Select Energy Services, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. The filing is for the quarter and six months ended June 30, 2022. Select provides U.S. oilfield water-management and chemical solutions through Water Services, Water Infrastructure and Oilfield Chemicals. The filing’s registrant is Select Energy Services, Inc. (NYSE: WTTR).
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $335.9m | $161.1m | $630.7m | $304.9m |
| Gross profit (loss) | $35.7m | ($1.6m) | $60.3m | ($6.0m) |
| Operating income (loss) | $8.3m | ($18.4m) | $4.0m | ($43.4m) |
| Net income (loss), consolidated | $14.6m | ($19.6m) | $22.6m | ($47.0m) |
| Net income (loss) attributable to Select | $12.5m | ($16.6m) | $19.3m | ($39.7m) |
| Adjusted EBITDA | $47.7m | $7.6m | $79.8m | $8.5m |
Q2 gross margin was 10.6%, versus negative 1.0% a year earlier; the six-month gross margin was 9.6%, versus negative 2.0%. Q2 diluted Class A earnings per share were $0.13; six-month diluted EPS was $0.20.
- Q2 revenue by segment: Water Services $196.0m, Water Infrastructure $60.3m and Oilfield Chemicals $79.6m. Each segment’s revenue increased year over year, reflecting higher activity and pricing; acquisitions also contributed to water-segment growth.
- Cash flow: For the first half, operating cash flow was negative $7.5m, investing cash flow negative $11.9m and financing cash flow negative $40.7m. Cash declined $60.1m to $25.7m. Operating cash flow included a $89.7m use of cash from accounts receivable.
- Capital spending: Cash purchases of property and equipment were $31.0m in the first half. Segment-reported capital expenditures totaled $39.1m; the filing also reports $20.2m of capital expenditures in accounts payable and accrued liabilities.
- Balance sheet and liquidity: At June 30, cash was $25.7m, current assets $437.1m and current liabilities $206.0m. The company reported no bank borrowings and $195.6m of available borrowing capacity under its $270m sustainability-linked revolving facility, after letters of credit. Total liabilities were $302.7m; equity was $741.1m.
Changes, outlook and risks
- Revenue rose 108.5% in Q2 and 106.9% in the first half versus 2021. Results also benefited from improved demand and pricing after pandemic-related weakness. The prior-year first half was affected by severe February 2021 weather, which management estimated reduced revenue by $9m–$12m.
- Q2 included a $5.6m bargain purchase gain; the first half included $17.0m, including gains related to Nuverra and purchase-price adjustments for prior acquisitions. These gains increased reported earnings and are excluded from Adjusted EBITDA.
- The February 2022 Nuverra acquisition was paid for with 4.2m Class A shares, valued at $35.9m. The company repaid Nuverra debt of $18.8m and added water logistics and infrastructure assets. The purchase-price allocation remained preliminary at quarter-end. Integration and realization of expected revenue and cost synergies are management priorities for the remainder of 2022.
- Management said current cash, operating cash flow and available facility borrowings should provide sufficient liquidity for at least the next 12 months and beyond. It provided no specific revenue or earnings guidance in the supplied filing text. At August 1, available facility capacity was $206.9m; borrowings remained zero.
- Management cited oil and gas price volatility, the Russia-Ukraine conflict and related sanctions, inflation in labor, fuel and services, supply constraints, customer spending and consolidation, regulation, and the uncertain effects of COVID-19 as risks. Higher fuel and labor costs affected the period, although management said much of the cost inflation had been passed through via surcharges and pricing.
- The revolving facility has borrowing-base and covenant requirements, including a fixed-charge coverage test when availability falls below specified thresholds. The company reported covenant compliance at June 30. Ordinary-course lawsuits and claims were not expected by management to have a material adverse effect; self-insurance exposures remain.
Important facts for investors to verify
- How much of revenue and margin growth reflects acquired businesses versus organic volume, pricing and activity—and whether acquisition synergies are being realized.
- Whether receivables are collected as expected: trade receivables rose to $338.9m from $232.8m at year-end, contributing to negative first-half operating cash flow.
- How sustainable margins and Adjusted EBITDA are after excluding bargain purchase gains and considering inflation, acquisition costs and higher depreciation.
- Remaining liquidity and borrowing-base availability, facility covenant headroom, and the effects of continued capital spending and share repurchases.
- Final purchase-price accounting for Nuverra and other acquisitions, including the valuation of acquired assets and asset-retirement obligations.