Business Context and Reporting Period
This Form 8-K, dated November 2, 2017, reports the completion of the merger between Select Energy Services, Inc. ("Select") and Rockwater Energy Solutions, Inc. ("Rockwater") on November 1, 2017. The transaction was executed pursuant to a Merger Agreement dated July 18, 2017. Select is an emerging growth company incorporated in Delaware.
Key Financial Metrics and Capital Structure
Debt and Liquidity:
- New Credit Facility: Entered into a $300.0 million senior secured revolving credit facility with Wells Fargo Bank, N.A. as administrative agent.
- Sublimits: Includes a $40.0 million sublimit for letters of credit and a $30.0 million sublimit for swingline loans.
- Expansion Option: Select has the option to increase the facility by $150.0 million within the first three years post-closing.
- Borrowing Base: Borrowings are limited to the lesser of $300.0 million or a borrowing base calculated based on eligible receivables and inventory.
- Interest Rates: Applicable margins range from 1.50% to 2.00% for Eurocurrency Rate loans and 0.50% to 1.00% for Base Rate loans. Until June 30, 2018, margins are fixed at 1.75% (Eurocurrency) and 0.75% (Base Rate).
- Maturity: The facility matures on the fifth anniversary of the closing.
- Previous Debt: The previous credit facility (dated May 3, 2011) was repaid in full and terminated.
Equity Issuance:
- Exchange Ratio: 0.7652 shares of Select stock for each share of Rockwater stock (adjusted from the original 0.7777).
- Total Issuance: Approximately 37.3 million shares of Select common stock were issued in aggregate (including equity awards).
- Breakdown: Approximately 25.9 million Class A, 6.7 million Class A-2, and 4.4 million Class B shares issued to former Rockwater holders.
Financial Statements: The filing does not provide specific revenue, profit, cash flow, or margin figures for the reporting period. Financial statements of the acquired business and pro forma information are scheduled to be filed within 71 calendar days.
Material Changes Versus Prior Period
- Corporate Structure: Rockwater became a wholly-owned subsidiary of Select following the merger.
- Capitalization: Significant increase in authorized Class A common stock from 250 million to 350 million shares.
- Debt Obligations: Replacement of the 2011 credit facility with a new $300 million facility containing specific covenants regarding fixed charge coverage ratios and excess availability.
- Equity Ownership: Issuance of approximately 37.3 million new shares to former Rockwater shareholders.
Guidance, Outlook, Management Commentary, and Risks
Management Changes:
- CEO: Holli C. Ladhani (former Rockwater CEO) appointed President and CEO of Select.
- Executive Chairman: John Schmitz (former Select CEO) appointed Executive Chairman.
- Board Expansion: Board size increased from 5 to 9 directors, with four new directors appointed from the former Rockwater board.
- Officer Appointments: New Executive Vice Presidents appointed for Wellsite Services, Oilfield Chemicals, and Water Solutions.
Covenants and Restrictions:
- Distributions: Restricted unless specific excess availability thresholds (greater of 25% of borrowing base or $37.5 million) or fixed charge coverage ratios (1.0 to 1.0) are met.
- Fixed Charge Coverage: Required to maintain a ratio of at least 1.0 to 1.0 when availability drops below specific thresholds.
Risks and Contingencies:
- Default Consequences: Events of default allow lenders to declare all amounts immediately due and payable and increase interest rates by 2.00%.
- Registration Rights: Select assumed obligations to file a shelf registration statement for the resale of Class A-2 Common Stock within 180 days.
- Observer Rights: White Deer Energy L.P. granted board observer rights contingent on maintaining a specific beneficial ownership threshold.
Important Facts for Investor Verification
- Verify the pro forma financial impact of the merger once the 71-day filing deadline passes.
- Monitor the company's ability to maintain the required fixed charge coverage ratio and excess availability to permit future distributions.
- Confirm the effectiveness of the shelf registration statement for Class A-2 Common Stock within the 180-day window.
- Review the integration progress of Rockwater's operations and the retention of key management personnel.
- Assess the utilization of the new $300 million credit facility and the borrowing base calculations.