Select Energy Services, Inc. (WTTR) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019, compared with Q1 2018. The filing identifies the registrant as Select Energy Services, Inc.; this differs from the company name in the request metadata. Amounts below are in U.S. dollars and generally in millions.
Business context and financial performance
The company provides water-management services and infrastructure, and manufactures oilfield chemicals for the U.S. oil and gas industry. In Q1 2019 it reorganized reporting into Water Services, Water Infrastructure and Oilfield Chemicals; remaining businesses being sold or wound down are reported as Other. Prior-period segment information was restated.
- Revenue: $362.6, down 3.7% from $376.4. Water Services generated $220.6 (+1.1%); Water Infrastructure $53.6 (-0.8%); Oilfield Chemicals $66.8 (+5.0%); and Other $21.6 (-46.6%).
- Profit and margins: Gross profit was $46.0, down 4.1%; gross margin remained 12.7%. Operating income fell 64.3% to $6.6. Net income was $1.4 versus $16.1, and net income attributable to Select was $1.1 versus $10.1. Class A basic and diluted EPS were $0.01 versus $0.15.
- Non-GAAP measures: EBITDA was $35.2 versus $49.2; Adjusted EBITDA was $53.4 versus $59.6. Adjusted EBITDA is a company-defined non-GAAP measure.
- Cash flow: Operating cash flow was $36.6 versus $35.2. Investing cash outflow was $16.7, including $36.5 of property and equipment purchases and $16.0 of divestiture proceeds. Financing cash outflow was $21.6, including $25.0 of debt repayments and $5.0 of revolver borrowing. Cash declined $1.6 to $15.7.
- Liquidity and debt: Current assets were $433.9 and current liabilities $193.9. Debt under the revolving credit facility was $25.0 at quarter-end; unused borrowing capacity was $218.5, after $20.8 of letters of credit. The company reported covenant compliance. Total assets were $1,412.0.
- Leases: Adoption of the new lease standard brought $72.3 of operating right-of-use assets and $92.6 of operating lease liabilities onto the balance sheet. These obligations are distinct from reported debt.
Material changes and unusual items
- Revenue and costs in Other declined following sales and wind-downs of portions of Affirm, Canadian operations and the sand-hauling business. The company sold its Affirm crane operations for $11.2 and a portion of its Canadian operations for a base price of $5.8; the Canadian transaction produced a $4.7 loss. The Affirm crane sale reduced goodwill by $2.6.
- Operating expenses included $4.4 of Affirm goodwill impairment, $0.5 of property and equipment impairment, and $1.1 of lease abandonment costs. Losses on sales of property and equipment were $4.5. SG&A increased 26.1% to $32.4, driven mainly by incentive-plan and severance costs.
- Water Services and Oilfield Chemicals gross profit improved, including lower Water Services third-party costs and savings from the Midland friction-reducer plant. Water Infrastructure margin weakened, with costs of revenue rising to 77.3% of segment revenue from 74.2%.
Outlook, risks and contingencies
No quantified full-year revenue, earnings or capital-spending guidance is provided in the supplied filing text. Management said customer budgets for 2019 may constrain completion activity despite improved oil prices, while current prices and production profiles could support future investment. Management believes operating cash flow and revolver availability will be sufficient for at least the next 12 months, but gives no assurance.
- Results are exposed to oil and gas prices, customer capital spending and activity, competition, labor availability, regional infrastructure constraints, technology changes, regulation and environmental requirements.
- Former Rockwater subsidiaries remain subject to a U.S. investigation concerning alleged vehicle emissions-control modifications. The company is cooperating; charges had not been brought, and it could not estimate potential fines or penalties. The filing notes that similar cases have involved fines of up to $7,200 per altered vehicle.
- Ordinary-course claims are not expected by management to have a material adverse effect, although outcomes cannot be assured.
- Management reported disclosure controls effective at March 31, 2019. Previously identified material weaknesses in acquisition purchase-price accounting and fixed-asset reconciliations were being addressed with new controls; operating-effectiveness testing was still underway.
Key investor verification points
- Confirm the scale, timing and financial impact of the remaining Affirm, Canadian and sand-hauling exits, including final sale proceeds and any further impairments or costs.
- Track receivables, operating cash conversion, capital spending and revolver availability; receivables were $349.3 including related-party balances, against $15.7 of cash.
- Assess whether Water Infrastructure margins recover and whether Midland plant efficiencies support continued Oilfield Chemicals growth.
- Seek updates on the emissions investigation, potential liability and remediation, and on testing of the controls intended to remediate the material weaknesses.
- Evaluate Adjusted EBITDA alongside GAAP earnings and cash flow, noting the quarter’s substantial adjustments for impairments, asset-sale losses, severance and non-cash compensation.