Select Energy Services, Inc. (NYSE: WTTR) — Q2 2021 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2021. The company provides water-management and oilfield chemical services to the U.S. oil and gas industry through Water Services, Water Infrastructure, and Oilfield Chemicals. The filing reports the registrant as Select Energy Services, Inc.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $161.1 million | $92.2 million | $304.9 million | $370.5 million |
| Gross loss (margin) | $1.6 million (1.0%) | $23.7 million (25.7%) | $6.0 million (2.0%) | $8.4 million (2.3%) |
| Net loss | $19.6 million | $53.0 million | $47.0 million | $344.3 million |
| Adjusted EBITDA | $7.6 million | $(8.3) million | $8.5 million | $15.3 million |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $(11.4) million | $102.7 million |
- Q2 segment revenue was $76.7 million in Water Services, $33.3 million in Water Infrastructure, and $51.1 million in Oilfield Chemicals.
- At June 30, cash and equivalents were $143.7 million, total current assets $356.0 million, and current liabilities $102.2 million. The company had no bank borrowings and $113.2 million of available revolver capacity after letters of credit.
- The $300 million revolving facility matures November 1, 2022. The borrowing base was $128.3 million, letters of credit were $15.1 million, and the company reported compliance with covenants.
- Cash fell $25.3 million during the first half. Investing cash outflow was $11.5 million and financing cash outflow was $2.4 million. Capital expenditures were $13.5 million; the filing does not present free cash flow as a defined measure.
Material changes versus comparable periods
- Q2 revenue increased 74.7% year over year as activity recovered from the pandemic-related downturn. Revenue rose in all three segments, with the largest percentage increases in Water Infrastructure and Oilfield Chemicals.
- Q2 gross loss narrowed substantially, and Adjusted EBITDA improved from a loss to positive $7.6 million. Management attributed improvement principally to higher activity and better absorption of fixed costs; Q2 2020 also included impairment, severance, and closure costs.
- First-half revenue remained 17.7% below 2020, primarily due to lower Water Services revenue, reduced activity and pricing, and severe February weather. First-half Adjusted EBITDA declined to $8.5 million from $15.3 million.
- First-half 2020 net loss included $276.0 million of goodwill and trademark impairment and $7.9 million of property and equipment impairment; neither charge recurred in first-half 2021.
- Operating cash flow swung from $102.7 million provided to $11.4 million used, mainly reflecting the nonrecurrence of prior-year working-capital reductions and the timing of receivables collection.
Outlook, commentary, risks, and unusual items
- Management said cash, expected operating cash flow, and available revolver capacity should be sufficient to meet obligations and maintain covenant compliance for at least the next 12 months. No formal revenue or earnings guidance is provided.
- Management cited improving oil and gas prices and customer activity, while warning that pandemic uncertainty, oil and gas prices, customer spending and financial health, industry consolidation, regulation, and supply constraints could affect demand and results.
- February 2021 severe weather disrupted operations and raw-material supply. Management estimated first-half revenue was reduced by $9 million to $12 million.
- The company started construction on three Permian produced-water recycling facilities and upgrades to an existing facility. It expected the projects to be operational by the end of Q3 2021 and estimated aggregate spending of approximately $9.5 million.
- On July 9, 2021, after quarter-end, the company acquired substantially all water-related assets and operations of Complete Energy Services for 3.6 million Class A shares and $14.2 million cash, subject to closing adjustments.
- During the first half, the company recorded $3.2 million in severance related to its former CEO; it was paid in Q1. A Clean Air Act plea agreement concerning pre-acquisition conduct was resolved with final payments of $2.6 million in April, with no additional monetary penalty. The EPA terminated proposed debarment proceedings on July 6, 2021.
- The company reported no material off-balance-sheet arrangements and no material changes to the risk factors in its 2020 Form 10-K. Ordinary-course lawsuits and claims remain, but management does not expect them to have a material adverse effect.
Important facts for investors to verify
- Whether revenue recovery and positive quarterly Adjusted EBITDA are sustained, particularly given first-half revenue and operating cash flow declines.
- Receivables collection and working-capital trends, which drove the first-half operating cash outflow.
- Completion, utilization, spending, and contracted economics of the Permian recycling projects.
- Closing adjustments, integration, share dilution, and cash impact of the July acquisition; the filing reports 91.8 million Class A shares outstanding on August 2 versus 88.2 million at June 30.
- Exposure to commodity-price changes, customer distress or reduced spending, weather, raw-material inflation, environmental regulation, and revolver borrowing-base or covenant requirements.