Select Energy Services, Inc. (NYSE: WTTR) — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing, not a standalone fourth-quarter report. The filing identifies the registrant as Select Energy Services, Inc.; the request’s “Select Water Solutions” name does not appear as the filing’s registrant name.
Business context
Select provides water-management and oilfield chemical services to U.S. oil and gas companies through Water Services, Water Infrastructure, and Oilfield Chemicals. Results are sensitive to customer drilling and completion activity, commodity prices, and operating costs. In 2021, higher oil and gas prices and recovering activity supported demand, while acquisitions expanded the company’s assets and geographic reach.
Financial performance and liquidity
| Metric | 2021 | 2020 |
|---|---|---|
| Revenue | $764.6 million | $605.1 million |
| Gross profit (loss) | $20.9 million | ($29.3) million |
| Gross margin | 2.7% | (4.8)% |
| Operating loss | ($65.5) million | ($394.8) million |
| Net loss | ($50.1) million | ($401.7) million |
| Net loss attributable to Select Energy Services, Inc. | ($42.2) million | ($338.7) million |
| Class A basic and diluted loss per share | ($0.48) | ($3.98) |
| Adjusted EBITDA (non-GAAP) | $50.0 million | $20.9 million |
| Cash from operating activities | ($16.2) million | $105.8 million |
| Capital expenditures | $40.0 million | $21.2 million |
Revenue increased 26.4%. By segment, Water Services revenue was $394.1 million (+23.2%), Water Infrastructure was $154.8 million (+23.5%), and Oilfield Chemicals was $215.8 million (+34.9%). The company reported that higher activity, as well as contributions from acquisitions, drove the increases. Acquisitions contributed $78.6 million of Water Services revenue and $6.0 million of Water Infrastructure revenue; the filing does not separately quantify their contribution to consolidated revenue growth.
Year-end cash and cash equivalents were $85.8 million, down from $169.0 million. The company had no outstanding borrowings under its revolving credit facility, a $132.7 million borrowing base, $15.6 million of letters of credit, and $117.1 million of available borrowing capacity. Current assets were $394.8 million and current liabilities were $162.0 million. The $300 million facility was scheduled to mature November 1, 2022; management said it intended to extend or replace it. The company reported no material off-balance-sheet arrangements.
There was no bank debt at year-end, but the balance sheet included $67.2 million of operating lease liabilities and $29.6 million of asset retirement obligations. The company reported covenant compliance throughout 2021 and stated it expected adequate liquidity for at least the next 12 months.
Material changes versus 2020
- Gross profit improved by $50.1 million, and net loss narrowed by $351.6 million. The comparison is significantly affected by 2020 noncash charges: $276.0 million of goodwill and trademark impairments and $7.9 million of property and equipment impairment and abandonment costs.
- 2021 included a $19.0 million bargain purchase gain from acquisitions. Adjusted EBITDA, a non-GAAP measure, increased to $50.0 million from $20.9 million.
- Operating cash flow declined by $122.1 million, from positive $105.8 million to negative $16.2 million. Management attributed the decrease primarily to the nonrecurrence of substantial working-capital harvesting in 2020 and the timing of receivable collections as revenue increased.
- Investing cash outflow increased to $64.5 million, reflecting acquisitions, higher equipment purchases, and lower asset-sale proceeds. The company issued 5.7 million Class A shares in 2021 acquisitions.
- Cash costs and working capital demands rose in several areas: raw material costs were $209.7 million versus $154.2 million, and fuel and freight costs were $58.5 million versus $35.6 million.
Outlook, commentary, risks, and unusual items
- Management described 2022 customer budget indications as generally positive, while emphasizing that customers remained disciplined about capital spending and that forecasting activity and profitability remained uncertain. The filing provides no specific revenue, earnings, or cash-flow guidance.
- Acquisitions completed in 2021 included Complete, Agua Libre/selected Basic assets, and HB Rentals. The Nuverra acquisition closed February 23, 2022, after year-end; Select issued approximately 4.15 million Class A shares and expected to repay about $19 million of Nuverra debt with cash. Management cited added permitted disposal capacity and potential future synergies, while noting integration risks.
- Severe February 2021 winter weather disrupted operations for about a week across most locations and contributed to chemical raw-material shortages. Management estimated a $9 million to $12 million revenue impact.
- Key risks include volatility in oil and gas prices and customer spending, COVID-19 and supply-chain disruption, labor availability and costs, chemical input-price volatility, and environmental and regulatory requirements. Disposal-well restrictions and induced seismicity are notable risks: Texas regulators took actions affecting wells in the Gardendale Seismic Response Area in 2021, and further restrictions could reduce disposal activity.
- Other material exposures include water sourcing and permitting, weather and drought, potential environmental liabilities, customer credit risk, acquisition integration, and the ability to extend or replace the credit facility before its stated maturity. The company also disclosed a $79.0 million estimated Tax Receivable Agreement termination payment as of December 31, 2021, if the agreements had been terminated then; this was an estimate, not a reported current liability.
- The company reported a $2.6 million final payment in April 2021 resolving a pre-acquisition Clean Air Act matter; total settlement payments were $4.3 million. Management said ordinary-course litigation was not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether operating cash flow turns positive as receivables are collected, and how working capital changes as activity expands.
- Whether acquisition-related growth produces sustainable margins and cash flows, and whether integration and purchase-price allocations are finalized as expected.
- Progress on extending or replacing the revolving credit facility before its November 2022 maturity, along with ongoing covenant compliance.
- Actual performance and utilization of recycling facilities and disposal assets, including impacts from seismicity-related restrictions and permitting.
- Whether higher chemical, labor, fuel, and freight costs can be passed through to customers without harming demand or margins.
- The scope and timing of Nuverra integration, the cash debt repayment, and resulting dilution from shares issued.
- Controls coverage: management and the auditor reported effective internal control over financial reporting, but excluded Complete and certain Basic operations, representing approximately 12% of year-end assets and 10% of 2021 revenue, pending integration. The financial-statement audit opinion was unqualified.