August 10, 2018 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

Table of Contents

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 June 30, 2018

☐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)

515 Post Oak Boulevard, Suite 200 Houston, TX	77027
(Address of principal executive offices)	(Zip Code)

(713) 235‑9500

(Registrant’s telephone number, including area code)

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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post 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 ☐
		(Do not check if a 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 August 3, 2018, the registrant had 79,337,119 shares of Class A common stock and 27,351,022 shares of Class B common stock outstanding.

Table of Contents

SELECT ENERGY SERVICES, INC.

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	57

Item 4.	Controls and Procedures	58

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	59

Item 1A.	Risk Factors	59

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59

Item 3.	Defaults upon Senior Securities	60

Item 4.	Mine Safety Disclosures	60

Item 5.	Other Information	60

Item 6.	Exhibits	60

Table of Contents

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 and under the heading “Part II―Item 1A. Risk Factors” in this Quarterly Report. 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 ultimate outcome and results of integrating our operations with the operations of Rockwater (as defined herein);

the effects of our business combination with Rockwater, including the combined company’s future financial condition, results of operations, strategy and plans;

potential adverse reactions or changes to business relationships resulting from the completion of the Rockwater Merger (as defined herein);

expected benefits from the Rockwater Merger and the ability of the combined company to realize those benefits;

the level of capital spending by oil and gas companies;

trends and volatility in oil and gas prices;

demand for our services;

regional impacts to our business such as takeaway capacity and our key infrastructure assets;

our ability to retain key management and employees;

our ability to hire and retain skilled labor;

our level of indebtedness and our ability to comply with covenants contained in our Credit Agreement (as defined herein) or future debt instruments;

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 safety performance;

Table of Contents

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 fresh water transfer, chemicals and various environmental matters;

the impacts of competition on our operations;

the degree to which customers may elect to source water services internally;

delays or restrictions in obtaining permits by us or our customers;

constraints in supply or availability of equipment used in our business;

the impacts of advancements, or changes in costs, in drilling, completions and well service technologies;

changes in global political or economic conditions, generally, and in the markets we serve;

accidents, weather, seasonality 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 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.

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SELECT ENERGY SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	June 30, 2018		December 31, 2017
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	11,301	$	2,774
Accounts receivable trade, net of allowance for doubtful accounts of $3,762 and $2,979, respectively		425,217		373,633
Accounts receivable, related parties		820		7,669
Inventories		51,680		44,598
Prepaid expenses and other current assets		29,800		17,842
Total current assets		518,818		446,516
Property and equipment		1,063,847		1,034,995
Accumulated depreciation		(580,102)		(560,886)
Property and equipment, net		483,745		474,109
Goodwill		278,359		273,421
Other intangible assets, net		148,908		156,066
Other assets		3,912		6,256
Total assets	$	1,433,742	$	1,356,368
Liabilities and Equity
Current liabilities
Accounts payable	$	66,756	$	52,579
Accounts payable and accrued expenses, related parties		3,924		2,772
Accrued salaries and benefits		14,394		21,324
Accrued insurance		23,260		12,510
Sales tax payable		9,870		12,931
Accrued expenses and other current liabilities		96,409		81,112
Current portion of capital lease obligations		1,468		1,965
Total current liabilities		216,081		185,193
Accrued lease obligations		19,220		18,979
Other long term liabilities		9,629		13,827
Long-term debt		80,000		75,000
Total liabilities		324,930		292,999
Commitments and contingencies (Note 9)
Class A common stock, $0.01 par value; 350,000,000 shares authorized and 77,298,660 shares issued and outstanding as of June 30, 2018; 350,000,000 shares authorized and 59,182,176 shares issued and outstanding as of December 31, 2017		773		592
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized, no shares issued or outstanding as of June 30, 2018; 40,000,000 shares authorized, 6,731,845 shares issued and outstanding as of December 31, 2017		—		67
Class B common stock, $0.01 par value; 150,000,000 shares authorized and 29,383,320 shares issued and outstanding as of June 30, 2018; 150,000,000 shares authorized and 40,331,989 shares issued and outstanding as of December 31, 2017		294		404
Preferred stock, $0.01 par value; 50,000,000 shares authorized and no shares issued and outstanding as of June 30, 2018 and December 31, 2017		—		—
Additional paid-in capital		790,699		673,141
Retained earnings (accumulated deficit)		9,203		(17,859)
Accumulated other comprehensive (deficit) income		(148)		302
Total stockholders’ equity		800,821		656,647
Noncontrolling interests		307,991		406,722
Total equity		1,108,812		1,063,369
Total liabilities and equity	$	1,433,742	$	1,356,368

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

Table of Contents

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share data)


	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Revenue
Water solutions and related services	$	297,446	$	107,812	$	579,001	$	186,189
Accommodations and rentals		15,949		13,327		30,693		22,842
Wellsite completion and construction services		15,045		13,310		31,511		25,343
Oilfield chemical product sales		64,807		—		128,437		—
Total revenue		393,247		134,449		769,642		234,374
Costs of revenue
Water solutions and related services		223,758		78,028		439,183		138,649
Accommodations and rentals		10,773		10,799		21,438		18,722
Wellsite completion and construction services		13,043		10,848		27,433		21,267
Oilfield chemical product sales		58,500		—		115,584		—
Depreciation and amortization		30,445		22,520		61,327		43,724
Total costs of revenue		336,519		122,195		664,965		222,362
Gross profit		56,728		12,254		104,677		12,012
Operating expenses
Selling, general and administrative		26,871		23,254		52,552		33,211
Depreciation and amortization		807		491		1,348		937
Impairment of property and equipment		2,282		—		2,282		—
Impairment of investment		—		—		2,000		—
Lease abandonment costs		1,973		418		3,097		2,281
Total operating expenses		31,933		24,163		61,279		36,429
Income (loss) from operations		24,795		(11,909)		43,398		(24,417)
Other income (expense)
Interest expense, net		(1,342)		(671)		(2,493)		(1,401)
Foreign currency losses, net		(340)		—		(740)		—
Other income, net		2,060		1,952		1,602		3,016
Income (loss) before tax expense		25,173		(10,628)		41,767		(22,802)
Tax (expense) benefit		(150)		138		(612)		32
Net income (loss)		25,023		(10,490)		41,155		(22,770)
Less: net (income) loss attributable to noncontrolling interests		(8,060)		6,274		(14,093)		14,382
Net income (loss) attributable to Select Energy Services, Inc.	$	16,963	$	(4,216)	$	27,062	$	(8,388)

Net income (loss) per share attributable to common stockholders (Note 15):
Class A—Basic	$	0.24	$	(0.16)	$	0.40	$	(0.36)
Class A-1—Basic	$	—	$	(0.16)	$	—	$	(0.36)
Class A-2—Basic	$	—	$	—	$	0.40	$	—
Class B—Basic	$	—	$	—	$	—	$	—

Net income (loss) per share attributable to common stockholders (Note 15):
Class A—Diluted	$	0.24	$	(0.16)	$	0.39	$	(0.36)
Class A-1—Diluted	$	—	$	(0.16)	$	—	$	(0.36)
Class A-2—Diluted	$	—	$	—	$	0.39	$	—
Class B—Diluted	$	—	$	—	$	—	$	—

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

Table of Contents

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

(in thousands)


	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Net income (loss)	$	25,023	$	(10,490)	$	41,155	$	(22,770)
Other comprehensive income (loss)
Foreign currency translation adjustment, net of tax of $0		(191)		—		(450)		—
Net change in unrealized loss		(191)		—		(450)		—
Comprehensive income (loss)		24,832		(10,490)		40,705		(22,770)
Less: comprehensive (income) loss attributable to noncontrolling interests		(7,998)		6,274		(13,939)		14,382
Comprehensive income (loss) attributable to Select Energy Services, Inc.	$	16,834	$	(4,216)	$	26,766	$	(8,388)

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

Table of Contents

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the six months ended June 30, 2018 and 2017

(unaudited)

(in thousands, except share data)


	Class A			Class A-2			Class B			Preferred							Accumulated
	Stockholders			Stockholders			Stockholders			Stockholders					Retained		Other
		Class A			Class A-2			Class B					Additional		Earnings		Comprehensive		Total
		Common			Common			Common			Preferred		Paid-In		(Accumulated		Income		Stockholders’		Noncontrolling
	Shares	Stock		Shares	Stock		Shares	Stock		Shares	Stock		Capital		Deficit)		(Loss)		Equity		Interests		Total
Balance as of December 31, 2017	59,182,176	$	592	6,731,845	$	67	40,331,989	$	404	—	$	—	$	673,141	$	(17,859)	$	302	$	656,647	$	406,722	$	1,063,369
Conversion of Class A-2 to Class A	6,731,839		67	(6,731,839)		(67)	—		—	—		—		—		—		—		—		—		—
Conversion of Class B to Class A	10,948,669		110	—		—	(10,948,669)		(110)	—		—		111,803		—		—		111,803		(111,803)		—
ESPP shares issued	3,986		—	—		—	—		—	—		—		50		—		—		50		4		54
Equity-based compensation	—		—	—		—	—		—	—		—		3,617		—		—		3,617		1,848		5,465
Issuance of restricted shares	430,595		4	—		—	—		—	—		—		2,261		—		—		2,265		(2,265)		—
Exercise of restricted stock units	27,860		—	—		—	—		—	—		—		104		—		—		104		(104)		—
Stock options exercised	37,209		—	—		—	—		—	—		—		376		—		—		376		1		377
Repurchase of common stock	(45,034)		—	(6)		—	—		—	—		—		(583)		—		—		(583)		(74)		(657)
Restricted shares forfeited	(18,640)		—	—		—	—		—	—		—		(70)		—		—		(70)		70		—
Noncontrolling interest in subsidiary	—		—	—		—	—		—	—		—		—		—		—		—		(280)		(280)
Foreign currency translation adjustment	—		—	—		—	—		—	—		—		—		—		(450)		(450)		(221)		(671)
Net income	—		—	—		—	—		—	—		—		—		27,062		—		27,062		14,093		41,155
Balance as of June 30, 2018	77,298,660	$	773	—	$	—	29,383,320	$	294	—	$	—	$	790,699	$	9,203	$	(148)	$	800,821	$	307,991	$	1,108,812


	Class A			Class A-1			Class A-2			Class B			Preferred							Accumulated
	Stockholders			Stockholders			Stockholders			Stockholders			Stockholders							Other
		Class A			Class A-1			Class A-2			Class B					Additional				Comprehensive		Total
		Common			Common			Common			Common			Preferred		Paid-In		Accumulated		Income		Stockholders’		Noncontrolling
	Shares	Stock		Shares	Stock		Shares	Stock		Shares	Stock		Shares	Stock		Capital		Deficit		(Loss)		Equity		Interests		Total
Balance as of December 31, 2016	3,802,972	$	38	16,100,000	$	161	—	$	—	38,462,541	$	385	—	$	—	$	113,175	$	(1,043)	$	—	$	112,716	$	221,992	$	334,708
Conversion of Class A-1 to Class A	16,100,000		161	(16,100,000)		(161)	—		—	—		—	—		—		—		—		—		—		—		—
Issuance of shares for acquisition	403,368		4	—		—	—		—	—		—	—		—		3,301		—		—		3,305		4,195		7,500
Issuance of shares for initial public offering	10,005,000		100	—		—	—		—	—		—	—		—		87,276		—		—		87,376		41,128		128,504
Equity-based compensation	—		—	—		—	—		—	—		—	—		—		543		—		—		543		689		1,232
Noncontrolling interest in subsidiary	—		—	—		—	—		—	—		—	—		—		—		—		—		—

Form: 10-Q

Documents