Select Water Solutions, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023. Amounts are in millions of dollars unless stated otherwise. Select provides water-management and chemical solutions to the U.S. energy industry through Water Services, Water Infrastructure and Chemical Technologies.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $366.5 | $416.6 |
| Gross profit / margin | $52.7 / 14.4% | $59.7 / 14.3% |
| Operating income | $7.0 | $12.0 |
| Net income | $3.9 | $13.7 |
| Net income attributable to Select | $3.6 | $12.3 |
| Class A basic and diluted EPS | $0.04 | $0.12 |
| Adjusted EBITDA (non-GAAP) | $59.8 | $67.2 |
| Operating cash flow | $32.1 | $(18.0) |
| Free cash flow (company-defined, non-GAAP) | $3.5 | $(39.2) |
- Revenue declined 12.0%. Water Services fell 16.9% to $228.3; Chemical Technologies fell 13.6% to $74.7; Water Infrastructure grew 14.5% to $63.5.
- Gross margin was broadly stable, but lower revenue and higher SG&A contributed to lower operating and net income. SG&A increased 22.7% to $44.0, including higher incentive/equity compensation, wages, transaction and rebranding costs, and $0.6 of CFO severance expense.
- Adjusted EBITDA decreased from $67.2 to $59.8. The company’s reconciliation includes $6.4 of non-cash compensation and $4.9 of transaction and rebranding costs in Q1 2024; this non-GAAP measure is not directly comparable across all companies.
- Operating cash flow improved primarily due to working-capital changes, including improved billing and collections. Investing cash outflow was $136.9, including $108.3 for acquisitions and $33.8 of property and equipment purchases. Financing cash inflow was $60.5, including net revolver borrowings.
- Cash was $12.8 at quarter-end, down from $57.1 at December 31, 2023. Total current assets were $411.7 and current liabilities $212.0.
- Debt under the revolving facility was $75.0 at March 31, bearing 7.02%; borrowing capacity available was $155.8, after letters of credit. On April 29, borrowings were $100.0 and available capacity was $131.2. The company reported compliance with debt covenants at quarter-end.
Material changes and developments
- Four Q1 acquisitions added Water Infrastructure assets in the Haynesville, Rockies and Bakken for $108.3 cash consideration. The company said these added approximately 450,000 barrels per day of permitted disposal capacity across 21 saltwater disposal wells, two slurry injection wells, a solids treatment facility and two landfills. Purchase-price allocations remain preliminary.
- On April 1, 2024, Select acquired Trinity for $29.4 of initial consideration, adding disposal wells, pipelines and permits, principally in the Permian Basin.
- Water Infrastructure’s revenue growth reflected acquisitions and recycling growth; its cost of revenue as a share of segment revenue improved to 53.1% from 61.9%. Water Services and Chemical Technologies faced weaker activity and pricing.
- Property and equipment, net, rose to $591.2 from $517.6, and long-term debt increased from zero to $75.0. Goodwill rose to $31.2, including $26.5 recorded for Q1 acquisitions.
- The company paid a quarterly dividend/distribution of $0.06 per share or unit. Q1 repurchases of 830,337 Class A shares were for employee tax withholding; no shares were bought under the public repurchase program during the quarter.
Outlook, commentary and risks
- No specific financial guidance was provided. Management said it expects available cash, operating cash flow and revolver capacity to be sufficient to meet obligations and maintain covenant compliance for at least the next 12 months.
- Management is prioritizing water infrastructure investment, integrated water-lifecycle solutions and produced-water recycling and reuse. It cited long-term contracted and production-related infrastructure work as a source of steadier revenue and potentially higher margins.
- Management attributed weaker activity in part to lower frac-crew deployments and competitor-driven pricing pressure. It reported average WTI of $77.50 per barrel versus $75.93 a year earlier, while Henry Hub natural gas averaged $2.15 per MMBtu versus $2.64; it said lower gas prices negatively affected activity in natural-gas basins.
- Key risks include oil and gas activity and commodity-price volatility, customer capital-spending decisions and consolidation, competitive pricing, interest rates and access to capital, supply-chain disruption and geopolitical conflict, environmental and water-related regulation, permits, weather, safety and customer credit risk. The company has variable-rate debt and no interest-rate hedges.
- Ordinary-course lawsuits and claims, including environmental and employee matters, were not expected by management to have a material adverse effect; outcomes remain uncertain. No material off-balance-sheet arrangements were reported. Disclosure controls were assessed as effective at March 31, 2024.
Investor verification points
- Check whether lower Water Services and Chemical Technologies activity and pricing persist, and whether Water Infrastructure growth and margins continue after acquisitions.
- Review cash conversion, capital expenditure and acquisition spending alongside the sharp quarter-end cash decline and rising revolver borrowings, including the April 29 debt update.
- Monitor integration and realized returns from the Q1 acquisitions and Trinity, including final purchase-price allocations and acquired disposal capacity.
- Assess the quality and comparability of Adjusted EBITDA and free cash flow, including the company’s adjustments for compensation, transaction costs and other items.
- Track the board’s quarterly dividend decisions, revolver availability and covenant headroom, as well as commodity, customer-spending and regulatory risks.