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)

 

 

16858 Interstate Highway 20

Cisco, Texas 76437

(817) 850-1008

(Address, including zip code, and telephone number, including area code, of registrant’s 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:

 

 

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):

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

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.

 

 

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.

 

 

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

 

Co-Managers

 

 

The date of this prospectus is          , 2011.

 

TABLE OF CONTENTS

 

 

 

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 dealer’s 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.

 

PROSPECTUS SUMMARY

(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.

 

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.

	•	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

	•	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.

	•	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.

																		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)

																		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

*		Unavailable

		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 company’s 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, 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”.

 

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:

 

 

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

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 “Management’s 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

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 Committee’s 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

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 EPA’s 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:

 

 

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

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

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.

 

 

 

 

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:

 

 

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.

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.

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 “Management’s 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:

 

 

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

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:

 

 

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.

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:

 

 

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 SEC’s 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 SEC’s 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 company’s 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, 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.

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:

 

 

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

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:

 

 

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.

 

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:

 

 

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.

 

 

 

 

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.

 

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”.

 

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.

 

 

 

 

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:

 

 

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:

 

 

 

 

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 “Management’s 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.

 

 

 

 

 

 

 

 

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:

 

 

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

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:

 

 

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:

 

 

 

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:

 

 

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

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:

 

 

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.

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

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:

 

 

 

 

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.

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:

 

 

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

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: