Select Energy Services, Inc. — Form 10-Q summary
Reporting period: Three and nine months ended September 30, 2019. The filing identifies the registrant as Select Energy Services, Inc. (NYSE: WTTR), a U.S. oilfield water-management and chemicals provider. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $329.0 million | $397.0 million | $1,015.5 million | $1,166.6 million |
| Gross profit / margin | $41.0 million / 12.5% | $59.4 million / 15.0% | $126.9 million / 12.5% | $164.1 million / 14.1% |
| Operating income | $12.5 million | $32.3 million | $30.3 million | $75.7 million |
| Net income | $7.2 million | $31.3 million | $16.6 million | $72.4 million |
| Net income attributable to Select Energy Services, Inc. | $5.4 million | $23.0 million | $12.7 million | $50.0 million |
| Class A diluted EPS | $0.07 | $0.29 | $0.16 | $0.69 |
| Adjusted EBITDA (non-GAAP) | $48.9 million | $73.7 million | $153.9 million | $201.5 million |
Cash flow and balance sheet: Nine-month operating cash flow was $142.2 million, versus $124.6 million a year earlier. Investing cash outflow was $57.2 million, including $86.4 million of property and equipment purchases, partly offset by divestiture proceeds. Financing cash outflow was $59.4 million, including $50.0 million of net debt repayments and $13.4 million of share repurchases. Cash increased by $25.8 million to $43.0 million.
At September 30, 2019, current assets were $425.1 million and current liabilities were $165.9 million. The company had no bank borrowings, $19.9 million of letters of credit and $208.5 million of available revolver capacity. The $300 million revolving facility had a $228.4 million borrowing base; the company reported compliance with its debt covenants. Total liabilities were $250.7 million, including operating lease liabilities of $92.2 million.
Material changes versus the prior comparable period
- Q3 revenue fell 17.1% year over year; nine-month revenue fell 13.0%. Lower activity and pricing in Water Services and reduced contribution from Water Infrastructure were compounded by the sale or wind-down of Affirm, sand hauling and Canadian operations.
- Water Services revenue declined 15.7% in Q3 and 9.7% for the nine-month period. Water Infrastructure revenue declined 2.9% and 3.6%, respectively. Oilfield Chemicals revenue grew 6.2% in Q3 and 2.8% for nine months, supported by friction-reducer sales.
- Gross margin declined to 12.5% from 15.0% in Q3 and to 12.5% from 14.1% for nine months. Water Infrastructure costs rose relative to revenue; Chemicals margins improved with freight savings and a stronger product mix.
- Nine-month SG&A increased 12.0% to $87.0 million, reflecting divestiture-related costs and higher equity compensation. Nine-month net income was also affected by $4.4 million of goodwill impairment and losses on divestitures and asset sales.
- The company completed the $10.4 million acquisition of Well Chemical Services (WCS) on September 30, expanding water-treatment and chemical services. The company also repurchased approximately 1.5 million Class A shares during the first nine months for $13.4 million.
Outlook, commentary, risks and unusual items
Management issued no specific numerical guidance. It said weaker oil and gas prices, customer focus on free cash flow, and the likely exhaustion of annual customer budgets could constrain activity through the remainder of 2019; customer capital spending could remain constrained in 2020. Management sees longer-term opportunities in produced-water treatment and reuse, water infrastructure, and integrated water and chemical services. It emphasized disciplined investment, positive free cash flow and balance-sheet strength.
Key exposures include oil and gas prices and customer spending, pricing pressure, completion-efficiency gains that may reduce time on wellsites, regional activity and infrastructure constraints, regulatory and environmental requirements, labor availability, competition, and access to capital. The filing also describes a continuing U.S. investigation concerning emissions-control modifications on company vehicles acquired with Rockwater. The company was cooperating; no charges had been brought as of the filing, and potential penalties could not be estimated. The filing notes that EPA fines in similar cases have reached $7,200 per altered vehicle.
Other notable items include the adoption of the new lease standard, which added $73.1 million of right-of-use assets and $92.2 million of operating lease liabilities; $4.4 million of Affirm goodwill impairment; and divestiture-related asset losses and transaction costs. Management said disclosure controls were effective at September 30, 2019. Previously identified internal-control material weaknesses had remediation controls implemented, whose operating effectiveness was still being tested.
Important facts for investors to verify
- Whether lower activity and pricing persist, and how they affect Water Services and Water Infrastructure margins and cash generation.
- The final purchase accounting and operating contribution from WCS, acquired on September 30, 2019.
- Available borrowing capacity and borrowing-base changes under the revolver, alongside ongoing lease obligations and capital spending needs.
- The eventual outcome and possible financial consequences of the emissions investigation and other ordinary-course claims.
- Whether the newly implemented controls fully remediate the previously reported material weaknesses.
- How much of the reported year-over-year decline reflects divestitures and wind-downs versus underlying performance of continuing operations.