Select Energy Services, Inc. (WTTR) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; compared with the three months ended March 31, 2019. The filing identifies the registrant as Select Energy Services, Inc., although the request metadata names Select Water Solutions, Inc.
Business context
The company provides U.S. oilfield water-management services and infrastructure, and develops and supplies oilfield chemicals. Its reportable segments are Water Services, Water Infrastructure and Oilfield Chemicals. Results were affected by the COVID-19 pandemic, lower oil demand, and the oil-price shock following OPEC+ production disputes.
Financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $278.3 million | $362.6 million |
| Gross profit / margin | $15.3 million / 5.5% | $46.0 million / 12.7% |
| Operating income (loss) | $(290.8) million | $6.6 million |
| Consolidated net income (loss) | $(291.2) million | $1.4 million |
| Net income (loss) attributable to Select Energy Services, Inc. | $(245.9) million | $1.1 million |
| Class A diluted EPS | $(2.86) | $0.01 |
| Adjusted EBITDA | $23.7 million | $53.4 million |
| Cash from operating activities | $46.7 million | $36.6 million |
| Capital expenditures | $7.1 million | $31.6 million |
Segment revenue: Water Services was $149.5 million, down 32.2%; Water Infrastructure was $57.8 million, up 7.7%; Oilfield Chemicals was $71.0 million, up 6.3%. Other revenue was nil versus $21.6 million, primarily reflecting 2019 divestitures and wind-downs.
Cash flow and liquidity: Investing activities used $5.5 million and financing activities used $6.3 million. Cash increased to $114.1 million from $79.3 million at year-end 2019. At March 31, the company had no revolver borrowings, a $200.6 million borrowing base, $19.8 million of letters of credit and $180.8 million of available capacity. Total liabilities were $211.4 million; total assets were $1.027 billion. The company reported compliance with debt covenants.
Material changes and unusual items
- Revenue fell 23.3% year over year, principally because Water Services revenue declined and the prior-year comparison included subsequently divested operations.
- Water Services costs fell less rapidly than revenue; costs were 86.4% of segment revenue versus 73.9% a year earlier. Water Infrastructure costs were also pressured by lower pricing and a customer bankruptcy-related expense. Oilfield Chemicals margins improved.
- The company recorded $276.0 million of goodwill and trademark impairment, including full impairment of goodwill in Water Services and Water Infrastructure and a $9.1 million trademark impairment. It also recorded $3.2 million of property and equipment impairment. These noncash charges drove the large GAAP loss.
- Adjusted EBITDA declined $29.7 million to $23.7 million. Management cited weaker Water Services gross profit as a principal factor.
- Operating cash flow increased despite the loss, helped by working-capital movements, including a reduction in accounts receivable. The company repurchased 979,391 Class A shares for approximately $6.6 million.
Outlook, risks and contingencies
- Management expected a net loss for full-year 2020 and said the scale and duration of the pandemic’s effects, and the resulting activity and profitability, could not be estimated with reasonable certainty. It anticipated materially lower near-term customer activity and did not expect significant incremental industry capital to support demand for the remainder of 2020.
- Liquidity actions included headcount and salary reductions, yard closures, lower third-party spending and capital expenditures, operational streamlining, excess-equipment sales, and deferral of employer payroll taxes under the CARES Act. Management believed cash, operating cash flow and available revolver capacity would support obligations and covenant compliance for at least 12 months.
- Key risks include prolonged low oil and gas prices, reduced customer capital spending, production shut-ins and storage constraints, customer credit deterioration, pandemic-related operating and supply-chain disruption, and further asset impairments.
- The company disclosed an ongoing investigation involving alleged emissions-control modifications to a limited number of vehicles. It was cooperating with authorities; no charges had been brought as of the filing, and potential penalties could not be estimated. The company did not believe expected fines would be material, but could not assure the outcome.
- Management reported no material off-balance-sheet arrangements and no material change in disclosure controls; controls were deemed effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether subsequent quarterly filings confirm the expected 2020 loss, the severity of customer activity declines and management’s liquidity assumptions.
- Changes in cash, borrowing-base availability, letters of credit, covenant headroom and customer receivable quality; the allowance for credit losses rose to $7.1 million from $5.8 million at year-end.
- Whether additional impairments, restructuring costs or capital-expenditure reductions followed the Q1 write-downs and cost actions.
- Developments in the emissions investigation and any resulting charges, penalties or remediation obligations.
- Comparability of year-over-year results given 2019 divestitures and the September 2019 WCS acquisition; also confirm the registrant’s name and corporate identity used in subsequent filings.