Select Energy Services, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
The filing is for the three months ended March 31, 2017, with year-over-year comparisons to Q1 2016. The registrant is identified in the filing as Select Energy Services, Inc. (not “Select Water Solutions, Inc.” as stated in the request metadata). It provides water solutions and related oilfield services, principally to U.S. onshore oil and gas operators. The company completed its IPO after quarter-end, on April 26, 2017.
Financial performance, cash flow and liquidity
Unless otherwise noted, amounts are in millions of dollars. Figures are consolidated.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $99.9 | $78.8 |
| Gross profit (loss) / margin | $(0.2) / (0.2)% | $(11.9) / (15.1)% |
| Operating loss | $(12.5) | $(21.6) |
| Consolidated net loss | $(12.3) | $(25.8) |
| Net loss attributable to Select Energy Services, Inc. | $(4.2) | $0.0 reported |
| EBITDA / Adjusted EBITDA | $10.2 / $13.8 | $4.7 / $5.7 |
| Net cash from (used in) operating activities | $(7.9) | $16.4 |
| Net cash used in investing activities | $(58.1) | $(19.5) |
| Net cash from financing activities | $34.0 | $0.7 |
At March 31, cash was $8.0 million, current assets were $118.1 million and current liabilities were $53.5 million. Debt was $34.0 million under a $100 million revolving facility; $16.1 million of letters of credit reduced availability to $49.9 million. The company reported compliance with debt covenants. Its facility was secured by substantially all assets and matured February 2020. After quarter-end, IPO proceeds were used in part to repay the $34.0 million borrowing; the company reported no drawn borrowings and approximately $85.9 million of availability as of May 18.
Material changes versus the prior comparable period
- Revenue increased 26.7%, led by water solutions (+25.8%); accommodations and rentals grew 11.8%, and wellsite completion and construction services grew 49.7%. Management attributed growth to increased completion activity and a higher rig count amid more stable commodity prices.
- Gross loss narrowed substantially, and operating and net losses improved. Depreciation and amortization fell 18.9%, primarily because assets were fully depreciated or impaired in 2016. Interest expense declined 78.3%, following repayment of prior debt using proceeds from the December 2016 private offering.
- Operating cash flow swung from positive $16.4 million to negative $7.9 million, mainly from higher receivables and working capital associated with revenue growth. Investing outflow rose principally due to the Permian acquisition.
- Segment revenue remains concentrated in Water Solutions, which represented 78.5% of Q1 revenue.
Outlook, risks, contingencies and unusual items
- No numerical revenue, earnings or cash-flow guidance is provided. Management said operating cash flow and available facility borrowings were expected to fund operations for at least twelve months, and expected public-company general and administrative costs to rise.
- On March 10, the company acquired Gregory Rockhouse Ranch and affiliated assets for $56.5 million: $51.0 million cash and $5.5 million in Class A shares. It funded the cash consideration with $17.0 million cash and $34.0 million facility borrowings. The acquired business contributed $1.9 million of revenue and $0.3 million of net income through March 31. The purchase-price allocation, including $10.7 million of goodwill and acquired intangibles, was preliminary.
- The company recorded $1.9 million in lease-abandonment charges in Q1. It had $20.4 million of related accrued lease obligations and terminations at March 31 and expects non-cancelable payments to continue through 2027.
- Subsequent events include an IPO of 8.7 million shares at $14 per share and a 1.305 million-share over-allotment. The filing reports approximately $111.4 million net proceeds from the IPO and approximately $17.1 million from the over-allotment; proceeds funded debt repayment, a $7.8 million phantom-unit settlement and capital expenditures/general corporate purposes. The filing also reports $1.7 million in executive success bonuses approved May 18.
- Key risks include oil and gas price and activity volatility, customer demand, regional exposure including the Bakken, competition, access to capital, labor, safety, permits, environmental and water-related regulation, and debt covenants. Ordinary-course lawsuits and claims were not expected to have a material adverse effect. Management reported disclosure controls effective as of March 31.
- Legacy owners’ tax receivable agreements generally provide for payment of 85% of specified realized or deemed tax savings. Class B shares carry voting rights but no economic interest in the company.
Important facts for investors to verify
- Confirm the registrant identity and ticker/security details, given the mismatch between the request metadata and the filing’s stated company name.
- Reconcile IPO and over-allotment proceeds, their reported net amounts, and subsequent uses of proceeds across the filing’s sections.
- Review the facility’s covenant thresholds, borrowing availability, letters of credit, and post-IPO debt repayment status.
- Assess the final Permian acquisition valuation, goodwill and intangible-asset assumptions, and the acquired business’s contribution to ongoing results.
- Evaluate working-capital demands, receivable collections, and the remaining lease-exit obligations through 2027.
- Consider the effects of the dual-class/noncontrolling-interest structure, tax receivable agreements, and related-party arrangements.