Select Energy Services, Inc. (NYSE: WTTR) — Q1 2022 10-Q
Reporting period: Three months ended March 31, 2022, compared with the three months ended March 31, 2021. The filing describes Select as a U.S. provider of oilfield water-management and chemical solutions. Results include substantial acquisition activity; the company cautions that the quarter may not indicate full-year results.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $294.8 million | $143.7 million |
| Gross profit (loss) | $24.7 million | $(4.4) million |
| Gross margin | 8.4% | (3.1)% |
| Operating loss | $(4.3) million | $(25.0) million |
| Net income (loss) | $8.0 million | $(27.4) million |
| Net income (loss) attributable to Select | $6.8 million | $(23.1) million |
| Adjusted EBITDA (non-GAAP) | $32.2 million | $0.9 million |
| Cash used in operating activities | $(18.6) million | $(3.9) million |
- Revenue by segment: Water Services $163.6 million, Water Infrastructure $58.6 million, and Oilfield Chemicals $72.6 million.
- Cash and cash equivalents were $24.8 million, with $2.6 million of restricted cash, at March 31. Total liabilities were $288.5 million; total equity was $723.4 million.
- No bank debt was outstanding at quarter-end. The revolving facility had a $204.1 million borrowing base, $15.6 million of letters of credit, and $188.5 million of unused availability. The company reported compliance with debt covenants.
- Cash, cash equivalents and restricted cash fell $58.4 million during the quarter to $27.4 million. Financing cash use was $39.8 million, including $18.8 million of long-term debt repayment and $18.9 million of share repurchases. Investing cash use was $0.1 million.
Material changes versus the prior-year quarter
- Revenue more than doubled, up 105.1%, with growth in all three segments. Management attributed the increase chiefly to stronger demand and incremental contributions from acquisitions completed since 2021.
- Gross profit improved by $29.1 million, and the operating loss narrowed by $20.8 million. Higher activity improved Water Services and Chemicals cost ratios; Water Infrastructure’s cost ratio worsened, partly due to a lower relative contribution from high-margin pipeline revenue.
- Net income included an $11.4 million bargain-purchase gain, primarily related to the Nuverra acquisition. Adjusted EBITDA excludes this gain; it increased to $32.2 million from $0.9 million.
- Q1 2021 was affected by severe winter weather, estimated by management to have reduced revenue by $9 million to $12 million, as well as depressed activity following the onset of COVID-19.
Outlook, commentary, risks and unusual items
- No numerical revenue, earnings or cash-flow guidance is provided. Management said it expected available cash, operating cash flow and revolver capacity to be sufficient for at least the next 12 months, while noting uncertainty in forecasting activity and profitability.
- Management identified integration of five acquisitions completed between July 2021 and February 2022 as a key focus for the rest of 2022. Planned opportunities include market-share gains, regional expansion, pricing, operating synergies and sales of excess assets.
- The February 2022 Nuverra acquisition was paid for with 4.2 million Class A shares and expanded water logistics and infrastructure, including a 60-mile pipeline network. Its preliminary purchase-price allocation generated a bargain-purchase gain; valuation work remained unfinished. Nuverra debt of $18.8 million was repaid after closing.
- Quarter-end cash-flow pressure included $46.6 million of cash use from the increase in accounts receivable, alongside acquisition-related liability settlements. Management cited timing of receivable collections and acquisition integration.
- Management reported higher commodity prices: average WTI was $95.18 per barrel versus $58.09 a year earlier, and average Henry Hub natural gas was $4.66 versus $3.56. It said these levels supported customer drilling and completion programs, but warned that the Russia-Ukraine war, sanctions, commodity volatility, customer spending discipline and consolidation make the outlook uncertain.
- Other risks include COVID-19 effects, fuel and raw-material costs, labor availability, environmental and water-related regulation, permitting, customer financial health, supply constraints, competition and the pace of drilling and completions. Faster completion efficiencies may reduce wellsite days and revenue for day-rate services.
- Unusual items include $3.6 million of acquisition-related transaction costs, the bargain-purchase gain, and $18.9 million of share repurchases. The company repurchased 2.66 million shares at a weighted-average price of $7.34; shares issued for the Nuverra acquisition partly offset the reduction.
- The filing reports ordinary-course lawsuits and claims, but does not expect them to have a material adverse effect. No material off-balance-sheet arrangements or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of revenue and Adjusted EBITDA growth reflects organic activity, pricing and margins versus acquired operations—and whether acquisition synergies materialize.
- Whether operating cash flow improves as receivables are collected, given the quarter’s cash use and receivables increase.
- The final Nuverra purchase-price allocation and bargain-purchase gain, which were preliminary, and the status of integration and assumed obligations.
- Actual borrowing-base availability, letters of credit, liquidity and covenant headroom; reported availability had changed by May 2, 2022.
- Whether segment margins, especially Water Infrastructure, improve and whether fuel, labor and raw-material costs can be passed through to customers.
- The sustainability-linked facility’s terms and the company’s execution against its water-recycling and employee-safety targets.