Select Energy Services, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports fourth-quarter results. The registrant named in the filing is Select Energy Services, Inc. (NYSE: WTTR). It provides U.S. oilfield water-management services and infrastructure, and oilfield chemicals.
Financial performance
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $1,291.6 million | $1,528.9 million | Down 15.5% |
| Gross profit / margin | $148.7 million / 11.5% | $198.5 million / 13.0% | Margin down 1.5 percentage points |
| Operating income | $23.1 million | $61.7 million | Down 62.6% |
| Net income | $4.1 million | $54.3 million | Down 92.4% |
| Net income attributable to Select Energy Services, Inc. | $2.8 million | $36.5 million | |
| Operating cash flow | $203.9 million | $232.4 million | Down $28.5 million |
| Capital expenditures | $110.1 million | $165.4 million | Down $55.2 million |
| Adjusted EBITDA (non-GAAP) | $182.7 million | $257.6 million | Down 29.1% |
Fourth-quarter 2019 revenue was $276.1 million, versus $362.3 million in Q4 2018. The company reported a $12.5 million quarterly net loss, compared with an $18.1 million loss a year earlier.
At December 31, cash and cash equivalents were $79.3 million, with no outstanding bank borrowings and $194.7 million of available revolver capacity after letters of credit. The $300 million revolving facility matures November 1, 2022; the company reported covenant compliance. Total assets were $1.35 billion and total liabilities were $234.8 million. Current assets were $415.6 million and current liabilities were $151.9 million.
Business mix and changes
- Water Services generated $772.3 million, down 13.9%, mainly from lower water-transfer, hauling, flowback and well-testing activity and pricing pressure.
- Water Infrastructure generated $221.6 million, down 3.7%; weaker Bakken activity offset growth from the New Mexico pipeline system.
- Oilfield Chemicals generated $268.6 million, up 3.4%, including three months of WCS acquisition revenue and improved chemical margins.
- “Other” revenue fell to $29.1 million from $142.2 million as Affirm, Canadian operations and sand hauling were sold or wound down. The company does not expect regular recurring revenue from these discontinued activities.
Overall revenue declined partly because of these divestitures, as well as lower activity and pricing. Water Services cost reductions did not fully offset pricing pressure; its cost of revenue rose to 77.5% of segment revenue from 76.0%. Water Infrastructure costs rose to 75.3% of revenue from 69.6%, reflecting a lower contribution from the higher-margin Bakken pipeline system. Chemicals costs improved to 85.8% of revenue from 89.9%, aided by Midland manufacturing freight savings, inventory management and a higher mix of friction reducers.
Outlook, risks and unusual items
- Management expected customers to reduce 2020 capital budgets relative to 2019, citing lower commodity prices, investor pressure for capital discipline and continued operational efficiencies. The filing provides no quantified company revenue or earnings guidance.
- 2019 average oil and natural-gas prices and U.S. rig count declined, while customer spending and service pricing weakened, particularly in the fourth quarter. Management emphasized cost control, automation, water reuse, chemicals and longer-lived infrastructure as strategic priorities.
- The company invested approximately $40 million in its Northern Delaware Basin pipeline project, substantially operational at year-end. A five-year take-or-pay contract provides for delivery of 75 million barrels in total. It acquired WCS for $10 million and received $30.1 million from divestitures and asset sales.
- Significant risks include oil-and-gas capital-spending cycles, commodity-price and pricing volatility, customer concentration by region, water access and permitting, disposal-well restrictions or induced seismicity, environmental regulation, chemical supply and raw-material costs, safety incidents, and competition. The Permian accounted for approximately 47% of 2019 revenue.
- An investigation concerns alleged emissions-control alterations on approximately 60 vehicles, less than 5% of the fleet when the issue was identified. No charges had been brought; discussions with authorities were ongoing and the company could not estimate potential penalties.
- 2019 included $4.4 million of goodwill impairment and $3.7 million of property-and-equipment impairment, plus $11.6 million of net losses on property sales and divestitures. Adjusted EBITDA includes substantial adjustments, including $21.7 million of non-cash losses on asset sales and $15.5 million of non-cash compensation.
- The company reported that prior material weaknesses in fixed-asset controls were remediated in 2019; management and its auditor concluded internal control over financial reporting was effective at year-end. The auditor issued an unqualified opinion on the financial statements.
Most important facts to verify
- Whether the 2020 budget reductions and continued pricing pressure translated into weaker subsequent revenue, margins and cash flow.
- How much of 2019 operating cash flow and Adjusted EBITDA is sustainable, including the impact of working-capital movements and the non-GAAP adjustments.
- Actual utilization, returns and contract performance of the New Mexico pipeline investment and other infrastructure assets.
- The outcome and financial consequences, if any, of the emissions investigation, and the status of disposal permits and water access.
- Current revolver availability, lease obligations and potential Tax Receivable Agreement exposure; the filing estimated $58.1 million of termination payments if those agreements had ended on December 31, 2019.