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Select Energy Services Reports Third Quarter 2020 Financial Results And Operational Updates

·22 min read

Revenue of $101 million generated during the third quarter of 2020, up 10% sequentially

$19 million net increase in cash during the third quarter of 2020

Total available liquidity of $233 million, including $185 million of cash and cash equivalents, and no debt outstanding at the end of the third quarter of 2020

HOUSTON, Nov. 3, 2020 /PRNewswire/ -- Select Energy Services, Inc. (NYSE: WTTR) ("Select" or "the Company"), a leading provider of water management and chemical solutions to the U.S. unconventional oil and gas industry, today announced results for the quarter ended September 30, 2020.

Holli Ladhani, President and CEO, stated, "While the third quarter was not without its challenges, based on recent discussions with our customers, I believe we've already seen the market bottom of the current downturn. We continue to closely monitor the global crude oil demand outlook, and though current market conditions remain challenging, we are experiencing significant ongoing positive trends, with activity levels having increased steadily over the course of the third quarter. We generally expect these positive trends to continue, and anticipate further activity improvements in 2021.

"Our revenue growth during the third quarter was driven by strong recoveries in our Oilfield Chemicals segment and our Bakken infrastructure, two businesses with high operating leverage, resulting in strong incremental gross margins quarter over quarter. And while we were unable to get back to breakeven EBITDA for the third quarter, we remain on an encouraging trajectory, reaching positive Adjusted EBITDA levels in September on a normalized basis. We remain optimistic about the future and are moving into the fourth quarter with steady momentum.

"We delivered our eleventh consecutive quarter of positive free cash flow, with meaningful contribution from working capital in addition to the team's disciplined restraint around capital expenditures. This resulted in cash flow from operations less capital expenditures, net of asset sales, of $19 million during the third quarter, for a total of $117 million through the first nine months of 2020. With $185 million of cash and cash equivalents at quarter end and no bank debt, we remain very well-positioned to navigate this downturn, and to capitalize on opportunities created by the current market dislocation and future recovery.

"Looking ahead, we are confident that we will identify opportunities to deliver clear shareholder value and enhance our market position, while protecting our strong balance sheet. At the same time, we are prepared to remain disciplined and patient to ensure we deliver value," concluded Ladhani.

Consolidated Financial Information

Revenue for the third quarter of 2020 was $101.2 million as compared to $92.2 million in the second quarter of 2020 and $329.0 million in the third quarter of 2019. Net loss for the third quarter of 2020 was $36.3 million as compared to a net loss of $53.0 million in the second quarter of 2020 and net income of $7.2 million in the third quarter of 2019.

Gross loss was $16.9 million in the third quarter of 2020 as compared to a gross loss of $23.7 million in the second quarter of 2020 and gross profit of $41.0 million in the third quarter of 2019. Total gross margin for Select was (16.7%) in the third quarter of 2020 as compared to (25.7%) in the second quarter of 2020 and 12.5% in the third quarter of 2019. Gross margin before depreciation and amortization ("D&A") for the third quarter of 2020 was 6.9% as compared to 1.9% for the second quarter of 2020 and 21.1% for the third quarter of 2019.

SG&A during the third quarter of 2020 was $16.0 million as compared to $17.7 million during the second quarter of 2020 and $27.3 million during the third quarter of 2019. SG&A during the third quarter of 2020 was impacted by non-ordinary course bad debt reserve accruals of $1.1 million and $0.5 million of other non-recurring costs primarily related to the settlement of legacy legal claims relating to previously acquired businesses.

Adjusted EBITDA was ($4.7) million in the third quarter of 2020 as compared to ($8.3) million in the second quarter of 2020 and $48.9 million in the third quarter of 2019. Please refer to the end of this release for reconciliations of gross profit before D&A (non-GAAP measure) to gross profit (loss) and of Adjusted EBITDA (non-GAAP measure) to net income (loss).

Select's consolidated Adjusted EBITDA during the quarter of 2020 includes $6.4 million of non-recurring or non-cash adjustments, including $1.6 million of other non-recurring charges primarily related to legacy sales tax audits of previously acquired businesses, $1.4 million of losses on asset sales, $0.7 million in lease abandonment costs, and $0.5 million in transaction costs. Non-cash compensation expense accounted for an additional $2.2 million adjustment.

Business Segment Information

The Water Services segment generated revenues of $54.5 million in the third quarter of 2020, as compared to $55.8 million in the second quarter of 2020 and $196.8 million in the third quarter of 2019. Gross margin before D&A for Water Services was 3.0% in the third quarter of 2020 as compared to 3.2% in the second quarter of 2020 and 21.9% in the third quarter of 2019. While revenues and margins improved off of monthly lows in the second quarter, quarterly revenues modestly declined sequentially while margins held relatively flat. Pricing pressures remain a challenge in this segment and the improving revenue trajectory in the third quarter was not able to fully make up for the strength of April revenues that began the second quarter.

The Water Infrastructure segment generated revenues of $16.2 million in the third quarter of 2020 as compared to $15.3 million in the second quarter of 2020 and $64.0 million in the third quarter of 2019. Gross margin before D&A for Water Infrastructure was 20.7% in the third quarter of 2020 as compared to 9.3% in the second quarter of 2020 and 26.9% in the third quarter of 2019. Sequential revenue increases were largely driven by increased volumes on the Bakken Pipelines, and gross margins were significantly improved due to the increased revenue weighting from the segment's higher margin businesses including the Bakken Pipelines and disposal systems.

The Oilfield Chemicals segment generated revenues of $30.6 million in the third quarter of 2020, as compared to $21.1 million in the second quarter of 2020 and $67.9 million in the third quarter of 2019. Gross margin before D&A for Oilfield Chemicals was 6.6% in the third quarter of 2020 as compared to (6.8%) in the second quarter of 2020 and 15.6% in the third quarter of 2019. Revenues and gross margins improved significantly driven by improving demand for both the segment's completions chemicals and water treatment solutions.

Cash Flow and Balance Sheet

Cash flow from operations for the third quarter of 2020 was $17.1 million as compared to $56.0 million in the second quarter of 2020 and $67.5 million in the third quarter of 2019. Cash flow from operations during the third quarter of 2020 included a $26.0 million contribution from net working capital changes. Capital expenditures for the third quarter of 2020 were $2.6 million, which combined with ordinary course asset sales during the quarter of $4.8 million, resulted in a $2.2 million positive cash inflow from investing activities during the third quarter of 2020. Cash flow from operations less capital expenditures, net of asset sales, was $19.3 million during the third quarter of 2020. For the third quarter of 2020, the Company had 84,794,286 weighted average Class A shares outstanding and 16,221,101 weighted average Class B shares outstanding.

Total liquidity was $233.4 million as of September 30, 2020, as compared to $274.0 million as of December 31, 2019. The Company had no borrowings outstanding under its revolving credit facility as of September 30, 2020 and December 31, 2019. As of September 30, 2020, and December 31, 2019, the borrowing base under the revolving credit facility was $63.6 million and $214.6 million, respectively. The borrowing capacity under the revolving credit facility was reduced by outstanding letters of credit of $15.6 million and $19.9 million as of September 30, 2020 and December 31, 2019, respectively. As of September 30, 2020, the Company had approximately $48.0 million of available borrowing capacity under its revolving credit facility, after giving effect to the $15.6 million of outstanding letters of credit. The significant reduction in the borrowing base since December 31, 2019 was driven primarily by the meaningful reductions in accounts receivables during the nine months ended September 30, 2020, which represent the primary collateral for the borrowing base, due to largely successful collections efforts combined with significantly reduced revenue levels. Total cash and cash equivalents were $185.4 million as of September 30, 2020 as compared to $79.3 million as of December 31, 2019.

Conference Call

Select has scheduled a conference call on Wednesday, November 4, 2020 at 10:00 a.m. Eastern time / 9:00 a.m. Central time. Please dial 201-389-0872 and ask for the Select Energy Services call at least 10 minutes prior to the start time of the call, or listen to the call live over the Internet by logging on to the website at the address http://investors.selectenergyservices.com/events-and-presentations. A telephonic replay of the conference call will be available through November 18, 2020 and may be accessed by calling 201-612-7415 using passcode 13711684#. A webcast archive will also be available at the link above shortly after the call and will be accessible for approximately 90 days.

About Select Energy Services, Inc.

Select Energy Services, Inc. ("Select") is a leading provider of comprehensive water management and chemical solutions to the unconventional oil and gas industry in the United States. Select provides for the sourcing and transfer of water, both by permanent pipeline and temporary hose, prior to its use in the drilling and completion activities associated with hydraulic fracturing, as well as complementary water-related services that support oil and gas well completion and production activities, including containment, monitoring, treatment and recycling, flowback, hauling, gathering and disposal. Select, under its Rockwater Energy Solutions brand, develops and manufactures a full suite of specialty chemicals used in the well completion process and production chemicals used to enhance performance over the producing life of a well. Select currently provides services to exploration and production companies and oilfield service companies operating in all the major shale and producing basins in the United States. For more information, please visit Select's website, http://www.selectenergy.com.

Cautionary Statement Regarding Forward-Looking Statements

All statements in this communication other than statements of historical facts are forward-looking statements which contain our current expectations about our future results. We have attempted to identify any forward-looking statements by using words such as "believe," "expect," "will," "estimate" and other similar expressions. Although we believe that the expectations reflected, and the assumptions or bases underlying our forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Such statements are not guarantees of future performance or events and are subject to known and unknown risks and uncertainties that could cause our actual results, events or financial positions to differ materially from those included within or implied by such forward-looking statements. Factors that could materially impact such forward-looking statements include, but are not limited to: the severity and duration of world health events, including the COVID-19 pandemic, related economic repercussions and the resulting severe disruption in the oil and gas industry and negative impact on demand for oil and gas, which is negatively impacting our business; actions by the members of OPEC+ with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with supply limitations; operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions; the level of capital spending and access to capital markets by oil and gas companies, including significant recent reductions and potential additional reductions in capital expenditures by oil and gas producers in response to commodity prices and dramatically reduced demand; trends and volatility in oil and gas prices, and our ability to manage through such volatility; and other factors discussed or referenced in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2019, our subsequently filed Quarterly Reports on Form 10-Q and those set forth from time to time in our other filings with the SEC. Investors should not place undue reliance on our forward-looking statements. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, unless required by law.

WTTR-ER

Contacts:

Select Energy Services


Chris George - VP, Investor Relations & Treasurer


(713) 296-1073


IR@selectenergyservices.com




Dennard Lascar Investor Relations


Ken Dennard / Lisa Elliott


713-529-6600


WTTR@dennardlascar.com

SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share data)




Three months ended September 30,


Nine months ended September 30,



2020


2019


2020


2019

Revenue













Water Services


$

54,516


$

196,782


$

259,834


$

619,388

Water Infrastructure



16,165



63,953



89,227



169,279

Oilfield Chemicals



30,561



67,932



122,705



197,762

Other





301





29,072

Total revenue



101,242



328,968



471,766



1,015,501

Costs of revenue













Water Services



52,861



153,741



235,989



472,013

Water Infrastructure



12,816



46,748



74,500



126,634

Oilfield Chemicals



28,558



57,357



110,996



170,935

Other



30



1,865



37



30,365

Depreciation and amortization



23,877



28,263



75,567



88,624

Total costs of revenue



118,142



287,974



497,089



888,571

Gross (loss) profit



(16,900)



40,994



(25,323)



126,930

Operating expenses













Selling, general and administrative



15,955



27,280



58,902



86,953

Depreciation and amortization



685



952



2,204



2,858

Impairment of goodwill and trademark







276,016



4,396

Impairment and abandonment of property and equipment





49



7,910



942

Lease abandonment costs



672



238



2,493



1,494

Total operating expenses



17,312



28,519



347,525



96,643

(Loss) income from operations



(34,212)



12,475



(372,848)



30,287

Other income (expense)













Gain (loss) on sales of property and equipment and divestitures, net



891



(2,033)



(1,727)



(8,233)

Interest expense, net



(789)



(438)



(1,633)



(2,370)

Foreign currency gain (loss), net



13



(59)



(6)



268

Other expense, net



(2,364)



(272)



(4,805)



(62)

(Loss) income before income tax benefit (expense)



(36,461)



9,673



(381,019)



19,890

Income tax benefit (expense)



201



(2,501)



495



(3,250)

Net (loss) income



(36,260)



7,172



(380,524)



16,640

Less: net loss (income) attributable to noncontrolling interests



5,719



(1,793)



59,823



(3,926)

Net (loss) income attributable to Select Energy Services, Inc.


$

(30,541)


$

5,379


$

(320,701)


$

12,714














Net (loss) income per share attributable to common stockholders:













Class A—Basic


$

(0.36)


$

0.07


$

(3.76)


$

0.16

Class B—Basic


$


$


$


$














Net (loss) income per share attributable to common stockholders:













Class A—Diluted


$

(0.36)


$

0.07


$

(3.76)


$

0.16

Class B—Diluted


$


$


$


$

SELECT ENERGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)










September 30, 2020


December 31, 2019



(unaudited)



Assets







Current assets







Cash and cash equivalents


$

185,438


$

79,268

Accounts receivable trade, net of allowance for credit losses of $9,731 and $5,773, respectively



92,148



267,628

Accounts receivable, related parties



595



4,677

Inventories



34,366



37,542

Prepaid expenses and other current assets



19,815



26,486

Total current assets



332,362



415,601

Property and equipment



907,980



1,015,379

Accumulated depreciation



(538,380)



(562,986)

Property and equipment held-for-sale, net





885

Total property and equipment, net



369,600



453,278

Right-of-use assets, net



57,402



70,635

Goodwill





266,934

Other intangible assets, net



118,801



136,952

Other assets, net



2,468



4,220

Total assets


$

880,633


$

1,347,620

Liabilities and Equity







Current liabilities







Accounts payable


$

11,037


$

35,686

Accrued accounts payable



13,058



47,547

Accounts payable and accrued expenses, related parties



300



2,789

Accrued salaries and benefits



14,811



20,079

Accrued insurance



10,227



8,843

Sales tax payable



678



2,119

Accrued expenses and other current liabilities



13,296



15,375

Current operating lease liabilities



14,611



19,315

Current portion of finance lease obligations



304



128

Total current liabilities



78,322



151,881

Long-term operating lease liabilities



64,217



72,143

Other long-term liabilities



12,698



10,784

Total liabilities



155,237



234,808








Class A common stock, $0.01 par value; 350,000,000 shares authorized and 86,824,127 shares issued and
outstanding as of September 30, 2020; 350,000,000 shares authorized and 87,893,525 shares issued and
outstanding as of December 31, 2019



868



879

Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; no shares issued or outstanding
as of September 30, 2020 and December 31, 2019





Class B common stock, $0.01 par value; 150,000,000 shares authorized and 16,221,101 shares issued and
outstanding as of September 30, 2020 and December 31, 2019



162



162

Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares issued and outstanding as of
September 30, 2020 and December 31, 2019





Additional paid-in capital



904,832



914,699

Accumulated (deficit) retained earnings



(299,264)



21,437

Total stockholders' equity



609,598



937,177

Noncontrolling interests



115,798



175,635

Total equity



725,396



1,112,812

Total liabilities and equity


$

880,633


$

1,347,620

SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)




Nine months ended September 30,



2020


2019

Cash flows from operating activities







Net (loss) income


$

(380,524)


$

16,640

Adjustments to reconcile net (loss) income to net cash provided by operating activities







Depreciation and amortization



77,771



91,482

Net loss on disposal of property and equipment



1,316



4,971

Bad debt expense



6,108



1,764

Amortization of debt issuance costs



516



516

Inventory write-downs



787



228

Equity-based compensation



4,058



11,874

Impairment of goodwill and trademark



276,016



4,396

Impairment and abandonment of property and equipment



7,910



942

Loss on divestitures



411



3,262

Other operating items, net



158



259

Changes in operating assets and liabilities







Accounts receivable



171,700



14,835

Prepaid expenses and other assets



11,761



9,774

Accounts payable and accrued liabilities



(58,160)



(18,727)

Net cash provided by operating activities



119,828



142,216

Cash flows from investing activities







Working capital settlement





691

Proceeds received from divestitures



197



24,927

Purchase of property and equipment



(19,100)



(86,374)

Acquisitions, net of cash received





(10,400)

Proceeds received from sales of property and equipment



15,854



13,958

Net cash used in investing activities



(3,049)



(57,198)

Cash flows from financing activities







Borrowings from revolving line of credit





5,000

Payments on long-term debt





(50,000)

Payments of finance lease obligations



(189)



(743)

Proceeds from share issuance



59



110

Contributions from (distributions to) noncontrolling interests



383



(349)

Repurchase of common stock



(10,876)



(13,401)

Net cash used in financing activities



(10,623)



(59,383)

Effect of exchange rate changes on cash



14



127

Net increase in cash and cash equivalents



106,170



25,762

Cash and cash equivalents, beginning of period



79,268



17,237

Cash and cash equivalents, end of period


$

185,438


$

42,999


Comparison of Non-GAAP Financial Measures

EBITDA, Adjusted EBITDA, gross profit before depreciation and amortization (D&A) and gross margin before D&A are not financial measures presented in accordance with GAAP. We define EBITDA as net income, plus interest expense, taxes and depreciation & amortization. We define Adjusted EBITDA as EBITDA plus/(minus) loss/(income) from discontinued operations, plus any impairment charges or asset write-offs pursuant to accounting principles generally accepted in the U.S. ("GAAP"), plus non-cash losses on the sale of assets or subsidiaries, non-recurring compensation expense, non-cash compensation expense, and non-recurring or unusual expenses or charges, including severance expenses, transaction costs, or facilities-related exit and disposal-related expenditures and plus/(minus) foreign currency losses/(gains). We define gross profit before D&A as revenue less cost of revenue, excluding cost of sales D&A expense. We define gross margin before D&A as gross profit before D&A divided by revenue. EBITDA, Adjusted EBITDA, gross profit before D&A and gross margin before D&A are supplemental non-GAAP financial measures that we believe provide useful information to external users of our financial statements, such as industry analysts, investors, lenders and rating agencies because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization) and non-recurring items outside the control of our management team. We present EBITDA, Adjusted EBITDA, gross profit before D&A and gross margin before D&A because we believe they provide useful information regarding the factors and trends affecting our business in addition to measures calculated under GAAP.

Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. Gross profit (loss) is the GAAP measure most directly comparable to gross profit before D&A. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as an analytical tool due to exclusion of some but not all items that affect the most directly comparable GAAP financial measures. You should not consider EBITDA, Adjusted EBITDA or gross profit before D&A in isolation or as substitutes for an analysis of our results as reported under GAAP. Because EBITDA, Adjusted EBITDA and gross profit before D&A may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. For further discussion, please see "Item 6. Selected Financial Data" in our Annual Report on Form 10-K for the year ended December 31, 2019.

The following table presents a reconciliation of EBITDA and Adjusted EBITDA to our net income (loss), which is the most directly comparable GAAP measure for the periods presented:


















Three months ended September 30,




Nine months ended September 30,



2020


2019




2020


2019





(in thousands)


Net (loss) income


$

(36,260)


$

7,172




$

(380,524)


$

16,640

Interest expense, net



789



4338





1,633



2,370

Income tax (benefit) expense



(201)



2,501





(495)



3,250

Depreciation and amortization



24,562



29,215





77,771



91,482

EBITDA



(11,110)



39,326





(301,615)



113,742

Impairment of goodwill and trademark









276,016



4,396

Non-recurring severance expenses









7,168



1,680

Impairment and abandonment of property and
equipment





49





7,910



942

Yard closure costs related to consolidating
operations









2,961



Non-cash loss on sale of assets or subsidiaries



1,400



3,648





6,901



16,868

Lease abandonment costs



672



238





2,493



1,494

Non-cash compensation expenses



2,242



3,566





4,058



11,874

Foreign currency (gain) loss, net



(13)



59





6



(268)

Non-recurring transaction costs



527



2,025





3,150



3,099

Other non-recurring charges



1,622







1,622



75

Adjusted EBITDA


$

(4,660)


$

48,911




$

10,670


$

153,902



















The following table presents a reconciliation of gross profit before D&A to total gross profit (loss), which is the most directly comparable GAAP measure, and a calculation of gross margin before D&A for the periods presented:













Three months ended,



September 30, 2020


June 30, 2020


September 30, 2019



(unaudited)



(in thousands)

Gross (loss) profit by segment










Water services


$

(13,233)


$

(14,088)


$

23,622

Water infrastructure



(3,207)



(5,594)



10,796

Oilfield chemicals



(430)



(4,034)



8,140

Other



(30)



(3)



(1,564)

As reported gross (loss) profit



(16,900)



(23,719)



40,994











Plus depreciation and amortization










Water services



14,888



15,881



19,419

Water infrastructure



6,556



7,023



6,409

Oilfield chemicals



2,433



2,604



2,435

Other







Total depreciation and amortization



23,877



25,508



28,263











Gross profit before D&A


$

6,977


$

1,789


$

69,257











Gross profit (loss) before D&A by segment










Water services



1,655



1,793



43,041

Water infrastructure



3,349



1,429



17,205

Oilfield chemicals



2,003



(1,430)



10,575

Other



(30)



(3)



(1,564)

Total gross profit before D&A


$

6,977


$

1,789


$

69,257











Gross margin before D&A by segment










Water services



3.0%



3.2%



21.9%

Water infrastructure



20.7%



9.3%



26.9%

Oilfield chemicals



6.6%



(6.8%)



15.6%

Other



n/a



n/a



(519.6%)

Total gross margin before D&A



6.9%



1.9%



21.1%

Cision
Cision

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SOURCE Select Energy Services, Inc.