Select Energy Services, Inc. — Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The filing identifies the registrant as Select Energy Services, Inc.; the request metadata uses Select Water Solutions. Financial amounts below are in millions unless otherwise stated.
Business context
The company provides water sourcing, transfer, treatment, containment, flowback and disposal services to U.S. oil and gas operators, alongside accommodations, rentals, wellsite and construction services. Water Solutions is its largest segment. Results reflect a recovering market, higher completion activity and acquisitions, including GRR, acquired in March, and Resource Water, acquired in September.
Financial results and liquidity
- Third-quarter revenue: $153.9 million, up 108.2% year over year. Water Solutions contributed $125.1 million; Accommodations and Rentals $15.6 million; Wellsite Completion and Construction Services $13.2 million.
- Third-quarter gross profit: $19.5 million versus a gross loss of $9.0 million a year earlier; gross margin was approximately 12.7% versus negative 12.1%. Operating income was $2.5 million and net income was $2.6 million. Net income attributable to Select Energy Services, Inc. was $1.2 million; diluted earnings per Class A share were $0.04.
- Nine-month revenue: $388.3 million, up 80.0%. Gross profit was $31.5 million versus a gross loss of $38.2 million; gross margin was approximately 8.1% versus negative 17.7%. Operating loss was $22.0 million and net loss was $20.2 million; the loss attributable to the company was $7.2 million.
- EBITDA and Adjusted EBITDA: Third-quarter EBITDA was $26.6 million and Adjusted EBITDA was $32.4 million. Nine-month figures were $49.8 million and $73.4 million, respectively. These are non-GAAP measures defined by the company.
- Cash flow: Nine-month operating cash flow was negative $4.2 million, compared with positive $8.1 million in 2016, primarily due to higher receivables and working capital. Investing cash outflow was $121.5 million, including $62.2 million for acquisitions and $66.0 million of property and equipment purchases. Financing cash inflow was $128.1 million, largely reflecting the IPO.
- Balance sheet at September 30: Cash was $42.4 million; trade receivables were $148.4 million, up from $75.9 million at December 31, 2016. Current assets were $205.5 million and current liabilities $72.3 million. No revolving-credit borrowings or long-term debt were outstanding. The $100 million revolver had $85.9 million available after $14.1 million of letters of credit. Total liabilities were $98.4 million, including accrued lease obligations.
Changes, outlook and risks
- Revenue growth reflected higher completion activity and rig counts, with the GRR acquisition adding $10.4 million of third-quarter revenue and $21.5 million for the nine months. The company reported no impairment charges in 2017, compared with $198.7 million of goodwill, intangible and property impairment charges in the 2016 nine-month period.
- SG&A increased 83.6% in the quarter, partly from public-company costs and merger-related legal and professional fees. Nine-month SG&A included $12.5 million of phantom-equity and IPO-related compensation. Lease abandonment expense was $0.6 million for the quarter and $2.9 million for the nine months; approximately $20.0 million of lease-related obligations remained, with payments extending through 2027.
- Management stated that operating cash flow and available credit were expected to fund operations for at least the next 12 months. The filing provides no numerical revenue or earnings guidance. It cautions that service demand depends on oil and gas activity, prices and customer spending, and identifies weather, regulation, competition, labor, safety and access to capital as risks.
- Subsequent events: On November 1, 2017, the company completed its merger with Rockwater, issuing approximately 37.3 million shares in aggregate, including equity awards. It also entered a new $300 million secured revolving credit agreement, subject to a borrowing base, and terminated the prior facility. The merger may fail to deliver expected benefits or bring unanticipated costs and liabilities.
- The company reported compliance with its existing credit covenants at September 30 and effective disclosure controls. It reported no material litigation expected to affect its financial position or results.
Important facts for investors to verify
- Whether receivables growth and working-capital use convert into operating cash flow and timely collections.
- Whether reported Adjusted EBITDA reconciles to GAAP results on a comparable basis, considering its add-backs and non-GAAP limitations.
- Final purchase-price allocations and realized performance of GRR and Resource Water, and the costs and benefits of the Rockwater merger.
- Post-merger share count, noncontrolling interests, dilution and the actual borrowing capacity available under the new borrowing-base facility.
- Ongoing lease-abandonment obligations, related-party transactions, and exposure to oilfield activity, commodity-price, regulatory and environmental risks.