Select Energy Services, Inc. (announced rebrand to Select Water Solutions, Inc.) — Q1 2023 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022. The company provides U.S. oilfield water-management and chemical solutions through Water Services, Water Infrastructure and Oilfield Chemicals. It announced plans to rebrand during the first half of 2023 while retaining NYSE ticker WTTR.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $416.6 million | $294.8 million |
| Gross profit / gross margin | $59.7 million / 14.3% | $24.7 million / 8.4% |
| Operating income (loss) | $12.0 million | $(4.3) million |
| Net income | $13.7 million | $8.0 million |
| Net income attributable to Select Energy Services, Inc. | $12.3 million | $6.8 million |
| Adjusted EBITDA (non-GAAP) | $67.2 million | $32.2 million |
| Cash from operating activities | $(18.0) million | $(18.6) million |
Revenue rose 41.3%. Water Services revenue increased 39.7% to $228.6 million, Water Infrastructure rose 73.4% to $101.5 million, and Oilfield Chemicals increased 19.1% to $86.4 million. Management attributed growth to stronger demand and pricing; Water Services and Water Infrastructure also benefited from acquisitions. Gross margin improved across all three segments, reflecting pricing, operating scale, a higher share of infrastructure disposal revenue and improved chemicals mix.
Q1 2023 diluted and basic earnings per Class A share were $0.12, versus $0.07 a year earlier. Adjusted EBITDA is a non-GAAP measure; the filing cautions it is not a substitute for GAAP results.
Liquidity, debt and cash flows
- At March 31, cash and cash equivalents were $6.0 million; current assets were $579.9 million and current liabilities $237.3 million.
- Revolver borrowings were $75.5 million, at an 8.75% interest rate; reported available borrowing capacity was $159.2 million. Letters of credit totaled $22.6 million. The company was in compliance with debt covenants.
- As of May 1, borrowings had increased to $104.0 million and available capacity was $134.0 million.
- Operating cash use was $18.0 million, primarily reflecting increased working capital, including the timing of receivable billing and collection. Investing cash use was $30.6 million, including $27.9 million of property and equipment purchases and $9.4 million for asset acquisitions, partly offset by asset-sale proceeds.
- Financing provided $47.3 million, including net revolver borrowing; the company also paid $6.2 million in dividends and repurchased $10.9 million of stock. Cash decreased $1.3 million during the quarter.
Management said available cash, expected operating cash flow and revolver capacity should be sufficient to meet obligations and maintain covenant compliance for at least the next 12 months, while noting that capital availability and market conditions are uncertain.
Changes, unusual items and outlook
- Q1 2023 included an $11.1 million trademark abandonment charge in Oilfield Chemicals following the rebranding announcement, plus $0.1 million of impairment in Water Services. The prior-year quarter included an $11.4 million bargain-purchase gain, which did not recur.
- The company acquired certain Midland Basin assets for $9.4 million during the quarter. It said recent acquisitions expanded its geographic reach and water-recycling capacity; purchase accounting for the 2022 Breakwater acquisition remained preliminary.
- Management reported average WTI crude oil of $75.93 per barrel in Q1 2023 versus $95.18 a year earlier, and Henry Hub natural gas of $2.65 versus $4.66. It viewed oil prices as supportive of customer activity, but said sustained low gas prices could affect near-term activity. It did not provide specific revenue or earnings guidance.
- Key risks include commodity-price and customer-spending volatility; interest-rate and banking-market disruption; customer credit deterioration; competition and consolidation; labor, equipment and supply constraints; and regulation affecting oil and gas, water access, wastewater disposal and emissions. Faster completion efficiency may also reduce activity days and revenue for day-rate services.
- The company reported ordinary-course lawsuits and claims, including environmental and employee-related matters, but did not expect them to have a material adverse effect. It reported no material off-balance-sheet arrangements. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether revenue and margin gains persist after acquisition contributions and the quarter’s pricing and activity conditions.
- Receivable collections, working-capital needs and the resulting effect on operating cash flow.
- Revolver borrowings, borrowing-base availability, interest costs and covenant headroom; borrowings increased after quarter-end.
- The final purchase accounting and realized operating benefits from acquisitions, and the rebranding’s costs and effects.
- Future capital spending, dividends and share repurchases, which remain subject to liquidity needs, facility restrictions and board decisions.