Select Energy Services, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The filing is by Select Energy Services, Inc. (not “Select Water Solutions”). Figures below are in U.S. dollars; financial statement amounts are unaudited. The November 2017 Rockwater merger materially affects comparability with 2017.
Business context
The company provides water-management services, oilfield chemicals and wellsite services to the North American oil and gas industry. Water Solutions remains the largest segment. Oilfield Chemicals revenue in 2018 reflects Rockwater operations; that segment had no reported revenue in the 2017 comparison.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $393.2m | $134.4m | $769.6m | $234.4m |
| Gross profit | $56.7m | $12.3m | $104.7m | $12.0m |
| Gross margin | 14.4% | 9.1% | 13.6% | 5.1% |
| Operating income (loss) | $24.8m | $(11.9)m | $43.4m | $(24.4)m |
| Net income (loss) | $25.0m | $(10.5)m | $41.2m | $(22.8)m |
| Net income (loss) attributable to Select | $17.0m | $(4.2)m | $27.1m | $(8.4)m |
| Adjusted EBITDA | $68.2m | $27.3m | $127.9m | $41.0m |
Q2 diluted EPS attributable to Class A shareholders was $0.24, versus a loss of $0.16 per share in Q2 2017. Reported revenue rose 192.5% in the quarter and 228.4% in the first half. Management attributed the improvement to higher completion activity and acquired Rockwater operations, as well as the 2017 GRR acquisition in the first-half comparison. The filing cautions that acquisition activity limits period-to-period comparability.
- Segments, Q2: Water Solutions revenue was $273.7m; Oilfield Chemicals $64.8m; and Wellsite Services $54.7m. Segment-level results improved, with Water Solutions reporting $33.0m income before taxes, Oilfield Chemicals $1.0m and Wellsite Services $2.0m.
- Cash flow, first half: Operating cash flow was $64.3m, compared with cash used of $24.0m in 2017. Property and equipment purchases were $63.1m; investing cash outflow was $59.1m. Financing provided $3.5m. Cash increased $8.5m to $11.3m.
- Liquidity and debt: Current assets were $518.8m and current liabilities $216.1m. Debt outstanding was $80.0m under a $300m secured revolving facility; unused borrowing capacity was $188.6m at June 30. The weighted-average borrowing rate was 3.966%. The company reported compliance with all debt covenants.
- Capital spending: First-half segment capital expenditures totaled $76.9m in the segment table; cash purchases of property and equipment were $63.1m. The filing reports $25.0m of capital expenditures included in accounts payable and accrued liabilities.
Material changes, outlook and risks
- Management cited stronger oil prices and rising completion activity as supportive of demand. Average WTI was $68.07 per barrel in Q2 versus $48.10 in Q2 2017. Permian pipeline-capacity constraints could restrain activity; management said equipment and personnel could be redeployed among basins.
- No quantified earnings or revenue guidance was provided. Management stated that operating cash flow and available revolver borrowings should fund operations for at least the next 12 months.
- Management noted operating-cost pressure from labor, contract labor, equipment rental and maintenance, fuel and chemical raw materials. It also identified a new Midland friction-reducer production line as a potential freight and logistics cost benefit.
- Accounting estimate change: extending estimated useful lives of certain equipment reduced Q2 depreciation and amortization by $4.8m and increased net income by $4.6m (about $0.04 per share); first-half reductions were $9.5m and $9.3m, respectively.
- Unusual charges included a $2.3m write-down of fluid-disposal equipment to zero, a $2.0m investment impairment, and $3.1m of first-half lease-abandonment costs. Remaining abandoned-facility lease obligations were about $22.0m, with payments extending through 2027.
- Rockwater subsidiaries are under investigation concerning alleged alteration of vehicle emissions controls. The company said no charges had been brought as of the filing and it could not estimate potential fines or penalties. It reported about 60 potentially modified vehicles in a fleet of roughly 1,400 at the time of the investigation’s initiation; the filing notes prior EPA fines of up to $7,200 per altered vehicle in similar cases.
- Key business risks include oil and gas price and activity volatility, customer demand, competition, labor availability and costs, pipeline constraints, regulation and permitting, integration of Rockwater, variable-rate debt and Canadian-dollar exposure. A 1% change in the assumed borrowing rate would affect annual interest expense by approximately $0.8m at the reported debt balance.
Investor facts to verify
- Separate organic growth from the Rockwater and GRR acquisition contribution when assessing the large reported revenue increase.
- Review the sustainability of margins and adjusted EBITDA, including the effect of the useful-life estimate change and the company’s non-GAAP adjustments.
- Track working-capital needs: trade receivables were $425.2m, and first-half operating cash flow included a $46.1m cash use from accounts receivable.
- Confirm future capital spending, cash conversion and revolver availability against the borrowing base, letters of credit and covenant requirements.
- Monitor resolution and potential financial consequences of the emissions investigation, along with the remaining facility-lease obligations and merger integration.