would be paid in the normal course of continued employment, such as accrued but unpaid salary, payment for accrued but unused vacation and vested account balances under our retirement plans that are generally available to all of our salaried employees. Where applicable, the information in the table uses a price per share for our common stock of $19.01, the closing price on December 29, 2017 (the “Year-End Closing Price”). Generally, payment of severance benefits to an NEO following termination of employment is subject to the NEO’s timely execution and non-revocation of a release of claims in favor of the Company.
As stated elsewhere in this Annual Report on Form 10-K, Mr. Dacar resigned during fiscal year 2017 and became eligible to receive the severance benefits described in “—Compensation Discussion and Analysis—Dacar Agreements.”
James C. Stewart | |||||||||||||||
Payments and Benefits | Death or Disability ($) | For Cause or Without Good Reason ($) | Without Cause or for Good Reason, No Change in Control ($) | Without Cause or for Good Reason, Upon or Following Change in Control ($) | Change in Control, No Termination of Employment ($) | ||||||||||
Cash Severance(1) | 250,000 | — | 2,000,000 | 2,000,000 | — | ||||||||||
Annual Bonus(2) | 2,000,000 | — | 2,000,000 | 2,000,000 | — | ||||||||||
Deferred Stock Award Vesting(3) | — | — | 3,951,412 | 3,951,412 | 3,951,412 | ||||||||||
Stock Option Vesting(4) | — | — | — | 2,149 | — | ||||||||||
Restricted Stock Unit Vesting(5) | — | — | — | 4,085,021 | — | ||||||||||
Health Benefits | — | — | — | — | — | ||||||||||
Total | 2,250,000 | — | 7,951,412 | 12,038,582 | 3,951,412 | ||||||||||
_______________ | |||||||||||||||
(1) | Reflects severance payments equal to (i) in the event of Mr. Stewart’s death or disability, three months of his base salary payable over the three-month period following his termination, or (ii) in the event of a termination of Mr. Stewart’s employment without Cause or for Good Reason, an amount equal to two times his annual base salary payable over the 24-month period following his termination. |
(2) | Reflects the annual bonus payable to Mr. Stewart for fiscal year 2017 under our 2017 Executive Bonus Program. |
(3) | Pursuant to his Deferred Stock Award, Mr. Stewart’s unvested stock bonuses will become fully vested upon a change in control or upon a termination of his employment without Cause or for Good Reason. |
(4) | Pursuant to his Stock Option Award, Mr. Stewart’s unvested stock options will become fully vested in the event of a termination of his employment without Cause or for Good Reason within twelve months following a change in control. The amount in the table reflects the aggregate per share value based on the Year-End Closing Price in excess of the option exercise price. |
(5) | Pursuant to his Restricted Stock Unit Award, Mr. Stewart’s unvested restricted stock units will become fully vested in the event of a termination of his employment without Cause or for Good Reason within twelve months following a change in control. |
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Gregory L. Powell | ||||||||||||||||||
Payments and Benefits | Death ($) | Disability ($) | For Cause or Without Good Reason ($) | Without Cause or for Good Reason, No Change in Control ($) | Without Cause or for Good Reason, Upon or Following Change in Control ($) | Change in Control, No Termination of Employment ($) | ||||||||||||
Cash Severance(1) | 200,000 | 200,000 | — | 1,600,000 | 1,600,000 | — | ||||||||||||
Annual Bonus(2) | 1,600,000 | 1,600,000 | — | 1,600,000 | 1,600,000 | — | ||||||||||||
Deferred Stock Award Vesting(3) | — | — | — | 3,292,844 | 3,292,844 | 3,292,844 | ||||||||||||
Stock Option Vesting(4) | — | — | — | — | 1,748 | — | ||||||||||||
Restricted Stock Unit Vesting(5) | — | — | — | — | 3,322,473 | — | ||||||||||||
Health Benefits(6) | — | 18,730 | — | 18,730 | 18,730 | — | ||||||||||||
Total | 1,800,000 | 1,818,730 | — | 6,511,574 | 9,835,795 | 3,292,844 | ||||||||||||
_______________ | ||||||||||||||||||
(1) | Reflects severance payments equal to (i) in the event of Mr. Powell’s death or disability, three months of his base salary payable over the three-month period following his termination, or (ii) in the event of a termination of Mr. Powell’s employment without Cause or for Good Reason, an amount equal to two times his annual base salary payable over the 24 month period following his termination. |
(2) | Reflects of the annual bonus payable to Mr. Powell for fiscal year 2017 under our 2017 Executive Bonus Program. |
(3) | Pursuant to his Deferred Stock Award, Mr. Powell’s unvested stock bonuses will become fully vested upon a change in control or upon a termination of his employment without Cause or for Good Reason. |
(4) | Pursuant to his Stock Option Award, Mr. Powell’s unvested stock options will become fully vested in the event of a termination of his employment without Cause or for Good Reason within twelve months following a change in control. The amount in the table reflects the aggregate per share value based on the Year-End Closing Price in excess of the option exercise price. |
(5) | Pursuant to his Restricted Stock Unit Award, Mr. Powell’s unvested restricted stock units will become fully vested in the event of a termination of his employment without Cause or for Good Reason within twelve months following a change in control. |
(6) | Reflects our payment for the cost of continuation health coverage for Mr. Powell for twelve months following his termination. |
M. Paul DeBonis Jr. | |||||||||||||||
Payments and Benefits | Death or Disability ($) | For Cause or Voluntary Terminations ($) | Without Cause, No Change in Control ($) | Without Cause, Upon or Following Change in Control ($) | Change in Control, No Termination of Employment ($) | ||||||||||
Cash Severance(1) | — | — | 700,000 | 700,000 | — | ||||||||||
Annual Bonus | — | — | — | — | — | ||||||||||
Deferred Stock Award Vesting(2) | — | — | 1,317,138 | 1,317,138 | 1,317,138 | ||||||||||
Stock Option Vesting(3) | — | — | — | 565 | — | ||||||||||
Restricted Stock Unit Vesting(4) | — | — | — | 1,073,191 | — | ||||||||||
Health Benefits | — | — | — | — | — | ||||||||||
Total | — | — | 2,017,138 | 3,090,894 | 1,317,138 | ||||||||||
_______________ | |||||||||||||||
(1) | Reflects severance payments equal to two times Mr. DeBonis’ annual base salary payable over the 24 month period following his termination in the event of a termination of his employment without Cause. |
(2) | Pursuant to his Deferred Stock Award, Mr. DeBonis’ unvested stock bonuses will become fully vested upon a change in control or upon a termination of his employment without Cause. |
(3) | Pursuant to his Stock Option Award, Mr. DeBonis’ unvested stock options will become fully vested in the event of a termination of his employment without Cause within twelve months following a change in control. The amount in the table reflects the aggregate per share value based on the Year-End Closing Price in excess of the option exercise price. |
(4) | Pursuant to his Restricted Stock Unit Award, Mr. DeBonis’ unvested restricted stock units will become fully vested in the event of a termination of his employment without Cause within twelve months following a change in control. |
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Kevin M. McDonald | |||||||||||||||
Payments and Benefits | Death or Disability ($) | For Cause or Without Good Reason ($) | Without Cause or for Good Reason, No Change in Control ($) | Without Cause or for Good Reason, Upon or Following Change in Control ($) | Change in Control, No Termination of Employment ($) | ||||||||||
Cash Severance(1) | — | — | 400,000 | 1,750,000 | — | ||||||||||
Annual Bonus | — | — | — | — | — | ||||||||||
Stock Option Vesting(2) | — | — | — | 807 | — | ||||||||||
Restricted Stock Unit Vesting(3) | — | — | — | 1,534,145 | — | ||||||||||
Class B Unit Vesting(4) | — | — | — | — | — | ||||||||||
Health Benefits(5) | — | — | 13,276 | 13,276 | — | ||||||||||
Total | — | — | 413,276 | 3,298,228 | — | ||||||||||
_______________ | |||||||||||||||
(1) | Reflects severance payments equal to (i) Mr. McDonald’s annual base salary payable in a lump sum in the event of a termination of his employment without Cause or for Good Reason if no change in control was consummated on or prior to December 31, 2017, or (ii) $1,750,000 payable in a lump sum in the event of a termination of his employment without Cause or for Good Reason if a change in control had been consummated on or prior to December 31, 2017. |
(2) | Pursuant to his Stock Option Award, Mr. McDonald’s unvested stock options will become fully vested in the event of a termination of his employment without Cause or for Good Reason within twelve months following a change in control. The amount in the table reflects the aggregate per share value based on the Year-End Closing Price in excess of the option exercise price. |
(3) | Pursuant to his Restricted Stock Unit Award, Mr. McDonald’s unvested restricted stock units will become fully vested in the event of a termination of his employment without Cause or for Good Reason within twelve months following a change in control. |
(4) | Pursuant to his Class B Interest Award Agreement, the next tranche of Mr. Henkes’ unvested Class B Units of Keane Investor Holdings LLC will become vested in the event of a termination of his employment without Cause, and the remaining unvested units will remain outstanding for a period of 90 days following termination and will vest if a change in control occurs during such 90-day period. The market value of the Class B Units is not determinable, because there is no public market for such units. Therefore, such value, if any, has not been included herein. |
(5) | Reflects our payment for the cost of continuation health coverage for Mr. McDonald for twelve months following his termination. |
Ian J. Henkes | |||||||||||||||
Payments and Benefits | Death or Disability ($) | For Cause or Without Good Reason ($) | Without Cause or for Good Reason, No Change in Control ($) | Without Cause or for Good Reason, Upon or Following Change in Control ($) | Change in Control, No Termination of Employment ($) | ||||||||||
Cash Severance(1) | — | — | 300,000 | 300,000 | — | ||||||||||
Annual Bonus | — | — | — | — | — | ||||||||||
Stock Option Vesting(2) | — | — | — | 316 | — | ||||||||||
Restricted Stock Unit Vesting(3) | — | — | — | 600,317 | — | ||||||||||
Class B Unit Vesting(4) | — | — | — | — | — | ||||||||||
Health Benefits(5) | — | — | 9,365 | 9,365 | — | ||||||||||
Total | — | — | 309,365 | 909,998 | — | ||||||||||
_______________ | |||||||||||||||
(1) | Reflects severance payments equal to Mr. Henkes’ annual base salary payable over the 12 month period following his termination in the event of a termination of his employment without Cause or for Good Reason. |
(2) | Pursuant to his Stock Option Award, Mr. Henkes’ unvested stock options will become fully vested in the event of a termination of his employment without Cause or for Good Reason within twelve months following a change in control. The amount in the table reflects the aggregate per share value based on the Year-End Closing Price in excess of the option exercise price. |
(3) | Pursuant to his Restricted Stock Unit Award, Mr. Henkes’ unvested restricted stock units will become fully vested in the event of a termination of his employment without Cause or for Good Reason within twelve months following a change in control. |
(4) | Pursuant to his Class B Interest Award Agreement, the next tranche of Mr. Henkes’ unvested Class B Units of Keane Investor Holdings LLC will become vested in the event of a termination of his employment without Cause, and the remaining unvested units will remain outstanding for a period of 90 days following termination and will vest if a change in control occurs during such 90-day period. The market value of the Class B Units is not determinable, because there is no public market for such units. Therefore, such value, if any, has not been included herein. |
(5) | Reflects our payment for the cost of continuation health coverage for Mr. Henkes for six months following his termination. |
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Director Compensation
Director Compensation Table
All non-employee members of our board of directors earned or received compensation for service on our board of directors during fiscal year 2017, as set forth in the table below and as described in the accompanying narrative.
(in dollars) Name | Fees Earned or Paid in Cash $ | Stock Awards $(1) | Option Awards $ | Non-Equity Incentive Plan Compensation $ | Change in Pension Value and non- qualified Deferred Compensation Earnings $ | All Other Compensation $ | Total | |||||||
Gary M. Halverson | 75,000 | — | — | — | — | — | 75,000 | |||||||
Elmer D. Reed | 75,000 | — | — | — | — | — | 75,000 | |||||||
Marc G. R. Edwards | 100,000 | — | — | — | — | — | 100,000 | |||||||
Christian A. Garcia(2) | 59,505 | 274,542 | — | — | — | — | 334,047 | |||||||
Lucas N. Batzer(3) | 75,000 | 75,000 | ||||||||||||
Dale M. Dusterhoft | 75,000 | 75,000 | ||||||||||||
James E. Geisler(3) | 75,000 | 75,000 | ||||||||||||
Lisa A. Gray(3) | 75,000 | 75,000 | ||||||||||||
Shawn Keane(3) | 75,000 | 75,000 | ||||||||||||
Lenard B. Tessler(3) | 75,000 | 75,000 | ||||||||||||
Scott Wille(3) | 75,000 | 75,000 | ||||||||||||
(1) | Reflects the grant date fair value calculated in accordance with ASC 718 of the restricted stock granted to Mr. Garcia in fiscal year 2017. See Note (12) Equity-Based Compensation in our consolidated and combined financial statements, included in this Annual Report on Form 10-K, for a discussion of the assumptions used in the valuation of such awards. |
(2) | Mr. Garcia joined our board of directors effective May 15, 2017. |
As of December 31, 2017, the aggregate number of shares of restricted stock held by each non-employee director was:
Name | Number of Shares of Restricted Stock | |||
Gary M. Halverson | 20,833 | |||
Elmer D. Reed | 20,833 | |||
Marc G. R. Edwards | 34,722 | |||
Christian A. Garcia | 18,947 | |||
Narrative Disclosure to Director Compensation Table
Director Services Agreements
We have entered into Director Services Agreements with each of Marc G. R. Edwards, Christian A. Garcia, Gary M. Halverson and Elmer D. Reed. The Director Services Agreements provide that each such director serve on an at-will basis until the earlier of disability, death, resignation or removal.
Pursuant to the Director Services Agreement with Mr. Edwards, he serves as our lead director and is entitled to receive an annual fee of $100,000 per year. The Director Services Agreements with Messrs. Halverson, Reed and Garcia provide that each director is entitled to receive an annual fee of $75,000 per year. Mr Garcia receives an additional annual fee of $20,000 for his service as chair of the audit and risk committee.
In connection with his appointment as a director, on May 15, 2017, we granted Mr. Garcia 18,947 shares of restricted stock under our Equity and Incentive Award Plan. Subject to Mr. Garcia’s continued service with the Company on each vesting date, his restricted stock will vest in three equal installments on each of March 15, 2018, March 15, 2019
163
and March 15, 2020, and will become fully vested upon a change in control. All unvested restricted stock will be forfeited upon a termination of service for any reason, except that upon a termination of service without cause, (i) all unvested restricted stock that would have vested on the next vesting date following the termination will vest upon such termination and (ii) the remaining unvested restricted stock will remain outstanding for a period of 90 days following the termination date and will vest if a change in control occurs during such 90-day period.
Commencing in fiscal year 2017, each of the other non-employee members of our board or directors became eligible to receive a director service fee in the amount of $75,000 per year.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee is or has at any time during the past year been an officer or employee of ours. None of our executive officers serves as a member of the compensation committee or board of directors of any other entity that has an executive officer serving as a member of our board of directors or compensation committee.
164
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Information about the number of shares of our common stock beneficially owned by each director and named executive officer, by all directors and executive officers as a group and on each beneficial owner of more than 5% of our common stock is contained in our 2018 Proxy Statement and is incorporated herein by reference.
Equity Compensation Plan Information
In accordance with the rules of the SEC, the following table sets forth information about our equity compensation plans as of December 31, 2017. As of December 31, 2017, we had in place the Keane Management Holdings LLC Management Incentive Plan, which was approved by the security holders of Keane Management Holdings LLC, and the Equity and Incentive Award Plan, which was approved by the security holders of Keane Group, Inc.
Number of securities to be issued upon exercise of outstanding options, warrants and rights (#) | Weighted-average exercise price of outstanding options, warrants and rights ($) | Number of securities remaining available for future issuance under equity compensation plans (#) | |||||||
Equity compensation plans approved by security holders(1) | — | — | 5,911,477 | ||||||
Equity compensation plans not approved by security holders | — | — | — | ||||||
Total | — | — | 5,911,477 | ||||||
(1) | In connection with the IPO and the Organizational Transactions, the Keane Management Holdings LLC Management Incentive Plan was assigned to and assumed by Keane Investor and no further awards will be granted thereunder. |
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Item 13. Certain Relationships and Related-Party Transactions and Director Independence
The following discussion is a brief summary of certain material arrangements, agreements and transactions we have with related parties. It does not include all of the provisions of our material arrangements, agreements and transactions with related parties, does not purport to be complete and is qualified in its entirety by reference to the arrangements, agreements and transactions described. We enter into transactions with our stockholders and other entities owned by, or affiliated with, our direct and indirect stockholders in the ordinary course of business. These transactions include, amongst others, professional advisory, consulting and other corporate services.
We paid COAC, an affiliate of Cerberus, fees totaling approximately $0.3 million, $1.0 million and $0.7 million during 2017, 2016 and 2015, respectively, for consulting services provided in connection with improving the company’s operations. We may retain COAC to provide similar services in the future.
KG Fracing Acquisition Corp., an affiliate of Cerberus, and several entities affiliated with the Keane family (the “Keane Parties”), including KCK Family Limited Partnership, LP and SJK Family Limited Partnership, LP, made certain members loans in the amount of $20,000,000 to Keane Group on December 23, 2014 (collectively, the “Shareholder Loan”). In connection with our acquisition of the Acquired Trican Operations, such entities contributed all of their right, title and interest in and to the Shareholder Loan (other than accrued but unpaid interest, which was canceled and forgiven) in exchange for an aggregate 41,468.59 Class A Units.
Several of our board members are employees of our Sponsor, and funds managed by one or more affiliates of our Sponsor indirectly own a substantial portion of our equity through their ownership of Keane Investor.
Organizational Transactions
In connection with our corporate reorganization and in connection with our IPO, we entered in transactions with certain of our affiliates who became members of Keane Investor. See Note (1) Basis of Presentation and Nature of Operations of "Item 8. Financial Statements and Supplementary Data" for a description of these transactions.
Trican Transaction
On January 25, 2016, Keane Frac, LP entered into an asset purchase agreement with Trican, pursuant to which Keane Frac, LP agreed to acquire substantially all of the pressure-pumping assets, of which Trican had previously invested $1 billion in before write-downs, and assume specified related liabilities, relating to Trican’s U.S. oilfield services business. The Trican transaction was completed on March 16, 2016 for aggregate consideration comprised of a cash payment of $200 million, subject to customary working capital adjustments, and Class A and Class C Units of Keane Group. Trican agreed to provide Keane Group a seller indemnity (payable by Trican in cash or through a return of a portion of its interests in Keane Group to Keane Group), against which we have asserted certain claims. In addition, the seller indemnity is further partially backstopped by a representations and warranties insurance policy for the benefit of Keane Group.
As a result of the Trican transaction, Keane Frac, LP acquired, among other things, approximately 645,000 hydraulic horsepower, 14 cement pumps, seven coiled tubing units, 19 nitrogen units and 14 acidizing units and assumed various customer relationships. In addition, Keane Frac, LP acquired Trican U.S.’s operating bases located in strategic oil and gas basins, including the Permian Basin, the Marcellus Shale/Utica Shale, the SCOOP/STACK Formation, the Bakken Formation and the Eagle Ford Shale, as well as the Engineered Solutions Center.
Keane Frac, LP also acquired ownership of substantially all intellectual property relating primarily to Trican’s United States oilfield services business, which includes know-how, trade secrets, formulas, processes, customer lists and other non-registered intellectual property primarily used in connection with that business (the “Acquired Trican Intellectual Property”).
We refer to the acquired assets and assumed liabilities acquired in the Trican transaction as the “Acquired Trican Operations.”
In addition, Keane Group entered into two fully paid-up, perpetual, non-exclusive licenses to certain intellectual property owned by Trican or its affiliates and used in Trican’s U.S. oilfield service business, other than the Acquired Trican Intellectual Property. In the first license agreement between Keane Group and Trican Parent (the “Pump Control IP License Agreement”), Keane Group obtained the right to use Trican Parent’s electronic control system technology related to pump control and all related intellectual property owned by Trican’s Parent as of the closing date of the Trican
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transaction, limited to the oilfield services business in the United States. The Pump Control IP License Agreement also grants Keane Group a non-exclusive right of offer to negotiate and enter into a separate license agreement for certain intellectual property newly developed by Trican or its affiliates following the consummation of the Trican transaction on commercially reasonable terms, which will expire upon the later of (i) a change of control of Keane Group, (ii) the date Trican ceases to own any equity interest in Keane Group, or (iii) five years from the date of the Pump Control IP License Agreement.
In a separate license agreement entered into between Keane Group and Trican as part of the Trican transaction (the “General IP License Agreement”), Keane Group obtained the right to use substantially all intellectual property owned by Trican or its affiliates used in Trican’s U.S. oilfield services business as of the closing date of the Trican transaction (other than intellectual property related to the Fracking Fluids), limited to the oilfield services business in the United States. In addition, Keane Group received the right to use certain Trican proprietary fracking-related fluids as of the closing date of the Trican transaction, including the Fracking Fluids, for Keane Group’s hydraulic fracturing services to its customers, which license does not allow Keane to manufacture the Fracking Fluids but allows Keane Group to purchase the Fracking Fluids from Trican’s suppliers on favorable pricing terms. Keane Group also received the right to negotiate with Trican for the supply of Fracking Fluids that are improved following the consummation of the Trican transaction on terms at least as favorable as the most favorable terms granted by Trican to any of its other customers or licensees, which will expire upon the later of (i) a change of control of Keane, (ii) the date Trican ceases to own any equity interest in Keane, or (iii) five years from the date of the General IP License Agreement.
Keane Group also entered into a non-competition provision with Trican as part of its acquisition of the Acquired Trican Operations, pursuant to which, subject to certain limited exceptions, Keane may not compete, directly or indirectly, with Trican in Canada in the oilfield services business through March 16, 2018. Subject to certain limited exceptions, Keane also may not own an interest in any entity that competes directly or indirectly with Trican in Canada, other than with respect to any industrial services or completion tools business or certain interests in companies with limited revenues derived from Canadian operations. Keane is also restricted from knowingly interfering with business relationships of Trican. The non-competition provision does not restrict Keane’s ability to participate in certain limited equity investments in publicly owned companies.
Pursuant to the non-competition provision above, Trican may not compete with Keane in the oilfield services business in the United States, own an interest in any entity that competes, directly or indirectly, with Keane in any capacity, or knowingly interfere with the business relationships of Keane, in each case subject to certain limited restrictions, until the earlier of March 16, 2018 and the date on which certain prescribed reductions in Trican’s ownership interests in Keane occurs.
At the time of the transaction, Keane Group and Trican also entered into a customary transition services agreement that facilitated Keane Group’s integration of the acquired business into its existing operations.
Stockholders’ Agreement
In connection with the IPO, Keane entered into a Stockholders' Agreement (the “Stockholders’ Agreement”) with Keane Investor. Upon the consummation of the RockPile Acquisition, on July 3, 2017, the Company, RockPile Energy Holdings, LLC (“RockPile Holdings”), WDE RockPile Aggregate, LLC (the “White Deer Holder”), LLC and Keane Investor amended and restated such Stockholders' Agreement. The rights of Keane Investor under such agreement are described below:
Registration Rights
Any holders of registrable securities that are party to, or permitted assignees of rights under, the Stockholders’ Agreement (each such party, a “Holder”) and (i) collectively and beneficially own at least 20% of the total issued and outstanding Registrable Securities (as defined herein) or (ii) collectively and beneficially own at least 10% of the total issued and outstanding Registrable Securities, provided they beneficially own Registrable Securities equivalent to at least 50% of the Registrable Securities beneficially owned by them as of the effective date (each such Holder, a “Demand Holder”) may, subject to limitations, request we register the resale, under the Securities Act, of all or any portion of the shares of common stock that such Demand Holder owns (provided that in the case of a demand from Keane Investor, shares to be registered are on a pro rata and pari passu basis based on each member of Keane Investor’s beneficial ownership of Registrable Securities).
With respect to the Stockholders’ Agreement, “Registrable Securities” generally refers to outstanding shares of our common stock owned or hereafter acquired by a Holder; provided, however, that any such shares shall cease to be Registrable Securities to the extent (i) a registration statement with respect to the sale of such shares has been declared
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effective under the Securities Act and such shares have been disposed of in accordance with the plan of distribution set forth in such registration statement, (ii) such shares have been sold to the public through a broker, dealer or market maker in compliance with Rule 144 or Rule 145 of the Securities Act (or any successor rule), or (iii) such shares cease to be outstanding.
Any Demand Holder may require that we effect a registration, and either RockPile Holdings or the White Deer Holder may require that we effect a registration with respect to the Registrable Securities held by the RockPile Holders (as defined in the Stockholders’ Agreement), provided that we are not required to effect more than one “marketed” underwritten offering or more than one demand registration in any consecutive 180-day period (excluding a marketed underwritten offering at the request of RockPile Holdings or the White Deer Holder), that the number of shares of common stock requested to be registered in any underwritten offering have a value equal to at least $40.0 million or 100% of the Registrable Securities then held by such Demand Holder, that we are not required to effect more than one demand registration (including a marketed underwritten offering) at the request of RockPile Holdings or the White Deer Holder and that we are not required to effect more than six demand registrations. We may postpone for a reasonable period of time, which may not exceed 90 days, the filing of a registration statement that a Demand Holder requested that it file pursuant to the Stockholders’ Agreement if our board of directors determines that the filing of the registration statement would require us to disclose material non-public information that, in our board of directors’ good faith judgment, after consultation with independent outside counsel to the Company, would be required to be disclosed in such registration statement but which we have a bona fide business purpose for not disclosing publicly, provided that, unless otherwise approved in writing by the Holders of a majority of our common stock that demanded the registration, we may not postpone such filing more than twice, or for more than an aggregate of 90 days, in each case, during any 12-month period.
In addition, if we propose to register additional shares of common stock, each Holder will be entitled to notice of the registration and will be entitled to include its shares of common stock (on a pro rata and pari passu basis) in that registration with all registration expenses paid by us. Prior to the distribution by Keane Investor of all of the common stock it holds as of the completion of this offering to its equityholders, Holders other Keane Investor or a Demand Holder will not be entitled to include shares of common stock held by such Holder in a registration proposed by us unless Keane Investor or a Demand Holder also elects to participate in such registration.
Board Representation Rights
Pursuant to the Stockholders’ Agreement, we are required to appoint individuals designated by Keane Investor (the “Keane Investor Designees”) to our board of directors.
Our certificate of incorporation provides that, prior to the 50% Trigger Date, the authorized number of directors may be increased or decreased by the Designated Controlling Stockholder or a majority of our directors. The Designated Controlling Stockholder shall, immediately prior to the 50% Trigger Date, set the size of the board of directors at 11 directors. On or after the 50% Trigger Date, the authorized number of directors may be increased or decreased by the affirmative vote of not less than two-thirds (2/3) of the then-outstanding shares of capital stock or by resolution of our board of directors. Under the Stockholders’ Agreement, Keane Investor, or any Holder, will have the following board representation rights:
•from the date on which the Company is no longer a controlled company under the applicable rules of the NYSE but prior to the 35% Trigger Date, Keane Investor shall have the right to designate to our board of directors a number of individuals equal to one director fewer than 50% of our board of directors at any time, and will (i) cause its directors appointed to the board of directors to vote in favor of maintaining an 11-person board of directors (unless the management board of Keane Investor otherwise agrees by affirmative vote of 80% of the members of the management board of Keane Investor) and (ii) appoint four directors designated by Cerberus and one director designated by Trican; provided, however, that such Keane Investor Designees are qualified and suitable to serve as members of our board of directors under all applicable corporate governance policies and guidelines of the Company and our board of directors, and all applicable legal, regulatory and stock exchange requirements (other than any requirements under the NYSE regarding director independence) (the “Director Requirements”);
•for so long as any Holder has beneficial ownership of less than 35% but at least 20% of our then- outstanding common stock, such Holder shall have the right to designate to our board of directors a number of individuals who satisfy the Director Requirements equal to the greater of (i) three or (ii) 25% of the size of our board of directors at any time (rounded up to the next whole number);
•for so long as any Holder has beneficial ownership of less than 20% but at least 15% of our then- outstanding common stock, such Holder shall have the right to designate to our board of directors a
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number of individuals who satisfy the Director Requirements equal to the greater of (i) two or (ii) 15% of the size of our board of directors at any time (rounded up to the next whole number);
•for so long as any Holder has beneficial ownership of less than 15% but at least 10% of our then- outstanding common stock, such Holder shall have the right to designate one individual to our board of directors who satisfies the Director Requirements.
Each of Cerberus, Trican and a representative of a majority of the shares of common stock held by the Keane Parties, shall be entitled to, at its option, designate up to two individuals in the capacity of non-voting observers (the “Observers”) to our board of directors. RockPile Holdings (or WDE RockPile Aggregate, LLC, if
RockPile Holdings designates its appointment right) shall be entitled, subject to certain conditions, to appoint one individual in the capacity of Observer to our board of directors. The appointment and removal of any Observer shall be by written notice to the board of directors. An Observer may attend any meeting of the board of directors, provided that no Observer shall have the right to vote or otherwise participate in the board of directors meeting in any way other than to observe any applicable meeting of the board of directors. Our board of directors or any committee thereof shall have the right to exclude an Observer from any meeting or portion thereof in the sole discretion of a majority of the members in attendance at such meeting. If the Keane Parties, directly or indirectly, cease to beneficially own at least 50% of our common stock beneficially owned by the Keane Parties at the time of this offering, the Keane Parties shall no longer have any right to appoint Observers and shall cause any appointed Observers to immediately resign. If Trican, directly or indirectly, ceases to beneficially own at least 25% of our common stock beneficially owned by Trican at the time of this offering, Trican shall no longer have any right to appoint Observers and shall cause such appointed Observers to immediately resign. If the RockPile Holders, directly or indirectly, cease to beneficially own at least 50% of our common stock beneficially owned by the RockPile Holders at the time of the RockPile Closing Date, RockPile Holdings shall no longer have any right to appoint Observers and shall cause any appointed Observers to immediately resign.
Under the Stockholders’ Agreement, in the event of a vacancy on our board of directors arising through the death, resignation or removal of a Holder’s board designee, the Holder shall have the right to designate a replacement who satisfies the Director Requirements to fill such vacancy.
Indemnification; Expenses
We have agreed to indemnify Keane Investor, or any Holder, against any losses or damages resulting from any untrue statement or omission of material fact in any registration statement or prospectus pursuant to which we sell our shares, unless such liability arose from Keane Investor, or any such Holder’s, misstatement or omission, and Keane Investor and the Holders have agreed to indemnify us against all losses caused by their misstatements or omissions. We have also agreed to pay all expenses incident to our performance of or compliance with the registration rights under the Stockholders’ Agreement, including but not limited to all underwriting discounts, commissions, fees and related expenses of underwriters, provided that a Demand Holder shall be responsible for our out-of-pocket registration expenses in the case of a withdrawal of a demand registration by such party (subject to certain exceptions). In addition, the Stockholders’ Agreement will provide that any ownership interests in Keane forfeited by Trican as a result of an indemnification by Trican (in connection with our acquisition of the Acquired Trican Operations) will be subsequently transferred to our company by Keane Investor.
Keane Investor Limited Liability Company Agreement
Our Sponsor, the Keane Parties, Trican and management holders of Keane Group’s Class B Units, entered into the Keane Investor LLC Agreement, pursuant to which Keane Investor’s appointees to our Board of Directors will be selected. The Keane Investor LLC Agreement also contains certain non-competition restrictions as described above in “—Trican Transaction,” as well as transfer restrictions relating to Keane Investor’s shares of our common stock.
Coiled Tubing Asset Sales
In December 2017, we sold our dormant coiled tubing assets, including seven coiled tubing units and ancillary equipment related thereto, to Patriot Well Solutions LLC, an affiliate of WDE RockPile Aggregate, LLC, for a purchase price of $10.0 million.
Policy and Procedures for the Review, Approval or Ratification of Transactions with Related Persons
Prior to the completion of the IPO, our board of directors adopted a written policy (the “Related Party Policy”) and procedures for the review, approval or ratification of “Related Party Transactions” by the independent members of the
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audit and risk committee of our board of directors. For purposes of the Related Party Policy, a “Related Party Transaction” is 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 herein) has or will have a direct or indirect material interest.
The Related Party Policy defines “Related Party” as any person who is, or, at any time since the beginning of the company’s last fiscal year, 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 in the company, (3) an immediate family member 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. Immediate family members (each, a “Family Member”) includes 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.
Prior to the company entering into any Related Party Transaction, such Related Party Transaction will be reported to our General Counsel who will report the same to the audit and risk committee. Our General Counsel will conduct an investigation and evaluation of the Related Party Transaction and will report his or her findings to the audit and risk committee, including a summary of material facts. The audit and risk committee will review the material facts of all Related Party Transactions which require the audit and risk committee’s approval and either approve or disapprove of the Related Party Transaction, subject to the exceptions described below. If advance notice of a Related Party Transaction has been given to the audit and risk committee and it is not possible to convene a meeting of the audit and risk committee, then the chairman of the audit and risk committee will consider whether the Related Party Transaction is appropriate and, if it is, will approve the Related Party Transaction, with the audit and risk committee being asked to ratify the Related Party Transaction at the next regularly scheduled meeting of the audit and risk committee. In the event the audit and risk committee does not ratify any such Related Party Transaction, management shall make all reasonable efforts to cancel or annul such Related Party Transaction. In determining whether to approve or ratify a Related Party Transaction, the audit and risk committee, or its chairman, as applicable, will consider all factors it deems appropriate, including the factors listed below in “—Review Criteria.”
Entering into a Related Party Transaction without the approval or ratification required by the terms of the Related Party Policy is prohibited and a violation of such policy. In the event the company’s directors, executive officers or Chief Accounting Officer become aware of a Related Party Transaction that was not previously approved or ratified under the Related Party Policy, such person will promptly notify the audit and risk committee (or, if it is not practicable for the company to wait for the audit and risk committee to consider the matter, the chairman of the audit and risk committee) will consider whether the Related Party Transaction should be ratified or rescinded or other action should be taken, with such review considering all of the relevant facts and circumstances regarding the Related Party Transaction, including the factors listed below in “—Review Criteria.” The chairman of the audit and risk committee will report to the committee at its next regularly scheduled meeting any actions taken under the Related Party Policy pursuant to the authority delegated in this paragraph. The audit and risk committee will also review all of the facts and circumstances pertaining to the failure to report the Related Party Transaction to the audit and risk committee and will take, or recommend to our board of directors, any action the audit and risk committee deems appropriate.
No member of the audit and risk committee or director of our board will participate in any discussion or approval of a Related Party Transaction for which he or she is a Related Party, except that the audit and risk committee member or board director will provide all material information concerning the Related Party Transaction to the audit and risk committee.
If a Related Party Transaction will be ongoing, the audit and risk committee may establish guidelines for the company’s management to follow in its ongoing dealings with the Related Party. Thereafter, the audit and risk committee, on at least an annual basis, will review and assess ongoing relationships with the Related Party to ensure that they are in compliance with the audit and risk committee’s guidelines and that the Related Party Transaction remains appropriate.
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Review Criteria
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. As appropriate for the circumstances, the audit and risk committee or its chairman, as applicable, will review and consider:
•the Related Party’s interest in the Related Party Transaction;
•the terms of the Related Party Transaction, including the approximate dollar value of the amount involved in the Related Party Transaction and the approximate dollar value of the amount of the Related Party’s interest in the transaction without regard to the amount of any profit or loss;
•whether the transaction is being undertaken in the ordinary course of business of the company;
•whether the transaction with the Related Party is proposed to be, or was, entered into on terms no less favorable to the company than terms that could have been reached with an unrelated third party;
•the purpose of, and the potential benefits to the company of, the Related Party Transaction;
•a description of any provisions or limitations imposed as a result of entering into the Related Party Transaction;
•whether the proposed transaction includes any potential reputational risk issues for the company which may arise as a result of or in connection with the Related Party Transaction;
•whether the proposed transaction would violate any requirements of the company’s financing or other material agreements; and
•any other relevant information regarding the Related Party Transaction or the Related Party.
The audit and risk committee, or its chairman, as applicable, may approve or ratify the Related Party Transaction only if the audit and risk committee, or its chairman, as applicable, determines in good faith that, under all of the circumstances, the transaction is fair to the company. The audit and risk committee, in its sole discretion, may impose such conditions as it deems appropriate on the company or the Related Party in connection with approval of the Related Party Transaction.
Pre-Approved Related Party Transactions
The audit and risk committee has determined that the following transactions will be deemed pre-approved or ratified and will not require review or approval of the audit and risk committee, even if the aggregate amount involved will exceed $120,000, unless otherwise specifically determined by the audit and risk committee.
•Any employment by the company of an executive officer of the company or any of its subsidiaries if the related compensation conforms with our company’s compensation policies and if the executive officer is not a Family Member of another executive officer or of a director of our board; and
•Any compensation paid to a director of our board if the compensation is consistent with the company’s bylaws and any compensation policies.
Notwithstanding anything to the contrary in the Related Party Policy, in the event the bylaws of the company require review by our board of directors and/or approval of a Related Party Transaction, the audit and risk committee, and its chairman, will not have the authority to review or approve a Related Party Transaction but will provide a recommendation to our board of directors for the board’s use in its consideration of a given Related Party Transaction.
Director Independence
Our board of directors has affirmatively determined that Marc G. R. Edwards, Christian A. Garcia, Gary M. Halverson and Elmer D. Reed are independent directors under the applicable rules of the NYSE and as such term is defined in Rule 10A-3(b)(1) under the Exchange Act.
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Item 14. Principal Accountant Fees and Services
Audit Fees
The following table summarizes fees paid or accrued to our independent registered public accounting firm, KPMG LLP (“KPMG”), in connection with various services for the years ended December 31, 2017 and 2016 respectively:
(Thousands of Dollars) | ||||||||
2017 | 2016 | |||||||
Audit Fees(1) | $ | 1,377 | $ | 671 | ||||
Audit –Related Fees(2) | 983 | 1,832 | ||||||
Tax Fees(3) | 690 | 231 | ||||||
All Other Fees(4) | 264 | 45 | ||||||
Total | $ | 3,314 | $ | 2,779 | ||||
(1) | Consists of fees for professional services rendered for the audits of our consolidated financial statements for fiscal years 2017, 2016 and 2015 included in our Registration Statements on Form S-1 and Annual Report on Form 10-K |
(2) | Consists of fees billed for assurance and related services, primarily related to our initial public offering and acquisition of RockPile |
(3) | Consists of fees for professional services rendered by our principal accountant for tax compliance, tax advice, and tax planning. |
(4) | Consists of fees for products and services provided by our principal accountant, other than the services reported under “audit fees,” “audit-related fees,” and “tax fees. |
Pre-Approval Policy
Our audit and risk committee has adopted a policy (the “Pre-Approval Policy”), that sets forth the procedures and conditions pursuant to which audit and non-audit services proposed to be performed by the independent auditor may be pre-approved. The Pre-Approval Policy generally provides that we will not engage KPMG to render any audit, audit-related, tax or permissible non-audit service unless the service is either (i) explicitly approved by the audit and risk committee (“specific pre-approval”) or (ii) entered into pursuant to the pre-approval policies and procedures described in the Pre-Approval Policy (“General Pre-Approval”). Unless a type of service to be provided by KPMG has received General Pre-Approval under the Pre-Approval Policy, it requires specific pre-approval by the audit and risk committee. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval. On an annual basis, the audit and risk committee reviews and generally pre-approves the services (and related fee levels or budgeted amounts) that may be provided by KPMG without first obtaining specific pre-approval from our audit and risk committee. Our audit and risk committee may revise the list of general pre-approved services from time to time, based on subsequent determinations.
During 2017 and 2016, no services were provided to us by KPMG other than in accordance with the pre-approval policies and procedures described above.
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PART IV
Item 15. Exhibits and Financial Schedules
The following documents are filed as part of this report:
Financial Statements
Keane Group Holdings, LLC | |
Audited Consolidated Financial Statements | |
Report of Independent Registered Public Accounting Firm | |
Consolidated Balance Sheets | |
Consolidated Statements of Operations and Comprehensive (Loss) | |
Consolidated Statements of Changes in Owners’ Equity | |
Consolidated Statements of Cash Flows | |
Notes to Consolidated Financial Statements | |
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Exhibits
The documents listed in the Exhibit Index of this Annual Report on Form 10-K are incorporated by reference or are filed with this Annual Report on Form 10-K, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).
EXHIBIT INDEX
Incorporated by Reference | ||||||||||||
Exhibit Number | Exhibit Description | Filed/ Furnished Herewith | Form | File No. | Exhibit | Filing Date | ||||||
S-1 | 333-215079 | 3.1 | 12/14/16 | |||||||||
10-K | 001-37988 | 3.2 | 3/21/17 | |||||||||
8-K | 001-37988 | 10.3 | 7/3/17 | |||||||||
8-K | 001-37988 | 10.1 | 12/28/17 | |||||||||
10-K | 001-37988 | 10.2 | 03/21/17 | |||||||||
8-K | 001-37988 | 10.4 | 7/3/17 | |||||||||
S-1 | 333-215079 | 10.6 | 12/14/16 | |||||||||
10-K | 001-37988 | 10.4 | 3/21/17 | |||||||||
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S-1 | 333-215079 | 10.8 | 12/14/16 | |||||||||
S-1 | 333-215079 | 10.9 | 12/14/16 | |||||||||
S-1 | 333-215079 | 10.10 | 12/14/16 | |||||||||
S-1 | 333-215079 | 10.11 | 12/14/16 | |||||||||
S-1 | 333-215079 | 10.12 | 12/14/16 | |||||||||
S-1 | 333-215079 | 10.13 | 12/14/16 | |||||||||
S-1 | 333-215079 | 10.14 | 12/14/16 | |||||||||
S-1 | 333-215079 | 10.16 | 12/14/16 | |||||||||
S-1 | 333-215079 | 10.18 | 12/14/16 | |||||||||
S-1 | 333-215079 | 10.19 | 12/14/16 | |||||||||
8-K | 001-37988 | 10.1 | 4/4/17 | |||||||||
S-1 | 333-215079 | 10.20 | 12/14/16 | |||||||||
8-K | 001-37988 | 10.4 | 1/26/17 | |||||||||
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S-1 | 333-215079 | 10.22 | 12/14/16 | |||||||||
S-1 | 333-215079 | 10.23 | 12/14/16 | |||||||||
S-1 | 333-215079 | 10.24 | 12/14/16 | |||||||||
8-K | 333-215079 | 10.1 | 5/19/17 | |||||||||
8-K | 001-37988 | 10.1 | 7/3/17 | |||||||||
8-K | 001-37988 | 10.3 | 1/26/17 | |||||||||
10-K | 001-37988 | 10.23 | 3/21/17 | |||||||||
10-Q | 001-37988 | 10.1 | 8/3/17 | |||||||||
10-Q | 001-37988 | 10.2 | 8/3/17 | |||||||||
* | ||||||||||||
* | ||||||||||||
* | ||||||||||||
* | ||||||||||||
* | ||||||||||||
** | ||||||||||||
101.INS | XBRL Instance Document | * | ||||||||||
101.SCH | XBRL Taxonomy Extension Schema Document | * | ||||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | * | ||||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | * | ||||||||||
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101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | * | ||||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | * | ||||||||||
† Indicates a management contract or compensatory plan or arrangement.
* Filed herewith.
** Furnished herewith.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on February 28, 2018.
Keane Group, Inc. (Registrant) | ||
By: | /s/ James C. Stewart | |
James C. Stewart | ||
Chairman and Chief Executive Officer | ||
(Principal Executive Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ James C. Stewart | Chairman and Chief Executive Officer (Principal Executive Officer) | February 28, 2018 | ||
James C. Stewart | ||||
/s/ Gregory L. Powell | President and Chief Financial Officer (Principal Financial Officer) | February 28, 2018 | ||
Gregory L. Powell | ||||
/s/ Phung Ngo-Burns | Chief Accounting Officer (Principal Accounting Officer) | February 28, 2018 | ||
Phung Ngo-Burns | ||||
/s/ Marc G. R. Edwards | Lead Director | February 28, 2018 | ||
Marc G. R. Edwards | ||||
/s/ Lucas N. Batzer | Director | February 28, 2018 | ||
Lucas N. Batzer | ||||
/s/ Dale M. Dusterhoft | Director | February 28, 2018 | ||
Dale M. Dusterhoft | ||||
/s/ Christian A. Garcia | Director | February 28, 2018 | ||
Christian A. Garcia | ||||
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/s/ Lisa A. Gray | Director | February 28, 2018 | ||
Lisa A. Gray | ||||
/s/ Gary M. Halverson | Director | February 28, 2018 | ||
Gary M. Halverson | ||||
/s/ Shawn Keane | Director | February 28, 2018 | ||
Shawn Keane | ||||
/s/ Lenard B. Tessler | Director | February 28, 2018 | ||
Lenard B. Tessler | ||||
/s/ Elmer D. Reed | Director | February 28, 2018 | ||
Elmer D. Reed | ||||
/s/ Scott Wille | Director | February 28, 2018 | ||
Scott Wille | ||||
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