Select Energy Services, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. The supplied filing is for Select Energy Services, Inc.; the request metadata names Select Water Solutions. Financial amounts below are in U.S. dollars, generally millions unless noted.
Business context and reporting period
Select provides water-related services to U.S. oil and gas producers, including water sourcing and transfer, containment, treatment, flowback and disposal. It also provides workforce accommodations and rentals, and wellsite completion and construction services. Results reflect a recovery in customer activity and the March 2017 acquisition of Gregory Rockhouse Ranch (GRR). The company completed its IPO in April 2017 and its over-allotment offering in May. Comparisons with 2016 require care: the filing describes a reorganization, and the prior-year results include substantial impairment charges.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $134.4 | $62.9 | $234.4 | $141.8 |
| Gross profit (loss) | $12.3 | $(17.3) | $12.0 | $(29.2) |
| Gross margin | 9.1% | (27.5)% | 5.1% | (20.6)% |
| Operating loss | $(11.9) | $(224.8) | $(24.4) | $(246.4) |
| Net loss | $(10.5) | $(228.2) | $(22.8) | $(254.0) |
| Adjusted EBITDA, non-GAAP | $27.3 | $0.6 | $41.0 | $6.3 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $(24.0) | $11.0 |
Q2 revenue increased 113.7% year over year; six-month revenue increased 65.3%. Water Solutions generated about 80% of Q2 revenue. The filing attributes growth to increased completion activity and rig counts, plus GRR, which contributed $11.1 million of revenue from acquisition through June 30. Adjusted EBITDA is a company-defined non-GAAP measure and includes adjustments such as $12.5 million of phantom equity and IPO-related compensation in 2017.
At June 30, cash was $52.8 million, current assets $191.2 million and current liabilities $55.0 million; working capital was approximately $136.2 million. Total assets were $528.6 million and total liabilities $79.7 million. There was no drawn debt under the $100 million revolving credit facility; $14.1 million of letters of credit left $85.9 million available. The company reported compliance with covenants. Cash rose from $40.0 million at year-end 2016.
For the six months, investing cash outflow was $91.4 million, including $55.5 million for acquisitions and $41.7 million of purchases of property, equipment and intangible assets, partly offset by asset-sale proceeds. Financing cash inflow was $128.2 million, mainly from the IPO. Operating cash outflow of $24.0 million reflected increased receivables and working capital amid revenue growth.
Material changes versus prior comparable period
- All three segments grew in Q2: Water Solutions revenue rose 116.1%, Accommodations and Rentals 154.7%, and Wellsite Completion and Construction Services 70.8%. Revenue growth outpaced costs of revenue, and gross profit returned to positive territory.
- Q2 2016 included $198.7 million of impairment charges, including $137.6 million of goodwill and $60.0 million of property and equipment impairment; there were no impairment charges in 2017. This is a major reason reported losses narrowed and limits comparability.
- Q2 2017 SG&A increased to $23.3 million from $8.2 million, including $12.5 million of phantom equity and IPO-related compensation. Interest expense fell to $0.7 million from $4.1 million following debt repayment.
- GRR was acquired for approximately $56.8 million in March, funded with cash, shares and temporary credit-facility borrowings. The company also completed the $4.0 million DAWS asset acquisition and a $4.2 million cash acquisition of fixed assets from Tex-Star in June.
Outlook, risks, contingencies and unusual items
- Management stated that operating cash flow and available revolver capacity should be sufficient to fund operations for at least the next 12 months. No specific revenue or earnings guidance was provided.
- Management identified oil and gas prices, customer capital spending and service demand as key uncertainties. Other cited risks include competition, labor availability, regulation and permitting, safety, weather, and access to capital.
- On July 18, 2017, the company agreed to a stock-for-stock merger with Rockwater Energy Solutions, expected to close in Q3 2017 subject to customary conditions, including regulatory approval. Select expected to issue approximately 38 million shares; existing Select shareholders were expected to own about 64.4% of the combined company. A committed senior secured facility of up to $150 million was intended, among other purposes, to refinance debt and fund transaction costs; additional increases were conditional on lender commitments.
- Facility exits resulted in $2.3 million of six-month lease abandonment costs. Remaining obligations for exited facilities were approximately $20.2 million, with non-cancelable lease payments extending through 2027.
- The company reported ordinary-course lawsuits and claims, including environmental and employee matters, but did not expect them to have a material adverse effect. It also reported related-party purchases and sales and tax receivable agreements providing certain holders 85% of specified realized or deemed tax savings.
Important facts for investors to verify
- Whether growth and positive gross profit persist after separating underlying activity gains from GRR acquisition contributions and one-time compensation items.
- Receivables collection and operating cash conversion, given the $48.0 million six-month cash-flow use from accounts receivable and negative operating cash flow.
- Merger closing status, financing terms, final share issuance, integration costs and expected benefits; the merger was pending at the filing date.
- Credit-facility covenant headroom and restrictions, including the disclosed limits on capital spending and cash balances, as well as available borrowing capacity after letters of credit.
- Final GRR purchase accounting, remaining facility lease commitments, and potential environmental, regulatory and other contingencies.