Select Energy Services, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2018. The filing identifies the registrant as Select Energy Services, Inc. The company provides water-management, oilfield chemical, and wellsite services to the North American oil and gas industry.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $397.0 million | $153.9 million | $1,166.6 million | $388.3 million |
| Gross profit | $59.4 million | $19.5 million | $164.1 million | $31.5 million |
| Gross margin | 15.0% | 12.7% | 14.1% | 8.1% |
| Net income (loss) | $31.3 million | $2.6 million | $72.4 million | $(20.2) million |
| Net income (loss) attributable to Select Energy Services, Inc. | $23.0 million | $1.2 million | $50.0 million | $(7.2) million |
| Adjusted EBITDA (non-GAAP) | $73.7 million | $32.4 million | $201.5 million | $73.4 million |
- Operating cash flow was $124.6 million for the nine months, versus cash use of $4.2 million a year earlier. Investing activities used $102.1 million, including $109.5 million of cash capital expenditures. Financing activities used $12.2 million. Cash increased by $10.3 million to $13.1 million.
- At September 30, cash was $13.1 million, current assets $508.0 million, and current liabilities $202.4 million. Trade receivables were $422.4 million.
- Long-term debt was $65.0 million, down from $75.0 million at year-end 2017. The company reported $205.0 million of available borrowing capacity at September 30 and compliance with debt covenants. The revolving facility matures November 2022 and is secured by substantially all domestic personal property assets.
Changes and business context
- Revenue growth reflects stronger activity and the addition of Rockwater, acquired November 1, 2017. Oilfield Chemicals contributed $64.0 million of Q3 revenue and $192.4 million for the nine months; it had no reported revenue in the comparable 2017 periods. Thus, year-over-year comparisons are materially affected by the acquisition.
- Water Solutions generated 70.9% of Q3 revenue; Oilfield Chemicals 16.1%; Wellsite Services 13.0%. Management cited higher well-completion activity, increased utilization, and the acquired operations as key growth drivers.
- Gross margin improved, partly because of higher asset utilization and changes in estimated useful lives and salvage values. Those accounting estimate changes reduced depreciation and increased nine-month net income by $9.9 million and earnings per share by $0.14, according to the filing.
- The company invested in growth: property and equipment purchases were $109.5 million in cash during the nine months. Debt declined by $10.0 million from year-end.
Outlook, risks, and unusual items
- No quantified financial guidance was provided. Management said completion activity was slowing entering Q4 as some operators moved ahead of budgets, expected the slowdown to be short-lived, and anticipated higher capital budgets and activity in 2019 if oil prices remained supportive.
- Management identified potential Permian pipeline-capacity constraints, labor and cost inflation, and volatility in oil and gas prices and customer spending as relevant business factors. Other risks include competition, customer insourcing, permitting, environmental and water regulations, equipment availability, weather, and the ability to meet credit-agreement requirements.
- Q3 included $2.6 million of Rockwater merger-related transaction costs. Nine-month unusual charges included $2.3 million of property impairment, $2.0 million of investment impairment, and $4.1 million of lease-abandonment costs. Remaining abandoned-facility obligations were $21.1 million, with lease payments extending through 2027.
- The company reported an ongoing U.S. investigation concerning alleged alteration of emissions-control systems on vehicles at acquired Rockwater operations. It said approximately 4% of its fleet at the time was affected, was cooperating with authorities, and could not estimate potential fines or penalties. No charges had been brought against the company as of the filing.
- Other noted exposures include self-insured workers’ compensation, general and vehicle liability claims, and variable-rate debt. Management said operating cash flow and available credit were expected to fund operations for at least the next 12 months.
Investor verification priorities
- Separate acquisition-driven growth from organic trends, particularly for Rockwater’s chemicals and other operations.
- Check receivables collection and working-capital requirements against the company’s low cash balance and revolving borrowing-base availability.
- Assess whether margin and earnings improvements persist after accounting for the $9.9 million year-to-date benefit from depreciation-estimate changes and the non-GAAP adjustments in Adjusted EBITDA.
- Monitor capital spending, utilization, labor and fuel costs, and management’s expected Q4 slowdown and 2019 activity recovery.
- Follow developments in the emissions-control investigation, potential penalties, and the $21.1 million of abandoned-lease obligations.