Select Energy Services, Inc. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone Q4 report; the filing also presents unaudited quarterly results. The company provides U.S. oilfield water-management services and infrastructure, and oilfield chemical products and services.
Financial performance
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Revenue | $605.1 million | $1,291.6 million |
| Gross profit (loss) | ($29.3 million); margin (4.8%) | $148.7 million; margin 11.5% |
| Operating income (loss) | ($394.8 million) | $23.1 million |
| Net income (loss) | ($401.7 million) | $4.1 million |
| Net loss attributable to Select Energy Services, Inc. | ($338.7 million); Class A EPS ($3.98) | $2.8 million; Class A EPS $0.03 |
| EBITDA / Adjusted EBITDA | ($299.4 million) / $20.9 million | $129.4 million / $182.7 million |
| Cash from operating activities | $105.8 million | $203.9 million |
| Capital expenditures | $21.2 million | $110.1 million |
Revenue fell 53.2%. Water Services revenue was $319.8 million, down 58.6%; Water Infrastructure was $125.4 million, down 43.4%; and Oilfield Chemicals was $160.0 million, down 40.4%. The company attributed the declines mainly to pandemic-related demand disruption, lower oil prices, reduced drilling and completions activity, and pricing pressure. The 2019 comparison also included businesses divested or wound down during 2019.
Fourth-quarter 2020 revenue was $133.3 million, gross loss was $3.9 million, operating loss was $21.9 million, and net loss was $21.2 million. In Q4 2019, revenue was $276.1 million and net loss was $12.5 million.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $169.0 million at year-end, up from $79.3 million. The company reported no outstanding bank borrowings and a positive net cash position.
- At December 31, 2020, the revolving credit facility borrowing base was $96.4 million, with $15.6 million of letters of credit and $80.8 million of available capacity. At February 22, 2021, available capacity was $105.5 million.
- Total assets were $875.4 million, down from $1,347.6 million; total liabilities were $169.5 million and total equity was $705.9 million.
- Operating cash flow declined 48.1%. Cash increased partly because of working-capital inflows, including collections and lower receivables; investing outflow fell substantially as capital spending was reduced.
- The $300 million revolving credit agreement matures November 1, 2022 and includes restrictive covenants. The company reported covenant compliance at year-end. Contractual operating-lease obligations totaled $87.7 million; total disclosed lease and estimated interest obligations were $90.9 million.
Material changes and unusual items
- The company recorded $266.9 million of goodwill impairment, eliminating its goodwill balance, primarily following the sharp oil-market downturn and weaker projected cash flows. It also recorded a $9.1 million trademark impairment and $7.9 million of property and equipment impairments and abandonments.
- Cost reductions included lower headcount, wages, director compensation, third-party expenses and capital spending; facility idling and yard closures; and equipment sales. SG&A fell 33.4% to $74.4 million.
- Operating cash flow remained positive, but adjusted EBITDA fell to $20.9 million from $182.7 million. Adjusted EBITDA is a non-GAAP measure and includes substantial adjustments; it should not be treated as equivalent to cash flow or GAAP earnings.
- The company repurchased approximately $10.9 million of common stock during 2020. It has not paid common-stock dividends and said it has no near-term plan to do so.
- A $1.6 million customer receivable was settled in securities; the company recorded a $1.8 million unrealized gain, and the securities were valued at $3.4 million at year-end.
Outlook, risks and contingencies
Management expected activity to improve in 2021 relative to the second half of 2020, but did not anticipate an immediate return to 2019 levels and cautioned that the recovery was uncertain. It said cash, operating cash flow and available credit were expected to support obligations and covenant compliance for at least 12 months. Two Permian produced-water recycling facilities were under development, with approximately $5 million planned for one facility and both expected to be operational by the end of Q1 2021. The filing does not provide financial guidance for 2021.
- Key risks include the duration and effects of COVID-19, oil and gas price volatility, customer spending cuts or insolvencies, competition and pricing pressure, and the possibility of continued losses.
- Regulatory changes affecting hydraulic fracturing, federal-land leasing, emissions, water sourcing, wastewater disposal and induced seismicity could raise costs or constrain customer activity. The filing also highlights climate-policy, environmental, safety, supply-chain, labor and cybersecurity risks.
- Water rights and infrastructure are concentrated in the Bakken and Northern Delaware Basin. A multistate Rio Grande water-rights dispute could affect water availability in New Mexico.
- The company disclosed an investigation by the U.S. Attorney’s Office and EPA concerning alleged emissions-control alterations on fewer than 5% of vehicles in certain acquired subsidiaries. No charges had been brought against the company; it accrued $4.3 million toward settlement and paid $1.7 million in 2020.
- Ordinary-course lawsuits and claims were not expected by management to have a material adverse effect. Tax receivable agreement payments could be significant: estimated termination payments were approximately $69.8 million at December 31, 2020, but no liability was recognized because payment was not considered probable under the accounting criteria.
- The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether revenue, margins, utilization and adjusted EBITDA recover, and whether cash generation is sustainable after working-capital effects.
- Actual commissioning, contracted volumes and economics of the two Permian recycling facilities.
- Available borrowing capacity, borrowing-base movements, covenant headroom and refinancing plans ahead of the November 2022 credit-facility maturity.
- Final resolution and payments related to the emissions investigation, and any changes in environmental or water-rights proceedings.
- Potential tax receivable agreement obligations and the assumptions behind the estimated termination payment.
- Impairment assumptions, customer credit quality, and the company’s ability to manage lease commitments and other liquidity needs during a prolonged downturn.