Select Energy Services, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The filing identifies the registrant as Select Energy Services, Inc. (NYSE: WTTR). The company provides water-management services and infrastructure, and oilfield chemicals to the U.S. oil and gas industry. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $101.2 | $329.0 | $471.8 | $1,015.5 |
| Gross profit (loss) | $(16.9) | $41.0 | $(25.3) | $126.9 |
| Gross margin | (16.7%) | 12.5% | (5.4%) | 12.5% |
| Operating income (loss) | $(34.2) | $12.5 | $(372.8) | $30.3 |
| Consolidated net income (loss) | $(36.3) | $7.2 | $(380.5) | $16.6 |
| Net income (loss) attributable to Select Energy Services, Inc. | $(30.5) | $5.4 | $(320.7) | $12.7 |
| Adjusted EBITDA | $(4.7) | $48.9 | $10.7 | $153.9 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $119.8 | $142.2 |
Class A basic and diluted loss per share was $0.36 for Q3 and $3.76 for the nine-month period, versus earnings per share of $0.07 and $0.16, respectively, in 2019.
- Revenue by segment, Q3: Water Services $54.5 million, Water Infrastructure $16.2 million, and Oilfield Chemicals $30.6 million. Versus Q3 2019, these declined 72.3%, 74.7%, and 55.0%, respectively.
- Revenue by segment, nine months: Water Services $259.8 million, Water Infrastructure $89.2 million, and Oilfield Chemicals $122.7 million. These declined 58.0%, 47.3%, and 38.0%, respectively. The prior-year comparison also includes $29.1 million of revenue from business lines divested or wound down in 2019.
- Cash and liquidity at September 30: Cash and equivalents were $185.4 million, versus $79.3 million at year-end 2019. Current assets were $332.4 million and current liabilities $78.3 million.
- Debt and borrowing capacity: No borrowings were outstanding under the revolving credit facility. The borrowing base was $63.6 million, with $15.6 million of letters of credit and $48.0 million of available capacity. The borrowing base was $214.6 million at year-end 2019, primarily reflecting lower receivables. The company reported compliance with debt covenants.
- Cash flows and investment: Nine-month operating cash flow was $119.8 million; investing cash outflow was $3.0 million, including $19.1 million of property and equipment purchases; financing cash outflow was $10.6 million. Cash increased by $106.2 million during the period. Receivables collections contributed materially to operating cash flow.
Material changes and unusual items
- Revenue fell 69.2% in Q3 and 53.5% for the nine-month period versus 2019, driven by lower customer activity and pricing amid COVID-19, weaker oil and gas demand, and reduced drilling and completions. Cost reductions did not keep pace with the activity decline, producing negative gross margins.
- Nine-month results included $276.0 million of goodwill and trademark impairment, including full impairment of goodwill and a $9.1 million partial trademark impairment, plus $7.9 million of property and equipment impairment. These charges contributed substantially to the reported loss; goodwill was zero at September 30, 2020.
- The company recorded nine-month severance of $7.2 million, yard-closure costs of $3.0 million, and lease-abandonment costs of $2.5 million. It also reported $10.7 million of nine-month Adjusted EBITDA, a non-GAAP measure; the filing cautions that it is not a substitute for GAAP results.
- Trade receivables, net, declined to $92.1 million from $267.6 million at year-end 2019. The allowance for credit losses increased to $9.7 million from $5.8 million; the filing notes customer-credit risks and uncertainty associated with the pandemic.
- The company deferred $3.8 million of employer payroll taxes under the CARES Act, repayable half by December 31, 2021 and half by December 31, 2022. It suspended the company match to its 401(k) plan during the nine-month period.
- A customer settled $1.6 million of receivables with restricted shares, warrants, and other securities. These were carried at $1.8 million at quarter-end, with a $0.2 million unrealized gain; the company expected registration in Q4 2020 or Q1 2021 before sale.
Outlook, risks, and contingencies
Management expected a net loss for full-year 2020 and said it could not reliably forecast the timing or extent of recovery. It observed some activity recovery in Q3 as average WTI rose from $27.96 per barrel in Q2 to $40.89 in Q3, but did not expect an immediate return to 2019 activity levels. Management stated that cash, operating cash flow, available credit, and cost actions were expected to support liquidity and covenant compliance for at least 12 months.
- Key risks include the duration and effects of COVID-19, oil and gas prices and supply decisions by OPEC+, customer capital-spending cuts or insolvency, competition, access to capital, and regulatory and environmental requirements.
- The company is cooperating with a U.S. investigation into alleged vehicle emissions-control modifications at certain acquired operations. It had accrued $4.3 million before Q3 and paid $1.2 million during Q3. Management did not expect the ultimate resolution to be material, but the outcome remains uncertain.
- Management reported no material off-balance-sheet arrangements and no pending legal matter it expected to have a material adverse effect; ordinary-course claims and investigations remain possible.
Important facts for investors to verify
- Whether customer activity, pricing, and revenue recover, particularly in Water Services and Water Infrastructure, and whether margins improve as costs adjust.
- Whether the company sustains operating cash generation and liquidity as the borrowing base remains tied to receivables; verify updated cash, letters of credit, availability, and covenant compliance.
- Whether further asset impairments, customer credit losses, or restructuring and closure costs arise.
- The progress and final cost of the emissions investigation, and the timing and collectability of the customer securities received for receivables.
- How much of nine-month operating cash flow reflects sustainable operations versus working-capital movements, including receivables collections.