ProPetro Holding Corp.: Form 10-Q for the period ended Sep 30, 2023

The financial information, discussion and analysis that follow should be read in conjunction with our consolidated financial statements and the related notes included in the Form 10-K as well as the financial and other information included therein.

Unless otherwise indicated, references in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" to the "Company," "we," "our," "us" or like terms refer to ProPetro Holding Corp. and its subsidiaries.

Overview

We are a leading integrated oilfield services company, located in Midland, Texas, focused on providing innovative hydraulic fracturing, wireline and other complementary oilfield completion services to leading upstream oil and gas companies engaged in the exploration and production ("E&P") of North American oil and natural gas resources. Our operations are primarily focused in the Permian Basin, where we have cultivated longstanding customer relationships with some of the region's most active and well-capitalized E&P companies. The Permian Basin is widely regarded as one of the most prolific oil-producing areas in the United States, and we believe we are one of the leading providers of completion services in the region.

Our completion services segment includes hydraulic fracturing, wireline and cementing operations. Our hydraulic fracturing operations account for the significant portion of our operations, and our hydraulic fracturing operations revenue is approximately 80.2% of our total revenues, while wireline and cementing accounts for our remaining revenues. Our total available hydraulic horsepower ("HHP") in our hydraulic fracturing operations as of September 30, 2023, was 1,354,500 HHP, which was comprised of 447,500 HHP of our Tier IV Dynamic Gas Blending ("DGB") dual-fuel equipment, 42,000 HHP of electric equipment and 865,000 HHP of conventional Tier II equipment. Our hydraulic fracturing fleets range from approximately 50,000 to 80,000 HHP depending on the job design and customer demand at the wellsite. Our equipment has been designed to handle the operating conditions commonly encountered in the Permian Basin and the region’s increasingly high-intensity well completions (including simultaneous hydraulic fracturing ("Simul-Frac"), which involves fracturing multiple wellbores at the same time), which are characterized by longer horizontal wellbores, more stages per lateral and increasing amounts of proppant per well. With the industry transition to lower emissions equipment and Simul-Frac, in addition to several other changes to our customers' job designs, we believe that our available capacity could decline if we decide to reconfigure our fleets to increase active HHP and backup HHP at wellsites. In addition, in 2021 and 2022, we committed to additional conversions of our Tier II equipment to Tier IV DGB, and purchase of new Tier IV DGB dual-fuel equipment. As such, we entered into conversion and purchase arrangements with our equipment manufacturers for a total 452,500 HHP of Tier IV DGB equipment and as of September 30, 2023, we have received 447,500 HHP of the converted and new Tier IV DGB equipment and expect to receive the remaining 5,000 HHP by the end of 2023. In 2022, we entered into three-year electric fleet leases for a total of four FORCESM electric-powered hydraulic fracturing fleets with 60,000 HHP per fleet. As of September 30, 2023, we have received 42,000 HHP of electric equipment. We currently expect to receive the remaining equipment associated with the first fleet and all equipment associated with the second fleet in the fourth quarter of 2023, and all equipment associated with the third and fourth fleets in the first half of 2024. We currently have 23 wireline units and 27 cement units.

On December 31, 2018, we consummated the purchase of certain pressure pumping assets and real property from Pioneer Natural Resources USA, Inc. ("Pioneer") and Pioneer Pumping Services (the "Pioneer Pressure Pumping Acquisition") in exchange for 16.6 million shares of our common stock and $110.0 million in cash, and concurrently entered into a pressure pumping services agreement (the "Pioneer Services Agreement") with Pioneer.

On March 31, 2022, we entered into an amended and restated pressure pumping services agreement (the "A&R Pressure Pumping Services Agreement") to replace the Pioneer Services Agreement that was entered into in connection with the Pioneer Pressure Pumping Acquisition. The A&R Pressure Pumping Services Agreement, which was effective from January 1, 2022 to December 31, 2022, reduced the number of contracted fleets from eight fleets to six fleets, modified the pressure pumping scope of work and pricing mechanism for contracted fleets, and replaced the idle fees arrangement with equipment reservation fees (the "Reservation fees"). As part of the Reservation fees arrangement, the Company was entitled to receive compensation for all eligible contracted fleets that were made available to Pioneer at the beginning of every quarter in 2022 through the term of the A&R Pressure Pumping Services Agreement. This agreement expired at the conclusion of its term and was replaced by the Fleet One Agreement and Fleet Two Agreement described below.

On October 31, 2022, we entered into two pressure pumping services agreements (the "Fleet One Agreement" and "Fleet Two Agreement") with Pioneer, pursuant to which we provided hydraulic fracturing services with two committed fleets, subject to certain termination and release rights. The Fleet One Agreement was effective as of January 1, 2023 and was terminated on August 31, 2023. The Fleet Two Agreement was effective as of January 1, 2023 and was terminated on May 12, 2023.

Effective September 1, 2022, we disposed of our coiled tubing assets to STEP Energy Services Ltd. ("STEP") and shut down our coiled tubing operations. We received cash of approximately $2.8 million and 2.6 million common shares of STEP valued at $11.9 million as consideration. Upon the sale of our coiled tubing assets, we recorded a loss on sale of $13.8 million.

On November 1, 2022, we consummated the acquisition of all of the outstanding limited liability company interests of Silvertip Completion Services Operating, LLC ("Silvertip"), which provides wireline perforation and ancillary services solely in the Permian Basin in exchange for 10.1 million shares of our common stock valued at $106.7 million, $30.0 million of cash, the payoff of $7.2 million of assumed debt, and the payment of certain other closing and transaction costs. At September 30, 2023, we had 23 wireline units available to provide wireline perforation and ancillary services. The Silvertip Acquisition positions the Company as a more integrated and diversified completions-focused oilfield services provider headquartered in the Permian Basin.

Our competitors include many large and small oilfield services companies, including Halliburton Company, Liberty Energy Inc., Patterson-UTI Energy Inc., ProFrac Holding Corp., RPC, Inc., and a number of private and locally-oriented businesses. The markets in which we operate are highly competitive. To be successful, an oilfield services company must provide services that meet the specific needs of oil and natural gas E&P companies at competitive prices. Competitive factors impacting sales of our services are price, reputation, technical expertise, emissions profile, service and equipment design and quality, and health and safety standards. Although we believe our customers consider all of these factors, we believe price is a key factor in an E&P company's criteria in choosing a service provider. However, we have recently observed the energy industry and our customers shift to lower emissions equipment, which we believe will be an increasingly important factor in an E&P company's selection of a service provider. The transition to lower emissions equipment has been challenging for companies in the oilfield service industry because of the capital requirements. While we seek to price our services competitively, we believe many of our customers elect to work with us based on our operational efficiencies, productivity, equipment portfolio and quality, reliability, ability to manage multifaceted logistics challenges, commitment to safety and the ability of our people to handle the most complex Permian Basin well completions.

Our substantial market presence in the Permian Basin positions us well to capitalize on drilling and completion activity in the region. Primarily, our operational focus has been in the Permian Basin's Midland sub-basin, where our customers have operated. However, we have increased our operations in the Delaware sub-basin and are well-positioned to support further increases to our activity in this area in response to demand from our customers. Over time, we expect the Permian Basin's Midland and Delaware sub-basins to continue to command a disproportionate share of future North American E&P spending.

Through our Completion Services segment, which includes our hydraulic fracturing, cementing and wireline operations, we primarily provide hydraulic fracturing services to E&P companies in the Permian Basin. During the three months ended September 30, 2023, our hydraulic fracturing, cementing and wireline operations accounted for 80.2%, 7.3% and 12.5% of our total revenue, respectively. During the nine months ended September 30, 2023, our hydraulic fracturing, cementing and wireline operations accounted for 79.4%, 6.6% and 14.0% of our total revenue, respectively. Our equipment has been designed to handle Permian Basin specific operating conditions and the region's increasingly high-intensity well completions, which are characterized by longer horizontal wellbores, more frac stages per lateral and increasing amounts of proppant per well. We plan to continually reinvest in our equipment to ensure optimal performance and reliability.

Our hydraulic fracturing, wireline and cementing operations have been aggregated into one reportable segment: "Completion Services." In connection with our divestiture of our coiled tubing operations and the Silvertip Acquisition, we have revised our reportable segment presentation from Pressure Pumping to Completion Services and have restated prior periods accordingly. Our now discontinued coiled tubing, drilling and flowback operations were aggregated into the "All Other" category.

Commodity Price and Other Economic Conditions

The oil and gas industry has traditionally been volatile and is characterized by a combination of long-term, short-term and cyclical trends, including domestic and international supply and demand for oil and gas, current and expected future prices for oil and gas and the perceived stability and sustainability of those prices, and capital investments of E&P companies toward their development and production of oil and gas reserves. The oil and gas industry is also impacted by general domestic and international economic conditions such as supply chain disruptions and inflation, political instability in oil producing countries, government regulations (both in the United States and internationally), levels of consumer demand, adverse weather conditions, and other factors that are beyond our control.

In October 2023, an ongoing conflict between Israel and Palestinian militants in the Israel-Gaza region has led to significant armed hostilities. The geopolitical and macroeconomic consequences of this conflict remain uncertain, and such events, or any further hostilities in the Israel-Gaza region or elsewhere, could severely impact the world economy, the demand for and price of crude oil and the oil and gas industry generally and may adversely affect our financial condition.

Similarly, the geopolitical and macroeconomic consequences of the Russian invasion of Ukraine, including the associated sanctions, and the adverse impacts of the COVID-19 pandemic in recent years have resulted in volatility in supply and demand dynamics for crude oil and associated volatility in crude oil pricing. As the global response to the COVID-19 pandemic began to wane, the demand and prices for crude oil increased from the lows experienced in 2020, with the WTI average crude oil price reaching approximately $94 per barrel in 2022, the highest average price in the prior nine years. However, in 2023, the WTI average crude oil price declined to below $70 per barrel before rebounding to approximately $89 per barrel in September 2023 and $77 per barrel for the nine months ended in September 30, 2023. We believe that the volatility of crude oil prices in recent years has been partly driven by declines in crude oil supplies, concerns over sanctions resulting from Russia's invasion of Ukraine, slower crude oil production growth due to the lack of reinvestment in the oil and gas industry in the last two years, recent OPEC+ production cuts of approximately 1.3 million barrels per day and concerns of a potential global recession resulting from rising inflation and interest rates.

With the significant increase in global crude oil prices from 2021, including the WTI crude oil price, there has been an increase in the Permian Basin rig count from approximately 179 at the beginning of 2021 to approximately 312 at the end of September 2023, according to Baker Hughes. Following the increase in rig count and the WTI crude oil price, the oilfield service industry has experienced increased demand for its completion services, and improved pricing. However, we have recently experienced a 12% decrease in the rig count between January and September 2023 which resulted in a reduction in the demand for completion services and pressure on pricing of our services.

Sustained levels of high inflation have likewise caused the U.S. Federal Reserve and other central banks to increase interest rates, and to the extent elevated inflation remains, we may experience further cost increases for our operations, including interest rates, labor costs and equipment. We cannot predict any future trends in the rate of inflation and crude oil prices. A significant increase in or continued high levels of inflation, to the extent we are unable to timely pass-through the cost increases to our customers, or further declines in crude oil prices would negatively impact our business, financial condition and results of operations.

Government regulations and investors are encouraging the oil and gas industry, including the upstream and oilfield service companies, to transition to a lower emissions operating environment. As a result, we are working with our customers and equipment manufacturers to transition our equipment to a lower emissions profile. Currently, a number of lower emission solutions for pumping equipment, including Tier IV DGB dual-fuel, electric, direct drive gas turbine and other technologies have been developed, and we expect additional lower emission solutions will be developed in the future. We are continually evaluating these technologies and other investment and acquisition opportunities that would support our existing and new customer relationships. The transition to lower emissions equipment is quickly evolving and will be capital intensive. Over time, we may be required to convert substantially all of our conventional Tier II equipment to lower emissions equipment. We have transitioned our hydraulic fracturing equipment portfolio from approximately 10% lower emissions equipment in 2021 to approximately 35% in 2022, and expect to increase to approximately 65% by the end of the first half of 2024. To the extent any of our customers have certain expectations or requirements with respect to emissions reductions from their contractors, if we are unable to continue quickly transitioning to lower emissions equipment, the demand for our services could be adversely impacted.

If the rig count and market conditions improve, including improved pricing for our services and labor availability, and we are able to meet our customers' lower emissions equipment demands, we believe our operational and financial results will also continue to improve. If the rig count or market conditions do not improve or decline in the future, and we are unable to increase our pricing or pass-through future cost increases to our customers, there could be a material adverse impact on our business, results of operations and cash flows.

Our results of operations have historically reflected seasonal tendencies, typically in the fourth quarter, relating to the holiday season, inclement winter weather and exhaustion of our customers' annual budgets. As a result, we typically experience declines in our operating and financial results in November and December, even in a stable commodity price and operations environment.

How We Evaluate Our Operations

Our management uses Adjusted EBITDA or Adjusted EBITDA margin to evaluate and analyze the performance of our various operating segments.

Adjusted EBITDA and Adjusted EBITDA Margin

We view Adjusted EBITDA and Adjusted EBITDA margin as important indicators of performance. We define EBITDA as our earnings, before (i) interest expense, (ii) income taxes and (iii) depreciation and amortization. We define Adjusted EBITDA as EBITDA, plus (i) loss/(gain) on disposal of assets, (ii) stock-based compensation, and (iii) other unusual or nonrecurring (income)/expenses such as impairment charges, retention bonuses, severance, costs related to asset acquisitions, insurance recoveries, one-time professional fees and legal settlements. Adjusted EBITDA margin reflects our Adjusted EBITDA as a percentage of our revenues.

Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures utilized by our management and other users of our financial statements such as investors, commercial banks, and research analysts, to assess our financial performance because it allows us and other users to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization), nonrecurring (income)/expenses and items outside the control of our management team (such as income taxes). Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools and should not be considered as an alternative to net income/(loss), operating income/(loss), cash flow from operating activities or any other measure of financial performance presented in accordance with accounting principles generally accepted in the United States of America ("GAAP").

Note Regarding Non-GAAP Financial Measures

Adjusted EBITDA and Adjusted EBITDA margin are not financial measures presented in accordance with GAAP ("non-GAAP"), except when specifically required to be disclosed by GAAP in the financial statements. We believe that the presentation of Adjusted EBITDA and Adjusted EBITDA margin provide useful information to investors in assessing our financial condition and results of operations because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure, asset base, nonrecurring expenses (income) and items outside the control of the Company. Net income (loss) is the GAAP measure most directly comparable to Adjusted EBITDA. Adjusted EBITDA and Adjusted EBITDA margin should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as analytical tools because they exclude some, but not all, items that affect the most directly comparable GAAP financial measures. You should not consider Adjusted EBITDA or Adjusted EBITDA margin in isolation or as a substitute for an analysis of our results as reported under GAAP. Because Adjusted EBITDA and Adjusted EBITDA margin may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

Reconciliation of net income (loss) to Adjusted EBITDA (in thousands):

-31-

(1) Includes unrealized gain on short-term investment of $1.8 million for the three months ended September 30, 2023 and unrealized loss on short-term investment of $2.1 million for the nine months ended September 30, 2023.

(2) Other general and administrative expense, (net of reimbursement from insurance carriers) primarily relates to nonrecurring professional fees paid to external consultants in connection with our audit committee review, SEC investigation, shareholder litigation, legal settlement to a vendor and other legal matters, net of insurance recoveries. During the three and nine months ended September 30, 2023, we received reimbursement of approximately $0.1 million and $0.4 million, respectively, from our insurance carriers in connection with the SEC investigation and shareholder litigation. During the three and nine months ended September 30, 2022, we received reimbursement of approximately $3.4 million and $6.9 million, respectively, from our insurance carriers in connection with the SEC investigation and shareholder litigation. See "Note 13 - Commitments and Contingencies—Contingent Liabilities—Legal Matters" for further information.

(3) Includes unrealized loss on short-term investment of $3.3 million and non cash income of $2.7 million from fixed asset inventory received as part of a settlement of warranty claims with an equipment manufacturer.

(4) Includes $10.7 million of net tax refund (net of advisory fees) received in March 2022 from the Texas Comptroller of Public Accounts in connection with limited sales, excise and use tax of the period July 1, 2015 through December 31, 2018.

Results of Operations

In 2023, we conducted our business through three operating segments: hydraulic fracturing, cementing and wireline. For reporting purposes, the hydraulic fracturing, cementing and wireline operating segments are aggregated into one reportable segment—Completion Services. We disposed of our coiled tubing assets and shut down our coiled tubing operations effective September 1, 2022. The results of our coiled tubing operations prior to September 1, 2022 are reflected in the "All Other" category.

On November 1, 2022, we consummated the acquisition of all of the outstanding limited liability company interests of Silvertip, which provides wireline perforation and ancillary services (wireline operating segment) solely in the Permian Basin in exchange for 10.1 million shares of our common stock valued at $106.7 million, $30.0 million of cash, the payoff of $7.2 million of assumed debt, and the payment of certain other closing and transaction costs. At September 30, 2023, we had 23 wireline units available to provide wireline perforation and ancillary services. The Silvertip Acquisition positions the Company as a more integrated and diversified completions-focused oilfield services provider headquartered in the Permian Basin. The Company's 2023 results include the impact of Silvertip's operations for the entire period which was not included in our 2022 results herein because we acquired Silvertip in November 2022. Accordingly, the full impact of the results of Silvertip may affect the comparability of our 2023 results when compared to prior period. See "Note 7 — Reportable Segment Information" in the notes to our financial statements included in this Form 10-Q for our revenue contribution for wireline operations and other operating segments.

The following table sets forth the results of operations for the periods presented:

(in thousands, except for percentages)

(1) Exclusive of depreciation and amortization.

(2) Inclusive of stock-based compensation.

(3) For definitions of the non-GAAP financial measures of Adjusted EBITDA and Adjusted EBITDA margin and reconciliation of Adjusted EBITDA to our most directly comparable financial measures calculated in accordance with GAAP, please read "How We Evaluate Our Operations". Included in our Adjusted EBITDA is reservation fees of $0 and $6.8 million for the three months ended September 30, 2023 and 2022, respectively.

(4) The non-GAAP financial measure of Adjusted EBITDA margin for the Completion Services segment is calculated by taking Adjusted EBITDA for the Completion Services segment as a percentage of our revenue for the Completion Services segment.

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022

Revenues. Revenues increased 27.3%, or $90.8 million, to $423.8 million during the three months ended September 30, 2023, as compared to $333.0 million during the three months ended September 30, 2022. Our Completion Services segment revenues increased 28.1%, or $93.0 million, for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022. The increases were primarily attributable to the significant increase in our existing and new customers' activity levels, resulting in higher demand for completion services, improved pricing and the addition of wireline operations. The addition of wireline operations contributed $52.8 million of the increase in total revenues. As a result of our customers' increased activity levels, our effectively utilized hydraulic fracturing fleet count improved to approximately 16 active fleets during the three months ended September 30, 2023, from approximately 15 active fleets for the three months ended September 30, 2022. The effective utilized fleet count is determined by dividing the total number of days our fleets were actively working at wellsites during the month by 25 days (predetermined number of expected active work days in the month). Our revenue for the three months ended September 30, 2023 and 2022, included reservation fees charged to a customer of approximately $0 and $6.8 million, respectively.

Revenues from services other than Completion Services decreased 100.0%, or $2.2 million, to $0 for the three months ended September 30, 2023, as compared to $2.2 million for the three months ended September 30, 2022. The decrease in revenue from services other than Completion Services was due to the discontinuation of our coiled tubing operations effective September 1, 2022.

Cost of Services. Cost of services increased 30.5%, or $68.4 million, to $292.5 million for the three months ended September 30, 2023, as compared to $224.1 million during the three months ended September 30, 2022. Cost of services in our Completion Services segment increased $72.2 million for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022. These increases were primarily attributable to the significantly increased activity levels resulting from the increased demand for our services as compared to 2022, the addition of wireline operations and the impact of general cost inflation. The addition of wireline operations contributed to $35.8 million of the increase in total cost of services. As a percentage of Completion Services segment revenues (including reservation fees), Completion Services cost of services was 69.0% for the three months ended September 30, 2023, as compared to 66.6% for the three months ended September 30, 2022. Excluding reservation fees revenue of $0 and $6.8 million recorded during the three months ended September 30, 2023 and 2022, respectively, our Completion Services cost of services as a percentage of Completion Services revenues decreased to 69.0% during the three months ended September 30, 2023, as compared to 68.0% for the three months ended September 30, 2022. The increase in the percentages was primarily driven by costs of $11.4 million associated with the replacement of fluid ends during the three months ended September 30, 2023. Fluid ends were capitalized and depreciated in 2022. Effective January 1, 2023, the Company commenced expensing fluid ends as part of cost of services rather than capitalizing fluid ends as part of property and equipment as a result of the change in estimated useful life.

General and Administrative Expenses. General and administrative expenses increased 1.4%, or $0.4 million, to $28.6 million for the three months ended September 30, 2023, as compared to $28.2 million for the three months ended September 30, 2022. The net increase was primarily attributable to (i) a $1.8 million increase in payroll and related expenses, (ii) a $0.6 million increase in travel expenses, (iii) a $0.9 million increase in utilities and other office expenses, (iv) a $0.4 million increase in consulting fees and (v) a $0.6 million increase in other general and administrative expenses, partially offset by a $3.9 million decrease in legal settlements.

Excluding nonrecurring and non-cash items (stock-based compensation, insurance reimbursements, legal settlements, nonrecurring transaction expenses, retention bonuses and severance expenses), general and administrative expenses were $23.6 million during the three months ended September 30, 2023, as compared to $18.9 million during the three months ended September 30, 2022.

Depreciation and Amortization. Depreciation and amortization increased 29.3%, or $12.2 million, to $53.8 million for the three months ended September 30, 2023, as compared to $41.6 million for the three months ended September 30, 2022. The increase was primarily attributable to (i) assets placed into service since September 30, 2022, (ii) shortening of useful lives of power ends and hydraulic fracturing units effective January 1, 2023 and (iii) the addition of wireline assets which included $3.4 million of depreciation and $1.4 million of amortization of intangible assets.

Loss on Disposal of Assets. Loss on disposal of assets decreased 83.2%, or $21.2 million, to $4.3 million for the three months ended September 30, 2023, as compared to $25.5 million for the three months ended September 30, 2022. The decrease was primarily attributable to the disposal of our coiled tubing assets on September 1, 2022, which resulted in a loss of approximately $13.8 million for the three months ended September 30, 2022 and the Company expensing costs associated with replacement of fluid ends as part of cost of services resulting from the change in estimated useful life effective January 1, 2023.

Interest Expense. Interest expense increased to $1.2 million for the three months ended September 30, 2023, as compared to $0.2 million for the three months ended September 30, 2022. The increase was primarily attributable to outstanding borrowings under our ABL Credit Facility during the three months ended September 30, 2023, compared to no outstanding borrowings during the three months ended September 30, 2022 and the addition of the Power Equipment Lease (a finance lease) in August 2023.

Other (Income) Expense. Other income was approximately $1.9 million for the three months ended September 30, 2023, compared to other expense of $0.6 million for the three months ended September 30, 2022. Other income for the three months ended September 30, 2023 is primarily comprised of a $1.8 million unrealized gain on short-term investment.

Income Taxes. Total income tax expense was $10.6 million resulting in an effective tax rate of 23.4% for the three months ended September 30, 2023, as compared to income tax expense of $2.8 million or an effective tax rate of 21.6% for the three months ended September 30, 2022. The change in income tax expense recorded during the three months ended September 30, 2023, compared to the three months ended September 30, 2022, is primarily attributable to the difference in the estimated pre-tax income for 2023, as compared to 2022.

The following table sets forth the results of operations for the periods presented:

(in thousands, except for percentages)

(1) Exclusive of depreciation and amortization.

(2) Inclusive of stock-based compensation.

(3) For definitions of the non-GAAP financial measures of Adjusted EBITDA and Adjusted EBITDA margin and reconciliation of Adjusted EBITDA to our most directly comparable financial measures calculated in accordance with GAAP, please read "How We Evaluate Our Operations". Included in our Adjusted EBITDA is reservation fees of $0 and $20.3 million for the nine months ended September 30, 2023 and 2022, respectively.

(4) The non-GAAP financial measure of Adjusted EBITDA margin for the Completion Services segment is calculated by taking Adjusted EBITDA for the Completion Services segment as a percentage of our revenue for the Completion Services segment.

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

Revenues. Revenues increased 37.8%, or $351.8 million, to $1,282.6 million during the nine months ended September 30, 2023, as compared to $930.8 million during the nine months ended September 30, 2022. Our Completion Services segment revenues increased 39.8%, or $365.3 million, for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. The increases were primarily attributable to the significant increase in our existing and new customers' activity levels, resulting in higher demand for completion services, improved pricing and the addition of wireline operations. The addition of wireline operations contributed $179.2 million of the increase in total revenues. As a result of our customers' increased activity levels, our effectively utilized hydraulic fracturing fleet count rose to approximately 16 active fleets during the nine months ended September 30, 2023, from approximately 14 active fleets for the nine months ended September 30, 2022. Our revenue for the nine months ended September 30, 2023 and 2022, included reservation fees charged to a customer of approximately $0 and $20.3 million, respectively.

Revenues from services other than Completion Services decreased 100.0%, or $13.4 million, to $0 for the nine months ended September 30, 2023, as compared to $13.4 million for the nine months ended September 30, 2022. The decrease in revenue from services other than Completion Services was due to the discontinuation of our coiled tubing operations effective September 1, 2022.

Cost of Services. Cost of services increased 36.0%, or $230.6 million, to $870.8 million for the nine months ended September 30, 2023, as compared to $640.2 million during the nine months ended September 30, 2022. Cost of services in our Completion Services segment increased $244.2 million for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. These increases were primarily attributable to increased activity levels resulting from the increased demand for our services as compared to 2022, the addition of wireline operations and the impact of general cost inflation. The addition of wireline operations resulted in $118.9 million increase in our cost of services. As a percentage of Completion Services segment revenues (including reservation fees), Completion Services cost of services was 67.9% for the nine months ended September 30, 2023, as compared to 68.3% for the nine months ended September 30, 2022. Excluding reservation fees revenue of $0 and $20.3 million recorded during the nine months ended September 30, 2023 and 2022, respectively, our Completion Services cost of services as a percentage of Completion Services revenues decreased to 67.9% during the nine months ended September 30, 2023, as compared to 69.8% for the nine months ended September 30, 2022. The decrease in the percentages was primarily a result of increased operational efficiencies, operating scale from higher utilization and improved customer pricing, partially offset by costs of $28.8 million associated with the replacement of fluid ends during the nine months ended September 30, 2023. Fluid ends were capitalized and depreciated in 2022. Effective January 1, 2023, the Company commenced expensing fluid ends as part of cost of services rather than capitalizing fluid ends as part of property and equipment as a result of the change in estimated useful life.

General and Administrative Expenses. General and administrative expenses increased 1.6%, or $1.4 million, to $86.4 million for the nine months ended September 30, 2023, as compared to $85.0 million for the nine months ended September 30, 2022. The net increase was primarily attributable to (i) a $5.7 million increase in payroll and related expenses, (ii) a $5.2 million increase in advertising expenses, rents, utilities and other office expenses, (iii) a $1.5 million increase in travel expenses, (iv) a $1.0 million increase in consulting fees, (v) a $0.8 million increase in retention bonus and severance expense and (vi) a $1.1 million increase in other general and administrative expenses, partially offset by a $7.5 million decrease in stock-based compensation expense driven by the acceleration of stock awards during the nine months ended September 30, 2022 upon resignation of a former executive; and (ii) a $6.4 million decrease in legal settlements.

Excluding nonrecurring and non-cash items (stock-based compensation, insurance reimbursements, legal settlements, transaction expenses, retention bonuses and severance expenses), general and administrative expenses were $72.2 million during the nine months ended September 30, 2023, as compared to $58.1 million during the nine months ended September 30, 2022.

Depreciation and Amortization. Depreciation and amortization increased 30.6%, or $36.9 million, to $157.5 million for the nine months ended September 30, 2023, as compared to $120.6 million for the nine months ended September 30, 2022. The increase was primarily attributable to (i) assets placed into service since September 30, 2022, (ii) reduction of the estimated useful life of certain equipment in 2023, and (iii) the addition of wireline assets which included $9.6 million of depreciation and $4.3 million of amortization of intangible assets.

Impairment Expense. There was no impairment expense during the nine months ended September 30, 2023. During the nine months ended September 30, 2022, we recorded a loss of $57.5 million in connection with the impairment of our DuraStim® electric powered hydraulic fracturing equipment.

Loss on Disposal of Assets. Loss on disposal of assets decreased 39.2%, or $19.0 million, to $29.4 million for the nine months ended September 30, 2023, as compared to $48.4 million for the nine months ended September 30, 2022. The decrease was primarily attributable to the disposal of our coiled tubing assets on September 1, 2022, which resulted in a loss of approximately $13.8 million for the nine months ended September 30, 2022 and the Company expensing costs associated with replacement of fluid ends as part of cost of services resulting from the change in estimated useful life effective January 1, 2023, partially offset by losses incurred from the decommissioning/conversion of certain hydraulic fracturing equipment and the write-off of certain hydraulic fracturing equipment as a result of an accidental fire at a wellsite in March 2023.

Interest Expense. Interest expense increased to $3.0 million for the nine months ended September 30, 2023, as compared to $1.0 million for the nine months ended September 30, 2022. The increase was primarily attributable to outstanding borrowings under our ABL Credit Facility during the nine months ended September 30, 2023, compared to no outstanding borrowings during the nine months ended September 30, 2022 and the addition of the Power Equipment Lease (a finance lease) in August 2023.

Other Expense (Income). Other expense was approximately $1.7 million for the nine months ended September 30, 2023, as compared to other income of $9.7 million for the nine months ended September 30, 2022. Other expense during the nine months ended September 30, 2023 is primarily comprised of a $2.1 million unrealized loss on short-term investment. Other income during the nine months ended September 30, 2022 was primarily comprised of a $10.7 million net tax refund of sales, excise and use taxes.

Income Taxes. Total income tax expense was $31.1 million resulting in an effective tax rate of 23.2% for the nine months ended September 30, 2023, as compared to income tax benefit of $1.2 million or an effective tax rate of 9.6% for the nine months ended September 30, 2022. The change in income tax expense (benefit) recorded during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, is primarily attributable to the difference in the impact of nondeductible expenses on the estimated pre-tax income for 2023, as compared to the pre-tax loss for 2022.

Liquidity and Capital Resources

Our liquidity is currently provided by (i) existing cash balances, (ii) operating cash flows and (iii) borrowings under our ABL Credit Facility (as defined below). Our cash is primarily used to fund our operations, support growth opportunities, fund share repurchases under our share repurchase program and satisfy future debt payments. Our restricted cash, which was received from a customer, will be used solely for the construction or operation of FORCESM electric-powered hydraulic fracturing equipment. Our Borrowing Base (as defined below), as redetermined monthly, is tied to the sum of 85% to 90% of monthly eligible accounts receivable and 80% of eligible unbilled accounts (up to a maximum of 25% of the Borrowing Base), in each case, depending on the credit ratings of our accounts receivable counterparties, less customary reserves. Changes to our operational activity levels and our customers' credit ratings have an impact on our total eligible accounts receivable, which could result in significant changes to our Borrowing Base and therefore, our availability under our ABL Credit Facility.

We received advance payments from a customer for our services, and the amount outstanding in connection with the advance payments as of September 30, 2023 was $20.5 million, which does not include any restricted cash.

As of September 30, 2023, our borrowings under our ABL Credit Facility were $45.0 million and our total liquidity was approximately $179.6 million, consisting of cash, cash equivalents and restricted cash of $54.3 million and $125.3 million of availability under our ABL Credit Facility.

On May 17, 2023, the Board authorized and the Company announced a share repurchase program that allows the Company to repurchase up to $100 million of the Company's common stock beginning immediately and continuing through and including May 31, 2024. The shares may be repurchased from time to time in open market transactions, block trades, accelerated share repurchases, privately negotiated transactions, derivative transactions or otherwise, certain of which may be made pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Exchange Act, as amended, in compliance with applicable state and federal securities laws. The timing, as well as the number and value of shares repurchased under the program, will be determined by the Company at its discretion and will depend on a variety of factors, including management's assessment of the intrinsic value of the Company's common stock, the market price of the Company's common stock, general market and economic conditions, available liquidity, compliance with the Company's debt and other agreements, applicable legal requirements, and other considerations. The Company is not obligated to purchase any shares under the repurchase program, and the program may be suspended, modified, or discontinued at any time without prior notice. The Company expects to fund the repurchases using cash on hand and expected free cash flow to be generated through May 2024. During the nine months ended September 30, 2023, the Company repurchased and retired 4.2 million shares of common stock for an aggregate of $36.3 million, an average price per share of $8.67 including commissions, under the repurchase program. As of September 30, 2023, $63.7 million remained authorized for future repurchases of common stock under the repurchase program.

As part of our real estate consolidation strategy, we sold our corporate office building and the associated real property in August 2023 for cash proceeds of $4.7 million after commission and closing costs and recognized a gain on disposal of assets of $0.1 million during the nine months ended September 30, 2023. We have subsequently relocated our corporate office to a leased office space. See "Note 12 - Leases" for further information.

There can be no assurance that our operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures and to continue with our share repurchases under our share repurchase program. Future cash flows are subject to a number of variables, and are highly dependent on the drilling, completion, and production activity by our customers, which in turn is highly dependent on oil and natural gas prices. Depending upon market conditions and other factors, we may issue equity and debt securities or take other actions necessary to fund our business or meet our future long-term liquidity requirements.

Capital Requirements, Future Sources and Use of Cash and Contractual Obligations

Capital expenditures incurred were $59.1 million during the three months ended September 30, 2023, as compared to $115.1 million during the three months ended September 30, 2022. The significant portion of our total capital expenditures incurred were maintenance capital expenditures and conversion of our hydraulic fracturing equipment to lower emissions equipment.

Our future material use of cash will be to fund our capital expenditures and lease payments on our electric fleet and power equipment leases. We may also use material amounts of cash to repurchase shares under our share repurchase program. Capital expenditures for 2023 are projected to be primarily related to extending the useful life of our existing completion services assets, converting or rebuilding some existing equipment to lower emissions equipment, strategic purchases and other ancillary equipment purchases, subject to market conditions and customer demand and potential strategic acquisitions. Our future capital expenditures depend on our projected operational activity, emission requirements and planned conversions to lower emissions equipment, among other factors, which could vary significantly throughout the year. We could incur significant additional capital expenditures if our projected activity levels increase during the course of the year, inflation and supply chain tightness continue to adversely impact our operations or we invest in new or different lower emissions equipment. The Company will continue to evaluate the emissions profile of its equipment over the coming years and may, depending on market conditions, convert or retire additional conventional Tier II equipment in favor of lower emissions equipment. The Company’s decisions regarding the retirement or conversion of equipment or the addition of lower emissions equipment will be subject to a number of factors, including (among other factors) the availability of equipment, including parts and major components, supply chain disruptions, prevailing and expected commodity prices, customer demand and requirements and the Company’s evaluation of projected returns on conversion or other capital expenditures. Depending on the impacts of these factors, the Company may decide to retain conventional equipment for a longer period of time or accelerate the retirement, replacement or conversion of that equipment.

We anticipate our capital expenditures will be funded by existing cash, cash flows from operations, and if needed, borrowings under our ABL Credit Facility. Our cash flows from operations will be generated from services we provide to our customers. In addition, our cash flows could be improved by prepayments received from certain customers in connection with our completion services contractual arrangements, as applicable.

We entered into a sand purchase agreement with a supplier that will expire on December 31, 2024 with a remaining take-or-pay commitment of approximately $22.4 million. We also entered into three-year equipment leases (the "Electric Fleet Leases") for a total of four FORCESM electric-powered hydraulic fracturing fleets with capacity of 60,000 HHP per fleet, which contain options to extend the leases or purchase the equipment at the end of each lease or at the end of each subsequent renewal period. As of September 30, 2023, one of the Electric Fleet Leases commenced when the Company took possession of some of the equipment associated with the first FORCESM electric-powered hydraulic fracturing fleet. Lease payments pertaining to the remaining equipment under this lease and the remaining Electric Fleet Leases will commence when we take possession of the associated equipment. We currently expect to receive the remaining equipment associated with the first fleet and all equipment associated with the second fleet in the fourth quarter of 2023, and all equipment associated with the third and fourth fleets in the first half of 2024. The total estimated contractual commitment in connection with the Electric Fleet Leases excluding the cost associated with the option to purchase the equipment at the end of each lease is approximately $105.1 million. We also entered into a three year lease (the "Power Equipment Lease") for certain power generation equipment. The total estimated contractual commitment in connection with the Power Equipment Lease is approximately $56.9 million.

In the normal course of business, we enter into various contractual obligations and incur expenses in connection with routine growth, conversion and maintenance capital expenditures that impact our future liquidity. There were no other known future material contractual obligations as of September 30, 2023.

Cash, Restricted Cash and Cash Flows

The following table sets forth the historical cash flows for the nine months ended September 30, 2023, and 2022:

(in thousands)

Cash Flows From Operating Activities

Net cash provided by operating activities was $305.1 million for the nine months ended September 30, 2023, compared to $175.0 million for the nine months ended September 30, 2022. The net increase of approximately $130.0 million was primarily due to the improvement in our net income, resulting from the significant increase in our existing and new customers' activity levels, resulting in higher demand for completion services, increased operational efficiencies and reduction in operational downtime. The increase in cash provided by operating activities was also impacted by timing of our receivable collections from our customers and payments to our vendors, partially offset by increases in inventories and prepaid expenses.

Cash Flows From Investing Activities

Net cash used in investing activities increased to $312.8 million for the nine months ended September 30, 2023, from $240.0 million for the nine months ended September 30, 2022. The increase was primarily attributable to maintenance capital expenditures and our investment in lower emissions Tier IV DGB dual-fuel equipment (conversion of Tier II equipment to Tier IV DGB equipment and new Tier IV DGB equipment). During the nine months ended September 30, 2023, we have paid approximately $108.6 million in connection with our Tier IV DGB dual-fuel equipment and FORCESM electric-powered equipment.

Cash Flows From Financing Activities

Net cash used in financing activities was $26.8 million for the nine months ended September 30, 2023, compared to $3.7 million for the nine months ended September 30, 2022. The net increase was primarily driven by share repurchases of $36.3 million, partially offset by net borrowings of $15.0 million under our ABL Credit Facility (as defined below) during the nine months ended September 30, 2023.

Credit Facility and Other Financing Arrangements

Our revolving credit facility, as amended and restated in April 2022, prior to giving effect to the amendment to the revolving credit facility in June 2023, had a total borrowing capacity of $150.0 million. The revolving credit facility had a borrowing base of 85% to 90%, depending on the credit ratings of our accounts receivable counterparties, of monthly eligible accounts receivable less customary reserves. The revolving credit facility included a springing fixed charge coverage ratio to apply when excess availability was less than the greater of (i) 10% of the lesser of the facility size or the borrowing base or (ii) $10.0 million. Under the revolving credit facility we were required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens, indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities.

Effective June 2, 2023, the Company entered into an amendment to its amended and restated revolving credit facility the revolving credit facility (as amended and restated in April 2022, as amended in June 2023 and as may be amended further, "ABL Credit Facility"). The amendment increased the borrowing capacity under the ABL Credit Facility to $225.0 million (subject to the Borrowing Base (as defined below) limit), and extended the maturity date to June 2, 2028. The ABL Credit Facility has a borrowing base of the sum of 85% to 90% of monthly eligible accounts receivable and 80% of eligible unbilled accounts (up to a maximum of 25% of the Borrowing Base) less customary reserves (the "Borrowing Base"), in each case, depending on the credit ratings of our accounts receivable counterparties, as redetermined monthly. The Borrowing Base as of September 30, 2023, was approximately $176.3 million. The ABL Credit Facility includes a springing fixed charge coverage ratio to apply when excess availability is less than the greater of (i) 10% of the lesser of the facility size or the Borrowing Base or (ii) $15.0 million. Under the ABL Credit Facility we are required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens, indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. Borrowings under the ABL Credit Facility are secured by a first priority lien and security interest in substantially all assets of the Company.

Borrowings under the ABL Credit Facility accrue interest based on a three-tier pricing grid tied to availability, and we may elect for loans to be based on either the Secured Overnight Financing Rate ("SOFR") or the base rate, plus the applicable margin, which ranges from 1.75% to 2.25% for SOFR loans and 0.75% to 1.25% for base rate loans.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of September 30, 2023.

Critical Accounting Policies and Estimates

Other than the change in accounting estimate discussed in Note 1 of our Condensed Consolidated Financial Statements (Unaudited), there have been no material changes during the nine months ended September 30, 2023 to the methodology applied by our management for critical accounting policies previously disclosed in our Form 10-K. Please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates" in our Form 10-K for a discussion of our critical accounting policies and estimates.

Recently Issued Accounting Standards

Disclosure concerning recently issued accounting standards is incorporated by reference to Note 2 of our Condensed Consolidated Financial Statements (Unaudited) contained in this Form 10-Q.

As of September 30, 2023, there have been no material changes in market risk from the information provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” or “Quantitative and Qualitative Disclosures of Market Risk” in our Form 10-K.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in our reports that 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 our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2023.

Changes in Internal Control over Financial Reporting

There were no changes in our system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Other than as set forth below, there have been no material changes to the risk factors disclosed in Part I, Item 1A. of our Form 10-K.

Adverse developments affecting the financial services industry, such as events or concerns involving liquidity, defaults or non-performance by financial institutions or transactional counterparties, could adversely affect the Company’s current and projected business operations and its financial condition and results of operations.

Events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, concerns or rumors about such events or other similar risks, have in the past and may in the future lead to acute or market-wide liquidity problems. In addition, if any of the Company’s customers, suppliers or other business counterparties are unable to access funds held by such a financial institution, such parties’ ability to pay their obligations to the Company or to enter into new commercial arrangements requiring additional payments to the Company could be adversely affected.

Inflation and rapid increases in interest rates have led to a decline in the trading value of previously issued government securities with interest rates below current market interest rates. Although the U.S. Department of Treasury, Federal Deposit Insurance Corporation ("FDIC") and Federal Reserve Board have announced a program to mitigate the risk of potential losses on the sale of such instruments, widespread demands for customer withdrawals or other needs of financial institutions for immediate liquidity may exceed the capacity of such program. Additionally, the Company maintains cash balances at third-party financial institutions in excess of the FDIC standard insurance limits, and there is no guarantee that the U.S. Department of Treasury, FDIC and Federal Reserve Board will provide access to uninsured funds in the future in the event of the closure of such banks or financial institutions, or that they would do so in a timely fashion.

Access to funding sources and other credit arrangements in amounts adequate to finance the Company’s business operations could be significantly impaired by the foregoing factors that affect the Company, any financial institutions with which the Company enters into credit agreements or arrangements directly, or the financial services industry or economy in general. These factors could include, among others, events such as liquidity constraints or failures, the ability to perform obligations under various types of financial, credit or liquidity agreements or arrangements, disruptions or instability in the financial services industry or financial markets, or concerns or negative expectations about the prospects for companies in the financial services industry.

The results of events or concerns that involve one or more of these factors could include a variety of material and adverse impacts on the Company’s current and projected business operations and the Company’s financial condition and results of operations. These risks include, but may not be limited to, the following:

• delayed access to deposits or other financial assets or the uninsured loss of deposits or other financial assets;
• inability to enter into credit facilities or other working capital resources;
• potential or actual breach of contractual obligations that require the Company to maintain letters of credit or other credit support arrangements; or
• termination of cash management arrangements and/or delays in accessing or actual loss of funds subject to cash management arrangements.

In addition, investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for the Company to acquire financing on acceptable terms or at all. Any decline in available funding or access to cash and liquidity resources could, among other risks, adversely impact the Company’s ability to meet operating expenses or other obligations, financial or otherwise, result in breaches of the Company’s financial and/or contractual obligations, or result in violations of federal or state wage and hour laws. In addition, any further deterioration in the macroeconomic economy or financial services industry could lead to losses or defaults by the Company’s customers, vendors or suppliers. Any of these impacts, or any other impacts resulting from the factors described above or other related or similar factors, could have material adverse impacts on the Company’s liquidity and their current and/or projected business operations and financial condition and results of operations.

There can be no assurance that our share repurchase program will be fully consummated or that such program will enhance the long-term value of our share price.

On May 17, 2023, the Company's Board approved a share repurchase program that allows the Company to repurchase up to $100 million of the Company's common stock through and including May 31, 2024. There is no obligation for the Company to continue to repurchase or to repurchase any specific dollar amount of stock. The timing, as well as the number and value of shares repurchased under the program, will be determined by the Company at its discretion and will depend on a variety of factors, including management's assessment of the intrinsic value of the Company's common stock, the market price of the Company's common stock, general market and economic conditions, available liquidity, compliance with the Company's debt and other agreements, applicable legal requirements, and other considerations. The Company is not obligated to purchase any shares under the repurchase program, and the program may be suspended, modified, or discontinued at any time without prior notice. The repurchase program could affect the price of our stock and increase volatility in the market. We cannot guarantee that the repurchase program will be fully consummated or that such program will enhance the long-term value of our share price. In addition, repurchase regulations and taxes may add additional payment burden to the Company from our share repurchase program. For example, the Biden administration has proposed increasing the amount of the excise tax from 1% to 4%. However, it is unclear whether such a change in the amount of the excise tax will be enacted and, if enacted, how soon any such change could take effect.