BASIC ENERGY SERVICES, INC.
The following management's discussion and analysis ("MD&A") of our financial
condition and results of operations should be read in conjunction with our
consolidated financial statements and related notes that appear elsewhere in
this Annual Report on Form 10-K. In addition to historical consolidated
financial information, the following discussion contains forward-looking
statements that reflect our plans, estimates, or beliefs. Actual results could
differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to these differences include those
discussed below and elsewhere in this Annual Report on Form 10-K, particularly
in "Risk Factors."
Management's Overview
We provide wellsite services in the United States to oil and natural gas
production companies, with a focus on well servicing, water logistics, and
completion and remedial services which are trusted, safe, and reliable. These
services are fundamental to establishing and maintaining the flow of oil and
natural gas throughout the productive life of a well. Our broad range of
services enables us to meet multiple needs of our customers at the wellsite. The
Company's operations are concentrated in major United States onshore oil and
natural gas producing regions located in Texas , California , New Mexico ,
Oklahoma , Arkansas , Louisiana , Wyoming , North Dakota and Colorado . We operate
three reportable segments: Well Servicing, Water Logistics and Completion and
Remedial Services.
In 2020, our Well Servicing segment represented 52% of our consolidated
revenues. Revenue in our Well Servicing segment is derived from maintenance,
workover, completion and plugging and abandonment services. The Water Logistics
segment represented 34% of our consolidated revenues. Revenue in our Water
Logistics segment is derived from our network of disposal wells, pipelines,
gathering systems, and fresh and brine water wells that comprise our midstream
operations. In addition to our water midstream business, Water Logistics also
includes transportation and maintenance services. Our Completion & Remedial
Services segment represented 14% of our consolidated revenues. Revenues from our
Completion & Remedial Services segment are derived from our rental and fishing
tool operations, coiled tubing and related services and underbalanced drilling.
Summary Financial Results
•Total revenue for 2020 was $411.4 million , which represented a decrease of
$155.9 million from 2019.
•Net loss for 2020 was $268.2 million , compared to $181.9 million in 2019.
•Adjusted EBITDA(1) for 2020 was negative $15.0 million , which represented a
decrease of $54.6 million from 2019. See later in this MD&A for our
reconciliation of net loss to adjusted EBITDA.
(1)Adjusted EBITDA is not a measure determined in accordance with United States
generally accepted accounting principles ("GAAP"). See "Supplemental Non-GAAP
Financial Measure - Adjusted EBITDA" below for further explanation and
reconciliation to the most directly comparable financial measures calculated and
presented in accordance with GAAP.
Acquisition of C&J Well Services
On March 9, 2020 , the Company acquired C&J Well Services, Inc. ("CJWS") from
NexTier Holding Co. CJWS is the third largest rig servicing provider in the
U.S. , with a leading footprint in California and a strong customer base. Through
the acquisition of CJWS, the Company expanded its footprint in the Permian,
California and other key oil basins. The Company paid $95.7 million in total
consideration for the acquisition at closing, comprised of $59.4 million in cash
and $36.3 million in other consideration described fully in Note 1. "Description
of Business - Acquisition of C&J Well Services, Inc. " in the notes to our
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K.
General Industry Overview
Our business is driven by expenditures of oil and gas companies. Our customers'
spending is categorized as either an operating or a capital expenditure.
Activities designed to add hydrocarbon reserves are classified as capital
expenditures, while those associated with maintaining or accelerating production
are categorized as operating expenses.
Because existing oil and natural gas wells require ongoing spending to maintain
production, expenditures by oil and gas companies for the maintenance of
existing wells historically have been relatively stable and predictable. In
contrast, capital expenditures by oil and gas companies for exploration and
drilling are more directly influenced by current and expected oil and natural
gas prices and generally reflect the volatility of commodity prices. We believe
our focus on production and workover activity partially insulates our financial
results from the volatility of the active drilling rig count. However,
significantly lower commodity prices have impacted production and workover
activities due to both customer cash liquidity limitations and well economics
for these service activities.
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Capital expenditures by oil and gas companies tend to be sensitive to volatility
in oil or natural gas prices because project decisions are based on a return on
investment over a number of years. As such, capital expenditure economics often
require the use of commodity price forecasts which may prove inaccurate in the
amount of time required to plan and execute a capital expenditure project (such
as the drilling of a deep well). When commodity prices are depressed for even a
short period of time, capital expenditure projects are routinely deferred until
prices return to an acceptable level.
In contrast, both mandatory and discretionary operating expenditures are
substantially more stable than exploration and drilling expenditures. Mandatory
operating expenditure projects involve activities that cannot be avoided in the
short term, such as regulatory compliance, safety, contractual obligations and
projects to maintain the well and related infrastructure in operating condition
(for example, repairs or replacement of wellbore production equipment, repairs
to well casings to maintain mechanical integrity or well interventions to
evaluate wellbore integrity). Discretionary operating expenditure projects may
not be critical to the short-term viability of a lease or field, but these
projects are relatively insensitive to commodity price volatility. Discretionary
operating expenditure work is evaluated according to a simple short-term payout
criterion that is far less dependent on commodity price forecasts.
Going Concern and Strategic Initiatives
Demand for services offered by our industry is a function of our customers'
willingness and ability to make operating and capital expenditures to explore
for, develop and produce hydrocarbons in the United States . Our customers'
expenditures are affected by both current and expected levels of commodity
prices.
Industry conditions during 2020 were greatly influenced by factors that impacted
supply and demand in the global oil and natural gas markets, including a global
outbreak of the novel coronavirus ("COVID-19") and the announced price
reductions and possible production increases by members of Organization of the
Petroleum Exporting Countries ("OPEC") and other oil exporting nations. As a
result, the posted price for West Texas Intermediate oil ("WTI") declined
sharply during early 2020 from 2019.
This decline in oil and natural gas prices, and the consequent impact on
industry exploration and production activity, has adversely impacted the level
of drilling and workover activity by our customers. As a result of these weak
energy sector conditions and lower demand for our products and services,
customer contract pricing, our operating results, our working capital and our
operating cash flows have been negatively impacted during 2020. During the last
half of 2020, we had difficulty paying for our contractual obligations as they
came due, and we continue to have this difficulty in 2021. Management has taken
several steps to generate additional liquidity, including reducing operating and
administrative costs, employee headcount reductions, closing operating
locations, implementing employee furloughs, other cost reduction measures, and
the suspension of growth capital expenditures.
While market prices for oil and natural gas have improved in early 2021, the
overall trends in our business have not yet recovered. We expect that demand for
our services will increase as a result of these higher oil and natural gas
prices; however, we are unable to predict when this increased demand and
resulting improvement in our results of operations will occur.
Our liquidity and ability to comply with debt covenants that may be required
under the Senior Notes and the revolving credit facility (the "ABL Facility")
have been negatively impacted by the downturn in the energy markets, volatility
in commodity prices and their effects on our customers and us, as well as
general macroeconomic conditions. If an event of default were to occur, our
lenders could, in addition to other remedies such as charging default interest,
accelerate the maturity of the outstanding indebtedness, making it immediately
due and payable, and we may not have sufficient liquidity to repay those
amounts.
We continue to have difficulty paying for our contractual obligations as they
come due. Management has taken several steps to generate additional liquidity,
including reducing operating and administrative costs, employee headcount
reductions, closing operating locations, implementing employee furloughs, other
cost reduction measures, and the suspension of growth capital expenditures. As
discussed in Note 1 to the consolidated financial statements included elsewhere
in this annual report, the recent decline in the customers' demand for our
services has had a material adverse impact on the financial condition of the
Company, resulting in recurring losses from operations, a net capital
deficiency, and liquidity constraints that raise substantial doubt about its
ability to continue as a going concern. Among the other steps that our
management may or is implementing to attempt to alleviate this substantial doubt
include additional sales of non-strategic assets, obtaining waivers of debt
covenant requirements from our lenders, restructuring or refinancing our debt
agreements, or obtaining equity financing. In addition, we had a significant
contractual obligation to pay cash or issue additional Senior Notes to our
largest shareholder, Ascribe, resulting from our acquisition of CJWS. On March
31, 2021 , the Company negotiated a settlement of this obligation
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with Ascribe in exchange for issuing additional Senior Notes to Ascribe with an
aggregate par value of $47.5 million . See Note 18. "Subsequent Event" in the
notes to our consolidated financial statements included elsewhere in this Annual
Report on Form 10-K for more information about the settlement of the Make-Whole
Reimbursement.
Management has prepared the consolidated financial statements included in this
annual report in accordance with U.S. generally accepted accounting principles
applicable to a going concern, which contemplates that assets will be realized
and liabilities will be discharged in the normal course of business as they
become due. These consolidated financial statements do not reflect the
adjustments to the carrying values of assets and liabilities and the reported
revenues and expenses and balance sheet classifications that would be necessary
if the Company was unable to realize its assets and settle its liabilities as a
going concern in the normal course of operations. Such adjustments could be
material and adverse to the financial results of the Company.
We are engaged in ongoing discussions regarding our liquidity and financial
situation with representatives of the lenders under the ABL Credit Facility, and
have received from the lenders under the ABL Credit Facility a waiver of the
default that otherwise would have arisen under the ABL Credit Facility as a
result of the "going concern" disclosures described above. We also are
evaluating certain strategic alternatives including financings, refinancings,
amendments, waivers, forbearances, asset sales, debt issuances, exchanges and
purchases, a combination of the foregoing, or other out-of-court or in-court
bankruptcy restructurings of our debt to address these matters, which may
include discussions with holders of the Senior Notes for a comprehensive
de-leveraging transaction.
If the Company is unable to effectuate a successful debt restructuring, the
Company expects that it will continue to experience adverse pressures on its
relationships with counterparties who are critical to its business, its ability
to access the capital markets, its ability to execute on its operational and
strategic goals and its business, prospects, results of operations and liquidity
generally. There can be no assurance as to when or whether the Company will
implement any action as a result of these strategic initiatives, whether the
implementation of one or more such actions will be successful, whether the
Company will be able to effect a refinancing of its Senior Notes or otherwise
access the capital markets, or the effects the failure to take action may have
on the Company's business, its ability to achieve its operational and strategic
goals or its ability to finance its business or refinance its indebtedness. A
failure to address the Company's level of corporate leverage in the near-term
will have a material adverse effect on the Company's business, prospects,
results of operations, liquidity and financial condition, and its ability to
service or refinance its corporate debt as it becomes due.
Business Environment
Our business depends on our customers' willingness and ability to make
expenditures to produce, develop and explore for oil and natural gas in the
United States . The willingness of our customers to make these expenditures is
primarily influenced by current and expected future prices for oil and natural
gas. Industry conditions during 2020 were greatly influenced by factors that
impacted supply and demand in the global oil and natural gas markets, including
a global outbreak of the novel coronavirus ("COVID-19") and the announced price
reductions and possible production increases by members of Organization of the
Petroleum Exporting Countries ("OPEC") and other oil exporting nations. As a
result, the posted price for West Texas Intermediate oil ("WTI") declined
sharply during early 2020 from 2019.
This decline in oil and natural gas prices, and the consequent impact on
industry exploration and production activity, has adversely impacted the level
of drilling and workover activity by our customers. As a result of these weak
energy sector conditions and lower demand for our products and services,
customer contract pricing, our operating results, our working capital and our
operating cash flows have been negatively impacted during 2020. During the last
half of 2020, we have had difficulty paying for our contractual obligations as
they come due. Management has taken several steps to generate additional
liquidity, including reducing operating and administrative costs, employee
headcount reductions, closing operating locations, implementing employee
furloughs, other cost reduction measures, and the suspension of growth capital
expenditures.
Outlook
While market prices for oil and natural gas have improved in early 2021, the
overall trends in our business have not yet recovered. We expect that demand for
our services will increase as a result of these higher oil and natural gas
prices; however, we are unable to predict when this increased demand and
resulting improvement in our results of operations will occur.
We continue to have difficulty paying for our contractual obligations as they
come due. Due to our current capital structure, working capital position, and
the uncertainty of our future results of operations and operating cash flows,
there is substantial doubt as to the ability of the Company to continue as a
going concern. Additional steps that management could implement to alleviate
this substantial doubt would include additional sales of non-strategic
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assets, obtaining waivers of debt covenant requirements from our lenders,
restructuring or refinancing our debt agreements, or obtaining equity financing.
However, there can be no assurances that the Company will be able to
successfully complete these actions in the current environment. For further
discussion of our liquidity position, see "Liquidity and Capital Resources."
The COVID-19 pandemic had an adverse effect on oil and natural gas prices, the
demand for our services and our reported results for 2020, and may continue to
negatively impact our business during 2021. The extent to which our operations
will be impacted by the pandemic will depend largely on future developments,
including the severity of the pandemic, actions by government authorities to
contain it or treat its impact and success of those efforts. These are highly
uncertain and cannot be accurately predicted. We will continue to monitor the
developments relating to COVID-19 and the volatility in oil and natural prices
closely, and will follow health and safety guidelines as they evolve.
Results of Operations
Revenues
Consolidated revenues decreased by 27% to $411.4 million in 2020 from $567.3
million in 2019. This decrease was due to decreased customer activity,
particularly in our Water Logistics and Completion & Remedial Services segments,
as exploration and production companies significantly reduced their capital
expenditure activity during 2020 due to low oil commodity pricing. Our
reportable segment revenues consisted of the following:
Year Ended December 31,
2020 2019
(dollars in thousands) Revenues % of Total Revenues Revenues % of Total Revenues
Well Servicing $ 212,817 52% $ 226,966 40%
Water Logistics 138,935 34% 199,816 35%
Completion & Remedial Services 59,623 14% 140,468 25%
Total revenues $ 411,375 100% $ 567,250 100%
The following table includes certain operating statistics related to our Well
Servicing segment. This table does not include revenues and profits associated
with our legacy rig manufacturing operations:
Weighted Average
Well Servicing Number of Rigs Rig Hours Rig Utilization Rate Revenue per Rig Hour Segment Profits %
2020 515 472,300 34% $439 18%
2019 308 595,400 68% $359 21%
Well Servicing revenues decreased by 6% to $212.8 million in 2020, compared to
$227.0 million in 2019. The decrease in revenue was partially offset by the
March 9, 2020 acquisition of CJWS. Rig utilization decreased to 34% in 2020 from
68% during 2019. Our weighted average number of well servicing rigs increased to
515 in 2020 from 308 during 2019 primarily due to the CJWS acquisition in the
first quarter of 2020. We experienced an increase of 22% in revenue per rig hour
to $439 during 2020 from $359 during 2019, due to increased mix of higher rate
work in the California markets resulting from an increased presence in that
market following the CJWS transaction. The acquisition of CJWS contributed
$103.9 million of revenues to the Well Servicing segment.
The following table includes certain operating statistics related to our Water
Logistics segment:
Weighted Average
Pipeline Volumes (in Trucking Volumes (in Number of Water
Water Logistics bbls) bbls) Logistics Trucks Truck Hours Revenue (in thousands) Segment Profits
2020 14,070,000 18,557,000 1,193 1,145,000 $138,935 19%
2019 14,163,000 27,139,000 799 1,570,100 $199,816 29%
Water Logistics revenue decreased by 30% to $138.9 million in 2020, compared to
$199.8 million in 2019 due to decreases in the trucking line of business
resulting from a strategic shift towards higher margin pipeline-based disposals.
Pipeline disposal volumes decreased 1% to 14.1 million barrels in 2020 compared
to 14.2 million barrels in 2019. Our weighted average number of water logistics
trucks increased to 1,193 in 2020 from 799 in 2019, primarily from the CJWS
acquisition in the first quarter of 2020. The acquisition of CJWS contributed
$36.2 million of revenues to the Water Logistics segment.
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Completion & Remedial Services Revenues (in thousands) Segment Profits %
2020 $59,623 13%
2019 $140,468 30%
Completion & Remedial Services revenue decreased by 58% to $59.6 million in
2020, compared to $140.5 million in 2019. Revenues declined primarily due to
pricing pressures coupled with decreased completion activity as decreased
commodity prices resulted in decreased drilling and completion activity by our
customers throughout the year. The acquisition of CJWS contributed $17.4 million
of revenues to the Completion & Remedial Services segment.
Costs of Services
Consolidated costs of services, which primarily consist of labor costs,
including workers' compensation and health insurance, and maintenance and repair
costs, decreased by 20% to $338.1 million in 2020 from $421.5 million in 2019,
due to decreases in activity and corresponding decreases in employee headcount
and wages to adapt to current activity levels.
Costs of services for the Well Servicing segment decreased by 4% to $174.0
million in 2020 as compared to $181.5 million in 2019, due to reduced activity
and headcount. The acquisition of CJWS contributed $82.7 million of costs of
services to this segment in 2020. Segment profits as a percentage of segment
revenues decreased to 18% of revenues in 2020 from 21% of revenues in 2019 due
to decreased pricing for our services in 2020.
Costs of services for the Water Logistics segment decreased by 21% to $112.2
million in 2020 from $141.4 million in 2019 due to reduced activity levels and
headcount. The acquisition of CJWS contributed $27.1 million of costs of
services to this segment in 2020. Segment profits as a percentage of segment
revenues decreased to 19% in 2020 from 29% in 2019, due to decreased pricing for
our services in 2020.
Costs of services for the Completion & Remedial Services segment decreased by
47% to $51.8 million in 2020 from $98.7 million in 2019, due to reduced activity
levels and headcount. The acquisition of CJWS contributed $10.9 million of costs
of services to this segment in 2020. Segment profits as a percentage of segment
revenues decreased to 13% in 2020 compared to 30% in 2019, due to decreased
pricing for our services in 2020.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses decreased by $17.4
million or 15% to $98.1 million in 2020 from $115.5 million in 2019. This
decrease was despite the March 9, 2020 acquisition of CJWS, which contributed
$20.6 million of selling, general and administrative costs in 2020, and was due
to the Company's cost reduction initiatives in 2020. Stock-based compensation
expense was $1.5 million during 2020 compared to $8.7 million during 2019.
Depreciation and Amortization Expenses
Consolidated depreciation and amortization expense was $52.5 million during
2020, a decrease of 24% from $69.5 million in 2019. The decrease in depreciation
and amortization expense was due to impairments of certain long-lived property
and equipment assets in the first quarter of 2020 and decreased capital spending
in 2020. During 2020, we incurred $7.8 million for cash capital expenditures and
$1.6 million for finance leases, compared to $55.4 million for cash capital
expenditures and $7.9 million for finance leases in 2019.
Impairments and Other Charges
The following table summarizes our impairments and other charges:
Year Ended December 31,
(in thousands) 2020 2019
Long lived asset impairments $ 88,697 $ -
Goodwill impairments 19,089 -
Inventory write-downs 5,281 5,266
Transaction costs 4,734 2,153
Field restructuring 351 -
Executive departure - 843
Total impairments and other charges $ 118,152 $ 8,262
Long-lived asset impairments - The reduction in demand for our services
beginning in
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that our Well Servicing segment long-lived assets were not recoverable. The
estimated fair value of the Well Servicing segment assets was determined to be
below its carrying value and as a result we recorded impairments of property and
equipment totaling $86.0 million and write-downs of component parts inventory
totaling $4.8 million as of March 31, 2020 . As of December 31, 2020 , we recorded
an additional $2.7 million impairment of long-lived assets related to certain
real property yard and facility locations that we no longer use.
Goodwill impairments - The Company recorded goodwill of $19.1 million in
connection with the acquisition of CJWS, which was allocated to our Well
Servicing and Water Logistics reporting units. On March 31, 2020 , due to the
reduction in demand for our services, we determined that the fair value of the
Well Servicing reporting unit was less than its carrying value, which resulted
in a goodwill impairment of $10.6 million for this reporting unit. As part of
our annual goodwill impairment test, we determined that the remaining fair value
of the Water Logistics reporting unit was less than its carrying value, which
resulted in a goodwill impairment of $8.5 million for this reporting unit.
Inventory write-downs - In connection with the downturn in our business, we
recorded a $4.8 million write-down of certain parts inventory in our Well
Servicing segment in the first quarter of 2020. We also recorded a $5.3 million
write-down of certain parts inventory in our Well Servicing segment during 2019
due to obsolescence.
Transaction costs - In response to the downturn in our business, and in
connection with our plans to adjust our capital structure accordingly, we
incurred $4.7 million of legal and professional consulting costs, including
costs associated with the Exchange Offer. For further discussion of the Exchange
Offer, see Note 4. "Indebtedness and Borrowing Facility" in the notes to our
consolidated financial statements included in this Annual Report on Form 10-K.
Field restructuring costs - In 2020, we incurred $0.4 million of costs
associated with yard closures in connection with our field restructuring
initiative.
Executive departure - In 2019, we incurred $0.8 million in costs related to the
departure of our Chief Executive Officer.
Acquisition Related Costs
Acquisition related costs includes CJWS Transaction-related costs, including
approximately $8.9 million of external legal and consulting fees and due
diligence costs, along with other costs associated with the CJWS acquisition,
including severance costs paid to CJWS employees pursuant to the Purchase
Agreement.
Loss (Gain) on Disposal of Assets
During 2020, we sold non-strategic property and equipment as part of our
continuing operations. We received $14.7 million of proceeds and recognized a
$3.5 million net gain on the sale of these assets. During 2019, we also sold
non-strategic property and equipment assets. We received $6.6 million of
proceeds and recognized a $4.0 million net loss on the sale of these assets.
Gain on Derivative
The Company's derivative liability relates to our make-whole obligation to our
majority shareholder for the Senior Notes they contributed to the purchase
consideration for the CJWS acquisition. The notional amount of the make-whole
obligation was $28.5 million and the fair value was $4.8 million at December 31,
2020 . The fair value of the derivative liability was based on a credit-adjusted
recovery value based on the trading value of our Senior Notes. The fair value of
the derivative liability resulted in a net $4.9 million gain in 2020. On March
31, 2021 , the Company negotiated a settlement of the Make-Whole Reimbursement
obligation with Ascribe in exchange for issuing additional Senior Notes to
Ascribe with an aggregate par value of $47.5 million . See Note 18. "Subsequent
Event" in the notes to our consolidated financial statements included elsewhere
in this Annual Report on Form 10-K for more information about the settlement of
the Make-Whole Reimbursement.
Interest Expense, net
The Company's net interest expense consisted of the following:
Year Ended December 31,
(in thousands) 2020 2019
Cash payments for interest $ 37,322 $ 39,248
Amortization of debt discounts and issuance costs 8,845 3,392
Change in accrued interest 513 86
Interest Income (63) (509)
Other 363 161
Interest expense, net $ 46,980 $ 42,378
42-------------------------------------------------------------------------------- Consolidated net interest expense increased to$47.0 million in 2020 from$42.4 million in 2019. The increase in net interest expense in 2020 was primarily due to additional interest expense related to our increased average outstanding debt during 2020, increased amortization of debt discounts, and the$1.1 million accelerated amortization of deferred financing cost assets following amendments to the ABL Facility during 2020. Income Tax (Benefit) Expense Income tax benefit was$3.8 million in 2020 compared to$0.0 million of income tax expense in 2019. Our effective tax rate was 1.51% in 2020, compared to an effective tax rate of negative 0.02% in 2019. The tax benefit during 2020 was generated from the impact of long-lived asset impairments recorded during 2020 and the composition of deferred tax liabilities acquired as part of theMarch 2020 acquisition of CJWS. During 2019, we filed an amended 2007 federal tax return under section 172(f) of the Internal Revenue Code of 1986, as amended, which allowed us to claim a refund of$1.9 million of 2007 taxes. Discontinued Operations During the year endedDecember 31, 2019 , based on the Company's evaluation of the demand for pressure pumping and contract drilling services, we decided to divest substantially all of our contract drilling rigs, pressure pumping equipment and related ancillary equipment, with a carrying value of$91.8 million . A significant majority of the assets were divested in the first quarter of 2020 and proceeds from sale of assets related to discontinued operations totaled$42.7 million and$10.7 million for the year endedDecember 31, 2020 and 2019, respectively. The Company is pursuing opportunities to sell the remainder of these non-strategic assets. For further discussion of financial results for discontinued operations, see Note 1, "Description of Business - Discontinued Operations" in the notes to our consolidated financial statements included in this Annual Report on Form 10-K. Supplemental Non-GAAP Financial Measures - Adjusted EBITDA Adjusted EBITDA should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP. However, the Company believes Adjusted EBITDA is a useful supplemental financial measure used by management and directors and by external users of its financial statements, such as investors, to assess: •The financial performance of its assets without regard to financing methods, capital structure or historical cost basis; •The ability of its assets to generate cash sufficient to pay interest on its indebtedness; and •Its operating performance and return on invested capital as compared to those of other companies in the oilfield services industry. Adjusted EBITDA has limitations as an analytical tool and should not be considered an alternative to net income, operating income, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA excludes some, but not all, items that affect net income and operating income, and these measures may vary among other companies. 43 --------------------------------------------------------------------------------
The following table presents a reconciliation of net loss from continuing operations to Adjusted EBITDA:
Year Ended December 31,
(in thousands) 2020 2019
Net loss from continuing operations $ (249,208) $ (91,401)
Income tax (benefit) expense (3,832) 21
Interest expense, net 46,980 42,378
Depreciation and amortization 52,537 69,489
(Gain) loss on disposal of assets (6,138) 2,135
Gain on derivative (4,866) -
Long lived asset impairments 88,697 -
Acquisition related costs 21,635 -
Goodwill impairments 19,089 -
Inventory write-downs 5,281 5,266
Transaction costs 4,734 2,153
Significant insurance claim 3,819 -
Significant provision for credit losses 2,889 -
Stock-based compensation 1,532 8,714
Reactivation costs 1,153 -
Field restructuring costs 351 -
Other professional fees 345 -
Executive departure - 843
Adjusted EBITDA $ (15,002) $ 39,598
Liquidity and Capital Resources
Historically, our primary capital resources have been our cash and cash
equivalents, cash flows from our operations, availability under our revolving
credit facility (the "ABL Facility"), and the ability to enter into finance
leases. During 2020, we also generated liquidity through additional secured
indebtedness and proceeds from the sale of non-strategic assets. At December 31,
2020 , our sources of liquidity included our cash and cash equivalents of $1.9
million , the potential sale of non-strategic assets, and potential additional
secured indebtedness. We were restricted from borrowing under the ABL Facility
at December 31, 2020 .
Certain covenants, such as a consolidated fixed charge coverage ratio and cash
dominion provisions in the ABL Facility, spring into effect if our Availability
(as defined under the ABL Facility) falls below $9.4 million . To avoid
triggering the consolidated fixed charge coverage ratio and cash dominion
covenants during 2020, we advanced $8.1 million , net, of our available cash to
the Administrative Agent of the ABL Facility, which increased the Availability
under the ABL Facility. As of March 26, 2021 , the amount we had advanced to the
Administrative Agent increased to $15.5 million .
The ABL Credit Facility has a covenant whereby the Company would be in default
if the report of its independent registered public accounting firm on the
Company's annual financial statements included a going concern qualification or
like exemption. On March 31, 2021 , the Company obtained a waiver under the ABL
Credit Facility with respect to any such default arising with respect to the
2020 audited financial statements and also agreed to reduce the maximum
aggregate principal amount of the ABL Credit Facility from $75 million to $60
million . As a result, the Company is in compliance with the covenants under the
ABL Credit Agreement.
The downturn in the energy markets has negatively impacted our liquidity and
ability to comply with debt covenants that may be required under the Senior
Notes and the ABL Facility. Based on our operating and commodity price forecasts
and capital structure, we believe that if certain financial ratios or covenants
were to come into effect under our debt instruments, we will have difficulty
complying with certain of such obligations. Failure to comply with certain
covenants will result in an event of default under the ABL Facility, which will
result in a cross-default under the Senior Notes. If an event of default were to
occur, our lenders could accelerate the maturity of our outstanding
indebtedness, making it immediately due and payable, and we will not have
sufficient liquidity to repay those amounts without additional sources of debt
or equity financings.
We had difficulty paying for our contractual obligations as they became due in
2020, and we continue to have this difficulty in 2021. Due to our current
capital structure, working capital position, and the uncertainty of our future
results of operations and operating cash flows, there is substantial doubt as to
the ability of the Company to continue as a going concern. Additional steps that
management could implement to alleviate this substantial doubt would include
additional sales of non-strategic assets, obtaining waivers of debt covenant
requirements from our
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lenders, restructuring or refinancing our debt agreements, or obtaining equity
financing. However, there can be no assurances that the Company will be able to
successfully complete these actions in the current environment.
As market conditions warrant and subject to our contractual restrictions,
liquidity position and other factors, we may access the capital markets or seek
to recapitalize, refinance or otherwise restructure our capital structure. We
may accomplish this through open market or privately negotiated transactions,
which may include, among other things, repurchases of our common stock or
outstanding debt, debt-for-debt or debt-for-equity exchanges, refinancings,
private or public equity or debt raises and rights offerings. Many of these
alternatives may require the consent of current lenders, stockholders or
noteholders, and there is no assurance that we will be able to execute any of
these alternatives on acceptable terms or at all.
Our ability to make scheduled payments on, or to refinance, our debt obligations
will depend on our financial and operating performance, which is subject to
prevailing economic and competitive conditions and certain financial, business
and other factors beyond our control. Any refinancing of our debt could be at
higher interest rates and may require us to comply with more onerous covenants,
which could further restrict our business and operations. If we continue to
experience operating losses and we are not able to generate additional
liquidity, including through our proposed strategic divestitures and other
business operations, then our liquidity needs may exceed availability under our
ABL Facility and other facilities that we may enter into in the future, and we
might need to secure additional sources of funds, which may or may not be
available to us. If we are unable to secure such additional funds, we may not be
able to meet our future obligations as they become due. If, for any reason, we
are unable to meet our debt service and repayment obligations, we would be in
default under the terms of the agreements governing our debt, which would allow
our creditors at that time to declare all outstanding indebtedness to be due and
payable, which could in turn trigger cross-acceleration or cross-default rights
between the relevant agreements. In addition, our lenders could compel us to
apply all of our available cash to repay our borrowings, or they could prevent
us from making payments on the Senior Notes. If amounts outstanding under our
ABL Facility or the Senior Notes were to be accelerated, we cannot be certain
that our assets would be sufficient to repay in full the money owed to the
lenders or to our other debt holders.
Cash Flow Summary
The Statement of Cash Flows for the periods presented includes cash flows from
continuing and discontinued operations.
Cash Flows from Operating Activities
Net cash used by operating activities was $20.2 million in 2020, compared to net
cash provided by operating activities of $20.2 million in 2019. The $40.4
million decrease was primarily due to lower revenues and operating margins
during 2020.
Cash Flows from Investing Activities
Net cash used by investing activities in 2020 totaled $9.8 million compared to
$39.3 million during 2019. This change was due to $47.5 million in decreased
capital expenditures and $40.1 million of increased proceeds from the sale of
assets in 2020. These changes were partially offset by the $59.4 million of cash
consideration paid at closing in the CJWS acquisition in 2020. The sale of
assets related to our discontinued operations generated proceeds of $42.7
million and $10.7 million in 2020 and 2019, respectively.
Cash Flows from Financing Activities
Net cash provided by financing activities was $3.8 million in 2020, compared to
net cash used in financing activities of $35.0 million in 2019. This change was
primarily due to proceeds of $15.0 million from the Senior Secured Promissory
Note issued in connection with the CJWS Transaction and proceeds of $15.0
million from the Second Lien Delayed Draw Promissory Note used for working
capital purposes.
Cash Requirements
As of December 31, 2020 , we had no borrowings under the ABL Facility, $330.0
million of aggregate principal amount of indebtedness, and $17.0 million of
finance lease obligations. See Note 4. "Indebtedness and Borrowing Facility" in
the notes to our consolidated financial statements included elsewhere in this
Form 10-K for further discussion of our outstanding debt. Our interest payments
for our indebtedness are expected to be approximately $34 million in 2021. In
2021, we have planned capital expenditures ranging from $20 to $25 million . On
March 31, 2021 , the Company negotiated a settlement of the Make-Whole
Reimbursement obligation with Ascribe in exchange for issuing additional Senior
Notes to Ascribe with an aggregate par value of $47.5 million . See Note 18.
"Subsequent Event" in the notes to our consolidated financial statements
included elsewhere in this Annual Report on Form 10-K for more information about
the settlement of the Make-Whole Reimbursement.
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Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to
have a material current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with United States GAAP
requires management to make estimates and assumptions. These estimates and
assumptions affect the amounts reported in our Consolidated Financial Statements
and notes. We base our estimates on historical experience, current trends and
various other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from these estimates, and estimates are
subject to change due to modifications in the underlying conditions or
assumptions. Below are expanded discussions of our more significant accounting
policies, estimates and judgments, i.e., those that reflect more significant
estimates and assumptions used in the preparation of our financial statements. A
complete summary of these policies is included in Note 2. "Summary of
Significant Accounting Policies" of the notes to our consolidated financial
statements.
Impairments - We have a variety of long-lived assets on our balance sheet
including property, plant and equipment, goodwill, and other intangible assets.
Impairment is the condition that exists when the carrying amount of a long-lived
asset exceeds its fair value, and any impairment charge that we record reduces
our operating income. We conduct impairment tests of goodwill annually, as of
December 31 each year, or more frequently whenever events or changes in
circumstances indicate an impairment may exist. We conduct impairment tests on
long-lived assets, other than goodwill, whenever events or changes in
circumstances indicate that the carrying value may not be recoverable.
When conducting an impairment test on long-lived assets, other than goodwill, we
first group individual assets based on the lowest level for which identifiable
cash flows are largely independent of the cash flows from other assets. This
requires some judgment. We then compare estimated future undiscounted cash flows
expected to result from the use and eventual disposition of the asset group to
its carrying amount. If the undiscounted cash flows are less than the asset
group's carrying amount, we then determine the asset group's fair value by using
discounted cash flow analysis. This analysis is based on estimates such as
management's short-term and long-term forecast of operating performance,
including revenue growth rates and expected profitability margins, estimates of
the remaining useful life and service potential of the assets within the asset
group, terminal value growth rate, and a discount rate, based on our weighted
average cost of capital, used in the discounted cash flow model. An impairment
loss is measured and recorded as the amount by which the asset group's carrying
amount exceeds its fair value. As part of goodwill impairment testing, fair
value is determined by using a combination of the income approach and the market
approach. The income approach estimates the fair value by using forecasted
revenues and operating cash flows, estimating terminal values and associated
growth rates, and discounting them using an estimate of the discount rate, or
expected return, that a market participant would have required as of the
valuation date. The market approach involves the selection of the appropriate
peer group companies and valuation multiples. See Note 11. "Impairments and
Other Charges" in the consolidated financial statements for further discussion
of impairments recorded during the year ended December 31, 2020 .
Litigation, Self-Insured Risk Reserves, and Other Contingent Liabilities -
Litigation, self-insured risk reserves, and other loss contingencies are
uncertain and unresolved matters that arise in the ordinary course of business
and result from events or actions by others that have the potential to result in
a future loss. The preparation of our consolidated financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses and related disclosures as well as disclosures
about any contingent assets and liabilities. We estimate our reserves related to
litigation, self-insured risks, and other contingencies based on the facts and
circumstances specific to a particular matter and our past experience with
similar claims. The actual outcome of litigation, insured claims, and other
contingencies could differ materially from estimated amounts. We are
self-insured up to retention limits with regard to workers' compensation,
general liability claims, and medical and dental coverage of our employees. We
have deductibles per occurrence for workers' compensation, general liability
claims, and medical and dental coverage of $2 million , $1 million , and $0.4
million , respectively. We maintain accruals in our consolidated balance sheets
related to self-insurance retentions based upon our claims history.
Acquisition Purchase Price Allocations - We account for acquisitions of
businesses using the acquisition method of accounting in accordance with
Accounting Standards Codification ("ASC") No. 805 "Business Combinations," which
requires the allocation of the purchase price consideration based on the fair
values of the assets and liabilities acquired. We estimate the fair values of
the assets and liabilities acquired using accepted valuation methods, and, in
many cases, such estimates are based on our judgments as to the future operating
cash
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flows expected to be generated from the acquired assets throughout their estimated useful lives. Following theMarch 9, 2020 acquisition of CJWS, we accounted for the various assets (including intangible assets) and liabilities acquired and issued as consideration based on our estimates of their fair values.Goodwill represents the excess of acquisition purchase price consideration over the estimated fair values of the net assets acquired. Our estimates and judgments of the fair value of acquired businesses could prove to be inexact, and the use of inaccurate fair value estimates could result in the improper allocation of the acquisition purchase price consideration to acquired assets and liabilities, which could result in asset impairments, the recording of previously unrecorded liabilities, and other financial statement adjustments. The difficulty in estimating the fair values of acquired assets and liabilities is increased during periods of economic uncertainty. Recent Accounting Pronouncements See Note 2. "Summary of Significant Accounting Policies," to the Consolidated Financial Statements for a description of the recent accounting pronouncements.
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