Select Energy Services, Inc. (NYSE: WTTR) — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This annual filing reports full-year results, not standalone fourth-quarter results. The registrant name in the filing is Select Energy Services, Inc.
Business context
Select provides water-management and oilfield chemical solutions to U.S. oil and gas customers through Water Services, Water Infrastructure and Oilfield Chemicals. The Permian Basin accounted for approximately 47% of 2022 revenue. The company completed multiple acquisitions during 2021–2022, expanding its service capacity, geographic reach and produced-water recycling and disposal infrastructure.
Financial performance and liquidity
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Revenue | $1.387 billion | $764.6 million |
| Gross profit / margin | $160.8 million / 11.6% | $20.9 million / 2.7% |
| Operating income (loss) | $39.2 million | $(65.5) million |
| Net income (loss) | $54.9 million | $(50.1) million |
| Net income (loss) attributable to Select, Inc. | $48.3 million | $(42.2) million |
| Class A diluted EPS | $0.50 | $(0.48) |
| Adjusted EBITDA (non-GAAP) | $194.8 million | $50.0 million |
| Cash from operating activities | $33.2 million | $(16.2) million |
- Revenue increased 81.5%, reflecting higher demand and pricing as well as acquired businesses. Segment revenue was Water Services $799.4 million (+102.8%), Water Infrastructure $270.4 million (+74.7%) and Oilfield Chemicals $317.6 million (+47.2%).
- Gross profit improved across all three segments. Management cited stronger activity and pricing, scale benefits in Water Services, and higher manufacturing utilization in Oilfield Chemicals. Cost inflation affected labor, fuel and services; the company said it recovered some increases through surcharges and pricing.
- Net income included a $13.4 million bargain-purchase gain related to acquisitions and purchase-price adjustments. Adjusted EBITDA is a non-GAAP measure and excludes this gain, among other adjustments.
- Operating cash flow improved, but working capital absorbed cash: trade receivables rose to $430.0 million from $232.8 million, which management attributed to higher revenue, acquired businesses and integration-related billing and collection challenges. Capital expenditures were $71.9 million, making operating cash flow less capital expenditures approximately negative $38.7 million.
- Cash and cash equivalents were $7.3 million at year-end, versus $85.8 million in 2021. Debt outstanding was $16.0 million; the company reported $206.1 million of available borrowing capacity under its revolving facility at year-end. As of February 20, 2023, debt was $50.0 million and available capacity was $155.4 million.
- The $270 million sustainability-linked revolving facility matures in March 2027. Year-end borrowing interest was 8.25%; the facility includes financial and other covenants. The company reported covenant compliance as of December 31, 2022.
Material changes and unusual items
- Acquisitions during 2022 included Nuverra, Breakwater and Cypress; the company also acquired the remaining noncontrolling interests in the Big Spring Recycling System and certain adjacent Midland Basin assets. The Breakwater transaction consideration was reported at $105.3 million, primarily in shares. Several purchase-price allocations remained preliminary at year-end.
- Class A shares outstanding increased to 109.4 million at December 31, 2022 from 94.2 million a year earlier, partly reflecting shares issued for acquisitions. The company also repurchased shares during 2022.
- The company initiated a quarterly dividend in 2022 at $0.05 per share; future payments remain subject to board approval and facility restrictions.
- Reported total assets were $1.223 billion and total equity was $883.7 million at year-end. Operating lease liabilities totaled approximately $64.1 million.
Outlook, commentary and risks
- Management said customer budgets for 2023 were expected to stabilize or modestly increase, but did not provide quantified company guidance for revenue, earnings, cash flow or capital spending. It identified acquisition integration, market-share gains, infrastructure investment and operating synergies as priorities for 2023.
- Management cautioned that oilfield activity and profitability remain difficult to forecast. Demand depends on commodity prices, customer capital spending and broader economic conditions; oil and gas prices were volatile amid the Russia-Ukraine conflict, sanctions, inflation and changing supply-demand expectations.
- Key exposures include concentration in the Permian, water sourcing and disposal restrictions, induced-seismicity regulation affecting disposal wells, environmental and climate-related rules, inflation and labor availability, supply-chain constraints, customer credit risk, and the ability to integrate acquisitions and collect receivables.
- The company reported no pending legal matters expected to have a material adverse effect, while noting ordinary-course lawsuits and claims. Management and the auditor reported effective internal controls; however, Breakwater, representing 11.9% of year-end assets and 1.1% of 2022 revenue, was excluded from the internal-control evaluation because integration was incomplete.
Important facts for investors to verify
- Whether the sharp increase in receivables converts to cash and whether billing and collection processes improve.
- How much of revenue and earnings growth came from acquisitions versus underlying demand, pricing and utilization; also confirm the final purchase-price allocations.
- Whether 2023 operating cash flow can support capital spending, dividends and debt needs, given low year-end cash and higher borrowings reported after year-end.
- Facility borrowing availability, covenant headroom, variable-rate interest exposure and the effect of sustainability-linked adjustments.
- Produced-water recycling utilization and economics, disposal capacity restrictions and seismicity-related regulatory developments, particularly in the Permian.
- Potential dilution, including acquisition-related share issuance and the impact of ongoing repurchases and dividends.