Select Energy Services, Inc. — Q1 2021 Form 10-Q
Business context and reporting period
The filing is for the three months ended March 31, 2021, compared with Q1 2020. The company provides water-management services and infrastructure, and oilfield chemicals to the U.S. oil and gas industry. The filing registrant is Select Energy Services, Inc.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $143.7 million | $278.3 million |
| Gross profit (loss); margin | $(4.4) million; (3.1)% | $15.3 million; 5.5% |
| Operating loss | $(25.0) million | $(290.8) million |
| Net loss | $(27.4) million | $(291.2) million |
| Adjusted EBITDA (non-GAAP) | $0.9 million | $23.7 million |
| Cash from operating activities | $(3.9) million | $46.7 million |
| Capital expenditures | $5.3 million | $7.1 million |
At March 31, cash and cash equivalents were $160.0 million; total current assets were $355.6 million and current liabilities were $103.5 million. The company had no borrowings under its revolving credit facility, $15.6 million in letters of credit, and $102.2 million of available borrowing capacity. It reported $57.8 million of long-term operating lease liabilities and $0.3 million of current finance lease obligations. The company was in compliance with debt covenants.
Material changes versus Q1 2020
- Revenue declined 48.3%. Water Services revenue fell 57.0% to $64.2 million, Water Infrastructure fell 34.6% to $37.8 million, and Oilfield Chemicals fell 41.3% to $41.7 million.
- Gross margin turned negative as activity and pricing fell faster than costs could be reduced. Water Services and Oilfield Chemicals cost pressures included reduced utilization; Oilfield Chemicals also faced higher raw-material costs that could not immediately be passed through. Water Infrastructure margin improved, partly due to a greater contribution from higher-margin pipeline revenue and a prior-year customer bankruptcy cost that did not recur.
- The net loss was much smaller chiefly because Q1 2020 included $276.0 million of goodwill and trademark impairment charges. Adjusted EBITDA, by contrast, fell to $0.9 million from $23.7 million.
- Operating cash flow shifted from $46.7 million provided to $3.9 million used, primarily reflecting weaker results and less favorable working-capital movements.
Outlook, commentary, risks and unusual items
- Management said COVID-19-related effects and uncertainty in oil demand and customer activity could continue to weigh on results, and stated that forecasting activity and profitability remained difficult. It believed cash, operating cash flow and available borrowing capacity would fund obligations for at least 12 months.
- February 2021 severe winter weather disrupted operations and raw-material supply. Management estimated a $9 million to $12 million adverse effect on Q1 revenue.
- Two Permian Basin produced-water recycling facilities became fully operational by quarter-end. The company reported approximately 250,000 barrels per day of centralized recycling capacity in the Permian, alongside mobile projects supporting nearly 150,000 barrels per day.
- Management highlighted produced-water reuse and treatment as an opportunity, while noting that completion efficiencies can reduce time on site and revenue for some day-rate services. It also cited customer capital-spending discipline, commodity-price volatility, customer consolidation, regulation, labor and supply constraints as risks.
- An EPA proposed-debarment notice could restrict eligibility for certain federal contracts, covered transactions and benefits if not withdrawn or resolved. The company was contesting the notices and seeking resolution. Separately, an April 2021 plea agreement resolved the Clean Air Act prosecution involving a Rockwater-acquired entity; the company reported final April payments of $2.6 million against the accrued settlement amount, with no additional fines.
- Other unusual items included a $1.8 million unrealized loss on publicly traded securities in Q1 2021 and $3.2 million of deferred employer payroll taxes, half due by December 31, 2021 and the remainder by December 31, 2022.
Most important facts for investors to verify
- Whether revenue, margins and cash generation recover as customer activity and pricing change, and whether cost reductions can keep pace.
- The status and potential operational or commercial impact of the EPA proposed debarment, distinct from the resolved criminal prosecution.
- Facility utilization, customer commitments and returns on the new Permian recycling projects.
- Working-capital trends, available borrowing capacity and repayment of deferred payroll taxes.
- Adjusted EBITDA is a non-GAAP measure; review the company’s reconciliation and adjustments alongside GAAP results.