As filed with the Securities and Exchange
Commission on December 14, 2010
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
Frac Tech Services,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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1389
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27-3778624
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer Identification
No.)
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16858 Interstate Highway 20
Cisco, Texas 76437
(817) 850-1008
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Dan Wilks
Chief Executive Officer
Frac Tech Services, Inc.
16858 Interstate Highway 20
Cisco, Texas 76437
(817) 850-1008
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Joe Dannenmaier
Kenn W. Webb
Thompson & Knight LLP
1722 Routh Street, Suite 1500
Dallas, Texas 75201
(214) 969-1700
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David J. Beveridge
Shearman & Sterling LLP
599 Lexington Avenue
New York, New York 10022
(212) 848-4000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933 check the
following
box: o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum
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Amount of
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Title of Each Class of
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Aggregate
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Registration
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Securities to Be Registered
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Offering Price(1)(2)
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Fee
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Common Stock, par value $0.001 per share
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$690,000,000
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$49,197
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(1)
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Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933, as
amended.
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(2)
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Includes approximately $90,000,000 attributable to shares of
Common Stock that may be offered upon exercise of a 30-day
option granted to the underwriters to cover over-allotments, if
any.
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The registrant hereby amends this registration statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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SUBJECT TO
COMPLETION, DATED DECEMBER 14, 2010
Shares
Frac
Tech Services, Inc.
Common
Stock
We are
selling shares
of common stock and the selling stockholders are
selling shares
of common stock. We will not receive any of the proceeds from
the shares of common stock sold by the selling stockholders.
Prior to this
offering, there has been no public market for our common stock.
The initial public offering price of the common stock is
expected to be between $ and
$ per share. We will apply to list
our common stock on The New York Stock Exchange under the symbol
FTS.
The underwriters
have an option to purchase a maximum
of
additional shares to cover over-allotments of shares.
Investing in our
common stock involves risks. See Risk Factors on
page 15.
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Underwriting
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Price to
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Discounts and
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Proceeds to
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Proceeds to
Selling
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Public
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Commissions
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Issuer
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Shareholders
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Per Share
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$
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$
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$
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$
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Total
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$
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$
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$
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$
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Delivery of the
shares of common stock will be made on or
about ,
2011.
Neither the
Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Joint Book-Running
Managers
Senior Co-Managers
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Johnson
Rice & Company L.L.C.
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Co-Managers
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Pritchard
Capital Partners, LLC
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Simmons &
Company
International
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Stephens
Inc.
Tudor,
Pickering, Holt & Co.
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The date of this
prospectus
is ,
2011.
TABLE OF
CONTENTS
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1
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15
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28
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30
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76
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80
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92
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103
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105
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108
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112
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119
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119
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F-1
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We are responsible for the information contained in this
prospectus and in any free writing prospectus we may authorize
to be delivered to you. Neither we nor the underwriters have
authorized anyone to provide you with additional or different
information. We and the underwriters are offering to sell, and
seeking offers to buy, these securities only in jurisdictions
where offers and sales are permitted. The information in this
prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or any
sale of these securities.
Dealer
Prospectus Delivery Obligation
Through and
including ,
2011 (25 days after the date of this prospectus), all
dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as an underwriter and with
respect to unsold allotments or subscriptions.
Industry
and Market Data
The market data and certain other statistical information used
throughout this prospectus are based on independent industry
publications, government publications or other published
independent sources. Some data is also based on our good faith
estimates. Although we believe these third-party sources are
reliable and that the information is accurate and complete, we
have not independently verified the information.
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PROSPECTUS
SUMMARY
This summary provides a brief overview of information
contained elsewhere in this prospectus. Because it is
abbreviated, this summary does not contain all the information
that you should consider before investing in our common stock.
You should read the entire prospectus carefully before making an
investment decision, including the information presented under
the headings Risk Factors, Cautionary Note
Regarding Forward-Looking Statements and
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the historical
consolidated financial statements and related notes thereto
included elsewhere in this prospectus. Unless otherwise
indicated, information presented in this prospectus assumes that
the underwriters option to purchase additional shares of
our common stock is not exercised.
As of the date of this prospectus, we conduct our business
through Frac Tech Services, LLC, a Texas limited liability
company, and its direct and indirect subsidiaries. Immediately
prior to the consummation of this offering, we will consummate a
reorganization pursuant to which (i) Frac Tech Holdings,
LLC, a Texas limited liability company and the direct parent
entity of Frac Tech Services, LLC, will merge with and into Frac
Tech Services, LLC, and (ii) Frac Tech Services, LLC will
then merge with and into its subsidiary Frac Tech Services,
Inc., a Delaware corporation, which will survive the merger and
issue the common stock being offered and sold in this offering.
The historical financial information presented in this
prospectus is the historical consolidated financial information
of Frac Tech Holdings, LLC, giving effect to certain prior
reorganization transactions pursuant to which that entity was
established as the parent company of Frac Tech Services, LLC and
its direct and indirect subsidiaries. See History and
Reorganization. In this prospectus, unless the context
otherwise requires, the terms Frac Tech,
we, us, our or
ours refer to Frac Tech Holdings, LLC and Frac
Tech Services, LLC, together with their subsidiaries and
predecessor entities before this reorganization, and to Frac
Tech Services, Inc., together with its subsidiaries as of the
completion of the reorganization and thereafter. See
History and Reorganization.
Our
Company
We are a leading independent provider of oil and natural gas
well stimulation services and products with expertise in
high-pressure hydraulic fracturing. Oil and natural gas
exploration and production (E&P) companies
operating in the United States use our services and products
primarily to enhance their recovery rates from wells drilled in
shale and other unconventional reservoirs. Our operations are
vertically integrated, which reduces our operating costs,
increases our asset utilization, improves our supply chain
flexibility and responsiveness and ultimately enhances our
financial performance and ability to provide high quality
customer service. We use proprietary designs to manufacture
durable equipment that we believe gives us a competitive
advantage in the most demanding applications. In response to the
high demand for our hydraulic fracturing services, we expanded
our business in 2007 and 2008 by acquiring raw sand reserves and
commencing sand mining and processing operations, and in January
2009 we began full operation of our first resin-coating sand
facility. These reserves and operations provide us with ready
access to raw sand and resin-coated sand, the two principal
proppants we use in our operations.
Our revenues have grown from $214.4 million in 2006 to
$ in
2010, a compound annual growth rate of %. We are
benefitting from a number of positive industry developments,
including a dramatic increase in the amount and efficiency of
horizontal drilling activity, an increase in the number of
hydraulic fracturing stages per well and an increase in drilling
activity in oil- and liquids-rich shale formations. These trends
have led to increased asset utilization in our industry and a
tight supply of fracturing fleets, proppants and other
fracturing-related services and products. We also believe there
is growing international interest in horizontal drilling and
fracturing methods, and we intend to evaluate these
opportunities as they arise.
Our operations are focused primarily in unconventional oil and
natural gas formations in the Haynesville Shale in northwestern
Louisiana and east Texas, the Marcellus Shale in the Appalachian
Basin in Pennsylvania and West Virginia, the Eagle Ford Shale in
south Texas, and the Permian Basin in west Texas and
southeastern New Mexico. We believe we have the largest market
share of any hydraulic fracturing service provider in the
Haynesville Shale and Marcellus Shale based on number of fleets.
We are also a leading service provider in the Eagle Ford Shale
where we have plans to significantly expand our operations for
the remainder of 2010
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and in 2011. In recent periods, we have obtained an increasing
number of engagements in connection with oil-directed drilling,
particularly in the Eagle Ford Shale and the Permian Basin. We
expect to deploy new fleets in additional regions with
significant oil- and liquids-directed drilling activity in 2011,
which may include the Bakken Shale in North Dakota and Montana,
the Niobrara Shale in Colorado, Wyoming and Nebraska and various
areas in Oklahoma including the Granite Wash. The customers we
currently serve are primarily large E&P companies such as
Petrohawk Energy Corporation, XTO Energy Inc. (which is a
subsidiary of Exxon Mobil Corporation), Chesapeake Energy
Corporation and Range Resources Corporation.
We own and operate fleets of mobile hydraulic fracturing units
and other auxiliary heavy equipment to perform fracturing
services. Our hydraulic fracturing units consist primarily of a
high pressure hydraulic pump, a diesel engine, a transmission
and various hoses, valves, tanks and other supporting equipment
that are typically mounted to a flat-bed trailer. The group of
fracturing units, other equipment and vehicles necessary to
perform a typical fracturing job is referred to as a
fleet and the personnel assigned to each fleet are
commonly referred to as a crew. In areas where we
operate on a
24-hour-per-day
basis, we typically staff two crews per fleet. We currently
operate 22 hydraulic fracturing fleets with approximately
875,500 horsepower in the aggregate.
We believe the vertical integration of our operations, which
provides the ready availability of the equipment and products
that are necessary to our business, provides us with a
significant competitive advantage. We manufacture all the
hydraulic fracturing units in our fleets as well as
substantially all the high-pressure pumps used in our fracturing
units. We own and operate sand mines, related processing
facilities, a resin-coating facility and a distribution network
that provide us with a reliable and low cost supply of raw and
resin-coated sand. Our raw sand and resin-coating sand
operations supplied approximately 70% and 58%, respectively, of
the raw sand and resin-coated sand we used as proppants in our
hydraulic fracturing operations during the nine months ended
September 30, 2010. In addition, we formulate and blend
some of the chemical compounds that we use in fracturing fluids
at our chemical manufacturing facility and research and
development laboratories. Our technical staff of engineers,
chemists, technicians and a geologist support our operations by
optimizing the design and delivery of our equipment, products
and services to continually improve the quality, durability and
effectiveness of the solutions we provide to our customers.
At full capacity, we are capable of producing up to 20
fracturing units, with an aggregate of approximately 50,000
horsepower, per month. To increase our fracturing units
durability, reliability, and utilization, we manufacture a
proprietary high pressure pump consisting of two key assemblies,
a power end and a fluid end. Although the power end of our pumps
may last several years, the fluid end, which is the part of the
pump through which the fracturing fluid is expelled under high
pressure, is a shorter-lasting consumable, often lasting less
than one year. We currently have the capacity to manufacture up
to 20 power ends and 100 fluid ends per month to equip new
fracturing units and to replace the fluid ends on our existing
fleets.
We have processing plants at our two sand mines in Texas and
Missouri and an additional sand processing plant in Wisconsin.
We are currently capable of extracting and processing
approximately 2.5 million tons per year of raw sand, which
is the most common type of proppant we use in our fracturing
operations. As of September 30, 2010, we had an estimated
240 million tons of strategically located sand reserves.
Our resin-coating facility can produce 600 million pounds
of resin-coated sand annually. In addition to our mines and
processing plants, we have seven sand distribution facilities in
Texas, Louisiana and Pennsylvania, 110 bulk hauling trailers for
highway transportation and approximately 1,100 leased rail cars.
Industry
Overview
The pressure pumping industry provides hydraulic fracturing and
other well stimulation services to E&P companies.
Fracturing involves pumping a fluid down a well casing or tubing
under high pressure to cause the underground formation to crack,
allowing the oil or natural gas to flow more freely. A propping
agent, or proppant, is suspended in the fracturing
fluid and keeps open the cracks created by the fracturing
process in the underground formation. Proppants generally
consist of sand, resin-coated sand or ceramic particles. The
total size of the hydraulic fracturing market, based on revenue,
was estimated to be approximately $16.0 billion in 2008 and
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approximately $10.5 billion in 2009 based on data from a
2009 report by Spears & Associates. We believe the
revenue generated in the hydraulic fracturing market in 2010
will exceed the revenue generated in 2008.
The main factors influencing demand for fracturing services in
North America are the level of horizontal drilling activity by
E&P companies and the fracturing requirements, including
the number of fracturing stages and the volume of fluids,
chemicals and proppant pumped per stage, in the respective
resource plays. There has been a significant increase in both
horizontal drilling activity and related fracturing
requirements, which has increased the demand for our services
and products.
Industry
Trends Impacting Our Business
Increase
in Frac Stages Resulting from Horizontal Drilling
Activity
Advances in drilling and completion technologies including
horizontal drilling and hydraulic fracturing have made the
development of many unconventional resources such as oil and
natural gas shale formations economically attractive. This has
led to a dramatic increase in the development of oil- and
natural gas-producing shale formations, or plays, in
the United States. According to Baker Hughes, Inc., the
North American horizontal rig count has risen from 335 at the
beginning of 2007 to 916 at the end of September 2010. At
the same time, the hydraulic fracturing industry is benefitting
from drilling trends that are causing the number of fracturing
stages to grow at a faster rate than the horizontal rig count.
As E&P companies have become more experienced at developing
shale plays, the time required to drill wells has decreased,
thus increasing the number of wells drilled per year and hence
the number of fracturing stages demanded for a given rig count.
At the same time, the length of well laterals is increasing and
fracturing stages are being performed at closer intervals, which
also is increasing the number of fracturing stages per well.
These trends are providing significantly greater revenue
opportunities for our services.
Increased
Service Intensity in More Demanding Shale Reservoirs
Many of the new shales that have been discovered, such as the
Haynesville and Eagle Ford Shales, are high pressure reservoirs
that require an increasing number of fracturing stages and more
technically sophisticated forms of proppant, such as
resin-coated sand and ceramic proppants. The additional
horizontal drilling activity, coupled with the demanding
characteristics of unconventional reservoirs, has put increasing
demands on hydraulic fracturing equipment. Moreover, individual
fracturing stages have become more intensive, requiring more
fluids, chemicals and proppant per stage. We focus on the most
demanding reservoirs where we believe we have a competitive
advantage due to the high performance and durability of our
equipment and our ability, through our vertical integration, to
support high asset utilization that results in more efficient
operations. We believe that, within the industry, we manufacture
and deploy one of the most durable fluid ends, which is the part
of the high pressure pump that requires replacement most
frequently.
Increased
Asset Utilization
We are ultimately compensated based on the number of fracturing
stages we complete. Historically, each of our fleets completed
one fracturing stage per day, but our fleets now typically
complete multiple stages per day, usually on the same well. In
our highest activity regions, our fleets are operating on a
24-hour-per-day,
seven-day-per-week
basis with two crews rotating to increase asset efficiency. In
addition, we are scheduling fracturing jobs that are
geographically close to one another in order to increase our
asset utilization. While increased asset utilization results in
higher levels of stress on our equipment, we have increased our
capacity to manufacture, maintain and repair fluid ends and
other products, which has bolstered our repair and maintenance
capability.
Increased
Drilling in Oil- and Liquids-Rich Formations
While the majority of U.S. drilling rigs are currently
drilling in natural gas formations, there is increasing activity
in oil- and liquids-rich formations such as the Eagle Ford,
Bakken and Niobrara Shales and various plays in Oklahoma,
including the Granite Wash. We believe that many of the oil- and
liquids-rich plays are
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economically attractive at oil prices substantially below the
current prevailing oil price. We believe this should provide
continued and growing opportunities for our services in the near
term.
Tight
Supply of Hydraulic Fracturing Fleets, Proppants and Other
Products
Due to increased drilling in unconventional formations, the
demand for well stimulation services and products has increased
dramatically. Consequently, fracturing fleets, proppants,
replacement and repair parts and other products have become
increasingly scarce, especially over the course of the first
nine months of 2010, resulting in pricing increases. Based on
current market conditions, we expect this trend to continue
through the balance of 2010 and into 2011. We are well
positioned to take advantage of the market scarcity due to our
vertical integration strategy because we supply our own pumps
and most of our proppant requirements and other equipment, and
we manufacture and repair our fracturing units in-house.
Growing
International Interest in Hydraulic Fracturing
There is growing international interest in the development of
unconventional resources such as oil and natural gas shales.
This interest has resulted in a number of recently completed
joint ventures between major U.S. and international
E&P companies related to shale plays in the United
States. We believe that these joint ventures, which generally
require the international partner to commit to significant
future capital expenditures, will provide additional demand for
hydraulic fracturing services in the coming years. Additionally,
we believe such joint ventures will continue to stimulate
development of other oil and natural gas shales outside the
United States.
Competitive
Strengths
We believe that we have the following competitive strengths:
Vertically
Integrated Business
Our vertical integration provides us with a number of
competitive advantages. For example, the time between initial
order and final delivery of a fracturing unit is significantly
reduced as a result of our in-house manufacturing. Moreover,
once our units are deployed, they are able to continue to
operate with minimal delays for our customers, because our
ability to quickly provide replacement fluid ends and other
consumables reduces our maintenance turnaround time. Similarly,
our raw sand and resin-coating operations provide a reliable
source of proppant for our operations. Our sand distribution
centers and our transportation infrastructure address the
logistical challenges inherent in our business by allowing us to
transport and deliver proppant and equipment quickly to our
fracturing jobs on short notice.
Because we produce most of the key equipment and products
necessary for our operations, we are able to provide swift
service while controlling costs. We estimate that our
manufacturing costs per fracturing unit is approximately 30%
less than we would pay to purchase a similar fracturing unit
from outside suppliers and that our manufacturing cost per fluid
end is approximately 30% less than we would pay to purchase a
similar fluid end from outside suppliers. Similarly, we are able
to produce proppants such as raw sand and resin-coated sand and
to blend chemicals at lower cost than we would typically pay for
such products from outside suppliers. As a result, our
vertically integrated business improves our margins, reduces our
maintenance capital expenditures and improves our equipment
utilization. These factors enable us to provide superior service
at competitive prices, thereby increasing customer satisfaction,
strengthening our existing customer relationships and helping us
to expand our customer base.
High-Quality
Fleet
We maintain high-quality fleets of hydraulic fracturing units
and related equipment. Our 22 fleets have approximately 875,500
horsepower in the aggregate and are strategically located
throughout our principal markets. We believe our fleets are
among the newest, most reliable and highest performing in the
industry with the capability of meeting the most demanding
pressure and flow rate requirements in the field. Our
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equipments durability minimizes delays and reduces
maintenance costs. Moreover, we maintain our high-quality fleets
through our manufacturing and repair facilities and our
maintenance and repair personnel who work out of our district
offices, which allow us to service, repair and rebuild our
equipment quickly and efficiently without incurring excessive
costs. These factors increase utilization of our fleets and
enhance customer satisfaction because of reduced down time and
delays.
Advanced
Equipment and Products
Our engineering team has enabled us to create what we believe to
be one of the most technologically advanced and durable fleets
of hydraulic pumps in the industry. We also have chemical
blending and research and development facilities where our
technical staff designs and improves upon the composition of the
chemicals we add to hydraulic fracturing fluids based on
specific customer needs and geological factors. For example, we
recently filed a U.S. patent application for a new additive
that uses nano particles to enhance the recovery of hydrocarbons
from significantly depleted hydrocarbon formations. In addition,
our technical staff has developed innovative techniques for
completing and stimulating wells in unconventional formations
that have helped establish us as a market leader in our industry.
Highly
Active Customer Base
We have long-standing relationships with many of the leading oil
and natural gas producers operating in the United States. Our
largest customers include Petrohawk Energy Corporation, XTO
Energy Inc., Chesapeake Energy Corporation and Range Resources
Corporation. Since 2002, we have broadened our customer base as
a result of our technical expertise, high-quality fracturing
fleets and reputation for quality and customer service. Our
strong customer relationships allow us significant revenue
visibility in the near to intermediate term and facilitate our
ability to opportunistically expand our business to provide
services to our customers in multiple areas in which they have
operations. In addition, we have exclusively dedicated a larger
portion of our fleets to our largest customers pursuant to
informal arrangements.
Leading
Market Share in Key Unconventional Resource Plays
As a result of our focus on superior service and strong customer
relationships, we believe we have leading market shares in the
Haynesville and Marcellus Shales. We are rapidly increasing our
market share in the Eagle Ford Shale, which is another
geologically demanding shale formation. In addition to our
current leading positions, we have plans to expand into other
prolific unconventional resource plays, such as the Bakken and
Niobrara Shales and the Granite Wash, where significant demand
exists for high-quality fracturing services. Our leading market
positions in the most demanding shale plays create economies of
scale that allow us to more efficiently deploy our crews and to
increase our productivity, efficiency and performance.
Incentivized
Work Force
The managers of our hydraulic fracturing crews are eligible to
receive incentive pay per fracturing stage subject to satisfying
quality and safety standards. In addition, all of our field
employees are eligible to receive incentive pay based on
satisfying safety standards. We believe that this incentive
program enables us to achieve higher utilization, attract the
most competent work force and motivate our employees to
continually maintain quality and safety. The incentive pay
available under this program may represent a significant
supplement to the compensation earned by our fleet managers.
Experienced
Management Team
We have an experienced management team that has built our
business. Dan Wilks and Farris Wilks, our chief executive
officer and chief operating officer, respectively, who founded
our company in 2002, each has more than 25 years of
oilfield business experience. We recently added Marc Rowland,
former Chief Financial Officer of Chesapeake Energy Corporation,
as our new President and CFO effective November 1, 2010.
Our Executive Vice President of Sales and Operations, Bill
Barker, has over 26 years of oilfield business experience.
The remainder of our management team is comprised of seasoned
operating, marketing, financial
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and administrative executives, many of whom have prior
experience at prominent oilfield service companies such as BJ
Services Company, Halliburton Corporation and Schlumberger
Limited. Our management teams extensive experience in and
knowledge of the oilfield services industry strengthens our
ability to compete and manage our business through industry
cycles.
Strategy
We intend to build upon our competitive strengths to grow our
business and increase our revenues and operating income. Our
strategy to achieve these goals consists of (1) enhancing
our vertical integration, (2) increasing our proppant
production and distribution and our pump manufacturing capacity,
(3) expanding our geographic footprint, (4) focusing
on our operational efficiencies and (5) continuing to
enhance our contract terms with customers.
Enhance
Vertical Integration
We will continue to seek opportunities to further enhance our
vertical integration by adding complementary service offerings
to improve our customer service. Any new services that we may
add will be focused primarily on improving the quality,
reliability and deliverability of our existing service offerings.
Increase
Proppant Production and Distribution and Pump Manufacturing
Capacity
We intend to increase our raw sand production capacity by
expanding our three existing processing plants in Texas,
Missouri and Wisconsin, and we are seeking to open a third sand
mine, as well as a new sand processing plant, in Illinois. In
addition, we plan to more than double our resin-coated sand
production capacity over the next few years, and we are
enlarging our distribution network to support the expansion of
our sand operations. We also intend to increase our high
pressure pump manufacturing capacity by expanding our existing
plants and adding new plants.
Expand
Geographic Footprint
We will continue to expand our operations to regions containing
unconventional formations that are likely to require multi-stage
high-pressure hydraulic fracturing efforts. For example, we
recently deployed a new fleet with approximately 35,000
horsepower to serve customers in the Eagle Ford Shale, bringing
our total horsepower in that region to approximately 143,000
horsepower. In addition, in response to strong demand for
horizontal drilling in oil- and liquids-rich regions, we are
contemplating the deployment of fleets to the Bakken Shale in
North Dakota and Montana, the Niobrara Shale in Colorado,
Wyoming and Nebraska and various areas in Oklahoma including the
Granite Wash. We intend to add more hydraulic fracturing fleets
to pursue these opportunities. We expect to add two additional
fleets this year and a total of 12 new fleets with an aggregate
horsepower of approximately 455,000 by the end of 2011. Although
we currently have no international operations, we will continue
to evaluate those opportunities as they arise.
Focus on
Operational Efficiencies
We intend to continue to focus on improving our operational
efficiencies to increase our asset utilization and to improve
our cost structure. We can quickly reposition our fleet into the
most active and profitable markets as demand for hydraulic
fracturing services changes in order to maintain fleet
utilization, generate additional revenues and improve margins.
In certain circumstances, we have deployed multiple crews for a
single fleet to allow us to operate our fleets on a
24-hour-per-day,
seven-day-per-week
basis, and we will continue to look for opportunities to do so.
We continue to strive to reduce equipment down time through the
use of our regional maintenance centers.
Continue
to Enhance Contract Terms with Customers
In response to increased demand and tight supply of fracturing
fleets in some of our key markets, at the request of a number of
our customers we have informally dedicated one or more of our
fleets exclusively to
6
their operations at agreed prices. These arrangements increase
our ability to forecast future revenues, increase our ability to
deploy our fleets efficiently and enhance our customer
relationships. Currently, 11 of our 22 fleets are informally
dedicated to customers under these arrangements.
We have recently begun negotiating written agreements with
customers pursuant to which we will agree to commit one or more
fleets to their operations. These agreements are typically for
two-year terms and will require customers to pay us a minimum
daily rate, or a minimum amount per quarter. We have entered
into such a written contract with one of our largest customers
for a two-year period relating to two of our fleets in the
Marcellus Shale and with another customer for a one-year period
relating to one of our fleets in the Eagle Ford Shale. Each of
these contracts requires the customer to pay a substantial fee
for early termination of the contract, and the prices we charge
the customers are subject to increases based on increases in our
costs, subject to certain limits. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations How We Generate Our Revenues.
We expect that a majority of the 12 new fleets we plan to deploy
by the end of 2011 will eventually operate under written
agreements with similar provisions. Each of the remaining fleets
will be dedicated to serving multiple customers on an
as-available basis, allowing us to retain the flexibility to
serve new customers and to redeploy our fleets to new regions as
attractive opportunities arise.
History
and Reorganization
Frac Tech Services, LLC was formed as a Texas limited
partnership in August 2000, and we began providing hydraulic
fracturing services to E&P companies in 2002. Since then,
we have undertaken several reorganization transactions as a
result of which that company has been converted to a Texas
limited liability company and all of the other entities through
which we conduct business have become direct or indirect wholly
owned subsidiaries of Frac Tech Services, LLC, and Frac Tech
Holdings, LLC, a Texas limited liability company, was
established as our direct parent entity.
In connection with our private offering of $550.0 million
aggregate principal amount of our 7.125% Senior Notes due
2018, which closed on November 12, 2010, we established
Frac Tech Finance, Inc., a Delaware corporation, for the purpose
of acting as co-issuer of those Senior Notes. Frac Tech Finance,
Inc. subsequently changed its name to Frac Tech Services,
Inc. Frac Tech Services, Inc. currently has no assets and
no liabilities other than with respect to the Senior Notes.
Immediately prior to consummation of our initial public offering
of common stock pursuant to this prospectus, Frac Tech Holdings,
LLC will be merged with and into Frac Tech Services, LLC, and
Frac Tech Services, LLC will be merged with and into Frac Tech
Services, Inc. As a result of those mergers, which we refer to
collectively as our Reorganization, (i) Frac
Tech Services, Inc. will survive as the parent company of all of
our subsidiaries and will own the assets and conduct the
business currently owned and conducted by Frac Tech Services,
LLC; (ii) Frac Tech Services, Inc., will be the sole direct
obligor under our Senior Notes; (iii) the current
beneficial owners of our outstanding equity securities, as
described under Principal and Selling Shareholders,
including the selling shareholders, will receive shares of Frac
Tech Services, Inc. common stock in exchange for their current
membership interests in Frac Tech Holdings, LLC; and
(iv) Frac Tech Services, Inc. will be the issuer of the
common stock offered and sold in our initial public offering
pursuant to this prospectus.
7
The following chart sets forth a condensed summary of our
organizational structure prior to this offering, and before
giving effect to our Reorganization. For information regarding
the impact of this offering on the shareholdings of our current
beneficial owners, see Principal and Selling
Shareholders.
|
|
|
(1)
|
|
World Investment Group, LLC, a
Delaware limited liability company, owns 74.2% of our
outstanding common stock, giving effect to our Reorganization.
World Investment Group, LLC is owned by Dan Wilks, Farris Wilks
and Bill Barker, each of whom is a manager and executive officer
of Frac Tech Services, LLC and a director and executive officer
of the issuer. See Management Directors and
Executive Officers and Principal and Selling
Shareholders.
|
|
(2)
|
|
Chesapeake Energy Corporation owns
its interest in us through its wholly owned subsidiary,
Chesapeake Operating, Inc., an Oklahoma corporation. See
Principal and Selling Shareholders.
|
|
(3)
|
|
Organizational structure diagram
excludes an intermediate holding company. All subsidiaries will
be directly or indirectly wholly owned by Frac Tech Services,
Inc., after giving effect to our Reorganization.
|
8
Company
Information
Frac Tech Services, Inc., a Delaware corporation, will be the
issuer of the shares of common stock being offered pursuant to
this prospectus. Frac Tech Services, Inc., as successor to Frac
Tech Holdings, LLC, a Texas limited liability company, and Frac
Tech Services, LLC, a Texas limited liability company, pursuant
to merger transactions to be consummated immediately prior to
the closing of this offering, will conduct our business,
directly and through its subsidiaries. See History and
Reorganization. Our principal executive offices are
located at 16858 Interstate Highway 20, Cisco, Texas 76437, and
our telephone number at that address is
(817) 850-1008.
Our website address is
http://www.fractech.net.
However, information contained on our website is not
incorporated by reference into this prospectus, and you should
not consider the information contained on our website to be part
of this prospectus.
9
The
Offering
|
|
|
Common stock offered by Frac Tech Services, Inc. |
|
shares |
|
Common stock offered by selling shareholders |
|
shares |
|
Common stock outstanding after the offering |
|
shares(1) |
|
Over-allotment option |
|
Frac Tech Services, Inc. and the selling shareholders have
granted the underwriters an option, exercisable for
30 days, to purchase up to an aggregate
of
additional shares of our common stock to cover over-allotments,
if any. |
|
Directed share program |
|
We have reserved up
to shares
of the common stock offered by this prospectus for employees,
directors and other persons associated with us who have
expressed an interest in purchasing common stock in the
offering. See Underwriting for more information. |
|
Use of proceeds |
|
We expect to receive approximately
$ million
of net proceeds from the sale of the common stock offered by us,
based upon the assumed initial public offering price of
$
per share (the midpoint of the price range set forth on the
cover page of this prospectus), after deducting underwriting
discounts and commissions and estimated offering expenses. Each
$1.00 increase (decrease) in the public offering price would
increase (decrease) our net proceeds by approximately
$ million. |
|
|
|
We intend to use the net proceeds we receive from this offering
to exercise our right under the indenture governing our 7.125%
Senior Notes due 2018 to redeem up to $192.5 million in
aggregate principal amount of Senior Notes, to fund capital
expenditures and for general corporate purposes. See Use
of Proceeds. |
|
|
|
We will not receive any of the net proceeds from the sale of the
common stock offered by the selling shareholders. |
|
Dividend policy |
|
After this offering, we do not anticipate paying cash dividends
on our common stock in the foreseeable future. See
Dividend Policy. |
|
New York Stock Exchange symbol (reserved) |
|
FTS |
|
|
|
(1)
|
|
The common stock that will be
outstanding after the offering is based on the shares that will
be outstanding immediately prior to the consummation of the
offering, after giving effect to the merger transactions
described under History and Reorganization, which we
refer to as our Reorganization, and to the issuance
of shares
of common stock that we propose to issue in this offering, and
does not
include shares
of common stock reserved for issuance under our Long-Term
Incentive Plan, of which options to
purchase shares
are currently outstanding.
|
Unless otherwise indicated, all information contained in this
prospectus:
|
|
|
|
|
Reflects the consummation of our Reorganization, as described
under History and Reorganization, and the issuance
of shares
of common stock to the owners of the equity interests in our
parent company, Frac Tech Holdings, LLC, in connection
therewith; and
|
10
|
|
|
|
|
Assumes that the underwriters over-allotment option
granted by us and the selling shareholders for an aggregate
of shares
of common stock will not be exercised.
|
Risk
Factors
An investment in our common stock involves significant risks.
Before investing in our common stock, you should carefully
consider all the information contained in this prospectus,
including the information under the headings Risk
Factors and Cautionary Note Regarding
Forward-Looking Statements. Our business, financial
condition and results of operations could be materially and
adversely affected by many factors, including the following
factors and the factors discussed in Risk Factors
and elsewhere in this prospectus:
|
|
|
|
|
the cyclical nature of demand for hydraulic fracturing and other
stimulation services during completion of oil and natural gas
wells or during post-completion recovery enhancement efforts;
|
|
|
|
volatility in market prices for oil and natural gas and in the
level of E&P activity in the United States, and the effect
of this volatility on the demand for oilfield services generally;
|
|
|
|
changes in legislation and the regulatory environment;
|
|
|
|
liabilities and risks, including environmental liabilities and
risks, inherent in oil and natural gas operations;
|
|
|
|
the loss of any of our key executives;
|
|
|
|
continuing or increased competition;
|
|
|
|
our inability to fully protect our intellectual property rights;
|
|
|
|
delays by our customers or by us in obtaining permits necessary
for the conduct of our operations; and
|
|
|
|
dependence on a limited number of major customers.
|
11
Summary
Consolidated Financial Information
The following summary consolidated financial information for
each of the years in the three-year period ended
December 31, 2009 is based on our audited consolidated
financial statements included elsewhere in this prospectus. The
summary consolidated financial information for the nine months
ended September 30, 2009 and 2010 is based on our unaudited
consolidated financial statements included elsewhere in this
prospectus. The summary consolidated financial information for
the year ended December 31, 2006 is based on our unaudited
consolidated financial statements not included in this
prospectus. In the opinion of our management, the interim
financial information includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair
presentation of our financial condition, results of operations
and cash flows. The results for interim periods set forth below
are not necessarily indicative of the results to be expected for
the full year. The information set forth below should be read
together with Managements Discussion and Analysis of
Financial Condition and Results of Operations and our
consolidated historical financial statements and the notes to
our financial statements included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per share information, ratios and
Operating Data)
|
|
|
Income Statement Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
214,426
|
|
|
$
|
362,462
|
|
|
$
|
573,543
|
|
|
$
|
389,230
|
|
|
$
|
276,328
|
|
|
$
|
806,197
|
|
Cost of revenues
|
|
|
103,885
|
|
|
|
241,293
|
|
|
|
411,216
|
|
|
|
345,216
|
|
|
|
250,185
|
|
|
|
494,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
110,541
|
|
|
$
|
121,169
|
|
|
$
|
162,327
|
|
|
$
|
44,014
|
|
|
$
|
26,143
|
|
|
$
|
312,123
|
|
Selling and administrative costs
|
|
|
20,731
|
|
|
|
35,006
|
|
|
|
81,940
|
|
|
|
68,386
|
|
|
|
47,089
|
|
|
|
74,558
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
5,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
89,810
|
|
|
$
|
86,163
|
|
|
$
|
74,416
|
|
|
$
|
(24,372
|
)
|
|
$
|
(20,946
|
)
|
|
$
|
237,565
|
|
Interest expense, net
|
|
|
(4,963
|
)
|
|
|
(13,467
|
)
|
|
|
(29,040
|
)
|
|
|
(15,945
|
)
|
|
|
(11,767
|
)
|
|
|
(13,562
|
)
|
Other income (expense), excluding interest
|
|
|
46
|
|
|
|
303
|
|
|
|
(23
|
)
|
|
|
425
|
|
|
|
1,575
|
|
|
|
(1,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
84,893
|
|
|
$
|
72,999
|
|
|
$
|
45,353
|
|
|
$
|
(39,892
|
)
|
|
$
|
(31,138
|
)
|
|
$
|
222,829
|
|
Income
taxes(1)
|
|
|
2,421
|
|
|
|
1,248
|
|
|
|
1,994
|
|
|
|
347
|
|
|
|
350
|
|
|
|
2,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
82,472
|
|
|
$
|
71,751
|
|
|
$
|
43,359
|
|
|
$
|
(40,239
|
)
|
|
$
|
(31,488
|
)
|
|
$
|
219,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) as reported
|
|
$
|
82,472
|
|
|
$
|
71,751
|
|
|
$
|
43,359
|
|
|
$
|
(40,239
|
)
|
|
$
|
(31,488
|
)
|
|
$
|
219,947
|
|
Pro forma adjustment for income tax expense
(benefit)(2)
|
|
$
|
32,529
|
|
|
$
|
27,949
|
|
|
$
|
15,881
|
|
|
$
|
(16,135
|
)
|
|
$
|
(12,673
|
)
|
|
$
|
88,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) allocable to common shareholders
|
|
$
|
49,943
|
|
|
$
|
43,802
|
|
|
$
|
27,478
|
|
|
$
|
(24,104
|
)
|
|
$
|
(18,815
|
)
|
|
$
|
131,386
|
|
Pro forma basic and diluted net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average common shares outstanding used in
basic and diluted net income (loss) per common
share(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per share information, ratios and
Operating Data)
|
|
|
Other Financial Information (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA(4)
|
|
$
|
105,449
|
|
|
$
|
124,836
|
|
|
$
|
148,302
|
|
|
$
|
64,868
|
|
|
$
|
41,745
|
|
|
$
|
325,641
|
|
Capital expenditures
|
|
|
195,727
|
|
|
|
292,469
|
|
|
|
163,040
|
|
|
|
61,777
|
|
|
|
34,275
|
|
|
|
116,202
|
|
Cash (end of period)
|
|
|
13,388
|
|
|
|
1,363
|
|
|
|
423
|
|
|
|
26,039
|
|
|
|
5,134
|
|
|
|
33,662
|
|
Total debt (end of period)
|
|
|
56,387
|
|
|
|
283,221
|
|
|
|
325,639
|
|
|
|
320,685
|
|
|
|
301,604
|
|
|
|
167,644
|
|
Operating Data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of wells fractured
|
|
|
398
|
|
|
|
750
|
|
|
|
839
|
|
|
|
675
|
|
|
|
552
|
|
|
|
973
|
|
Total fracturing stages
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
4,786
|
|
|
|
3,117
|
|
|
|
7,216
|
|
Average revenue per stage
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
$
|
81,327
|
|
|
$
|
88,652
|
|
|
$
|
111,724
|
|
Horsepower (end of period)
|
|
|
213,750
|
|
|
|
678,250
|
|
|
|
779,500
|
|
|
|
802,000
|
|
|
|
802,000
|
|
|
|
875,500
|
|
Number of fleets deployed (end of period)
|
|
|
11
|
|
|
|
16
|
|
|
|
19
|
|
|
|
20
|
|
|
|
20
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
As Further
|
|
|
|
Actual
|
|
|
As
Adjusted(5)
|
|
|
Adjusted(6)
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
33,662
|
|
|
$
|
255,462
|
|
|
$
|
|
|
Total assets
|
|
|
930,330
|
|
|
|
1,152,130
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
593,709
|
|
|
|
593,709
|
|
|
|
|
|
Long-term debt (including current portion)
|
|
|
167,644
|
|
|
|
593,044
|
|
|
|
|
|
Owners equity
|
|
|
612,286
|
|
|
|
398,786
|
|
|
|
|
|
|
|
|
(1)
|
|
Consists primarily of state
franchise taxes treated as income taxes for accounting purposes.
Prior to this offering, we have been treated as a partnership
for federal income tax purposes and therefore have not directly
paid federal or state income taxes on our income.
|
|
(2)
|
|
Immediately prior to the closing of
this offering, we will consummate our Reorganization, pursuant
to which Frac Tech Holdings, LLC and Frac Tech Services, LLC
will be merged with and into Frac Tech Services, Inc. and the
outstanding limited liability company units of Frac Tech
Holdings, LLC will be converted into shares of common stock of
Frac Tech Services, Inc. Frac Tech Services, Inc., the survivor
of such transactions, will be subject to federal and state
income taxes. We have computed pro forma tax expense using a 35%
corporate-level federal tax rate and a net apportioned state tax
rate, incorporating permanent differences.
|
|
(3)
|
|
The pro forma weighted average
common shares outstanding have been calculated as if
(a) our Reorganization had been consummated, and
outstanding limited liability company units of Frac Tech
Holdings, LLC had been converted into shares of common stock of
Frac Tech Services, Inc., and (b) our initial public
offering of common stock pursuant to this prospectus had been
consummated, assuming no exercise of the underwriters
over-allotment option, in each case at the beginning of the
earliest period reported in the table.
|
|
(4)
|
|
Adjusted EBITDA is a
non-GAAP financial measure that we define as net income before
interest, taxes, depreciation, amortization and gain or loss on
sale of assets, as further adjusted to add back amounts charged
to income for goodwill impairment related to the discontinuance
of the operations of a subsidiary in fiscal year 2008,
impairment of service equipment in the nine months ended
September 30, 2010 and other nonrecurring items.
Adjusted EBITDA, as used and defined by us, may not
be comparable to similarly titled measures employed by other
companies and is not a measure of performance calculated in
accordance with GAAP. 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, our management
believes Adjusted EBITDA may be useful to an investor in
evaluating our operating performance because this measure or a
similar measure:
|
|
|
|
is widely used by
investors in the oilfield services industry to measure a
companys operating performance without regard to items
excluded from the calculation of such measure, which can vary
substantially from company to company depending upon accounting
methods, book value of assets, capital structure and the method
by which assets were acquired, among other factors;
|
13
|
|
|
|
|
helps investors to more
meaningfully evaluate and compare the results of our operations
from period to period by removing the effect of our capital
structure and asset base from our operating structure; and
|
|
|
|
is used by our
management for various purposes including as a measure of
performance of our operating entities, and in presentations to
our board of managers as a basis for strategic planning and
forecasting.
|
|
|
|
There are significant limitations
to using Adjusted EBITDA as a measure of performance, including
the inability to analyze the effect of certain recurring and
non-recurring items that materially affect our net income or
loss, and the lack of comparability of results of operations of
different companies.
|
|
|
|
The following table reconciles our
net income, the most directly comparable GAAP financial measure,
to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
82,472
|
|
|
$
|
71,751
|
|
|
$
|
43,359
|
|
|
$
|
(40,239
|
)
|
|
$
|
(31,488
|
)
|
|
$
|
219,947
|
|
Interest expense, net
|
|
|
4,963
|
|
|
|
13,467
|
|
|
|
29,040
|
|
|
|
15,945
|
|
|
|
11,767
|
|
|
|
13,562
|
|
Income taxes
|
|
|
2,421
|
|
|
|
1,248
|
|
|
|
1,994
|
|
|
|
347
|
|
|
|
350
|
|
|
|
2,882
|
|
Depreciation and amortization
|
|
|
15,646
|
|
|
|
38,938
|
|
|
|
69,200
|
|
|
|
91,149
|
|
|
|
63,511
|
|
|
|
79,807
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
5,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of service
equipment(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,352
|
|
Loss (gain) on sale of assets
|
|
|
(47
|
)
|
|
|
(73
|
)
|
|
|
(442
|
)
|
|
|
(50
|
)
|
|
|
(369
|
)
|
|
|
464
|
|
Miscellaneous
revenue(b)
|
|
|
(6
|
)
|
|
|
(495
|
)
|
|
|
(820
|
)
|
|
|
(2,284
|
)
|
|
|
(2,026
|
)
|
|
|
(373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
105,449
|
|
|
$
|
124,836
|
|
|
$
|
148,302
|
|
|
$
|
64,868
|
|
|
$
|
41,745
|
|
|
$
|
325,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) The amount shown in the
table above for impairment of service equipment relates to a
charge taken during the nine months ended September 30,
2010 resulting from increased use of our equipment in demanding
shale reservoirs, which required us to replace the equipment
earlier than its originally estimated useful life.
|
|
|
|
(b) Miscellaneous revenue
consists principally of the following: rebates and commissions,
for the years ended December 31, 2006 and 2007; settlement
discounts and warranty claims, for the year ended
December 31, 2008; amortization of deferred gain, for the
year ended December 31, 2009; amortization of deferred
gain, for the nine months ended September 30, 2009; and
rental income and amortization of deferred gain, for the nine
months ended September 30, 2010.
|
|
|
|
(5)
|
|
As adjusted to give effect to the
consummation on November 12, 2010 of our issuance and sale
in a private placement of $550.0 million in principal
amount of our 7.125% Senior Notes due 2018 and the
application of the net proceeds therefrom and certain other
transactions that occurred subsequent to September 30,
2010, as described in Capitalization.
|
|
(6)
|
|
As further adjusted to give effect
to the consummation of this offering of common stock and the
application of the estimated net proceeds that we will receive
from this offering as described in Use of Proceeds.
|
14
RISK
FACTORS
An investment in our common stock involves risks. You should
carefully consider the risks described below before making an
investment decision. Our business, financial condition or
results of operations could be materially adversely affected by
any of these risks. The trading price of our common stock could
decline due to any of these risks, and you may lose all or part
of your investment.
Risks
Relating to Our Business
Our
business is cyclical and depends on spending and drilling
activity by the onshore oil and natural gas industry in the
United States, and the level of such activity is volatile. Our
business has been, and may continue to be, adversely affected by
industry conditions that are beyond our control.
Our business is cyclical, and we depend on our customers
willingness to make expenditures to explore for, develop and
produce oil and natural gas in the United States. Our
customers willingness to undertake these activities
depends largely upon prevailing industry conditions that are
influenced by numerous factors over which we have no control,
including:
|
|
|
|
|
prices, and expectations about future prices, of oil and natural
gas;
|
|
|
|
domestic and worldwide economic conditions;
|
|
|
|
domestic and foreign supply of and demand for oil and natural
gas;
|
|
|
|
the price and quantity of imports of foreign oil and natural gas;
|
|
|
|
the cost of exploring for, developing, producing and delivering
oil and natural gas;
|
|
|
|
available pipeline, storage and other transportation capacity;
|
|
|
|
lead times associated with acquiring equipment and products and
availability of qualified personnel;
|
|
|
|
the expected rates of decline in production from existing and
prospective wells;
|
|
|
|
the discovery rates of new oil and natural gas reserves;
|
|
|
|
federal, state and local regulation of exploration and drilling
activities and equipment, material or supplies that we furnish;
|
|
|
|
public pressure on, and legislative and regulatory interest
within, federal, state, and local governments to stop,
significantly limit or regulate hydraulic fracturing activities;
|
|
|
|
the availability, capacity and cost of disposal and recycling
services for used hydraulic fracturing fluids;
|
|
|
|
the availability of water resources for use in hydraulic
fracturing operations;
|
|
|
|
weather conditions, including hurricanes that can affect oil and
natural gas operations over a wide area and severe winter
weather that can interfere with our sand mining operations;
|
|
|
|
political instability in oil and natural gas producing countries;
|
|
|
|
advances in exploration, development and production technologies
or in technologies affecting energy consumption;
|
|
|
|
the price and availability of alternative fuels and energy
sources; and
|
|
|
|
uncertainty in capital and commodities markets and the ability
of oil and natural gas producers to raise equity capital and
debt financing.
|
The level of E&P activity in the United States is volatile.
Changes in current or anticipated future prices for crude oil
and natural gas are a primary factor affecting spending and
drilling activity by E&P companies, and decreases in
spending and drilling activity can cause rapid and material
declines in demand for fracturing services. A reduction in the
activity levels of our customers would cause a decline in the
demand for our services and could adversely affect the prices
that we can charge or collect for our services. In addition, any
15
prolonged substantial reduction in oil and natural gas prices
would likely affect oil and natural gas production levels and,
therefore, would affect demand for the services we provide. A
material decline in oil and natural gas prices or drilling
activity levels or sustained lower prices or activity levels
could have a material adverse effect on our business, financial
condition, results of operations and cash flow. Moreover,
reduced discovery rates of new oil and natural gas reserves, or
a decrease in the development rate of reserves, in our market
areas, whether due to increased governmental regulation,
limitations on exploration and drilling activity or other
factors, could also have a material adverse impact on our
business even in a stronger oil and natural gas price
environment. In addition, the development and utilization of
in-house fracturing capabilities by E&P companies could
decrease the demand for our services and have a material adverse
impact on our business.
A substantial portion of our revenues in 2010 was derived from
our activities in the Haynesville Shale. Drilling activity in
the Haynesville Shale may be reduced due to lower natural gas
prices, which could adversely impact our revenues.
In 2009, declines in prices for oil and natural gas, together
with adverse changes in the capital and credit markets, caused
many E&P companies to reduce capital budgets and drilling
activity. This trend resulted in a significant decline in demand
for our services, had a material negative impact on the prices
we were able to charge our customers, and adversely affected our
equipment utilization and results of operations. We were in
default with respect to certain covenants under our prior senior
secured revolving credit facility as of December 31, 2009,
which we resolved by entering into an amendment and forbearance
agreement in January 2010 and an amended and restated facility
in May 2010. See Managements Discussion and Analysis
of Financial Condition and Results of
Operations Liquidity and Capital
Resources. Future cuts in spending levels or drilling
activity could have similar adverse effects on our operating
results and financial condition, and such effects could be
material.
We are
subject to federal, state and local laws and regulations
regarding issues of health, safety and protection of the
environment. Under these laws and regulations, we may become
liable for penalties, damages or costs of remediation or other
corrective measures. Any changes in laws or government
regulations could increase our costs of doing
business.
Our operations are subject to stringent federal, state and local
laws and regulations relating to, among other things, protection
of natural resources, wetlands, endangered species, the
environment, health and safety, waste management, waste
disposal, and transportation of waste and other materials. Our
operations pose risks of environmental liability, including
leakage from our operations to surface or subsurface soils,
surface water or groundwater. Some environmental laws and
regulations may impose strict, joint and several liability.
Therefore in some situations we could be exposed to liability as
a result of our conduct that was lawful at the time it occurred
or the conduct of, or conditions caused by, third parties.
Actions arising under these laws and regulations could result in
the shutdown of our operations, fines and penalties,
expenditures for remediation or other corrective measures, and
claims for liability for property damage, exposure to hazardous
materials or hazardous waste, or personal injuries. Sanctions
for noncompliance with applicable environmental laws and
regulations also may include the assessment of administrative,
civil or criminal penalties, revocation of permits, temporary or
permanent cessation of operations in a particular location and
issuance of corrective action orders. Such claims or sanctions
and related costs could cause us to incur substantial costs or
losses and could have a material adverse effect on our business,
financial condition and results of operations. An increase in
regulatory requirements on oil and gas exploration and
completion activities could significantly delay or interrupt our
operations.
If we do not perform in accordance with government, industry or
our own safety standards, we could lose business from certain
customers, many of whom have an increased focus on safety issues
as a result of recent incidents, such as the Macondo Well event
in the Gulf of Mexico, and governmental initiatives on safety
and environmental issues related to E&P activities.
Laws protecting the environment generally have become more
stringent over time and we expect them to continue to do so,
which could lead to material increases in our costs for future
environmental compliance and
16
remediation. See Business Environmental
Regulation for more information on the environmental laws
and government regulations that are, or may be in the future,
applicable to us.
On June 9, 2009, companion bills entitled the Fracturing
Responsibility and Awareness of Chemicals (FRAC) Act of 2009
were introduced in the United States Senate (S. 1215) and
House of Representatives (H.R. 2766). Currently, unless the
fracturing fluid used in the hydraulic fracturing process
contains diesel, hydraulic fracturing operations are exempt from
regulation under the federal Safe Drinking Water Act. The FRAC
Act would remove the permit exemption and require the federal
Environmental Protection Agency, commonly referred to as the
EPA, to promulgate regulations on hydraulic fracturing. Further,
states with delegated authority to implement the Safe Drinking
Water Act would have to modify their programs to remain
consistent with any new federal regulations. The FRAC Act would
also require persons conducting hydraulic fracturing, such as
us, to disclose the chemical constituents, but not the
proprietary formulas, of their fracturing fluids to a regulatory
agency. This Act would make the information public via the
internet, which could make it easier for third parties opposed
to the hydraulic fracturing process to initiate legal
proceedings based on allegations that specific chemicals used in
the fracturing process could adversely affect the environment,
including groundwater, soil or surface water. If this or similar
legislation becomes law, the legislation could establish an
additional level of regulation at the federal level that could
lead to operational delays or increased operating costs, making
it more difficult to perform hydraulic fracturing and increasing
our costs of compliance and doing business. Currently, neither
S. 1215 nor H.R. 2766 is scheduled for consideration by the
Senate or the House, and it is not clear whether the 111th
Congress will act on either bill. Compliance or the consequences
of any failure to comply by us could have a material adverse
effect on our business, financial condition and operational
results. Disclosure of our proprietary chemical formulas to
third parties or to the public, even if inadvertent, could
diminish the value of those formulas and could result in
competitive harm to us.
Another bill has been introduced in Congress in 2010 that would
require disclosure of chemicals used in hydraulic fracturing
operations. The Clean Energy Jobs and Oil Company Accountability
Act of 2010 (S. 3663) remains on the Senate Legislative
Calendar under General Orders, and would amend the Emergency
Planning and Community
Right-to-Know
Act by requiring any person using hydraulic fracturing for an
oil or natural gas well to submit to the state, or make publicly
available, the list of chemicals used in each hydraulic
fracturing process (identified by well location and number),
including the chemical constituents of mixtures, Chemical
Abstracts Service registry numbers, and material safety data
sheets. S. 3663 would not, however, require public disclosure of
proprietary chemical formulas.
Several states have considered, or are considering, legislation
or regulations similar to the federal legislation described
above or are taking action to restrict hydraulic fracturing in
certain jurisdictions. In June 2010, the Wyoming Oil and Gas
Conservation Commission passed a rule requiring disclosure of
hydraulic fracturing fluid content. In October 2010, the
Governor of Pennsylvania issued a moratorium on new natural gas
development on state forest lands. In November 2010, the
Pennsylvania Environmental Quality Board proposed regulations
that would require reporting of the chemicals used in fracturing
fluids. At this time, it is not possible to estimate the
potential impact on our business of these state actions or the
enactment of additional federal or state legislation or
regulations affecting hydraulic fracturing.
On February 18, 2010, the Energy and Commerce Committee of
the United States House of Representatives requested that we and
other companies provide information concerning the chemicals
used in hydraulic fracturing. Subsequently, we received
follow-up
requests from the Committee for additional information and
documentation. We have worked with the Committees staff to
provide information concerning such chemicals while at the same
time acting to protect our proprietary interests and to fulfill
our contractually imposed confidentiality obligations to certain
customers.
Also, the EPA is reviewing the scope of its existing regulatory
authority and evaluating whether and how it can regulate
hydraulic fracturing. The EPA recently requested information
from several well-servicing companies concerning the chemicals
used in hydraulic fracturing. To date, the EPA has not requested
information from us. In addition, in March 2010, the EPA
announced its intention to conduct a comprehensive research
study, ordered by Congress, on the potential adverse impacts
that hydraulic fracturing may have on
17
water quality and public health. As part of this study, the EPA
is conducting public hearings across the country. Even if the
FRAC Act or similar legislation is not adopted, the EPA study,
depending on its results, could spur further initiatives to
regulate hydraulic fracturing under the Safe Drinking Water Act
or otherwise. The EPA has announced that the energy extraction
sector is one of the sectors designated for increased
enforcement over the next three to five years.
Additionally, the EPAs Tier IV regulations apply to
certain off-road diesel engines that are used by us to power
equipment in the field. Under these regulations, we are limited
in the number of non-compliant off-road diesel engines we can
purchase. Until
Tier IV-compliant
engines that meet our needs are available, these regulations
could limit our ability to acquire a sufficient number of diesel
engines to expand our fleet and to replace existing engines as
they are taken out of service.
We may
be subject to claims for personal injury and property damage,
which could materially adversely affect our financial condition
and results of operations.
Our services are subject to inherent hazards that can cause
personal injury or loss of life, damage to or destruction of
property, equipment or the environment, or the suspension of
operations. Litigation arising from an accident at a location
where our services are provided may cause us to be named as a
defendant in lawsuits asserting potentially large claims. We
maintain customary insurance to protect our business against
these potential losses but such insurance may not be adequate to
cover our liabilities. Further, our insurance has deductibles or
self-insured retentions and contains certain coverage
exclusions. We could become subject to material uninsured
liabilities that could have a material adverse effect on our
business, financial condition or results of operations. In
addition, insurance may not be available in the future at rates
that we consider reasonable and commercially justifiable.
The
loss of key executives would adversely affect our ability to
effectively finance and manage our business and obtain and
retain customers.
We are dependent upon the efforts and skills of our executives
to manage, finance and grow our business and to obtain and
retain customers. These executives include:
|
|
|
|
|
Dan Wilks, Chief Executive Officer;
|
|
|
|
Farris Wilks, Chief Operating Officer;
|
|
|
|
Marc Rowland, President and Chief Financial Officer; and
|
|
|
|
Bill Barker, Executive Vice President of Sales and Operations.
|
In addition, our development and expansion will require
additional experienced management, operations and technical
personnel. We cannot assure you that we will be able to identify
and retain these employees. Also, the loss of the services of
one or more of our key executives could increase our exposure to
the other risks described in this Risk Factors
section. We do not maintain key man insurance on any of our
personnel other than Mr. Barker.
Our
industry is highly competitive, with intense price competition,
which may intensify as our competitors expand their
operations.
The markets in which we operate are highly competitive.
Contracts are traditionally awarded on a competitive bid basis.
The competitive environment has intensified as recent mergers
among E&P companies have reduced the number of available
customers. Other companies that offer hydraulic fracturing
services are larger than we are, offer a broader range of
products and services than we do and have resources that are
significantly greater than ours. In addition, our competitors
have announced plans to significantly increase their horsepower
and fleets in the near term. These competitors may be better
able to withstand industry downturns, compete on the basis of
price and acquire new equipment and technologies, all of which
could affect our revenues and profitability. Moreover, other
companies may also become vertically integrated, potentially
lowering their costs and increasing their margins. Further, we
believe one source of our competitive
18
advantage is the superior durability of our fluid ends, which
advantage is most pronounced in the most demanding shale
formations such as the Haynesville Shale. To the extent drilling
activity moves to less demanding shale formations, competition
may increase. This competition may cause our business to suffer.
We believe that competition for contracts will continue to be
intense in the foreseeable future.
If we
are unable to fully protect our intellectual property rights, we
may suffer a loss in our competitive advantage or market
share.
Because of the technical nature of our business, we have trade
secrets that we believe provide us with a competitive advantage,
including proprietary designs we use in manufacturing our
hydraulic fracturing pumps and other equipment and formulas we
use in developing and producing the chemicals we use in
fracturing fluids. Moreover, although we have filed several
patent applications, we do not have patents or patent
applications relating to many of our key processes and
technology. If we are not able to maintain the confidentiality
of our trade secrets, or if our competitors are able to
replicate our technology, our competitive advantage would be
diminished. We also cannot assure you that any patents we may
obtain in the future would provide us with any significant
commercial benefit or would allow us to prevent our competitors
from employing comparable technologies or processes.
Delays
in obtaining permits by our customers for their operations or by
us for our operations could impair our business.
In most states, our customers are required to obtain permits
from one or more governmental agencies in order to perform
drilling and completion activities, including hydraulic
fracturing. Such permits are typically required by state
agencies, but can also be required by federal and local
governmental agencies. The requirements for such permits vary
depending on the location where such drilling and completion
activities will be conducted. As with all governmental
permitting processes, there is a degree of uncertainty as to
whether a permit will be granted, the time it will take for a
permit to be issued, and the conditions which may be imposed in
connection with the granting of the permit. Recently,
moratoriums on the issuance of permits have been imposed upon
inland drilling and completion activities. For example, the New
York Department of Environmental Conservation has effectively
ceased issuing permits for drilling and completion activities as
it conducts an environmental impact study. On November 29,
2010, the New York State Assembly passed a bill, previously
passed by the New York State Senate on August 3, 2010,
imposing a moratorium until May 15, 2011 on the issuance of
new permits for the drilling of wells that use hydraulic
fracturing for the purpose of stimulating natural gas or oil in
the Marcellus Shale formation. As of December 1, 2010, the
bill had not been signed or vetoed by the Governor of New York.
Wyoming and Colorado have enacted additional regulations
applicable to our business activities. Arkansas is presently
considering similar regulations. Some of the drilling and
completion activities may take place on federal land, requiring
leases from the federal government to conduct such drilling and
completion activities. In some cases, federal agencies have
cancelled oil and gas leases on federal lands. Consequently, our
operations in certain areas of the country may be interrupted or
suspended for varying lengths of time, causing a loss of revenue
and potentially having a materially adverse effect on our
operations.
We are also required to obtain federal and state permits in
connection with our sand mining and processing activities. These
permits impose certain conditions on our operations, some of
which require significant expenditures for filtering or other
emissions control devices at each of our processing facilities.
Changes in these requirements could increase our costs or limit
the amount of sand we can process. Any such changes could have a
material adverse effect on our financial condition and results
of operations.
We are
dependent on a few customers operating in a single industry; the
loss of one or more customers could adversely affect our
financial condition and results of operations.
Our customers are engaged in the E&P business in the United
States. Historically, we have been dependent upon a few
customers for a significant portion of our revenues. In 2009 and
the first nine months of 2010, our three largest customers
generated more than 53% and 41%, respectively, of our
consolidated
19
revenues. The following table shows the customers who generated
more than 10% of our consolidated gross revenues in any of the
fiscal years or in the nine-month period indicated below.
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Percentage of Revenues
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Year Ended
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Nine Months Ended
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December 31,
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September 30,
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Customer
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2007
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2008
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2009
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2010
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Petrohawk Energy Corporation
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*
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3.3
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20.6
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18.8
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XTO Energy
Inc.(1)
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31.7
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24.4
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21.9
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13.4
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Chesapeake Energy Corporation
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9.0
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17.1
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10.6
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8.8
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Range Resources Corporation
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10.3
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3.1
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6.7
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7.5
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Antero Resources Corporation
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16.0
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10.2
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*
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*
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*
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Less than 1%.
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(1)
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XTO Energy Inc. is a subsidiary of
Exxon Mobil Corporation.
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Our business, financial condition and results of operations will
be materially adversely affected if one or more of our
significant customers fails to pay us or ceases to engage us for
our services on terms that are favorable to us or at all. We
frequently provide our services on a
project-by-project
basis. Although we do have contracts for multiple projects with
certain of our customers, most of those contracts are
cancellable by either party without penalty.
Future
growth in our business could strain our resources, causing us to
lose customers and increasing our operating
expenses.
We have experienced rapid growth since we began providing
hydraulic fracturing services to E&P companies in 2002, and
we are currently expanding our operations to take advantage of
favorable market conditions. This growth has at times placed a
strain on our managerial and operational resources. Any future
growth may require us, among other things, to:
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raise additional capital;
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expand and improve our operational and financial procedures,
infrastructure, systems and controls;
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hire additional management, accounting or other personnel;
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improve our financial and management information systems;
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expand, train and manage a larger workforce; and
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improve the coordination among our operating, sales and
marketing, financial, accounting and management personnel.
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Our inability to manage growth effectively or to maintain the
quality of our services and products could have a material
adverse effect on our business, financial condition or results
of operations.
Changes
in trucking regulations may increase our costs and negatively
impact our results of operations.
For the transportation and relocation of our hydraulic
fracturing equipment, sand and chemicals, we operate trucks and
other heavy equipment. We therefore are subject to regulation as
a motor carrier by the United States Department of
Transportation and by various state agencies, whose regulations
include certain permit requirements of state highway and safety
authorities. These regulatory authorities exercise broad powers
over our trucking operations, generally governing such matters
as the authorization to engage in motor carrier operations,
safety, equipment testing and specifications and insurance
requirements. The trucking industry is subject to possible
regulatory and legislative changes that may impact our
operations by requiring changes in fuel emissions limits, the
hours of service regulations that govern the amount of time a
driver may drive or work in any specific period, limits on
vehicle weight and size and other matters. On May 21, 2010
the Obama Administration announced proposed regulations that
would set mileage requirements and emissions limits for medium-
and heavy-duty trucks. A final rule is expected by July 30,
2011 effective for the 2014 model year.
20
Associated with this ruling, we may experience an increase in
costs related to truck purchases or maintenance. Proposals to
increase federal, state, or local taxes, including taxes on
motor fuels, are also made from time to time, and any such
increase would increase our operating costs. We cannot predict
whether, or in what form, any legislative or regulatory changes
applicable to our trucking operations will be enacted.
New
technology may cause us to become less
competitive.
The oilfield service industry is subject to the introduction of
new drilling and completion techniques and services using new
technologies, some of which may be subject to patent protection.
Although we believe our equipment and processes currently give
us a competitive advantage, as competitors and others use or
develop new or comparable technologies in the future, we may
lose market share or be placed at a competitive disadvantage.
Further, we may face competitive pressure to implement or
acquire certain new technologies at a substantial cost. Some of
our competitors have greater financial, technical and personnel
resources that may allow them to enjoy technological advantages
and implement new technologies before we can. We cannot be
certain that we will be able to implement new technologies or
products on a timely basis or at an acceptable cost. Thus,
limits on our ability to effectively use and implement new and
emerging technologies may have a material adverse effect on our
business, financial condition or results of operations.
Increased
labor costs or the unavailability of skilled workers could hurt
our operations.
Companies in our industry, including us, are dependent upon the
available labor pool of skilled employees. We compete with other
hydraulic fracturing businesses, other oilfield services
businesses and other employers to attract and retain qualified
personnel with the technical skills and experience required to
provide our customers with the highest quality service. We are
also subject to the Fair Labor Standards Act, which governs such
matters as minimum wage, overtime and other working conditions.
A shortage in the labor pool of skilled workers or other general
inflationary pressures or changes in applicable laws and
regulations could make it more difficult for us to attract and
retain personnel and could require us to enhance our wage and
benefits packages. We cannot assure you that labor costs will
not increase. Any increase in our operating costs could have a
material adverse effect on our business, financial condition and
results of operations.
Union
attempts to organize our employees could negatively affect our
business.
None of our employees are currently subject to a collective
bargaining agreement. As we continue to grow, unions may attempt
to organize all or part of our employee base. Responding to such
attempts may distract management and employees and may have a
negative financial impact on our business as a whole.
Shortages
or increases in the costs of products or equipment we use in our
operations or parts we use in the manufacture of our equipment
could adversely affect our operations in the
future.
We do not have long-term contracts with the third party
suppliers of many of the products that we use in large volumes
in our operations, including many parts we use in the
manufacture of our fracturing units and pumps, some of the
chemicals we use in fracturing fluids and the fuel we use in our
equipment and vehicles. During periods in which fracturing
services are in high demand, the availability of the key
products used in our industry decreases and the price of such
products increases. During such periods in the past, we have
experienced delays in obtaining certain parts that we use in
manufacturing our fracturing units. We are dependent on a small
number of suppliers for certain parts that are in high demand in
our industry. For example, we buy all the diesel engines we use
in our fracturing units from Caterpillar Inc. and Cummins Inc.
and all the transmissions we use in our fracturing units from
Caterpillar Inc. and Twin Disc, Inc. Our reliance on a small
number of suppliers could increase the difficulty of obtaining
such parts in the event of shortage of those parts in our
industry. In addition, rising diesel fuel prices have had a
significant impact on our expenses, and adversely impacted our
earnings, in some periods. Any increase in our operating costs,
or difficulty in obtaining enough materials for our operations,
could have a material adverse effect on our business, financial
condition or results of operations.
21
We
will require additional capital in the future to maintain
competitive assets and to expand our existing operations, which
may not be available to us.
Our business is capital intensive, requiring specialized
equipment and trained personnel to provide services. In order to
be kept in good operating condition, our hydraulic fracturing
equipment and other assets require continual maintenance and
capital expenditures. During 2009, we reduced our capital
expenditures for the manufacturing of new fracturing units in
response to the deteriorating economic and industry environment
we faced, though we did not curtail our maintenance capital
expenditures. Going forward, we intend to increase our capital
spending in order to expand our equipment fleet to take
advantage of market opportunities and to grow our business. If
we are unable to purchase or manufacture new assets, we may be
placed at a competitive disadvantage as our assets may become
less efficient than those of our competitors and subject to a
higher likelihood of mechanical failure. Moreover, in such a
scenario our inability to take advantage of market opportunities
may prevent us from growing our business. If we are unable to
continue to expand our fleets successfully, our business,
financial condition or results of operations could be materially
adversely affected. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Capital Expenditures.
Our ability to expand our existing operations depends on our
ability to generate positive cash flow or to raise additional
funds through debt or equity financings. Adequate funds may not
be available when needed or may not be available on favorable
terms. If funding is insufficient at any time in the future, we
may be unable to execute our business strategy, service our
equipment and other assets, fund acquisitions of new assets,
take advantage of business opportunities or respond to
competitive pressures, any of which could harm our business.
Severe
weather could have a material adverse impact on our
business.
Our business could be materially adversely affected by severe
weather. Oil and natural gas operations of our customers located
in Louisiana and parts of Texas may be adversely affected by
hurricanes and tropical storms, resulting in reduced demand for
our services. Further, our customers operations in the
Rocky Mountain and Atlantic Coast regions of the United States
may be adversely affected by seasonal weather conditions in the
winter months. Adverse weather can also directly impede our own
operations. Repercussions of severe weather conditions may
include:
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curtailment of services;
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weather-related damage to facilities and equipment, resulting in
suspension of operations;
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inability to deliver equipment, personnel and products to job
sites in accordance with contract schedules;
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interference with sand mining and processing operations,
particularly at our Wisconsin facility and our planned Illinois
facility; and
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loss of productivity.
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These constraints could delay our operations and materially
increase our operating and capital costs.
Unusually warm winters also adversely affect the demand for our
services by decreasing the demand for natural gas.
A
third party may claim we infringed upon their intellectual
property rights, and we may be subjected to costly
litigation.
Our equipment and manufacturing operations may unintentionally
infringe upon the patents or trade secrets of a competitor or
other company that uses proprietary components or processes in
their manufacturing operations, and that company may have legal
recourse against our use of their protected information. If this
were to happen, these claims could result in legal and other
costs associated with litigation, and may distract our
management team from their
day-to-day
running of our business. If found to have infringed upon
protected
22
information, we may have to make royalty payments in order to
continue using that information, which could substantially
increase the costs previously associated with certain products
or services, or we may have to discontinue use of the
information altogether. In the latter case, we may no longer be
able to use the product or to provide the service associated
with such protected information.
Risks
Relating to the Offering and Our Common Stock
The
initial public offering price of our common stock may not be
indicative of the market price of our common stock after this
offering. In addition, an active liquid trading market for our
common stock may not develop and our stock price may be
volatile.
Prior to this offering, our equity securities were not traded on
any market. An active and liquid trading market for our common
stock may not develop or be maintained after this offering.
Liquid and active trading markets usually result in less price
volatility and more efficiency in carrying out investors
purchase and sale orders. The market price of our common stock
could vary significantly as a result of a number of factors,
some of which are beyond our control. In the event of a drop in
the market price of our common stock, you could lose a
substantial part or all of your investment in our common stock.
The initial public offering price will be negotiated between us
and representatives of the underwriters, based on numerous
factors that we discuss in the Underwriting section
of this prospectus, and may not be indicative of the market
price of our common stock after this offering. Consequently, you
may not be able to sell shares of our common stock at prices
equal to or greater than the price paid by you in the offering.
The following factors, among others, could affect our stock
price:
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our operating and financial performance;
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quarterly variations in the rate of growth of our financial
indicators, such as net income per share, net income and
revenues;
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changes in revenue or earnings estimates or publication of
reports by equity research analysts;
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speculation in the press or investment community;
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sales of our common stock by us or our shareholders, or the
perception that such sales may occur;
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general market conditions, including fluctuations in actual and
anticipated future commodity prices; and
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domestic and international economic, legal and regulatory
factors unrelated to our performance.
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The stock markets in general have experienced extreme volatility
that has often been unrelated to the operating performance of
particular companies. These broad market fluctuations may
adversely affect the trading price of our common stock.
Purchasers
of common stock in this offering will experience immediate and
substantial dilution.
Based on an assumed initial public offering price of
$
per share (the midpoint of the price range set forth on the
cover page of this prospectus), purchasers of our common stock
in this offering will experience an immediate and substantial
dilution of
$
per share in the pro forma as adjusted net tangible book value
per share of common stock from the initial public offering
price. Our pro forma as adjusted net tangible book value as
of ,
2011 after giving effect to this offering would be
$
per share. See Dilution for a complete description
of the calculation of net tangible book value.
23
Because
we are a relatively small company, the requirements of being a
public company, including compliance with the reporting
requirements of the Securities Exchange Act of 1934, as amended,
which we refer to as the Exchange Act, and the requirements of
the Sarbanes-Oxley Act, may strain our resources, increase our
costs and distract management; we may be unable to comply with
these requirements in a timely or cost-effective
manner.
As a public company with listed equity securities, we will have
to comply with numerous laws, regulations and requirements,
certain corporate governance provisions of the Sarbanes-Oxley
Act of 2002, the
Dodd-Frank
Wall Street Reform and Consumer Protection Act, related
regulations of the SEC and the requirements of the New York
Stock Exchange, or the NYSE, with which we are not required to
comply as a private company. Complying with these statutes,
regulations and requirements will occupy a significant amount of
time of our board of directors and management and will
significantly increase our costs and expenses. We will need to:
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institute a more comprehensive compliance function;
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expand, evaluate and maintain our system of internal controls
over financial reporting in compliance with the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002 and the
related rules and regulations of the SEC and the Public Company
Accounting Oversight Board;
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establish new internal policies, such as those relating to
disclosure controls and procedures and insider trading;
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comply with corporate governance and other rules promulgated by
the NYSE;
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prepare and file annual, quarterly and other periodic public
reports in compliance with the federal securities laws;
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prepare proxy statements and solicit proxies in connection with
annual meetings of our shareholders;
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involve and retain to a greater degree outside counsel and
accountants in the above activities; and
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establish an investor relations function.
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In addition, we also expect that being a public company subject
to these rules and regulations will require us to accept less
director and officer liability insurance coverage than we desire
or to incur substantial costs to obtain such coverage. These
factors could also make it more difficult for us to attract and
retain qualified members of our board of directors, particularly
to serve on our Audit Committee, and qualified executive
officers.
We may
be unsuccessful in implementing required internal controls over
financial reporting.
We are not currently required to comply with the SECs
rules implementing Section 404 of the Sarbanes-Oxley Act of
2002, and are therefore not required to make a formal assessment
of the effectiveness of our internal control over financial
reporting for that purpose. Upon becoming a public company, we
will be required to comply with the SECs rules
implementing Section 302 of the Sarbanes-Oxley Act of 2002,
which will require our management to certify financial and other
information in our quarterly and annual reports and provide an
annual management report on the effectiveness of our internal
control over financial reporting. We will not be required to
make our first assessment of our internal control over financial
reporting until the year following our first annual report
required to be filed with the SEC. To comply with the
requirements of being a public company, we will need to upgrade
our systems, including information technology, implement
additional financial and management controls, reporting systems
and procedures and hire additional accounting, finance and legal
staff.
Our management identified certain material weaknesses in our
internal control over financial reporting in connection with the
preparation of our financial statements for fiscal years 2007
and 2008. The Public Company Accounting Oversight Board has
defined a material weakness as a deficiency, or combination of
deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material
misstatement of the companys annual or interim financial
statements will not be prevented, or
24
detected and subsequently corrected, on a timely basis. The
material weaknesses referred to above included failure to
maintain controls adequate to capture, evaluate and record sales
and use tax liabilities, which resulted in an underaccrual of
$5.6 million related to periods prior to January 1,
2008 and consequently resulted in a restatement of our 2007
financial statements.
Management identified a significant deficiency in our internal
control over financial reporting in connection with the
preparation of our financial statements for fiscal year 2009.
The Public Company Accounting Oversight Board has defined a
significant deficiency as a deficiency, or combination of
deficiencies, in internal control that is less severe than a
material weakness, yet important enough to merit attention by
those charged with governance. The significant deficiency
related to a manual inventory valuation process. We have
implemented a number of actions intended to address this
deficiency, but we cannot yet assert that the remediation is or
will be effective as we have not yet had sufficient time to test
the newly implemented actions.
Our management did not identify any material weaknesses in our
internal control over financial reporting in connection with the
preparation of our financial statements for fiscal year 2009.
However, our efforts to further develop and maintain effective
internal controls may not be successful, and we may be unable to
maintain effective controls over our financial processes and
reporting in the future and comply with the certification and
reporting obligations under Sections 302 and 404 of the
Sarbanes-Oxley Act. Any failure to remediate future deficiencies
and to develop or maintain effective controls, or any
difficulties encountered in our implementation or improvement of
our internal controls over financial reporting could result in
material misstatements that are not prevented or detected on a
timely basis, which could potentially subject us to sanctions or
investigations by the SEC, the NYSE or other regulatory
authorities. Ineffective internal controls could also cause
investors to lose confidence in our reported financial
information.
We do
not intend to pay dividends on our common stock and,
consequently, you will have an opportunity to achieve a return
on your investment only if the price of our stock
appreciates.
We do not plan to declare dividends on shares of our common
stock in the foreseeable future. Additionally, we are currently
limited in our ability to make cash distributions to
shareholders pursuant to the terms of the indenture governing
our Senior Notes, and we anticipate that the new senior secured
revolving credit facility we expect to enter into prior to the
closing of this offering will also contain covenants restricting
our ability to make distributions to shareholders. Consequently,
your only opportunity to achieve a return on your investment in
us will be if the market price of our common stock appreciates,
which may not occur, and you sell your shares at a profit. There
is no guarantee that the price of our common stock that will
prevail in the market after this offering will ever exceed the
price that you pay. See Dividend Policy.
Future
sales of our common stock in the public market could lower our
stock price, and any additional capital raised by us through the
sale of equity or convertible securities may dilute your
ownership in us.
We may sell additional shares of common stock in subsequent
public offerings. We may also issue additional shares of common
stock or convertible securities. After the completion of this
offering, we will
have
outstanding shares of common stock. This number
includes shares
that we and the selling shareholders are selling in this
offering (assuming no exercise of the underwriters
over-allotment option), which may be resold immediately in the
public market. Following the completion of this offering,
certain of our affiliates will own the balance of our
outstanding shares of common stock, consisting
of shares
or
approximately %
of total outstanding shares, all of which are restricted from
immediate resale under the federal securities laws and are
subject to the
lock-up
agreements between such parties and the underwriters described
in Underwriting, but may be sold into the market in
the future.
As soon as practicable after this offering, we intend to file a
registration statement with the SEC on
Form S-8
providing for the registration
of shares
of our common stock issued or reserved for issuance under our
long-term incentive plan,
including
shares subject to currently outstanding options. Subject to the
satisfaction of vesting conditions, shares registered under that
registration statement on
Form S-8
will be available for resale immediately in the public market
without restriction.
25
We cannot predict the size of future issuances of our common
stock or the effect, if any, that future issuances and sales of
shares of our common stock will have on the market price of our
common stock. Sales of substantial amounts of our common stock
(including shares issued in connection with an acquisition), or
the perception that such sales could occur, may adversely affect
prevailing market prices of our common stock.
Our
certificate of incorporation and bylaws, as well as Delaware
law, contain provisions that could discourage acquisition bids
or merger proposals, which may adversely affect the market price
of our common stock.
Our certificate of incorporation authorizes our board of
directors to issue and set the terms of preferred stock without
shareholder approval. If our board of directors elects to issue
preferred stock, it could be more difficult for a third party to
acquire us. In addition, we anticipate that our certificate of
incorporation and bylaws that will be effective upon
consummation of this offering, or after our founders cease to
own specified percentages of our outstanding voting stock, will
contain provisions that could make it more difficult for a third
party to acquire control of us, even if the change of control
would be beneficial to our shareholders. Such provisions may
include:
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requiring a change of the authorized number of directors to be
made by resolution of the board;
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allowing a majority of the directors then in office, even if
less than a quorum, to fill vacancies, including newly-created
directorships;
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requiring the approval of a supermajority of the holders of our
outstanding stock to amend or repeal our certificate of
incorporation or bylaws;
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requiring any action of the shareholders to be taken at a duly
called annual or special meeting of the shareholders and not by
written consent;
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permitting the removal of a director only for cause and only by
the affirmative vote of a supermajority of the holders of our
outstanding common stock;
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limiting the ability of our shareholders to call special
meetings; and
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advance notice provisions for shareholder proposals and
nominations for elections to the board of directors to be acted
upon at meetings of shareholders.
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Delaware law prohibits us from engaging in any business
combination with any interested stockholder, meaning
generally that a shareholder who beneficially owns more than 15%
of our voting stock cannot acquire us for a period of three
years from the date this person became an interested
stockholder, unless various conditions are met, such as approval
of the transaction by our board of directors.
Our
founders, Dan Wilks and Farris Wilks, will retain a majority
interest in us and control all major company decisions, and
their interests may conflict with the interests of our other
shareholders.
After this offering, our founders, Dan Wilks and Farris Wilks,
will indirectly own and control a majority of our outstanding
common stock and therefore will have the power to control our
affairs and policies. See Principal and Selling
Shareholders. They will also control the election of the
board of directors, the appointment of our management, the entry
into business combinations or dispositions, and other
extraordinary transactions. The interests of Dan Wilks and
Farris Wilks could conflict with your interests.
We are
a controlled company within the meaning of New York
Stock Exchange rules and, as a result, will qualify for, and
intend to rely on, exemptions from certain corporate governance
requirements. You will not have the same protections afforded to
shareholders of companies that are subject to such
requirements.
After completion of this offering, World Investment Group, LLC,
an entity controlled by our founders, Dan Wilks and Farris
Wilks, will control a majority of the voting power of our
outstanding common stock. As a result, we will be a
controlled company within the meaning of the
corporate governance standards of the
26
New York Stock Exchange. Under these rules, a company of which
more than 50% of the voting power is held by an individual,
group or another company is a controlled company and
may elect not to comply with certain corporate governance
requirements, including:
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the requirement that a majority of the board of directors
consist of independent directors;
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the requirement that we have a nomination/corporate governance
committee that is composed entirely of independent directors
with a written charter addressing the committees purpose
and responsibilities;
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the requirement that we have a compensation committee that is
composed entirely of independent directors with a written
charter addressing the committees purpose and
responsibilities; and
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the requirement for an annual performance evaluation of the
nomination/corporate governance and compensation committees.
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Following this offering, we intend to rely on each of these
exemptions. As a result, we will not have a majority of
independent directors, our nomination and corporate governance
committee and compensation committee will not consist entirely
of independent directors and such committees will not be subject
to annual performance evaluations. Accordingly, you will not
have the same protections afforded to shareholders of companies
that are subject to all of the corporate governance requirements
of the New York Stock Exchange.
27
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this prospectus constitute
forward-looking statements. These statements relate to future
events or our future performance. All statements other than
statements of historical fact may be forward-looking statements.
Forward-looking statements are often, but not always, identified
by the use of words such as seek,
anticipate, plan, continue,
estimate, expect, may,
will, project, predict,
potential, targeting,
intend, could, might,
should, believe and similar expressions.
These statements involve known and unknown risks, uncertainties
and other facts that may cause actual results or events to
differ materially from those anticipated in such forward-looking
statements. We believe the expectations reflected in these
forward-looking statements are reasonable but we cannot assure
you that these expectations will prove to be correct. You should
not place undue reliance on forward-looking statements included
in this prospectus. We do not intend, and do not assume any
obligation, to update any forward-looking statements.
Examples of forward-looking statements contained in this
prospectus include statements about, among other things:
|
|
|
|
|
our planned capital expenditures and capital expenditure plans
for third parties;
|
|
|
|
our deployment of additional fleets;
|
|
|
|
the expansion of our manufacturing and production facilities and
distribution network;
|
|
|
|
our ability to enter into additional dedicated service contracts
with customers;
|
|
|
|
our ability to continue to increase or to maintain market share
in certain operating regions;
|
|
|
|
our ability to make additional technological advances in the
design of our equipment or chemicals;
|
|
|
|
our ability to improve operational efficiencies or to open and
successfully operate additional sand processing facilities;
|
|
|
|
our ability to successfully add complementary service offerings
and improve customer service;
|
|
|
|
expectations regarding our ability to raise capital;
|
|
|
|
our treatment under governmental regulatory regimes;
|
|
|
|
projections of market prices and costs;
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|
|
supply and demand for oilfield services; and
|
|
|
|
commodity prices.
|
28
USE OF
PROCEEDS
We will receive net proceeds of approximately
$ million
from the sale of shares of our common stock in this offering,
assuming an initial public offering price of
$
per share (the midpoint of the price range set forth on the
cover page of this prospectus) and after deducting estimated
expenses and underwriting discounts and commissions of
approximately
$ million.
If the over-allotment option that we have granted to the
underwriters is exercised in full, we estimate that the net
proceeds to us will be approximately
$ million.
We will not receive any proceeds from the sale of shares by the
selling shareholders, including any shares subject to the
over-allotment option that they have granted to the
underwriters. The selling shareholders will be responsible for
the underwriting discounts and commissions with respect to their
shares sold in the offering, but we will pay all other expenses
related to this offering, including legal fees and other
expenses, incurred by the selling shareholders.
We intend to use the net proceeds to us from this offering to
exercise our right under the equity clawback
provision in the indenture governing our 7.125% Senior
Notes due 2018 to redeem up to $192.5 million in aggregate
principal amount of Senior Notes, to fund capital expenditures
and for general corporate purposes.
The following table shows our estimated uses for the net
proceeds we receive in this offering, as of November 30,
2010. This table is subject to change based on actual amounts
received at the closing of the offering.
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|
|
|
|
|
|
Amount
|
|
|
|
(In millions)
|
|
|
Redemption of outstanding Senior
Notes(1)
|
|
$
|
206.2
|
|
Capital expenditures and general corporate
purposes(2)
|
|
|
.
|
|
|
|
|
|
|
|
|
$
|
.
|
|
|
|
|
|
|
|
|
|
(1) |
|
We intend to redeem 35% of our outstanding Senior Notes at a
redemption price of 107.125% of their aggregate principal
amount, plus accrued and unpaid interest from November 12,
2010 (the date of issuance) to the date of redemption. The
amount shown in the table does not include accrued interest. |
|
(2) |
|
We expect to make capital expenditures of approximately
$282 million in 2010, and we expect to make capital
expenditures of approximately $438 million during the full
year 2011. We expect to fund 2011 capital expenditures in
part with proceeds from our November 2010 offering of
$550.0 million aggregate principal amount of our Senior
Notes, in part with proceeds of this offering and in part with
cash flows from operations. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital
Resources Capital Expenditures. |
An increase or decrease of $1.00 in the initial public offering
price per share of our common stock would cause the net proceeds
that we will receive from the offering, after deducting
estimated expenses and underwriting discounts and commissions,
to increase or decrease by approximately
$ million.
29
DIVIDEND
POLICY
In connection with the closing of our offering of
7.125% Senior Notes due 2018 on November 12, 2010,
Frac Tech Services, LLC distributed $200.0 million of the
proceeds of that offering to its direct parent, Frac Tech
Holdings, LLC, and Frac Tech Holdings, LLC distributed such
amount to its owners, who have made significant contributions to
our capital since our founding in 2000. Between September and
November 2010, Frac Tech Holdings, LLC made distributions to its
owners in the aggregate amount of $30.5 million.
We expect to make distributions to the existing beneficial
owners of our equity securities prior to the effectiveness of
our Reorganization and the closing of this offering in amounts
approximately equal to the amount of income taxes they expect to
incur on our net income as a result of our status as a
pass-through entity for federal income tax purposes for the 2010
tax year and for the period between January 1, 2011 and the
date on which we consummate the Reorganization.
We currently intend to retain future earnings, if any, for use
in the operation and expansion of our business and, therefore,
do not anticipate paying any additional cash dividends in the
foreseeable future. However, our board of directors, in its
discretion, may authorize the payment of dividends in the
future. Any decision to pay future dividends will depend upon
various factors, including our results of operations, financial
condition, capital requirements and investment opportunities. In
addition, the indenture governing our Senior Notes contains, and
we anticipate that our new senior secured revolving credit
facility will contain, covenants that restrict our ability to
make distributions to our shareholders. See Description of
Certain Indebtedness.
30
CAPITALIZATION
The following table sets forth our unaudited cash and
capitalization as of September 30, 2010 (a) on an
actual basis; (b) as adjusted to give effect to
(i) the consummation on November 12, 2010 of our
offering of $550.0 million in aggregate principal amount of
our 7.125% Senior Notes due 2018 and the repayment in full
of all borrowings under our prior senior secured revolving
credit facility and certain other indebtedness as reflected in
the table below with the net proceeds of that offering,
(ii) the repayment subsequent to September 30, 2010 of
other debt in the amount of $9.4 million, as stated in
footnote 3 to the table below, and (iii) the redemption
subsequent to September 30, 2010 of preferred equity
interests for $13.5 million as stated in footnote 4 to the
table below; and (c) as further adjusted to give effect to
(i) the consummation of our Reorganization pursuant to
which we will convert from a limited liability company to a
corporation immediately prior to the closing of this offering,
as described in History and Reorganization, and
(ii) the consummation of the offering of our common stock
pursuant to this prospectus and the application of the estimated
net proceeds that we will receive in this offering, as described
in Use of Proceeds.
You should read this table in conjunction with our financial
statements and the notes to our financial statements included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
|
|
|
|
|
|
|
|
As Further
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
Adjusted
|
|
|
|
(In millions)
|
|
|
|
(Unaudited)
|
|
|
Cash
|
|
$
|
33.7
|
|
|
$
|
255.5
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit facility
|
|
|
91.0
|
(1)
|
|
|
0.0
|
|
|
|
|
|
Loans from equity owners
|
|
|
8.9
|
(2)
|
|
|
0.0
|
|
|
|
|
|
7.125% Senior Notes due 2018
|
|
|
0.0
|
|
|
|
550.0
|
|
|
|
|
|
Other debt
|
|
|
67.7
|
(3)
|
|
|
43.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
167.6
|
|
|
|
593.0
|
|
|
|
|
|
Owners equity/stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred equity interests
|
|
|
13.5
|
(4)
|
|
|
0.0
|
|
|
|
|
|
Common equity interests
|
|
|
598.8
|
|
|
|
398.8
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total owners equity/stockholders equity
|
|
|
612.3
|
|
|
|
398.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
779.9
|
|
|
$
|
991.8
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The actual amount of debt
outstanding under our prior senior secured revolving credit
facility that was repaid with proceeds of our offering of Senior
Notes on November 12, 2010 was $81.4 million. We terminated
this credit facility on that date, and as of December 1,
2010, we had no indebtedness under any revolving credit facility.
|
|
(2)
|
|
Consists of principal and interest
owed by certain of our subsidiaries to our founders, Dan Wilks
and Farris Wilks, or a company owned by them. As of
September 30, 2010, these loans consisted of (a) an
aggregate outstanding balance of $4.4 million owed by a
subsidiary to a partnership owned by Dan Wilks and Farris Wilks
under a series of term installment notes secured by certain
items of equipment; (b) an aggregate outstanding balance of
$2.7 million owed by a subsidiary to Dan Wilks and Farris
Wilks under two unsecured term installment notes; and
(c) an aggregate outstanding balance of $1.8 million
owed by a subsidiary under an unsecured general working capital
line of credit provided to that subsidiary by Dan Wilks and
Farris Wilks. We repaid these loans in full on November 12,
2010 with proceeds of our offering of Senior Notes.
|
|
(3)
|
|
Consists primarily of (a) term
installment notes having an aggregate balance outstanding of
$15.3 million, secured by accounts receivable, inventory,
equipment or airplanes, which we repaid in full on
November 12, 2010 with proceeds of our offering of Senior
Notes; (b) a term installment note having a balance
outstanding of $9.4 million, secured by equipment, which we
repaid using operating cash on October 27, 2010; (c) a
term installment note having a maturity date of
December 29, 2016 and a balance outstanding of
$12.2 million, secured by an airplane; (d) term
installment notes with an aggregate balance outstanding of
$29.6 million payable to various lenders at various
maturity dates through 2014 and secured by certain of our
equipment and vehicles; and (e) a term installment note
with a balance outstanding of $1.2 million maturing in 2022
and secured by certain tracts of real estate owned by a
subsidiary. The indebtedness described in clauses (c)
through (e) of the preceding sentence remains outstanding.
See
|
31
|
|
|
|
|
Note 7 to our unaudited
historical consolidated financial statements for the nine months
ended September 30, 2010 and 2009 included elsewhere in
this prospectus for additional information about our outstanding
indebtedness.
|
|
(4)
|
|
These preferred membership
interests were redeemed using operating cash as part of a series
of redemption transactions on October 21, 2010, which
resulted in the redemption by World Investment Group, LLC, the
majority equity holder in our company, of preferred membership
interests in that entity held by Dan Wilks and Farris Wilks, our
founders and managers and executive officers. See Certain
Relationships and Related Party Transactions and
Principal and Selling Shareholders.
|
|
(5)
|
|
The amount of the adjustment
represents a return of capital to our equity owners, using a
portion of the proceeds of our offering of Senior Notes.
|
32
DILUTION
Purchasers of our common stock in this offering will experience
immediate and substantial dilution in the net tangible book
value per share of our common stock for accounting purposes. Our
net tangible book value as
of ,
2010, after giving pro forma effect to our Reorganization, was
approximately
$ million,
or $
per share of common stock. Pro forma net tangible book value per
share is determined by dividing our pro forma tangible net worth
(tangible assets less total liabilities) by the total number of
outstanding shares of common stock that will be outstanding
immediately prior to the closing of this offering giving effect
to our Reorganization. After giving effect to the sale of the
shares of our common stock in this offering and application of
the estimated net proceeds to us from the offering (after
deducting estimated underwriting discounts and commissions and
expenses of this offering), our adjusted pro forma net tangible
book value as
of ,
2010 would have been approximately
$ million,
or $
per share. This represents an immediate increase in the net
tangible book value of
$
per share to our existing shareholders and an immediate dilution
(i.e., the difference between the offering price and the
adjusted pro forma net tangible book value after this offering)
to new investors purchasing shares in this offering of
$
per share. The following table illustrates the per share
dilution to new investors purchasing shares in this offering:
|
|
|
|
|
Assumed initial public offering price per share
|
|
$
|
|
|
Pro forma net tangible book value per share as
of ,
2010 (after giving effect to our Reorganization)
|
|
|
|
|
Increase per share attributable to new investors in this offering
|
|
|
|
|
As adjusted pro forma net tangible book value per share after
giving effect to our Reorganization and this offering
|
|
|
|
|
Dilution in pro forma net tangible book value per share to new
investors in this offering
|
|
$
|
|
|
The following table summarizes, on an adjusted pro forma basis
as
of ,
2010, the total number of shares of common stock acquired by
existing shareholders (or deemed to have been acquired by them
after giving effect to our Reorganization) during the past five
years and to be owned by new investors, the total consideration
paid, and the average price per share paid by our existing
shareholders and to be paid by new investors in this offering at
$ ,
the midpoint of the range of the initial public offering prices
set forth on the cover page of this prospectus, calculated
before deduction of estimated underwriting discounts and
commissions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Acquired
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
per Share
|
|
|
Existing holders
|
|
|
|
(1)
|
|
|
|
%
|
|
$
|
(2
|
)
|
|
|
|
%
|
|
$
|
(2
|
)
|
New investors
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
|
|
|
|
Total
|
|
|
|
|
|
|
100
|
%
|
|
$
|
|
|
|
|
100
|
%
|
|
$
|
|
|
|
|
|
(1)
|
|
The number of shares presented for
the existing shareholders
includes shares
underlying unvested outstanding options. See Executive
Compensation and Other Information Compensation
Discussion and Analysis Elements of Our Compensation
and Why We Pay Each Element Long-Term Equity-Based
Incentives.
|
|
(2)
|
|
The total consideration and average
price per share represents the consideration paid by our
existing equity holders during the past five years for their
interests in Frac Tech Holdings, LLC, our direct parent entity,
and our subsidiaries and predecessors, and allocated on a pro
forma basis to the shares of common stock that will be issued in
respect to such interests in our Reorganization immediately
prior to consummation of this offering.
|
33
SELECTED
CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial information for
each of the years in the three-year period ended
December 31, 2009 is based on our audited consolidated
financial statements included elsewhere in this prospectus. The
selected consolidated financial information for the nine months
ended September 30, 2009 and 2010 is based on our unaudited
consolidated financial statements included elsewhere in this
prospectus. The selected consolidated financial information for
the year ended December 31, 2006 is based on our unaudited
consolidated financial statements not included in this
prospectus. In the opinion of our management, the interim
financial information includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair
presentation of our financial condition, results of operations
and cash flows. The results for interim periods set forth below
are not necessarily indicative of the results to be expected for
the full year. The information set forth below should be read
together with Managements Discussion and Analysis of
Financial Condition and Results of Operations and our
consolidated historical financial statements and the notes to
our financial statements included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per share information and ratios)
|
|
|
Income Statement Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
214,426
|
|
|
$
|
362,462
|
|
|
$
|
573,543
|
|
|
$
|
389,230
|
|
|
$
|
276,328
|
|
|
$
|
806,197
|
|
Cost of revenues
|
|
|
103,885
|
|
|
|
241,293
|
|
|
|
411,216
|
|
|
|
345,216
|
|
|
|
250,185
|
|
|
|
494,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
110,541
|
|
|
$
|
121,169
|
|
|
$
|
162,327
|
|
|
$
|
44,014
|
|
|
$
|
26,143
|
|
|
$
|
312,123
|
|
Selling and administrative costs
|
|
|
20,731
|
|
|
|
35,006
|
|
|
|
81,940
|
|
|
|
68,386
|
|
|
|
47,089
|
|
|
|
74,558
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
5,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
89,810
|
|
|
$
|
86,163
|
|
|
$
|
74,416
|
|
|
$
|
(24,372
|
)
|
|
$
|
(20,946
|
)
|
|
$
|
237,565
|
|
Interest expense, net
|
|
|
(4,963
|
)
|
|
|
(13,467
|
)
|
|
|
(29,040
|
)
|
|
|
(15,945
|
)
|
|
|
(11,767
|
)
|
|
|
(13,562
|
)
|
Other income (expense), excluding Interest
|
|
|
46
|
|
|
|
303
|
|
|
|
(23
|
)
|
|
|
425
|
|
|
|
1,575
|
|
|
|
(1,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
84,893
|
|
|
$
|
72,999
|
|
|
$
|
45,353
|
|
|
$
|
(39,892
|
)
|
|
$
|
(31,138
|
)
|
|
$
|
222,829
|
|
Income
taxes(1)
|
|
|
2,421
|
|
|
|
1,248
|
|
|
|
1,994
|
|
|
|
347
|
|
|
|
350
|
|
|
|
2,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
82,472
|
|
|
$
|
71,751
|
|
|
$
|
43,359
|
|
|
$
|
(40,239
|
)
|
|
$
|
(31,488
|
)
|
|
$
|
219,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) as reported
|
|
$
|
82,472
|
|
|
$
|
71,751
|
|
|
$
|
43,359
|
|
|
$
|
(40,239
|
)
|
|
$
|
(31,488
|
)
|
|
$
|
219,947
|
|
Pro forma adjustment for income tax expense
(benefit)(2)
|
|
$
|
32,529
|
|
|
$
|
27,949
|
|
|
$
|
15,881
|
|
|
$
|
(16,135
|
)
|
|
$
|
(12,673
|
)
|
|
$
|
88,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) allocable to common shareholders
|
|
$
|
49,943
|
|
|
$
|
43,802
|
|
|
$
|
27,478
|
|
|
$
|
(24,104
|
)
|
|
$
|
(18,815
|
)
|
|
$
|
131,386
|
|
Pro forma basic and diluted net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average common shares outstanding used in
basic and diluted net income (loss) per common
share(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per share information and ratios)
|
|
|
Other Financial Information (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA(4)
|
|
$
|
105,449
|
|
|
$
|
124,836
|
|
|
$
|
148,302
|
|
|
$
|
64,868
|
|
|
$
|
41,745
|
|
|
$
|
325,641
|
|
Capital expenditures
|
|
|
195,727
|
|
|
|
292,469
|
|
|
|
163,040
|
|
|
|
61,777
|
|
|
|
34,275
|
|
|
|
116,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
13,388
|
|
|
$
|
1,363
|
|
|
$
|
423
|
|
|
$
|
26,039
|
|
|
$
|
5,134
|
|
|
$
|
33,662
|
|
Total assets
|
|
|
364,872
|
|
|
|
657,415
|
|
|
|
793,267
|
|
|
|
740,541
|
|
|
|
713,864
|
|
|
|
930,330
|
|
Net property, plant and equipment
|
|
|
261,929
|
|
|
|
542,959
|
|
|
|
598,532
|
|
|
|
570,018
|
|
|
|
577,254
|
|
|
|
593,709
|
|
Long-term debt (including current portion)
|
|
|
56,387
|
|
|
|
283,221
|
|
|
|
325,639
|
|
|
|
320,685
|
|
|
|
301,604
|
|
|
|
167,644
|
|
Owners equity
|
|
|
270,399
|
|
|
|
266,368
|
|
|
|
327,702
|
|
|
|
318,829
|
|
|
|
328,114
|
|
|
|
612,286
|
|
|
|
|
(1)
|
|
Consists primarily of state
franchise taxes treated as income taxes for accounting purposes.
Prior to this offering, we have been treated as a partnership
for federal income tax purposes and therefore have not directly
paid federal or state income taxes on our income.
|
|
(2)
|
|
Immediately prior to the closing of
this offering, we will consummate our Reorganization, pursuant
to which Frac Tech Holdings, LLC and Frac Tech Services, LLC
will be merged with and into Frac Tech Services, Inc. and the
outstanding limited liability company units of Frac Tech
Holdings, LLC will be converted into shares of common stock of
Frac Tech Services, Inc. Frac Tech Services, Inc., the survivor
of such transactions, will be subject to federal and state
income taxes. We have computed pro forma tax expense using a 35%
corporate-level federal tax rate and a net apportioned state tax
rate, incorporating permanent differences.
|
|
(3)
|
|
The weighted average common shares
outstanding have been calculated as if (a) our
Reorganization had been consummated, and outstanding limited
liability company units of Frac Tech Holdings, LLC had been
converted into shares of common stock of Frac Tech Services,
Inc., and (b) our initial public offering of common stock
pursuant to this prospectus had been consummated, assuming no
exercise of the underwriters over-allotment option, in
each case at the beginning of the earliest period reported in
the table.
|
|
(4)
|
|
Adjusted EBITDA is a
non-GAAP financial measure that we define as net income before
interest, taxes, depreciation, amortization and gain or loss on
sale of assets, as further adjusted to add back amounts charged
to income for goodwill impairment related to the discontinuance
of the operations of a subsidiary in fiscal year 2008,
impairment of service equipment in the nine months ended
September 30, 2010, and other nonrecurring items.
Adjusted EBITDA, as used and defined by us, may not
be comparable to similarly titled measures employed by other
companies and is not a measure of performance calculated in
accordance with GAAP. 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, our management
believes Adjusted EBITDA may be useful to an investor in
evaluating our operating performance because this measure or a
similar measure:
|
|
|
|
is widely used by
investors in the oilfield services industry to measure a
companys operating performance without regard to items
excluded from the calculation of such measure, which can vary
substantially from company to company depending upon accounting
methods, book value of assets, capital structure and the method
by which assets were acquired, among other factors;
|
|
|
|
helps investors to more
meaningfully evaluate and compare the results of our operations
from period to period by removing the effect of our capital
structure and asset base from our operating structure; and
|
|
|
|
is used by our
management for various purposes, including as a measure of
performance of our operating entities, in presentations to our
board of managers and as a basis for strategic planning and
forecasting.
|
|
|
|
There are significant limitations
to using Adjusted EBITDA as a measure of performance, including
the inability to analyze the effect of certain recurring and
non-recurring items that materially affect our net income or
loss, and the lack of comparability of results of operations of
different companies.
|
35
|
|
|
|
|
The following table reconciles our
net income, the most directly comparable GAAP financial measure,
to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Net income (Loss)
|
|
$
|
82,472
|
|
|
$
|
71,751
|
|
|
$
|
43,359
|
|
|
$
|
(40,239
|
)
|
|
$
|
(31,488
|
)
|
|
$
|
219,947
|
|
Interest expense, net
|
|
|
4,963
|
|
|
|
13,467
|
|
|
|
29,040
|
|
|
|
15,945
|
|
|
|
11,767
|
|
|
|
13,562
|
|
Income taxes
|
|
|
2,421
|
|
|
|
1,248
|
|
|
|
1,994
|
|
|
|
347
|
|
|
|
350
|
|
|
|
2,882
|
|
Depreciation and amortization
|
|
|
15,646
|
|
|
|
38,938
|
|
|
|
69,200
|
|
|
|
91,149
|
|
|
|
63,511
|
|
|
|
79,807
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
5,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of service
equipment(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,352
|
|
Loss (gain) on sale of assets
|
|
|
(47
|
)
|
|
|
(73
|
)
|
|
|
(442
|
)
|
|
|
(50
|
)
|
|
|
(369
|
)
|
|
|
464
|
|
Miscellaneous
revenue(b)
|
|
|
(6
|
)
|
|
|
(495
|
)
|
|
|
(820
|
)
|
|
|
(2,284
|
)
|
|
|
(2,026
|
)
|
|
|
(373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
105,449
|
|
|
$
|
124,836
|
|
|
$
|
148,302
|
|
|
$
|
64,868
|
|
|
$
|
41,745
|
|
|
$
|
325,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) The amount shown in the
table above for impairment of service equipment relates to a
charge taken during the nine months ended September 30,
2010 resulting from increased use of our equipment in demanding
shale reservoirs, which required us to replace the equipment
earlier than its originally estimated useful life.
|
|
|
|
(b) Miscellaneous revenue
consisted principally of the following: rebates and commissions,
for the years ended December 31, 2006 and 2007; settlement
discounts and warranty claims, for the year ended
December 31, 2008; amortization of deferred gain, for the
year ended December 31, 2009; amortization of deferred
gain, for the nine months ended September 30, 2009; and
rental income and amortization of deferred gain, for the nine
months ended September 30, 2010.
|
36
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in
conjunction with our consolidated financial statements and
related notes included elsewhere in this prospectus. This
discussion contains forward-looking statements based on our
current expectations, assumptions, estimates and projections
about our operations, the hydraulic fracturing services industry
and the broader E&P industry. These forward-looking
statements involve known and unknown risks, uncertainties and
other facts outside of our control that may cause actual results
or events to differ materially from those anticipated in such
forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to:
general economic and competitive conditions, changes in market
prices for oil and natural gas, the level of oil and natural gas
drilling and corresponding increases or decreases in the demand
for our services, the level of capital expenditures by our
existing and prospective customers, regulatory changes and other
uncertainties, as well as those factors discussed below and
elsewhere in this prospectus, particularly in Risk
Factors and Cautionary Note Regarding
Forward-Looking Statements. We undertake no obligation to
update publicly, or in any communications to shareholders, any
forward-looking statements, even if new information becomes
available or other events materially impact any of the
forward-looking statements contained in this prospectus.
Overview
We are a leading provider of high-pressure hydraulic fracturing
services to E&P companies in the United States. We have
particular expertise in stimulating production of oil and
natural gas from wells in shale and other unconventional
formations that require extensive fracturing. We are vertically
integrated:
|
|
|
|
|
We manufacture substantially all the fracturing units and
fracturing pumps we use in our operations.
|
|
|
|
We produce from our own mines and processing plants most of the
raw sand and resin-coated sand we use as proppants.
|
|
|
|
We formulate and blend some of the chemicals we use in
fracturing fluids.
|
|
|
|
We transport most of the raw sand and other products to job
sites by rail and truck using our distribution network.
|
This vertical integration allows us to provide superior customer
service, rapidly adapt to changing market conditions, maintain
and control the quality of our equipment and products and manage
costs. We believe our vertical integration has been one of the
key factors that has facilitated our rapid growth since 2004.
We are one of the three largest hydraulic fracturing companies
in the country, based on third party estimates of total
horsepower. We believe we have the largest market share of any
company in both the Haynesville Shale in northwestern Louisiana
and east Texas and the Marcellus Shale in Pennsylvania and West
Virginia, which are two of the most active natural gas plays in
the country. We are also rapidly increasing our market share in
the Eagle Ford Shale in south Texas, where many of the wells we
fracture produce oil. Currently, we have 22 fleets operating out
of our nine active district offices, and we anticipate adding 12
new fleets by the end of 2011. We plan to deploy crews in
additional oil and natural gas producing areas in 2011,
including the Bakken Shale in North Dakota and Montana and the
Niobrara Shale in Colorado, Wyoming and Nebraska and various
areas in Oklahoma including the Granite Wash.
Key
Accomplishments
Our hydraulic fracturing business experienced rapid growth over
the five-year period from 2004 through 2008. After a downturn in
our industry in 2009, we have resumed our rapid growth in the
first nine months of 2010. The total horsepower of our hydraulic
fracturing fleets has increased from approximately 31,500
horsepower at the end of 2004 to approximately 875,500
horsepower at September 30, 2010. Revenue for the nine
months ended September 30, 2010 was $806.2 million,
compared to $276.3 million for the comparable
37
period in 2009. Our revenue for the year ended December 31,
2010 will substantially exceed revenue for the year ended
December 31, 2008, which was our previous record year.
Other highlights include:
|
|
|
|
|
We began manufacturing our own fracturing units in 2003,
established in-house chemical blending operations in 2006, and
began manufacturing our own fracturing pumps using proprietary
technology in 2006, which has allowed us to modify our equipment
and fracturing fluids in response to customer requirements,
using the knowledge and experience we gain by operating in harsh
geological environments. We believe our technologically advanced
fleets are among the newest, most reliable and highest
performing in the industry with the capability of meeting the
most demanding pressure and flow rate requirements in the field.
|
|
|
|
We began mining and processing our own raw sand in 2007 in
Missouri and in 2008 in Texas and acquired a resin-coating
operation in Alabama in January 2009. We also have a lease
giving us rights to approximately 60 million tons of sand
in Oakdale, Wisconsin and operate a processing plant to serve
that location. Including the sand available to us under that
lease, and based on estimates by our internal geologist, we now
have approximately 240 million tons of raw sand reserves,
which we believe will be generally sufficient to supply us with
enough raw sand to support our operations for the foreseeable
future. We plan to add production facilities to expand both our
raw sand and our resin-coating operations during 2011.
|
|
|
|
In a further effort to avoid delays based on product sourcing
and logistical issues, which is a common problem in our
industry, we began developing our own sand distribution network
in 2006. This network now includes 110 bulk hauling trailers
owned by us and approximately 1,100 leased rail cars. In
addition to storage facilities at our district offices, we have
six separate sand distribution and storage facilities with
railhead access.
|
As a result of these efforts, we believe our hydraulic
fracturing operations are vertically integrated to a greater
extent than any of our principal competitors. We are able to
reduce both capital and operating costs, minimize delays based
on equipment down time and ensure timely delivery of proppants
or other products to the job site. This enables us to increase
the utilization rates of our equipment and allows customers to
avoid costs associated with delays in completing their wells.
Our ability to complete jobs on a timely basis is a key
component of our superior customer service and has allowed us to
develop strong customer relationships with many of the leading
E&P companies in the country.
Recent
Trends Affecting Our Business
Our industry is cyclical. Volatility in oil and natural gas
prices, and expected future prices, can cause significant
changes in levels of capital expenditures and drilling activity
by E&P companies and corresponding changes in demand for
hydraulic fracturing services. Prior to mid-2008, we benefitted
from increased spending by E&P companies spurred by high
commodity prices for oil and natural gas. During the period from
mid-2008 through mid-2009, commodity prices declined
dramatically. This decline in commodity prices, together with
the crisis in the credit markets, resulted in significant
curtailments in drilling activity and capital expenditures by
E&P companies, including spending for hydraulic fracturing
services.
This downturn in our industry, which began in late 2008 and
continued into the fourth quarter of 2009, caused a significant
decrease in our revenues for the year ended December 31,
2009. We were in default with respect to certain covenants under
our prior senior secured revolving credit facility as of
December 31, 2009, which we resolved by entering into an
amendment and forbearance agreement in January 2010 and an
amended and restated facility in May 2010. See
Liquidity and Capital Resources.
Notwithstanding these consequences of the downturn, we increased
our market share in key markets and made a number of
improvements in our operations during this period. Beginning in
the first quarter and continuing through the end of 2009, we
took the following actions, which contributed to these
accomplishments:
|
|
|
|
|
We suspended the manufacturing of new fracturing units, but
continued to make capital expenditures as necessary to repair
and maintain our existing fleet.
|
38
|
|
|
|
|
We closed three of our district offices and relocated some of
our crews to regions where we believed demand for fracturing
services would remain at the highest levels and where we had a
competitive advantage based on our ability to operate at high
pressures in difficult geological environments.
|
|
|
|
We made significant personnel changes, including three workforce
reductions at all levels of our business and decreases in
overtime pay and guaranteed minimum hours.
|
|
|
|
We reduced costs by renegotiating contracts with our chemical
suppliers and other vendors and increased managements
focus on expense control.
|
|
|
|
We rationalized our purchasing function by mandating greater use
of our centralized parts and chemical distribution centers and
implementing tighter inventory controls.
|
|
|
|
We continued to purchase replacement parts as needed to repair
and maintain our fracturing units rather than cannibalizing idle
equipment, which positioned us to quickly redeploy our entire
fleet when market conditions improved.
|
In addition to improving the efficiency of our operations, these
actions allowed us to continue to provide excellent service to
our customers and to establish new customer relationships during
the downturn. As a result, we believe we increased our market
share in most of our primary markets during 2009 and we believe
we are now the market share leader in the Haynesville Shale and
the Marcellus Shale. These actions also positioned us to respond
quickly to customer requests for service when demand for
hydraulic fracturing services increased beginning in late 2009
and early 2010.
Beginning in the fourth quarter of 2009, the hydraulic
fracturing market improved dramatically. Since November 2009,
all of our fracturing units have been continuously deployed,
other than during routine maintenance periods. This quick
recovery enabled us to increase pricing as well as the
utilization of our fracturing units. The strengthening of demand
in our market was mainly the consequence of the increase in
natural gas drilling, although we have also experienced
increased demand for our services in oil producing areas such as
the Permian Basin and the Eagle Ford Shale. Our market share in
the Eagle Ford Shale has increased rapidly during 2010. In the
near future, we expect that our oil-directed activity will
increase more rapidly than our gas-directed activity.
The following trends have increased the demand for our services,
and we believe they will continue to impact our business in the
near to intermediate term:
|
|
|
|
|
An increase in the development of unconventional resource plays,
including natural gas- and oil-bearing shale;
|
|
|
|
An increase in hydraulic fracturing intensity in more demanding
shale formations;
|
|
|
|
An increase in the oil-directed horizontal rig count; and
|
|
|
|
Tight supply of hydraulic fracturing equipment, proppant and
other products.
|
How We
Generate Our Revenues
Historically, we have derived a majority of our revenues from
engagements for one or a discrete series of hydraulic fracturing
jobs, including a significant amount of recurring business from
existing customers. Many customers hire service companies
through a competitive bidding process. We believe the principal
factors in our industry on which hiring decisions are based are
service quality, timing and availability of equipment and
products, particularly proppants, performance history, and
price. Our strategy is not to compete primarily on the basis of
price. Instead, we believe we have a competitive advantage based
on the relationships we have developed with significant
customers by consistently delivering exceptional service, our
stable supply and ready availability of raw sand and other
products, our reliable equipment, and our ability to operate at
high pressures in harsh environments.
We have entered into master service agreements with many of our
clients. These agreements specify payment terms, audit rights
and insurance requirements and allocate certain operational
risks through
39
indemnity and similar provisions. In general, risks relating to
surface activities associated with the fracturing process, other
than water disposal, are allocated to us and
down-hole liabilities, and disposal of water used in
the fracturing process, are the responsibility of the customer.
We supplement these agreements for each engagement with a bid
proposal, subject to customer acceptance, containing such things
as the estimated number of fracturing stages to be performed,
pricing, quantities of products expected to be needed, and the
number, horsepower and pressure ratings of the fracturing fleets
to be used.
Generally, we invoice our customers for each fracturing stage
during the engagement. As a result, increases in our asset
utilization have a significant positive impact on our revenue.
Payment is typically required within 30 days after
completion of the stage. Our invoices typically include:
|
|
|
|
|
an equipment charge determined by applying a base rate for the
amount of time our pumps are in operation, typically in
increments of 15 or 30 minutes, with a minimum of two hours (the
base rate varies based on the pressure, flow rate and horsepower
required, which are determined largely by the characteristics of
the geological formation, and may be changed on the job);
|
|
|
|
a mobilization charge, which typically applies only to the first
fracturing stage in a job, based on the distance we are required
to transport our equipment and products to the job site; and
|
|
|
|
product charges, determined by applying an agreed rate to the
amount of raw sand (in 100-pound increments), chemicals (in
gallons) and other products we actually use.
|
In response to increased demand and the tight supply of
fracturing fleets in some of our key markets, a number of
customers have recently asked us to allocate one or more of our
fleets exclusively to their operations at agreed prices.
Currently, 11 of our 22 fleets are operating under such
dedicated, oral arrangements. This increases our visibility into
future revenues, increases our ability to deploy our fleets
efficiently and enhances our customer relationships. We have
recently begun negotiating written agreements with customers
pursuant to which we will agree to commit one or more fleets to
their operations. These agreements are typically for two-year
terms and will require our customers to pay us a minimum daily
rate or a minimum amount per quarter, which will provide us with
more predictability regarding our future revenue. We have
entered into such a written contract with one of our largest
customers pursuant to which we have agreed to dedicate two of
our fleets to its operations in the Marcellus Shale for a
two-year period beginning November 1, 2010. This contract
provides for a
24-hour-per-day,
five-day-per-week
work schedule. We have entered into a written contract with
another customer pursuant to which we have agreed to dedicate
one of our fleets to its operations in the Eagle Ford Shale for
a one-year period beginning January 1, 2011, with a
one-year renewal option for us. This contract provides for a
24-hour-per-day,
seven-day-per-week
work schedule. Each of these two contracts requires the customer
to pay a substantial fee for early termination of the contract
and additional fees if it fails to use our fleets for a
specified number of stages during specified periods. The prices
we charge the customers under these contracts are subject to
increases based on increases in our costs, subject to certain
limits. We expect that a majority of the 12 new fleets we plan
to deploy by the end of 2011 will eventually operate under
written agreements with similar provisions. Each of the
remaining fleets will be dedicated to serving multiple customers
on an as-available basis.
The Costs
of Conducting Our Business
The principal expenses involved in conducting our hydraulic
fracturing business are product costs and freight, the costs of
manufacturing, maintaining and repairing our hydraulic
fracturing units, labor expenses and fuel costs. By being
vertically integrated, we believe we are able to control costs
to a greater extent than our competitors who do not produce
their own raw sand and who do not have in-house manufacturing
and maintenance facilities and operations.
Based on estimates by our internal geologist, we have
approximately 240 million tons of strategically located raw
sand reserves, and we have an in-house resin-coating operation.
This stable source of the two principal proppants we use in our
business results in significant cost savings. Our raw sand and
resin-coating sand operations supplied approximately 70% and
58%, respectively, of the raw sand and resin-coated sand we used
as proppants in our hydraulic fracturing operations during the
nine months ended September 30, 2010.
40
We also operate an extensive sand and chemical distribution
network. Our distribution network also results in savings on
freight costs. The cost of sand, chemicals and freight
represented approximately 29.3% of our revenues for the nine
months ended September 30, 2010.
We manufacture, maintain and repair substantially all the
fracturing units we use in our operations, as well as most of
the pumps used in those units. We purchase from third party
vendors certain of the parts we use to manufacture our pumps, as
well as the other major components of our fracturing units,
including engines, transmissions, radiators and trailers, and
other service equipment such as blenders and sand kings. We
capitalize the costs of manufacturing our fracturing units and
generally depreciate them over ten years. Depreciation costs
represented approximately 9.8% of our revenues for the nine
months ended September 30, 2010. We estimate that our cost
per fracturing unit is approximately 30% less than the amount we
would have to pay to a third party manufacturer for a comparable
unit.
Direct labor costs represented approximately 8.6% of our
revenues for the nine months ended September 30, 2010.
We incur significant fuel costs in connection with the operation
of our fracturing units and the transportation of our equipment
and products. Fuel costs represented approximately 6.3% of our
revenues for the nine months ended September 30, 2010.
Preventive and remedial repair and maintenance costs that do not
involve the replacement of major components of our fracturing
units are expensed as incurred. These repair and maintenance
costs represented approximately 1.8% of our revenues for the
nine months ended September 30, 2010. We perform
substantially all repair and maintenance services on our
fracturing units through our service and manufacturing
facilities and our maintenance and repair personnel who work out
of our district offices. We also maintain a centralized parts
inventory and distribution center in Cisco, Texas.
We are taxed as a partnership for federal income tax purposes
and therefore do not directly pay federal or state income taxes
on our income. The amounts we record as income tax for
accounting purposes consist primarily of franchise taxes paid to
the State of Texas, which generally are determined on the basis
of gross revenues from Texas sources, less certain deductions.
Historically, our owners have been subject to personal income
taxes on taxable income, if any, generated by us. As a result of
our Reorganization, after this offering we will be treated as a
corporation for tax purposes and will be required to pay federal
and state income taxes. Our summary and selected financial
information and historical consolidated financial statements
included elsewhere in this prospectus present pro forma tax
expense to reflect the tax expense we would have incurred if we
had been subject to tax as a corporation in the historical
periods presented.
How We
Evaluate Our Operations
A key financial and operating measurement that our management
uses to analyze and monitor the operating performance of our
business is Adjusted EBITDA, which consists of net income before
interest, income taxes, depreciation, amortization and gain or
loss on sale of assets, as further adjusted to add back amounts
charged to income for goodwill impairment related to the
discontinuance of the operations of a subsidiary in fiscal year
2008 and other nonrecurring items. See Prospectus
Summary Summary Consolidated Financial
Information and Selected Consolidated Financial
Information. We also evaluate our performance using
certain key operating data relating to the utilization of our
fracturing fleets and the level of
41
activity in our business, based on, for example, the number of
wells we service and the number of fracturing stages we perform.
The following table shows certain operating data for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of wells fractured
|
|
|
750
|
|
|
|
839
|
|
|
|
675
|
|
|
|
552
|
|
|
|
973
|
|
Total fracturing stages
|
|
|
*
|
|
|
|
*
|
|
|
|
4,786
|
|
|
|
3,117
|
|
|
|
7,216
|
|
Average revenue per stage
|
|
|
*
|
|
|
|
*
|
|
|
$
|
81,327
|
|
|
$
|
88,652
|
|
|
$
|
111,724
|
|
Horsepower (end of period)
|
|
|
678,250
|
|
|
|
779,500
|
|
|
|
802,000
|
|
|
|
802,000
|
|
|
|
875,500
|
|
Number of fleets deployed (end of period)
|
|
|
16
|
|
|
|
19
|
|
|
|
20
|
|
|
|
20
|
|
|
|
22
|
|
We use the operating metrics shown above as a measure of
performance, as is typical in the hydraulic fracturing industry.
We also use these metrics in forecasting our future business
performance. Our management also evaluates and manages the
performance of our business by comparing our current actual
results against hydraulic fracturing industry trends.
Industry-specific trends and internal productivity analysis
allow us to gauge our performance regarding margin expectations
and operating efficiencies. Resources are then allocated
throughout our company in order to achieve our expected
hydraulic fracturing results.
Outlook
The market for hydraulic fracturing services is currently more
robust than it has ever been, driven by increased oil and
natural gas drilling activity in the domestic onshore market,
particularly horizontal drilling in unconventional shale plays.
As the volume of hydraulic fracturing services used by E&P
companies increases, prices for such services tend to increase
as well. The increased demand for our services has allowed us to
increase our prices for new engagements and to improve the
utilization of our fracturing equipment. We anticipate that
favorable market conditions will continue in the near to
intermediate term. We intend to take advantage of these market
conditions, as noted above, by increasing the size of our
hydraulic fracturing fleet, deploying additional crews in
existing and new market areas and establishing and strengthening
customer relationships. By expanding our business, continuing to
increase market share and securing more long-term engagements,
we believe we will enhance our ability to maintain the stability
of our revenues and satisfactory pricing and utilization rates
during future periods.
The increase in demand for hydraulic fracturing services also
resulted in an increase in the costs of products, including raw
sand, during 2010. Although we have not yet seen shortages in
sand supplies to the extent experienced in 2008, we anticipate
that industry sand supplies may tighten, and our industry could
experience shortages of raw sand during 2011. We believe our
large reserves of raw sand, our processing plants and
resin-coating operations, and our sand distribution network give
us a competitive advantage in providing our hydraulic fracturing
services during periods in which our industry experiences such
shortages or delays in obtaining adequate volumes of sand. Our
planned expansion of our sand operations and distribution
network will further limit the impact of any such shortages on
our operations.
42
Results
of Operations
Nine
Months Ended September 30, 2009 Compared to Nine Months
Ended September 30, 2010
The following table sets forth each line item of our
consolidated income statement as a percentage of revenues for
the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
|
|
(Unaudited)
|
|
|
Revenues
|
|
$
|
276,328
|
|
|
|
|
|
|
$
|
806,197
|
|
|
|
|
|
Cost of revenues
|
|
|
250,185
|
|
|
|
90.5
|
%
|
|
|
494,074
|
|
|
|
61.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
26,143
|
|
|
|
9.5
|
%
|
|
|
312,123
|
|
|
|
38.7
|
%
|
Selling and administrative costs
|
|
|
47,089
|
|
|
|
17.0
|
%
|
|
|
74,558
|
|
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(20,946
|
)
|
|
|
(7.6
|
)%
|
|
|
237,565
|
|
|
|
29.4
|
%
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(11,767
|
)
|
|
|
(4.3
|
)%
|
|
|
(13,562
|
)
|
|
|
(1.7
|
)%
|
Other
|
|
|
1,575
|
|
|
|
0.6
|
%
|
|
|
(1,174
|
)
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other expenses
|
|
|
(10,192
|
)
|
|
|
(3.7
|
)%
|
|
|
(14,736
|
)
|
|
|
(1.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(31,138
|
)
|
|
|
(11.3
|
)%
|
|
|
222,829
|
|
|
|
27.6
|
%
|
Income Taxes
|
|
|
350
|
|
|
|
0.1
|
%
|
|
|
2,882
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(31,488
|
)
|
|
|
(11.4
|
)%
|
|
$
|
219,947
|
|
|
|
27.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Revenues increased by
$529.9 million, or 191.8%, from $276.3 million for the
nine months ended September 30, 2009 to $806.2 million
for the comparable period in the current year. This improvement
was due to an increase in demand for our services resulting
primarily from an increase in the horizontal rig count and
drilling activity in our markets. The horizontal rig count
increased from 111 to 191 in the Haynesville Shale and from 54
to 131 in the Marcellus Shale from September 30, 2009 to
September 30, 2010. This increased demand resulted in an
increase in the volume of activity. This increased activity,
particularly in harsh shale environments in which we believe we
have a competitive advantage, also allowed us to increase our
prices. We estimate that approximately 30.0% of the increase in
our revenues was due to increased prices and 70.0% to increased
activity.
Cost of Revenues. Cost of revenues increased
by $243.9 million, or 97.5%, from $250.2 million for
the nine months ended September 30, 2009 to
$494.1 million for the nine months ended September 30,
2010. The increase in cost of revenues was generally due to our
overall increase in operating activity, and the most significant
increases were in the costs of products, freight and fuel,
primarily due to the larger volumes we used in our operations,
and to a lesser extent direct labor costs and depreciation.
Depreciation relative to gross asset value increased due to
accelerating depreciation of equipment used in deeper shale
environments with longer horizontal wells requiring higher
pressure fracturing. We also recorded an impairment of certain
service equipment due to retirement earlier than its originally
estimated useful life, which resulted in a $9.4 million
cost of revenue being recognized. The net effect of the increase
in the cost of revenues, combined with the significant increase
in our revenues, was a decrease in our costs as a percentage of
revenue, from 90.5% of revenue for the nine months ended
September 30, 2009 to 61.3% of revenue for the comparable
period in 2010.
Gross Profit. Our increase in revenues
combined with the fixed nature of certain of our costs of
revenues resulted in a $286.0 million, or 1,093.9%,
increase in gross profit, from $26.1 million for the nine
months ended September 30, 2009 to $312.1 million for
the nine months ended September 30, 2010.
Selling and Administrative Costs. For the nine
months ended September 30, 2010, selling and administrative
costs increased by $27.5 million, or 58.3%, from
$47.1 million to $74.6 million. This increase was due
to an increase in costs associated with the volume growth and
higher district-related expenses. We reduced our
43
labor force during the nine months ended September 30, 2009
due to depressed economic and market conditions, and we rehired
personnel as market conditions and demand for our services
improved during the nine months ended September 30, 2010.
Selling and administrative costs decreased as a percentage of
revenue for the same period primarily due to our revenues
growing proportionately faster than our administrative expenses.
Our selling and administrative costs were 17.0% of revenues for
the period ended September 30, 2009 compared to 9.2% for
September 30, 2010.
Income from Operations. For the nine months
ended September 30, 2010, income from operations increased
by $258.5 million, from a loss of $20.9 million to an
income of $237.6 million in the comparable period in 2010.
This increase was due to the reasons described above.
Other Expense, Net. Interest expense, net,
increased by $1.8 million, or 15.3%, from
$11.8 million for the nine months ended September 30,
2009 to $13.6 million in the comparable period in 2010.
This increase was due to increased interest expense as a result
of higher rates that became effective under our senior secured
revolving credit facility when it was extended beyond its
original maturity pursuant to a forbearance agreement, prior to
its refinancing.
Income Taxes. Income taxes increased by
$2.5 million, or 723.5%, from $0.4 million for the
nine months ended September 30, 2009 to $2.9 million
in the comparable 2010 period. This increase was the result of
higher franchise taxes paid in the state of Texas, which are
generally based on gross revenues, less certain deductions.
Net (Loss)/Income. As a result of the
foregoing factors, net income increased by $251.4 million,
from a net loss of $31.5 million in the nine months ended
September 30, 2009 to net income of $219.9 million for
the nine months ended September 30, 2010.
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2009
The following table sets forth each line item of our
consolidated income statement as a percentage of revenues for
the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues
|
|
$
|
573,543
|
|
|
|
|
|
|
$
|
389,230
|
|
|
|
|
|
Cost of revenues
|
|
|
411,216
|
|
|
|
71.7
|
%
|
|
|
345,216
|
|
|
|
88.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
162,327
|
|
|
|
28.3
|
%
|
|
|
44,014
|
|
|
|
11.3
|
%
|
Selling and administrative costs
|
|
|
81,940
|
|
|
|
14.3
|
%
|
|
|
68,386
|
|
|
|
17.6
|
%
|
Goodwill impairment
|
|
|
5,971
|
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
74,416
|
|
|
|
13.0
|
%
|
|
|
(24,372
|
)
|
|
|
(6.3
|
)%
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(29,040
|
)
|
|
|
(5.1
|
)%
|
|
|
(15,945
|
)
|
|
|
(4.1
|
)%
|
Other
|
|
|
(23
|
)
|
|
|
*
|
|
|
|
425
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other expenses
|
|
|
(29,063
|
)
|
|
|
(5.1
|
)%
|
|
|
(15,520
|
)
|
|
|
(4.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
45,353
|
|
|
|
7.9
|
%
|
|
|
(39,892
|
)
|
|
|
(10.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
1,994
|
|
|
|
0.3
|
%
|
|
|
347
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
43,359
|
|
|
|
7.6
|
%
|
|
$
|
(40,239
|
)
|
|
|
(10.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Revenues decreased by
$184.3 million, or 32.1%, from $573.5 million in 2008
to $389.2 million in 2009. This decrease was due to a
significant reduction in demand for our services as customers
decreased capital expenditures during the financial crisis and
as a result of declines in commodity prices. We
44
also experienced lower prices for the services that we did
provide. We estimate that approximately 81.3% of the decrease in
our revenues was due to the decline in prices and 18.7% due to
decreased activity.
Cost of Revenues. For the year ended
December 31, 2008 compared to the year ended
December 31, 2009, cost of revenues decreased by
$66.0 million, or 16.1%, from $411.2 million to
$345.2 million, due to a significant decline in our
activity, resulting from a dramatic decline in drilling activity
in our markets. Costs of revenues increased from 71.7% of
revenue for 2008 to 88.7% of revenue for 2009. The increase in
the cost of revenues, as a percentage of revenues, was due
primarily to the fixed nature of many of our costs and to a lag
in cost reduction initiatives following the dramatic decline in
activity and pricing resulting from unfavorable market
conditions. In addition, we transitioned more of our business to
more challenging shale formations such as the Haynesville Shale
and Marcellus Shale, which require the use of more expensive
proppants such as resin-coated sand and ceramics and increased
stress on our equipment, requiring accelerated depreciation and
increased maintenance and repairs.
Gross Profit. The significant decrease in our
revenues combined with the increase in the cost of revenues as a
percentage of revenues resulted in a decrease of
$118.3 million, or 72.9%, in gross profit, from
$162.3 million in 2008 to $44.0 million in 2009.
Selling and Administrative Costs. Selling and
administrative costs decreased by $13.5 million, or 16.5%,
from $81.9 million in 2008 to $68.4 million in 2009.
This decrease was due to a reduction of our labor force and the
implementation of other cost reduction initiatives in 2009.
Goodwill Impairment. The $6.0 million
goodwill impairment charge incurred in 2008 resulted from
discontinued operations that resulted from the closing of a
business we had purchased for priority rights to purchase
equipment we sought from the manufacturer. The operation that we
discontinued had insignificant assets as of the date we stopped
these operations.
Income (Loss) from Operations. Income from
operations decreased by $98.8 million, from
$74.4 million in 2008 to a loss of $24.4 million in
2009. This decrease was due to the reasons set forth above.
Other Expense, Net. Interest expense, net,
decreased by $13.1 million, or 45.1%, from
$29.0 million in 2008 to $15.9 million in 2009, due
primarily to a change in the fair value of our interest rate
swap agreements from a liability of $10.7 million in 2008
to a liability of $5.7 million at December 31, 2009,
and a reduction in our outstanding borrowings. Net changes in
the value of interest rate swap agreements are recognized as
income or expense for the period in which the changes occur.
Other expense, which includes gain or loss on sale of assets,
amortization expense and miscellaneous income, remained
relatively unchanged year over year.
Income Taxes. Income taxes decreased by
$1.6 million, or 82.6%, from $2.0 million in 2008 to
$0.3 million in 2009. This decrease was due to a decrease
in revenues from our Texas operations.
Net (Loss)/Income. As a result of the
foregoing factors, net income decreased by $83.6 million,
from net income of $43.4 million in 2008 to a net loss of
$40.2 million in 2009.
45
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2008
The following table sets forth each line item of our
consolidated income statement as a percentage of revenues for
the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues
|
|
$
|
362,462
|
|
|
|
|
|
|
$
|
573,543
|
|
|
|
|
|
Cost of revenues
|
|
|
241,293
|
|
|
|
66.6
|
%
|
|
|
411,216
|
|
|
|
71.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
121,169
|
|
|
|
33.4
|
%
|
|
|
162,327
|
|
|
|
28.3
|
%
|
Selling and administrative costs
|
|
|
35,006
|
|
|
|
9.7
|
%
|
|
|
81,940
|
|
|
|
14.3
|
%
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
5,971
|
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
86,163
|
|
|
|
23.8
|
%
|
|
|
74,416
|
|
|
|
13.0
|
%
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(13,467
|
)
|
|
|
(3.7
|
)%
|
|
|
(29,040
|
)
|
|
|
(5.1
|
)%
|
Other
|
|
|
303
|
|
|
|
0.1
|
%
|
|
|
(23
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other expenses
|
|
|
(13,164
|
)
|
|
|
(3.6
|
)%
|
|
|
(29,063
|
)
|
|
|
(5.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
72,999
|
|
|
|
20.1
|
%
|
|
|
45,353
|
|
|
|
7.9
|
%
|
Income taxes
|
|
|
1,248
|
|
|
|
0.3
|
%
|
|
|
1,994
|
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
71,751
|
|
|
|
19.8
|
%
|
|
$
|
43,359
|
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Revenues increased by
$211.0 million, or 58.2%, from $362.5 million in 2007
to $573.5 million in 2008. This increase was due to an
increase in demand for our services resulting primarily from an
increase in the horizontal rig count and drilling activity in
our markets. The horizontal rig count increased from 468 to 663
in the United States onshore market. This increased demand
resulted in an increase in activity for us in existing markets,
which allowed us to increase our prices and the utilization of
our equipment and personnel. In addition, our revenues increased
due to our entry into new markets, including the Haynesville
Shale and Marcellus Shale, during 2008.
Costs of Revenues. For the year ended
December 31, 2007 compared to the year ended
December 31, 2008, costs of revenues increased by
$169.9 million, or 70.4%, from $241.3 million to
$411.2 million, due to increased activity and to costs
incurred in conjunction with the expansion of our business.
Costs of revenues increased from 66.6% of revenue in 2007 to
71.7% of revenue for 2008. The increase in costs of revenues as
a percentage of revenues was due primarily to an increase in the
cost of sand and accelerated depreciation due to an increase in
the number of fracturing units we manufactured and related
equipment and parts we purchased. We manufactured 124 fracturing
units in 2007 and 100 fracturing units in 2008.
Gross Profit. The net effect of the increase
in our revenues and the increase in costs of revenues as a
percentage of revenues resulted in a $41.1 million, or
33.9%, increase in gross profit, from $121.2 million in
2007 to $162.3 million in 2008.
Selling and Administrative Costs. Selling and
administrative costs increased by $46.9 million, or 134.1%,
from $35.0 million in 2007 to $81.9 million in 2008.
This increase was due to a slight increase in general and
administrative costs that followed the growth in activity and
business as well as higher district-related expenses from an
increase in activity and the number of districts.
Income from Operations. Income from operations
decreased by $11.8 million, or 13.7%, from
$86.2 million in 2007 to $74.4 million in 2008. This
decrease was due to a $6.0 million goodwill impairment
charge incurred in 2008 and to the increase in costs of revenues
as a percentage of revenues for the reasons described above, as
well as an increase in indirect expenses.
46
Interest Expense, net. Interest expense
increased by $15.5 million, or 114.8%, from
$13.5 million in 2007 to $29.0 million in 2008. This
increase was due primarily to increased borrowings on credit
lines and loans associated with manufacturing equipment and
opening new districts.
Other. Other income decreased by
$0.3 million, or 100.0%, from $0.3 million in 2007 to
zero in 2008. This decrease was due to an offset in 2008 of
expenses related to other income.
Income Taxes. Income taxes increased by
$0.7 million, or 59.8%, from $1.2 million in 2007 to
$2.0 million in 2008. This increase was due to an increase
in revenues from our Texas operations.
Net Income. As a result of the foregoing
factors, net income decreased by $28.4 million, or 39.6%,
from $71.8 million in 2007 to $43.4 million in 2008.
Liquidity
and Capital Resources
Historically, we have met our liquidity needs principally from
cash flows from operating activities, borrowings under Frac Tech
Services, LLCs bank credit agreements, equity investments
by Chesapeake Energy Corporation, equipment financings and
borrowings by our subsidiaries. In addition, on
November 12, 2010, we consummated a private offering of our
7.125% Senior Notes due 2018, from which we obtained net
proceeds, after payment of discounts, of approximately
$539.0 million. We used approximately $105.8 million
of such proceeds to repay indebtedness and $200.0 million
of such proceeds to return capital to our equity owners. We
used, and will use, the balance of the net proceeds, in the
amount of approximately $233.2 million, to fund capital
expenditures, offering expenses and for general corporate
purposes.
Our principal uses of cash are to fund capital expenditures,
primarily for expanding and maintaining our fleets and acquiring
or expanding facilities, to fund operations and to service
outstanding debt.
Additionally, since we are treated as a partnership for income
tax purposes, we have historically distributed cash to our
owners for payment of personal income taxes on taxable income,
if any, generated by us. As a result of our Reorganization,
after this offering we will be treated as a corporation and will
be required to pay federal and state income taxes. This will
result in an increase in cash we use to pay income taxes and a
corresponding decrease in the amount we distribute to our owners
to pay personal income taxes on taxable income that we
generated. Therefore, this change will not result in a material
change in our uses of cash.
Frac Tech Services, LLC entered into an amended and restated
senior secured revolving credit facility with Wells Fargo Bank,
N.A., as administrative agent, on May 20, 2010. Its credit
facility with Wells Fargo had matured on January 10, 2010
and had been extended pursuant to an amendment and forbearance
agreement in which we acknowledged defaults related to our
failure to comply with leverage ratio and fixed charge coverage
ratio covenants in the fourth quarter of 2009 and the first
quarter of 2010 and a failure to deliver an opinion of our
auditors without a going-concern qualification for the year
ended December 31, 2009. Following execution of our amended
and restated credit facility on May 20, 2010, we obtained
an unqualified opinion from our auditors for the year ended
December 31, 2009. As of the date we entered into that
amended and restated credit facility and as of
September 30, 2010, we were in compliance with the
covenants contained in that facility. On November 12, 2010,
we repaid in full the outstanding balance under that facility
with a portion of the proceeds of our offering of
7.125% Senior Notes due 2018 and terminated the facility.
We expect to enter into a new senior secured revolving credit
facility before the closing of this offering. We have received
commitments in the aggregate amount of $200.0 million for
this new facility. See New Senior Secured
Credit Facility.
After completion of this offering, our primary sources of cash
will include cash flows generated from our operations and
borrowings under the new credit facility that we intend to enter
into. We may also pursue additional debt or equity financings in
the public or private markets in the future. We believe that
cash generated from operations and borrowings available under
the credit facility or other financing arrangements will be
sufficient to meet working capital requirements, anticipated
capital expenditures and scheduled debt
47
payments for at least the next 12 months. Our ability to
satisfy debt service obligations, to fund planned capital
expenditures and to make any acquisitions will depend upon our
future operating performance, which will be affected by
prevailing economic conditions, market conditions in the
E&P industry and financial, business and other factors,
many of which are beyond our control.
Cash
Flows
The table below summarizes our cash flows for the years ended
December 31, 2007, 2008, and 2009 and the nine-month
periods ended September 30, 2009 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Cash flow statement data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operating activities
|
|
$
|
118,854
|
|
|
$
|
61,790
|
|
|
$
|
75,621
|
|
|
$
|
45,040
|
|
|
$
|
201,569
|
|
Cash flow from investing activities
|
|
|
(292,527
|
)
|
|
|
(152,707
|
)
|
|
|
(78,295
|
)
|
|
|
(51,327
|
)
|
|
|
(113,173
|
)
|
Cash flow from financing activities
|
|
|
161,648
|
|
|
|
89,977
|
|
|
|
28,290
|
|
|
|
10,998
|
|
|
|
(80,773
|
)
|
Opening cash
|
|
|
13,388
|
|
|
|
1,363
|
|
|
|
423
|
|
|
|
423
|
|
|
|
26,039
|
|
Closing cash
|
|
|
1,363
|
|
|
|
423
|
|
|
|
26,039
|
|
|
|
5,134
|
|
|
|
33,662
|
|
Net
Cash Provided by Operating Activities
Cash provided by operating activities was $45.0 million for
the nine months ended September 30, 2009 compared to
$201.6 million in the comparable 2010 period. For the nine
months ended September 30, 2010, cash provided by operating
activities consisted primarily of net income of
$219.9 million, depreciation and amortization of
$79.8 million, an increase in accounts payable and accrued
expenses of $56.0 million, and a decrease in inventory of
$19.3 million, partially offset by an increase in accounts
receivable of $138.0 million.
Cash provided by operating activities was $75.6 million for
the year ended December 31, 2009. Cash provided by
operating activities for 2009 consisted primarily of
depreciation and amortization of $91.1 million and a
$43.0 million decrease in accounts receivable, partially
offset by a net loss of $40.2 million and a decrease in
accounts payable and other accrued expenses of
$18.0 million.
Net
Cash Used in Investing Activities
For the nine months ended September 30, 2009, net cash used
in investing activities was $51.3 million compared to
$113.2 million in the comparable 2010 period. Net cash used
in investing activities for the nine months ended
September 30, 2010 consisted primarily of purchases of
property and equipment.
Net cash used in investing activities was $78.3 million for
the year ended December 31, 2009. Net cash used in
investing activities for 2009 consisted primarily of purchases
of property and equipment of $61.8 million and the purchase
of a resin-coated sand business for $17.5 million.
Net
Cash (Used In)/Provided by Financing Activities
Net cash provided by financing activities was $11.0 million
for the nine months ended September 30, 2009 compared to
net cash used in financing activities of $80.8 million in
the comparable 2010 period. Net cash used in financing
activities for the nine months ended September 30, 2010
consisted primarily of a net decrease in the balance outstanding
under our revolving credit facility of $147.9 million, a
decrease in short- and long-term debt of $4.0 million, and
an increase in distributions to owners of $26.0 million,
offset by a $100.0 million equity investment by Chesapeake
Energy Corporation.
Net cash provided by financing activities was $28.3 million
in 2009, consisting primarily of a $37.5 million equity
investment by Chesapeake Energy Corporation, partially offset by
a net decrease in outstanding balances under our revolving
credit facility of $12.4 million.
48
Capital
Expenditures
Our policy is to invest in growth through capital expenditures,
principally for the manufacture and maintenance of our
fracturing units, including the manufacture of the high-pressure
pumps and the purchase of other component parts used in the
manufacture of those units, such as engines, transmissions and
radiators, facility acquisitions and the purchase of other
equipment we use in our business, including blenders and sand
kings. We may also consider acquiring other companies from time
to time as opportunities arise.
Capital expenditures amounted to $292.5 million,
$163.0 million and $61.8 million in the years ended
December 31, 2007, 2008 and 2009, respectively, and
$116.2 million for the nine months ended September 30,
2010.
For the full year ended December 31, 2010, we expect our
capital expenditures to be approximately $282 million, a
substantial portion of which will be spent in connection with
our manufacture of approximately 78 fracturing units during the
third and fourth quarters of 2010. In addition, we intend to
increase our raw sand and resin-coated sand production capacity
and high pressure pump manufacturing capacity. We expect our
capital expenditures will amount to approximately
$438 million for the year ended December 31, 2011. We
estimate we will manufacture approximately 158 fracturing units
in 2011. We may increase or decrease the number of fracturing
units we manufacture during any period based on market
conditions or other factors.
New
Senior Secured Credit Facility
Before the closing of this offering, we expect to enter into a
new four-year $200.0 million senior secured revolving
credit facility with a syndicate of lenders led by Credit Suisse
AG and Credit Suisse Securities (USA) LLC (collectively,
Credit Suisse), as sole administrative agent and
sole syndication agent. We have received commitments for 100% of
the proposed borrowing amount from Credit Suisse, Royal Bank of
Canada and RBC Capital Markets, LLC, Bank of America, N.A. and
Citigroup Global Markets Inc. (on behalf of Citibank, N.A. and
its affiliates). The commitments are subject to customary
conditions precedent.
We anticipate that our borrowing capacity under this new
revolving credit facility will be available to finance working
capital requirements and other general corporate purposes,
including capital expenditures. Of the aggregate
$200.0 million of capacity under the new revolving credit
facility, an amount to be agreed will be available for the
issuance of standby letters of credit.
Borrowings under the new revolving credit facility will mature
four years from the date of the closing of the new revolving
credit facility. We anticipate that amounts under the new
revolving credit facility may be repaid and reborrowed prior to
the final maturity date. As of September 30, 2010, after
giving effect to (a) the issuance and sale of our
7.125% Senior Notes due 2018 on November 12, 2010, and
the application of the net proceeds therefrom, as described
under Capitalization, (b) the consummation of
this offering of common stock and the application of the
estimated net proceeds we will receive from this offering, as
described under Use of Proceeds, and (c) the
closing of our new revolving credit facility, as if each such
transaction had occurred on that date, we would have had
$200.0 million of availability under our new revolving
credit facility. The new revolving credit facility will contain
an accordion feature that will allow us to increase the maximum
borrowing amount by $100.0 million subject to certain
conditions and the agreement of the lenders providing the
additional borrowing capacity.
The agreements that will govern this facility have not been
finalized or executed. See Description of Certain
Indebtedness for a discussion of the terms that we
anticipate will be included in the facility.
Contractual
Commitments and Obligations
In the normal course of business, we enter into various
contractual obligations that impact, or could impact, our
liquidity. The following table summarizes our material
obligations at September 30, 2010, with projected cash
payments in the years shown, after giving effect to (a) our
offering of 7.125% Senior Notes due
49
2018, which we completed on November 12, 2010, and the
application of the net proceeds therefrom, and
(b) repayment of other indebtedness since
September 30, 2010, as described under
Capitalization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
|
(Dollars in thousands)
|
|
|
|
(Unaudited)
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.125% Senior
Notes(1)
|
|
$
|
550,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
550,000
|
|
Other long-term
debt(2)
|
|
|
43,040
|
|
|
|
13,288
|
|
|
|
15,664
|
|
|
|
4,859
|
|
|
|
9,229
|
|
Interest(3)
|
|
|
317,263
|
|
|
|
40,732
|
|
|
|
79,892
|
|
|
|
78,793
|
|
|
|
117,846
|
|
Operating
leases(4)
|
|
|
32,210
|
|
|
|
14,046
|
|
|
|
16,677
|
|
|
|
1,456
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(5)
|
|
$
|
942,513
|
|
|
$
|
68,066
|
|
|
$
|
112,233
|
|
|
$
|
85,108
|
|
|
$
|
677,106
|
|
|
|
|
(1)
|
|
Assumes aggregate principal amount
of $550.0 million of our Senior Notes will be outstanding
until maturity and does not give effect to the use of proceeds
of this offering, which may include the redemption by us of up
to 35% ($192.5 million) of the aggregate principal amount of our
outstanding Senior Notes. See Use of Proceeds.
|
|
(2)
|
|
Consists of principal payments
required under outstanding debt instruments.
|
|
(3)
|
|
Primarily consists of contractual
interest payments on our Senior Notes and other indebtedness.
|
|
(4)
|
|
Consists primarily of equipment
leases. Amounts disclosed assume no exercise of options to renew
or extend the leases.
|
|
(5)
|
|
We have no purchase obligations
other than purchase orders or other contracts that we may cancel
at any time without penalty, subject to minimum notice
requirements of no more than 120 days. We have no material
capital lease commitments or obligations.
|
Off-Balance
Sheet Arrangements
We have no off-balance sheet arrangements, other than normal
operating leases included in the table above, that have or are
likely to have a current or future material effect on our
financial condition, changes in financial condition, revenues,
expenses, results of operations, liquidity, capital expenditures
or capital resources.
Critical
Accounting Policies
Our consolidated financial statements are prepared in accordance
with GAAP, which requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues
and expenses during the reported periods. We have provided a
description of all of our significant accounting policies in
Note 1 to our audited consolidated financial statements
included elsewhere in this prospectus. We believe that of these
significant accounting policies, the following may involve a
higher degree of judgment or complexity.
Fixed
Assets
Fixed asset additions are recorded at cost. Cost of units
manufactured within the consolidated group consists of products,
components, labor, and overhead. Expenditures for renewals and
betterments that extend the lives of the assets are capitalized.
An allocable amount of interest on borrowings is capitalized for
self-constructed assets and equipment during their construction
period. Amounts spent for maintenance and repairs are charged
against operations as incurred. Costs of fixed assets are
depreciated on a straight-line basis over the estimated useful
lives of the related assets which range from two to ten years
for office and service equipment and thirty-nine years for
buildings. Land costs include the purchase price, plus zoning
and other costs, to prepare it for its intended purpose, and any
improvements not included under buildings. Building improvements
are depreciated over the lesser of the estimated useful life of
the improvement or the remaining life of the building.
Management is responsible for reviewing the carrying value of
property, plant, and equipment for impairment whenever events
and circumstances indicate that the carrying value of an asset
may not be recoverable from estimated future cash flows expected
to result from its use and eventual disposition. In cases
50
where undiscounted expected future cash flows are less than the
carrying value, an impairment loss equal to the amount by which
the carrying value exceeds the fair value of assets is
recognized. When making this assessment, the following factors
are considered: current operating results, trends, and
prospects, as well as the effects of obsolescence, demand,
competition, and other economic factors.
Inventories
Inventories consists of both raw materials and work in process.
This includes sand and chemicals which are used in providing
frac services and components and parts used in manufacturing.
Inventories are carried at the lower of cost or market value
determined on a
first-in-first-out
basis, except sand and chemicals, which are determined on a
weighted average cost basis. Raw materials are valued at cost,
including freight, and work in process is valued at cost plus
labor and overhead.
Trade
Accounts Receivable
Trade accounts receivable are reported at net realizable value
consisting of amounts billed less an allowance for doubtful
accounts. Most areas in which we operate have provisions for a
mechanics lien against the property on which the service
is performed if the lien is filed within a specified time-frame.
Determination of when receivables are past due is generally
based on the age of the receivable, with over 90 days
deemed to be of concern.
We determine our allowance by considering a number of factors,
including the length of time trade accounts receivable are past
due, previous loss history, the customers
creditworthiness, and the condition of the general economy and
the industry as a whole. We write off accounts when they are
determined to be uncollectible.
Revenue
Recognition
Revenues are recognized as services are completed. With respect
to our hydraulic fracturing services, we recognize revenue and
invoice our customers upon the completion of each fracturing
stage. We typically complete multiple fracturing stages per day
during the course of a job. Jobs seldom extend beyond a few
days. With respect to sales of sand or other products to third
parties, we recognize revenue upon shipment of the products from
our facilities.
Consolidation
Our consolidated financial statements include all wholly-owned
subsidiaries and majority-owned subsidiary partnerships and
limited liability companies. In addition, we review our
relationships with other entities to assess whether we are the
primary beneficiary of a variable interest entity. If the
determination is made that we are the primary beneficiary, then
that entity is consolidated in accordance with Financial
Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) 810, Consolidation
(ASC 810).
All material inter-company balances and transactions are
eliminated in consolidation.
Income
Taxes
We are treated as a partnership for federal income tax purposes.
As such, we generally do not directly pay income taxes on our
income or benefit from losses. Instead, our income and other tax
attributes are passed through to our owners for federal and,
where applicable, state income tax purposes. The provision for
income taxes is for the Texas margins tax and other partnership
taxes which are deemed to be income taxes for financial
statement purposes.
We adopted the provisions of ASC 740, Income Taxes,
on January 1, 2009. As required by the uncertain tax
position guidance in ASC 740, we recognize the financial
statement benefit of a tax position only after determining that
the relevant tax authority would more likely than not sustain
the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the
financial statements is the largest benefit that has a greater
than 50 percent likelihood of being realized upon ultimate
settlement
51
with the relevant tax authority. At the adoption date, we
applied the uncertain tax position guidance in ASC 740 to
all tax positions for which the statute of limitations remained
open. The adoption of this standard for the year ended
December 31, 2009 had no impact on our financial statements.
As a result of our Reorganization, which we will complete
immediately prior to the consummation of this offering, we will
be treated as a corporation for tax purposes and will be
required to pay federal and state income taxes. Our summary and
selected financial information and historical consolidated
financial statements included elsewhere in this prospectus
present pro forma tax expense to reflect the tax expense we
would have incurred if we had been subject to tax as a
corporation in the historical periods presented. We have
computed pro forma tax expense using a 35% corporate-level
federal tax rate and a net apportioned state tax rate,
incorporating permanent differences.
Presentation
of Transactional Taxes
We collect and remit sales tax on revenues in jurisdictions
where our services are taxable. We pay use taxes to appropriate
taxing authorities on our taxable purchases. We pay federal
excise tax, federal heavy use tax, and report fuel taxes on our
fleets of hydraulic fracturing units. Our accounting policy is
to exclude tax collected and remitted from revenue and cost of
sales.
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of these financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Recent
Accounting Pronouncements
In December 2007, the FASB established new accounting and
reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary, which
were incorporated into ASC 810. Among other items,
ASC 810 requires that equity attributable to
non-controlling interests be recognized in equity separate from
that of the companys and that consolidated net income now
includes the results of operations attributable to
non-controlling interests. We adopted ASC 810 on
January 1, 2009 and it did not have a material impact on
our consolidated financial statements.
In June 2009, the FASB amended ASC 810 to change the
existing consolidation guidance applicable to a variable
interest entity. Among other things, it requires a qualitative
analysis to be performed in determining whether an enterprise is
the primary beneficiary of a variable interest entity. The
amendments to ASC 810 are effective for interim and annual
reporting periods that begin after November 15, 2009. We
adopted the amendments to ASC 810 on January 1, 2010,
and they did not have a material impact on our consolidated
financial statements.
Quantitative
and Qualitative Disclosures about Market Risk
We have been exposed to variable interest rate risk primarily as
a result of borrowings under our prior revolving credit
agreement and floating-rate term notes. To mitigate this
interest rate risk, we entered into three interest rate swap
agreements. The purpose of these swaps is to reduce interest
rate variability by converting the variable rates payable on
portions of our outstanding borrowings into fixed-rate
obligations. The swaps we have entered into convert
variable-rate payments based on the London Interbank Offered
Rate (LIBOR) to fixed-rate payments. Amounts received or paid
under these swaps are recorded as reductions or increases in
interest expense. We do not use financial instruments or
derivatives for any trading or other speculative purposes. The
new revolving credit facility will bear variable interest rate
risk on any outstanding balances.
52
One agreement was matched with a term note payable with a
principal balance of $12.2 million as of September 30,
2010, an interest rate of LIBOR plus 0.85% and a maturity date
of December 29, 2016. We entered into an interest rate swap
agreement under which we paid interest at a fixed rate of 5.95%.
The notional amount of this swap declined directly in step with
the principal payments on the loan. The expiration date for this
swap agreement was March 2012, but we terminated this agreement
on November 12, 2010, using net proceeds from our offering
of 7.125% Senior Notes due 2018.
The other two agreements related to a total of
$140.0 million of Eurodollar borrowings under our senior
secured revolving credit agreement. These borrowings had
interest rates that floated with the LIBOR rate. These two swap
agreements, which expired in September 2010, provided for us to
pay interest at fixed rates of 4.79% on $40.0 million and
4.925% on $100.0 million.
Based on balances outstanding on September 30, 2010, and
including the impact of the swap agreements discussed in the two
preceding paragraphs, we estimate that for 2010, a 1% increase
or decrease in the interest rates payable on borrowings under
our prior senior secured revolving credit facility and our other
floating-rate debt would impact our interest expense by
approximately $1.4 million compared to our actual interest
expense in 2009, assuming no change in such outstanding balances.
Internal
Controls and Procedures
We are not currently required to comply with the SECs
rules implementing Section 404 of the Sarbanes Oxley Act of
2002, and are therefore not required to make a formal assessment
of the effectiveness of our internal control over financial
reporting for that purpose. Upon becoming a public company, we
will be required to comply with the SECs rules
implementing Section 302 of the Sarbanes-Oxley Act of 2002,
which will require our management to certify financial and other
information in our quarterly and annual reports and provide an
annual management report on the effectiveness of our internal
control over financial reporting. We will not be required to
make our first assessment of our internal control over financial
reporting until the year following our first annual report
required to be filed with the SEC.
Our management identified certain material weaknesses in our
internal control over financial reporting in connection with the
preparation of our financial statements for fiscal years 2007
and 2008. The Public Company Accounting Oversight Board has
defined a material weakness as a deficiency, or combination of
deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material
misstatement of the companys annual or interim financial
statements will not be prevented, or detected and subsequently
corrected, on a timely basis. The material weaknesses referred
to above included failure to maintain controls adequate to
capture, evaluate and record sales and use tax liabilities,
which resulted in an underaccrual of $5.6 million related
to periods prior to January 1, 2008 and consequently
resulted in a restatement of our 2007 financial statements.
Management identified a significant deficiency in our internal
control over financial reporting in connection with the
preparation of our financial statements for fiscal year 2009.
The Public Company Accounting Oversight Board has defined a
significant deficiency as a deficiency, or combination of
deficiencies, in internal control that is less severe than a
material weakness, yet important enough to merit attention by
those charged with governance. The significant deficiency
related to a manual inventory valuation process. We have
implemented a number of actions intended to address this
deficiency, but we cannot yet assert that the remediation is or
will be effective as we have not yet had sufficient time to test
the newly implemented actions.
Our management did not identify any material weaknesses in our
internal control over financial reporting in connection with the
preparation of our financial statements for fiscal year 2009.
However, while we have begun the process of evaluating our
internal control over financial reporting, we will not complete
our review until the audit of our financials statements for
fiscal year 2010 has been completed. We cannot predict the
outcome of our review at this time. During the course of the
review, we may identify control deficiencies, which could give
rise to significant deficiencies and other material weaknesses.
Management has taken steps to improve our internal control over
financial reporting, including the implementation of new
accounting
53
processes and control procedures and the addition of
experienced, certified professionals to our accounting staff.
As a result of recent changes in federal law, our independent
registered public accounting firm will not be required to
formally attest to the effectiveness of our internal controls
over financial reporting until such time as we become an
accelerated filer as defined in
Rule 12b-2
of the Exchange Act. When and if it is required to do so, our
independent registered public accounting firm may issue a report
that is adverse in the event it is not satisfied with the level
at which our controls are documented, designed, operated or
reviewed.
54
BUSINESS
Our
Company
We are a leading independent provider of oil and natural gas
well stimulation services and products with expertise in
high-pressure hydraulic fracturing. E&P companies operating
in the United States use our services and products primarily to
enhance their recovery rates from wells drilled in shale and
other unconventional reservoirs. Our operations are vertically
integrated, which reduces our operating costs, increases our
asset utilization, improves our supply chain flexibility and
responsiveness and ultimately enhances our financial performance
and ability to provide high quality customer service. We use
proprietary designs to manufacture durable equipment that we
believe gives us a competitive advantage in the most demanding
applications. In response to the high demand for our hydraulic
fracturing services, we expanded our business in 2007 and 2008
by acquiring raw sand reserves and commencing sand mining and
processing operations, and in January 2009 we began full
operation of our first resin-coating sand facility. These
reserves and operations provide us with ready access to raw sand
and resin-coated sand, the two principal proppants we use in our
operations.
Our revenues have grown from $214.4 million in 2006 to
$ in
2010, a compound annual growth rate of %. We are
benefitting from a number of positive industry developments,
including a dramatic increase in the amount and efficiency of
horizontal drilling activity, an increase in the number of
hydraulic fracturing stages per well and an increase in drilling
activity in oil- and liquids-rich shale formations. These trends
have led to increased asset utilization in our industry and a
tight supply of fracturing fleets, proppants and other
fracturing-related services and products. We also believe there
is growing international interest in horizontal drilling and
fracturing methods, and we intend to evaluate these
opportunities as they arise.
Our operations are focused primarily in unconventional oil and
natural gas formations in the Haynesville Shale in northwestern
Louisiana and east Texas, the Marcellus Shale in the Appalachian
Basin in Pennsylvania and West Virginia, the Eagle Ford Shale in
south Texas, and the Permian Basin in west Texas and
southeastern New Mexico. We believe we have the largest market
share of any hydraulic fracturing service provider in the
Haynesville Shale and Marcellus Shale based on number of fleets.
We are also a leading service provider in the Eagle Ford Shale
where we have plans to significantly expand our operations for
the remainder of 2010 and in 2011. In recent periods, we have
obtained an increasing number of engagements in connection with
oil-directed drilling, particularly in the Eagle Ford Shale and
the Permian Basin. We expect to deploy new fleets in additional
regions with significant oil- and liquids-directed drilling
activity in 2011, which may include the Bakken Shale in North
Dakota and Montana, the Niobrara Shale in Colorado, Wyoming and
Nebraska and various areas in Oklahoma including the Granite
Wash. The customers we currently serve are primarily large
E&P companies such as Petrohawk Energy Corporation, XTO
Energy Inc. (which is a subsidiary of Exxon Mobil Corporation),
Chesapeake Energy Corporation and Range Resources Corporation.
We currently operate 22 hydraulic fracturing fleets with
approximately 875,500 horsepower in the aggregate.
We believe the vertical integration of our operations, which
provides the ready availability of the equipment and products
that are necessary to our business, provides us with a
significant competitive advantage. We manufacture all the
hydraulic fracturing units in our fleets as well as
substantially all the high-pressure pumps used in our fracturing
units. We own and operate sand mines, related processing
facilities, a resin-coating facility and a distribution network
that provide us with a reliable and low cost supply of raw and
resin-coated sand. Our raw sand and resin-coating sand
operations supplied approximately 70% and 58%, respectively, of
the raw sand and resin-coated sand we used as proppants in our
hydraulic fracturing operations during the nine months ended
September 30, 2010. In addition, we formulate and blend
some of the chemical compounds that we use in fracturing fluids
at our chemical manufacturing facility and research and
development laboratories. Our technical staff of engineers,
chemists, technicians and a geologist support our operations by
optimizing the design and delivery of our equipment, products
and services to continually improve the quality, durability and
effectiveness of the solutions we provide to our customers.
At full capacity, we are capable of producing up to 20
fracturing units, with an aggregate of approximately 50,000
horsepower, per month. To increase our fracturing units
durability, reliability, and utilization, we manufacture a
proprietary high pressure pump consisting of two key assemblies,
a power end
55
and a fluid end. Although the power end of our pumps may last
several years, the fluid end, which is the part of the pump
through which the fracturing fluid is expelled under high
pressure, is a shorter-lasting consumable, often lasting less
than one year. We currently have the capacity to manufacture up
to 20 power ends and 100 fluid ends per month to equip new
fracturing units and to replace the fluid ends on our existing
fleets.
We have processing plants at our two sand mines in Texas and
Missouri and an additional sand processing plant in Wisconsin.
We are currently capable of extracting and processing
approximately 2.5 million tons per year of raw sand, which
is the most common type of proppant we use in our fracturing
operations. As of September 30, 2010, we had an estimated
240 million tons of strategically located sand reserves.
Our resin-coating facility can produce 600 million pounds
of resin-coated sand annually. In addition to our mines and
processing plants, we have seven sand distribution facilities in
Texas, Louisiana and Pennsylvania, 110 bulk hauling trailers for
highway transportation and approximately 1,100 leased rail cars.
Industry
Overview
The pressure pumping industry provides hydraulic fracturing and
other well stimulation services to E&P companies.
Fracturing involves pumping a fluid down a well casing or tubing
under high pressure to cause the underground formation to crack,
allowing the oil or natural gas to flow more freely. A propping
agent, or proppant, is suspended in the fracturing
fluid and keeps open the cracks created by the fracturing
process in the underground formation. Proppants generally
consist of sand, resin-coated sand or ceramic particles. The
total size of the hydraulic fracturing market, based on revenue,
was estimated to be approximately $16.0 billion in 2008 and
approximately $10.5 billion in 2009 based on data from a
2009 report by Spears & Associates. We believe the
revenue generated in the hydraulic fracturing market in 2010
will exceed the revenue generated in 2008.
The main factors influencing demand for fracturing services in
North America are the level of horizontal drilling activity by
E&P companies and the fracturing requirements in the
respective resource plays. The level of drilling activity in
turn depends largely on current and anticipated future crude oil
and natural gas prices and production depletion rates. The most
critical factor in assessing the outlook for the industry is the
worldwide supply and demand for oil and the domestic supply and
demand for natural gas. Demand for oil and natural gas is
cyclical, as the industry is driven by commodity demand and
corresponding price fluctuations. When oil and natural gas price
increases occur, E&P companies generally increase their
capital expenditures, which results in greater revenues and
profits for oilfield service companies. The increased capital
expenditures also ultimately result in greater production, which
historically has resulted in increased supplies and reduced
prices, which, in turn, tends to reduce demand for fracturing
services.
A recent phenomenon that has increased the demand for fracturing
services has been the development of unconventional oil- and
natural gas-rich fields in the United States. Conventional
production seeks to recover oil or natural gas that is trapped
in a reservoir below the surface, and requires only a
conventional vertical well to recover the oil or natural gas.
Conversely, unconventional oil and natural gas production
requires fracturing and other well stimulation techniques to
recover oil or natural gas that is trapped in the source rock.
The estimated natural gas supply in the United States increased
by 35% between 2006 and 2008, primarily due to the development
of unconventional resource plays, and shale gas resources have
grown from 5% of total production in 2006 to 20% in 2009.
56
Two technologies hydraulic fracturing and horizontal
drilling are critical to recovering unconventional
oil and natural gas. Increased production from unconventional
reserves has resulted in more horizontal drilling, which
increases demand for our fracturing services. In addition,
horizontal wells have become longer and more complex, resulting
in (i) an increase in the number of fracturing stages per
well, (ii) more intensive fracturing (as measured by
relative horsepower used per day per job) and (iii) an
increase in the amount of proppant used per well and per stage.
The following chart illustrates the recent trend in the number
of rigs with horizontal and vertical drilling activity in North
America, depicting an increasing share of rigs with horizontal
drilling.
Data Source: Baker Hughes, Inc.
A trend that has further increased the demand for fracturing
services is the increase in the number of oil-related horizontal
rigs as compared with the number of gas-related rigs.
The following chart illustrates the recent trends depicting the
increase in the oil-related rig count as compared to the
gas-related rig count.
Data Source: Baker Hughes, Inc.
57
The following chart shows a comparison of oil and natural gas
prices.
Data Source: Factset
Industry
Trends Impacting Our Business
Increase
in Frac Stages Resulting from Horizontal Drilling
Activity
Advances in drilling and completion technologies including
horizontal drilling and hydraulic fracturing have made the
development of many unconventional resources such as oil and
natural gas shale formations economically attractive. This has
led to a dramatic increase in the development of oil- and
natural gas-producing shale formations, or plays, in
the United States. According to Baker Hughes, Inc., the North
American horizontal rig count has risen from 335 at the
beginning of 2007 to 916 at the end of September 2010. At
the same time, the hydraulic fracturing industry is benefitting
from drilling trends that are causing the number of fracturing
stages to grow at a faster rate than the horizontal rig count.
As E&P companies have become more experienced at developing
shale plays, the time required to drill wells has decreased,
thus increasing the number of wells drilled per year and hence
the number of fracturing stages demanded for a given rig count.
At the same time, the length of well laterals is increasing and
fracturing stages are being performed at closer intervals, which
also is increasing the number of fracturing stages per well.
These trends are providing significantly greater revenue
opportunities for our services.
Increased
Service Intensity in More Demanding Shale
Reservoirs
Many of the new shales that have been discovered, such as the
Haynesville and Eagle Ford Shales, are high pressure reservoirs
that require an increasing number of fracturing stages and more
technically sophisticated forms of proppant, such as
resin-coated sand and ceramic proppants. The additional
horizontal drilling activity, coupled with the demanding
characteristics of unconventional reservoirs, has put increasing
demands on hydraulic fracturing equipment. Moreover, individual
fracturing stages have become more intensive, requiring more
fluids, chemicals and proppant per stage. We focus on the most
demanding reservoirs where we believe we have a competitive
advantage due to the high performance and durability of our
equipment and our ability, through our vertical integration, to
support high asset utilization that results in more efficient
operations. We believe that, within the industry, we manufacture
and deploy one of the most durable fluid ends, which is the part
of the high pressure pump that requires replacement most
frequently.
58
Increased
Asset Utilization
We are ultimately compensated based on the number of fracturing
stages we complete. Historically, each of our fleets completed
one fracturing stage per day, but our fleets now typically
complete multiple stages per day, usually on the same well. In
our highest activity regions, our fleets are operating on a
24-hour-per-day,
seven-day-per-week
basis with two crews rotating to increase asset efficiency. In
addition, we are scheduling fracturing jobs that are
geographically close to one another in order to increase our
asset utilization. While increased asset utilization results in
higher levels of stress on our equipment, we have increased our
capacity to manufacture, maintain and repair fluid ends and
other products, which has bolstered our repair and maintenance
capability.
Increased
Drilling in Oil- and Liquids-Rich Formations
While the majority of U.S. drilling rigs are currently
drilling in natural gas formations, there is increasing activity
in oil- and liquids-rich formations such as the Eagle Ford,
Bakken and Niobrara Shales and various plays in Oklahoma,
including the Granite Wash. In addition, we believe that many of
the oil- and liquids-rich plays are economically attractive at
oil prices substantially below the current prevailing oil price.
In addition, we believe this should provide continued and
growing opportunities for our services in the near term.
Tight
Supply of Hydraulic Fracturing Fleets, Proppants and Other
Products
Due to increased drilling in unconventional formations, the
demand for well stimulation services and products has increased
dramatically. Consequently, fracturing fleets, proppants,
replacement and repair parts and other products have become
increasingly scarce, especially over the course of the first
nine months of 2010, resulting in pricing increases. Based on
current market conditions, we expect this trend to continue
through the balance of 2010 and into 2011. We are well
positioned to take advantage of the market scarcity due to our
vertical integration strategy because we supply our own pumps
and most of our proppant requirements and other equipment, and
we manufacture and repair our fracturing units in-house.
Growing
International Interest in Hydraulic Fracturing
There is growing international interest in the development of
unconventional resources such as oil and natural gas shales.
This interest has resulted in a number of recently completed
joint ventures between major U.S. and international E&P
companies related to shale plays in the United States. We
believe that these joint ventures, which generally require the
international partner to commit to significant future capital
expenditures, will provide additional demand for hydraulic
fracturing services in the coming years. Additionally, we
believe such joint ventures will continue to stimulate
development of other oil and natural gas shales outside the
United States.
Competitive
Strengths
We believe that we have the following competitive strengths:
Vertically
Integrated Business
Our vertical integration provides us with a number of
competitive advantages. For example, the time between initial
order and final delivery of a fracturing unit is significantly
reduced as a result of our in-house manufacturing. Moreover,
once our units are deployed, they are able to continue to
operate with minimal delays for our customers, because our
ability to quickly provide replacement fluid ends and other
consumables reduces our maintenance turnaround time. Similarly,
our raw sand and resin-coating operations provide a reliable
source of proppant for our operations. Our sand distribution
centers and our transportation infrastructure address the
logistical challenges inherent in our business by allowing us to
transport and deliver proppant and equipment quickly to our
fracturing jobs on short notice.
Because we produce most of the key equipment and products
necessary for our operations, we are able to provide swift
service while controlling costs. We estimate that our
manufacturing costs per fracturing unit is
59
approximately 30% less than we would pay to purchase a similar
fracturing unit from outside suppliers and that our
manufacturing cost per fluid end is approximately 30% less than
we would pay to purchase a similar fluid end from outside
suppliers. Similarly, we are able to produce proppants such as
raw sand and resin-coated sand and to blend chemicals at lower
cost than we would typically pay for such products from outside
suppliers. As a result, our vertically integrated business
improves our margins, reduces our maintenance capital
expenditures and improves our equipment utilization. These
factors enable us to provide superior service at competitive
prices, thereby increasing customer satisfaction, strengthening
our existing customer relationships and helping us to expand our
customer base.
High-Quality
Fleet
We maintain high-quality fleets of hydraulic fracturing units
and related equipment. Our 22 fleets have approximately 875,500
horsepower in the aggregate and are strategically located
throughout our principal markets. We believe our fleets are
among the newest, most reliable and highest performing in the
industry with the capability of meeting the most demanding
pressure and flow rate requirements in the field. Our
equipments durability minimizes delays and reduces
maintenance costs. Moreover, we maintain our high-quality fleets
through our manufacturing and repair facilities and our
maintenance and repair personnel who work out of our district
offices, which allow us to service, repair and rebuild our
equipment quickly and efficiently without incurring excessive
costs. These factors increase utilization of our fleets and
enhance customer satisfaction because of reduced down time and
delays.
Advanced
Equipment and Products
Our engineering team has enabled us to create what we believe to
be one of the most technologically advanced and durable fleets
of hydraulic pumps in the industry. We also have chemical
blending and research and development facilities where our
technical staff designs and improves upon the composition of the
chemicals we add to hydraulic fracturing fluids based on
specific customer needs and geological factors. For example, we
recently filed a U.S. patent application for a new additive
that uses nano particles to enhance the recovery of hydrocarbons
from significantly depleted hydrocarbon formations. In addition,
our technical staff has developed innovative techniques for
completing and stimulating wells in unconventional formations
that have helped establish us as a market leader in our industry.
Highly
Active Customer Base
We have long-standing relationships with many of the leading oil
and natural gas producers operating in the United States. Our
largest customers include Petrohawk Energy Corporation, XTO
Energy Inc., Chesapeake Energy Corporation and Range Resources
Corporation. Since 2002, we have broadened our customer base as
a result of our technical expertise, high-quality fracturing
fleets and reputation for quality and customer service. Our
strong customer relationships allow us significant revenue
visibility in the near to intermediate term and facilitate our
ability to opportunistically expand our business to provide
services to our customers in multiple areas in which they have
operations. In addition, we have exclusively dedicated a larger
portion of our fleets to our largest customers pursuant to
informal arrangements.
Leading
Market Share in Key Unconventional Resource Plays
As a result of our focus on superior service and strong customer
relationships, we believe we have leading market shares in the
Haynesville and Marcellus Shales. We are rapidly increasing our
market share in the Eagle Ford Shale, which is another
geologically demanding shale formation. In addition to our
current leading positions, we have plans to expand into other
prolific unconventional resource plays, such as the Bakken and
Niobrara Shales and the Granite Wash, where significant demand
exists for high-quality fracturing services. Our leading market
positions in the most demanding shale plays create economies of
scale that allow us to more efficiently deploy our crews and to
increase our productivity, efficiency and performance.
60
Incentivized
Work Force
The managers of our hydraulic fracturing crews are eligible to
receive incentive pay per fracturing stage subject to satisfying
quality and safety standards. In addition, all of our field
employees are eligible to receive incentive pay based on
satisfying safety standards. We believe that this incentive
program enables us to achieve higher utilization, attract the
most competent work force and motivate our employees to
continually maintain quality and safety. The incentive pay
available under this program may represent a significant
supplement to the compensation earned by our fleet managers.
Experienced
Management Team
We have an experienced management team that has built our
business. Dan Wilks and Farris Wilks, our chief executive
officer and chief operating officer, respectively, who founded
our company in 2002, each has more than 25 years of
oilfield business experience. We recently added Marc Rowland,
former Chief Financial Officer of Chesapeake Energy Corporation,
as our new President and CFO effective November 1, 2010.
Our Executive Vice President of Sales and Operations, Bill
Barker, has over 26 years of oilfield business experience.
The remainder of our management team is comprised of seasoned
operating, marketing, financial and administrative executives,
many of whom have prior experience at prominent oilfield service
companies such as BJ Services Company, Halliburton Corporation
and Schlumberger Limited. Our management teams extensive
experience in and knowledge of the oilfield services industry
strengthens our ability to compete and manage our business
through industry cycles.
Strategy
We intend to build upon our competitive strengths to grow our
business and increase our revenues and operating income. Our
strategy to achieve these goals consists of (1) enhancing
our vertical integration, (2) increasing our proppant
production and distribution and our pump manufacturing capacity,
(3) expanding our geographic footprint, (4) focusing
on our operational efficiencies and (5) continuing to
enhance our contract terms with customers.
Enhance
Vertical Integration
We will continue to seek opportunities to further enhance our
vertical integration by adding complementary service offerings
to improve our customer service. Any new services that we may
add will be focused primarily on improving the quality,
reliability and deliverability of our existing service offerings.
Increase
Proppant Production and Distribution and Pump Manufacturing
Capacity
We intend to increase our raw sand production capacity by
expanding our three existing processing plants in Texas,
Missouri and Wisconsin, and we are seeking to open a third sand
mine, as well as a new sand processing plant, in Illinois. In
addition, we plan to more than double our resin-coated sand
production capacity over the next few years, and we are
enlarging our distribution network to support the expansion of
our sand operations. We also intend to increase our high
pressure pump manufacturing capacity by expanding our existing
plants and adding new plants.
Expand
Geographic Footprint
We will continue to expand our operations to regions containing
unconventional formations that are likely to require multi-stage
high-pressure hydraulic fracturing efforts. For example, we
recently deployed a new fleet with approximately 35,000
horsepower to serve customers in the Eagle Ford Shale, bringing
our total horsepower in that region to approximately 143,000
horsepower. In addition, in response to strong demand for
horizontal drilling in oil- and liquids-rich regions, we are
contemplating the deployment of fleets to the Bakken Shale in
North Dakota and Montana, the Niobrara Shale in Colorado,
Wyoming and Nebraska and various areas in Oklahoma including the
Granite Wash. We intend to add more hydraulic fracturing fleets
to pursue these opportunities. We expect to add two additional
fleets this year and a total of 12 new fleets with
61
an aggregate horsepower of approximately 455,000 by the end of
2011. Although we currently have no international operations, we
will continue to evaluate those opportunities as they arise.
Focus
on Operational Efficiencies
We intend to continue to focus on improving our operational
efficiencies to increase our asset utilization and to improve
our cost structure. We can quickly reposition our fleet into the
most active and profitable markets as demand for hydraulic
fracturing services changes in order to maintain fleet
utilization, generate additional revenues and improve margins.
In certain circumstances, we have deployed multiple crews for a
single fleet to allow us to operate our fleets on a
24-hour-per-day,
seven-day-per-week
basis, and we will continue to look for opportunities to do so.
We continue to strive to reduce equipment down time through the
use of our regional maintenance centers.
Continue
to Enhance Contract Terms with Customers
In response to increased demand and tight supply of fracturing
fleets in some of our key markets, at the request of a number of
our customers we have informally dedicated one or more of our
fleets exclusively to their operations at agreed prices. These
arrangements increase our ability to forecast future revenues,
increase our ability to deploy our fleets efficiently and
enhance our customer relationships. Currently, 11 of our 22
fleets are informally dedicated to customers under these
arrangements.
We have recently begun negotiating written agreements with
customers pursuant to which we will agree to commit one or more
fleets to their operations. These agreements are typically for
two-year terms and will require customers to pay us a minimum
daily rate, or a minimum amount per quarter. We have entered
into such a written contract with one of our largest customers
for a two-year period relating to two of our fleets in the
Marcellus Shale and with another customer for a one-year period
relating to one of our fleets in the Eagle Ford Shale. Each of
these contracts requires the customer to pay a substantial fee
for early termination of the contract, and the prices we charge
the customers are subject to increases based on increases in our
costs, subject to certain limits. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations How We Generate Our Revenues. We
expect that a majority of the 12 new fleets we plan to deploy by
the end of 2011 will eventually operate under written agreements
with similar provisions. Each of the remaining fleets will be
dedicated to serving multiple customers on an as-available
basis, allowing us to retain the flexibility to serve new
customers and to redeploy our fleets to new regions as
attractive opportunities arise.
Hydraulic
Fracturing Operations
We provide high-pressure hydraulic fracturing (or frac) services
to E&P companies. Fracturing services are performed to
enhance the production of oil and natural gas from formations
having low permeability such that the natural flow is
restricted. We have significant expertise in the fracturing of
multi-stage horizontal oil- and natural gas-rich wells in shale
and other unconventional geological formations. In prior
periods, most of our engagements were for natural gas wells. In
recent periods, we have obtained an increasing number of
engagements in connection with oil wells, particularly in the
Permian Basin and the Eagle Ford Shale. We expect to deploy new
fleets in additional regions with significant oil- and
liquids-directed drilling activity in 2011, which may include
the Bakken Shale in North Dakota and Montana, the Niobrara Shale
in Colorado, Wyoming and Nebraska and various areas in Oklahoma
including the Granite Wash, among others.
The fracturing process consists of pumping a fracturing fluid
into a well at sufficient pressure to fracture the formation.
Materials known as proppants, in our case primarily sand or sand
coated with resin, are suspended in the fracturing fluid and are
pumped into the fracture to prop it open. To a lesser extent, we
also use ceramic materials, which we obtain from third party
suppliers, as proppants. The fracturing fluid is designed to
break, or lose viscosity, and be forced out of the
formation by its pressure, leaving the proppants suspended in
the fractures.
In some cases, fracturing is performed using an acid solution
pumped under pressure without a proppant or with small amounts
of proppant. Acids are typically used to enhance the flow rate
of oil and natural gas
62
from wells that experience formation damage from drilling or
completion fluids or the gradual
build-up of
materials that restrict the flow of hydrocarbons in the
formation. Acidizing entails pumping large volumes of specially
formulated acids into reservoirs to dissolve barriers and
enlarge crevices in the formation, thereby eliminating obstacles
to the flow of oil and natural gas.
We own and operate fleets of mobile hydraulic fracturing units
and other auxiliary heavy equipment to perform fracturing
services. Our hydraulic fracturing units consist primarily of a
high pressure hydraulic pump, a diesel engine, a transmission
and various hoses, valves, tanks and other supporting equipment
that are typically mounted to a flat-bed trailer. The group of
fracturing units, other equipment and vehicles necessary to
perform a typical fracturing job is referred to as a
fleet and the personnel assigned to each fleet are
commonly referred to as a crew. For information
about the equipment that is typically included in a fleet, see
Properties and Equipment
Equipment below. In areas where we operate on a
24-hour-per-day
basis, we typically staff two crews per fleet. We manufacture
all our fracturing units and high pressure pumps in order to
enhance the performance and durability of our equipment and meet
our customers needs. See Our
Company above.
An important element of fracturing services is determining the
proper fracturing fluid, proppants and injection program to
maximize results. Our field engineering personnel provide
technical evaluation and job design recommendations for
customers as an integral element of our fracturing service.
Technological developments in the industry over the past several
years have focused on proppant density control, liquid gel
concentrate capabilities, computer design and monitoring of jobs
and cleanup properties for fracturing fluids.
During fiscal years 2007, 2008 and 2009 and the first nine
months of 2010, our capital expenditures were
$292.5 million, $163.0 million, $61.8 million and
$116.2 million, respectively. We contemplate that we will
make approximately $282 million of capital expenditures for
the full year ending December 31, 2010. This investment
demonstrates our commitment to growing our business and the
significant capital required to be a major participant in the
industry, particularly in shale and other unconventional
formations that place intense mechanical demands on fracturing
equipment.
Our operations are focused in areas of the United States in
which there are significant onshore shale formations in which
E&P companies are actively developing and producing oil and
natural gas. The shale areas in which we are currently most
active are the Haynesville Shale, the Marcellus Shale and the
Eagle Ford Shale. These geologically demanding shale formations
are typically hydraulically fractured in order to be productive.
We also have significant operations in the Permian Basin.
Haynesville Shale. We believe we currently
have the largest market share of any hydraulic fracturing
company in the Haynesville Shale in northwestern Louisiana and
east Texas. Our operations in the Haynesville currently generate
the largest percentage of our revenues of any region. The
Haynesville Shale reservoir is defined by a shale formation
located approximately 1,500 feet below the Cotton Valley
formation at depths ranging from approximately 10,500 feet
to 13,000 feet. The Haynesville Shale, which is as much as
300 feet thick and composed of an organic rich black shale,
has become one of the most active natural gas reservoirs in the
United States. As of September 30, 2010, there were
approximately 191 horizontal natural gas wells being operated in
the Haynesville Shale, and a single well may be completed in as
many as 25 stages, or horizontal zones, each of which requires a
separate fracturing job. We currently have eight fleets
operating in the Haynesville Shale, consisting of 185 fracturing
units with approximately 426,400 aggregate hydraulic horsepower
and eight crews consisting of 240 total employees.
Marcellus Shale. We also believe we currently
have the largest market share of any hydraulic fracturing
company in the Marcellus Shale in Pennsylvania and West
Virginia. The Marcellus Shale ranges in thickness from
approximately 150 to 200 feet at depths between
approximately 5,000 and 8,000 feet. As of
September 30, 2010, there were approximately 131 horizontal
natural gas wells being operated in the Marcellus Shale. We have
been operating in the Marcellus Shale since 2007. We currently
have four fleets operating in this area, consisting of 65
fracturing units with approximately 146,250 aggregate hydraulic
horsepower, and four crews consisting of 90 total employees.
63
Eagle Ford Shale. We have recently begun
operations in the Eagle Ford Shale in south Texas and our market
share is rapidly increasing. The Eagle Ford Shale, which is as
much as 200 feet thick, ranges in depth between
approximately 4,000 and 14,000 feet. This shale, which does
not have significant natural fractures, is considered the
source rock for the Austin Chalk and Edwards
formations above it. As of September 30, 2010, there were
approximately 45 horizontal oil wells and 67 horizontal natural
gas wells being operated in the Eagle Ford Shale. Our first
significant engagement in the Eagle Ford Shale was in August
2010. We currently have three fleets operating in this area,
consisting of 62 fracturing units with approximately 143,000
aggregate hydraulic horsepower, and three crews consisting of 69
total employees. We plan to add an additional three fleets to
our operations in this region during the next 12 months. We
anticipate that our operations in the Eagle Ford Shale will
generate an increasing percentage of our revenue over the next
several years.
Permian Basin. We began our operations in the
Permian Basin in west Texas and southeastern New Mexico in 2007.
The Permian Basin ranges in thickness from approximately 2,000
to 3,000 feet at depths between approximately 7,000 and
10,000 feet. As of September 30, 2010, there were
approximately 268 oil wells and 52 horizontal natural gas wells
being operated in the Permian Basin. We currently have six
fleets operating in this area, consisting of 53 fracturing units
with approximately 138,850 aggregate hydraulic horsepower, and
six crews consisting of 102 total employees.
Barnett Shale. Our operations in the Barnett
Shale in the Fort Worth Basin of north-central Texas were
one of the key drivers of our growth. Earlier in our history, a
majority of our revenues were produced by our operations in the
Barnett Shale, and we had the largest market share of any
hydraulic fracturing company in the region in 2008. In recent
periods, we have expanded our operations in areas with more
challenging geological formations, including those listed above,
where we believe we have a competitive advantage over companies
with less durable equipment or less sophisticated hydraulic
fracturing operations. The Barnett Shale became less significant
to our overall operations, and we are not currently operating in
this region. We still own our district office in this region and
could quickly reestablish operations in the Barnett Shale if
market conditions made it desirable.
Other Formations. In addition to the areas
discussed above, we currently have one fleet providing
fracturing services in the Uinta Basin out of our Vernal, Utah
district office consisting of eight fracturing units and several
smaller pumping systems with approximately 24,000 aggregate
hydraulic horsepower, and one crew consisting of
11 employees. We anticipate expanding our operations in the
near to intermediate term by deploying new fleets in additional
formations, which may include, among others, various areas in
Oklahoma such as the Granite Wash, a tight sands oil and natural
gas formation, and oil-rich regions such as the Bakken Shale in
North Dakota and Montana and the Niobrara Shale in Colorado,
Wyoming and Nebraska.
Sand
Production and Distribution
Sand
Production
The proppants we use most frequently are raw sand and
resin-coated sand. A reliable source of raw sand and the ability
to deliver it to job sites quickly and efficiently are crucial
to the success of our business. This is particularly significant
during periods in which there are shortages of sand, such as
late 2008. As activity in our industry has increased in the
fourth quarter of 2009 and throughout 2010, demand for and
prices of raw sand and resin-coated sand have increased
significantly. We believe shortages could result in certain
markets during 2011. By acquiring extensive reserves of raw
sand, and by operating our own mining and processing facilities
and resin-coating operations, we have provided for ourselves a
stable source of proppants and have reduced our exposure to
potential shortages.
Raw sand is the cheapest widely-used proppant in the industry.
Raw sand that is compliant with American Petroleum Institute
standards is available primarily in only two areas of the
country in large quantities, namely, the northern midwest
(Ottawa sand) and central Texas (Brady sand). We began our
mining operations in Perryville, Missouri in 2007 and in Voca,
Texas in 2008. We are currently seeking permits to operate a
third sand mine, which we own, in Ottawa, Illinois. As of
September 30, 2010, we had estimated sand reserves of
240 million tons, consisting of approximately
180 million tons that we own at our three sand mines and
approximately 60 million
64
tons in which we have rights under a lease on property in
Oakdale, Wisconsin. We own processing plants at our Texas,
Missouri and Wisconsin locations and we intend to build a fourth
processing plant in Illinois when we have completed the
permitting process. We are currently capable of extracting and
processing approximately 2.5 million tons of raw sand per
year. During 2008, 2009 and the first nine months of 2010, we
distributed approximately 705,000 tons, 469,000 tons and 628,000
tons, respectively, of raw sand. Our raw sand and resin-coating
sand operations supplied approximately 70% and 58%,
respectively, of the raw sand and resin-coated sand we used as
proppants in our hydraulic fracturing operations during the nine
months ended September 30, 2010.
In addition to raw sand, we use resin-coated sand as proppants
in the more geologically challenging formations that require
fracturing at higher pressures. Resin-coated sand is raw sand
that has been processed and coated with resin. During 2008, 2009
and the first nine months of 2010, we distributed approximately
106 million pounds, 220 million pounds and
472 million pounds, respectively, of resin-coated sand. We
used all of the resin-coated sand we processed during the nine
months ended September 30, 2010 as proppants in our
fracturing operations.
We acquired a resin-coating operation in Birmingham, Alabama
effective January 1, 2009, in order to provide a stable
supply of resin-coated sand for our operations. We produce
resin-coated sand at this facility primarily using raw sand from
our own mines. We currently operate four production lines in
Birmingham with a combined annual production capacity of
approximately 600 million pounds of resin-coated sand, and
we expect to add up to five additional production lines in the
next 12 months. As part of such expansion, we have entered
into definitive agreements for the acquisition of production
facilities consisting of two production lines in Cutler,
Illinois that will provide an estimated additional annual
production capacity of 400 million pounds of resin-coated
sand. We are also seeking permits to build a resin-coating plant
at our Ottawa, Illinois mine location.
Our reserves of raw sand and our resin-coating operations
provide a reliable source of the sand that we use as proppants
in our operations. We generally meet most of the sand
requirements of our hydraulic fracturing operations with our own
sand, and we anticipate that we will be able to continue to
generally meet our sand requirements for at least the next
20 years. Our sand reserves and production facilities are
strategically located in proximity to key oil and natural gas
producing areas, including the regions in which we are currently
most active. We expect to double our proppant capacity in the
next 12 months by adding new raw sand and resin-coated sand
processing plants and by expanding our existing facilities. This
will support the planned expansion of our fracturing operations
and decrease delivery times to our job sites.
Sand
Distribution
We operate an extensive sand distribution network. Our sand
distribution facilities include a central distribution facility
that we own in Cleburne, Texas and six satellite facilities in
Texas, Louisiana and Pennsylvania that we own or lease. We have
also recently acquired land in Pleasanton, Texas and have begun
building a storage facility and rail yard at that location,
which we expect to open in the fourth quarter of 2010. We own
110 bulk hauling trailers used for highway transportation of
sand and lease approximately 1,100 rail cars. Additional details
about our sand distribution facilities is set forth in the table
below.
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Number of
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Facility-Specific
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Railcar Capacity
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Number of
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Silo Storage Capacity
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Facility Location
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Railcars
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(in tons)
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Silos
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(in tons)
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Cleburne, Texas (owned)
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*
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8
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1,600
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Monahans, Texas (owned)
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80
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8,000
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12
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|
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2,100
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Shreveport, Louisiana (leased)
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50
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5,000
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24
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|
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4,200
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Rook, Pennsylvania (leased)
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14
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1,400
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8
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1,400
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Glenwood, Pennsylvania (leased)
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155
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15,500
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Longview, Texas (owned)
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12
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1,200
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12
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3,000
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Hughes Springs, Texas (leased)
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45
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4,500
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*
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Cleburne is a central distribution
facility and no rail cars are assigned to this facility. We have
approximately 744 railcars in our distribution network that are
not assigned to any specific facility. The total capacity of all
our approximately 1,100 rail cars is approximately 110,000 tons.
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65
Through our sand distribution centers and transportation
infrastructure, we are better able to service our
customers short-notice needs and provide solutions to the
logistical challenges presented by the large volume of sand
required for fracturing jobs. We use our trailers and rail cars
to move this sand quickly and efficiently from our
strategically-located sand distribution centers to our
customers well sites, enabling us to minimize work
stoppages and delays often created in our industry by logistical
issues related to proppant sourcing.
There are significant barriers to entry into the raw sand and
resin-coated sand businesses, including the costs of acquiring
significant reserves of Brady sand or Ottawa sand, the costs of
building processing facilities and establishing a distribution
network, the permit processes, which can be complex and
protracted, and the expertise necessary to produce sand meeting
American Petroleum Institute specifications for oil and natural
gas fracturing sand. We believe these barriers to entry,
together with our extensive reserves and the scope of our
existing and planned production facilities and distribution
network, give us a significant competitive advantage. Given that
multi-stage horizontal wells drilled in shale and other
unconventional formations require large amounts of proppant, our
advantage may become even more significant as the number of
these wells continues to increase.
Manufacturing
Operations
We manufacture all the hydraulic fracturing units we use in our
operations at our manufacturing facilities in Cisco, Texas. At
this facility, we also manufacture many of the components used
in our fracturing units, including fuel tanks, structural
brackets, hoses, mufflers and trailers. At our facility in
Fort Worth, Texas, we manufacture substantially all the
high-pressure hydraulic pumps used in our fracturing units. At
our Aledo, Texas facility, we have recently begun manufacturing
manifolds, which are a significant component of our fracturing
units, and certain of the other service equipment we use in our
operations, including blenders. In the future, we may also
manufacture these items at our Cisco facility.
Our in-house manufacturing operations enable us to increase our
units durability, reliability and utilization, which
allows us to perform in geologically demanding formations that
many of our competitors are unable to fracture efficiently. Our
manufacturing operations also provide significant benefits to
our customers by reducing down time due to equipment failure. We
can also modify our proprietary equipment designs quickly in
response to customer requirements, using the knowledge and
experience we gain by operating in harsh geological
environments. We believe our technologically advanced fleets are
among the newest, most reliable and highest performing in the
industry with the capability of meeting the most demanding
pressure and flow rate requirements in the field. We also
perform maintenance and repair services on our equipment at our
manufacturing facilities and at our district facilities, which
allows us to service and repair our equipment quickly and
efficiently without incurring excessive costs. This further
increases utilization of our fleets and enhances customer
satisfaction because of reduced down time and delays. For these
reasons, we believe our in-house manufacturing operations give
us a significant competitive advantage.
Operating at full capacity, our manufacturing facility in Cisco,
Texas is capable of producing up to 20 fracturing units per
month, with approximately 50,000 aggregate horsepower. In 2008,
we produced 100 fracturing units at this facility. Due to
weakness in the E&P market, we curtailed manufacturing
activities during 2009, by producing 16 fracturing units in
2009. During the first nine months of 2010, we produced 34
fracturing units as activity in our industry increased, and we
anticipate that we will produce 80 fracturing units during the
full year 2010 and approximately 158 units in 2011.
To increase our fracturing units durability, reliability
and utilization, we manufacture a proprietary high pressure pump
consisting of two key assemblies, a power end and a fluid end.
Although the power end of our pumps may last as long as several
years, the fluid end, which is the part of the pump through
which the fracturing fluid is expelled under high pressure, is a
shorter-lasting consumable, typically lasting less than one
year. Our pump manufacturing facility in Fort Worth, Texas
currently has the capacity to manufacture up to 20 power ends
and 100 fluid ends per month to equip new fracturing units and
to replace the fluid ends on our existing fleets. In 2008, 2009
and the first nine months of 2010, we manufactured and used in
our fracturing unit manufacturing operations 138, 271 and 606,
respectively, fluid ends and 96, 11 and 90, respectively,
66
power ends. We intend to increase our high pressure pump
manufacturing capacity through expansion of existing plants and
the addition of new plants.
We estimate that our manufacturing cost per fracturing unit is
approximately 30% less than we would pay to purchase a similar
fracturing unit from outside suppliers and that our
manufacturing cost per fluid end is approximately 30% less than
we would pay to purchase a similar fluid end from outside
suppliers.
We purchase from third party vendors certain of the parts we use
to manufacture our pumps, as well as certain other major
components of our fracturing units, including engines,
transmissions, radiators and trailers, and some of our other
service equipment such as blenders and sand kings.
Chemical
Blending Operations
We formulate and blend the chemical compounds we use in
fracturing fluids in our chemical manufacturing facility and
research and development laboratories in Chickasha, Oklahoma. By
employing a staff of chemists and other technical personnel at
these facilities, we are able to continually improve the
effectiveness of fracturing fluids using proven laboratory
testing methods and information from our operating personnel
about the effectiveness of fracturing fluids in the field. We
believe our chemical blending operations give us the ability to
produce some of the most technologically advanced fracturing
fluids in the industry. For example, through our research and
development efforts, we have recently developed an additive for
fracturing fluids that uses nano particles to enhance recovery
of hydrocarbons from significantly depleted reservoirs. We have
filed a U.S. patent application for the process by which
this additive enhances recovery of oil and natural gas. By
continually improving the chemicals used in our operations, in
many cases with our own proprietary formulas, we are able to
control the quality of fracturing fluids.
By blending the chemicals at our own facilities, we are also
able to reduce costs. We believe our in-house chemical
development and blending operations give us a competitive
advantage over our competitors who purchase all of their
chemicals from third party suppliers.
We distribute the chemicals we use in our operations using our
own trucks.
Properties
and Equipment
In addition to our sand reserves and related properties and
assets, our principal properties include our district office
facilities, manufacturing facilities and equipment and parts
distribution centers, as well as the fracturing units and other
equipment and vehicles operating out of these facilities.
District
Offices
We currently have ten district offices and are conducting
hydraulic fracturing services out of nine of those offices. We
are not currently operating any fleets out of our facility in
Aledo, Texas, as we have discontinued operations in the Barnett
Shale. However, we continue to use the Aledo facility as our
transportation and logistics headquarters, as a training center
and as an equipment repair, maintenance and electronics
installation facility. We have also recently begun manufacturing
certain components of our fracturing units and other service
equipment at the Aledo facility. See
Manufacturing Operations. We can resume
providing fracturing services out of this facility if we
determine to operate in the Barnett Shale in the future. The
following table provides certain information about our district
office locations. Except as indicated, we own
67
the land and facilities at each of these locations. In the
aggregate, we own 271 acres and lease 17 acres of land
on which our district facilities are located.
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Facilities
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Size (Sq. Ft.)
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Acres
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District Office
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Primary Area of Service and Geological Formation
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(approx.)
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(approx.)
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Aledo, Texas (inactive)
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Fort Worth Basin (Barnett Shale)
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79,350
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20
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Longview, Texas
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Eastern Texas and Western Louisiana (Haynesville Shale)
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36,000
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14
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Shreveport, Louisiana
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Ark-La-Tex area (Haynesville Shale)
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35,680
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40
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Odessa, Texas
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West Texas and Southeastern New Mexico (Permian Basin)
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47,820
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30
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Hearne, Texas
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Southeastern Texas (Freestone Trend and Permian Basin)
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17,500
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18
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Artesia, New Mexico
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Southeastern New Mexico (Permian Basin)
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20,500
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16
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Pleasanton, Texas
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South Texas (Eagle Ford Shale)
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9,400
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123
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Williamsport, Pennsylvania
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Pennsylvania (Marcellus Shale)
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19,000
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(1)
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7
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Brownsville, Washington County, Pennsylvania
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Pennsylvania, West Virginia and New York (Marcellus Shale)
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28,000
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(2)
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10
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Vernal, Utah
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Rocky Mountain area in Utah (Uinta Basin)
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20,800
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10
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(1)
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We currently lease
19,000 square feet at this facility. Pursuant to a real
estate purchase and sales contract which is expected to close on
January 14, 2011, we will become the owner of
9,000 square feet at this facility.
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(2)
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We currently lease
28,000 square feet at this facility.
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We own two additional facilities, a
31-acre
facility in McAlester, Oklahoma (from which we served the
Woodford and Fayetteville Shales) and a
28-acre
facility in Conway, Arkansas (from which we served the
Fayetteville Shale), that we used as district offices until late
2008 and late 2009, respectively. We can reopen these facilities
if we determine they are needed for operations in those regions
in the future.
We own approximately 500 additional acres of undeveloped land,
primarily in Colorado, Oklahoma, New Mexico, Texas and Utah, of
which we are currently holding approximately 175 acres for
sale.
Manufacturing
and Distribution Facilities
Our equipment manufacturing and repair plant in Cisco, Texas has
approximately 138,000 square feet of space and, operating
at full capacity, is capable of producing up to 20 fracturing
units per month. At this facility, we also manufacture many of
the components used in our fracturing units, including fuel
tanks, structural brackets, hoses and mufflers, as well as many
of the trailers we use in our operations. We also have a parts
distribution center in Cisco, Texas, which has approximately
35,000 square feet of space.
We manufacture the high-pressure hydraulic pumps that are used
in our fracturing units in an approximately 89,500-square foot
facility owned by us in Fort Worth, Texas.
We operate an approximately 348,000-square foot chemical
manufacturing and blending facility located on approximately
56 acres owned by us in Chickasha, Oklahoma.
We have also recently begun manufacturing certain components of
our fracturing units and other service equipment at our Aledo,
Texas district facility. See Manufacturing
Operations and District Offices.
Headquarters
Our headquarters are located in an approximately 13,000-square
foot facility owned by us in Cisco, Texas.
68
Sales
Offices
We have seven sales offices, which we lease in Fort Worth,
Dallas, Houston, Tyler and Midland, Texas, and in Tulsa and
Oklahoma City, Oklahoma.
Equipment
The equipment and vehicles we use in our operations have
significant value. At September 30, 2010 we were operating
22 hydraulic fracturing fleets. Each fleet typically consists of
eight to 22 fracturing units, two or more blenders (one used as
a backup), which blend the proppant and chemicals into the
fracturing fluid, sand kings, which are large containers used to
store sand on location, various vehicles used to transport sand,
chemicals, gels and other materials, various service trucks and
a monitoring van equipped with monitoring equipment and
computers that control the fracturing process. We design and
manufacture much of the equipment we use in our operations. See
Our Company,
Manufacturing Operations and
Properties and Equipment
Manufacturing Facilities.
At September 30, 2010, the principal equipment that we
owned and used in our hydraulic fracturing operations included
400 fracturing units, all of which were deployed out of our
district offices, a total of 1,468 flat bed trucks and other
transport and service vehicles, 131 blending and storage
containers, and 65 fully-equipped computer monitoring vans.
Customers
Our principal customers are independent E&P companies
conducting onshore operations in the United States. The
following table shows the customers who represented more than
10% of our consolidated gross revenues from our hydraulic
fracturing operations in any of the periods indicated below. The
loss of any of our largest existing customers could have a
material adverse effect on our results of operations.
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|
|
|
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|
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|
|
|
Percentage of Revenues
|
|
|
Year Ended
|
|
Nine Months Ended
|
|
|
December 31,
|
|
September 30,
|
Customer
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Petrohawk Energy Corporation
|
|
|
|
*
|
|
|
3.3
|
|
|
|
20.6
|
|
|
|
18.8
|
|
XTO Energy
Inc.(1)
|
|
|
31.7
|
|
|
|
24.4
|
|
|
|
21.9
|
|
|
|
13.4
|
|
Chesapeake Energy Corporation
|
|
|
9.0
|
|
|
|
17.1
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|
|
|
10.6
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|
|
|
8.8
|
|
Range Resources Corporation
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|
|
10.3
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|
|
|
3.1
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|
|
|
6.7
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|
|
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7.5
|
|
Antero Resources Corporation
|
|
|
16.0
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|
|
|
10.2
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|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Less than 1%
|
|
(1)
|
|
XTO Energy is a subsidiary of Exxon
Mobil Corporation.
|
One of our principal customers, Chesapeake Energy Corporation,
is also a significant equity holder in our company and has the
right to designate one person to serve on our board of
directors. See Principal and Selling Shareholders
and Management Board of Directors and
Executive Officers.
Suppliers
We purchase some of the parts we use in the manufacturing of our
fracturing units and certain of the raw materials we use in our
operations, such as chemicals and diesel fuel, from a variety of
suppliers throughout the United States. We buy all the diesel
engines we use in our fracturing units from Caterpillar Inc. and
Cummins Inc. and all the transmissions we use in our fracturing
units from Caterpillar Inc. and Twin Disc, Inc. We currently
have agreements with Caterpillar and Twin Disc providing for
delivery of specified numbers of transmissions at set prices
during 2010 and 2011, and agreements with Caterpillar and
Cummins providing for delivery of specified numbers of diesel
engines at set prices during 2010 and 2011. We believe we will
be able to enter into similar contracts with these manufacturers
for future periods. To date, we have generally been able to
obtain on a timely basis the equipment, parts and supplies
necessary to support our operations. We have experienced some
delays in obtaining parts that we use in our manufacturing
operations during
69
periods of high demand, and fuel price increases have resulted
in significant increases in our operating costs in certain
periods. If demand for our services and competition in our
industry increase significantly in the future, we could
experience delays or increased costs in acquiring new equipment,
parts or supplies necessary to expand our business.
See Sand Production and Distribution for
information about our sources of supply for the raw sand and
resin-coated sand we use as proppants in our hydraulic
fracturing operations.
Competition
Our competition includes multi-national oilfield service
companies as well as regional competitors. Our major
multi-national competitors are Halliburton Company, Schlumberger
Ltd., and BJ Services Company, each of which has significantly
greater financial resources than we do. In April 2010, BJ
Services Company was acquired by Baker Hughes Incorporated. We
believe we are the third largest hydraulic fracturing service
company in the United States, based on the total horsepower of
our fleets, and that our equipment fleets are significantly
newer than the fleets operated by our major competitors. Our
three large multi-national competitors, as well as some smaller
companies that we do not consider to be our primary competitors,
have more diverse product and service offerings than we do,
providing a number of oilfield services and products in addition
to well stimulation.
Cyclical
Nature of Industry
We operate in a highly cyclical industry. The main factor
influencing demand for fracturing services is the level of
drilling activity by E&P companies, which in turn depends
largely on current and anticipated future crude oil and natural
gas prices and production depletion rates. The most critical
factor in assessing the outlook for the industry is the
worldwide supply and demand for oil and the domestic supply and
demand for natural gas. Demand for oil and natural gas is
cyclical and is subject to large and rapid fluctuations. This is
primarily because the industry is driven by commodity demand and
corresponding price increases. When oil and natural gas price
increases occur, producers increase their capital expenditures,
which generally results in greater revenues and profits for
oilfield service companies. The increased capital expenditures
also ultimately result in greater production, which historically
has resulted in increased supplies and reduced prices that, in
turn, tends to reduce demand for oilfield services such as
hydraulic fracturing services. For these reasons, our results of
operations may fluctuate from quarter to quarter and from year
to year, and these fluctuations may distort
period-to-period
comparisons of our results of operations.
Employees
In general, we believe we have good relations with our
employees. None of our employees is represented by a union. At
September 30, 2010, we had approximately
2,262 employees. Our employees include 1,171 persons
employed at our nine active district offices (our hydraulic
fracturing crews), 576 persons employed at our distribution
and equipment manufacturing and repair facilities, 133
management, administrative and other employees working at
headquarters, 89 persons employed in our resin-coating sand
operations, 50 persons employed in our chemical formulation
and blending operations, and 243 persons employed in
various functions including sales and transportation.
Insurance
We carry a variety of insurance coverages for our operations,
and we are partially self-insured for certain claims, in amounts
that we believe to be customary and reasonable. However, our
insurance may not be sufficient to cover any particular loss or
may not cover all losses. Also, insurance rates have in the past
been subject to wide fluctuation, and changes in coverage could
result in less coverage, increases in cost or higher deductibles
and retentions.
70
Environmental
Regulation
Our operations are subject to stringent federal, state and local
laws regulating the discharge of materials into the environment
or otherwise relating to health and safety or the protection of
the environment. Numerous governmental agencies, such as the
U.S. Environmental Protection Agency, commonly referred to
as the EPA, issue regulations to implement and enforce these
laws, which often require difficult and costly compliance
measures. Failure to comply with these laws and regulations may
result in the assessment of substantial administrative, civil
and criminal penalties, expenditures associated with exposure to
hazardous materials, remediation of contamination, property
damage and personal injuries, as well as the issuance of
injunctions limiting or prohibiting our activities. In addition,
some laws and regulations relating to protection of the
environment may, in certain circumstances, impose strict
liability for environmental contamination, rendering a person
liable for environmental damages and cleanup costs without
regard to negligence or fault on the part of that person. Strict
adherence with these regulatory requirements increases our cost
of doing business and consequently affects our profitability. We
believe that we are in substantial compliance with current
applicable environmental laws and regulations and that continued
compliance with existing requirements will not have a material
adverse impact on our operations. However, environmental laws
and regulations have been subject to frequent changes over the
years, and the imposition of more stringent requirements could
have a material adverse effect on our business, financial
condition and results of operations.
The Comprehensive Environmental Response, Compensation and
Liability Act, referred to as CERCLA or the
Superfund law, and comparable state laws impose strict joint and
several liability, without regard to fault, on certain classes
of persons that are considered to be responsible for the release
of hazardous or other state-regulated substances into the
environment. These persons include the current or former owner
or operator of the disposal site or the site where the release
occurred and the parties that disposed or arranged for the
disposal or treatment of hazardous or other state-regulated
substances that have been released at the site. Under CERCLA,
these persons may be subject to strict, joint and several
liability for the costs of investigating and cleaning up
hazardous substances that have been released into the
environment, for damages to natural resources and for health
studies. In addition, companies that incur liability frequently
confront additional claims because neighboring landowners and
other third parties often file claims for personal injury and
property damage allegedly caused by hazardous or other
state-regulated substances or other pollutants released into the
environment.
The federal Solid Waste Disposal Act, as amended by the Resource
Conservation and Recovery Act of 1976, referred to as
RCRA, generally excludes oil and gas exploration and
production wastes (e.g., drilling fluids, produced waters) from
regulation as hazardous wastes. However, these wastes remain
subject to potential regulation as solid wastes under federal or
state laws. To the extent that these wastes are commingled with
regulated hazardous wastes, the resulting mixture is regulated
as hazardous waste. Moreover, wastes from some of our operations
(such as our chemical development, blending, and distribution
operations) may not qualify for the exemption from regulation as
hazardous waste under RCRA. Further, the exemption under RCRA
does not alter treatment of the substance under CERCLA.
From time to time, releases of materials or wastes have occurred
at locations we own or at which we have operations. These
properties and the materials or wastes released thereon may be
subject to CERCLA, RCRA, the federal Clean Water Act, and
analogous state laws. Under these laws or other laws and
regulations, we have been and may be required to remove or
remediate these materials or wastes and make expenditures
associated with personal injury or property damage. At this
time, with respect to any properties where materials or wastes
may have been released, but of which we have not been made
aware, it is not possible to estimate the potential costs that
may arise from unknown, latent liability risks.
On June 9, 2009, companion bills entitled the Fracturing
Responsibility and Awareness of Chemicals (FRAC) Act of 2009
were introduced in the United States Senate (Senate Bill number
1215) and House of Representatives (House Bill number
2766). Currently, unless the fracturing fluid used in the
hydraulic fracturing process contains diesel, hydraulic
fracturing operations are exempt from regulation under the
federal Safe Drinking Water Act. The FRAC Act would remove the
permit exemption and require the federal Environmental
Protection Agency, commonly referred to as the EPA, to
promulgate regulations on hydraulic
71
fracturing. Further, states with delegated authority to
implement the Safe Drinking Water Act would have to modify their
programs to remain consistent with any new federal regulations.
The FRAC Act would also require persons conducting hydraulic
fracturing, such as us, to disclose the chemical constituents,
but not the proprietary formulas, of their fracturing fluids to
a regulatory agency. This Act would make the information public
via the internet, which could make it easier for third parties
opposing the hydraulic fracturing process to initiate legal
proceedings based on allegations that specific chemicals used in
the fracturing process could adversely affect groundwater.
Fracturing companies would be required to disclose specific
chemical contents of fluids, including proprietary chemical
formulas, to state authorities or to a requesting physician or
nurse if deemed necessary by the physician or nurse in
connection with a medical emergency. If this or similar
legislation becomes law, it could establish an additional level
of regulation at the federal level that could lead to
operational delays or increased operating costs, make it more
difficult to perform hydraulic fracturing and increase our costs
of compliance and doing business. Currently, neither S. 1215 nor
H.R. 2766 is scheduled for consideration by the Senate or the
House, and it is not clear whether the 111th Congress will act
on either bill. Compliance or the consequences of any failure to
comply by us could have a material adverse effect on our
business, financial condition and results of operations.
Disclosure of our proprietary chemical formulas to third parties
or the public, even if inadvertent, could diminish the value of
those formulas and result in competitive harm to us.
Another bill has been introduced in Congress in 2010 that would
require disclosure of chemicals used in hydraulic fracturing
operations. The Clean Energy Jobs and Oil Company Accountability
Act of 2010 (S. 3663) remains on the Senate Legislative
Calendar under General Orders, and would amend the Emergency
Planning and Community
Right-to-Know
Act to require any person using hydraulic fracturing for an oil
or natural gas well to submit to the state or make publicly
available the list of chemicals used in each hydraulic
fracturing process (identified by well location and number),
including the chemical constituents of mixtures, Chemical
Abstracts Service registry numbers, and material safety data
sheets. S. 3663 would not, however, require public disclosure of
proprietary chemical formulas.
Several states have considered, or are considering, legislation
or regulations similar to the federal legislation described
above or are taking actions to restrict hydraulic fracturing in
certain jurisdictions. In June 2010, the Wyoming Oil and Gas
Conservation Commission passed a rule requiring disclosure of
the contents of hydraulic fracturing fluids. In October 2010,
the Governor of Pennsylvania issued a moratorium on new natural
gas development on state forest lands. In November 2010, the
Pennsylvania Environmental Quality Board proposed regulations
that would require reporting of the chemicals used in fracturing
fluids. At this time, it is not possible to estimate the
potential impact on our business of these state actions or the
enactment of additional federal or state legislation or
regulations affecting hydraulic fracturing.
On February 18, 2010, the Energy and Commerce Committee of
the United States House of Representatives requested that we and
other companies provide information concerning chemicals used in
hydraulic fracturing. We have received
follow-up
requests from the Committee for additional information and
documentation. We have worked with the Committees staff to
provide information concerning such chemicals while at the same
time acting to protect our proprietary interests and fulfill
contractually imposed confidentiality obligations to certain
customers.
Also, the EPA is reviewing the scope of its existing regulatory
authority and evaluating whether and how it can regulate
hydraulic fracturing. The EPA recently requested information
from several well-servicing companies concerning chemicals used
in hydraulic fracturing. To date, the EPA has not requested
information from us. In addition, in March 2010, the EPA
announced its intention to conduct a comprehensive research
study, ordered by Congress, on the potential adverse impacts
that hydraulic fracturing may have on water quality and public
health. The EPA is conducting public hearings across the country
as part of this study. Thus, even if the FRAC Act or similar
legislation is not adopted, the EPA study, depending on its
results, could spur further initiatives to regulate hydraulic
fracturing under the Safe Drinking Water Act. The EPA has
announced that the energy extraction sector is one of the
sectors designated for increased enforcement over the next three
to five years.
72
Additionally, the EPAs Tier IV regulations apply to
certain off-road diesel engines used by us to power equipment in
the field. Under these regulations, we are limited in the number
of non-compliant off-road diesel engines we can purchase. Until
Tier IV-compliant
engines that meet our needs are available, these regulations
could limit our ability to acquire a sufficient number of diesel
engines to expand our fleet and to replace existing engines as
they are taken out of service. We have, therefore, taken steps
intended to ensure both compliance with these regulations and an
adequate supply of diesel engines to meet growth and replacement
needs.
Our operations are also subject to the federal Clean Water Act
and analogous state laws. Under the Clean Water Act, the EPA has
adopted regulations concerning discharges of storm water runoff.
This program requires covered facilities to obtain individual
permits, or seek coverage under a general permit. Some of our
properties may require permits for discharges of storm water
runoff and, as part of our overall evaluation of our current
operations, we would apply for storm water discharge permit
coverage for those properties, and update storm water discharge
management practices at some of our facilities. We believe that
we will be able to obtain, or be included under, these permits,
where necessary, and make minor modifications to existing
facilities and operations that would not have a material effect
on us.
The Federal Clean Air Act and comparable state laws regulate
emissions of various air pollutants through air emissions
permitting programs and the imposition of other requirements. In
addition, the EPA has developed and continues to develop
stringent regulations governing emissions of toxic air
pollutants from specified sources. Federal and state regulatory
agencies can impose administrative, civil and criminal penalties
for non-compliance with air permits or other requirements of the
Federal Clean Air Act and associated state laws and regulations.
We are required to obtain federal and state permits in
connection with our sand mining and processing activities under
applicable laws. These permits impose certain conditions and
restrictions on our operations, some of which require
significant expenditures for filtering or other emissions
control devices at each of our processing facilities. Changes in
these requirements, or in the permits we operate under, could
increase our costs or limit the amount of sand we can process.
E&P activities on federal lands are subject to the National
Environmental Policy Act, or NEPA. NEPA requires federal
agencies, including the Department of Interior, to evaluate
major agency actions that have the potential to significantly
impact the environment. In the course of such evaluations, an
agency will prepare an Environmental Assessment that assesses
the potential direct, indirect and cumulative impacts of a
proposed project and, if necessary, will prepare a more detailed
Environmental Impact Statement that may be made available for
public review and comment. All of our activities and our
customers current E&P activities, as well as proposed
exploration and development plans, on federal lands require
governmental permits that are subject to the requirements of
NEPA. This process has the potential to delay the development of
oil and natural gas projects.
Various state and federal statutes prohibit certain actions that
adversely affect endangered or threatened species and their
habitat, migratory birds, wetlands, and natural resources. These
statutes include the Endangered Species Act, the Migratory Bird
Treaty Act, the Clean Water Act and CERCLA. Where takings of or
harm to species or damages to wetlands habitat or natural
resources occur or may occur, government entities or at times
private parties may act to prevent oil and gas exploration
activities or seek damages for harm to species, habitat, or
natural resources resulting from filling of wetlands or
construction or releases of oil, wastes, hazardous substances or
other regulated materials.
Many nations have agreed to limit emissions of greenhouse
gases pursuant to the United Nations Framework Convention
on Climate Change, also known as the Kyoto Protocol.
Methane, a primary component of natural gas, and carbon dioxide,
a byproduct of the burning of oil, natural gas, and refined
petroleum products, are greenhouse gases regulated
by the Kyoto Protocol. Although the United States is not
participating in the Kyoto Protocol at this time, several states
have adopted legislation and regulations to reduce emissions of
greenhouse gases. Additionally, the U.S. Supreme Court has
ruled, in Massachusetts, et al. v. EPA, that the EPA
abused its discretion under the Clean Air Act by refusing to
regulate carbon dioxide emissions from mobile sources. As a
result of the Supreme Court decision and the change in
presidential administrations, the EPA recently enacted federal
greenhouse gas regulations and emissions limits under the
73
Clean Air Act. The EPAs action may affect the outcome of
other climate change lawsuits pending in U.S. federal
courts in a manner unfavorable to our industry. The EPA has
proposed and finalized a number of rules requiring a number of
industry sectors to track and report, and, in some cases,
control greenhouse gas emissions. EPAs Mandatory Reporting
of Greenhouse Gases Rule was published in October 2009. This
rule requires large sources and suppliers in the U.S. to
track and report greenhouse gas emissions. On November 8,
2010, the EPA finalized a rule that sets forth reporting
requirements for the petroleum and natural gas industry. Among
other things, this final rule requires persons that hold state
permits for onshore oil and gas exploration and production and
that emit 25,000 metric tons or more of carbon dioxide
equivalent per year to annually report carbon dioxide, methane,
and nitrous oxide combustion emissions from (1) stationary
and portable equipment and (2) flaring. Under the final
rule, our customers may be required to include calculated
emissions from our hydraulic fracturing equipment located on
their well sites in their emission inventory. In June 2010, the
EPAs Greenhouse Gas Tailoring Rule became effective. For
this rule to apply initially, the source must already be subject
to the Clean Air Act Prevention of Significant Deterioration
program or Title V permit program. We are not subject to
either Clean Air Act program. The EPA and the National Highway
Traffic Safety Administration recently announced their intent to
propose coordinated rules to regulate greenhouse gas emissions
from heavy-duty engines and vehicles, and light-duty vehicles.
To date, proposed rules have not been issued. In addition, the
U.S. House of Representatives passed the American Clean
Energy and Security Act on June 26, 2009, which would,
among other things, establish a
cap-and-trade
system to regulate greenhouse gas emissions. Although a number
of climate change bills are pending in various Senate
Committees, the full Senate appears unlikely to consider or pass
any climate change measures in the current term. Even without
federal legislation or regulation of greenhouse gas emissions,
states may pursue the issue either directly or indirectly.
Restrictions on emissions of methane or carbon dioxide that may
be imposed in various states could adversely affect the oil and
natural gas industry and, therefore, could reduce the demand for
our products and services.
On the other hand, climate change regulation may drive an
increased demand for natural gas for producing electricity and
as a transportation fuel. An increased demand for natural gas
may positively affect our business. Currently, our operations
are not adversely impacted by existing state and local climate
change initiatives. At this time, we cannot accurately estimate
how potential future laws or regulations addressing greenhouse
gas emissions would impact our business.
We seek to minimize the possibility of a pollution event through
equipment and job design, as well as through an extensive
training program for our employees. However, if a pollution
event does occur, we have a thorough pollution risk management
program in place to address the issue. We carry a comprehensive
insurance portfolio designed to respond to any foreseeable
environmental exposures. This insurance portfolio has been
structured to address incidents that result in bodily injury or
property damage and any ensuing clean up needed at our owned
facilities, as a result of the mobilization and utilization of
our fleet, as well as any claims resulting from our operations.
Safety
and Health Regulation
We are subject to the requirements of the federal Occupational
Safety and Health Act, commonly referred to as OSHA, and
comparable state statutes that regulate the protection of the
health and safety of workers. In addition, the OSHA hazard
communication standard requires that information be maintained
about hazardous materials used or produced in operations and
that this information be provided to employees, state and local
government authorities and the public. We believe that our
operations are in substantial compliance with the OSHA
requirements, including general industry standards, record
keeping requirements, and monitoring of occupational exposure to
regulated substances.
Our sand mining operations are subject to the requirements of
the Mine Safety and Health Act of 1969, commonly referred to as
MSHA, which imposes comprehensive safety and health standards on
all aspects of mining operations. In addition to federal
regulatory programs, the states in which our mines are located
have programs aimed at improving mine safety and health. In
reaction to recent mine accidents, particularly in the coal
mining industry, federal and state legislatures and regulatory
authorities have increased scrutiny of mine safety matters and
passed more stringent laws governing mining. We have received
citations related to
74
violations of a number of MSHA regulations relating to our
operations at our sand mines. These citations generally require
the payment of fines, none of which has been material.
Intellectual
Property Rights
Our research and development efforts are focused on providing
specific solutions to the challenges our customers face when
fracturing and stimulating wells. In addition to the design and
manufacture of innovative equipment, we have also developed
proprietary blends of chemicals that we use in connection with
our hydraulic fracturing services. We have filed five patent
applications relating to our fracturing methods, including a
method for applying nano particles to enhance recovery of
hydrocarbons from oil and natural gas reservoirs, for the
technology used in our high-pressure fluid ends, pumps and other
equipment and for certain of our chemicals. These applications
include three U.S. applications and two patent cooperation
treaty applications. The patent cooperation treaty applications
preserve our right to file certain patent applications in other
countries.
We believe our rights in the name Frac Tech, as well
as information regarding our customer and supplier
relationships, are also valuable proprietary assets. We have a
federally registered service mark for the name Frac
Tech in combination with our logo and for various other
marks, and have pending applications and registered trademarks
for various names under which our subsidiaries conduct business.
Except for the foregoing, we do not own or license any patents,
trademarks or other intellectual property that we believe to be
material to the success of our business.
Legal
Proceedings
We are involved in various legal proceedings from time to time
in the ordinary course of our business. However, we are not
currently involved in any legal proceedings that we believe are
likely to have a material adverse effect on our operations or
financial condition.
75
MANAGEMENT
Directors
and Executive Officers
The following persons will serve in the positions indicated for
Frac Tech Services, Inc., upon consummation of our
Reorganization, which we will complete immediately prior to the
closing of this offering. See History and
Reorganization. Each person currently serves in
corresponding positions for Frac Tech Services, LLC.
|
|
|
|
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Name
|
|
Age
|
|
Position
|
|
Dan Wilks
|
|
|
54
|
|
|
Chief Executive Officer and Director
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Farris Wilks
|
|
|
58
|
|
|
Chief Operating Officer and Director
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Bill Barker
|
|
|
53
|
|
|
Executive Vice President of Sales and
|
|
|
|
|
|
|
Operations and Director
|
Marc Rowland
|
|
|
58
|
|
|
President and Chief Financial Officer
|
Domenic J. DellOsso
|
|
|
34
|
|
|
Director
|
Kevin McGlinch
|
|
|
40
|
|
|
Senior Vice President Finance and
|
|
|
|
|
|
|
Treasurer
|
James Coy Randle, Jr.
|
|
|
49
|
|
|
Senior Vice President of Operations
|
Brad Holms
|
|
|
57
|
|
|
Senior Vice President of Marketing and
|
|
|
|
|
|
|
Technology
|
John Carlton
|
|
|
50
|
|
|
Senior Vice President of Sales
|
William A. Hicks
|
|
|
56
|
|
|
Vice President and General Counsel
|
Sharon E. Hicks
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|
|
47
|
|
|
Vice President and Senior Legal Counsel
|
Dan Wilks, Chief Executive Officer and director, is one
of our co-founders. Mr. Wilks is also a co-founder and
co-owner of Wilks Masonry Corporation, a Texas corporation,
Interstate Explorations LLC, a Texas limited liability company,
and Cisco Supply, Ltd., a Texas limited partnership.
Mr. Wilks has more than 25 years of experience in the
oilfield business.
Farris Wilks, Chief Operating Officer and director, is
one of our co-founders. Mr. Wilks is also a co-founder and
co-owner of Wilks Masonry Corporation, a Texas corporation,
Interstate Explorations LLC, a Texas limited liability company,
and Cisco Supply, Ltd., a Texas limited partnership.
Mr. Wilks has more than 25 years of experience in the
oilfield business.
Bill Barker has served as Executive Vice President of
Sales and Operations since November 1, 2010. He joined us
as President of Operations and manager in March 2003. He
continues to serve as a manager, and will serve as a director
upon consummation of our Reorganization. Previously,
Mr. Barker worked for BJ Services Company for 23 years
as a Senior Sales Representative, Product Champion, and
Operations Manager.
Marc Rowland joined us as our President and Chief
Financial Officer on November 1, 2010. Previously, he was
Chesapeake Energy Corporations designee on our board of
managers from 2006 to October 29, 2010 pursuant to an
agreement entered into in connection with Chesapeakes
initial investment in us. Prior to November 1, 2010,
Mr. Rowland worked for Chesapeake as their Executive Vice
President and Chief Financial Officer, and he continues to serve
as a director of Chesapeake Midstream Partners, L.P., a public
company, a position he has held since January 2010. From 1990
until he joined Chesapeake in 1993, Mr. Rowland was Chief
Operating Officer of Anglo-Suisse, L.P. assigned to the White
Nights Russian Enterprise, a joint venture of Anglo-Suisse, L.P.
and Phibro Energy Corporation, a major foreign operation which
was granted the right to engage in oil and gas operations in
Russia. Prior to his association with White Nights Russian
Enterprise, Mr. Rowland owned and managed his own natural
gas and oil company and prior to that was Chief Financial
Officer of a private exploration company in Oklahoma City from
1981 to 1985. Mr. Rowland graduated from Wichita State
University and is a Certified Public Account.
76
Domenic J. DellOsso joined us as a director on
October 29, 2010. Mr. DellOsso is the designee
of Chesapeake Energy Corporation on our board, succeeding
Mr. Rowland in that capacity, pursuant to an agreement
entered into in connection with Chesapeakes initial
investment in our company. Mr. DellOsso currently
serves as Chesapeake Energy Corporations Executive Vice
President and Chief Financial Officer. Prior to November 1,
2010, Mr. DellOsso served as Vice President of
Finance of Chesapeake Energy Corporation and as Chief Financial
Officer of Chesapeakes wholly-owned midstream subsidiary,
Chesapeake Midstream Development, L.P. Before joining Chesapeake
in 2008, Mr. DellOsso worked at Jefferies &
Company, Inc. and Banc of America Securities as an energy
investment banker. Mr. DellOsso graduated from Boston
College in 1998 with a degree in Economics and from The
University of Texas with an MBA in 2003.
Kevin McGlinch has served as Senior Vice President of
Finance and Treasurer since November 1, 2010. He joined us
in September 2008 as our Corporate Controller and in November
2008 became our Chief Financial Officer. During the year and a
half prior to joining us, Mr. McGlinch worked for Vought
Aircraft Industries, Inc. as their Corporate Controller. Prior
to his job at Vought Aircraft Industries, Inc.,
Mr. McGlinch worked for two years as the Controller of
EDSCO Fasteners. He has 18 years of finance and accounting
experience with leading manufacturers such as Sherwin-Williams,
Stanley, NewellRubbermaid, and Vought Aircraft. He has served in
a variety of financial roles for those companies. He has a BS in
Finance from Miami University, a JD from Capital University, and
an MBA from the University of North Carolina as well as a CPA
certification.
James Coy Randle, Jr. has served as our Senior Vice
President of Operations since March 2009. He joined us as
Southern Division Manager in March 2007 and served as Vice
President of Operations from August 2007 to March 2009.
Mr. Randle has more than 27 years of oilfield services
experience, including 25 years operating and supervising
various business units for BJ Services Company, most recently as
a Division Manager from 2001 to 2007.
Brad Holms has served as our Senior Vice President of
Marketing and Technology since November 2007. Before joining us,
Mr. Holmes worked for Schlumberger Limited for
30 years, most recently in the position of Global Account
Manager. Mr. Holms has more than 33 years of
experience in marketing, technology, operations management,
global sales and account management.
John Carlton has served as our Senior Vice President of
Sales since June 2008. He joined us in September 2007 as
Regional Sales Manager. For seven years before joining us,
Mr. Carlton served as Basin Sales Manager of Schlumberger
Limited. Mr. Carlton has more than 28 years of
oilfield services experience, including both cementing and
hydraulic fracturing. He served in various engineering and
management positions in both operations and sales for
Schlumberger Limited in the United States, Saudi Arabia and
Dubai U.A.E., for 25 years. Mr. Carlton received a
bachelors degree in engineering from Texas A&M
University in 1982.
William A. Hicks, Vice President and General Counsel,
joined us as General Counsel in January 2007 after over
26 years as a director and shareholder with the Abilene,
Texas law firm of McMahon, Surovik, Suttle, PC. He is a 1976
graduate of Lamar University and 1980 graduate of Texas Tech
School of Law. He is a Fellow in the American College of Trial
Attorneys, a Life Fellow in the Texas Bar Foundation, a member
of the American Board of Trial Advocates, a member of the
Association of Corporate Counsel, and a member of the Texas and
American Bar Associations. He is licensed in all Texas state
courts and Federal District Courts for the Northern and Western
Districts of Texas, as well as the Fifth Circuit Court of
Appeals.
Sharon E. Hicks, Vice President and Senior Legal Counsel,
joined us in January 2007. She began her legal career in 1988
with the Cantey & Hanger law firm in Fort Worth,
Texas, then practiced 15 years with the City of Abilene,
serving the last 10, until December 2006, as City Attorney. She
received her undergraduate degree from Texas A&M and her
law degree from the University of Texas in 1988. She is licensed
in all Texas state courts and the Federal District Court for the
Northern District of Texas as well as the Fifth Circuit Court of
Appeals. She is a member of the Association of Corporate Counsel
and the Texas and American Bar Associations.
77
Dan Wilks and Farris Wilks are brothers. William A. Hicks and
Sharon E. Hicks are husband and wife. Except for the foregoing,
none of our managers or executive officers has any family
relationship with any of our other managers or executive
officers.
Board of
Directors
Our board of directors currently has four members, each of whom
is a manager of Frac Tech Services, LLC and will continue to
serve on our board after our Reorganization. All directors will
serve until they resign, are removed, die or until their
successors are elected and take office. Three of our directors,
Dan Wilks, Farris Wilks and Bill Barker, are also executive
officers. None of our current directors is an
independent director under the standards of the New
York Stock Exchange (NYSE) and Securities and
Exchange Commission (SEC) regulations. We are
currently seeking to add three independent directors to our
board. Although we have not established any specific objective
criteria for service on our board, we anticipate that we will
offer the positions to persons who have significant experience
relevant to companies in our industry and other qualifications
that the existing members of our board believe will enable such
persons to make significant contributions to our company. In
addition, we will seek to identify candidates to fill the
positions who meet the requirements for service on our Audit
Committee, as described below.
After this offering, World Investment Group, LLC, an entity
controlled by our founders, Dan Wilks and Farris Wilks, will own
a majority of our outstanding voting stock and we will be a
controlled company under the corporate governance
rules of the NYSE. As a controlled company, we are eligible for
exemptions from some of the requirements of these rules,
including the requirements (i) that a majority of our board
of directors consist of independent directors, (ii) that we
have a nominating and corporate governance committee and a
compensation committee, which are composed entirely of
independent directors and governed by a written charter
addressing the committees purpose and responsibilities,
and (iii) for annual performance evaluations of the
nominating and corporate governance committee and the
compensation committee. We intend to rely on some or all of
these exemptions for as long as our founders or any other person
or entity continues to own a majority of our outstanding voting
stock. If we cease to be a controlled company within the meaning
of these rules, we will be required to comply with these
provisions after the specified transition periods.
The number of executive and non-executive directors will be
determined by the board of directors. Our founders, through
World Investment Group, LLC, will continue to control the
election of members of the board of directors. Pursuant to an
agreement entered into with Chesapeake Energy Corporation and
our other equity holders in connection with that companys
initial investment in us, Chesapeake has the right to designate
one person to serve on our board for as long as Chesapeake owns
any of our outstanding securities. Mr. DellOsso is
currently serving as Chesapeakes designee on our board.
Committees
of the Board of Directors
Prior to the closing of this offering, our board of directors
will establish an Audit Committee, a Compensation Committee and
a Nominating and Governance Committee, and may establish such
other committees as the board of directors shall determine from
time to time. Each of the standing committees of the board of
directors will have the responsibilities described below.
Audit
Committee
We will rely on the phase-in rules of the SEC and NYSE with
respect to the independence of our Audit Committee. These rules
permit us to have an Audit Committee that has one member that is
independent upon the effectiveness of the registration statement
of which this prospectus forms a part, a majority of members
that are independent within 90 days thereafter and all
members that are independent within one year thereafter. We
anticipate that our Audit Committee will initially consist of
three members who are financially literate, one of whom is an
audit committee financial expert as described in
Item 407(d)(5) of
Regulation S-K
and one of whom is independent under the standards
of the NYSE and SEC regulations.
78
This committee will oversee, review, act on and report on
various auditing and accounting matters to our board of
directors, including: the selection of our independent
accountants, the scope of our annual audits, fees to be paid to
the independent accountants, the performance of our independent
accountants and our accounting practices. In addition, the Audit
Committee will oversee our compliance programs relating to legal
and regulatory requirements. We will adopt an Audit Committee
charter defining the committees primary duties in a manner
consistent with the rules of the SEC and NYSE or market
standards. A copy of that charter will be available on our
website following this offering.
Compensation
Committee
This committee will establish salaries, incentives and other
forms of compensation for officers and other employees. Our
Compensation Committee will also administer our incentive
compensation and benefit plans. We will adopt a Compensation
Committee charter defining the committees primary duties
in a manner consistent with the rules of the SEC and NYSE or
market standards. A copy of that charter will be available on
our website following this offering.
Nominating
and Governance Committee
This committee will identify, evaluate and recommend qualified
nominees to serve on our board of directors, develop and oversee
our internal corporate governance processes and maintain a
management succession plan. We will adopt a Nominating and
Governance Committee charter defining the committees
primary duties in a manner consistent with the rules of the SEC
and NYSE or market standards. A copy of that charter will be
available on our website following this offering.
Compensation
Committee Interlocks and Insider Participation
We anticipate that all the persons who will be initial members
of our Compensation Committee may also be executive officers of
ours. Except as set forth in the following paragraph, none of
our executive officers serves on the board of directors or
compensation committee of a company that has an executive
officer that serves on our board or Compensation Committee, and
no member of our board is an executive officer of a company in
which one of our executive officers serves as a member of the
board of directors or compensation committee.
Our founders, Dan Wilks and Farris Wilks, are executive officers
and directors or managers of us and of certain other companies
that are owned and controlled by them, and they have
participated in compensation decisions for all such entities.
Those entities include Wilks Masonry Corporation, Cisco
Trucking, Inc., Cisco Supply, Ltd., Interstate Exploration, LLC,
Wilks Ranch Texas, Ltd., Wilks Ranch Idaho, Ltd., Wilks Ranch
Montana, Ltd., Wilks Ranch Holdings, LLC and THC Investments,
LLC. See Certain Relationships and Related Party
Transactions for information about certain transactions
between us and certain of such entities.
To the extent any members of our Compensation Committee and
affiliates of theirs have participated in transactions with us,
those transactions are described in Certain Relationships
and Related Party Transactions.
Code of
Business Conduct and Ethics
Our board of directors will adopt a code of business conduct and
ethics applicable to our employees, directors and officers, in
accordance with applicable U.S. federal securities laws and
the corporate governance rules of the NYSE. Any waiver of this
code may be made only by our board of directors and will be
promptly disclosed as required by applicable U.S. federal
securities laws and the corporate governance rules of the NYSE.
Corporate
Governance Guidelines
Our board of directors will adopt corporate governance
guidelines in accordance with the corporate governance rules of
the NYSE.
79
EXECUTIVE
COMPENSATION AND OTHER INFORMATION
Compensation
Discussion and Analysis
This compensation discussion and analysis, or CD&A,
provides information about our compensation objectives and
policies for our principal executive officer, our principal
financial officer and our other three most highly-compensated
executive officers, and is intended to place in perspective the
information contained in the executive compensation tables that
follow this discussion. This CD&A provides a general
description of our executive compensation program and specific
information about its various components.
Throughout this discussion, the following individuals are
referred to as the Named Executive Officers and
included in the Summary Compensation Table:
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Dan Wilks, Chief Executive Officer;
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Marc Rowland, President and Chief Financial Officer (beginning
November 1, 2010);
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Farris Wilks, Chief Operating Officer;
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Bill Barker, Executive Vice President of Sales and Operations;
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Kevin McGlinch, Senior Vice President of Finance and Treasurer
(our Chief Financial Officer prior to November 1,
2010); and
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William A. Hicks, Vice President and General Counsel.
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Contemporaneously with this offering, we anticipate making
adjustments to our compensation practices to be used in 2011 and
later years that we believe will be appropriate for a company
with public shareholders. This CD&A discusses the
compensation practices in place during 2010 and highlights
changes we anticipate implementing for 2011 upon the
consummation of this offering.
Compensation
Program Objectives
Our founders, Dan Wilks and Farris Wilks, control a majority of
the voting power of our outstanding equity securities and will
continue to do so after this offering. Prior to the consummation
of this offering, our board of directors, comprised of Dan
Wilks, Farris Wilks and Bill Barker, each of whom is an
executive officer, and a designee of Chesapeake Energy
Corporation (currently, Domenic J. DellOsso), has
made all of our compensation decisions.
Our compensation program is designed to reward performance that
supports our long-term strategy and achievement of our
short-term goals. We believe that compensation should:
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help to attract and retain talented individuals to contribute to
our sustained progress, growth and profitability by being
competitive with compensation paid to persons having similar
responsibilities and duties in other companies in the same and
closely related industries;
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align the interests of the individual with those of our
shareholders and long-term value creation; and
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reflect the unique qualifications, skills, experience and
responsibilities of each individual.
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Although not formally adopted as objectives for 2010 and prior
years, the preceding objectives are consistent with the informal
objectives we have employed historically.
Setting
Executive Officer Compensation
Prior to the consummation of this offering, Dan Wilks, our Chief
Executive Officer, Farris Wilks, our Chief Operating Officer,
and Marc Rowland, our President and Chief Financial Officer,
will together review our Named Executive Officers
compensation and make a recommendation to our board of directors
on overall compensation structure and individual compensation
levels for each executive officer, including themselves, to be
effective contemporaneous with this offering. Their
recommendation will be made based on their
80
experience in managing executives and establishing compensation.
Our board of directors will consider this recommendation, which,
if approved, will become effective upon the consummation of this
offering.
Following consummation of this offering, our Compensation
Committee will determine the compensation of our Named Executive
Officers for future years, subject to the terms of the
employment agreements we have entered into or will enter into
with some of our executive officers. Compensation decisions will
be qualitative, not quantitative, and will take into account
such factors as the Compensation Committee may deem relevant
such as the particular officers contribution to our
financial performance and condition, as well as such
officers qualifications, skills, experience and
responsibilities. We expect external factors may be considered
as well, such as industry shortages of qualified employees for
such positions and other market factors.
Historically, neither our board of directors nor our management
has used peer group analyses or benchmarking for executive
compensation purposes. In the future, our Compensation Committee
may review survey information as a frame of reference, but we do
not anticipate that we will set base salary and bonus or
targeted total compensation at any certain percentile of
compensation paid by peer group or other companies included in
any survey.
Elements
of Our Compensation and Why We Pay Each Element
Historically, our compensation program consisted of base salary
and periodic discretionary bonus awards. Following the
consummation of this offering, we expect that the compensation
program for our Named Executive Officers will be comprised of
three elements: base salary, bonus awards and other employee
benefits. We also may make awards of long-term equity-based
compensation.
Base Salary. Contemporaneously with the
consummation of this offering, we anticipate that we will
implement salary increases for certain of our Named Executive
Officers in order to bring their base salaries in line with
similarly titled executives at comparable public companies. The
base salary changes, upon the effectiveness of this offering,
are set forth in the following table:
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2010 Base
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2011 Base
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Annual Salary
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Annual Salary
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Dan Wilks
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$
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$
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Marc Rowland
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$
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$
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Farris Wilks
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$
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$
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Bill Barker
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$
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$
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Kevin McGlinch
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$
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$
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William A. Hicks
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$
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$
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We pay each Named Executive Officer a base salary in order to:
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recognize each executive officers unique value and
historical contributions to our success in light of salary norms
in the industry and the general marketplace,
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remain competitive for executive talent within our
industry, and
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reflect position and level of responsibility.
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Bonus Awards. Each year since we began
operations, our board of directors has had discretion to award
cash bonuses. Although these bonuses were discretionary, our
board considered company and individual achievement of
performance goals in setting award levels.
While we expect to continue our practice of paying discretionary
cash bonuses, we may implement annual performance-based cash
bonus awards as part of our compensation program if we conclude
these awards will help to:
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motivate management to achieve key shorter-term corporate
objectives, and
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align executives interests with our equity holders
interests.
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81
In December 2010 Messrs. Wilks, Wilks and Barker received
bonuses of
$ ,
$
and
$ ,
respectively.
In November 2010 Mr. Rowland received a one-time signing bonus
of $5.0 million. Pursuant to his employment agreement he
will be paid a retention bonus of $5.2 million, payable in
equal installments on the first, second and third anniversaries
of the date he commenced employment with us.
Long-Term Equity-Based Incentives. For 2011
and later years, we believe it is important and consistent with
the compensation programs of the companies with whom we compete
for talent within our industry to establish a formal long-term
equity incentive program. As a result, we will adopt a Long-Term
Incentive Plan, or LTIP, to be effective as of the consummation
of this offering, that permits the grant of stock options,
restricted stock, restricted stock units, stock appreciation
rights, and other awards, any of which may be designated as
performance awards or be made subject to other conditions, to
our Named Executive Officers and other eligible employees in
2011 and later years. See Long-Term Incentive
Plan.
The committee responsible for the administration of the LTIP (or
its designee) will have the authority to award incentive
compensation to our executive officers in such amounts and on
such terms as the committee determines to be appropriate.
We have not historically made equity compensation awards to our
executives. In October 2010, however, we granted
Mr. Rowland a stock option effective upon commencement of
his employment by us on November 1, 2010. See
Employment Agreements.
Employee Benefits. In addition to the main
elements of compensation previously discussed in this section,
the Named Executive Officers are eligible for the same health,
welfare and other employee benefits as are available to all our
employees generally, which include medical, dental and vision
insurance, short and long-term disability, basic and voluntary
term life, and accidental death and dismemberment insurance, and
a 401(k) plan. We do not sponsor any defined benefit pension
plan or nonqualified deferred compensation arrangements at this
time. Pursuant to his employment agreement, Marc Rowland, our
new President and CFO, is entitled to up to 50 hours of
personal use of our airplanes per year. We anticipate that some
of our other Named Executive Officers will also be granted the
right to personal use of our airplanes following this offering.
We provide each of our Named Executive Officers with a company
vehicle, which they may use for business and personal purposes.
The general benefits offered to all employees (and thus to the
Named Executive Officers) are reviewed by our board of directors
each year.
How
Elements of Our Compensation Program are Related to Each
Other
Following the consummation of this offering, we expect that our
compensation philosophy will foster entrepreneurship at all
levels of the organization through bonus awards and possibly
long-term equity-based incentives. We have not adopted any
formal or informal policies or guidelines for allocating
compensation between long-term and currently paid out
compensation, between cash and non-cash compensation, or among
different forms of non-cash compensation. However, we believe
that the compensation packages we are implementing are
representative of an appropriate mix of compensation elements,
and anticipate that our Compensation Committee will use a
similar, though not identical, mix of compensation in future
years. The
82
approximate allocation of compensation elements in the proposed
2011 compensation packages for each Named Executive Officer is
as follows:
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Dan Wilks, CEO
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Marc Rowland, CFO
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Farris Wilks
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Bill Barker
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Kevin McGlinch
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William A. Hicks
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Base Salary
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%
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%
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%
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%
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%
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%
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Annual Cash Incentive Bonus
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%
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%
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%
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%
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%
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%
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Equity Incentive Awards
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%
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%
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%
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%
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%
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%
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Total
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100.0
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%
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100.0
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%
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100.0
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%
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100.0
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%
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100.0
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%
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100.0
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%
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Accounting
and Tax Considerations
Under Section 162(m) of the Internal Revenue Code of 1986,
as amended, or the Code, a limitation was placed on tax
deductions of any publicly-held corporation for individual
compensation to certain executives of such corporation exceeding
$1,000,000 in any taxable year, unless the compensation is
performance-based. An exception applies to this deductibility
limitation for a limited period of time after a company first
becomes publicly-traded.
We reserve the right to use our judgment to authorize
compensation payments that do not comply with the exemptions in
Section 162(m) when we believe that such payments are
appropriate and in the best interest of the shareholders, after
taking into consideration changing business conditions or the
executives individual performance
and/or
changes in specific job duties and responsibilities.
If an executive becomes entitled to nonqualified deferred
compensation benefits that are subject to Section 409A of
the Code, and such compensation does not comply with or is not
exempt from Section 409A, then the benefits are taxable in
the first year they are not subject to a substantial risk of
forfeiture and are subject to certain additional adverse tax
consequences. We intend to design any such arrangements to
comply with or be exempt from Section 409A.
We intend that any equity awards we make to our employees,
including executive officers, and to our directors will be
granted and reflected in our consolidated financial statements,
based upon the applicable accounting guidance, at fair market
value on the grant date in accordance with Financial Accounting
Standards Board (FASB) Accounting Standards Codification, Topic
718, Compensation Stock Compensation.
Employment
Agreements
We have entered into employment agreements with seven of our
executive officers, including Marc Rowland, our new CFO, and two
of our other Named Executive Officers, Kevin McGlinch and
William A. Hicks. The principal terms of Mr. Rowlands
employment agreement are described below. We anticipate that the
other employment agreements will be cancelled and new agreements
will be entered into to be effective as of the closing of this
offering. We also anticipate that we will enter into employment
agreements with our Named Executive Officers who do not
currently have employment agreements Dan Wilks,
Farris Wilks and Bill Barker. We believe that our success will
be largely dependent on the skills, experience and efforts of
our management team and consider these employment agreements
critical to the ongoing stability and development of our
business.
Employment Agreement with Marc Rowland. In
October 2010, we entered into an Employment Agreement with Marc
Rowland, pursuant to which Mr. Rowland agreed to serve as
our President and Chief Financial Officer. The initial term of
the Employment Agreement is for a period of three years from
November 1, 2010, and the term and expiration date will
automatically renew for an additional one-year period on each
anniversary of the Employment Agreement, subject to the right of
either party to terminate the Employment Agreement as described
below. Mr. Rowland is entitled to an annual base salary of
$2.2 million and a retention bonus of $5.2 million,
payable in equal installments on the first, second and third
anniversaries
83
of his employment term. In addition, we have paid a one-time
signing bonus to Mr. Rowland in the amount of
$5.0 million, subject to reimbursement by Mr. Rowland
if his employment with us terminates for certain reasons before
September 30, 2012. We also granted Mr. Rowland an
option to purchase a number of units of Frac Tech Holdings, LLC,
our parent entity, at an exercise price equal to the fair market
value of such units on the date of grant. After giving effect to
our Reorganization, such option will entitle Mr. Rowland to
purchase a two percent equity interest in us, as determined
immediately prior to commencement of his employment, during a
ten-year period from the date of grant and vesting with respect
to one-third of the equity on each of the first three
anniversary dates of the commencement of his employment.
Mr. Rowland is eligible for additional equity awards under
equity compensations plans that may be established by us from
time to time. As additional compensation, we provide
Mr. Rowland with the use of our aircraft, health insurance
coverage and such other fringe benefits as we may provide to our
officers from time to time.
We may terminate the Employment Agreement at any time for cause,
and may terminate the Employment Agreement without cause upon
30 days written notice to Mr. Rowland.
Mr. Rowland may terminate the Employment Agreement with or
without cause upon 90 days written notice to us. If
we terminate Mr. Rowlands employment without cause,
he will be entitled to receive one years base salary, to
be paid in a lump sum, his options and all other equity
compensation granted to him shall immediately vest and he shall
receive payment of any vacation pay accrued. In addition, if we
experience a change of control during the term of
Mr. Rowlands employment, he will be entitled to
receive an amount equal to 200% of his then current base salary,
in addition to the vesting of his options, any other equity
compensation granted to him and his retention bonus.
Mr. Rowlands Employment Agreement contains a covenant
not to compete providing that for a period of up to
12 months following termination of his employment for any
reason, he will neither engage in a business that competes with
ours nor assist others in doing so.
Long-Term
Incentive Plan Awards
Each of our Named Executive Officers may be awarded grants under
our proposed 2011 Long-Term Incentive Plan.
Severance
and Change in Control Arrangements
Kevin McGlinch and William A. Hicks are entitled to receive
certain severance benefits upon involuntary termination and
enhanced payments upon a change in control pursuant to their
existing employment agreements. We anticipate that these
employment agreements will terminate upon the consummation of
this offering and will be of no further force or effect, and we
will enter into new employment agreements with these individuals
and our other Named Executive Officers (other than
Mr. Rowland). Mr. Rowlands employment agreement
provides for the payment of compensation upon a change in
control regardless of whether Mr. Rowland terminates
employment.
Gross-Ups. Under
the employment agreement with Mr. Rowland, if benefits to
which he becomes entitled in connection with a change in control
are considered excess parachute payments under
Section 280G of the Code, then Mr. Rowland is entitled
to an additional
gross-up
payment in an amount such that, after payment of all taxes
including any excise tax imposed upon the
gross-up
payment, he will retain an amount equal to the excise tax
imposed upon the payment.
Stock
Ownership Guidelines
Stock ownership guidelines have not been implemented for our
Named Executive Officers or directors. We will continue to
periodically review best practices and reevaluate our position
with respect to stock ownership guidelines.
84
Securities
Trading Policy
Prior to the closing of this offering, we will adopt a
securities trading policy that will provide that executive
officers, including the Named Executive Officers, and our
directors, may not, among other things, purchase or sell puts or
calls to sell or buy our stock, engage in short sales with
respect to our stock, buy our securities on margin, or otherwise
hedge their ownership of our stock. The purchase or sale of
stock by our executive officers and directors may only be made
during certain windows of time and under the other conditions
contained in our policy.
Executive
Compensation
Summary
Compensation Table
The following table shows information concerning the annual
compensation for services provided to us by our Named Executive
Officers during the fiscal year ended December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
All Other
|
|
|
Name and Principal Position
|
|
Year
|
|
Salary
|
|
Bonus(3)
|
|
Awards(4)
|
|
Compensation(5)
|
|
Total
|
|
Dan Wilks
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marc Rowland
|
|
|
2010
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farris Wilks
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill Barker
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Vice President of Sales and Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin McGlinch
|
|
|
2010
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Vice President of Finance and Treasurer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William A. Hicks
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vice President and General Counsel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Compensation shown for Marc Rowland
is compensation paid from November 1, 2010, the date on
which he commenced employment as our President and Chief
Financial Officer, through December 31, 2010.
|
|
(2)
|
|
Mr. McGlinch served as our
chief financial officer prior to November 1, 2010.
|
|
(3)
|
|
Reflects discretionary bonus awards
approved by our board and paid in cash during 2010, except that
the amounts paid to Mr. Rowland were paid pursuant to the
terms of his employment agreement entered into on
October 4, 2010. See Compensation Discussion and
Analysis Employment Agreements.
|
|
(4)
|
|
Reflects the aggregate grant date
fair value of nonqualified stock options granted under our 2010
Long-Term Incentive Plan. Options represent the right to
purchase shares of common stock at a price per share equal to
fair market value on the date of grant. Options will vest
ratably over three years in equal installments on the first,
second and third anniversaries of the date of grant. Vesting of
these options is not contingent upon the satisfaction of any
performance goals, although none of the options may be exercised
before the first anniversary (absent a change of control of the
company) or after the tenth anniversary of the date of grant.
See the Grants of Plan-Based Awards table for information on
stock options granted in 2010.
|
|
(5)
|
|
The following items are reported in
the All Other Compensation column:
|
All Other
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
Life and
|
|
|
|
|
|
|
|
|
Use of
|
|
Disability
|
|
|
|
Total of
|
Named Executive
|
|
Personal Use of
|
|
Company
|
|
Insurance
|
|
Other
|
|
All Other
|
Officer
|
|
Airplanes
|
|
Vehicles
|
|
Premiums
|
|
Fringe Benefits
|
|
Compensation
|
|
Dan Wilks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marc Rowland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farris Wilks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill Barker
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin McGlinch
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William A. Hicks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
The officers titles shown in the Summary Compensation
Table are their current titles. As of December 31, 2009,
and until November 1, 2010, Mr. Barkers title
was President of Operations and Marketing and
Mr. McGlinchs title was Executive Vice President,
Treasurer and Chief Financial Officer.
Marc Rowland joined us as our President and CFO on
November 1, 2010. See Management
Directors and Executive Officers. For information
regarding Mr. Rowlands compensation and terms of
employment, see Compensation Discussion and
Analysis Employment Agreements.
2010
Grants of Plan-Based Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
Option Awards:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
Grant Date
|
|
|
|
|
Date of Board
|
|
Securities
|
|
Exercise or
|
|
Fair Value of
|
|
|
|
|
Approval
|
|
Underlying
|
|
Base Price of
|
|
Stock and
|
Name
|
|
Grant Date
|
|
of Grant
|
|
Options(#)
|
|
Option Awards($/sh)
|
|
Option Awards($)
|
|
Dan Wilks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marc Rowland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farris Wilks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill Barker
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin McGlinch
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William A. Hicks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discussion
of Summary Compensation Table
Our executive compensation policies and practices, pursuant to
which the compensation set forth in the Summary Compensation
Table was paid or awarded, are described above in the CD&A.
As indicated therein, our executive compensation for 2010
consisted of base salary and discretionary, annual cash bonus
awards in amounts determined by our board. In addition,
Mr. Rowland, who joined our management team as President
and CFO on November 1, 2010, received certain cash and
equity awards pursuant to the terms of his employment agreement
with us.
Discussion
of Grants of Plan-Based Awards Table
Mr. Rowland received options to acquire membership units in
our predecessor parent entity, Frac Tech Holdings, LLC, in
connection with his hiring as our President and CFO effective
November 1, 2010. The number of shares shown in the table
reflects the conversion of such membership units into shares of
common stock of Frac Tech Services, Inc. in connection with our
Reorganization. Other than this grant, none of our Named
Executive Officers received any grants of plan-based awards in
2010.
We may grant restricted stock or other awards under our
Long-Term Incentive Plan to our Named Executive Officers, to be
effective concurrently with the closing of this offering.
86
Outstanding
Equity Awards at Fiscal Year Ended December 31,
2010
Outstanding
Equity Awards at Fiscal Year-End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Number of
|
|
Number of
|
|
|
|
|
|
|
Securities
|
|
Securities
|
|
|
|
|
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
|
Unexercised Options
|
|
Unexercised Options
|
|
Option Exercise
|
|
Option Expiration
|
Name
|
|
(#) Exercisable
|
|
(#) Unexercisable
|
|
Price ($)
|
|
Date
|
|
Dan Wilks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marc Rowland
|
|
|
|
|
|
|
|
(1)
|
|
|
|
|
|
|
11/1/2020
|
|
Farris Wilks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill Barker
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin McGlinch
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William A. Hicks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
331/3%
of these stock options vest November 1, 2011;
331/3%
of these stock options vest November 1, 2012; and
331/3%
of these stock options vest November 1, 2013.
|
Pension
Benefits
Other than our 401(k) Plan, we do not have any plan that
provides for payments or other benefits at, following, or in
connection with, retirement.
Non-Qualified
Deferred Compensation
We do not have any plan that provides for the deferral of
compensation on a basis that is not tax qualified.
Potential
Payments Upon Termination and Change in Control
The table below discloses the amount of compensation and
benefits due to the Named Executive Officers in the event of a
qualifying termination of employment
and/or in
the event we undergo a change in control. The amounts disclosed
assume such termination
and/or the
occurrence of such change in control was effective
December 31, 2010, but taking into account the severance
and change in control arrangements described above that will be
entered into or adopted contemporaneously with the consummation
of this offering. The amounts below constitute estimates of the
amounts that would be paid to the Named Executive Officers upon
their respective terminations or upon a change in control under
such arrangements. The actual amounts to be paid are dependent
on various factors, which may or may not exist at the time a
Named Executive Officer is actually terminated or a change in
control actually occurs. Therefore, such amounts and disclosures
should be considered forward-looking statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Constituting Separation
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
from Service Based on
|
|
|
Termination
|
|
|
Termination
|
|
|
Change
|
|
|
|
without Cause or
|
|
|
Breach of
|
|
|
Due to
|
|
|
Due to
|
|
|
In
|
|
Named Executive Officer
|
|
for Good Reason
|
|
|
Material Provision
|
|
|
Incapacity
|
|
|
Death
|
|
|
Control
|
|
|
Dan Wilks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Bonus Amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COBRA Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Control Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Constituting Separation
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
from Service Based on
|
|
|
Termination
|
|
|
Termination
|
|
|
Change
|
|
|
|
without Cause or
|
|
|
Breach of
|
|
|
Due to
|
|
|
Due to
|
|
|
In
|
|
Named Executive Officer
|
|
for Good Reason
|
|
|
Material Provision
|
|
|
Incapacity
|
|
|
Death
|
|
|
Control
|
|
|
Marc Rowland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Bonus Amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Control Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Farris Wilks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Bonus Amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COBRA Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Control Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Bill Barker
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Bonus Amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COBRA Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Control Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Kevin McGlinch
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Bonus Amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COBRA Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Control Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
William A. Hicks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Bonus Amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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COBRA Premiums
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Change in Control Payments
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Total
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$
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$
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$
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$
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Long-Term
Incentive Plan
Our board of directors will adopt a 2011 Long-Term Incentive
Plan, or LTIP, to be effective as of the consummation of this
offering, in order to attract and retain the best available
personnel for positions of substantial responsibility, to
provide additional incentives to our employees, directors and
consultants, and to promote the success of our business. The
LTIP will provide for grants of (a) incentive stock options
qualified as such under U.S. federal income tax laws,
(b) nonqualified stock options that do not qualify as
incentive stock options, (c) stock appreciation rights, or
SARs, (d) restricted stock awards, (e) restricted
stock units, (f) performance awards, (g) other
incentive awards, or (h) any combination of such awards.
88
The LTIP is not subject to the Employee Retirement Income
Security Act of 1974, as amended, or ERISA. The LTIP, for a
limited period of time following this offering, will qualify for
an exception to the deductibility limitations imposed by
Section 162(m) of the Code. As a result, during that
limited period of time, awards will be exempt from the
limitations on the deductibility of compensation that exceeds
$1,000,000.
Shares Available. The maximum aggregate
number of shares of our common stock that may be reserved and
available for delivery in connection with awards under the LTIP
is , subject to adjustment in
accordance with the terms of the LTIP. The stock option we
granted to Mr. Rowland effective November 1, 2010 will
be taken into account in determining the number of shares
available for grant under the LTIP. If common stock subject to
any award is not issued or transferred, or ceases to be issuable
or transferable for any reason, including stock subject to an
award that is cancelled, forfeited or settled in cash and shares
withheld to pay the exercise price of or to satisfy the
withholding obligations with respect to an award, those shares
of common stock will again be available for delivery under the
LTIP to the extent allowable by law. The maximum number of
shares of common stock that may be subject to nonqualified stock
options and SARs granted under the LTIP to any one participant
during a fiscal year
is shares.
The maximum aggregate number of shares that may be issued under
the LTIP through incentive stock options
is shares.
Eligibility. Any individual who provides
services to us, including officers, employees, non-employee
directors and consultants, is eligible to participate in the
LTIP (each, an Eligible Person). Each Eligible
Person who is designated by the Compensation Committee to
receive an award under the LTIP will be a
Participant. An Eligible Person will be eligible to
receive an award pursuant to the terms of the LTIP and subject
to any limitations imposed by appropriate action of the
Compensation Committee.
Administration. The Compensation Committee
will administer the LTIP pursuant to its terms, except in the
event our board of directors chooses to take action under the
LTIP. The Compensation Committee or the board may delegate
authority to make certain awards under the LTIP to our Chief
Executive Officer or another executive officer. Unless otherwise
limited, the Compensation Committee has broad discretion to
administer the LTIP, including the power to determine to whom
and when awards will be granted, to determine the amount of such
awards (measured in cash, shares of common stock or as otherwise
designated), to proscribe and interpret the terms and provisions
of each award agreement, to accelerate the exercise terms of any
award, to delegate duties under the LTIP and to execute all
other responsibilities permitted or required under the LTIP.
Terms of Options. The Compensation Committee
may grant options to Eligible Persons including
(a) incentive stock options (only to our employees) that
comply with Section 422 of the Code and
(b) nonqualified options. The exercise price for an option
must not be less than the greater of (a) the par value per
share of common stock or (b) the fair market value per
share as of the date of grant. Options may be exercised as the
Compensation Committee determines, but not later than
10 years from the date of grant. Any incentive stock option
granted to an employee who possesses more than 10% of the total
combined voting power of all classes of our shares within the
meaning of Section 422(b)(6) of the Code must have an
exercise price of at least 110% of the fair market value of the
underlying shares at the time the option is granted and may not
be exercised later than five years from the date of grant.
Terms of SARs. SARs may be awarded in
connection with or separate from an option. A SAR is the right
to receive an amount equal to the excess of the fair market
value of one share of our common stock on the date of exercise
over the grant price of the SAR. SARs will be exercisable as the
Compensation Committee determines. The term of an SAR will be
for a period determined by the Compensation Committee but will
not exceed ten years. SARs may be paid in cash, common stock or
a combination of cash and stock, as provided for by the
Compensation Committee in the award agreement.
Restricted Stock Awards. A restricted stock
award is a grant of shares of common stock subject to a risk of
forfeiture, restrictions on transferability, and any other
restrictions imposed by the Compensation Committee in its
discretion. Except as otherwise provided under the terms of the
LTIP or an award agreement, the holder of a restricted stock
award may have rights as a stockholder, including the right to
vote or to receive dividends
89
(subject to any mandatory reinvestment or other requirements
imposed by the Compensation Committee). A restricted stock award
that is subject to forfeiture restrictions may be forfeited and
reacquired by us upon termination of employment or services.
Common stock distributed in connection with a stock split or
stock dividend, and other property distributed as a dividend,
may be subject to the same restrictions and risk of forfeiture
as the restricted stock with respect to which the distribution
was made.
Restricted Stock Units. Restricted stock units
are rights to receive common stock, cash or a combination of
both at the end of a specified period. Restricted stock units
may be subject to restrictions, including a risk of forfeiture,
as specified in the award agreement. Restricted stock units may
be satisfied by common stock, cash or any combination thereof,
as determined by the Compensation Committee. Except as otherwise
provided by the Compensation Committee in the award agreement or
otherwise, restricted stock units subject to forfeiture
restrictions will be forfeited upon termination of a
participants employment or services prior to the end of
the specified period. The Compensation Committee may, in its
sole discretion, grant dividend equivalents with respect to
restricted stock units.
Performance Awards. The LTIP also provides for
the grant of performance awards that may be granted in the form
of common stock, cash or a combination of both. Each performance
award will set forth (a) the amount, including a target and
maximum amount if applicable, a Participant may earn in the form
of cash or shares of Common Stock or a formula for determining
that amount, (b) the performance criteria and level of
achievement versus the criteria that will determine the amount
payable or number of shares of our common stock to be granted,
issued, retained
and/or
vested, (c) the performance period over which performance
is to be measured, (d) the timing of any payments to be
made, (e) restrictions on the transferability of the award
and (f) such other terms and conditions as our Compensation
Committee may determine.
After we become subject to Section 162(m) of the Code, the
Compensation Committee will have the discretion to determine
whether all or any portion of a performance award is intended to
satisfy the requirements for performance-based
compensation under Section 162(m).
Section 162(m) generally disallows deductions for
compensation in excess of $1,000,000 for some executive officers
unless the compensation qualifies as performance-based
compensation. For any performance award that is intended
to satisfy this performance-based compensation exception, the
Compensation Committee may establish a performance goal or goals
based on one or more of the criteria specified in the LTIP.
Performance awards may contain performance measures based on one
or more of the following criteria: (a) earnings or earnings
per share (whether on a pre-tax, after-tax, operational or other
basis), (b) return on equity, (c) return on assets or
net assets, (d) return on capital or invested capital and
other related financial measures, (e) cash flow or EBITDA
or EBITDAX, (f) revenues, (g) income or operating
income, (h) expenses or costs or expense levels or cost
levels (absolute or per unit), (i) one or more operating
ratios, (j) stock price, (k) total stockholder return,
(l) operating profit, (m) profit margin,
(n) capital expenditures, (o) net borrowing, debt
leverage levels, credit quality or debt ratings, (p) the
accomplishment of mergers, acquisitions, dispositions, public
offerings or similar extraordinary business transactions,
(q) net asset value per share, (r) economic value
added, (s) individual business objectives, (t) finding
and development cost per unit and (u) strategic business
objectives, consisting of one or more objectives based on
meeting specified cost targets, business expansion goals, and
goals relating to acquisitions or divestures, or any combination
thereof.
These criteria may be applied to an individual holder of a
Performance Award, the company as a whole or a relevant portion
of the companys operations. The performance goals
established using these criteria may be expressed on an absolute
or a relative basis, and may employ comparisons based on
internal targets or the performance of other companies, or the
historical performance of the company or any of its operating
units or divisions. Any earnings-based measures may use
comparisons relating to capital, shareholders equity,
shares outstanding, assets or net assets.
The maximum amount that may be paid in cash pursuant to a
performance award granted to any holder with respect to any
single fiscal year, if the award is intended to satisfy the
qualified performance-based compensation requirements of Code
Section 162(m), is $ . If a
Performance Award provides for a performance period longer than
one fiscal year, the maximum amount that may be paid to the
holder under that award is $
multiplied by the number of full fiscal years in the performance
period. The LTIP also
90
provides that the maximum number of shares of common stock for
which awards may be granted to any single participant during a
fiscal year, including awards the vesting or payment of which is
subject to the achievement of performance goals,
is .
Before payment is made under any performance award that is
intended to satisfy the qualified performance-based compensation
requirements of Code Section 162(m), the Compensation
Committee must certify the extent to which the performance goals
and other material terms of the award have been satisfied, and
the Compensation Committee has the discretion to reduce, but not
to increase, the amount payable and the number of shares that
may be received.
The class of persons eligible to receive performance awards
under the LTIP is the same class eligible to receive awards
under the LTIP generally, that is, all employees and other
service providers, including non-employee directors.
Other Awards. Eligible Persons may be granted,
subject to applicable legal limitations and the terms of the
LTIP and its purposes, other awards related to common stock.
Such awards may include, but are not limited to, common stock
awarded as a bonus, dividend equivalents, convertible or
exchangeable debt securities, other rights convertible or
exchangeable into common stock, purchase rights for common
stock, awards with value and payment contingent upon our
performance or any other factors designated by the Compensation
Committee, and awards valued by reference to the book value of
common stock or the value of securities of or the performance of
specified subsidiaries. The Compensation Committee will
determine terms and conditions of all such awards. Long-term
cash awards also may be made under the LTIP. Cash awards also
may granted as an element of or a supplement to any awards
permitted under the LTIP. Awards may also be granted in lieu of
obligations to pay cash or deliver other property under the LTIP
or under other plans or compensation arrangements, subject to
any applicable provision under Section 16 of the Exchange
Act.
Director
Compensation
We did not award any compensation to any non-employee director
during fiscal year 2010. Going forward, the board of directors
believes that attracting and retaining qualified non-employee
directors will be critical to our future value growth and
governance. Following this offering, our non-employee directors
are expected to receive compensation that is commensurate with
the compensation that is offered to directors of companies that
are similar to ours, including equity-based awards granted under
our Long-Term Incentive Plan. We have not nor do we expect to
compensate our employee directors for their service on our board
of directors. We expect to reimburse our directors for
reasonable out-of-pocket expenses that they incur in connection
with their service as directors, in accordance with our general
expense reimbursement policies.
91
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Procedures
for Approval of Related Party Transactions.
A Related Party Transaction is a transaction,
arrangement or relationship in which we or any of our
subsidiaries was, is or will be a participant, and which
involves an amount exceeding $120,000, and in which any related
party had, has or will have a direct or indirect material
interest. A Related Party means:
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any person who is, or at any time during the applicable period
was, one of our executive officers or one of our directors;
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any person who is known by us to be the beneficial owner of more
than 5.0% of our common stock;
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any immediate family member of any of the foregoing persons,
which means any child, stepchild, parent, stepparent, spouse,
sibling,
mother-in-law,
father-in-law,
son-in-law,
daughter-in-law,
brother-in-law
or
sister-in-law
of a director, executive officer or a beneficial owner of more
than 5.0% of our common stock, and any person (other than a
tenant or employee) sharing the household of such director,
executive officer or beneficial owner of more than 5.0% of our
common stock; and
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any firm, corporation or other entity in which any of the
foregoing persons is a partner or principal or in a similar
position or in which such person has a 10.0% or greater
beneficial ownership interest.
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Our board of directors will adopt a written related party
transactions policy prior to the completion of this offering.
Pursuant to this policy, the Audit Committee will review all
material facts of all Related Party Transactions and either
approve or disapprove entry into the Related Party Transaction,
subject to certain limited exceptions. In determining whether to
approve or disapprove entry into a Related Party Transaction,
the Audit Committee shall take into account, among other
factors, the following: (1) whether the Related Party
Transaction is on terms no less favorable to us than terms
generally available to an unaffiliated third-party under the
same or similar circumstances and (2) the extent of the
Related Partys interest in the transaction. Further, the
policy will require that all Related Party Transactions required
to be disclosed in our filings with the SEC be so disclosed in
accordance with applicable laws, rules and regulations.
The following transactions were entered into prior to our
establishment of an Audit Committee or the adoption of the
approval procedures described above. Each transaction was
approved by our board.
Transactions
with Chesapeake
One of our major customers, Chesapeake Energy Corporation, holds
a 25.8% beneficial ownership interest in us through its
subsidiary, Chesapeake Operating, Inc. See
Business Customers and Principal
and Selling Shareholders. In fiscal years 2007, 2008 and
2009 and the nine months ended September 30, 2010, we
received approximately $32.5 million, $97.8 million,
$41.2 million and $70.7 million, respectively, in
revenues from Chesapeake Energy Corporation for hydraulic
fracturing services. On May 14, 2010 we entered into an
agreement with Chesapeake Energy Corporation in which Chesapeake
made an equity investment in us, in the amount of
$100.0 million. All of our transactions with Chesapeake
Energy Corporation or its affiliates are negotiated at
arms length and are on terms no less favorable to us than
we could reasonably expect to obtain from unaffiliated third
parties in similar circumstances.
By agreement among our principal shareholders, World Investment
Group, LLC (WIG) and Chesapeake Operating, Inc., and
our founders Dan Wilks and Farris Wilks, who control WIG,
Chesapeake Operating, Inc. is permitted to designate one member
of the board of Frac Tech Services, LLC for as long as it owns
an equity interest in us. The operating agreement of our parent
entity, Frac Tech Holdings, LLC (Holdings), also
provides certain rights to and imposes certain restrictions on
WIG and its members and Chesapeake Operating, Inc. with respect
to their ownership interests in our parent entity, including
certain tag-along rights, drag-along rights, preemptive rights,
and a right of first offer, each as is customary to agreements
of this type.
92
Transactions
with Founders and Related Entities
We have entered into certain transactions with Wilks Masonry
Corporation, a Texas corporation, including transactions
pursuant to which that company provided construction-related
services and masonry services in connection with the
construction of certain of our facilities. During the years
ended December 31, 2007, 2008 and 2009 and the nine months
ended September 30, 2010, we paid $19.4 million,
$9.0 million, $1.2 million and $7.9 million,
respectively, to Wilks Masonry. During the years ended
December 31, 2007 and 2008, Wilks Masonry made payments to
us for equipment or property rentals in the amounts of
approximately $464,000 and $2.1 million, respectively. In
the year ended December 31, 2009, Wilks Masonry paid us
approximately $92,000 in reimbursements for shared services such
as insurance costs. During the nine months ended
September 30, 2010, Wilks Masonry paid us approximately
$57,000 for the purchase of shop supplies and equipment and
$79,000 in reimbursements for shared services such as insurance
costs. Dan Wilks and Farris Wilks are the sole owners of Wilks
Masonry Corporation. Dan Wilks and Farris Wilks are our founders
and serve as managers and executive officers of Frac Tech
Services, LLC (and will serve as directors and executive
officers of us after the offering), and together they
beneficially own a majority equity interest in us. See
Management Directors and Executive
Officers and Principal and Selling
Shareholders.
On January 1, 2009, our subsidiary Proppant Specialists,
LLC (Proppant Specialists) issued several term
installment notes to Wilks Ranch, a general partnership owned by
Dan Wilks and Farris Wilks, in an aggregate principal amount of
$4.9 million, each secured by certain equipment purchased
by Proppant Specialists from Wilks Ranch. On April 29,
2010, this subsidiary issued three additional term installment
notes to Wilks Ranch in an aggregate amount of $897,400, each
secured by specified equipment of our subsidiary. The term
installment notes have various interest rates ranging from 4.04%
to 5.90% and have various maturity dates through September 2013.
The aggregate amount of principal paid under the term
installment notes for the year ended December 31, 2009 and
the nine months ended September 30, 2010 was
$1.9 million and $1.3 million, respectively, and the
aggregate amount of interest paid under the term installment
notes for the year ended December 31, 2009 and the nine
months ended September 30, 2010 was approximately $200,000
and $103,000, respectively. As of September 30, 2010, the
aggregate principal balance outstanding on the term installment
notes was $2.6 million, and the highest aggregate balance
outstanding at any time during their terms was
$4.9 million. These notes were repaid on November 12,
2010.
On March 18, 2008, Dan Wilks and Farris Wilks provided an
unsecured working capital line of credit to our subsidiary
Proppant Specialists, which had an initial term ending
June 30, 2008 and automatically renews thereafter for
successive six-month terms. As of September 30, 2010, the
balance of principal and interest outstanding under this line of
credit was $1.8 million, and the highest balance
outstanding at any time during its term was $7.0 million.
Amounts borrowed under the line of credit bear interest at a
rate of 6.00%. The aggregate amount of principal paid under the
line of credit for the years ended December 31, 2008 and
2009 and the nine months ended September 30, 2010 was
$1.5 million, $3.5 million and $-0-, respectively, and
the aggregate amount of interest paid under the line of credit
for the years ended December 31, 2008 and 2009 and the nine
months ended September 30, 2010 was approximately $257,000,
$90,000 and $142,000, respectively. This working capital line of
credit was repaid and cancelled on November 12, 2010.
During 2008, Proppant Specialists made payments to Wilks Ranch
in the aggregate amount of approximately $455,000 for equipment
leasing related to the construction and operation of certain of
our sand mining facilities. During the nine months ended
September 30, 2010, we paid Wilks Ranch approximately
$123,000 for the lease of certain property.
During the year ended December 31, 2006, our subsidiary,
THC I Investments, Inc. received a $6.0 million advance for
asset purchases and working capital from WIG. During the fiscal
year ended December 31, 2009 we repaid $2.1 million
and during the nine months ended September 30, 2010 we
repaid $0.4 million. As of September 30, 2010, the
$3.3 million balance was assigned by WIG to Frac Tech
Holdings, LLC (Holdings) in partial repayment of an
advance to WIG from Holdings.
On March 27, 2009, Dan Wilks and Farris Wilks made two
unsecured loans in the aggregate principal amount of
$5.2 million to our subsidiary, Southern Precision Sands,
LLC. As of September 30, 2010, the balance of principal
outstanding under these loans was $4.4 million. These loans
bear interest at a rate of
93
6.00%. No principal was paid on these loans for the year ended
December 31, 2009 but $0.8 million was paid for in the
nine months ended September 30, 2010, and the aggregate
amount of interest paid on these loans for the year ended
December 31, 2009 and the nine months ended
September 30, 2010 was approximately $181,000 and $210,000,
respectively. Each of these loans has a maturity date of
March 30, 2011. These loans were repaid on
November 15, 2010.
Dan Wilks and Farris Wilks made loans on various dates and in
various principal amounts to a nominee entity for Proppant
Specialists to fund the purchase of certain real properties.
These loans had an interest rate of 5.25%. No amount of
principal or interest was paid on these loans during the years
ended December 31, 2007 and 2008. The loans were paid in
full in 2009. The aggregate amount of principal paid on these
loans and the aggregate amount of interest paid on these loans
were $3.0 million and $265,000, respectively.
During the years ended December 31, 2008 and
December 31, 2009 and the nine months ended
September 30, 2010, WIG was billed approximately
$1.5 million, $400,000 and $300,000, respectively, for the
use of our airplanes and for legal services. During the year
ended December 31, 2009, WIG paid us approximately
$1.6 million for these billings. Dan Wilks, Farris Wilks
and Bill Barker are the sole owners of WIG.
We have entered into certain transactions with Cisco Trucking,
Inc., a Texas corporation, including transactions pursuant to
which we have leased trucks from that company and engaged that
company to provide hauling and delivery services for us. During
the years ended December 31, 2007, 2008 and 2009 and the
nine months ended September 30, 2010, we paid Cisco
Trucking, Inc. approximately $448,000, $52,000, $17,000 and
$25,000, respectively. Dan Wilks and Farris Wilks are the sole
owners of Cisco Trucking, Inc.
We believe that each of the transactions described above was on
terms no less favorable to us than terms we could have obtained
for similar transactions with unrelated third parties.
Redemption
of Preferred Equity
On October 21, 2010, Frac Tech Services, LLC, used
$13.5 million to fund the redemption of preferred equity
interests held by Dan Wilks and Farris Wilks. This was
accomplished through a series of redemptions as follows: Frac
Tech Services, LLC redeemed preferred equity interests held by
its direct parent entity, Holdings; Holdings redeemed preferred
equity interests in it held by WIG, which owns a majority of
Holdings outstanding equity interests; and WIG redeemed
preferred equity interests in it held by Dan Wilks and Farris
Wilks. In each case, the aggregate redemption price was
$13.5 million. Such preferred equity interests were issued
in connection with certain reorganization transactions in
replacement of loans made in 2008 by Dan Wilks and Farris Wilks
to Frac Tech Services, LLC. Holdings will be merged with and
into us in connection with our Reorganization.
Transactions
with Truck Dealership
A company owned by WIG and Chesapeake Operating, Inc. has
recently acquired a truck dealership. We anticipate that we will
purchase trucks for use in our operations from this dealership
in future periods, on terms no less favorable to us than we
could obtain from unrelated third parties. We made our initial
purchases from this dealership in November 2010.
Registration
Rights Agreement
We plan to enter into a registration rights agreement with our
existing pre-offering shareholders. These shareholders will be
entitled to demand registration rights for their shares of our
common stock, and any shares acquired by such persons under
benefit plans maintained by us or our affiliates. In order to
exercise their demand for registration, shareholders who hold,
individually or as a group, more than a specified percentage of
the shares of our common stock outstanding at the time of
exercise must deliver a written request to us. Until we become
eligible to use
Form S-3
for a registration of shares of our common stock, these
shareholders will have the right to exercise demand rights for
an agreed number of separate registrations.
94
After we become eligible to use
Form S-3
for a registration of shares of our common stock, these
shareholders will have the right to exercise demand rights for
an additional number of separate registrations, less the number
of registrations that were effected prior to such date as a
result of the exercise of such demand rights.
We expect that the registration rights agreement will provide
that if our board of directors determines that it would be in
our best interests, we may delay any demand registration for a
period not to exceed 90 days, and that we will not be
required to effect more than one demand registration requested
by the shareholders in any six-month period. In addition, these
shareholders will have the right to participate in any public
offering of our common stock, other than an offering under a
registration statement on
Form S-4
or
Form S-8
or any other forms not available for registering capital stock
for sale to the public, subject to marketing considerations as
determined by our managing underwriter for that offering and
execution of a
lock-up
agreement.
We will pay all expenses in connection with any registration
under the registration rights agreement, except for transfer
taxes, shareholders attorneys fees and fees and
commissions of brokers, dealers and underwriters. We anticipate
that the demand registration rights described above will begin
six months from the closing date of this offering and terminate
ten years from that date, and that the
piggyback registration rights described above will
begin upon the closing and terminate ten years thereafter.
All the members of our board of directors may be deemed to
beneficially own or control shares of our common stock and may
therefore personally benefit from the registration rights
agreement. See Principal and Selling Shareholders.
Compensation
of Executive Officer
Sharon Hicks, our Vice President and Senior Legal Counsel, is
the wife of William A. Hicks, one of our Named Executive
Officers. On December 19, 2006, we entered into an
employment agreement with Sharon Hicks with an initial term from
January 1, 2007 to January 1, 2012. Ms. Hicks is
entitled to an annual base salary of $300,000 and is eligible
for an annual merit-based bonus in an amount equal to 25% of her
annual salary. As additional compensation, we provide
Ms. Hicks with health insurance coverage and such other
fringe benefits as we may provide to our other officers from
time to time. During 2010, we paid total compensation to
Ms. Hicks of
$ .
Either party may terminate the employment agreement upon
30 days written notice to the other party. If we
terminate Ms. Hicks employment without cause, she
will be entitled to receive her salary and any unpaid bonus
through the date of termination. In addition, if termination
occurs between January 1, 2011 and December 31, 2011,
we are obligated to pay her the balance of her 2011 salary.
95
HISTORY
AND REORGANIZATION
Frac Tech Services, LLC was formed as a Texas limited
partnership in August 2000, and we began providing hydraulic
fracturing services to E&P companies in 2002. Since then,
we have undertaken several reorganization transactions as a
result of which that company has been converted to a Texas
limited liability company and all of the other entities through
which we conduct business have become direct or indirect wholly
owned subsidiaries of Frac Tech Services, LLC, and Frac Tech
Holdings, LLC, a Texas limited liability company, was
established as our direct parent entity.
In connection with our private offering of $550.0 million
aggregate principal amount of our 7.125% Senior Notes due
2018, which closed on November 12, 2010, we established
Frac Tech Finance, Inc., a Delaware corporation, for the purpose
of acting as co-issuer of those Senior Notes. Frac Tech Finance,
Inc. subsequently changed its name to Frac Tech Services,
Inc. Frac Tech Services, Inc. currently has no assets and
no liabilities other than with respect to the Senior Notes.
Immediately prior to consummation of our initial public offering
of common stock pursuant to this prospectus, Frac Tech Holdings,
LLC will be merged with and into Frac Tech Services, LLC, and
Frac Tech Services, LLC will be merged with and into Frac Tech
Services, Inc. As a result of those mergers, which we refer to
collectively as our Reorganization, (i) Frac
Tech Services, Inc. will survive as the parent company of all of
our subsidiaries and will own the assets and conduct the
business currently owned and conducted by Frac Tech Services,
LLC; (ii) Frac Tech Services, Inc., will be the sole direct
obligor under our Senior Notes; (iii) the current
beneficial owners of our outstanding equity securities, as
described under Principal and Selling Shareholders,
including the selling shareholders, will receive shares of Frac
Tech Services, Inc. common stock in exchange for their current
membership interests in Frac Tech Holdings, LLC; and
(iv) Frac Tech Services, Inc. will be the issuer of the
common stock offered and sold in our initial public offering
pursuant to this prospectus.
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PRINCIPAL
AND SELLING SHAREHOLDERS
Frac Tech Services, LLCs sole member is Frac Tech
Holdings, LLC, a Texas limited liability company
(Holdings). Holdings currently has 137,580 limited
liability company units outstanding. World Investment Group,
LLC, a Delaware limited liability company (WIG), and
Chesapeake Operating, Inc., an Oklahoma corporation, are the
sole members of Holdings. WIG is owned by Dan Wilks, Farris
Wilks and Bill Barker, each of whom is an executive officer of
us. In connection with our Reorganization, Holdings will merge
with and into Frac Tech Services, LLC, and Frac Tech Services,
LLC will merge with and into its subsidiary, Frac Tech Services,
Inc. Pursuant to the Reorganization, each outstanding limited
liability company unit in Holdings will be converted
into shares
of common stock of Frac Tech Services, Inc. See History
and Reorganization.
The table below sets forth information regarding the beneficial
ownership of the common stock of Frac Tech Services, Inc. as
of ,
2010, on a pro forma basis giving effect to the Reorganization,
by (i) each beneficial owner of more than 5% of our
outstanding common stock, (ii) each director of Frac Tech
Services, Inc., (iii) each of our Named Executive Officers,
and (iv) all executive officers and directors as a group.
As
of ,
2010, on the basis stated above, there
were shares
of our common stock outstanding. The table also sets forth
information regarding the shares of our common stock that will
be offered and sold by the selling shareholders in this
offering. The ownership percentages after the offering are based
on the issuance and sale by us
of shares
of common stock in the offering, and the sale by the selling
shareholders
of
outstanding shares of common stock in the offering, assuming no
exercise of the underwriters over-allotment option. After
the offering, there will
be shares
of our common stock outstanding.
Except as indicated by footnote, to our knowledge the persons
named in the table below have sole voting and investment power
with respect to all common stock shown as beneficially owned by
them, subject to community property laws where applicable.
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Shares of
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Shares of
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Shares of Common
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Common Stock
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Common Stock
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Stock Offered
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Beneficially Owned
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Shares of
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Beneficially Owned
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Pursuant to
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Prior to the Offering
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Common Stock
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After The Offering
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Over-Allotment
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Name of Beneficial Owner
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Number
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Percentage
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Being Offered
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Number
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Percentage
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Option
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5% Holders
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World Investment Group,
LLC(1)
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74.167
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%
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Chesapeake Operating,
Inc.(2)
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25.833
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%
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Directors and Executive Officers
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Dan Wilks, Director and Chief Executive Officer
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(3)
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33.857
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%
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Farris Wilks, Director and Chief Operating Officer
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(4)
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33.857
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%
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Bill Barker, Director and Executive Vice President of Sales and
Operations
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(5)
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6.453
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%
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Domenic J. DellOsso, Director
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0
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Marc Rowland, President and Chief Financial Officer
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0
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Kevin McGlinch, Senior Vice President-Finance and Treasurer
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0
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William A. Hicks, Vice President and General Counsel
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0
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All directors and executive officers as a group
(11 persons)
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(6)
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74.167
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%
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(1)
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The business address of WIG is
16858 Interstate Highway 20, Cisco, Texas 76437.
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(2)
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Chesapeake Operating, Inc. is 100%
owned by Chesapeake Energy Corporation, a public company. The
business address of Chesapeake Operating, Inc. is
6100 N. Western Avenue, Oklahoma City, Oklahoma 73118.
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(3)
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For purposes of this table, Dan
Wilks is deemed to beneficially
own
of the shares owned by WIG, which are the shares that
Mr. Wilks would own if WIG were to make a complete
distribution of such shares to its members. Mr. Wilks has a
45.65% common equity interest in WIG. Mr. Wilks
business address is 16858 Interstate Highway 20, Cisco, Texas
76437.
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(4)
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For purposes of this table, Farris
Wilks is deemed to beneficially
own
of the shares owned by WIG, which are the shares that
Mr. Wilks would own if WIG were to make a complete
distribution of such shares to its members. Mr. Wilks has a
45.65% common equity interest in WIG. Mr. Wilks
business address is 16858 Interstate Highway 20, Cisco, Texas
76437.
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(5)
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For purposes of this table, Bill
Barker is deemed to beneficially
own
of the shares owned by WIG, which are the shares that
Mr. Barker would own if WIG were to make a complete
distribution of such shares to its members. Mr. Barker has
an 8.70% common equity interest in WIG. Mr. Barkers
business address is 16858 Interstate Highway 20, Cisco, Texas
76437.
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(6)
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Consists of shares owned by WIG
deemed to be beneficially owned by Dan Wilks, Farris Wilks and
Bill Barker as described in footnotes (3), (4) and
(5) above.
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DESCRIPTION
OF CAPITAL STOCK
The authorized capital stock of the company consists
of shares
of common stock, par value $0.001 per share,
and shares
of preferred stock, par value $0.001 per share.
The following summary of the capital stock and certificate of
incorporation and bylaws of Frac Tech Services, Inc. does not
purport to be complete and is qualified in its entirety by
reference to the provisions of applicable law and to our
certificate of incorporation and bylaws, which are filed as
exhibits to the registration statement of which this prospectus
is a part.
Common
Stock
Except as provided by law or in a preferred stock designation,
holders of common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the
shareholders, will have the exclusive right to vote for the
election of directors and do not have cumulative voting rights.
Except as otherwise required by law, holders of common stock, as
such, are not entitled to vote on any amendment to the
certificate of incorporation (including any certificate of
designations relating to any series of preferred stock) that
relates solely to the terms of any outstanding series of
preferred stock if the holders of such affected series are
entitled, either separately or together with the holders of one
or more other such series, to vote thereon pursuant to the
certificate of incorporation (including any certificate of
designations relating to any series of preferred stock) or
pursuant to the General Corporation Law of the State of
Delaware. Subject to preferences that may be applicable to any
outstanding shares or series of preferred stock, holders of
common stock are entitled to receive ratably such dividends
(payable in cash, stock or otherwise), if any, as may be
declared from time to time by our board of directors out of
funds legally available for dividend payments. All outstanding
shares of common stock are fully paid and non-assessable, and
the shares of common stock to be issued upon completion of this
offering will be fully paid and non-assessable. The holders of
common stock have no preferences or rights of conversion,
exchange, pre-emption or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common
stock. In the event of any liquidation, dissolution or
winding-up
of our affairs, holders of common stock will be entitled to
share ratably in our assets that are remaining after payment or
provision for payment of all of our debts and obligations and
after liquidation payments to holders of outstanding shares of
preferred stock, if any.
Preferred
Stock
Our certificate of incorporation authorizes our board of
directors, subject to any limitations prescribed by law, without
further stockholder approval, to establish and to issue from
time to time one or more classes or series of preferred stock,
par value $0.001 per share, covering up to an aggregate
of shares
of preferred stock. Each class or series of preferred stock will
cover the number of shares and will have the powers,
preferences, rights, qualifications, limitations and
restrictions determined by the board of directors, which may
include, among others, dividend rights, liquidation preferences,
voting rights, conversion rights, preemptive rights and
redemption rights. Except as provided by law or in a preferred
stock designation, the holders of preferred stock will not be
entitled to vote at or receive notice of any meeting of
shareholders.
Anti-Takeover
Effects of Provisions of Our Certificate of Incorporation, Our
Bylaws and Delaware Law
Some provisions of Delaware law, and our certificate of
incorporation and our bylaws described below, will contain
provisions that could make the following transactions more
difficult: acquisitions of us by means of a tender offer, a
proxy contest or otherwise; or removal of our incumbent officers
and directors. These provisions may also have the effect of
preventing changes in our management. It is possible that these
provisions could make it more difficult to accomplish or could
deter transactions that shareholders may otherwise consider to
be in their best interest or in our best interests, including
transactions that might result in a premium over the market
price for our shares.
These provisions, summarized below, are expected to discourage
coercive takeover practices and inadequate takeover bids. These
provisions are also designed to encourage persons seeking to
acquire control of us to first negotiate with us. We believe
that the benefits of increased protection and our potential
ability to
99
negotiate with the proponent of an unfriendly or unsolicited
proposal to acquire or restructure us outweigh the disadvantages
of discouraging these proposals because, among other things,
negotiation of these proposals could result in an improvement of
their terms.
Delaware
Law
We will be subject to the provisions of Section 203 of the
Delaware General Corporation Law, or DGCL, regulating corporate
takeovers. In general, those provisions prohibit a Delaware
corporation, including those whose securities are listed for
trading on the NYSE, from engaging in any business combination
with any interested stockholder for a period of three years
following the date that the stockholder became an interested
stockholder, unless:
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the transaction is approved by the board of directors before the
date the interested stockholder attained that status;
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upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction
commenced; or
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on or after such time the business combination is approved by
the board of directors and authorized at a meeting of
shareholders by at least two-thirds of the outstanding voting
stock that is not owned by the interested stockholder.
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Section 203 defines business combination to
include the following:
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any merger or consolidation involving the corporation and the
interested stockholder;
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any sale, transfer, pledge or other disposition of 10% or more
of the assets of the corporation involving the interested
stockholder;
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subject to certain exceptions, any transaction that results in
the issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
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any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; or
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the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
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In general, Section 203 defines an interested stockholder
as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or
person affiliated with or controlling or controlled by any of
these entities or persons.
A Delaware corporation may opt out of
Section 203 with an express provision in its original
certificate of incorporation or an express provision in its
certificate of incorporation or bylaws resulting from amendments
approved by the holders of at least a majority of the
corporations outstanding voting shares. We do not intend
to opt out of the provisions of Section 203.
The statute could prohibit or delay mergers or other takeover or
change in control attempts and, accordingly, may discourage
attempts to acquire us.
Certificate
of Incorporation and Bylaws
We anticipate that, upon the completion of this offering, our
certificate of incorporation and bylaws will contain certain
provisions that could make it more difficult for a third party
to acquire control of us. These provisions may:
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establish advance notice procedures with regard to stockholder
proposals relating to the nomination of candidates for election
as directors or new business to be brought before meetings of
our shareholders. Our bylaws may also contain provisions
requiring advance notice of shareholder proposals seeking the
inclusion of matters in the companys proxy statements for
its annual meetings, consistent with the
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SECs rules relating to such proposals. These requirements
may preclude shareholders from bringing matters before the
shareholders at an annual or special meeting;
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provide our board of directors the ability to authorize
undesignated preferred stock. This ability makes it possible for
our board of directors to issue, without stockholder approval,
preferred stock with voting or other rights or preferences that
could impede the success of any attempt to change control of us.
These and other provisions may have the effect of deferring
hostile takeovers or delaying changes in control or management
of our company;
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provide that the authorized number of directors may be changed
only by resolution of the board of directors;
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provide that all vacancies, including newly-created
directorships, may, except as otherwise required by law, be
filled by the affirmative vote of a majority of directors then
in office, even if less than a quorum;
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at any time after our founders, Dan Wilks and Farris Wilks, and
entities controlled by them, no longer own more than a specified
percentage of our common stock,
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provide that any action required or permitted to be taken by the
shareholders must be effected at a duly called annual or special
meeting of shareholders and may not be effected by any consent
in writing in lieu of a meeting of such shareholders, subject to
the rights of the holders of any series of preferred stock
(prior to such time, provide that such actions may be taken
without a meeting by written consent of holders of common stock
having not less than the minimum number of votes that would be
necessary to authorize such action at a meeting);
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provide that directors may be removed only for cause and only by
the affirmative vote of holders of a supermajority of our then
outstanding common stock (prior to such time, provide that
directors may be removed only for cause and only by the
affirmative vote of the holders of at least a majority of our
then outstanding common stock);
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provide that our certificate of incorporation and bylaws may be
amended by the affirmative vote of the holders of a
supermajority of our then outstanding common stock (prior to
such time, provide that our certificate of incorporation and
bylaws may be amended by the affirmative vote of the holders of
a majority of our then outstanding common stock); and
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provide that special meetings of our shareholders may only be
called by the board of directors, the chief executive officer or
the chairman of the board (prior to such time, provide that a
special meeting may also be called by shareholders holding a
majority of the voting power represented by the outstanding
shares entitled to vote).
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Limitation
of Liability and Indemnification Matters
Our certificate of incorporation limits the liability of our
directors for monetary damages for breach of their fiduciary
duty as directors, except for liability that cannot be
eliminated under the DGCL. Delaware law provides that directors
of a Delaware corporation will not be personally liable for
monetary damages for breach of their fiduciary duty as
directors, except for liabilities:
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for any breach of their duty of loyalty to us or our
shareholders;
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for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
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for unlawful payment of dividend or unlawful stock repurchase or
redemption, as provided under Section 174 of the
DGCL; or
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for any transaction from which the director derived an improper
personal benefit.
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101
Any amendment, repeal or modification of these provisions will
be prospective only and would not affect any limitation on
liability of a director for acts or omissions that occurred
prior to any such amendment, repeal or modification.
Our certificate of incorporation and bylaws also provide that we
will indemnify our directors and officers to the fullest extent
permitted by Delaware law. Our certificate of incorporation and
bylaws also permit us to purchase insurance on behalf of any
officer, director, employee or other agent for any liability
arising out of that persons actions as our officer,
director, employee or agent, regardless of whether Delaware law
would permit indemnification. We intend to enter into
indemnification agreements with each of our current and future
directors and officers. These agreements will require us to
indemnify these individuals to the fullest extent permitted
under Delaware law against liability that may arise by reason of
their service to us, and to advance expenses incurred as a
result of any proceeding against them as to which they could be
indemnified. We believe that the limitation of liability
provision in our certificate of incorporation and the
indemnification agreements will facilitate our ability to
continue to attract and retain qualified individuals to serve as
directors and officers.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is
.
Listing
We intend to apply to list our common stock on the NYSE under
the symbol FTS.
102
SHARES ELIGIBLE
FOR FUTURE SALE
Prior to this offering, there has been no public market for our
common stock. Future sales of our common stock in the public
market, or the availability of such shares for sale in the
public market, could adversely affect market prices prevailing
from time to time. As described below, only a limited number of
shares, other than shares sold in this offering, will be
available for sale shortly after this offering due to
contractual and legal restrictions on resale. Nevertheless,
sales of a substantial number of shares of our Common Stock in
the public market after such restrictions lapse, or the
perception that those sales may occur, could adversely affect
the prevailing market price at such time and our ability to
raise equity-related capital at a time and price we deem
appropriate.
Sales of
Restricted Shares
Upon the closing of this offering, we will have issued and
outstanding an aggregate of
shares
of common stock. Of these shares, all of the
shares
of common stock to be sold in this offering will be freely
tradable without restriction or further registration under the
Securities Act, unless the shares are held by any of our
affiliates as such term is defined in Rule 144
under the Securities Act. All remaining shares of common stock
held by existing shareholders will be deemed restricted
securities as such term is defined in Rule 144. The
restricted securities were issued and sold by us in private
transactions and are eligible for public sale only if registered
under the Securities Act or if they qualify for an exemption
from registration under Rule 144 or Rule 701 under the
Securities Act, which rules are summarized below.
The sale of a substantial number of shares of common stock, or
the perception that such sales could occur, could adversely
affect prevailing market prices for the common stock. In
addition, any such sale or perception could make it more
difficult for the company to sell equity securities or
equity-related securities in the future at a time and price that
the company deems appropriate. See Principal and Selling
Shareholders, Description of Capital Stock and
Underwriting.
As a result of the
lock-up
agreements described below and the provisions of Rule 144
and Rule 701 under the Securities Act, all of the shares of
our common stock (excluding the shares to be sold in this
offering) will be available for sale in the public market upon
the expiration of the
lock-up
agreements, beginning 180 days after the date of this
prospectus (subject to extension) and when permitted under
Rule 144 or Rule 701.
Lock-up
Agreements
We, all of our directors, officers and principal shareholders
have agreed not to sell or otherwise transfer or dispose of any
common stock for a period of 180 days from the date of this
prospectus, subject to certain exceptions and extensions. See
Underwriting for a description of these
lock-up
provisions.
Rule 144
In general, under Rule 144 as currently in effect, once we
have been a reporting company subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act for
90 days, a person (or persons whose shares are aggregated)
who is not deemed to have been an affiliate of ours at any time
during the three months preceding a sale, and who has
beneficially owned restricted securities within the meaning of
Rule 144 for at least six months (including any period of
consecutive ownership of preceding non-affiliated holders) would
be entitled to sell those shares, subject only to the
availability of current public information about us. A
non-affiliated person who has beneficially owned restricted
securities within the meaning of Rule 144 for at least one
year would be entitled to sell those shares without regard to
the provisions of Rule 144.
Once we have been a reporting company subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act for
90 days, a person (or persons whose shares are aggregated)
who is deemed to be an affiliate of ours and who has
beneficially owned restricted securities within the meaning of
Rule 144 for at least six months would be entitled to sell
within any three-month period a number of shares that does not
exceed the greater of one percent of the then outstanding shares
of our common stock or the average weekly
103
trading volume of our common stock reported through the New York
Stock Exchange during the four calendar weeks preceding the
filing of notice of the sale. Such sales are also subject to
certain manner of sale provisions, notice requirements and the
availability of current public information about us.
Rule 701
Employees, directors, officers, consultants or advisors who
purchased shares from us in connection with a compensatory stock
or option plan or other written compensatory agreement in
accordance with Rule 701 before the effective date of the
registration statement are entitled to sell such shares
90 days after the effective date of the registration
statement in reliance on Rule 144 without having to comply
with the holding period requirement of Rule 144 and, in the
case of non-affiliates, without having to comply with the public
information, volume limitation or notice filing provisions of
Rule 144. The SEC has indicated that Rule 701 will
apply to typical stock options granted by an issuer before it
becomes subject to the reporting requirements of the Exchange
Act, along with the shares acquired upon exercise of such
options, including exercises after the date of this prospectus.
Stock
Issued Under Employee Plans
We intend to file a registration statement on
Form S-8
under the Securities Act to register stock issuable under our
Long-Term Incentive Plan. This registration statement is
expected to be filed following the effective date of the
registration statement of which this prospectus is a part and
will be effective upon filing. Accordingly, shares registered
under such registration statement will be available for sale in
the open market following the effective date, unless such shares
are subject to vesting restrictions with us, Rule 144
restrictions applicable to our affiliates or the
lock-up
restrictions described above. Upon the closing of this offering,
there will be outstanding (i) no currently exercisable
options and (ii) options
covering shares
of common stock that will become exercisable with respect to
one-third of such shares on November 1, 2011, 2012 and
2013. We will have an
additional shares
of common stock reserved and available for future issuance as
stock options, restricted stock or other equity-based incentive
awards under our Long-Term Incentive Plan. For a description of
the terms of this plan, see Executive Compensation and
Other Information Executive Compensation
Long-Term Incentive Plan.
Registration
Rights
We have granted to our existing shareholders the right to
require us to register the shares of common stock held by them
under certain circumstances after consummation of this offering.
See Certain Relationships and Related Party
Transactions Registration Rights Agreement.
104
DESCRIPTION
OF CERTAIN INDEBTEDNESS
New
Senior Secured Credit Facility
General. Before the closing of this offering,
we expect to enter into a new four-year $200.0 million
senior secured revolving credit facility with a syndicate of
lenders led by Credit Suisse AG and Credit Suisse Securities
(USA) LLC (collectively, Credit Suisse), as sole
administrative agent and sole syndication agent. We have
received commitments for 100% of the proposed borrowing amount
from Credit Suisse, Royal Bank of Canada and RBC Capital
Markets, LLC, Bank of America, N.A. and Citigroup Global Markets
Inc. (on behalf of Citibank, N.A., and its affiliates). The
commitments are subject to customary conditions precedent.
We anticipate that our borrowing capacity under this new
revolving credit facility will be available to finance working
capital requirements and other general corporate purposes,
including capital expenditures and the issuance of standby
letters of credit. Although the agreements that will govern this
facility have not been finalized and executed, we currently
anticipate that the terms of this facility will be as described
below.
Borrowings under the new revolving credit facility will mature
four years from the date of the closing of the new revolving
credit facility. We anticipate that amounts under the new
revolving credit facility may be repaid and reborrowed prior to
the final maturity date.
The new revolving credit facility will contain an accordion
feature that will allow us to increase the maximum borrowing
amount by $100.0 million subject to certain conditions and
the agreement of the lenders providing the additional borrowing
capacity.
All borrowings under our new revolving credit facility will be
subject to the satisfaction of usual and customary conditions,
including the accuracy of representations and warranties and the
absence of defaults.
Guarantees and Security. Our obligations under
the new revolving credit facility will be guaranteed by all our
existing and future direct and indirect subsidiaries, with
limited exceptions. Borrowings under the new revolving credit
facility and any related guarantees will be secured by
substantially all of our assets and the assets of each
guarantor, whether owned on the closing date or thereafter
acquired, including but not limited to: (a) a perfected
first-priority pledge of all the equity interests in Frac Tech
Services, LLC held by Frac Tech Holdings, LLC, until the
Reorganization is consummated (b) a perfected
first-priority pledge of all the equity interests held by us or
any guarantor (which pledge, in the case of any foreign
subsidiary, shall be limited to 100% of the non-voting equity
interests (if any) and 66% of the voting equity interests in
such foreign subsidiary to the extent the pledge of any greater
percentage would result in adverse tax consequences to us) and
(c) perfected first-priority security interests in, and
mortgages on, substantially all tangible and intangible assets
of us and each guarantor (including but not limited to accounts
receivable, inventory, equipment, general intangibles,
investment property, intellectual property, real property having
a value in excess of a threshold to be determined, cash, deposit
and securities accounts, commercial tort claims, letter of
credit rights, intercompany notes and proceeds of the foregoing).
Interest and Fees.
Interest under the new revolving credit facility will be payable
at rates per annum based on the London Interbank Offered Rate,
or LIBOR, or an alternative base rate determined by reference to
Credit Suisses prime rate, the federal funds rate or
LIBOR. Under the new revolving credit facility, LIBOR loans may
be prepaid without penalty, in minimum increments and subject to
an obligation to reimburse related costs incurred by the lenders
in certain circumstances.
Covenants and Events of Default.
The new revolving credit facility will contain covenants
customary for agreements of this type, including, but not
limited to, limitations on our ability to:
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incur additional indebtedness and guarantees;
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create liens and other encumbrances on our assets;
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consolidate, merge or sell assets;
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105
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pay dividends and other distributions or repurchase stock;
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make certain investments, loans and advances;
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make capital expenditures;
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enter into operating leases and sale/leaseback transactions;
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enter into transactions with our affiliates;
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change the character of our business;
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engage in hedging activities unless certain requirements are
satisfied; and
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prepay other debt.
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We will also be required to comply with certain financial tests
and maintain certain financial ratios, which include:
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a maximum ratio of total debt to EBITDA of 3:0, and
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a minimum interest coverage ratio of 3.5:1.
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We also expect the new revolving credit facility to include
customary representations, warranties and events of default,
including events of default relating to non-payment of
principal, interest or fees, violation of covenants, inaccuracy
of representations and warranties, the termination of or default
under any material agreement, the result of which could
reasonably be expected to have a material adverse effect,
material and uncured judgments, bankruptcy and insolvency
events, cross-defaults and a default in the event of certain
changes of control. An event of default under the credit
agreement will permit the lenders to accelerate the maturity of
the indebtedness under the facility and may result in one or
more cross-defaults under other indebtedness, including our
7.125% Senior Notes due 2018. Similarly, a default generally
under the indenture governing our Senior Notes will constitute
an event of default under the credit agreement.
Letters of Credit. Of the aggregate
$200.0 million of borrowing capacity under the new
revolving credit facility, an amount to be agreed will be
available for the issuance of standby letters of credit.
7.125% Senior
Notes
On November 12, 2010, Frac Tech Services, LLC and Frac Tech
Finance, Inc., as co-issuers, completed a private offering of
$550.0 million aggregate principal amount of
7.125% Senior Notes due 2018 for total cash proceeds of
approximately $539.0 million, after deducting commissions.
The Senior Notes mature on November 15, 2018 and bear
interest at 7.125% per annum, payable semi-annually in arrears
on May 15 and November 15, beginning May 15, 2011. The
Senior Notes are unsecured and are guaranteed by Frac Tech
Services, LLCs existing and future subsidiaries, subject
to certain exceptions.
The Senior Notes are not entitled to any mandatory redemption or
sinking fund. On or before November 15, 2013, we may redeem
up to 35% of the Senior Notes with proceeds of certain equity
offerings, including this offering, at a redemption price of
107.125% of the principal amount plus accrued and unpaid
interest. Prior to November 15, 2014, we may redeem some or
all of the Senior Notes at a price equal to 100% of the
principal amount plus a make-whole premium determined pursuant
to a formula set forth in the indenture governing the Senior
Notes, plus accrued and unpaid interest. On or after
November 15, 2014, we may redeem all or part of the Senior
Notes at the following prices (as a percentage of principal),
plus accrued and unpaid interest, if redeemed during the
12-month
period beginning on November 15 of the years indicated below:
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Redemption
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Year
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Price
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2014
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103.563
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%
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2015
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101.781
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%
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2016 and thereafter
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100.000
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%
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106
Upon a change of control, as defined in the indenture, we will
be required to make an offer to purchase the Senior Notes at a
price equal to 101% of the principal amount plus accrued and
unpaid interest.
The indenture governing the Senior Notes contains covenants
that, among other things, limit our ability and the ability of
certain of our subsidiaries to:
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incur or guarantee additional indebtedness or issue certain
preferred stock;
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pay dividends on our capital stock or redeem capital stock or
subordinated indebtedness;
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transfer or sell assets;
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make investments;
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incur liens;
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enter into transactions with our affiliates; and
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merge or consolidate with other companies or transfer all or
substantially all of our assets.
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These covenants are subject to a number of qualifications and
exceptions.
107
MATERIAL
U.S. FEDERAL INCOME TAX
CONSIDERATIONS TO
NON-U.S.
HOLDERS
The following is a summary of the material United States federal
income tax consequences of the purchase, ownership and
disposition of our common stock to a
non-U.S. holder
as of the date hereof. For the purpose of this discussion, a
non-U.S. holder
is any beneficial owner of our common stock (other than a
partnership or entity treated as a partnership for United States
federal income tax purposes) that is not for United States
federal income tax purposes any of the following:
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an individual citizen or resident of the United States,
including an alien individual who is a lawful permanent resident
of the United States or who meets the substantial
presence test under Section 7701(b) of the Internal
Revenue Code of 1986, as amended, or the Code;
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a corporation (or other entity treated as a corporation for
United States federal income tax purposes) created or organized
in the United States or under the laws of the United States or
any state or the District of Columbia;
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an estate whose income is subject to United States federal
income tax regardless of its source; or
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a trust (1) whose administration is subject to the primary
supervision of a United States court and which has one or more
United States persons who have the authority to control all
substantial decisions of the trust or (2) which has made a
valid election to be treated as a United States person.
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If a partnership (or other entity treated as a partnership for
United States federal income tax purposes) holds our common
stock, the tax treatment of a partner in the partnership
generally will depend on the status of the partner and upon the
activities of the partnership. Accordingly, we urge partnerships
that hold our common stock and partners in such partnerships to
consult their tax advisors.
This summary assumes that a
non-U.S. holder
will hold our common stock issued pursuant to the offering as a
capital asset (generally, property held for investment). This
summary does not address all aspects of United States federal
income taxation and does not deal with foreign, state, local,
alternative minimum tax or other tax considerations that may be
relevant to
non-U.S. holders
in light of their personal circumstances. In addition, this
summary does not address United States federal income tax
considerations that may be relevant to
non-U.S. holders
that may be subject to special treatment under United States
federal income tax laws, including, without limitation, United
States expatriates, insurance companies, tax-exempt or
governmental organizations, dealers in securities or currency,
banks or other financial institutions, traders in securities
that
mark-to-market,
shareholders that hold our common stock as a result of a
constructive sale, shareholders who acquired our common stock
through the exercise of employee stock options or otherwise as
compensation or through a tax-qualified retirement plan, and
shareholders that hold our common stock as part of a hedge,
straddle, appreciated financial position, synthetic security,
conversion transaction or other integrated investment or risk
reduction transaction. Furthermore, this summary is based on
current provisions of the Code and Treasury Regulations and
administrative and judicial interpretations thereof, all as in
effect on the date hereof, and all of which are subject to
change, possibly with retroactive effect.
We have not sought any ruling from the Internal Revenue Service
(the IRS) with respect to the statements made and
the conclusions reached in the following summary, and there can
be no assurance that the IRS will agree with such statements and
conclusions. INVESTORS CONSIDERING THE PURCHASE OF COMMON STOCK
SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE
APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO
THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES
ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING
JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
Dividends
We currently intend to retain future earnings, if any, to
finance the expansion of our business. In addition, Frac Tech
Services, LLCs indenture governing its Senior Notes
limits, and the new senior secured credit facility that it
intends to enter into prior to the closing of this offering will
limit, its ability to make
108
distributions. However, if we do make distributions on our
common stock, those payments will constitute dividends for tax
purposes to the extent paid from our current or accumulated
earnings and profits, as determined under United States federal
income tax principles. To the extent those distributions exceed
our current and accumulated earnings and profits, the
distributions will constitute a return of capital and will first
reduce the
non-U.S. holders
adjusted tax basis in our common stock, but not below zero, and
then will be treated as gain realized from the sale or other
disposition of our common stock and will be treated as described
under Gain on Disposition of Common Stock below.
Any dividend paid to a
non-U.S. holder
of our common stock generally will be subject to United States
withholding tax either at a rate of 30% of the gross amount of
the dividend or such lower rate as may be specified by an
applicable income tax treaty. To receive the benefit of a
reduced treaty rate, a
non-U.S. holder
must provide us with an IRS
Form W-8BEN
(or applicable substitute or successor form) properly certifying
qualification for the reduced rate.
Dividends paid to a
non-U.S. holder
that are effectively connected with the conduct of a trade or
business by the
non-U.S. holder
in the United States (and, if required by an applicable income
tax treaty, are attributable to a United States permanent
establishment or fixed base of the
non-U.S. holder)
generally are exempt from the withholding tax described above
and instead will be subject to United States federal income tax
on a net income basis at the regular graduated United States
federal income tax rates in the same manner as if the
non-U.S. holder
were a United States person as defined under the Code. In such
case, we will not be required to withhold United States federal
income tax if the
non-U.S. holder
complies with applicable certification and disclosure
requirements. In order to obtain this exemption from withholding
tax, a
non-U.S. holder
must provide us with an IRS
Form W-8ECI
(or applicable substitute or successor form) properly certifying
eligibility for such exemption. Any such effectively connected
dividends received by a foreign corporation may be subject to an
additional branch profits tax at a rate of 30% or
such lower rate as may be specified by an applicable income tax
treaty.
Gain on
Disposition of Common Stock
Any gain realized on the disposition of our common stock by a
non-U.S. holder
generally will not be subject to United States federal income
tax unless:
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the gain is effectively connected with the conduct of a trade or
business by the
non-U.S. holder
in the United States (and, if required by an applicable income
tax treaty, is attributable to a United States permanent
establishment or fixed base of the
non-U.S. holder);
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the
non-U.S. holder
is an individual who is present in the United States for
183 days or more in the taxable year of that disposition,
and certain other conditions are met; or
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we are or have been a United States real property holding
corporation, or USRPHC, for United States federal income
tax purposes.
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A
non-U.S. holder
who has gain that is described in the first bullet point
immediately above will be subject to tax on the net gain derived
from the disposition under regular graduated United States
federal income tax rates in the same manner as if it were a
United States person as defined under the Code. In addition, a
non-U.S. holder
described in the first bullet point immediately above that is a
foreign corporation may be subject to the branch profits tax
equal to 30% of its effectively connected earnings and profits
or at such lower rate as may be specified by an applicable
income tax treaty.
A
non-U.S. holder
who meets the requirements described in the second bullet point
immediately above will be subject to a flat 30% tax on the gain
derived from the disposition, which may be offset by United
States source capital losses, even though the individual is not
considered a resident of the United States.
With respect to our status as a USRPHC, we do not believe that
we currently are, and do not expect to be for the foreseeable
future, a USRPHC for United States federal income tax purposes.
You should be aware, however, that the determination of whether
we are a USRPHC depends on the fair market value from time to
time of our interests in real property (and certain associated
personal property, including property used on our
109
real property interests to extract natural deposits) located
within the United States relative to our other business assets.
There can be no assurance that we will not become a USRPHC in
the future. In the event we do become a USRPHC, so long as our
common stock is regularly traded on an established
securities market within the meaning of the applicable
U.S. Treasury Regulations, a
non-U.S. holder
will not be subject to U.S. federal withholding tax on the
sale or other disposition of its shares of our common stock and
any gain realized on such sale or other disposition would only
be subject to U.S. federal income tax if the selling
non-U.S. holder
actually or constructively holds more than five percent of our
common stock at any time during the shorter of the five-year
period preceding the date of disposition or the holders
holding period.
Non-U.S. holders
should consult their tax advisors with respect to the
application of the foregoing rules to their ownership and
disposition of our common stock.
Backup
Withholding and Information Reporting
Generally, we must report annually to the IRS and to each
non-U.S. holder
the amount of dividends paid to such
non-U.S. holder,
the name and address of the recipient, and the amount, if any,
of tax withheld with respect to those dividends. These
information reporting requirements apply even if withholding was
not required. Pursuant to tax treaties or other agreements, the
IRS may make its reports available to tax authorities in the
recipients country of residence.
Payments of dividends to a
non-U.S. holder
will be subject to backup withholding (at the applicable rate)
unless the
non-U.S. holder
establishes an exemption, for example, by properly certifying
its
non-United
States status on an IRS
Form W-8BEN
or another appropriate version of IRS
Form W-8.
Notwithstanding the foregoing, backup withholding will apply if
either we or our paying agent has actual knowledge, or reason to
know, that the beneficial owner is a United States person that
is not an exempt recipient.
Payments of the proceeds from sale or other disposition by a
non-U.S. holder
of our common stock effected outside the United States by or
through a foreign office of a broker generally will not be
subject to information reporting or backup withholding. However,
information reporting (but not backup withholding) will apply to
those payments if the broker does not have documentary evidence
that the holder is a
non-U.S. holder,
an exemption is not otherwise established, and the broker has
certain relationships with the United States.
Payments of the proceeds from a sale or other disposition by a
non-U.S. holder
of our common stock effected by or through a United States
office of a broker generally will be subject to information
reporting and backup withholding (at the applicable rate) unless
the
non-U.S. holder
establishes an exemption, for example, by properly certifying
its
non-United
States status on an IRS
Form W-8BEN
or another appropriate version of IRS
Form W-8.
Notwithstanding the foregoing, information reporting and backup
withholding will apply if the broker has actual knowledge, or
reason to know, that the holder is a United States person that
is not an exempt recipient.
Backup withholding is not an additional tax. Rather, the United
States income tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is timely
furnished to the IRS.
Recent
Legislative Developments
Recently enacted legislation, that is effective for amounts paid
after December 31, 2012, generally will impose a
withholding tax of 30 percent on any dividends on our
common stock paid to a foreign financial institution, unless
such institution enters into an agreement with the
U.S. government to collect and provide to the U.S. tax
authorities substantial information regarding U.S. account
holders of such institution (which includes certain equity and
debt holders of such institution, as well as certain account
holders that are foreign entities with U.S. owners). The
legislation will also generally impose a withholding tax of
30 percent on any dividends on our common stock paid to a
non-financial foreign entity unless such entity provides the
withholding agent with either certification that such entity
does not have any substantial United States owners
110
or identification of the direct and indirect U.S. owners of
the entity. Finally, withholding of 30 percent also
generally will apply to the gross proceeds of a disposition of
our common stock paid to a foreign financial institution or to a
non-financial foreign entity unless the reporting and
certification requirements described above have been met. Under
certain circumstances, a
non-U.S. holder
of our common stock might be eligible for refunds or credits of
such taxes. Investors are encouraged to consult with their tax
advisors regarding the possible implications of this legislation
on their investment in our common stock.
111
UNDERWRITING
Under the terms and subject to the conditions contained in an
underwriting agreement
dated ,
2011 we and the selling stockholders have agreed to sell to the
underwriters named below, for whom Credit Suisse Securities
(USA) LLC, Citigroup Global Markets Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Morgan
Stanley & Co. Incorporated and RBC Capital Markets,
LLC are acting as representatives the following respective
numbers of shares of common stock:
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Number
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Underwriter
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of Shares
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Credit Suisse Securities (USA) LLC
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Citigroup Global Markets Inc.
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Merrill Lynch, Pierce, Fenner & Smith
Incorporated
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Morgan Stanley & Co. Incorporated
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RBC Capital Markets, LLC
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Jefferies & Company, Inc.
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Johnson Rice & Company, L.L.C.
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Wells Fargo Securities, LLC
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Macquarie Capital (USA) Inc.
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Pritchard Capital Partners, LLC
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Raymond James & Associates, Inc.
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Simmons & Company International
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Stephens Inc.
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Tudor, Pickering, Holt & Co. Securities, Inc.
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Total
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The underwriting agreement provides that the underwriters are
obligated to purchase all the shares of common stock in the
offering if any are purchased, other than those shares covered
by the over-allotment option described below. The underwriting
agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be
increased or the offering may be terminated.
We and the selling stockholders have granted to the underwriters
a 30-day
option to purchase on a pro rata basis up
to additional
shares from us and an aggregate
of additional
outstanding shares from the selling stockholders at the initial
public offering price less the underwriting discounts and
commissions. The option may be exercised only to cover any
over-allotments of common stock.
The underwriters propose to offer the shares of common stock
initially at the public offering price on the cover page of this
prospectus and to selling group members at that price less a
selling concession of $ per share.
The underwriters and selling group members may allow a discount
of $ per share on sales to other
broker/dealers. After the initial public offering the
representatives may change the public offering price and
concession and discount to broker/dealers.
112
The following table summarizes the compensation and estimated
expenses we and the selling stockholders will pay:
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Per Share
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Total
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Without
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With
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Without
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With
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Over-allotment
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Over-allotment
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Over-allotment
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Over-allotment
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Underwriting Discounts and Commissions paid by us
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$
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$
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$
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$
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Expenses payable by us
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$
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$
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$
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$
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Underwriting Discounts and Commissions paid by selling
stockholders
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$
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$
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$
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$
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Expenses payable by the selling stockholders
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$
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$
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$
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$
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The underwriters will not confirm sales to any accounts over
which they exercise discretionary authority without first
receiving a written consent from those accounts.
We have agreed that we will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, or file
with the Securities and Exchange Commission a registration
statement under the Securities Act relating to, any shares of
our common stock or securities convertible into or exchangeable
or exercisable for any shares of our common stock, or publicly
disclose the intention to make any offer, sale, pledge,
disposition or filing, without the prior written consent of
Credit Suisse Securities (USA) LLC for a period of 180 days
after the date of this prospectus, except issuances
pursuant to the exercise of employee stock options outstanding
on the date hereof or pursuant to our dividend reinvestment
plan. However, in the event that either (1) during the last
17 days of the
lock-up
period, we release earnings results or material news or a
material event relating to us occurs or (2) prior to the
expiration of the lock-up period, we announce that
we will release earnings results during the
16-day
period beginning on the last day of the lock-up
period, then in either case the expiration of the
lock-up will be extended until the expiration
of the
18-day
period beginning on the date of the release of the earnings
results or the occurrence of the material news or event, as
applicable, unless Credit Suisse Securities (USA) LLC waives, in
writing, such an extension.
Our officers and directors and the selling stockholders have
agreed that they will not offer, sell, contract to sell, pledge
or otherwise dispose of, directly or indirectly, any shares of
our common stock or securities convertible into or exchangeable
or exercisable for any shares of our common stock, enter into a
transaction that would have the same effect, or enter into any
swap, hedge or other arrangement that transfers, in whole or in
part, any of the economic consequences of ownership of our
common stock, whether any of these transactions are to be
settled by delivery of our common stock or other securities, in
cash or otherwise, or publicly disclose the intention to make
any offer, sale, pledge or disposition, or to enter into any
transaction, swap, hedge or other arrangement, without, in each
case, the prior written consent of Credit Suisse Securities
(USA) LLC for a period of 180 days after the date of this
prospectus. However, in the event that either (1) during
the last 17 days of the
lock-up
period, we release earnings results or material news or a
material event relating to us occurs or (2) prior to the
expiration of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
lock-up
period, then in either case the expiration of the
lock-up
will be extended until the expiration of the
18-day
period beginning on the date of the release of the earnings
results or the occurrence of the material news or event, as
applicable, unless Credit Suisse Securities (USA) LLC waives, in
writing, such an extension.
The underwriters have reserved for sale at the initial public
offering price up to shares
of the common stock for employees, directors and other persons
associated with us who have expressed an interest in purchasing
common stock in the offering. The number of shares available for
sale to the general public in the offering will be reduced to
the extent these persons purchase the reserved shares. Any
reserved shares not so purchased will be offered by the
underwriters to the general public on the same terms as the
other shares.
We and the selling stockholders have agreed to indemnify the
underwriters against liabilities under the Securities Act, or
contribute to payments that the underwriters may be required to
make in that respect.
113
We intend to apply to list the shares of common stock on the
NYSE under the symbol FTS.
In connection with the listing of the common stock on the NYSE,
the underwriters will undertake to sell round lots of
100 shares or more to a minimum of beneficial owners.
An affiliate of Credit Suisse Securities (USA) LLC is expected
to act as joint book runner, joint lead arranger, administrative
agent, collateral agent and a lender and an affiliate of RBC
Capital Markets, LLC is expected to act as joint book runner,
joint lead arranger and a lender under the new senior secured
revolving credit facility that we expect to enter into prior to
this offering. Affiliates of certain other underwriters may also
become lenders under the new facility.
Prior to this offering, there has been no public market for our
common stock. The initial public offering price has been
determined by a negotiation among us and the representatives and
will not necessarily reflect the market price of our common
stock following the offering. The principal factors that were
considered in determining the public offering price included:
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The information presented in the prospectus;
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The history of and prospects for the industry in which we will
compete;
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The ability of our management;
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The prospects for our future earnings;
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The present state of our development and current financial
condition;
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|
The recent market prices of, and the demand for, publicly traded
common stock of generally comparable companies; and
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|
The general condition of the securities markets at the time of
this offering.
|
In connection with the offering the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate
covering transactions and penalty bids in accordance with
Regulation M under the Exchange Act.
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|
|
Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
|
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|
Over-allotment involves sales by the underwriters of shares in
excess of the number of shares the underwriters are obligated to
purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short
position. In a covered short position, the number of shares
over-allotted by the underwriters is not greater than the number
of shares that they may purchase in the over-allotment option.
In a naked short position, the number of shares involved is
greater than the number of shares in the over-allotment option.
The underwriters may close out any covered short position by
either exercising their over-allotment option
and/or
purchasing shares in the open market.
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|
Syndicate covering transactions involve purchases of the common
stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In
determining the source of shares to close out the short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through
the over-allotment option. If the underwriters sell more shares
than could be covered by the over-allotment option, a naked
short position, the position can only be closed out by buying
shares in the open market. A naked short position is more likely
to be created if the underwriters are concerned that there could
be downward pressure on the price of the shares in the open
market after pricing that could adversely affect investors who
purchase in the offering.
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|
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|
Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
|
114
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding
a decline in the market price of the common stock. As a result
the price of our common stock may be higher than the price that
might otherwise exist in the open market. These transactions may
be effected on the NYSE and, if commenced, may be discontinued
at any time.
A prospectus in electronic format may be made available on the
web sites maintained by one or more of the underwriters, or
selling group members, if any, participating in this offering
and one or more of the underwriters participating in this
offering may distribute prospectuses electronically. The
representatives may agree to allocate a number of shares to
underwriters and selling group members for sale to their online
brokerage account holders. Internet distributions will be
allocated by the underwriters and selling group members that
will make internet distributions on the same basis as other
allocations.
European
Economic Area
In relation to each member state of the European Economic Area
that has implemented the Prospectus Directive (each, a relevant
member state), an offer to the public of shares of our common
stock which are the subject of the offering described in this
prospectus may not be made in that relevant member state, except
that an offer to the public in that relevant member state of
shares of our common stock may be made at any time under the
following exemptions under the Prospectus Directive, if they
have been implemented in that relevant member state:
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|
|
to any legal entity that is authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in
securities; or
|
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|
|
to any legal entity that has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than 43,000,000 and
(3) an annual net turnover of more than 50,000,000,
as shown in its last annual or consolidated accounts; or
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|
to fewer than 100 natural or legal persons (other than qualified
investors as defined in the Prospectus Directive) subject to
obtaining the prior consent of the underwriters for any such
offer; or
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|
|
in any other circumstances that do not require the publication
of a prospectus pursuant to Article 3(2) of the Prospectus
Directive,
|
provided, that no such offer of shares of our common stock shall
result in a requirement for the publication by the company or
any representative of a prospectus pursuant to Article 3 of
the Prospectus Directive.
Each purchaser of shares of our common stock described in this
prospectus located in a relevant member state who receives any
communication in respect of, or who acquires any shares of our
common stock under, the offer contemplated in this prospectus
will be deemed to have represented, warranted and agreed to with
each underwriter and the company that (a) it is a
qualified investor within the meaning of
Article 2(1)(e) of the Prospectus Directive and (b) in
the case of any common stock acquired by it as a financial
intermediary, as that term is used in Article 3(2) of the
Prospectus Directive, (i) the shares of our common stock
acquired by it in the offer have not been acquired on behalf of,
nor have they been acquired with a view to their offer or resale
to, persons in any relevant member state, other than qualified
investors, as that term is defined in the Prospectus Directive,
or in circumstances in which the prior consent of the
underwriters have been given to the offer or resale; or
(ii) where shares of our common stock have been acquired by
it on behalf of persons in any relevant member state other than
qualified investors, the offer of such shares of our common
stock to it is not treated under the Prospectus Directive as
having been made to such persons.
For the purposes of this provision, the expression an
offer to the public in relation to any shares of our
common stock in any relevant member state means the
communication in any form and by any means of sufficient
information on the terms of the offer and any shares of our
common stock to be offered so as to enable an investor to decide
to purchase or subscribe for shares of our common stock, as the
expression may be varied in that member state by any measure
implementing the Prospectus Directive in that member state,
115
and the expression Prospectus Directive means
Directive 2003/71/EC and includes any relevant implementing
measure in each relevant member state.
United
Kingdom
This prospectus is only being distributed to, and is only
directed at, (a) persons who are outside the United Kingdom
or (b) persons in the United Kingdom that are qualified
investors within the meaning of Article 2(1)(e) of the
Prospectus Directive (Qualified Investors) that are also
(i) investment professionals falling within
Article 19(5) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005 (the Order) or
(ii) high net worth entities, and other persons to whom it
may lawfully be communicated, falling within
Article 49(2)(a) to (d) of the Order (all such persons
together being referred to as relevant persons). This prospectus
and its contents are confidential and should not be distributed,
published or reproduced (in whole or in part) or disclosed by
recipients to any other persons in the United Kingdom. Any
person in the United Kingdom that is not a relevant person
should not act or rely on this prospectus or any of its contents.
Notice to
Residents of Hong Kong
The underwriters and each of their affiliates have not
(i) offered or sold, and will not offer or sell, in Hong
Kong, by means of any document, shares of our common stock other
than (a) to professional investors as defined
in the Securities and Futures Ordinance (Cap.571) of Hong Kong
and any rules made under that Ordinance or (b) in other
circumstances which do not result in the document being a
prospectus as defined in the Companies Ordinance
(Cap. 32 of Hong Kong or which do not constitute an offer to the
public within the meaning of that Ordinance or (ii) issued
or had in its possession for the purposes of issue, and will not
issue or have in its possession for the purposes of issue,
whether in Hong Kong or elsewhere any advertisement, invitation
or document relating to shares of our common stock which is
directed at, or the contents of which are likely to be accessed
or read by, the public in Hong Kong (except if permitted to do
so under the securities laws of Hong Kong) other than with
respect to our securities which are or are intended to be
disposed of only to persons outside Hong Kong or only to
professional investors as defined in the Securities
and Futures Ordinance any rules made under that Ordinance. The
contents of this document have not been reviewed by any
regulatory authority in Hong Kong. You are advised to exercise
caution in relation to the offer. If you are in any doubt about
any of the contents of this document, you should obtain
independent professional advice.
Notice to
Residents of Singapore
This prospectus or any other offering material relating to
shares of our common stock has not been and will not be
registered as a prospectus with the Monetary Authority of
Singapore, and the shares will be offered in Singapore pursuant
to exemptions under Section 274 and Section 275 of the
Securities and Futures Act, Chapter 289 of Singapore (the
Securities and Futures Act). Accordingly the shares
may not be offered or sold, or be the subject of an invitation
for subscription or purchase, nor may this prospectus or any
other offering material relating to the shares be circulated or
distributed, whether directly or indirectly, to the public or
any member of the public in Singapore other than (a) to an
institutional investor or other person specified in
Section 274 of the Securities and Futures Act, (b) to
a sophisticated investor, and in accordance with the conditions
specified in Section 275 of the Securities and Futures Act
or (c) otherwise pursuant to, and in accordance with the
conditions of, any other applicable provision of the Securities
and Futures Act.
Notice to
Residents of China
Shares of our common stock may not be offered or sold directly
or indirectly to the public in the Peoples Republic of
China (China) and neither this prospectus, which has
not been submitted to the Chinese Securities and Regulatory
Commission, nor any offering material or information contained
herein relating to the shares, may be supplied to the public in
China or used in connection with any offer for the subscription
or sale of the shares to the public in China. The shares may
only be offered or sold to China-related organizations which are
authorized to engage in foreign exchange business and offshore
investment from outside of China.
116
Such China-related investors may be subject to foreign exchange
control approval and filing requirements under the relevant
Chinese foreign exchange regulations. For the purpose of this
paragraph, China does not include Taiwan and the special
administrative regions of Hong Kong and Macau.
Notice to
Residents of Germany
Each person who is in possession of this prospectus is aware of
the fact that no German sales prospectus (Verkaufsprospekt)
within the meaning of the Securities Sales Prospectus Act
(Wertpapier-Verkaufsprospektgesetz, the Act) of the
Federal Republic of Germany has been or will be published with
respect to shares of our common stock. In particular, each
underwriter has represented that it has not engaged and has
agreed that it will not engage in a public offering
(offentliches Angebot) within the meaning of the Act with
respect to any of the shares of our common stock otherwise than
in accordance with the Act and all other applicable legal and
regulatory requirements.
Notice to
Residents of France
Shares of our common stock are being issued and sold outside the
Republic of France and that, in connection with their initial
distribution, each underwriter has not offered or sold and will
not offer or sell, directly or indirectly, any shares to the
public in the Republic of France, and that it has not
distributed and will not distribute or cause to be distributed
to the public in the Republic of France this prospectus or any
other offering material relating to the shares, and that such
offers, sales and distributions have been and will be made in
the Republic of France only to qualified investors
(investisseurs qualifiés) in accordance with
Article L.411-2
of the Monetary and Financial Code and decrét
no. 98-880
dated 1st October, 1998.
Notice to
Residents of the Netherlands
Shares of our common stock may not be offered, sold, transferred
or delivered in or from the Netherlands as part of their initial
distribution or at any time thereafter, directly or indirectly,
other than to, individuals or legal entities situated in The
Netherlands who or which trade or invest in securities in the
conduct of a business or profession (which includes banks,
securities intermediaries (including dealers and brokers),
insurance companies, pension funds, collective investment
institution, central governments, large international and
supranational organizations, other institutional investors and
other parties, including treasury departments of commercial
enterprises, which as an ancillary activity regularly invest in
securities; hereinafter, Professional Investors),
provided that in the offer, prospectus and in any other
documents or advertisements in which a forthcoming offering of
shares of our common stock is publicly announced (whether
electronically or otherwise) in The Netherlands, it is stated
that such offer is and will be exclusively made to such
Professional Investors. Individual or legal entities who are not
Professional Investors may not participate in the offering of
the shares of our common stock, and this prospectus or any other
offering material relating to the shares may not be considered
an offer or the prospect of an offer to sell or exchange the
shares.
Notice to
Prospective Investors in Switzerland
Shares in our common stock may not be publicly offered in
Switzerland and will not be listed on the SIX Swiss Exchange
(SIX) or on any other stock exchange or regulated
trading facility in Switzerland. This prospectus has been
prepared without regard to the disclosure standards for issuance
prospectuses under art. 652a or art. 1156 of the Swiss Code of
Obligations or the disclosure standards for listing prospectuses
under art. 27 ff. of the SIX Listing Rules or the listing rules
of any other stock exchange or regulated trading facility in
Switzerland. Neither this prospectus nor any other offering or
marketing material relating to the shares of our common stock or
the offering may be publicly distributed or otherwise made
publicly available in Switzerland.
Neither this prospectus nor any other offering or marketing
material relating to the offering, the company, or shares in our
common stock have been or will be filed with or approved by any
Swiss regulatory authority. In particular, this prospectus will
not be filed with, and the offer of the shares will not be
supervised by, the Swiss Financial Market Supervisory Authority
FINMA (FINMA), and the offer of the shares has not been and
117
will not be authorized under the Swiss Federal Act on Collective
Investment Schemes (CISA). The investor protection
afforded to acquirers of interests in collective investment
schemes under the CISA does not extend to acquirers of shares in
our common stock.
Notice to
Prospective Investors in the Dubai International Financial
Centre
This prospectus relates to an Exempt Offer in accordance with
the Offered Securities Rules of the Dubai Financial Services
Authority (DFSA). This prospectus is intended for
distribution only to persons of a type specified in the Offered
Securities Rules of the DFSA. It must not be delivered to, or
relied on by, any other person. The DFSA has no responsibility
for reviewing or verifying any documents in connection with
Exempt Offers. The DFSA has not approved this prospectus nor
taken steps to verify the information set forth herein and has
no responsibility for the prospectus. The shares of our common
stock to which this prospectus relates may be illiquid
and/or
subject to restrictions on their resale. Prospective purchasers
of the shares should conduct their own due diligence on the
shares. If you do not understand the contents of this prospectus
you should consult an authorized financial advisor.
118
LEGAL
MATTERS
The validity of the shares of common stock offered by this
prospectus will be passed upon for Frac Tech Services, Inc. by
Thompson & Knight LLP, Dallas, Texas. Certain legal
matters in connection with this offering will be passed upon for
the underwriters by Shearman & Sterling, LLP, New
York, New York.
EXPERTS
The audited consolidated financial statements of Frac Tech
Holdings, LLC, as of December 31, 2008 and 2009 and for
each of the three years in the period ending December 31,
2009 included in this prospectus and elsewhere in this
registration statement have been so included in reliance upon
the report of Grant Thornton LLP, independent registered public
accounting firm, upon authority of said firm as experts in
accounting and auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1
(including the exhibits, schedules and amendments thereto) under
the Securities Act, with respect to the shares of our common
stock offered hereby. This prospectus does not contain all of
the information set forth in the registration statement and the
exhibits and schedules thereto. For further information with
respect to us and the common stock offered hereby, we refer you
to the registration statement and the exhibits and schedules
filed therewith. Statements contained in that prospectus as to
the contents of any contract, agreement or any other document
are summaries of the material terms of this contract, agreement
or other document. With respect to each of these contracts,
agreements or other documents filed as an exhibit to the
registration statement, reference is made to the exhibits for a
more complete description of the matter involved. A copy of the
registration statement, and the exhibits and schedules thereto,
may be inspected without charge at the public reference
facilities maintained by the SEC at 100 F Street NE,
Washington, D.C. 20549. Copies of these materials may be
obtained, upon payment of a duplicating fee, from the Public
Reference Section of the SEC at 100 F Street NE,
Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
facility. The SEC maintains a website that contains reports,
proxy and information statements and other information regarding
registrants that file electronically with the SEC. The address
of the SECs website is
http://www.sec.gov.
After we have completed this offering, we will file annual,
quarterly and current reports, proxy statements and other
information with the SEC. After completion of this offering, we
expect our website to be located at
http://www.fractech.net,
and we expect to make our periodic reports and other
information filed with or furnished to the SEC available, free
of charge, through our website, as soon as reasonably
practicable after those reports and other information are
electronically filed with or furnished to the SEC. Information
on our website or any other website is not incorporated by
reference into this prospectus and does not constitute a part of
this prospectus. You may read and copy any reports, statements
or other information on file at the public reference rooms. You
can also request copies of these documents, for a copying fee,
by writing to the SEC, or you can review these documents on the
SECs website, as described above. In addition, we will
provide electronic or paper copies of our filings free of charge
upon request.
119
FRAC TECH
HOLDINGS, LLC
INDEX TO FINANCIAL STATEMENTS
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Page
|
|
Unaudited Consolidated Financial Statements
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
Audited Consolidated Financial Statements
|
|
|
|
|
|
|
|
F-18
|
|
|
|
|
F-19
|
|
|
|
|
F-20
|
|
|
|
|
F-21
|
|
|
|
|
F-22
|
|
|
|
|
F-23
|
|
The financial statements of Frac Tech Services, Inc. have been
omitted, as the entity has no activities except in connection
with its formation. The members of Frac Tech Holdings, LLC will
exchange their equity interests for equity interests in Frac
Tech Services, Inc. in connection with the Companys
Reorganization described in the Registration Statement.
F-1
Frac Tech
Holdings, LLC
(amounts
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma as of
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
(Unaudited)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
26,039
|
|
|
$
|
33,662
|
|
|
|
|
|
Accounts receivable trade, net
|
|
|
59,020
|
|
|
|
179,054
|
|
|
|
|
|
Inventories, net
|
|
|
55,137
|
|
|
|
74,482
|
|
|
|
|
|
Prepaid expenses
|
|
|
3,875
|
|
|
|
7,147
|
|
|
|
|
|
Amounts due from related parties
|
|
|
16,039
|
|
|
|
31,358
|
|
|
|
|
|
Other current assets
|
|
|
341
|
|
|
|
273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
160,451
|
|
|
|
325,976
|
|
|
|
|
|
Fixed assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
767,356
|
|
|
|
849,577
|
|
|
|
|
|
Construction in process
|
|
|
6,491
|
|
|
|
18,053
|
|
|
|
|
|
Equipment advances
|
|
|
5,039
|
|
|
|
7,841
|
|
|
|
|
|
Accumulated depreciation
|
|
|
(208,868
|
)
|
|
|
(281,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed assets, net
|
|
|
570,018
|
|
|
|
593,709
|
|
|
|
|
|
Goodwill
|
|
|
3,212
|
|
|
|
3,212
|
|
|
|
|
|
Other intangible assets
|
|
|
5,644
|
|
|
|
5,644
|
|
|
|
|
|
Other, net
|
|
|
1,216
|
|
|
|
1,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
740,541
|
|
|
$
|
930,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
62,366
|
|
|
$
|
102,792
|
|
|
|
|
|
Amounts due to related parties
|
|
|
4,380
|
|
|
|
2,794
|
|
|
|
|
|
Accrued payroll liabilities
|
|
|
4,804
|
|
|
|
8,493
|
|
|
|
|
|
Other accrued liabilities
|
|
|
22,485
|
|
|
|
34,474
|
|
|
|
|
|
Interest rate swaps
|
|
|
5,284
|
|
|
|
574
|
|
|
|
|
|
Loans from members
|
|
|
10,106
|
|
|
|
8,928
|
|
|
|
|
|
Revolving note payable
|
|
|
238,862
|
|
|
|
91,000
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
29,107
|
|
|
|
17,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
377,394
|
|
|
|
266,828
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term notes, net of current portion
|
|
|
42,610
|
|
|
|
49,943
|
|
|
|
|
|
Interest rate swaps
|
|
|
425
|
|
|
|
259
|
|
|
|
|
|
Deferred gain
|
|
|
1,283
|
|
|
|
1,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
44,318
|
|
|
|
51,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
421,712
|
|
|
|
318,044
|
|
|
|
|
|
Owners equity
|
|
|
318,829
|
|
|
|
612,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
740,541
|
|
|
$
|
930,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accompanying notes are an integral part of these consolidated
financial statements.
F-2
Frac Tech
Holdings, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
For the nine months ended
(amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
Revenues
|
|
$
|
248,366
|
|
|
$
|
735,544
|
|
Revenues from related parties
|
|
|
27,962
|
|
|
|
70,653
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
276,328
|
|
|
|
806,197
|
|
Costs of revenues
|
|
|
250,185
|
|
|
|
494,074
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
26,143
|
|
|
|
312,123
|
|
Selling and administrative costs
|
|
|
47,089
|
|
|
|
74,558
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from operations
|
|
|
(20,946
|
)
|
|
|
237,565
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
755
|
|
|
|
225
|
|
Interest expense
|
|
|
(12,522
|
)
|
|
|
(13,787
|
)
|
Other
|
|
|
1,575
|
|
|
|
(1,174
|
)
|
|
|
|
|
|
|
|
|
|
Net other expense
|
|
|
(10,192
|
)
|
|
|
(14,736
|
)
|
|
|
|
|
|
|
|
|
|
Income (Loss) before income taxes
|
|
|
(31,138
|
)
|
|
|
222,829
|
|
Provision for income taxes
|
|
|
350
|
|
|
|
2,882
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(31,488
|
)
|
|
$
|
219,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma information
|
|
|
|
|
|
|
|
|
Net income (loss) as reported
|
|
$
|
(31,488
|
)
|
|
$
|
219,947
|
|
Pro forma adjustment for income tax expense (benefit)
|
|
|
(12,673
|
)
|
|
|
88,561
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$
|
(18,815
|
)
|
|
$
|
131,386
|
|
Basic and diluted
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per common share
|
|
|
|
|
|
|
|
|
Pro forma weighted average common shares outstanding used in net
income (loss) per common share
|
|
|
|
|
|
|
|
|
Accompanying notes are an integral part of these consolidated
financial statements.
F-3
Frac Tech
Holdings, LLC
CONSOLIDATED STATEMENTS OF OWNERS EQUITY
For the nine months ended September 30,
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
Owners Equity as of January 1,
|
|
$
|
327,702
|
|
|
$
|
318,829
|
|
Net Income (Loss)
|
|
|
(31,488
|
)
|
|
|
219,947
|
|
Contributions from owners
|
|
|
37,500
|
|
|
|
100,000
|
|
Distributions to owners
|
|
|
(5,600
|
)
|
|
|
(26,000
|
)
|
Reorganization distribution
|
|
|
|
|
|
|
(490
|
)
|
|
|
|
|
|
|
|
|
|
Owners Equity as of September 30,
|
|
$
|
328,114
|
|
|
$
|
612,286
|
|
|
|
|
|
|
|
|
|
|
Accompanying notes are an integral part of these consolidated
financial statements.
F-4
Frac Tech
Holdings, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
(31,488
|
)
|
|
|
219,947
|
|
Adjustments to reconcile net income (loss) to cash flows from
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
63,511
|
|
|
|
79,807
|
|
Impairment of service equipment
|
|
|
|
|
|
|
9,352
|
|
(Gain) Loss on sale of assets
|
|
|
(369
|
)
|
|
|
464
|
|
Amortization of deferred gain
|
|
|
(268
|
)
|
|
|
(269
|
)
|
Bad debt expense
|
|
|
1,540
|
|
|
|
2,163
|
|
Changes in fair value of interest rate swap
|
|
|
(3,423
|
)
|
|
|
(4,875
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
63,630
|
|
|
|
(137,983
|
)
|
Inventories
|
|
|
(7,047
|
)
|
|
|
(19,345
|
)
|
Prepaid expenses
|
|
|
(697
|
)
|
|
|
(3,230
|
)
|
Other assets
|
|
|
694
|
|
|
|
(505
|
)
|
Deposit with related party
|
|
|
15,000
|
|
|
|
|
|
Accounts payable
|
|
|
(34,548
|
)
|
|
|
40,404
|
|
Accrued payroll and other accrued liabilities
|
|
|
(4,915
|
)
|
|
|
15,644
|
|
Customer prepayments
|
|
|
(16,580
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
45,040
|
|
|
|
201,569
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(34,275
|
)
|
|
|
(116,202
|
)
|
Proceeds from disposition of assets
|
|
|
448
|
|
|
|
3,029
|
|
Cash paid for acquisitions
|
|
|
(17,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(51,327
|
)
|
|
|
(113,173
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility
|
|
|
156,473
|
|
|
|
131,510
|
|
Repayments of revolving credit facility
|
|
|
(185,644
|
)
|
|
|
(279,372
|
)
|
Proceeds from long-term debt
|
|
|
24,591
|
|
|
|
14,000
|
|
Repayment of long-term debt
|
|
|
(17,753
|
)
|
|
|
(18,002
|
)
|
Loans/advances from owners
|
|
|
2,252
|
|
|
|
(3,395
|
)
|
Net change in receivables from related parties
|
|
|
(821
|
)
|
|
|
486
|
|
Distributions to owners
|
|
|
(5,600
|
)
|
|
|
(26,000
|
)
|
Contribution from owners
|
|
|
37,500
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
10,998
|
|
|
|
(80,773
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
4,711
|
|
|
|
7,623
|
|
Cash, beginning of period
|
|
|
423
|
|
|
|
26,039
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
|
5,134
|
|
|
|
33,662
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest, net of capitalized interest
|
|
|
13,179
|
|
|
|
14,304
|
|
Income taxes
|
|
|
946
|
|
|
|
493
|
|
Accompanying notes are an integral part of these consolidated
financial statements.
F-5
|
|
NOTE 1
|
DESCRIPTION
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
This description of business and summary of significant
accounting policies is presented to assist the reader in
understanding our financial statements. These financial
statements and notes are representations of our management who
is responsible for their integrity and objectivity. These
accounting policies conform to generally accepted accounting
principles and have been consistently applied in all material
respects in the preparation of these financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair
presentation have been included.
In these notes, references to the Company,
we, us, our, etc. are to the
consolidated group (discussed at Consolidation below).
DESCRIPTION
OF BUSINESS
Frac Tech Holdings, LLC (FTH) provides hydraulic fracturing and
acidizing services (pressure pumping or frac
services) to oil and natural gas producing companies
through Frac Tech Services, LLC (FTS), a Texas limited
liability company, and its direct and indirect subsidiaries.
Prior to January 1, 2010, FTS was a Texas limited
partnership and FTH held a 1% general partner interest in FTS.
Effective January 1, 2010, the owners of FTH assigned the
remaining 99% ownership of FTS to FTH and FTS was converted to a
Texas limited liability company. Additionally, effective
September 30, 2010, our owners assigned all ownership
interests of certain related entities to us, all of which were
also under common control. As a result of these assignments,
these entities, including entities that were previously
consolidated under Financial Accounting Standards Board
(FASB) Interpretation No. 46R (FIN 46),
Consolidation of Variable Interest Entities, an
Interpretation of APB No. 51 (which is now incorporated
into ASC 810) became our wholly-owned subsidiaries.
The historical consolidated balance sheets, and the historical
statements of operations, owners equity and cash flows
have all been presented as if the reorganization of these
entities took place as of the beginning of the earliest period
presented.
Immediately prior to consummation of our initial public offering
of common stock, FTH will be merged with and into FTS, and FTS
will be merged with and into Frac Tech Services, Inc., a
Delaware corporation that was formed to serve as the co-issuer
of our 7.125% Senior Notes due 2018 and that has no other
assets or liabilities. As a result of those mergers, which we
refer to collectively as our Reorganization,
(i) Frac Tech Services, Inc. will survive as the parent
company of all of our subsidiaries and will own the assets and
conduct the business currently owned and conducted by FTS;
(ii) the current owners of the outstanding membership
interests in FTH will receive shares of Frac Tech Services, Inc.
common stock in exchange for such membership interests; and
(iii) Frac Tech Services, Inc. will be the issuer of the
common stock offered and sold pursuant to such public offering
and will be the sole direct obligor under our Senior Notes.
The Companys services are provided during well completion
or during attempts to re-stimulate wells that have experienced
production declines. Since 2003, service capacity has been
expanded by the continuing addition of equipment. At the end of
September, 2010, we were providing fracturing services out of 10
districts: Aledo, TX; Artesia, NM; Bossier City, LA; Hearne, TX;
Longview, TX; Odessa, TX; Pleasanton, TX; Vernal, UT;
Williamsport, PA and Washington, PA. Our equipment assembly
plant, located in Cisco, TX, provides us with the ability to
increase the number of units in our frac fleet at lower costs
and in shorter periods than would be available if we were buying
this equipment from third parties. Within our consolidated
group, we build hydraulic fracturing units and various other
smaller pieces of equipment that are essential parts of the
fracturing business. We also blend our own set of proprietary
chemicals for use in fracturing wells and our chemical blending
facility, located in Chickasha, Oklahoma, provides us with some
of our chemicals.
F-6
Frac Tech
Holdings, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands)
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Accounting
Standards Codification
On July 1, 2009, the Financial Accounting Standards Board
(FASB) instituted a new referencing system which
codifies, but does not amend, previously existing
non-governmental U.S. generally accepted accounting
principles (GAAP). The FASB Accounting Standards
Codification (ASC) is now the single authoritative
source for US GAAP. Although the implementation of ASC has no
impact on the financial statements, certain references to
authoritative US GAAP literature within the footnotes have been
changed to cite the appropriate ASC content.
Consolidation
These consolidated financial statements include all wholly-owned
subsidiaries. In addition, we review our relationships with
other entities to assess whether we are the primary beneficiary
of a variable interest entity (VIE). If the determination is
made that we are the primary beneficiary, then that entity is
consolidated in accordance with ASC 810, Consolidation
(ASC 810). All material intercompany balances
are eliminated upon consolidation.
Unaudited
Interim Financial Information
The accompanying consolidated balance sheet as of
September 30, 2010, the consolidated statements of
operations and of cash flows for the nine months ended
September 30, 2009 and 2010, and the consolidated statement
of stockholders equity and comprehensive income (loss) for
the nine months ended September 30, 2010 are unaudited. The
unaudited interim financial statements have been prepared on the
same basis as the annual consolidated financial statements and,
in the opinion of management, reflect all adjustments, which
include only normal recurring adjustments, necessary to present
fairly the Companys financial position and results of
operations and cash flows for the three months ended
September 30, 2009 and 2010. The financial data and other
information disclosed in these notes to the consolidated
financial statements related to the nine month periods are
unaudited. The results of the nine months ended
September 30, 2010 are not necessarily indicative of the
results to be expected for the year ending December 31,
2010 or any other interim period of any other future year.
Unaudited
Pro Forma Consolidated Balance Sheet and Pro Forma Net Income
Per Share
Upon the consummation of the initial public offering
contemplated herein, the Company will convert to a C-corp and
issue shares of common stock. The September 30, 2010
unaudited pro forma consolidated balance sheet data and the
unaudited pro forma basic and diluted net income per share have
been prepared assuming the conversion of the Company and the
issuance of common shares.
Revenue
Recognition
Revenues are recognized as services are completed. With respect
to our hydraulic fracturing services, we recognize revenue and
invoice our customers upon the completion of each fracturing
stage. We typically complete one or more fracturing stages per
day during the course of a job. A stage seldom extends beyond a
few days. With respect to sales of sand or other products to
third parties, we recognize revenue upon shipment of the
products from our facilities.
F-7
Frac Tech
Holdings, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands)
Trade
Accounts Receivable
Trade accounts receivable are reported at net realizable value
consisting of amounts billed less an allowance for doubtful
accounts. Most areas in which we operate have provisions for a
mechanics lien against the property on which the service
is performed if such lien is filed within a specified
time-frame. Determination of when receivables are past due is
generally based on the age of the receivable with over
90 days deemed to be of concern.
We determine our allowance by considering a number of factors,
including the length of time trade accounts receivable are past
due, the Companys previous loss history, the
customers credit worthiness, and the condition of the
general economy and the industry as a whole. We write off
accounts when they are determined to be uncollectible.
Fixed
Assets
Fixed asset additions are recorded at cost. Cost of units
assembled within the consolidated group consists of materials,
components, labor, and overhead. Expenditures for renewals and
betterments that extend the lives of the assets are capitalized.
An allocable amount of interest on borrowings is capitalized for
self constructed assets and equipment during their construction
period. Amounts spent for maintenance and repairs are charged
against operations as incurred. Costs of fixed assets are
depreciated on a straight-line basis over the estimated useful
lives of the related assets which range from six months to ten
years for office and service equipment and thirty-nine years for
buildings. Land costs include the purchase price, plus zoning
and other costs to prepare it for its intended purpose, and any
improvements not included under buildings. Building improvements
are depreciated over the lesser of the estimated useful life of
the improvement or the remaining life of the building.
Management is responsible for reviewing the carrying value of
property, plant, and equipment for impairment whenever events
and circumstances indicate that the carrying value of an asset
may not be recoverable from estimated future cash flows expected
to result from its use and eventual disposition. In cases where
undiscounted expected future cash flows are less than the
carrying value, an impairment loss equal to the amount by which
the carrying value exceeds the fair value of assets is
recognized. When making this assessment, the following factors
are considered: current operating results, trends and prospects,
as well as the effects of obsolescence, demand, competition, and
other economic factors.
Inventories
Inventories consists of both raw materials and work in process.
This includes sand and chemicals which are used in providing
frac services and components and parts used in manufacturing and
assembly. Inventories are carried at the lower of cost or market
value determined on a
first-in-first-out
basis, except sand and chemicals, which are determined on a
weighted average cost basis. Raw materials are valued at cost
including freight and work in process is valued at cost plus
labor and overhead.
Income
Taxes
We are treated as a partnership for federal income tax purposes.
As such, we generally do not directly pay income taxes on our
income or benefit from losses. Instead, our income and other tax
attributes are passed through to our owners for federal and
where applicable, state income tax purposes. The provision for
income taxes is for the Texas margin tax which is deemed to be
an income tax and the Alabama income tax.
We adopted the provisions of ASC 740, Income
Taxes, on January 1, 2007. Previously, we had accounted
for tax contingencies in accordance with ASC 450,
Contingencies. As required by the uncertain tax
F-8
Frac Tech
Holdings, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands)
position guidance in ASC 740, we recognize the financial
statement benefit of a tax position only after determining that
the relevant tax authority would more likely than not sustain
the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the
financial statements is the largest benefit that has a greater
than 50 percent likelihood of being realized upon ultimate
settlement with the relevant tax authority. At the adoption
date, we applied the uncertain tax position guidance in
ASC 740 to all tax positions for which the statute of
limitations remained open. During the nine months ended
September 30, 2010, there were no financial statement
benefits or obligations recognized related to uncertain tax
positions.
Unaudited
Pro Forma Income Taxes
We are filing this registration statement in anticipation of a
proposed initial public offering (IPO) of our common stock. Upon
completion of the IPO, we will be treated as a
C-Corp under
the Internal Revenue Code and will be subject to income taxes.
Accordingly, a pro forma income tax provision has been disclosed
as if we were a
C-Corp for
all periods presented. We have computed pro forma tax expense
using a 35% corporate level tax rate and a net apportioned state
tax rate, incorporating permanent differences.
Cash
and Cash Equivalents
All highly liquid investments with an original maturity of three
months or less when acquired are considered to be cash
equivalents.
Advertising
Advertising costs are expensed as incurred.
Other
assets
Other assets subject to amortization include loan closing costs
which are being amortized using the straight-line method over
the life of the related loan and software costs being amortized
using the straight-line method over three to seven years.
Amortization costs for the nine months ended September 30,
2009 and 2010 totaled $821 and $1,084, respectively.
Goodwill
In accordance with ASC 805, Business Combinations,
the purchase method of accounting requires the excess of
purchase price paid over the estimated fair value of
identifiable tangible and intangible net assets of acquired
businesses to be recorded as goodwill. Under the provisions of
ASC 350, Goodwill and Other, goodwill is not amortized,
and instead, is tested at least annually for impairment at the
end of each year.
Interest
Rate Swaps
We use interest rate swaps to manage risks related to interest
rate movements on a term loan and a portion of our revolver,
both of which have floating interest rates. Our interest rate
risk management strategy is to stabilize cash flow requirements
by maintaining interest rate swap contracts to convert portions
of our variable-rate debt to fixed rates. We do not use
derivative financial instruments for speculative or trading
purposes.
Interest rate swaps are contracts in which a series of interest
cash flows or payments are exchanged over a prescribed period.
Changes in the fair values of the instruments we use are
recognized in earnings in the current period.
F-9
Frac Tech
Holdings, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands)
We account for these derivative financial instruments in
accordance with ASC 815, Derivatives and Hedging.
Accordingly, the derivative financial instruments are reflected
on the balance sheets at their fair values, in accordance with
ASC 820, Fair Value Measurements and Disclosures, as
discussed in Note 8.
Presentation
of Transactional Taxes
We collect and remit sales tax on revenues in jurisdictions
where our services are taxable. We pay use taxes to appropriate
taxing authority on our taxable purchases. We pay federal excise
tax, federal heavy use tax, and report fuel taxes on our fleets
of hydraulic fracturing units. Our accounting policy is to
exclude tax collected and remitted from revenue and cost of
sales.
Loans
From Members
Loans from members represents advances made on a line of credit
established between related parties and us. The total of the two
lines of credit are $10,000, of which $1,846 was outstanding as
of September 30, 2010. The lines bear interest at the rate
of 6.0%. At September 30, 2010 there were subordinated
notes and loans between related parties and the Company totaling
$7,082. The notes bear interest at rates ranging from
4.04% 6.00%. All loans from members were repaid
using proceeds from our November 2010 Senior Notes offering. See
Note 7.
Financial
Instruments
The Companys cash, accounts receivable, accounts payable
and accrued expenses all approximate fair value due to the
relative short term nature of the related account. Our
outstanding term loans, revolving credit facility, and advances
from members all bear interest rates comparable to prevailing
market terms and therefore the outstanding balances approximate
fair value.
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of these financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
|
|
NOTE 2
|
ACCOUNTS
RECEIVABLE
|
At December 31, 2009 and September 30, 2010, we had
receivables totaling $73,649 and $209,469, net of allowance for
bad debts, which is inclusive of $14,629 and $30,415 of trade
accounts receivable that is recorded in amounts due from related
parties. Collection of receivables generally occurs between
thirty and eighty days after the invoice date. At
December 31, 2009 and September 30, 2010,
respectively, our allowance for bad debts was $3,620 and $5,740.
Total bad debt expense for the nine months ended
September 30, 2009 and 2010 was $1,540 and $2,163,
respectively.
Receivables totaling $189,975 serve as collateral for our
revolver discussed at Note 7.
F-10
Frac Tech
Holdings, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands)
Our inventories at December 31, 2009 and September 30,
2010 consisted of the amounts in the following table.
Inventories totaling approximately $61,076 stood as collateral
under our revolver discussed at Note 7.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
Proppants and chemicals
|
|
$
|
23,917
|
|
|
$
|
31,403
|
|
Maintenance parts
|
|
|
31,096
|
|
|
|
42,953
|
|
Fuel
|
|
|
124
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
55,137
|
|
|
$
|
74,482
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of fixed assets at December 31,
2009 and September 30, 2010. Depreciation expense totaled
$62,690 and $78,723 for the nine months ended September 30,
2009 and 2010, respectively. These amounts are included in costs
of revenues. Construction in process of $3,500 and essentially
all of our service equipment serve as collateral for our
revolver (discussed at Note 7) or for other financing
obligations.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
Land
|
|
$
|
28,021
|
|
|
$
|
31,905
|
|
Buildings and improvements
|
|
|
96,678
|
|
|
|
99,458
|
|
Service equipment
|
|
|
596,869
|
|
|
|
668,964
|
|
Vehicles and transportation equipment
|
|
|
34,908
|
|
|
|
37,304
|
|
Office equipment and other
|
|
|
10,880
|
|
|
|
11,946
|
|
Equipment construction in process
|
|
|
6,491
|
|
|
|
18,053
|
|
Equipment advances
|
|
|
5,039
|
|
|
|
7,841
|
|
|
|
|
|
|
|
|
|
|
Total cost of fixed assets
|
|
|
778,886
|
|
|
|
875,471
|
|
Accumulated depreciation
|
|
|
(208,868
|
)
|
|
|
(281,762
|
)
|
|
|
|
|
|
|
|
|
|
Net fixed assets
|
|
$
|
570,018
|
|
|
$
|
593,709
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2010, the
company recognized approximately $9.4 million in impairment
of service equipment. The impairment was the result of increased
utilization of our equipment in more demanding shale reservoirs
that resulted in the replacement of equipment earlier than
anticipated. As a result of the use of our equipment in more
demanding shale reservoirs, we are evaluating the need to adjust
the depreciable lives of certain service equipment used in those
shales.
F-11
Frac Tech
Holdings, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands)
|
|
NOTE 6
|
OTHER
ACCRUED LIABILITIES
|
Other accrued liabilities at December 31, 2009 and
September 30, 2010 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
State sales and gross receipts tax
|
|
$
|
15,510
|
|
|
$
|
22,272
|
|
State franchise tax
|
|
|
2,205
|
|
|
|
2,832
|
|
Interest
|
|
|
2,806
|
|
|
|
2,240
|
|
Other
|
|
|
1,964
|
|
|
|
7,130
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
22,485
|
|
|
$
|
34,474
|
|
|
|
|
|
|
|
|
|
|
Revolver At December 31, 2009, we were
not in compliance with certain covenants under our prior
facility and we entered into an amendment and forbearance
agreement and subsequently amended and restated the facility in
its entirety. Our prior facility had a $300,000 limit and was
due in January 2010.
Our revolver is considered to be Senior Bank Debt. Collateral
for this agreement consists of accounts receivable, inventories,
and a list of specified equipment. Availability under this
agreement is determined using a monthly borrowing base
calculation from the underlying collateral amounts. Advances
under this facility are designated as Base Rate Advances. Under
the amendment interest rates are Prime plus 2.5% (5.75% as of
September 30, 2010) for Base Rate Advances. Our
revolver carries certain restrictive covenants and minimum ratio
requirements. The key ratio for most of these covenants is the
leverage ratio. The agreement provides limitations for operating
leases, acquisitions, and capital expenditures when this ratio
exceeds 3.5 to 1. It also provides for limitations on
distributions to owners and on borrowings from third parties.
There is also a compliance test using a fixed charge ratio. Some
ratios act as triggers for additional disclosure requirements or
can activate additional restrictive covenants. As of
September 30, 2010, the Company was in compliance with all
covenants. The total maximum borrowing capacity of the new
facility which expires in May 2011 is $200,000. The balance
outstanding under this agreement as of September 30, 2010
was $91,000.
F-12
Frac Tech
Holdings, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands)
The following is a summary of our total obligations, excluding
the revolver, at December 31, 2009 and September 30,
2010.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
Notes Payable:
|
|
|
|
|
|
|
|
|
Term installment notes payable with various maturities through
2014; due in monthly installments ranging from $917 to $186,290,
plus interest at various fixed and variable rates ranging from
2.56% to 10.75%; collateralized by equipment and trucks
|
|
$
|
52,453
|
|
|
$
|
47,275
|
|
Term installment notes payable with various maturities through
2013; due in monthly installments ranging from $441 to $1,248,
plus interest at various fixed rates ranging from 5.7% to 6.6%;
collateralized by vehicles
|
|
|
101
|
|
|
|
2,034
|
|
Term installment notes payable with various maturities through
2026; due in monthly installments ranging from $3,194 including
interest to $62,500 plus interest, at various rates ranging from
fixed rates of 6.48% and 6.5% to rates that float at LIBOR plus
0.85%; collateralized by airplanes
|
|
|
17,892
|
|
|
|
17,190
|
|
Term installment note payable maturing 2022; due in monthly
installments of $12,221 at Prime minus .25% (with a floor of
6%); collateralized by real estate
|
|
|
1,271
|
|
|
|
1,217
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
71,717
|
|
|
|
67,716
|
|
Less current portion
|
|
|
(29,107
|
)
|
|
|
(17,773
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
42,610
|
|
|
$
|
49,943
|
|
|
|
|
|
|
|
|
|
|
Maturities for our debt including our revolver at
September 30, 2010 are as follows:
|
|
|
|
|
2010
|
|
$
|
9,842
|
|
2011
|
|
|
100,794
|
|
2012
|
|
|
7,126
|
|
2013
|
|
|
7,300
|
|
2014
|
|
|
4,881
|
|
Thereafter
|
|
|
28,773
|
|
|
|
|
|
|
Total
|
|
$
|
158,716
|
|
|
|
|
|
|
Senior Notes On November 12, 2010, FTS
and Frac Tech Finance, Inc., as co-issuers, completed a private
offering of $550,000 aggregate principal amount of
7.125% Senior Notes due 2018 (Notes). The Notes mature on
November 15, 2018 and bear interest at 7.125% per annum,
payable semi-annually in arrears on May 15 and November 15,
beginning May 15, 2011. The Notes are unsecured and are
guaranteed by FTSs existing and future subsidiaries,
subject to certain exceptions.
The proceeds from our Senior Notes offering were used to pay off
our existing revolver, loans from members, and certain term
installment notes. Additionally, $200 million was used as a
return of capital to equity owners.
On or before November 15, 2013, we may redeem up to 35% of
the Notes with proceeds of certain equity offerings at a
redemption price of 107.125% of the principal amount plus
accrued and unpaid interest.
F-13
Frac Tech
Holdings, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands)
Prior to November 15, 2014, we may redeem some or all of
the Notes at a price equal to 100% of the principal amount plus
a make-whole premium determined pursuant to a formula set forth
in the indenture governing the Notes, plus accrued and unpaid
interest. On or after November 15, 2014, we may redeem all
or part of the Notes at the following prices (as a percentage of
principal), plus accrued and unpaid interest, if redeemed during
the 12-month
period beginning on November 15 of the years indicated below:
|
|
|
|
|
Year
|
|
Redemption Price
|
|
2014
|
|
|
103.563
|
%
|
2015
|
|
|
101.781
|
%
|
2016 and thereafter
|
|
|
100.000
|
%
|
Upon a change of control, as defined in the indenture, we will
be required to make an offer to purchase the Notes at a price
equal to 101% of the principal amount plus accrued and unpaid
interest.
The indenture governing the Notes contains covenants that, among
other things, limit our ability and the ability of certain of
our subsidiaries to incur or guarantee additional indebtedness
or issue certain preferred stock; pay dividends on our capital
stock or redeem capital stock or subordinated indebtedness;
transfer or sell assets; make investments; incur liens; enter
into transactions with our affiliates; and merge or consolidate
with other companies.
We have agreed to file with the Securities and Exchange
Commission within 240 days after November 12, 2010 a
registration statement for an offer to exchange the Notes and
related guarantees for registered notes and guarantees with
identical terms, or in certain circumstances to file a shelf
registration statement covering resales of the Notes and
guarantees.
|
|
NOTE 8
|
INTEREST
RATE SWAPS
|
During 2007, we entered into three interest rate swap agreements
related to variable rate borrowings. One agreement was matched
with a term note payable in the amount of $15,000 with an
interest rate of LIBOR plus 0.85% and a maturity date of
December 29, 2016. To minimize the effect of market changes
we entered into an interest rate swap agreement under which we
pay interest at a fixed rate of 5.95%. The notional amount of
this swap declines directly in step with the principal payments
on the loan. Scheduled termination date for this swap agreement
is March 2012 and the fair value of this agreement on
September 30, 2010 was $833.
The other two agreements were related to a total of $140,000 of
Eurodollar borrowings under our revolving line of credit. These
borrowings float with the LIBOR rate. These two swap agreements
matured in September 2010 and provided for us to pay interest at
fixed rates of 4.79% on $40,000 and 4.925% on $100,000.
Effective January 1, 2008, we adopted ASC 820 for all
financial instruments. ASC 820 defines fair value,
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. Level 1 inputs
are observable quotes in an active market for identical assets
and liabilities. Level 2 inputs are inputs observable for
similar assets and liabilities. We consider the interest rate
swap agreements Level 2 valuations since the value of these
derivatives are derived from assumptions from or supported by
data that is generally observable in the marketplace.
Level 3 utilizes significant unobservable inputs. We
currently do not have any fair value measurements within the
scope of ASC 820 considered as Level 1 or Level 3
inputs.
Although these three swap agreements are related to our
borrowings and are not held for trading purposes, they are
classified as
mark-to-market
derivatives. As such, the effect of changes in the swaps
fair values and their cash flow effects are included in interest
expense until the date the swap agreements mature or are
F-14
Frac Tech
Holdings, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands)
terminated. As of December 31, 2009 and September 30,
2010, respectively, the fair value of these swaps was a
liability $5,709 and $834.
|
|
NOTE 9
|
COMMITMENTS
AND CONTINGENCIES
|
We lease certain administrative and sales offices and
operational facilities in various cities. Rail cars are leased
from various entities. We lease portions of our office
equipment. In addition to lease, we rent various facilities and
equipment under temporary arrangements.
During 2008 we executed master lease agreements with Comerica
Leasing Corporation, VFS Leasing Co., and Wells Fargo Equipment
Finance, Inc. The market value of equipment leased under these
agreements totaled $31,451 at the time of the lease. Certain of
the transactions included the sale of frac service equipment
which was at least partially manufactured and assembled
internally. Leasing companies purchased chassis equipment
directly from the manufacturer, and purchased additional
assembly and modifications from us. Alternatively, leasing
companies purchased completed frac service equipment directly
from us for the sale-leaseback transactions. Gain on sale of
$1,790 was treated as deferred gain and is being amortized on a
straight-line basis over the life of the lease. All leases under
these agreements have five year terms, which consist of
60 monthly payments, and are treated as operating leases
under ASC 840, Leases.
Total lease expense for the nine months ended September 30,
2009 and September 30, 2010 under operating leases
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
Service equipment
|
|
$
|
6,430
|
|
|
$
|
6,606
|
|
Facilities (offices and operations)
|
|
|
1,166
|
|
|
|
1,287
|
|
Equipment
|
|
|
2,285
|
|
|
|
3,833
|
|
Office equipment
|
|
|
72
|
|
|
|
62
|
|
Trucks
|
|
|
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
9,953
|
|
|
$
|
11,982
|
|
|
|
|
|
|
|
|
|
|
In the ordinary course of business, we are subject to various
legal proceedings and claims. Management believes that costs
associated with such legal matters, if any, will not have a
material adverse effect on our financial condition, results of
operations, or cash flows.
Much of the equipment we purchase requires long lead times in
production. Due to this fact, at most points in time we have
orders and commitments for such equipment. Some of these orders
are being renewed on a revolving basis to achieve our goal of
maintaining a future supply of essential equipment. All of these
orders are cancelable upon written notice within time frames
specified in the order (generally ninety days).
|
|
NOTE 10
|
TRANSACTIONS
WITH RELATED PARTIES
|
We are related through common ownership or control to various
entities. Transactions with related entities during 2009 and
2010 included equipment, facilities and office leasing,
reimbursement of personnel and benefits costs, equipment
purchases, construction contracting, repair parts and services,
materials purchases, shared insurance policies, and some other
minor transactions. Related party transactions that are expected
to continue consist of personnel and benefits cost
reimbursements, construction contracting for facilities
expansion, materials and equipment purchases, repair parts and
services, and shared insurance costs, and other minor
transactions. We participate with related (commonly-owned)
entities to purchase most of our insurance and to obtain
employee benefit coverage. We also provide frac services to an
owner.
F-15
Frac Tech
Holdings, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands)
Transactions with related parties during 2009 and 2010 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
Amounts billed to us by related parties:
|
|
|
|
|
|
|
|
|
Construction contracting
|
|
$
|
1,788
|
|
|
$
|
7,890
|
|
Equipment purchases
|
|
|
1
|
|
|
|
|
|
Equipment leasing
|
|
|
|
|
|
|
25
|
|
Leasing and overhead expenses
|
|
|
208
|
|
|
|
286
|
|
Equipment components and repairs
|
|
|
57
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,054
|
|
|
$
|
8,207
|
|
|
|
|
|
|
|
|
|
|
Amounts billed to related parties:
|
|
|
|
|
|
|
|
|
For frac services
|
|
$
|
29,255
|
|
|
$
|
71,799
|
|
Equipment sales
|
|
|
66
|
|
|
|
|
|
For supplies, equipment, and leasing
|
|
|
177
|
|
|
|
321
|
|
For overhead expenses and insurance
|
|
|
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
29,498
|
|
|
$
|
72,237
|
|
|
|
|
|
|
|
|
|
|
During 2008, certain owners of our parent company advanced
$13,500 to FTS under a preferred limited partner units agreement
(preferred units). The preferred units were
subsequently assigned to our parent. The preferred units did not
provide for distribution, dividend or accumulation rights, and
could be redeemed at the discretion of the holder. In October
2010, the preferred units were redeemed for $13,500.
|
|
NOTE 11
|
RETIREMENT
PLAN
|
We maintain a 401(K) Retirement Plan. Employees may contribute a
portion of their salary, up to the limits established for an
individual by the IRS, to a qualified 401(K) plan. We do not
provide any matching contributions.
Our primary business is providing high-pressure, high-volume
fracturing services to oilfield drilling operators. These
services are part of the process of completing wells after they
have been drilled (and determined to have found hydrocarbons).
In performing our services during the first nine months of 2009
and 2010, we derived approximately 59% and 41%, respectively, of
our revenues from our three largest customers. Each of our three
highest customers in 2009 and 2010 provided 9% or more of our
total revenues.
At many times during the year, our primary bank balances have
exceeded federally insured limits.
|
|
NOTE 13
|
BUSINESS
COMBINATION
|
Effective January 1, 2009, the Company acquired an existing
business which manufactures resin coated sand. The acquisition
was accounted for as a business combination in our consolidated
balance sheets as of that date.
F-16
Frac Tech
Holdings, LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands)
The fair value of the assets acquired is as follows:
|
|
|
|
|
|
|
Fair Value
|
|
|
|
of Assets
|
|
|
|
Acquired
|
|
|
Land
|
|
$
|
100
|
|
Building
|
|
|
350
|
|
Service equipment
|
|
|
11,756
|
|
Vehicles
|
|
|
50
|
|
|
|
|
|
|
|
|
|
12,256
|
|
Other intangibles
|
|
|
5,244
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
17,500
|
|
|
|
|
|
|
The other intangibles acquired were determined to have an
indefinite useful life due to the ability to renew and or extend
the underlying asset for an insignificant amount. Accordingly,
the asset will be reviewed for impairment in connection with the
review of recoverability of other long-lived assets. For the
nine months ended September 30, 2010, no impairment charge
was recorded.
This acquisition provided a competitive advantage because the
existing company possessed an existing air permit for
processing. To obtain a new permit for new plant construction,
if one can be obtained at all, can take up to two years to
acquire.
The acquired companys operations were modified to produce
resin-coated frac sand. No existing foundry customers were
retained after the conversion. Frac sand was first delivered in
January 2009. The company sells to FTS and FTS customers
directly.
|
|
NOTE 14
|
RECENTLY
ISSUED ACCOUNTING STANDARDS
|
In December 2007, the FASB issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial
Statements An Amendment of ARB No. 51, or
SFAS No. 160
(SFAS No. 160) which is now incorporated
into the ASC as ASC 810. ASC 810 establishes new
accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a
subsidiary. Among other items, ASC 810 requires that equity
attributable to non-controlling interests be recognized in
equity separate from that of the Companys and that
consolidated net income now includes the results of operations
attributable to non-controlling interests. The Company adopted
ASC 810 on January 1, 2009 and it did not have a
material impact on the Companys consolidated financial
statements.
In June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation No. 46(R)
(SFAS No. 167) which is now incorporated
into the ASC as ASC 810. ASC 810 changes the existing
consolidation guidance applicable to a variable interest entity.
Among other things, it requires a qualitative analysis to be
performed in determining whether an enterprise is the primary
beneficiary of a variable interest entity. The adoption of this
guidance did not have a material impact on the Companys
consolidated financial statements.
|
|
NOTE 15
|
SUBSEQUENT
EVENTS
|
The Company evaluated its September 30, 2010 consolidated
financial statements for subsequent events through
December 14, 2010 the date the financials were available to
be issued.
We are not aware of any other subsequent events that would
require recognition or disclosure in the consolidated financial
statements.
F-17
Report of
Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Frac Tech Holdings, LLC
We have audited the accompanying consolidated balance sheets of
Frac Tech Holdings, LLC (a Texas limited liability company) and
subsidiaries as of December 31, 2008 and 2009, and the
related consolidated statements of operations, changes in
owners equity, and cash flows for each of the three years
in the period ended December 31, 2009. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal
controls over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Frac Tech Holdings, LLC as of December 31, 2008 and
2009, and the results of its operations and its cash flows for
each of the three years in the period ended December 31,
2009 in conformity with accounting principles generally accepted
in the United States of America.
/s/ Grant Thornton LLP
Dallas, Texas
December 14, 2010
F-18
Frac Tech
Holdings, LLC
CONSOLIDATED BALANCE SHEETS
As of December 31,
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
423
|
|
|
$
|
26,039
|
|
Accounts receivable trade, net
|
|
|
101,316
|
|
|
|
59,020
|
|
Inventories, net
|
|
|
46,756
|
|
|
|
55,137
|
|
Prepaid expenses
|
|
|
5,490
|
|
|
|
3,875
|
|
Amounts due from related parties
|
|
|
34,261
|
|
|
|
16,039
|
|
Other current assets
|
|
|
956
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
189,202
|
|
|
|
160,451
|
|
Fixed assets:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
681,861
|
|
|
|
767,356
|
|
Construction in process
|
|
|
35,417
|
|
|
|
6,491
|
|
Equipment advances
|
|
|
4,538
|
|
|
|
5,039
|
|
Accumulated depreciation
|
|
|
(123,284
|
)
|
|
|
(208,868
|
)
|
|
|
|
|
|
|
|
|
|
Total fixed assets, net
|
|
|
598,532
|
|
|
|
570,018
|
|
Goodwill
|
|
|
3,212
|
|
|
|
3,212
|
|
Other intangible assets
|
|
|
400
|
|
|
|
5,644
|
|
Other, net
|
|
|
1,921
|
|
|
|
1,216
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
793,267
|
|
|
$
|
740,541
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
70,404
|
|
|
$
|
62,366
|
|
Amounts due to related parties
|
|
|
6,026
|
|
|
|
4,380
|
|
Accrued payroll liabilities
|
|
|
8,291
|
|
|
|
4,804
|
|
Other accrued liabilities
|
|
|
26,612
|
|
|
|
22,485
|
|
Interest rate swaps
|
|
|
6,305
|
|
|
|
5,284
|
|
Customer prepayments
|
|
|
16,278
|
|
|
|
|
|
Loans from members
|
|
|
5,318
|
|
|
|
10,106
|
|
Revolving note payable
|
|
|
|
|
|
|
238,862
|
|
Current portion of long-term debt
|
|
|
16,878
|
|
|
|
29,107
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
156,112
|
|
|
|
377,394
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Revolving note payable
|
|
|
251,222
|
|
|
|
|
|
Long-term notes, net of current portion
|
|
|
52,221
|
|
|
|
42,610
|
|
Interest rate swaps
|
|
|
4,369
|
|
|
|
425
|
|
Deferred gain
|
|
|
1,641
|
|
|
|
1,283
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
309,453
|
|
|
|
44,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
465,565
|
|
|
|
421,712
|
|
Owners equity
|
|
|
327,702
|
|
|
|
318,829
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
793,267
|
|
|
$
|
740,541
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-19
Frac Tech
Holdings, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Revenues
|
|
$
|
329,920
|
|
|
$
|
475,726
|
|
|
$
|
348,026
|
|
Revenues for related parties
|
|
|
32,542
|
|
|
|
97,817
|
|
|
|
41,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
362,462
|
|
|
|
573,543
|
|
|
|
389,230
|
|
Costs of revenues
|
|
|
241,293
|
|
|
|
411,216
|
|
|
|
345,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
121,169
|
|
|
|
162,327
|
|
|
|
44,014
|
|
Selling and administrative costs
|
|
|
35,006
|
|
|
|
81,940
|
|
|
|
68,386
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
5,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
86,163
|
|
|
|
74,416
|
|
|
|
(24,372
|
)
|
Other income expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
737
|
|
|
|
219
|
|
|
|
4
|
|
Interest expense
|
|
|
(14,204
|
)
|
|
|
(29,259
|
)
|
|
|
(15,949
|
)
|
Other
|
|
|
303
|
|
|
|
(23
|
)
|
|
|
425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other expense
|
|
|
(13,164
|
)
|
|
|
(29,063
|
)
|
|
|
(15,520
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
72,999
|
|
|
|
45,353
|
|
|
|
(39,892
|
)
|
Provision for income taxes
|
|
|
1,248
|
|
|
|
1,994
|
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
|
$
|
71,751
|
|
|
$
|
43,359
|
|
|
$
|
(40,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma information
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) as reported
|
|
$
|
71,751
|
|
|
$
|
43,359
|
|
|
$
|
(40,239
|
)
|
Pro forma adjustment for income tax expense (benefit)
|
|
$
|
27,949
|
|
|
$
|
15,881
|
|
|
$
|
(16,135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$
|
43,802
|
|
|
$
|
27,478
|
|
|
$
|
(24,104
|
)
|
Basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average common shares outstanding used in net
income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-20
Frac Tech
Holdings, LLC
CONSOLIDATED STATEMENTS OF OWNERS EQUITY
For the years ended December 31, 2007, 2008 and 2009
(Amounts in thousands)
|
|
|
|
|
Equity as of January 1, 2007
|
|
$
|
270,399
|
|
Contributions by owners
|
|
|
25,800
|
|
Distributions to owners
|
|
|
(101,582
|
)
|
Net Income
|
|
|
71,751
|
|
|
|
|
|
|
Equity as of December 31, 2007
|
|
|
266,368
|
|
Issuance of preferred units
|
|
|
13,500
|
|
Contributions by owners
|
|
|
4,475
|
|
Net Income
|
|
|
43,359
|
|
|
|
|
|
|
Equity as of December 31, 2008
|
|
|
327,702
|
|
Contribution by owners
|
|
|
46,326
|
|
Distributions to owners
|
|
|
(14,960
|
)
|
Net Loss
|
|
|
(40,239
|
)
|
|
|
|
|
|
Equity as of December 31, 2009
|
|
$
|
318,829
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-21
Frac Tech
Holdings, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
|
$
|
71,751
|
|
|
$
|
43,359
|
|
|
$
|
(40,239
|
)
|
Adjustments to reconcile net (loss) income to cash flow from
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
38,938
|
|
|
|
69,200
|
|
|
|
91,149
|
|
Gain on sale of assets
|
|
|
(73
|
)
|
|
|
(442
|
)
|
|
|
(50
|
)
|
Amortization of deferred gain
|
|
|
|
|
|
|
(149
|
)
|
|
|
(358
|
)
|
Bad debt expense
|
|
|
1,699
|
|
|
|
1,121
|
|
|
|
1,312
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
5,971
|
|
|
|
|
|
Changes in fair value of interest rate swaps
|
|
|
4,851
|
|
|
|
5,823
|
|
|
|
(4,965
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(49,086
|
)
|
|
|
(43,455
|
)
|
|
|
43,006
|
|
Inventories
|
|
|
(9,282
|
)
|
|
|
(23,688
|
)
|
|
|
3,995
|
|
Prepaid expenses
|
|
|
(1,201
|
)
|
|
|
(3,413
|
)
|
|
|
1,342
|
|
Other assets
|
|
|
(309
|
)
|
|
|
(2,173
|
)
|
|
|
(317
|
)
|
Deposit with related party
|
|
|
|
|
|
|
(15,000
|
)
|
|
|
15,000
|
|
Accounts payable
|
|
|
53,942
|
|
|
|
(9,098
|
)
|
|
|
(10,362
|
)
|
Accrued expenses
|
|
|
7,624
|
|
|
|
17,456
|
|
|
|
(7,619
|
)
|
Customer prepayments
|
|
|
|
|
|
|
16,278
|
|
|
|
(16,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
118,854
|
|
|
|
61,790
|
|
|
|
75,621
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(292,469
|
)
|
|
|
(163,040
|
)
|
|
|
(61,777
|
)
|
Proceeds from disposition of assets
|
|
|
610
|
|
|
|
10,333
|
|
|
|
982
|
|
Cash paid for acquisitions
|
|
|
|
|
|
|
|
|
|
|
(17,500
|
)
|
Purchase price adjustment
|
|
|
(668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(292,527
|
)
|
|
|
(152,707
|
)
|
|
|
(78,295
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility
|
|
|
308,200
|
|
|
|
322,915
|
|
|
|
221,500
|
|
Proceeds from long-term debt
|
|
|
1,440
|
|
|
|
16,599
|
|
|
|
23,775
|
|
Repayment of revolving credit facility
|
|
|
(97,174
|
)
|
|
|
(282,720
|
)
|
|
|
(233,860
|
)
|
Repayment of long-term debt
|
|
|
(10,946
|
)
|
|
|
(19,695
|
)
|
|
|
(21,157
|
)
|
Loans/advances from owners
|
|
|
|
|
|
|
5,318
|
|
|
|
5,466
|
|
Issuance of preferred units
|
|
|
|
|
|
|
13,500
|
|
|
|
|
|
Proceeds from sale leaseback of assets
|
|
|
|
|
|
|
31,451
|
|
|
|
|
|
Net change in restricted cash
|
|
|
37,132
|
|
|
|
|
|
|
|
|
|
Deferred financing costs
|
|
|
(1,557
|
)
|
|
|
|
|
|
|
|
|
Net change in receivables from related parties
|
|
|
335
|
|
|
|
(1,866
|
)
|
|
|
1,199
|
|
Contributions from owners
|
|
|
25,800
|
|
|
|
4,475
|
|
|
|
46,327
|
|
Distributions to owners
|
|
|
(101,582
|
)
|
|
|
|
|
|
|
(14,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
161,648
|
|
|
|
89,977
|
|
|
|
28,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(12,025
|
)
|
|
|
(940
|
)
|
|
|
25,616
|
|
Cash, beginning of year
|
|
|
13,388
|
|
|
|
1,363
|
|
|
|
423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
1,363
|
|
|
$
|
423
|
|
|
$
|
26,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net of capitalized interest
|
|
$
|
8,485
|
|
|
$
|
21,017
|
|
|
$
|
20,566
|
|
Income taxes
|
|
|
1,871
|
|
|
|
1,022
|
|
|
|
303
|
|
Non-cash investing and financing
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment purchased with long-term debt
|
|
|
28,069
|
|
|
|
|
|
|
|
|
|
Note receivable converted from account receivable balance
|
|
|
759
|
|
|
|
2,053
|
|
|
|
|
|
Transfers of assets from CIP to inventory
|
|
|
|
|
|
|
|
|
|
|
12,376
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-22
Frac Tech
Holdings, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2008 and 2009
(Amounts in thousands)
|
|
NOTE 1
|
DESCRIPTION
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
This description of business and summary of significant
accounting policies is presented to assist the reader in
understanding our financial statements. These financial
statements and notes are representations of our management who
is responsible for their integrity and objectivity. These
accounting policies conform to generally accepted accounting
principles and have been consistently applied in all material
respects in the preparation of these financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair
presentation have been included.
In these notes, references to the Company,
we, us, our, etc. are to the
consolidated group (discussed at Consolidation below).
DESCRIPTION
OF BUSINESS
Frac Tech Holdings, LLC (FTH) provides hydraulic fracturing and
acidizing services (pressure pumping or frac
services) to oil and natural gas producing companies
through Frac Tech Services, LLC (FTS), a Texas limited
liability company, and its direct and indirect subsidiaries.
Prior to January 1, 2010, FTS was a Texas limited
partnership and FTH held a 1% general partner interest in FTS.
Effective January 1, 2010, the owners of FTH assigned the
remaining 99% ownership of FTS to FTH and FTS was converted to a
Texas limited liability company. Additionally, effective
September 30, 2010, our owners assigned all ownership
interests of certain related entities to us, all of which were
also under common control. As a result of these assignment,
these entities, including entities that were previously
consolidated under Financial Accounting Standards Board
(FASB) Interpretation No. 46R (FIN 46),
Consolidation of Variable Interest Entities, an
Interpretation of APB No. 51 (which is now incorporated
into ASC 810) became our wholly-owned subsidiaries.
The historical consolidated balance sheets, and the historical
statements of operations, owners equity and cash flows
have all been presented as if the reorganization of these
entities took place as of the beginning of the earliest period
presented.
Immediately prior to consummation of our initial public offering
of common stock, FTH will be merged with and into FTS, and FTS
will be merged with and into Frac Tech Services, Inc., a
Delaware corporation that was formed to serve as the co-issuer
of our 7.125% Senior Notes due 2018 and that has no other
assets or liabilities. As a result of those mergers, which we
refer to collectively as our Reorganization,
(i) Frac Tech Services, Inc. will survive as the parent
company of all of our subsidiaries and will own the assets and
conduct the business currently owned and conducted by FTS;
(ii) the current owners of the outstanding membership
interests in FTH will receive shares of Frac Tech Services, Inc.
common stock in exchange for such membership interests; and
(iii) Frac Tech Services, Inc. will be the issuer of the
common stock offered and sold pursuant to such public offering
and will be the sole direct obligor under our Senior Notes.
The Companys services are provided during well completion
or during attempts to re-stimulate wells that have experienced
production declines. Since 2003, service capacity has been
expanded by the continuing addition of equipment. At the end of
September, 2010, we were providing fracturing services out of 10
districts: Aledo, TX; Artesia, NM; Bossier City, LA; Hearne, TX;
Longview, TX; Odessa, TX; Pleasanton, TX; Vernal, UT;
Williamsport, PA and Washington, PA. Our equipment assembly
plant, located in Cisco, TX, provides us with the ability to
increase the number of units in our frac fleet at lower costs
and in shorter periods than would be available if we were buying
this equipment from third parties. Within our consolidated
group, we build hydraulic fracturing units and various other
smaller pieces of equipment that are essential parts of the
fracturing business. We also blend our own set of proprietary
chemicals for use in fracturing wells and our chemical blending
facility, located in Chickasha, Oklahoma, provides us with some
of our chemicals.
F-23
Frac Tech
Holdings, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Amounts in thousands)
At the end of 2009, we were providing fracturing services out of
8 districts: Aledo, TX; Artesia, NM; Bossier City, LA; Hearne,
TX; Longview, TX; Odessa, TX; Vernal, UT; and Washington, PA.
Our equipment assembly plant, located in Cisco, TX, provides us
with the ability to increase the number of units in our frac
fleet at lower costs and in shorter periods than would be
available if we were buying this equipment from third parties.
Our chemical blending facility, located in Chickasha, Oklahoma,
provides us with the majority of our chemicals. We also blend
our own set of proprietary chemicals for use in fracturing
wells. Within our consolidated group, we build hydraulic
fracturing units and various other smaller pieces of equipment
that are essential parts of the fracturing business.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Accounting
Standards Codification
On July 1, 2009, the Financial Accounting Standards Board
(FASB) instituted a new referencing system which
codifies, but does not amend, previously existing
non-governmental U.S. generally accepted accounting
principles (GAAP). The FASB Accounting Standards
Codification (ASC) is now the single authoritative
source for US GAAP. Although the implementation of ASC has no
impact on the financial statements, certain references to
authoritative US GAAP literature within the footnotes have been
changed to cite the appropriate ASC content.
Consolidation
These consolidated financial statements include all wholly-owned
subsidiaries. In addition, we review our relationships with
other entities to assess whether we are the primary beneficiary
of a variable interest entity. If the determination is made that
we are the primary beneficiary, then that entity is consolidated
in accordance with ASC 810, Consolidation (ASC
810). All material intercompany balances are eliminated
upon consolidation.
Revenue
Recognition
Revenues are recognized as services are completed. With respect
to our hydraulic fracturing services, we recognize revenue and
invoice our customers upon the completion of each fracturing
stage. We typically complete one or two fracturing stages per
day during the course of a job. Jobs seldom extend beyond a few
days. With respect to sales of sand or other products to third
parties, we recognize revenue upon shipment of the products from
our facilities.
Trade
Accounts Receivable
Trade accounts receivable are reported at net realizable value
consisting of amounts billed less an allowance for doubtful
accounts. Most areas in which we operate have provisions for a
mechanics lien against the property on which the service
is performed if such lien is filed within a specified
time-frame. Determination of when receivables are past due is
generally based on the age of the receivable with over
90 days deemed to be of concern.
We determine our allowance by considering a number of factors,
including the length of time trade accounts receivable are past
due, the Companys previous loss history, the
customers credit worthiness, and the condition of the
general economy and the industry as a whole. We write off
accounts when they are determined to be uncollectible.
F-24
Frac Tech
Holdings, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Amounts in thousands)
Fixed
Assets
Fixed asset additions are recorded at cost. Cost of units
assembled within the consolidated group consists of materials,
components, labor, and overhead. Expenditures for renewals and
betterments that extend the lives of the assets are capitalized.
An allocable amount of interest on borrowings is capitalized for
self constructed assets and equipment during their construction
period. Amounts spent for maintenance and repairs are charged
against operations as incurred. Costs of fixed assets are
depreciated on a straight-line basis over the estimated useful
lives of the related assets which range from two to ten years
for office and service equipment and thirty-nine years for
buildings. Land costs include the purchase price, plus zoning
and other costs to prepare it for its intended purpose, and any
improvements not included under Buildings. Building improvements
are depreciated over the lesser of the estimated useful life of
the improvement or the remaining life of the building.
Management is responsible for reviewing the carrying value of
property, plant, and equipment for impairment whenever events
and circumstances indicate that the carrying value of an asset
may not be recoverable from estimated future cash flows expected
to result from its use and eventual disposition. In cases where
undiscounted expected future cash flows are less than the
carrying value, an impairment loss equal to the amount by which
the carrying value exceeds the fair value of assets is
recognized. When making this assessment, the following factors
are considered: current operating results, trends, and
prospects, as well as the effects of obsolescence, demand,
competition, and other economic factors.
Inventories
Inventories consists of both raw materials and work in process.
This includes sand and chemicals which are used in providing
frac services and components and parts used in manufacturing and
assembly. Inventories are carried at the lower of cost or market
value determined on a
first-in-first-out
basis, except sand and chemicals, which are determined on a
weighted average cost basis. Raw materials are valued at cost
including freight and work in process is valued at cost plus
labor and overhead.
Income
Taxes
We are treated as a partnership for federal income tax purposes.
As such, we generally do not directly pay income taxes on our
income or benefit from losses. Instead, our income and other tax
attributes are passed through to our owners for federal and
where applicable, state income tax purposes. The provision for
income taxes is for the Texas margin tax which is deemed to be
an income tax.
We adopted the provisions of ASC 740, Income Taxes,
on January 1, 2007. Previously, we had accounted for
tax contingencies in accordance with ASC 450,
Contingencies. As required by the uncertain tax position
guidance in ASC 740, we recognize the financial statement
benefit of a tax position only after determining that the
relevant tax authority would more likely than not sustain the
position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the
financial statements is the largest benefit that has a greater
than 50 percent likelihood of being realized upon ultimate
settlement with the relevant tax authority. At the adoption
date, we applied the uncertain tax position guidance in
ASC 740 to all tax positions for which the statute of
limitations remained open. The adoption of this standard for the
year ended December 31, 2009 had no impact on the Company.
Unaudited
Pro Forma Income Taxes
We are filing this registration statement in anticipation of a
proposed initial public offering (IPO) of our common stock. Upon
completion of the IPO, we will be treated as a
C-Corp under
the Internal Revenue Code and will be subject to income taxes.
Accordingly, a pro forma income tax provision has been disclosed
F-25
Frac Tech
Holdings, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Amounts in thousands)
as if we were a
C-Corp for
all periods presented. We have computed pro forma tax expense
using a 35% corporate level tax rate and a net apportioned state
tax rate, incorporating permanent differences.
Cash
and Cash Equivalents
All highly liquid investments with an original maturity of three
months or less when acquired are considered to be cash
equivalents.
Advertising
Advertising costs are expensed as incurred.
Other
assets
Other assets subject to amortization include loan closing costs
which are being amortized using the straight-line method over
the life of the related loan and software costs being amortized
using the straight-line method over three years. Amortization
costs (in thousands) for 2007, 2008, and 2009 totaled $265,
$1,285, and $1,909, respectively.
Goodwill
In accordance with ASC 805, Business Combinations,
the purchase method of accounting requires the excess of
purchase price paid over the estimated fair value of
identifiable tangible and intangible net assets of acquired
businesses to be recorded as goodwill. Under the provisions of
ASC 350, Goodwill and Other, goodwill is not amortized,
and instead, is tested at least annually for impairment at the
end of each year.
Interest
Rate Swaps
We use interest rate swaps to manage risks related to interest
rate movements on a term loan and a portion of our revolver,
both of which have floating interest rates. Our interest rate
risk management strategy is to stabilize cash flow requirements
by maintaining interest rate swap contracts to convert portions
of our variable-rate debt to fixed rates. We do not use
derivative financial instruments for speculative or trading
purposes.
Interest rate swaps are contracts in which a series of interest
cash flows or payments are exchanged over a prescribed period.
Changes in the fair values of the instruments we use are
recognized in earnings in the current period.
We account for these derivative financial instruments in
accordance with ASC 815, Derivatives and Hedging.
Accordingly, the derivative financial instruments are reflected
on the balance sheets at their fair values, in accordance with
ASC 820, Fair Value Measurements and Disclosures, as
discussed in Note 8.
Presentation
of Transactional Taxes
We collect and remit sales tax on revenues in jurisdictions
where our services are taxable. We pay use taxes to appropriate
taxing authority on our taxable purchases. We pay federal excise
tax, federal heavy use tax, and report fuel taxes on our fleets
of hydraulic fracturing units. Our accounting policy is to
exclude tax collected and remitted from revenue and cost of
sales.
Loan
From Members
Loans from members represents advances made on a line of credit
established between related parties and the Company. The total
of the two lines of credit are $10,000, of which $5,318 and
$1,846 was outstanding as
F-26
Frac Tech
Holdings, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Amounts in thousands)
of December 31, 2008 and 2009, respectively. The lines bear
interest at the rate of 6.0%. At December 31, 2009 there
were subordinated notes and contributions between related
parties and the Company totaling $8,260. The notes bear interest
at rates ranging from 4.04% 6.0%. All loans from
members were repaid using proceeds from our November 2010 senior
notes offering. See Note 7.
Customer
Prepayments
Customer prepayments relate to cash received from customers for
services to be provided. During 2008, the Company received a
prepayment of $15,000 which was used in frac services during
2009.
Financial
Instruments
The Companys cash, accounts receivable, accounts payable
and accrued expenses all approximate fair value due to the
relative short term nature of the related account. Our
outstanding term loans, revolving credit facility, and advances
from members all bear interest rates comparable to prevailing
market terms and therefore the outstanding balances approximate
fair value.
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of these financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
|
|
NOTE 2
|
ACCOUNTS
RECEIVABLE
|
At December 31, 2008 and 2009, we had receivables totaling
$117,967 and $73,649, net of allowance for bad debts, which is
inclusive of $16,651 and $14,629 of trade accounts receivable
that is recorded in amounts due from related parties. Collection
of receivables generally occurs between forty-five and eighty
days after the invoice date. At December 31, 2008 and 2009,
respectively, our allowance for bad debts was $1,615 and $3,620.
Total bad debt expense for 2007, 2008, and 2009 was $1,699,
$1,121 and $1,312, respectively. Certain accounts receivable
were converted into notes receivable during 2008.
Receivables totaling $72,572 serve as collateral for our
revolver discussed at Note 7.
Inventories at December 31, 2008 and 2009 consisted of the
amounts in the following table. Inventories totaling
approximately $50,410 stood as collateral under our revolver
discussed at Note 8.
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Proppants and chemicals
|
|
$
|
24,461
|
|
|
$
|
23,917
|
|
Maintenance parts
|
|
|
22,258
|
|
|
|
31,096
|
|
Fuel
|
|
|
37
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
46,756
|
|
|
$
|
55,137
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of fixed assets at December 31,
2008 and 2009. Depreciation expense totaled $38,673, $67,915,
and $89,239 in 2007, 2008, and 2009, respectively. These amounts
are included in costs of
F-27
Frac Tech
Holdings, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Amounts in thousands)
revenues. Construction in process of $4,835 and essentially all
of our service equipment serve as collateral for our revolver
(discussed at Note 7) or for other financing
obligations.
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Land
|
|
$
|
24,724
|
|
|
$
|
28,021
|
|
Buildings and improvements
|
|
|
81,357
|
|
|
|
96,678
|
|
Service equipment
|
|
|
530,781
|
|
|
|
596,869
|
|
Vehicles and transportation equipment
|
|
|
34,941
|
|
|
|
34,908
|
|
Office equipment and other
|
|
|
10,058
|
|
|
|
10,880
|
|
Equipment construction in process
|
|
|
35,417
|
|
|
|
6,491
|
|
Equipment advances
|
|
|
4,538
|
|
|
|
5,039
|
|
|
|
|
|
|
|
|
|
|
Total cost of fixed assets
|
|
|
721,816
|
|
|
|
778,886
|
|
Accumulated depreciation
|
|
|
(123,284
|
)
|
|
|
(208,868
|
)
|
|
|
|
|
|
|
|
|
|
Net fixed assets
|
|
$
|
598,532
|
|
|
$
|
570,018
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2007, 2008, and 2009, we
capitalized interest of approximately $2,500, $1,000, and $500,
respectively.
When we order equipment from manufacturers, we are often
required to pay a deposit (advance) against the total cost of
the order as part of the acceptance of the order. Occasionally,
we are required to make progress payments as manufacturing
milestones are reached.
|
|
NOTE 5
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
There were no impairments as a result of our year-end goodwill
impairment analysis as of December 31, 2009. The Company
recorded an impairment of goodwill of $5,971 as of
December 31, 2008 associated with closing the facilities of
a consolidated subsidiary.
Other intangible assets consist of an air permit and other
assets separately identified on acquisition of certain
businesses. No impairment charge was recorded for the periods
ended December 31, 2007, 2008 and 2009.
|
|
NOTE 6
|
OTHER
ACCRUED LIABILITIES
|
Other accrued liabilities at December 31, 2008 and 2009
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
State sales and gross receipts tax
|
|
$
|
15,062
|
|
|
$
|
15,510
|
|
State franchise tax
|
|
|
3,456
|
|
|
|
2,205
|
|
Interest
|
|
|
2,458
|
|
|
|
2,806
|
|
Other
|
|
|
5,636
|
|
|
|
1,964
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
26,612
|
|
|
$
|
22,485
|
|
|
|
|
|
|
|
|
|
|
Revolver In January 2007, we entered into a
Credit Agreement with a group of banks to create a revolving
credit facility. This facility was increased twice during 2007
and now has a $300,000 maximum. It is due in January 2010 and
may be drawn on (subject to availability) or repaid at any time.
Collateral for this
F-28
Frac Tech
Holdings, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Amounts in thousands)
agreement consists of accounts receivable, inventory, and a list
of specified equipment. Availability under this agreement is
determined using a monthly borrowing base calculation from the
underlying collateral amounts. At December 31, 2009, we had
$231,360 outstanding on this line. Advances under this facility
are designated as Base Rate or Eurodollar Advances. At
December 31, 2009, interest rates were Prime plus 5.5%
(8.75%) for Base Rate Advances and LIBOR plus 6.5% (6.74%) for
Eurodollar Advances. The plus-rates are adjustable quarterly
based on our leverage ratio which is defined in the agreement as
the ratio of the trailing twelve months EBITDA (as
defined) to outstanding Debt.
Our revolver is considered to be Senior Bank Debt. It carries
certain restrictive covenants and minimum ratio requirements.
The key ratio for most of these covenants is the leverage ratio.
The agreement provides limitations for operating leases,
acquisitions, and capital expenditures when this ratio exceeds 2
to 1. It also provides for limitations on distributions to
owners and on borrowings from third parties. There is also a
compliance test using a fixed charge ratio. Some ratios act as
triggers for additional disclosure requirements or can activate
additional restrictive covenants. As of December 31, 2009,
the Company was in compliance with all covenants except the
leverage ratio. The lender subsequently suspended compliance
requirements while the debt was renegotiated. In May 2010, we
entered into an agreement to amend and restate the Existing
Credit Agreement in its entirety. Restrictive covenants and
ratio requirements were reinstated with slight modifications.
The total maximum borrowing capacity of the new facility which
expires in May 2011 is $200,000.
Line of Credit In March 2009, the Company
entered into an agreement to provide for borrowings under a line
of credit (LOC Agreement). The LOC Agreement
provides for maximum borrowings of $8,000 and may be drawn on or
repaid at any time through March 2010, at which time any
outstanding amount is due. The LOC Agreement is collateralized
by certain equipment, inventory, and other assets. At
December 31, 2009, the Company had $7,502 outstanding under
the LOC Agreement at an interest rate of 3.98%.
The following is a summary of our long-term debt obligations,
excluding the revolver, at December 31, 2008 and 2009.
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Notes Payable:
|
|
|
|
|
|
|
|
|
Term installment notes payable with various maturities through
2012; due in monthly installments ranging from $827 to $537,076,
including interest at various fixed and variable rates ranging
from 2.0% to 10.75%; collateralized by equipment and vehicles
|
|
$
|
48,704
|
|
|
$
|
52,453
|
|
Term installment notes payable with various maturities through
2010; due in monthly installments ranging from $514 to $1,147,
including interest at various fixed rates ranging from 0% to
6.6%; collateralized by vehicles
|
|
|
253
|
|
|
|
101
|
|
Term installment notes payable with various maturities through
2026; due in monthly installments ranging from $3,194 including
interest to $62,500 plus interest, at various rates ranging from
fixed rates of 6.48% and 6.5% to rates that float at LIBOR plus
0.85%; collateralized by airplanes
|
|
|
18,806
|
|
|
|
17,892
|
|
Term installment note payable maturing 2022; due in monthly
installments of $12,167 at Prime minus .25% (but not less than
6%) 6% at December 31, 2008 and 2009; collateralized by
real estate
|
|
|
1,336
|
|
|
|
1,271
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
69,099
|
|
|
|
71,717
|
|
Less current portion
|
|
|
(16,878
|
)
|
|
|
(29,107
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
52,221
|
|
|
$
|
42,610
|
|
|
|
|
|
|
|
|
|
|
F-29
Frac Tech
Holdings, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Amounts in thousands)
Maturities for our long-term debt including our revolver at
December 31, 2009 are as follows:
|
|
|
|
|
|
|
Year Ending
|
|
|
|
December 31,
|
|
|
2010
|
|
$
|
267,969
|
|
2011
|
|
|
11,486
|
|
2012
|
|
|
7,744
|
|
2013
|
|
|
8,015
|
|
2014
|
|
|
3,503
|
|
Thereafter
|
|
|
11,862
|
|
|
|
|
|
|
Total
|
|
$
|
310,579
|
|
|
|
|
|
|
Senior Notes On November 12, 2010, FTS
and Frac Tech Finance, Inc., as co-issuers, completed a private
offering of $550.0 million aggregate principal amount of
7.125% Senior Notes due 2018 (Notes). The Notes mature on
November 15, 2018 and bear interest at 7.125% per annum,
payable semi-annually in arrears on May 15 and November 15,
beginning May 15, 2011. The Notes are unsecured and are
guaranteed by FTSs existing and future subsidiaries,
subject to certain exceptions.
The proceeds from our Senior Notes offering were used to pay off
our existing revolver, loans from members, and certain term
installment notes. Additionally, $200 million was used as a
return of capital to equity owners.
On or before November 15, 2013, we may redeem up to 35% of
the Notes with proceeds of certain equity offerings at a
redemption price of 107.125% of the principal amount plus
accrued and unpaid interest. Prior to November 15, 2014, we
may redeem some or all of the Notes at a price equal to 100% of
the principal amount plus a make-whole premium determined
pursuant to a formula set forth in the indenture governing the
Notes, plus accrued and unpaid interest. On or after
November 15, 2014, we may redeem all or part of the Notes
at the following prices (as a percentage of principal), plus
accrued and unpaid interest, if redeemed during the
12-month
period beginning on November 15 of the years indicated below:
|
|
|
|
|
|
|
Redemption
|
|
Year
|
|
Price
|
|
|
2014
|
|
|
103.563
|
%
|
2015
|
|
|
101.781
|
%
|
2016 and thereafter
|
|
|
100.000
|
%
|
Upon a change of control, as defined in the indenture, we will
be required to make an offer to purchase the Notes at a price
equal to 101% of the principal amount plus accrued and unpaid
interest.
The indenture governing the Notes contains covenants that, among
other things, limit our ability and the ability of certain of
our subsidiaries to incur or guarantee additional indebtedness
or issue certain preferred stock; pay dividends on our capital
stock or redeem capital stock or subordinated indebtedness;
transfer or sell assets; make investments; incur liens; enter
into transactions with our affiliates; and merge or consolidate
with other companies.
We have agreed to file with the Securities and Exchange
Commission within 240 days after November 12, 2010 a
registration statement for an offer to exchange the Notes and
related guarantees for registered notes and guarantees with
identical terms, or in certain circumstances to file a shelf
registration statement covering resales of the Notes and
guarantees.
F-30
Frac Tech
Holdings, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Amounts in thousands)
|
|
NOTE 8
|
INTEREST
RATE SWAPS
|
During 2007, we entered into three interest rate swap agreements
related to variable rate borrowings. One agreement was matched
with a term note payable in the amount of $15,000 with an
interest rate of LIBOR plus 0.85% and a maturity date of
December 29, 2016. To minimize the effect of market changes
we entered into an interest rate swap agreement under which we
pay interest at a fixed rate of 5.95%. The notional amount of
this swap declines directly in step with the principal payments
on the loan. The scheduled termination date for this swap
agreement is March 2012.
The other two agreements were related to a total of $140,000 of
Eurodollar borrowings under our revolving line of credit. These
borrowings float with the LIBOR rate. These two swap agreements
mature in September 2010 and provide for us to pay interest at
fixed rates of 4.79% on $40,000 and 4.925% on $100,000.
Effective January 1, 2008, we adopted ASC 820 for all
financial instruments. ASC 820 defines fair value,
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. Level 1 inputs
are observable quotes in an active market for identical assets
and liabilities. Level 2 inputs are inputs observable for
similar assets and liabilities. We consider the interest rate
swap agreements Level 2 valuations since the value of these
derivatives are derived from assumptions from or supported by
data that is generally observable in the marketplace.
Level 3 utilizes significant unobservable inputs. We
currently do not have any fair value measurements within the
scope of ASC 820 considered as Level 1 or Level 3
inputs.
Although these three swap agreements are related to our
borrowings and are not held for trading purposes, they are
classified as
market-to-market
derivatives. As such, the effect of changes in the swaps
fair values and their cash flow effects are included in interest
expense until the date the swap agreements mature or are
terminated. As of December 31, 2008 and 2009, respectively,
the fair value of these swaps was a liability of $10,674 and
$5,709.
|
|
NOTE 9
|
COMMITMENTS
AND CONTINGENCIES
|
We lease certain administrative and sales offices and
operational facilities in various cities. Rail cars are leased
from two entities. We lease portions of our office equipment. In
addition to lease, we rent various facilities and equipment
under temporary arrangements.
During 2008 we executed master lease agreements with Comerica
Leasing Corporation, VFS Leasing Co., and Wells Fargo Equipment
Finance, Inc. The market value of equipment leased under these
agreements totaled $31,451 at the time of the lease. Certain of
the transactions included the sale of frac service equipment
which was at least partially manufactured and assembled
internally. Leasing companies purchased chassis equipment
directly from the manufacturer, and purchased additional
assembly and modifications from us. Alternatively, leasing
companies purchased completed frac service equipment directly
from us for the sale-leaseback transactions. Gain on sale of
$1,790 was treated as deferred gain and is being amortized on a
straight-line basis over the life of the lease. All leases under
these agreements have five year terms, which consist of
60 monthly payments, and are treated as operating leases
under ASC 840, Leases.
F-31
Frac Tech
Holdings, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Amounts in thousands)
Total lease expense for 2007, 2008, and 2009 under operating
leases consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Service equipment
|
|
$
|
|
|
|
$
|
8,207
|
|
|
$
|
8,209
|
|
Equipment
|
|
|
2,041
|
|
|
|
4,229
|
|
|
|
4,456
|
|
Facilities (offices and operations)
|
|
|
882
|
|
|
|
1,645
|
|
|
|
1,700
|
|
Trucks
|
|
|
377
|
|
|
|
19
|
|
|
|
|
|
Office equipment
|
|
|
71
|
|
|
|
115
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,371
|
|
|
$
|
14,215
|
|
|
$
|
14,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future minimum lease payments due under noncancellable operating
leases as of December 31, 2009 consist of the following:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
2010
|
|
$
|
14,147
|
|
2011
|
|
|
12,710
|
|
2012
|
|
|
10,823
|
|
2013
|
|
|
787
|
|
2014
|
|
|
34
|
|
Thereafter
|
|
|
45
|
|
|
|
|
|
|
Total
|
|
$
|
38,546
|
|
|
|
|
|
|
In the ordinary course of business, we are subject to various
legal proceedings and claims. Management believes that costs
associated with such legal matters, if any, will not have a
material adverse effect on our financial condition, results of
operations, or cash flows.
Much of the equipment we purchase requires long lead times in
production. Due to this fact, at most points in time we have
orders and commitments for such equipment. Some of these orders
are being renewed on a revolving basis to achieve our goal of
maintaining a future supply of essential equipment. All of these
orders are cancelable upon written notice within time frames
specified in the order (generally ninety days).
|
|
NOTE 10
|
TRANSACTIONS
WITH RELATED PARTIES
|
We are related through common ownership or control to various
entities. Transactions with related entities during 2008 and
2009 included equipment, facilities and office leasing,
reimbursement of personnel and benefits costs, equipment
purchases, construction contracting, repair parts and services,
materials purchases, shared insurance policies, and some other
minor transactions. Related party transactions that are expected
to continue consist of personnel and benefits cost
reimbursements, construction contracting for facilities
expansion, materials and equipment purchases, repair parts and
services, and shared insurance costs, and other minor
transactions. We participate with related (commonly-owned)
entities to purchase most of our insurance and to obtain
employee benefit coverage. We also provide frac services to an
owner.
F-32
Frac Tech
Holdings, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Amounts in thousands)
Transactions with related parties during 2007, 2008, and 2009
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Amounts billed to us by related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction contracting
|
|
$
|
19,308
|
|
|
$
|
9,041
|
|
|
$
|
1,200
|
|
Equipment purchases
|
|
|
|
|
|
|
|
|
|
|
4,947
|
|
Raw material and proppant
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Leasing and overhead expenses
|
|
|
915
|
|
|
|
226
|
|
|
|
541
|
|
Equipment components and repairs
|
|
|
296
|
|
|
|
1,010
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
20,519
|
|
|
$
|
10,277
|
|
|
$
|
6,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts billed to related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
For frac services
|
|
$
|
32,998
|
|
|
$
|
97,930
|
|
|
$
|
41,204
|
|
Deposit with related party
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
Equipment sales
|
|
|
|
|
|
|
|
|
|
|
58
|
|
For supplies, equipment, and leasing
|
|
|
464
|
|
|
|
2,157
|
|
|
|
|
|
For overhead expenses and insurance
|
|
|
74
|
|
|
|
541
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
33,536
|
|
|
$
|
115,628
|
|
|
$
|
41,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008, certain owners of our parent company advanced
$13,500 to FTS under a preferred limited partner units agreement
(preferred units). The preferred units were
subsequently assigned to our parent. The preferred units did not
provide for distribution, dividend or accumulation rights, and
could be redeemed at the discretion of the holder. In October
2010, the preferred units were redeemed for $13,500.
|
|
NOTE 11
|
RETIREMENT
PLAN
|
We maintain a 401(K) Retirement Plan. Employees may contribute a
portion of their salary, up to the limits established for an
individual by the IRS, to a qualified 401(K) plan. We do not
provide any matching contributions.
Our primary business is providing high-pressure, high-volume
fracturing services to E&P companies. These services are
part of the process of completing wells after they have been
drilled (and determined to have found hydrocarbons).
In performing our services during 2007, 2008 and 2009, we
derived approximately 60%, 58% and 53%, respectively, of our
revenues from our three largest customers. Each of our three
largest customers in 2008 and 2009 provided more than 10% of our
total revenues.
At many times during the year, our primary bank balances have
exceeded federally insured limits.
|
|
NOTE 13
|
BUSINESS
COMBINATION
|
Effective January 1, 2009, the Company acquired an existing
business which manufactures resin coated sand. The acquisition
was accounted for as a business combination in our consolidated
balance sheets as of that date.
F-33
Frac Tech
Holdings, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Amounts in thousands)
The fair value of the assets acquired is as follows:
|
|
|
|
|
|
|
Fair Value
|
|
|
|
of Assets
|
|
|
|
Acquired
|
|
|
Land
|
|
$
|
100
|
|
Building
|
|
|
350
|
|
Service equipment
|
|
|
11,756
|
|
Vehicles
|
|
|
50
|
|
|
|
|
|
|
|
|
|
12,256
|
|
Other intangibles
|
|
|
5,244
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
17,500
|
|
|
|
|
|
|
The other intangibles acquired were determined to have an
indefinite useful life due to the ability to renew and or extend
the underlying asset for an insignificant amount. Accordingly,
the asset will be reviewed for impairment in connection with the
review of recoverability of other long-lived assets. For the
year ending December 31, 2009, no impairment charge was
recorded.
This acquisition provided a competitive advantage because the
existing company possessed an existing air permit for
processing. To obtain a new permit for new plant construction,
if one can be obtained at all, can take up to two years to
acquire.
The acquired companys operations were modified to produce
resin-coated frac sand. No existing foundry customers were
retained after the conversion. Frac sand was first delivered in
January 2009. The company sells to FTS and FTS customers
directly.
|
|
NOTE 14
|
RECENTLY
ISSUED ACCOUNTING STANDARDS
|
In December 2007, the FASB issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial
Statements An Amendment of ARB No. 51, or
SFAS No. 160
(SFAS No. 160) which is now incorporated
into the ASC as ASC 810. ASC 810 establishes new
accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a
subsidiary. Among other items, ASC 810 requires that equity
attributable to non-controlling interests be recognized in
equity separate from that of the Companys and that
consolidated net income now includes the results of operations
attributable to non-controlling interests. The Company adopted
ASC 810 on January 1, 2009 and it did not have a
material impact on the Companys consolidated financial
statements.
In June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation No. 46(R)
(SFAS No. 167) which is now incorporated
into the ASC as ASC 810. ASC 810 changes the existing
consolidation guidance applicable to a variable interest entity.
Among other things, it requires a qualitative analysis to be
performed in determining whether an enterprise is the primary
beneficiary of a variable interest entity. ASC 810 is
effective for interim and annual reporting periods that begin
after November 15, 2009. The Company is currently
evaluating the effect that ASC 810 will have on its
consolidated financial statements.
|
|
NOTE 15
|
SUBSEQUENT
EVENTS
|
The Company evaluated its December 31, 2009 consolidated
financial statements for subsequent events through
December 14, 2010, the date the financials were available
to be issued.
We are not aware of any other subsequent events that would
require recognition or disclosure in the consolidated financial
statements, except as disclosed.
F-34
Part II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
ITEM 13.
|
Other
Expenses of Issuance and Distribution
|
The following table sets forth an itemized statement of the
amounts of all expenses (excluding underwriting discounts and
commissions) payable by us in connection with the registration
of the Common Stock offered hereby. With the exception of the
Registration Fee, FINRA Filing Fee and New York Stock Exchange
listing fee, the amounts set forth below are estimates.
|
|
|
|
|
SEC Registration Fee
|
|
$
|
49,197
|
|
FINRA Filing Fee
|
|
|
|
|
New York Stock Exchange listing fee
|
|
|
|
|
Accountants fees and expenses
|
|
|
|
|
Legal fees and expenses
|
|
|
|
|
Printing and engraving expenses
|
|
|
|
|
Transfer agent and registrar fees
|
|
|
|
|
Miscellaneous
|
|
|
|
|
Total
|
|
$
|
|
|
|
|
ITEM 14.
|
Indemnification
of Directors and Officers
|
Our certificate of incorporation provides that a director will
not be liable to the corporation or its shareholders for
monetary damages for breach of fiduciary duty as a director,
except for liability (1) for any breach of the
directors duty of loyalty to the corporation or its
shareholders, (2) for acts or omissions not in good faith
or which involved intentional misconduct or a knowing violation
of the law, (3) under section 174 of the DGCL for
unlawful payment of dividends or improper redemption of stock or
(4) for any transaction from which the director derived an
improper personal benefit. In addition, if the DGCL is amended
to authorize the further elimination or limitation of the
liability of directors, then the liability of a director of the
corporation, in addition to the limitation on personal liability
provided for in our certificate of incorporation, will be
limited to the fullest extent permitted by the amended DGCL. Our
bylaws provide that the corporation will indemnify, and advance
expenses to, any officer or director to the fullest extent
authorized by the DGCL.
Section 145 of the DGCL provides that a corporation may
indemnify directors and officers as well as other employees and
individuals against expenses, including attorneys fees,
judgments, fines and amounts paid in settlement in connection
with specified actions, suits and proceedings whether civil,
criminal, administrative, or investigative, other than a
derivative action by or in the right of the corporation, if they
acted in good faith and in a manner they reasonably believed to
be in or not opposed to the best interests of the corporation
and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A
similar standard is applicable in the case of derivative
actions, except that indemnification extends only to expenses,
including attorneys fees, incurred in connection with the
defense or settlement of such action and the statute requires
court approval before there can be any indemnification where the
person seeking indemnification has been found liable to the
corporation. The statute provides that it is not exclusive of
other indemnification that may be granted by a
corporations certificate of incorporation, bylaws,
disinterested director vote, stockholder vote, agreement or
otherwise.
Our certificate of incorporation also contains indemnification
rights for our directors and our officers. Specifically, our
certificate of incorporation provides that we shall indemnify
our officers and directors to the fullest extent authorized by
the DGCL. Further, we may maintain insurance on behalf of our
officers and directors against expense, liability or loss
asserted incurred by them in their capacities as officers and
directors.
We have obtained directors and officers insurance to
cover our directors, officers and some of our employees for
certain liabilities.
II-1
We will enter into written indemnification agreements with our
directors and officers. Under these proposed agreements, if an
officer or director makes a claim of indemnification to us,
either a majority of the independent directors or independent
legal counsel selected by the independent directors must review
the relevant facts and make a determination whether the officer
or director has met the standards of conduct under Delaware law
that would permit (under Delaware law) and require (under the
indemnification agreement) us to indemnify the officer or
director.
|
|
ITEM 15.
|
Recent
Sales of Unregistered Securities
|
In December 2008, our predecessor, Frac Tech Services, L.P.,
issued preferred limited partnership units to our founders, Dan
Wilks and Farris Wilks, for an aggregate purchase price of
$13,500,000. The preferred units were subsequently assigned to
our former parent entity. We redeemed the preferred units in
October 2010 for $13,500,000.
On September 30, 2009, Chesapeake Energy Corporation,
through a subsidiary, made a $37.5 million equity
investment in us, which investment, after giving effect to
certain reorganization transactions effected in January and
September 2010, is evidenced by 19,900 limited liability company
units in Frac Tech Holdings, LLC (Holdings), our
direct parent entity. In connection with the Reorganization that
we will consummate immediately prior to our initial public
offering pursuant to this registration statement, such units
will be converted
into shares
of common stock of Frac Tech Services, Inc.
On May 14, 2010, Chesapeake Energy Corporation, through a
subsidiary, made a $100.0 million equity investment in us,
which investment, after giving effect to certain reorganization
transactions effected in September 2010, is evidenced by 8,000
limited liability company units in Holdings. In connection with
the Reorganization that we will consummate immediately prior to
our initial public offering pursuant to this registration
statement, such units will be converted
into shares
of common stock of Frac Tech Services, Inc.
Pursuant to our Long-Term Incentive Plan, and as required by the
employment agreement we entered into with Marc Rowland, our new
President and CFO, on October 4, 2010, we granted to
Mr. Rowland an option effective concurrently with the
commencement of his employment on November 1, 2010 to
purchase two percent of the outstanding limited liability
company units of Holdings, on a post-exercise basis, or
2,807 units. In connection with the Reorganization that we
will consummate immediately prior to our initial public offering
pursuant to this registration statement, such units will be
converted
into shares
of common stock of Frac Tech Services, Inc.
On November 12, 2010, we completed a private offering of
$550.0 million in principal amount of our
7.125% Senior Notes due 2018. The initial purchasers of the
Senior Notes in this offering were Credit Suisse Securities
(USA) LLC, Citigroup Global Markets Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, RBC Capital Markets, LLC,
Wells Fargo Securities, LLC, Jefferies & Company,
Inc., Johnson Rice & Company, L.L.C., Comerica
Securities, Inc. and Simmons & Company Incorporated.
Pursuant to a Purchase Agreement between us and the initial
purchasers, we sold the Senior Notes to the initial purchasers
for $539.0 million (reflecting a discount of 2.0%), and the
initial purchasers resold the Senior Notes at par to qualified
institutional buyers under Rule 144A under the Securities
Act and to certain persons in offshore transactions in reliance
on Regulation S under the Securities Act.
The foregoing issuances of securities by us and our predecessors
did not involve any underwriters or public offerings, and we
believe that such issuances were exempt from the registration
requirements pursuant to Section 4(2) of the Securities Act
of 1933, as amended (the Securities Act), and, in
the case of the option issued under our Long-Term Incentive
Plan, pursuant to Rule 701 under the Securities Act.
|
|
ITEM 16.
|
Exhibits
and Financial Statement Schedules
|
(a) Exhibits
II-2
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement
|
|
2
|
.1*
|
|
Form of Agreement and Plan of Merger
dated ,
2011, between Frac Tech Holdings, LLC and Frac Tech Services, LLC
|
|
2
|
.2*
|
|
Form of Agreement and Plan of Merger
dated ,
2011, between Frac Tech Services, LLC and Frac Tech
Finance, Inc.
|
|
3
|
.1*
|
|
Form of Certificate of Incorporation, as amended, of Frac Tech
Services, Inc.
|
|
3
|
.2*
|
|
Form of Bylaws of Frac Tech Services, Inc.
|
|
4
|
.1*
|
|
Form of Common Stock Certificate
|
|
4
|
.2*
|
|
Form of Registration Rights Agreement
|
|
5
|
.1*
|
|
Opinion of Thompson & Knight LLP as to the legality of
the securities being registered
|
|
10
|
.1*
|
|
[List applicable material contracts]
|
|
21
|
.1*
|
|
List of Subsidiaries of Frac Tech Services, Inc.
|
|
23
|
.1
|
|
Consent of Grant Thornton LLP
|
|
23
|
.3*
|
|
Consent of Thompson & Knight LLP (included as part of
Exhibit 5.1 hereto)
|
|
24
|
.1
|
|
Power of Attorney (included on the signature page of the initial
filing of the registration statement)
|
|
|
|
* |
|
To be filed by amendment. |
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized in the City of Cisco, State of Texas, on
December 14, 2010.
FRAC TECH SERVICES, INC.
Name: Dan Wilks
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Title:
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Chief Executive Officer
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POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Dan Wilks and
Marc Rowland, and each of them severally, his true and lawful
attorney or attorneys-in-fact and agents, with full power to act
with or without the others and with full power of substitution
and resubstitution, to execute in his name, place and stead, in
any and all capacities, any or all amendments (including
pre-effective and post-effective amendments) to this
registration statement and any registration statement for the
same offering filed pursuant to Rule 462 under the
Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents and each of them, full power and
authority to do and perform in the name of on behalf of the
undersigned, in any and all capacities, each and every act and
thing necessary or desirable to be done in and about the
premises, to all intents and purposes and as fully as they might
or could do in person, hereby ratifying, approving and
confirming all that said attorneys-in-fact and agents or their
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities indicated on December 14, 2010. This
document may be executed by the signatories hereto on any number
of counterparts, all of which constitute one and the same
instrument.
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Signature
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Title
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/s/ Dan
Wilks Dan
Wilks
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Chief Executive Officer and Director
(principal executive officer)
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/s/ Marc
Rowland Marc
Rowland
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President and Chief Financial Officer
(principal financial officer)
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/s/ Kevin
McGlinch Kevin
McGlinch
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Senior Vice President Finance and Treasurer
(principal accounting officer)
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/s/ Farris
Wilks Farris
Wilks
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Director
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/s/ Bill
Barker Bill
Barker
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Director
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/s/ Domenic
J.
DellOsso Domenic
J. DellOsso
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Director
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II-4
INDEX TO
EXHIBITS
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Exhibit
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Number
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Description
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*1
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.1
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Form of Underwriting Agreement
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*2
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.1
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Form of Agreement and Plan of Merger
dated ,
2011, between Frac Tech Holdings, LLC and Frac Tech Services, LLC
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*2
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.2
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Form of Agreement and Plan of Merger
dated ,
2011, between Frac Tech Services, LLC and Frac Tech
Finance, Inc.
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*3
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.1
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Form of Certificate of Incorporation, as amended, of Frac Tech
Services, Inc.
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*3
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.2
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Form of Bylaws of Frac Tech Services, Inc.
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*4
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.1
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Form of Common Stock Certificate
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*4
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.2
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Form of Registration Rights Agreement
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*5
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.1
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Opinion of Thompson & Knight LLP as to the legality of
the securities being registered
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*10
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.1
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[List applicable material contracts]
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*21
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.1
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List of Subsidiaries of Frac Tech Services, Inc.
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23
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.1
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Consent of Grant Thornton LLP
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*23
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.3
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Consent of Thompson & Knight LLP (included as part of
Exhibit 5.1 hereto)
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24
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.1
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Power of Attorney (included on the signature page of the initial
filing of the registration statement)
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* |
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To be filed by amendment. |