Ranger Energy Services, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the historical financial statements and related notes included elsewhere in this Annual Report. This discussion contains “forward‑looking statements” reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward‑looking statements due to a number of factors. Factors that could cause or contribute to such differences include, but are not limited to, market prices for oil and natural gas, capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed below and elsewhere in this report. Please read Cautionary Statement Regarding Forward‑Looking Statements. Also, please read the risk factors and other cautionary statements described under “Part I, Item 1A.-Risk Factors.” We assume no obligation to update any of these forward‑looking statements, except as required by applicable law. Recent Events and Outlook The outbreak of the novel coronavirus (“COVID-19”) in the first quarter of 2020 and its continued spread across the globe during 2020 has resulted, and is likely to continue to result, in significant economic disruption and has, and will likely continue to, adversely affect the operations of the Company’s business, as the significantly reduced global and national economic activity has resulted in reduced demand for oil and natural gas. Federal, state and local governments mobilized to implement containment mechanisms and minimize impacts to their populations and economies. Various containment measures, which included the quarantining of cities, regions and countries, while aiding in the prevention of further outbreak, have resulted in a severe decline in general economic activity and a resulting decrease in energy demand. In addition, the global economy has experienced a significant disruption to global supply chains. The risks associated with the COVID-19 pandemic have impacted our workforce and the way we meet our business objectives. The extent of the COVID-19 outbreak on the Company’s operational and financial performance will significantly depend on certain developments, including the duration and spread of the outbreak and its continued impact on customer activity and third-party providers. The direct impact to the Company’s operations began to take affect at the close of the first quarter ended March 31, 2020 and continued through the year-ended December 31, 2020; however the full extent to which the COVID-19 outbreak may affect the Company’s financial conditions, results of operations or liquidity subsequent to the issuance of these financial statements is uncertain. At the time of this filing, cases of COVID-19 in the U.S. remain high, including in Texas, where we conduct significant operations. COVID-19 and numerous public and political responses thereto have contributed to equity market volatility and potentially the risk of a global recession. We expect this global equity market volatility experienced during 2020 to continue at least until the outbreak of COVID-19 stabilizes, if not longer. The response to the COVID-19 outbreak (such as stay-at-home orders, closures of restaurants and banning of group gatherings) and slowing of the global economy has contributed to increased unemployment rates. The severe drop in economic activity, travel restrictions and other restrictions due to COVID-19 have had a significant negative impact on the demand for oil and gas. In addition to the impact of the COVID-19 outbreak, in March 2020, OPEC, Russia and certain other oil producing states, commonly referred to as “OPEC Plus,” failed to agree on a plan to cut production of oil and natural gas. Subsequently, Saudi Arabia announced plans to increase production to record levels and reduce the prices at which they sell oil and, in turn, Russia responded with threats to also increase production. Collectively, these events created an unprecedented global oil and natural gas supply and demand imbalance, reduced global oil and natural gas storage capacity, caused oil and natural gas prices to decline significantly and resulted in continued volatility in oil, natural gas and NGLs prices through the year ended December 31, 2020. On April 12, 2020, OPEC Plus agreed to cut oil production by 9.7 million barrels per day (“mb/d”) in May and June 2020; however, on July 15, 2020 OPEC Plus agreed to increase production by 1.6 mb/d starting in August 2020. On December 3, 2020, OPEC Plus agreed to increase production by an additional 1.0 mb/d in January 2021, resulting in total production cuts of 7.1 mb/d by the end of February 2021. With the combined effects of the increased production levels earlier in 2020, the recent increase in production and the reduction in demand caused by COVID-19, the global oil and natural gas supply and demand imbalance persists and continues to have a significant adverse effect on the oil and gas industry. Due to the significantly reduced demand for oil and natural gas as a result of the COVID-19 pandemic and the current oversupply of oil and natural gas in the market, available storage and capacity for our customers’ production may be limited or completely unavailable in the future, which may further negatively impact the price of oil. We cannot predict whether or when the global supply and demand imbalance will be resolved or whether or when oil and natural gas production and economic activities will return to normalized levels. In the absence of additional reductions to global production, oil, natural gas and NGLs prices could remain at current levels, or decline further, for an extended period of time. 35 Factors deriving from the COVID-19 response, as well as the oil oversupply, that have and may continue to negatively impact sales, liquidity and gross margins in the future include, but are not limited to: limitations on the ability of our suppliers to provide materials or equipment, limitations on the ability of our employees to perform their work due to illness caused by the pandemic or local, state or federal orders requiring employees to remain at home; reduction of capital expenditures and discretionary spend; limitations on the ability of our customers to conduct business; and limitations on the ability of our customers to pay us on a timely basis. If prolonged, such factors may also negatively affect the carrying values of our property and equipment and intangible assets. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities, or that we determine are in the best interests of our employees, customers and stakeholders. The U.S. government has implemented a number of programs in the wake of the impacts of COVID-19, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the largest relief package in U.S. history, and the Main Street Lending Program established by the Federal Reserve. We qualified for limited aid under the CARES Act and have deferred payroll tax payments of $1.9 million as of December 31, 2020 under the CARES Act. Our Segments Our service offerings consist of well completion support, workover, well maintenance, wireline, fluid management, other complementary services, as well as installation, commissioning and operating of modular equipment, which are conducted in three reportable segments, as follows: • High Specification Rigs . Provides high-spec well service rigs and complementary equipment and services to facilitate operations throughout the lifecycle of a well. • Completion and Other Services . Provides wireline completion services necessary to bring a well on production and other ancillary services often utilized in conjunction with our high-spec rig services to enhance the production of a well. • Processing Solutions . Provides proprietary, modular equipment for the processing of natural gas. For additional financial information about our segments, please see “Part II, Item 8. Financial and Supplementary Data —Note 15 — Segment Reporting.” How We Evaluate Our Operations Management uses a variety of metrics to analyze our operating results and profitability, which include operating revenues, costs of conducting our operations, operating income (loss) and adjusted EBITDA, among others. Within our High Specification Rig segment, management uses additional metrics to analyze our activity levels and profitability, including rig hours and rig utilization. How We Generate Revenues We generate revenues through the provision of a variety of oilfield services. These services are performed under a variety of contract structures, including a long term take‑or‑pay contract and various master service agreements, as supplemented by statements of work, pricing agreements and specific quotes. A portion of our master services agreements include provisions that establish pricing arrangements for a period of up to one year in length. However, the majority of those agreements provide for pricing adjustments based on market conditions. The majority of our services are priced based on prevailing market conditions and changing input costs at the time the services are provided, giving consideration to the specific requirements of the customer. We analyze our revenues by comparing actual revenues to our internal projections for a given period and to prior periods to assess our performance. We believe that revenues are a meaningful indicator of the demand and pricing for our services. Rig Hours Within our High Specification Rigs segment, we analyze rig hours as an important indicator of our activity levels and profitability. Rig hours represent the aggregate number of hours that our well service rigs actively worked during the periods presented. We typically bill customers on an hourly basis during the period that a well service rig is actively working, making rig hours a useful metric for evaluating our profitability. Rig Utilization Within our High Specification Rigs segment, we analyze rig utilization as a further important indicator of our activity levels and profitability. We measure rig utilization by reference to average monthly hours per rig, which is calculated by 36 dividing (a) the approximate, aggregate operating well service rig hours for the periods presented by (b) the aggregate number of high specification rigs in our fleet during such period, as aggregated on a monthly basis utilizing a mid-month convention whereby a high-spec rig is added to our fleet during a month, meaning that we have taken delivery of such high-spec rig and is ready for service, is assumed to be in our fleet for one half of such month. We believe that rig utilization as measured by average monthly hours per high-spec rig is a meaningful indicator of the operational efficiency of our core revenue-producing assets, market demand for our well services and our ability to profitably capitalize on such demand. Our evaluation of our rig utilization as measured by average monthly hours per rig may not be comparable to that of our competitors. The primary factors that have historically impacted, and will likely continue to impact, our actual aggregate well service rig hours for any specified period are (i) customer demand, which is influenced by factors such as commodity prices, the complexity of well completion operations and technological advances in our industry, and (ii) our ability to meet such demand, which is influenced by changes in our fleet size and resulting rig availability, as well as weather, employee availability and related factors. The primary factors that have historically impacted, and will likely continue to impact, the aggregate number of high-spec rigs in our fleet during any specified period are the extent and timing of changes in the size of our fleet to meet short-term and expected long-term demand, and our ability to successfully maintain a fleet capable of ensuring sufficient, but not excess, rig availability to meet such demand. Costs of Conducting Our Business The principal expenses involved in conducting our business are personnel, repairs and maintenance costs, general and administrative costs, depreciation and amortization and interest expense. We manage the level of our expenses, except depreciation and amortization and interest expense, based on several factors, including industry conditions and expected demand for our services. In addition, a significant portion of the costs we incur in our business is variable based on the quantities of specific services provided and the requirements of such services. Direct cost of services and general and administrative expenses include the following major cost categories: (i) personnel costs and (ii) equipment costs (including repair and maintenance). Personnel costs associated with our operational employees represent a significant cost of our business. A substantial portion of our labor costs is attributable to our crews and is partly variable based on the requirements of specific customers and operations. A key component of personnel costs relates to the ongoing training of our employees, which improves safety rates and reduces attrition. We also incur costs to employ personnel to support and manage our services and perform maintenance on our assets. Costs for these employees are not directly tied to our level of business activity. We incur significant equipment costs in connection with the operation of our business, including repair and maintenance costs, as well as direct material costs. Operating Income (Loss) We analyze our operating income (loss), which we define as revenues less cost of services, general and administrative expenses, depreciation and amortization, impairment and other operating expenses, to measure our financial performance. We believe operating income (loss) is a meaningful metric because it provides insight on profitability and true operating performance based on the historical cost basis of our assets. We also compare operating income (loss) to our internal projections for a given period and to prior periods. Adjusted EBITDA We view Adjusted EBITDA, which is a non‑GAAP financial measure, as an important indicator of performance. We define Adjusted EBITDA as net income or loss before net interest expense, income tax provision or benefit, depreciation and amortization, equity‑based compensation, acquisition‑related and severance costs, impairment of goodwill and other non‑cash and certain other items that we do not view as indicative of our ongoing performance. See “—Results of Operations” and “—Note Regarding Non‑GAAP Financial Measure” for more information and reconciliations of net income (loss) to Adjusted EBITDA, the most directly comparable financial measure calculated and presented in accordance with GAAP. 37 Results of Operations The Year Ended December 31, 2020 compared to the Year Ended December 31, 2019 The following is an analysis of our operating results. See “—How We Evaluate Our Operations” for definitions of rig hours, rig utilization and other analogous information. The significant declines in operational activity, across all segments, as well as corporate-related expenses are related to the deterioration of crude oil pricing and significantly reduced demand for our services during the year ended December 31, 2020, as described in “—Recent Events and Outlook.” The information presented below is in millions. Year Ended December 31, Variance 2020 2019 $ % Revenues High specification rigs $ 82.5 $ 132.1 $ (49.6) (38) % Completion and other services 98.5 184.3 (85.8) (47) % Processing solutions 6.8 20.5 (13.7) (67) % Total revenues 187.8 336.9 (149.1) (44) % Operating expenses Cost of services (exclusive of depreciation and amortization): High specification rigs 71.5 114.8 (43.3) (38) % Completion and other services 73.7 139.0 (65.3) (47) % Processing solutions 2.7 9.2 (6.5) (71) % Total cost of services 147.9 263.0 (115.1) (44) % General and administrative 22.1 26.7 (4.6) (17) % Depreciation and amortization 35.0 34.8 0.2 1 % Gain on debt retirement (2.1) — (2.1) (100) % Total operating expenses 202.9 324.5 (121.6) (38) % Operating income (loss) (15.1) 12.4 (27.5) (222) % Other expenses Interest expense, net 3.4 5.8 (2.4) (41) % Total other expenses 3.4 5.8 (2.4) (41) % Income (loss) before income tax expense (18.5) 6.6 (25.1) (380) % Income tax expense — 2.2 (2.2) (100) % Net income (loss) $ (18.5) $ 4.4 $ (22.9) (521) % Revenues . Revenues decreased $149.1 million, or 44%, to $187.8 million for the year ended December 31, 2020 from $336.9 million for the year ended December 31, 2019. The change in revenues by segment was as follows: High Specification Rigs. High Specification Rig revenues decreased $49.6 million, or 38%, to $82.5 million for the year ended December 31, 2020 from $132.1 million for the year ended December 31, 2019. The decrease in rig services revenue included a 36% decline in total rig hours to 160,300 for the year ended December 31, 2020 from 249,100 for the year ended December 31, 2019. The decreased rig hours attributed to a 35% reduction in rig utilization. The average revenue per rig hour decreased three percent to $514 compared to $527 for the year ended December 31, 2019. The decrease in rig hou rs, rig utilization and average revenue per rig hour is attributable t o the decline in cr ude oil pricing. Completion and Other Services. Completion and Other Services revenues decreased $85.8 million, or 47%, to $98.5 million for the year ended December 31, 2020 from $184.3 million for the year ended December 31, 2019. The decrease is primarily attributable to our wireline business, which accounted for approximately $56.0 million, or 65%, of the segment revenue decrease. The decrease in wireline services revenue included a 36% decrease in average active wireline units to seven units for the year ended December 31, 2020, from 11 units for the year ended December 31, 2019. All other service lines within the segment also experienced revenue declines due to the deterioration of crude oil pricing. Processing Solutions. Processing Solutions revenues decreased $13.7 million, or 67%, to $6.8 million for the year ended December 31, 2020 from $20.5 million for the year ended December 31, 2019. The decrease was primarily attributable 38 to a decline in mobilization and maintenance revenue related to our Mechanical Refrigeration Units (“MRU”). Additionally revenues related to MRU rentals declined $5.0 million and included an 80% decrease in average MRU’s rented. Cost of services. Cost of services decreased $115.1 million, or 44%, to $147.9 million for the year ended December 31, 2020 from $263.0 million for the year ended December 31, 2019. As a percentage of revenue, cost of services was approximately 78% for both of the years ended December 31, 2020 and 2019. The change in cost of services by segment was as follows: High Specification Rigs. High Specification Rig cost of services decreased $43.3 million, or 38%, to $71.5 million for the year ended December 31, 2020 from $114.8 million for the year ended December 31, 2019. The decrease was primarily attributable to a reduction in variable expenses, notably employee costs and repair and maintenance costs. Additionally, the reduction corresponds with the decrease in rig hours and revenues. Completion and Other Services. Completion and Other Services cost of services decreased $65.3 million, or 47%, to $73.7 million for the year ended December 31, 2020 from $139.0 million for the year ended December 31, 2019. The decrease was primarily attributable to a reduction in our wireline business, which accounted for approximately $41.9 million, or 64%, of the segment cost of services decrease. The decrease was attributable to a reduction in variable expenses related to employee costs and direct material costs across all service lines. Processing Solutions. Processing Solutions cost of services decreased $6.5 million, or 71%, to $2.7 million for the year ended December 31, 2020 from $9.2 million for the year ended December 31, 2019. The decrease was primarily attributable to a reduction in employee costs and costs associated with ancillary equipment rentals. General and administrative. General and administrative expenses decreased $4.6 million, or 17%, to $22.1 million for the year ended December 31, 2020 from $26.7 million for the year ended December 31, 2019. The decrease in general and administrative expenses is primarily due to employee costs, which is related to our reduction in workforce, and lower professional fees during the year ended December 31, 2020. Depreciation and amortization. Depreciation and amortization increased $0.2 million, or 1%, to $35.0 million for the year ended December 31, 2020 from $34.8 million for the year ended December 31, 2019. The slight increase was attributable to depreciation expense for fixed assets placed into service during the year ended December 31, 2019, across all operating segments. Gain on debt retirement. Gain on debt retirement increased $2.1 million, or 100%, to $2.1 million for the year ended December 31, 2020, which is attributable to the settlement of the ESCO Seller’s Notes during the year ended December 31, 2020. Interest expense, net. Net interest expense decreased $2.4 million, or 41%, to $3.4 million for the year ended December 31, 2020 from $5.8 million for the year ended December 31, 2019. The decrease to net interest expense was attributable to the reduction of the principal balances on our Encina Master Financing Agreement (“Financing Agreement”) and Credit Facility. Tax Expense. Tax expense decreased $2.2 million, or 100% from $2.2 million for the year ended December 31, 2019. The decrease was primarily attributable to the net loss incurred during the year ended December 31, 2020 compared to net income generated during the year ended December 31, 2019. Note Regarding Non‑GAAP Financial Measure Adjusted EBITDA is not a financial measure determined in accordance with US GAAP. We define Adjusted EBITDA as net income or loss before net interest expense, income tax provision or benefit, depreciation and amortization, equity‑based compensation, acquisition-related, severance and reorganization costs, gain or loss on disposal of assets, and certain other non-cash items that we do not view as indicative of our ongoing performance. We believe Adjusted EBITDA is a useful performance measure because it allows for an effective evaluation of our operating performance when compared to our peers, without regard to our financing methods or capital structure. We exclude the items listed above from net income or loss in arriving at Adjusted EBITDA because these amounts can vary substantially within our industry depending upon accounting methods, book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income or loss determined in accordance with US GAAP. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are reflected in Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an indication that our results will be unaffected by the items excluded from Adjusted EBITDA. Our computations of Adjusted EBITDA may not be identical to other similarly titled 39 measures of other companies. The following table presents reconciliations of net income or loss, our most directly comparable financial measure calculated and presented in accordance with US GAAP, to Adjusted EBITDA. The Year Ended December 31, 2020 compared to The Year Ended December 31, 2019 Year Ended December 31, 2020 High Specification Rigs Completion and Other Services Processing Solutions Other Total (in millions) Net income (loss) $ (9.2) $ 14.6 $ 0.9 $ (24.8) $ (18.5) Interest expense, net — — — 3.4 3.4 Income Tax expense — — — — — Depreciation and amortization 20.2 10.2 3.2 1.4 35.0 Equity based compensation — — — 3.7 3.7 Severance and reorganization costs 0.4 0.2 — — 0.6 Gain on retirement of debt — — — (2.1) (2.1) (Gain) loss on disposal of property and equipment 0.6 (0.2) — (0.3) 0.1 Adjusted EBITDA $ 12.0 $ 24.8 $ 4.1 $ (18.7) $ 22.2 Year Ended December 31, 2019 High Specification Rigs Completion and Other Services Processing Solutions Other Total (in millions) Net income (loss) $ (2.8) $ 33.9 $ 9.1 $ (35.8) $ 4.4 Interest expense, net — — — 5.8 5.8 Income Tax expense — — — 2.2 2.2 Depreciation and amortization 20.1 11.4 2.2 1.1 34.8 Equity based compensation — — — 3.3 3.3 Severance and reorganization costs 0.1 — — — 0.1 Gain on retirement of debt — — — — — (Gain) loss on disposal of property and equipment — — — 0.2 0.2 Adjusted EBITDA $ 17.4 $ 45.3 $ 11.3 $ (23.2) $ 50.8 $ Variance High Specification Rigs Completion and Other Services Processing Solutions Other Total (in millions) Net income (loss) $ (6.4) $ (19.3) $ (8.2) $ 11.0 $ (22.9) Interest expense, net — — — (2.4) (2.4) Income Tax expense — — — (2.2) (2.2) Depreciation and amortization 0.1 (1.2) 1.0 0.3 0.2 Equity based compensation — — — 0.4 0.4 Severance and reorganization costs 0.3 0.2 — — 0.5 Gain on retirement of debt — — — (2.1) (2.1) (Gain) loss on disposal of property and equipment 0.6 (0.2) — (0.5) (0.1) Adjusted EBITDA $ (5.4) $ (20.5) $ (7.2) $ 4.5 $ (28.6) Adjusted EBITDA for the year ended December 31, 2020 decreased $28.6 million to $22.2 million from $50.8 million for the year ended December 31, 2019. The change by segment was as follows: High Specification Rigs. High Specification Rigs Adjusted EBITDA decreased $5.4 million to $12.0 million from $17.4 million primarily due to a decrease in revenues of $49.6 million partially offset by a corresponding decrease in cost of services of 43.3 million. 40 Completion and Other Services. Completion and Other Services Adjusted EBITDA decreased $20.5 million to $24.8 million from $45.3 million due to a decrease in revenues of $85.8 million partially offset by a corresponding decrease in cost of services of $65.3 million. Processing Solutions. Processing Solutions Adjusted EBITDA decreased $7.2 million to $4.1 million from $11.3 million due to a decrease in revenue of $13.7 million partially offset by a corresponding decrease in cost of services of $6.5 million. Other. Other Adjusted EBITDA increased for the year ended December 31, 2020 to a loss of $18.7 million from a loss $23.2 million due to decreased general and administrative expenses, which was related to a reduction of employee costs and professional fees. The balances included in Other reflect the general and administrative costs, interest expense, net and tax expense or benefit not directly attributable to any of our Segments. Liquidity and Capital Resources Overview We require capital to fund ongoing operations, including maintenance expenditures on our existing fleet and equipment, organic growth initiatives, investments and acquisitions. Our primary sources of liquidity are cash generated from operations and borrowings under our Credit Facility. As of December 31, 2020, we had total liquidity of $16.0 million, consisting of $2.8 million of cash on hand and availability under our Revolving Credit Facility of $13.2 million. As of December 31, 2020, our borrowing base, under the Credit Facility, was reduced to $20.7 million, compared to $30.5 million as of December 31, 2019, as a result of decreased operational activity, and accounts receivable, during the period. We strive to maintain financial flexibility and proactively monitor potential capital sources to meet our investment and target liquidity requirements and to permit us to manage the cyclicality associated with our business. We currently expect to have sufficient funds to meet the Company’s liquidity requirements and comply with our covenants of our debt agreements for at least the next 12 months from the date of issuance of these financial statements. For further details, see “—Our Debt Obligations.” Cash Flows The following table presents our cash flows for the periods indicated: Years Ended December 31, Variance 2020 2019 $ % (in millions) Net cash provided by operating activities $ 25.5 $ 51.9 $ (26.4) (51) % Net cash used in investing activities (5.4) (23.4) 18.0 77 % Net cash used in financing activities (24.2) (24.2) — — % Net change in cash $ (4.1) $ 4.3 $ (8.4) (195) % Operating Activities Net cash provided by operating activities decreased $26.4 million to $25.5 million for the year ended December 31, 2020 compared to $51.9 million for the year ended December 31, 2019. The change in cash flows provided by operating activities is attributable to cash collections related to accounts receivable, partially offset by cash payments related to our accounts payable and accrued expenses. Cash generated from working capital decreased to $4.0 million for the year ended December 31, 2020 from $7.4 million for the year ended December 31, 2019. Investing Activities Net cash used in investing activities decreased $18.0 million to a use of $5.4 million for the year ended December 31, 2020 compared to $23.4 million for the year ended December 31, 2019. The change in cash flows used in investing activities is attributable to a significant reduction in capital expenditures during the current year in response to the economic events that have taken place in the industry, as all planned growth capital expenditures were eliminated in April 2020. Additionally, there was an increased level of fixed assets acquired during the year ended December 31, 2019, relative to the corresponding period of the current year. Financing Activities Net cash used in financing activities remained flat at a use of cash of $24.2 million for both of the years ended December 31, 2020 and 2019. Although there was no change to net cash used in financing activities, during the year ended December 31, 2020, there were additional cash outflows related to the settlement of the ESCO Note Payable and repurchases 41 of Class A Common Stock, which was offset by a reduction in net cash payments on the principal balance of our Credit Facility. Supplemental Cash Flow Disclosures We added assets of $0.1 million that were non-cash additions in the year ended December 31, 2020 and purchased $1.0 million in finance leased assets. In addition, we early terminated certain vehicle financing leases, thereby reducing our current and long-term obligations by $1.3 million. Working Capital Our working capital, which we define as total current assets less total current liabilities, was $2.7 million and $3.6 million as of December 31, 2020 and 2019, respectively. The reduction in the Company’s operational activity, due to the current macroeconomic environment, is the primary reason for the decrease in working capital. Our Debt Agreements ESCO Notes Payable In connection with the initial public offering (the “Offering”) and the ESCO Leasing, LLC (“ESCO”) acquisition, both of which occurred on August 16, 2017, the Company issued $7.0 million of Seller’s Notes as partial consideration for the ESCO acquisition. These notes included a note for $1.2 million, which was paid in August 2018 and a note for $5.8 million, which was due in February 2019. The notes bore interest at 5.0% payable quarterly until their respective maturity dates. During the year ended December 31, 2018, the Company provided notice to ESCO that the Company sought to be indemnified for breach of contract. The Company exercised its right to stop payments of the remaining principal balance of $5.8 million on the Seller’s Notes and any unpaid interest, pending resolution of certain indemnification claims. Interest on the outstanding principal balance was accrued through the maturity date of the Note Payable. During the year ended December 31, 2020, the Company settled the indemnification claims, paid $3.8 million to settle the note and any unpaid interest, in full, and recognized a gain on the retirement of debt of $2.1 million. Credit Facility On August 16, 2017, Ranger, LLC entered into a $50.0 million senior revolving credit facility (the “Credit Facility”) by and among certain of Ranger’s subsidiaries, as borrowers, each of the lenders party thereto and Wells Fargo Bank, N.A., as administrative agent (the “Administrative Agent”). The applicable margin for LIBOR loans ranges from 1.5% to 2.0% and the applicable margin for Base Rate loans ranges from 0.5% to 1.0%, in each case, depending on Ranger LLC’s average excess availability under the Credit Facility. The applicable margin for the LIBOR loan was 2.2% and the Credit Facility’s interest rate was 4.3% as of December 31, 2020. The weighted average interest rate for the borrowings under the Credit Facility was 3.2% for the year ended December 31, 2020. Under the Credit Facility, the total loan capacity was $20.7 million, which was based on a borrowing base certificate in effect as of December 31, 2020. The Company had outstanding borrowings of $7.5 million under the Credit Facility, leaving a residual $13.2 million available for borrowing as of December 31, 2020. The Company was in compliance with the Credit Facility covenants as of December 31, 2020. The Credit Facility is subject to a borrowing base that is calculated based upon a percentage of the value of the Company’s eligible accounts receivable less certain reserves. Such calculation is submitted, in the form of a borrowing base certificate, to the Administrative Agent within ten business days of each preceding month end. The Credit Facility includes cash dominion provisions that permit the Administrative Agent to sweep cash daily from the Company’s bank accounts into an account of the Administrative Agent to repay the Company’s obligations under the Credit Facility. Such dominion is triggered when excess availability is less than the greater of $6.25 million and 12.5% of the lesser of (x) the maximum revolver amount and (y) the borrowing base as of such date of determination. When the Company is subject to dominion, for 30 consecutive days it is required to either (a) maintain excess availability in excess of the greater of $6.25 million and 12.5% of the lesser of (x) the maximum revolver amount and (y) the borrowing base as of such date of determination and no event of default has occurred and is continuing or (b) have no revolver drawings and available cash of at least $20.0 million for dominion to revert back to the Company. During the first quarter of 2020, the Company borrowed against the Credit Facility causing dominion to revert to the Administrative Agent, however after the 30 consecutive day period, as defined above, dominion reverted back to the Company in the second quarter of 2020. The borrowings under the Credit Facility, and related issuance costs, were included in long-term debt, net in the Consolidated Balance Sheets as of December 31, 2020, as the Company was not subject to dominion and the scheduled maturity date is August 16, 2022. 42 In addition, the Credit Facility restricts our ability to make distributions on, or redeem or repurchase, our equity interests, except for certain distributions, including distributions of cash so long as, both at the time of the distribution and after giving effect to the distribution, no default exists under the Credit Facility and either (a) excess availability at all times during the preceding 90 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 22.5% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $10.0 million or (b) if our fixed charge coverage ratio is at least 1.0x on a pro forma basis, excess availability at all times during the preceding 90 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 17.5% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $7.0 million. If the foregoing threshold under clause (b) is met, we may not make such distributions (but may make certain other distributions, including under clause (a) above) prior to the earlier of the date that is (a) 12 months from closing or (b) the date that our fixed charge coverage ratio is at least 1.0x for two consecutive quarters. Our Credit Facility generally permits us to make distributions required under the Tax Receivable Agreement (“TRA”), but a “Change of Control” under the TRA constitutes an event of default under our Credit Facility, and our Credit Facility does not permit us to make payments under the TRA upon acceleration of our obligations thereunder unless no event of default exists or would result therefrom and we have been in compliance with the fixed charge coverage ratio for the most recent 12-month period on a pro forma basis. Our Credit Facility also requires us to maintain a fixed charge coverage ratio of at least 1.0x if our liquidity is less than $10.0 million until our liquidity is at least $10.0 million for 30 consecutive days. We are not subject to a fixed charge coverage ratio if we have no drawings under the Credit Facility and have at least $20.0 million of qualified cash. The Credit Facility contains events of default customary for facilities of this nature, including, but not limited, to: • events of default resulting from our failure or the failure of any guarantors to comply with covenants and financial ratios; • the occurrence of a change of control; • the institution of insolvency or similar proceedings against us or any guarantor; and • the occurrence of a default under any other material indebtedness we or any guarantor may have. Upon the occurrence and during the continuation of an event of default, subject to the terms and conditions of the Credit Facility, the lenders are able to declare any outstanding principal of our Credit Facility debt, together with accrued and unpaid interest, to be immediately due and payable and exercise other remedies. Encina Master Financing and Security Agreement June 22, 2018, the Company entered into a Financing Agreement with Encina Equipment Finance SPV, LLC (the “Lender”). The amount available to be provided by the Lender to the Company under the Financing Agreement was contemplated to be not less than $35.0 million, and not to exceed $40.0 million. The first financing was required to be in an amount up to $22.0 million, which was used by the Company to acquire certain capital equipment. Subsequent to the first financing, the Company borrowed an additional $17.8 million, net of expenses and in two tranches, under the Financing Agreement. The Company utilized the additional net proceeds to acquire certain capital equipment. The Financing Agreement is secured by a lien on certain high specification rig assets. As of December 31, 2020, the aggregate principal balance outstanding under the Financing Agreement was $17.7 million. The total borrowings under the Financing Agreement were borrowed in three tranches, where the amounts outstanding are payable ratably over 48 months from the time of each borrowing. The three tranches mature in July 2022, November 2022 and January 2023. Borrowings under the Financing Agreement bear interest at a rate per annum equal to the sum of 8.0% plus the London Interbank Offered Rate (“LIBOR”), subject to a floor of 1.5%. As of December 31, 2020, LIBOR was 1.5%. Under the terms of the Financing Agreement, the Company is required to maintain a leverage ratio of 2.50 to 1.00. The Company was in compliance with the covenants under the Financing Agreement as of December 31, 2020. 43 Contractual and Commercial Commitments The following table summarizes our contractual obligations and commercial commitments as of December 31, 2020: Total Less than 1 year 1 - 3 years 3 - 5 years More than 5 years (in millions) Debt obligations (1) $ 27.0 $ 11.2 $ 15.6 $ 0.2 $ — Finance lease obligations (1) 4.1 2.7 1.4 — — Operating lease obligations (2) 7.9 1.3 2.5 2.4 1.7 Total $ 39.0 $ 15.2 $ 19.5 $ 2.6 $ 1.7 _________________________ (1) Debt and finance lease obligations include estimated interest to be paid in future periods. (2) In addition to our right-of-use asset obligation, the operating leases include our obligations for contracts with terms of less than 12 months. Tax Receivable Agreement With respect to obligations we expect to incur under our TRA (except in cases where we elect to terminate the TRA early, the TRA is terminated early due to certain mergers, asset sales, other forms of business combinations or other changes of control or we have available cash but fail to make payments when due), generally we may elect to defer payments due under the TRA if we do not have available cash to satisfy our payment obligations under the TRA or if our contractual obligations limit our ability to make these payments. Any such deferred payments under the TRA generally will accrue interest. In certain cases, payments under the TRA may be accelerated and/or significantly exceed the actual benefits, if any, we realize in respect of the tax attributes subject to the TRA. We intend to account for any amounts payable under the TRA in accordance with ASC 450, Contingencies. Further, we intend to account for the effect of increases in tax basis and payments for such increases under the TRA arising from future redemptions as follows: • when future sales or redemptions occur, we will record a deferred tax asset for the gross amount of the income tax effect along with an offset of 85% of this as a liability payable under the TRA; the remaining difference between the deferred tax asset and tax receivable agreement liability will be recorded as additional paid‑in capital; and • to the extent we have recorded a deferred tax asset for an increase in tax basis to which a benefit is no longer expected to be realized due to lower future taxable income, we will reduce the deferred tax asset with a valuation allowance. Critical Accounting Policies and Estimates Our financial statements are prepared in accordance with US GAAP. In connection with preparing our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expense and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time we prepare our consolidated financial statements. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with US GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ materially from our assumptions and estimates. Our significant accounting policies are discussed in our audited consolidated financial statements included elsewhere in this Annual Report. Management believes that the following accounting estimates are those most critical to fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. 44 Property and Equipment Policy description Property and equipment is stated at cost or estimated fair market value at the acquisition date less accumulated depreciation. Depreciation is charged to expense on the straight‑line basis over the estimated useful life of each asset, with estimated useful lives reviewed by management on an annual basis. Expenditures for major renewals and betterments are capitalized while expenditures for maintenance and repairs are charged to expenses as incurred. Assets under finance lease obligations and leasehold improvements are amortized over the shorter of the lease term or their respective estimated useful lives. Depreciation does not begin until property and equipment is placed in service. Once placed in service, depreciation on property and equipment continues while being repaired, refurbished or between periods of deployment. Judgments and assumptions Accounting for our property and equipment requires us to estimate the expected useful lives of our fleet and related equipment and any related salvage value. The range of estimated useful lives is based on overall size and specifications of the fleet, expected utilization along with continuous repairs and maintenance that may or may not extend the estimated useful lives. To the extent the expenditures extends the expected useful life, these expenditures are capitalized and depreciated over the extended useful life. Long‑lived Asset Impairment Policy description We evaluate the recoverability of the carrying value of long‑lived assets, including property and equipment and intangible assets, whenever events or circumstances indicate the carrying amount may not be recoverable. If a long‑lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long‑lived asset exceeds its fair value. Judgments and assumptions Our impairment analysis requires us to apply judgment in identifying impairment indicators and estimating future undiscounted cash flows of our fleets. If actual results are not consistent with our assumptions and estimates or our assumptions and estimates change due to new information, we may be exposed to an impairment charge. Key assumptions used to determine the undiscounted future cash flows include estimates of future fleet utilization and demands based on our assumptions around future commodity prices and capital expenditures of our customers. During the first and second quarter of 2020, the Company noted a sustained decline in stock price due to the reduced demand and oversupply of oil and natural gas, which was an indication that the fair value of the Company’s long-lived assets could have fallen below their carrying values. As a result, an impairment analysis was performed and it was determined that no impairment existed. Revenue Recognition Policy description In determining the appropriate amount of revenue to be recognized as the Company fulfills the obligations under its contracts with customers, the following steps must be performed at contract inception: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when, or as, the Company satisfies each performance obligation. We satisfy our performance obligation over time as the services are performed. The Company believes the output method is a reasonable measure of progress for the satisfaction of our performance obligations, which are satisfied over time, as it provides a faithful depiction of (i) our performance toward complete satisfaction of the performance obligation under the contract and (ii) the value transferred to the customer of the services performed under the contract. The Company has elected the right to invoice practical expedient for recognizing revenue. The Company invoices customers upon completion of the specified services and collection generally occurs within the payment terms agreed with customers. Accordingly, there is no financing component to our arrangements with customers. Judgments and assumptions Recording revenue involves the use of estimates and management judgment. We must make a determination at the time our services are provided whether the customer has the ability to make payments to us. While we do utilize past payment 45 history, and, to the extent available for new customers, public credit information in making our assessment, the determination of whether collection of the consideration is probable is ultimately a judgment decision that must be made by management. Income Taxes Policy description The Company provides for income tax expense based on the liability method of accounting for income taxes. Deferred tax assets and liabilities are recorded based upon differences between the tax basis of assets and liabilities and their carrying values for financial reporting purposes and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. A release of a valuation allowance would result in the recognition of an increase in deferred tax assets and an income tax benefit in the period in which the release occurs, although the exact timing and amount of the release is subject to change based on numerous factors, including our projections of future taxable income, which we continue to assess based on available information each reporting period. Judgments and assumptions The establishment of a valuation allowance requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. Under US GAAP, the valuation allowance is recorded to reduce the Company’s deferred tax assets to an amount that is more likely than not to be realized and is based upon the uncertainty of the realization of certain federal and state deferred tax assets related to net operating loss carryforwards and other tax attributes. Equity‑Based Compensation Policy description We record equity‑based payments at fair value on the date of the grant, and expense the value of these awards in compensation expense over the applicable vesting periods. Judgments and assumptions We estimate the fair value of our performance stock units using an option pricing model that includes certain assumptions, such as volatility, dividend yield and the risk free interest rate. Changes in these assumptions could change the fair value of our unit based awards and associated compensation expense in our consolidated statements of operations. Recent Accounting Pronouncements For information regarding new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements, please refer to Recent Accounting Pronouncements included in “Item 8. Financial Statements and Supplementary Data—Note 2 — Summary of Significant Accounting Policies.” Off‑Balance Sheet Arrangements We currently have no off‑balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. Emerging Growth Company and Smaller Reporting Company Status The Company is an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The Company will remain an emerging growth company until the earlier of (1) the last day of its fiscal year (a) following the fifth anniversary of the completion of the Offering, (b) in which its total annual gross revenue is at least $1.07 billion, or (c) in which the Company is deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the last business day of its most recently completed second fiscal quarter, or (2) the date on which the Company has issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable to public companies. The Company has irrevocably opted out of the extended transition period and, as a result, the Company will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. The Company is also a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act. Smaller reporting company means an issuer that is not an investment company, an asset-back issuer, or a majority-owned subsidiary of a parent that is not a smaller reporting company and that (i) has a market value of common stock held by non-affiliates of less than $250 million; or (i) has annual revenues of less than $100 million and either no common stock held by non-affiliates or a 46 market value of common stock held by non-affiliates of less than $700 million. Smaller reporting company status is determined on an annual basis.