Select Energy Services, Inc. (NYSE: WTTR) — Q2 2020 Form 10-Q
Business context and reporting period
The filing covers the quarter and six months ended June 30, 2020. The company provides water-management services and infrastructure, and oilfield chemicals to the U.S. oil and gas industry. Its three reportable segments are Water Services, Water Infrastructure, and Oilfield Chemicals.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 |
|---|---|---|
| Revenue | $92.2 million | $323.9 million |
| Gross profit (loss) | $(23.7) million; margin (25.7)% | $39.9 million; margin 12.3% |
| Operating income (loss) | $(47.8) million | $11.2 million |
| Net income (loss), consolidated | $(53.0) million | $8.1 million |
| Net income (loss) attributable to Select | $(44.3) million; $(0.52) per Class A share | $6.2 million; $0.08 per share |
| Adjusted EBITDA (non-GAAP) | $(8.3) million | $51.6 million |
For the six months, revenue was $370.5 million, down 46.0% year over year; consolidated net loss was $344.3 million, including $276.0 million of goodwill and trademark impairment. Adjusted EBITDA was $15.3 million versus $105.0 million.
Q2 revenue by segment was $55.8 million for Water Services, $15.3 million for Water Infrastructure, and $21.1 million for Oilfield Chemicals. Each declined sharply year over year, with the company citing reduced customer activity and lower pricing.
Six-month operating cash flow was $102.7 million versus $74.7 million, supported substantially by a $160.2 million accounts-receivable cash inflow. Investing cash use was $5.2 million, including $16.5 million of property and equipment purchases. Cash and cash equivalents were $166.4 million at June 30, compared with $79.3 million at December 31, 2019.
Total assets were $911.3 million, down from $1.35 billion at year-end, principally reflecting impairment and asset reductions. The company had no bank borrowings. Its revolving credit facility borrowing base was $111.1 million, with $95.5 million available after letters of credit; the borrowing base had fallen from $214.6 million at year-end. As of August 3, available capacity had declined to $59.9 million, with no borrowings. The company reported compliance with debt covenants at June 30. Lease liabilities remain on the balance sheet.
Material changes versus the prior comparable period
- Q2 revenue fell 71.5% year over year, reflecting the COVID-19-driven drop in oil demand, lower oil prices, reduced drilling and completions, and lower service pricing. The six-month decline also reflects 2019 divestitures and wind-downs.
- Gross margin turned negative as revenue fell faster than the company could reduce operating costs; segment costs as a percentage of revenue increased across all three segments.
- First-quarter impairment charges eliminated all $266.9 million of goodwill and reduced the Rockwater trademark by $9.1 million. The company also recorded $4.7 million of Q2 property and equipment impairment and abandonment charges.
- Cost actions reduced Q2 selling, general and administrative expense to $17.7 million from $27.3 million. Actions included headcount and compensation reductions, facility and yard closures, and lower capital spending.
Outlook, risks, contingencies, and unusual items
Management expected a net loss for full-year 2020 and said it did not anticipate a rapid return to prior-year activity levels. It did not provide numerical revenue or earnings guidance. Management said cash, operating cash flow, and available revolver capacity were expected to fund obligations for at least 12 months, while cautioning that the duration and effects of the pandemic were uncertain.
Key risks include continued COVID-19 disruption, oil and gas price and demand volatility, customer spending cuts or insolvencies, and a shrinking borrowing base tied primarily to receivables. Management warned further impairment could occur. It also cited operational and supply-chain challenges, regulatory and environmental exposure, and difficulty forecasting activity and profitability.
The company accrued $4.3 million toward resolution of an investigation concerning alleged emissions-control alterations on a small portion of its vehicle fleet; no charges had been brought as of the filing. Management did not expect the matter’s resolution to be material. The company deferred $2.2 million of employer payroll taxes under the CARES Act, repayable in 2021 and 2022, and suspended its 401(k) match during the period.
Important facts for investors to verify
- Whether the sharp decline in customer activity and negative gross margin stabilized or worsened after June 30.
- How the borrowing base and available revolver capacity changed after the August 3 disclosure, and whether covenant headroom remains adequate.
- Whether operating cash flow remains positive after the temporary benefit of collecting receivables and managing payables.
- Whether customer credit deterioration, bad debts, or additional asset impairments produce further losses.
- The final cost and status of the emissions-control investigation and the company’s ability to meet deferred payroll-tax and lease obligations.