UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to ________________
Commission File Number 001-38066
SELECT ENERGY SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 81-4561945 |
(State of incorporation) | (IRS Employer Identification Number) |
1233 W. Loop South, Suite 1400 Houston, TX | 77027 |
(Address of principal executive offices) | (Zip Code) |
(713) 235-9500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Class A common stock, par value $0.01 per share | WTTR | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☑ | Non-accelerated filer ☐ | Smaller reporting company ☐ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company. Yes ☐ No ☑
As of October 31, 2022, the registrant had 98,102,383 shares of Class A common stock and 16,221,101 shares of Class B common stock outstanding.
SELECT ENERGY SERVICES, INC.
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 40 | |
55 | ||
55 | ||
57 | ||
57 | ||
57 | ||
57 | ||
57 | ||
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57 | ||
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (the “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact, included in this Quarterly Report regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “preliminary,” “forecast,” and similar expressions or variations are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” included in our most recent Annual Report on Form 10-K, in our subsequently filed Quarterly Reports on Form 10-Q, under the heading “Part II—Item 1A. Risk Factors” in this Quarterly Report and those set forth from time to time in our other filings with the Securities and Exchange Commission (the “SEC”). These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.
Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:
| ● | the severity and duration of world health events, including the novel coronavirus (“COVID-19”) pandemic and its variants, and associated repercussions to supply and demand for oil and natural gas and the economy generally; |
| ● | global economic distress resulting from sustained Russia-Ukraine war and related economic sanctions, rising interest rates, and potential energy shortages in Europe which may decrease demand for oil and demand for our services or contribute to volatility in the prices for oil and natural gas; |
| ● | actions taken by the members of the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia (together with OPEC and other allied producing countries, “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 announced supply limitations; |
| ● | actions taken by the Biden Administration or state governments, such as executive orders or new or expanded regulations, that may negatively impact the future production of oil and natural gas in the United States (“U.S.”) or our customers’ access to federal and state lands for oil and gas development operations, thereby reducing demand for our services in the affected areas; |
| ● | the level of capital spending and access to capital markets by oil and gas companies in response to changes in commodity prices or reduced demand; |
| ● | the ability to source certain raw materials and other critical components or manufactured products globally on a timely basis from economically advantaged sources; |
| ● | operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, measures taken to protect the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions; |
| ● | any new or additional measures required by national, state or local governments to combat COVID-19, such as a COVID-19 vaccine mandate, which if enacted, could reduce labor availability or add additional operational costs as we may experience constraints on our workforce and the workforce of our supply chain, which could have a negative impact on our operations; |
3
| ● | the potential deterioration of our customers’ financial condition, including defaults resulting from actual or potential insolvencies; |
| ● | the degree to which consolidation among our customers may affect spending on U.S. drilling and completions; |
| ● | trends and volatility in oil and gas prices, and our ability to manage through such volatility; |
| ● | the impact of current and future laws, rulings and governmental regulations, including those related to hydraulic fracturing, accessing water, disposing of wastewater, transferring produced water, interstate freshwater transfer, chemicals, carbon pricing, pipeline construction, taxation or emissions, leasing, permitting or drilling on federal lands and various other environmental matters; |
| ● | regional impacts to our business, including our key infrastructure assets within the Bakken, the Northern Delaware portion of the Permian Basin, and the Haynesville; |
| ● | capacity constraints on regional oil, natural gas and water gathering, processing and pipeline systems that result in a slowdown or delay in drilling and completion activity, and thus a decrease in the demand for our services in our core markets; |
| ● | regulatory and related policy actions intended by federal, state and/or local governments to reduce fossil fuel use and associated carbon emissions, or to drive the substitution of renewable forms of energy for oil and gas, may over time reduce demand for oil and gas and therefore the demand for our services; |
| ● | growing demand for electric vehicles that may result in reduced demand for gasoline and therefore the demand for our services; |
| ● | our ability to hire and retain key management and employees, including skilled labor; |
| ● | our access to capital to fund expansions, acquisitions and our working capital needs and our ability to obtain debt or equity financing on satisfactory terms; |
| ● | our health, safety and environmental performance; |
| ● | the impact of competition on our operations; |
| ● | the degree to which our exploration and production (“E&P”) customers may elect to operate their water-management services in-house rather than source these services from companies like us; |
| ● | our level of indebtedness and our ability to comply with covenants contained in our Sustainability-Linked Credit Facility (as defined herein) or future debt instruments; |
| ● | delays or restrictions in obtaining permits by us or our customers; |
| ● | constraints in supply or availability of equipment used in our business; |
| ● | the impact of advances or changes in well-completion technologies or practices that result in reduced demand for our services, either on a volumetric or time basis; |
| ● | changes in global political or economic conditions, generally, and in the markets we serve, including the rate of inflation and potential economic recession; |
4
| ● | acts of terrorism, war or political or civil unrest in the U.S. or elsewhere; |
| ● | accidents, weather, natural disasters or other events affecting our business; and |
| ● | the other risks identified in our most recent Annual Report on Form 10-K and under the headings “Part I—Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II—Item 1A. Risk Factors” in this Quarterly Report. |
These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could have material adverse effects on our future results. Our future results will depend upon various other risks and uncertainties, including those described under the heading “Part I―Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K and under the heading “Part II―Item 1A. Risk Factors” in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022, and this Quarterly Report. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. All forward-looking statements attributable to us are qualified in their entirety by this cautionary note.
5
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
SELECT ENERGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, 2022 | December 31, 2021 | |||||
| (unaudited) |
| ||||
Assets | ||||||
Current assets |
| |||||
Cash and cash equivalents | $ | 13,222 | $ | 85,801 | ||
Accounts receivable trade, net of allowance for credit losses of $4,891 and $4,401, respectively |
| 388,797 |
| 232,824 | ||
Accounts receivable, related parties |
| 303 |
| 219 | ||
Inventories |
| 40,314 |
| 44,456 | ||
Prepaid expenses and other current assets |
| 37,334 |
| 31,486 | ||
Total current assets |
| 479,970 |
| 394,786 | ||
Property and equipment |
| 1,018,402 |
| 943,515 | ||
Accumulated depreciation |
| (591,340) |
| (551,727) | ||
Total property and equipment, net |
| 427,062 |
| 391,788 | ||
Right-of-use assets, net | 48,275 | 47,732 | ||||
Other intangible assets, net |
| 100,455 |
| 108,472 | ||
Other long-term assets, net |
| 16,639 |
| 7,414 | ||
Total assets | $ | 1,072,401 | $ | 950,192 | ||
Liabilities and Equity |
|
|
| |||
Current liabilities |
|
|
| |||
Accounts payable | $ | 55,844 | $ | 36,049 | ||
Accrued accounts payable | 64,861 | 52,051 | ||||
Accounts payable and accrued expenses, related parties |
| 3,775 |
| 1,939 | ||
Accrued salaries and benefits |
| 21,704 |
| 22,233 | ||
Accrued insurance |
| 21,520 |
| 13,408 | ||
Sales tax payable | 2,863 | 2,706 | ||||
Accrued expenses and other current liabilities |
| 21,957 |
| 19,544 | ||
Current operating lease liabilities | 16,957 | 13,997 | ||||
Current portion of finance lease obligations |
| 19 |
| 113 | ||
Total current liabilities |
| 209,500 |
| 162,040 | ||
Long-term operating lease liabilities |
| 48,552 |
| 53,198 | ||
Other long-term liabilities |
| 44,947 |
| 39,780 | ||
Total liabilities |
| 302,999 |
| 255,018 | ||
Commitments and contingencies (Note 9) |
|
|
| |||
Class A common stock, $0.01 par value; 350,000,000 shares authorized and 98,097,930 shares issued and as of September 30, 2022; 350,000,000 shares authorized and 94,172,920 shares issued and as of December 31, 2021 |
| 981 |
| 942 | ||
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; no shares issued or outstanding as of September 30, 2022 and December 31, 2021 |
|
| ||||
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, 2022 and December 31, 2021 |
| 162 |
| 162 | ||
Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares issued and outstanding as of September 30, 2022 and December 31, 2021 |
|
| ||||
Additional paid-in capital |
| 977,063 |
| 950,464 | ||
Accumulated deficit |
| (318,843) |
| (359,472) | ||
Total stockholders’ equity |
| 659,363 |
| 592,096 | ||
Noncontrolling interests |
| 110,039 |
| 103,078 | ||
Total equity |
| 769,402 |
| 695,174 | ||
Total liabilities and equity | $ | 1,072,401 | $ | 950,192 | ||
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
6
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, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Revenue |
|
|
|
| ||||||||
Water Services | $ | 221,243 | $ | 112,474 | $ | 580,845 | $ | 253,348 | ||||
Water Infrastructure | 74,396 | 36,787 | 193,234 | 107,916 | ||||||||
Oilfield Chemicals |
| 79,433 |
| 55,372 | 231,665 | 148,228 | ||||||
Total revenue |
| 375,072 |
| 204,633 | 1,005,744 | 509,492 | ||||||
Costs of revenue |
|
|
|
| ||||||||
Water Services | 170,845 | 94,667 | 465,951 | 227,736 | ||||||||
Water Infrastructure | 54,197 | 28,494 | 143,514 | 81,130 | ||||||||
Oilfield Chemicals |
| 64,519 | 49,583 | 194,670 | 132,103 | |||||||
Other |
| (1) | — | — | — | |||||||
Depreciation and amortization |
| 26,672 | 22,904 | 82,425 | 65,572 | |||||||
Total costs of revenue |
| 316,232 |
| 195,648 | 886,560 | 506,541 | ||||||
Gross profit |
| 58,840 |
| 8,985 | 119,184 | 2,951 | ||||||
Operating expenses |
|
|
|
| ||||||||
Selling, general and administrative |
| 29,782 | 22,044 | 84,792 | 57,828 | |||||||
Depreciation and amortization |
| 543 | 562 | 1,636 | 1,835 | |||||||
Lease abandonment costs |
| 83 | 154 | 336 | 480 | |||||||
Total operating expenses |
| 30,408 |
| 22,760 | 86,764 | 60,143 | ||||||
Income (loss) from operations |
| 28,432 |
| (13,775) | 32,420 | (57,192) | ||||||
Other income (expense) |
|
|
|
| ||||||||
(Loss) gain on sales of property and equipment and divestitures, net | (479) | 315 | 1,905 | (1,921) | ||||||||
Interest expense, net |
| (616) | (419) | (1,830) | (1,254) | |||||||
Foreign currency (loss) gain, net | (6) | (6) | (9) | 1 | ||||||||
Bargain purchase gain | (3,273) | — | 13,768 | — | ||||||||
Other |
| 1,153 | (222) | 2,277 | (956) | |||||||
Income (loss) before income tax (expense) benefit |
| 25,211 |
| (14,107) | 48,531 | (61,322) | ||||||
Income tax (expense) benefit |
| (276) | 32 | (672) | 211 | |||||||
Equity in losses of unconsolidated entities | (218) | (129) | (576) | (129) | ||||||||
Net income (loss) |
| 24,717 |
| (14,204) | 47,283 | (61,240) | ||||||
Less: net (income) loss attributable to noncontrolling interests |
| (3,393) | 2,160 | (6,654) | 9,522 | |||||||
Net income (loss) attributable to Select Energy Services, Inc. | $ | 21,324 | $ | (12,044) | $ | 40,629 | $ | (51,718) | ||||
Net income (loss) per share attributable to common stockholders (Note 15): |
| |||||||||||
Class A—Basic | $ | 0.23 | $ | (0.14) | $ | 0.44 | $ | (0.60) | ||||
Class B—Basic | $ | — | $ | — | $ | — | $ | — | ||||
Net income (loss) per share attributable to common stockholders (Note 15): |
| |||||||||||
Class A—Diluted | $ | 0.22 | $ | (0.14) | $ | 0.43 | $ | (0.60) | ||||
Class B—Diluted | $ | — | $ | — | $ | — | $ | — | ||||
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
7
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in thousands)
Three months ended September 30, | Nine months ended September 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Net income (loss) | $ | 24,717 | $ | (14,204) | $ | 47,283 | $ | (61,240) | ||||
Comprehensive income (loss) |
| 24,717 |
| (14,204) | 47,283 | (61,240) | ||||||
Less: comprehensive (income) loss attributable to noncontrolling interests |
| (3,393) |
| 2,160 | (6,654) | 9,522 | ||||||
Comprehensive income (loss) attributable to Select Energy Services, Inc. | $ | 21,324 | $ | (12,044) | $ | 40,629 | $ | (51,718) | ||||
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
8
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the nine months ended September 30, 2022 and 2021
(unaudited)
Class A | Class B | ||||||||||||||||||||||||
Stockholders | Stockholders | ||||||||||||||||||||||||
Class A | Class B | Additional | Total | ||||||||||||||||||||||
Common | Common | Paid-In | Accumulated | Stockholders’ | Noncontrolling | ||||||||||||||||||||
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Deficit |
| Equity |
| Interests |
| Total | ||||||||
Balance as of December 31, 2021 |
| 94,172,920 | $ | 942 |
| 16,221,101 | $ | 162 |
| $ | 950,464 | $ | (359,472) | $ | 592,096 | $ | 103,078 | $ | 695,174 | ||||||
ESPP shares issued | 4,681 | — |
| — | — |
| 34 | — | 34 | 1 | 35 | ||||||||||||||
Equity-based compensation | — | — |
| — | — |
| 9,454 | — | 9,454 | 1,569 | 11,023 | ||||||||||||||
Issuance of restricted shares |
| 2,529,231 | 25 |
| — | — |
| 2,220 | — | 2,245 | (2,245) | — | |||||||||||||
Stock options exercised |
| 70,000 | 1 |
| — | — |
| 583 | — | 584 | 24 | 608 | |||||||||||||
Issuance of shares for acquisitions | 4,203,323 | 42 |
| — | — |
| 34,456 | — | 34,498 | 1,356 | 35,854 | ||||||||||||||
Repurchase of common stock | (2,794,983) | (28) |
| — | — |
| (20,109) | — | (20,137) | (438) | (20,575) | ||||||||||||||
Restricted shares forfeited | (87,242) | (1) |
| — | — |
| (78) | — | (79) | 79 | — | ||||||||||||||
NCI income tax adjustment | — | — |
| — | — |
| 39 | — | 39 | (39) | — | ||||||||||||||
Net income |
| — | — |
| — | — |
| — | 40,629 | 40,629 | 6,654 | 47,283 | |||||||||||||
Balance as of September 30, 2022 |
| 98,097,930 | $ | 981 |
| 16,221,101 | $ | 162 |
| $ | 977,063 | $ | (318,843) | $ | 659,363 | $ | 110,039 | $ | 769,402 | ||||||
Class A | Class B | ||||||||||||||||||||||||
Stockholders | Stockholders | ||||||||||||||||||||||||
Class A | Class B | Additional | Total | ||||||||||||||||||||||
Common | Common | Paid-In | Accumulated | Stockholders’ | Noncontrolling | ||||||||||||||||||||
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Deficit |
| Equity |
| Interests |
| Total | ||||||||
Balance as of December 31, 2020 |
| 86,812,647 | $ | 868 |
| 16,221,101 | $ | 162 |
| $ | 909,278 | $ | (317,247) | $ | 593,061 | $ | 112,821 | $ | 705,882 | ||||||
ESPP shares issued | 7,787 | — | — | — | 44 | — | 44 | (1) | 43 | ||||||||||||||||
Equity-based compensation | — | — | — | — | 5,290 | — | 5,290 | 958 | 6,248 | ||||||||||||||||
Issuance of restricted shares | 2,154,897 | 22 | — | — | 2,162 | — | 2,184 | (2,185) | (1) | ||||||||||||||||
Issuance of shares for acquisitions | 3,600,000 | 36 | — | — | 20,627 | — | 20,663 | (359) | 20,304 | ||||||||||||||||
Other | 738 | — | — | — | 5 | — | 5 | — | 5 | ||||||||||||||||
Repurchase of common stock | (199,976) | (2) | — | — | (1,223) | — | (1,225) | 19 | (1,206) | ||||||||||||||||
Restricted shares forfeited | (319,874) | (3) | — | — | (332) | — | (335) | 335 | — | ||||||||||||||||
Noncontrolling interest in subsidiary | — | — | — | — | (140) | — | (140) | (934) | (1,074) | ||||||||||||||||
NCI income tax adjustment | — | — | — | — | 31 | — | 31 | (31) | — | ||||||||||||||||
Net loss |
| — |
| — |
| — |
| — |
|
| — |
| (51,718) |
| (51,718) |
| (9,522) |
|
| (61,240) | |||||
Balance as of September 30, 2021 |
| 92,056,219 | $ | 921 |
| 16,221,101 | $ | 162 |
| $ | 935,742 | $ | (368,965) | $ | 567,860 | $ | 101,101 | $ | 668,961 | ||||||
The accompanying notes to consolidated financial statements are an integral part of these financial statements
9
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the three months ended September 30, 2022 and 2021
(unaudited)
(in thousands, except share data)
Class A | Class B | ||||||||||||||||||||||||
Stockholders | Stockholders | ||||||||||||||||||||||||
Class A | Class B | Additional | Total | ||||||||||||||||||||||
Common | Common | Paid-In | Accumulated | Stockholders’ | Noncontrolling | ||||||||||||||||||||
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Deficit |
| Equity |
| Interests |
| Total | ||||||||
Balance as of June 30, 2022 |
| 98,160,573 | $ | 982 |
| 16,221,101 | $ | 162 |
| $ | 974,066 | $ | (340,167) | $ | 635,043 | $ | 106,102 | $ | 741,145 | ||||||
ESPP shares issued | 1,541 | — | — | — | 10 | — | 10 | — | 10 | ||||||||||||||||
Equity-based compensation | — | — | — | — | 3,265 | — | 3,265 | 539 | 3,804 | ||||||||||||||||
Repurchase of common stock | (40,060) | (1) | — | — | (268) | — | (269) | (2) | (271) | ||||||||||||||||
Restricted shares forfeited | (24,124) | — | — | — | (22) | — | (22) | 22 | — | ||||||||||||||||
NCI income tax adjustment | — | — | — | — | 12 | — | 12 | (15) | (3) | ||||||||||||||||
Net income |
| — |
| — |
| — |
| — |
|
| — |
| 21,324 |
| 21,324 |
| 3,393 |
|
| 24,717 | |||||
Balance as of September 30, 2022 |
| 98,097,930 | $ | 981 |
| 16,221,101 | $ | 162 |
| $ | 977,063 | $ | (318,843) | $ | 659,363 | $ | 110,039 | $ | 769,402 | ||||||
Class A | Class B | ||||||||||||||||||||||||
Stockholders | Stockholders | ||||||||||||||||||||||||
Class A | Class B | Additional | Total | ||||||||||||||||||||||
Common | Common | Paid-In | Accumulated | Stockholders’ | Noncontrolling | ||||||||||||||||||||
| Shares |
| Stock |
| Shares |
| Stock |
| Capital |
| Deficit |
| Equity |
| Interests |
| Total | ||||||||
Balance as of June 30, 2021 |
| 88,160,703 | $ | 882 |
| 16,221,101 | $ | 162 |
| $ | 912,872 | $ | (356,921) | $ | 556,995 | $ | 103,551 | $ | 660,546 | ||||||
ESPP shares issued | 2,906 | — | — | — | 14 | — | 14 | — | 14 | ||||||||||||||||
Equity-based compensation | — | — | — | — | 1,957 | — | 1,957 | 345 | 2,302 | ||||||||||||||||
Issuance of restricted shares | 311,089 | 3 | — | — | 281 | — | 284 | (285) | (1) | ||||||||||||||||
Issuance of shares for acquisitions | 3,600,000 | 36 | — | — | 20,627 | — | 20,663 | (359) | 20,304 | ||||||||||||||||
Restricted shares forfeited | (18,479) | — | — | — | (17) | — | (17) | 17 | — | ||||||||||||||||
NCI income tax adjustment | — | — | — | — | 8 | — | 8 | (8) | — | ||||||||||||||||
Net loss |
| — |
| — |
| — |
| — |
|
| — |
| (12,044) |
| (12,044) |
| (2,160) |
|
| (14,204) | |||||
Balance as of September 30, 2021 |
| 92,056,219 | $ | 921 |
| 16,221,101 | $ | 162 |
| $ | 935,742 | $ | (368,965) | $ | 567,860 | $ | 101,101 | $ | 668,961 | ||||||
The accompanying notes to consolidated financial statements are an integral part of these financial statements
10
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine months ended September 30, | ||||||
| 2022 |
| 2021 | |||
Cash flows from operating activities |
| |||||
Net income (loss) | $ | 47,283 | $ | (61,240) | ||
Adjustments to reconcile net income (loss) to net cash used in operating activities |
|
| ||||
Depreciation and amortization |
| 84,061 |
| 67,407 | ||
(Gain) loss on disposal of property and equipment and divestitures |
| (1,905) |
| 1,921 | ||
Equity in losses of unconsolidated entities | 576 | 129 | ||||
Bad debt expense (recovery) |
| 2,091 |
| (651) | ||
Amortization of debt issuance costs |
| 539 |
| 516 | ||
Inventory adjustments | (612) | 139 | ||||
Equity-based compensation |
| 11,023 |
| 6,248 | ||
Bargain purchase gain |
| (13,768) |
| — | ||
Unrealized loss on short-term investment | — | 1,406 | ||||
Other operating items, net |
| (710) |
| (309) | ||
Changes in operating assets and liabilities |
|
| ||||
Accounts receivable |
| (141,468) |
| (32,509) | ||
Prepaid expenses and other assets |
| (200) |
| (10,284) | ||
Accounts payable and accrued liabilities |
| 10,983 |
| 13,331 | ||
Net cash used in operating activities |
| (2,107) |
| (13,896) | ||
Cash flows from investing activities |
|
| ||||
Purchase of property and equipment |
| (50,815) |
| (29,925) | ||
Investment in note receivable | — |
| (1,101) | |||
Purchase of equity-method investments | (6,767) |
| (2,200) | |||
Collection of note receivable | 184 |
| — | |||
Distribution from cost method investment | 60 | 120 | ||||
Acquisitions, net of cash and restricted cash received |
| 5,707 |
| (18,644) | ||
Proceeds received from sales of property and equipment |
| 21,433 |
| 6,491 | ||
Proceeds received from divestitures | 705 |
| — | |||
Net cash used in investing activities |
| (29,493) |
| (45,259) | ||
Cash flows from financing activities |
|
| ||||
Borrowings from revolving line of credit | 82,000 | — | ||||
Payments on revolving line of credit |
| (82,000) |
| — | ||
Payments on long-term debt |
| (18,780) |
| — | ||
Payments of finance lease obligations | (108) | (238) | ||||
Payment of debt issuance costs |
| (2,144) |
| — | ||
Proceeds from share issuance | 35 | 43 | ||||
Distributions to noncontrolling interests |
| — |
| (1,074) | ||
Repurchase of common stock |
| (19,967) |
| (1,206) | ||
Net cash used in financing activities |
| (40,964) |
| (2,475) | ||
Effect of exchange rate changes on cash |
| (15) |
| 4 | ||
Net decrease in cash and cash equivalents |
| (72,579) |
| (61,626) | ||
Cash and cash equivalents, beginning of period |
| 85,801 |
| 169,039 | ||
Cash and cash equivalents, end of period | $ | 13,222 | $ | 107,413 | ||
Supplemental cash flow disclosure: |
|
| ||||
Cash paid for interest | $ | 1,255 | $ | 1,108 | ||
Cash refunds received for income taxes, net | $ | (452) | $ | (927) | ||
Supplemental disclosure of noncash investing activities: |
|
| ||||
Issuance of shares for acquisitions | $ | 35,854 | $ | 20,304 | ||
Conversion of notes receivable to equity-method investment | $ | 4,442 | $ | — | ||
Capital expenditures included in accounts payable and accrued liabilities | $ | 19,896 | $ | 8,433 | ||
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
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SELECT ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1—BUSINESS AND BASIS OF PRESENTATION
Description of the business: Select Energy Services, Inc. (“we,” “Select Inc.” or the “Company”) was incorporated as a Delaware corporation on November 21, 2016. The Company is a holding company whose sole material asset consists of common units (“SES Holdings LLC Units”) in SES Holdings, LLC (“SES Holdings”).
We are a leading provider of comprehensive water-management and chemical solutions to the oil and gas industry in the U.S. As a leader in the water solutions industry, we place the utmost importance on safe, environmentally responsible management of oilfield water throughout the lifecycle of a well. Additionally, we believe that responsibly managing water resources through our operations to help conserve and protect the environment in the communities in which we operate is paramount to our continued success.
Class A and Class B Common Stock: As of September 30, 2022, the Company had both Class A and Class B common shares issued and outstanding. Holders of shares of our Class A common stock, par value $0.01 per share (“Class A Common Stock”) and Class B common stock, par value $0.01 per share (“Class B Common Stock”) are entitled to one vote per share and vote together as a single class on all matters presented to our stockholders for their vote or approval.
Exchange rights: Under the Eighth Amended and Restated Limited Liability Company Agreement of SES Holdings (the “SES Holdings LLC Agreement”), SES Legacy Holdings LLC (“Legacy Owner Holdco”) and its permitted transferees have the right (an “Exchange Right”) to cause SES Holdings to acquire all or a portion of its SES Holdings LLC Units for, at SES Holdings’ election, (i) shares of Class A Common Stock at an exchange ratio of one share of Class A Common Stock for each SES Holdings LLC Unit exchanged, subject to conversion rate adjustments for stock splits, stock dividends, reclassification and other similar transactions or (ii) cash in an amount equal to the Cash Election Value (as defined within the SES Holdings LLC Agreement) of such Class A Common Stock. Alternatively, upon the exercise of any Exchange Right, Select Inc. has the right (the “Call Right”) to acquire the tendered SES Holdings LLC Units from the exchanging unitholder for, at its election, (i) the number of shares of Class A Common Stock the exchanging unitholder would have received under the Exchange Right or (ii) cash in an amount equal to the Cash Election Value of such Class A Common Stock. In connection with any exchange of SES Holdings LLC Units pursuant to an Exchange Right or Call Right, the corresponding number of shares of Class B Common Stock will be cancelled.
Basis of presentation: The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”) and pursuant to the rules and regulations of the SEC. These unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with GAAP.
This Quarterly Report relates to the three and nine months ended September 30, 2022 (the “Current Quarter” and the “Current Period”, respectively) and the three and nine months ended September 30, 2021 (the “Prior Quarter” and the “Prior Period”, respectively). The Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”), filed with the SEC on February 23, 2022, includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Quarterly Report. All material adjustments (consisting solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. The results for the Current Quarter and Current Period may not be indicative of the results to be expected for the full year, in part due to the war between Russia and Ukraine, the continuing effects of the COVID-19 pandemic and large variations in oil and natural gas prices during the Current Quarter and Current Period.
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The unaudited interim consolidated financial statements include the accounts of the Company and all of its majority-owned or controlled subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
For investments in subsidiaries that are not wholly owned, but where the Company exercises control, the equity held by the minority owners and their portion of net income or loss are reflected as noncontrolling interests. Investments in entities in which the Company exercises significant influence over operating and financial policies are accounted for using the equity-method, and investments in entities for which the Company does not have significant control or influence are accounted for using the cost method or other appropriate basis as applicable. As of September 30, 2022, the Company had three equity-method investments and one cost-method investment. The Company’s investments are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. When circumstances indicate that the fair value of its investment is less than its carrying value and the reduction in value is other than temporary, the reduction in value is recognized in earnings. Our investments in unconsolidated entities are summarized below and are included in the assets of our Water Services segment:
| (1) | Investment in notes receivable converted to equity-method investment during the Current Period. |
| (2) | Ownership percentage increased in the Current Period due to additional contributions. Minority interest was 33% as of December 31, 2021. |
| (3) | Ownership percentage increased in the Current Period due to additional contributions. Minority interest was 45% as of December 31, 2021. |
Segment reporting: The Company has three reportable segments. Reportable segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company’s current reportable segments are Water Services, Water Infrastructure, and Oilfield Chemicals. See “Note 16—Segment Information” for additional information.
The Water Services segment consists of the Company’s services businesses, including water transfer, flowback and well testing, fluids hauling, water containment and water network automation, primarily serving E&P companies. Additionally, this segment includes the operations of our accommodations and rentals business.
The Water Infrastructure segment consists of the Company’s infrastructure assets, including operations associated with our water sourcing and pipeline infrastructure, our water recycling solutions, and our produced water gathering systems and saltwater disposal wells, as well as solids disposal facilities, primarily serving E&P companies.
The Oilfield Chemicals segment provides technical solutions, products and expertise related to chemical applications in the oil and gas industry. We develop, manufacture, manage logistics and provide a full suite of chemicals used in hydraulic fracturing, stimulation, cementing, pipelines and well completions for customers ranging from pressure pumpers to major integrated and independent oil and gas producers. This segment also utilizes its chemical experience and lab testing capabilities to customize tailored water treatment solutions designed to optimize the fracturing fluid system in conjunction with the quality of water used in well completions.
Reclassifications: Certain reclassifications have been made to the Company’s prior period consolidated financial information to conform to the current year presentation. These presentation changes did not impact the Company’s consolidated net income, consolidated cash flows, total assets, total liabilities or total stockholders’ equity.
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NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies: The Company’s significant accounting policies are disclosed in Note 2 of the consolidated financial statements for the year ended December 31, 2021, included in the 2021 Form 10-K.
Use of estimates: The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
On an ongoing basis, the Company evaluates its estimates, including those related to the recoverability of long-lived assets and intangibles, useful lives used in depreciation and amortization, uncollectible accounts receivable, inventory reserve, income taxes, self-insurance liabilities, share-based compensation, contingent liabilities, lease-related reasonably certain option exercise assessments, and the incremental borrowing rate for leases. The Company bases its estimates on historical and other pertinent information that are believed to be reasonable under the circumstances. The accounting estimates used in the preparation of the consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes.
Allowance for credit losses: The Company’s allowance for credit losses relates to trade accounts receivable. The Company treats trade accounts receivable as one portfolio and records an initial allowance calculated as a percentage of revenue recognized based on a combination of historical information and future expectations. Additionally, the Company adjusts this allowance based on specific information in connection with aged receivables. Historically, most bad debt has been incurred when a customer’s financial condition significantly deteriorates, which in some cases leads to bankruptcy. Market volatility is highly uncertain and, as such, the impact on expected losses is subject to significant judgment and may cause variability in the Company’s allowance for credit losses in future periods.
The change in the allowance for credit losses is as follows:
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Asset retirement obligations: The Company’s asset retirement obligations (“ARO”) relate to disposal facilities with obligations for plugging wells, removing surface equipment, and returning land to its pre-drilling condition. The following table describes the changes to the Company’s ARO liability for the Current Period:
We review the adequacy of our ARO liabilities whenever indicators suggest that the estimated cash flows underlying the liabilities have changed. The Company’s ARO liabilities are included in accrued expenses and other current liabilities and other long-term liabilities in the accompanying consolidated balance sheets.
Lessor Income: The Company is a lessor for a nominal number of owned facilities and also recognizes income related to multiple facility subleases that are accounted for as follows:
The Company also generates short-term equipment rental revenue. See “Note 4—Revenue” for a discussion of revenue recognition for the accommodations and rentals business.
Defined Contribution Plan: During 2020, due to worsening economic conditions, the Company suspended the match of its defined contribution 401(k) plan and the suspension continued into the first half of 2021. Effective July 1, 2021, the Company reinstated matching contributions of 50% of employee contributions, up to 4% of eligible earnings. The Company incurred $0.5 million, $0.1 million, $1.7 million and $0.1 million match expense in the Current Quarter, Prior Quarter, Current Period and Prior Period, respectively.
Payroll Tax Deferral: In 2020, the Company took advantage of the employer payroll tax deferral provision in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and deferred the payment of $6.0 million of payroll taxes. Half of the deferral was paid during the fourth quarter of 2021 and the remaining balance of $3.0 million must be repaid by December 31, 2022. The remaining deferral is reported under accrued salaries and benefits on the accompanying consolidated balance sheets as of September 30, 2022.
Severance: During the Prior Period, the Company incurred $3.2 million of severance in connection with the termination of its former chief executive officer, which was paid in full during the first quarter of 2021 and included in selling, general and administrative in the consolidated statements of operations.
15
NOTE 3—ACQUISITIONS
Business combinations
The following table presents key information connected with our 2022 and 2021 acquisitions (dollars in thousands, except share amounts):
Assets and Operations Acquired | Acquisition Date | Shares Issued | Cash Consideration | Value of Shares Issued | Total Consideration | Segments | |||
Nuverra | February 23, 2022 | 4,203,323 | $ | — | $ | 35,854 | $ | 35,854 | Water Services & Water Infrastructure |
HB Rentals | December 3, 2021 | 1,211,375 | 2,610 | 7,135 | 9,745 | Water Services | |||
Agua Libre and Basic | October 1, 2021 | 902,593 | 16,394 | 4,684 | 21,078 | Water Services & Water Infrastructure | |||
Complete | July 9, 2021 | 3,600,000 | 14,356 | 20,304 | 34,660 | Water Services & Water Infrastructure | |||
Total | 9,917,291 | $ | 33,360 | $ | 67,977 | $ | 101,337 |
Nuverra Acquisition
On February 23, 2022, the Company completed the acquisition of Nuverra Environmental Solutions, Inc. (“Nuverra”) for total consideration of $35.9 million based on the closing price of the Company’s shares of Class A Common Stock on February 23, 2022 (the “Nuverra Acquisition”). Consideration transferred consisted of 4,203,323 shares of Class A Common Stock. The acquisition strengthened Select’s geographic footprint with a unique set of water logistics and infrastructure assets, particularly in the Bakken, Haynesville and Northeast, while continuing to expand Select’s production-related revenues. Select also acquired a 60-mile underground twin pipeline network in the Haynesville Shale in Texas and Louisiana. This pipeline network is used for the collection of produced water for transport to interconnected disposal wells and the delivery or re-delivery of water from water sources to operator locations for use in well completion activities. Additionally, Nuverra operates a landfill facility in North Dakota located on a 50-acre site. The facility provides a unique opportunity for Select to expand its logistics capabilities into a new service offering. The acquisition is expected to result in a bargain purchase gain based on our preliminary evaluation, as Nuverra was experiencing financial distress and actively evaluating strategic alternatives leading up to the transaction.
The Nuverra Acquisition was accounted for as a business combination under the acquisition method of accounting. When determining the fair values of assets acquired and liabilities assumed, management made estimates, judgments and assumptions. The Company has engaged third-party valuation experts to assist in the purchase price allocation. These estimates, judgments and assumptions and valuation of the property and equipment acquired, current assets, current liabilities and long-term liabilities have not been finalized as of September 30, 2022. The Nuverra debt, including accrued interest, totaled $18.8 million, and was repaid during the Current Period after the acquisition was completed. The assets acquired and liabilities assumed are included in the Company’s Water Services and Water Infrastructure segments. The Company incurred $0.5 million and $3.6 million of transaction-related costs related to this acquisition in the Current Quarter and Current Period, respectively, and such costs are included in selling, general and administrative within the consolidated statements of operations.
The Company assumed $1.6 million of severance liabilities in connection with the Nuverra acquisition and $0.1 million is included in accrued salaries and benefits as of September 30, 2022.
16
The following table summarizes the consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition: