November 7, 2018 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

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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, 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 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 November 2, 2018, the registrant had 80,658,534 shares of Class A common stock and 26,026,843 shares of Class B common stock outstanding.

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SELECT ENERGY SERVICES, INC.

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		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

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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 level of capital spending by oil and gas companies;

trends and volatility in oil and gas prices;

demand for our services;

capacity constraints on regional oil and natural gas gathering, processing and pipeline systems that result in slowdown in drilling and completion investment, and thus the demand for our services in our core markets;

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

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 health, safety and environmental performance;

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 impact of competition on our operations;

the degree to which our exploration and production (“E&P”) customers may elect to bring their water-management services in-house rather than source these services from companies like us;

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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;

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.

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SELECT ENERGY SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	September 30, 2018		December 31, 2017
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	13,050	$	2,774
Accounts receivable trade, net of allowance for doubtful accounts of $2,549 and $2,979, respectively		422,383		373,633
Accounts receivable, related parties		2,313		7,669
Inventories, net		49,457		44,598
Prepaid expenses and other current assets		20,805		17,842
Total current assets		508,008		446,516
Property and equipment		1,112,138		1,034,995
Accumulated depreciation		(608,040)		(560,886)
Property and equipment, net		504,098		474,109
Goodwill		274,753		273,421
Other intangible assets, net		148,327		156,066
Other assets		3,599		6,256
Total assets	$	1,438,785	$	1,356,368
Liabilities and Equity
Current liabilities
Accounts payable	$	54,437	$	52,579
Accounts payable and accrued expenses, related parties		4,341		2,772
Accrued salaries and benefits		25,614		21,324
Accrued insurance		20,492		12,510
Sales tax payable		5,155		12,931
Accrued expenses and other current liabilities		91,218		81,112
Current portion of capital lease obligations		1,176		1,965
Total current liabilities		202,433		185,193
Accrued lease obligations		18,547		18,979
Other long-term liabilities		10,133		13,827
Long-term debt		65,000		75,000
Total liabilities		296,113		292,999
Commitments and contingencies (Note 9)
Class A common stock, $0.01 par value; 350,000,000 shares authorized and 80,658,534 shares issued and outstanding as of September 30, 2018; 350,000,000 shares authorized and 59,182,176 shares issued and outstanding as of December 31, 2017		807		592
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized, no shares issued or outstanding as of September 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 26,026,843 shares issued and outstanding as of September 30, 2018; 150,000,000 shares authorized and 40,331,989 shares issued and outstanding as of December 31, 2017		260		404
Preferred stock, $0.01 par value; 50,000,000 shares authorized and no shares issued and outstanding as of September 30, 2018 and December 31, 2017		—		—
Additional paid-in capital		828,137		673,141
Retained earnings (accumulated deficit)		32,153		(17,859)
Accumulated other comprehensive (deficit) income		(17)		302
Total stockholders’ equity		861,340		656,647
Noncontrolling interests		281,332		406,722
Total equity		1,142,672		1,063,369
Total liabilities and equity	$	1,438,785	$	1,356,368

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

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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,
	2018		2017		2018		2017
Revenue
Water solutions and related services	$	301,410	$	125,086	$	880,411	$	311,275
Accommodations and rentals		18,022		15,615		48,715		38,457
Wellsite completion and construction services		13,553		13,179		45,064		38,522
Oilfield chemical product sales		63,985		—		192,422		—
Total revenue		396,970		153,880		1,166,612		388,254
Costs of revenue
Water solutions and related services		226,622		88,087		665,805		226,737
Accommodations and rentals		11,578		11,976		33,016		30,697
Wellsite completion and construction services		11,047		10,888		38,480		32,155
Oilfield chemical product sales		56,473		—		172,057		—
Depreciation and amortization		31,853		23,420		93,180		67,144
Total costs of revenue		337,573		134,371		1,002,538		356,733
Gross profit		59,397		19,509		164,074		31,521
Operating expenses
Selling, general and administrative		25,110		16,087		77,662		49,298
Depreciation and amortization		984		375		2,332		1,312
Impairment of property and equipment		—		—		2,282		—
Impairment of investment		—		—		2,000		—
Lease abandonment costs		1,045		590		4,142		2,871
Total operating expenses		27,139		17,052		88,418		53,481
Income (loss) from operations		32,258		2,457		75,656		(21,960)
Other income (expense)
Interest expense, net		(1,322)		(484)		(3,815)		(1,885)
Foreign currency gain (loss), net		248		—		(492)		—
Other income, net		1,498		326		3,099		3,342
Income (loss) before tax expense		32,682		2,299		74,448		(20,503)
Income tax (expense) benefit		(1,415)		294		(2,027)		326
Net income (loss)		31,267		2,593		72,421		(20,177)
Less: net (income) loss attributable to noncontrolling interests		(8,316)		(1,369)		(22,409)		13,013
Net income (loss) attributable to Select Energy Services, Inc.	$	22,951	$	1,224	$	50,012	$	(7,164)

Net income (loss) per share attributable to common stockholders (Note 15):
Class A—Basic	$	0.29	$	0.04	$	0.69	$	(0.28)
Class A-1—Basic	$	—	$	—	$	—	$	(0.28)
Class A-2—Basic	$	—	$	—	$	0.69	$	—
Class B—Basic	$	—	$	—	$	—	$	—

Net income (loss) per share attributable to common stockholders (Note 15):
Class A—Diluted	$	0.29	$	0.04	$	0.69	$	(0.28)
Class A-1—Diluted	$	—	$	—	$	—	$	(0.28)
Class A-2—Diluted	$	—	$	—	$	0.69	$	—
Class B—Diluted	$	—	$	—	$	—	$	—

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

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SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

(in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Net income (loss)	$	31,267	$	2,593	$	72,421	$	(20,177)
Other comprehensive income (loss)
Foreign currency translation adjustment, net of tax of $0		131		—		(319)		—
Net change in unrealized gain (loss)		131		—		(319)		—
Comprehensive income (loss)		31,398		2,593		72,102		(20,177)
Less: comprehensive (income) loss attributable to noncontrolling interests		(8,351)		(1,369)		(22,310)		13,013
Comprehensive income (loss) attributable to Select Energy Services, Inc.	$	23,047	$	1,224	$	49,792	$	(7,164)

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

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SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the nine months ended September 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	14,305,146		144	—		—	(14,305,146)		(144)	—		—		146,865		—		—		146,865		(146,865)		—
ESPP shares issued	6,413		—	—		—	—		—	—		—		99		—		—		99		(13)		86
Equity-based compensation	—		—	—		—	—		—	—		—		5,543		—		—		5,543		2,487		8,030
Issuance of restricted shares	438,182		4	—		—	—		—	—		—		2,321		—		—		2,325		(2,325)		—
Exercise of restricted stock units	27,860		—	—		—	—		—	—		—		104		—		—		104		(104)		—
Stock options exercised	79,333		1	—		—	—		—	—		—		1,018		—		—		1,019		(374)		645
Repurchase of common stock	(62,777)		(1)	(6)		—	—		—	—		—		(803)		—		—		(804)		(73)		(877)
Restricted shares forfeited	(49,638)		—	—		—	—		—	—		—		(380)		—		—		(380)		379		(1)
Distributions to noncontrolling interests, net	—		—	—		—	—		—	—		—		—		—		—		—		(506)		(506)
NCI income tax adjustment	—		—	—		—	—		—	—		—		229		—		—		229		(229)		—
Foreign currency translation adjustment	—		—	—		—	—		—	—		—		—		—		(319)		(319)		(176)		(495)
Net income	—		—	—		—	—		—	—		—		—		50,012		—		50,012		22,409		72,421
Balance as of September 30, 2018	80,658,534	$	807	—	$	—	26,026,843	$	260	—	$	—	$	828,137	$	32,153	$	(17)	$	861,340	$	281,332	$	1,142,672


	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	560,277		6	—		—	—		—	—		—	—		—		4,360		—		—		4,366		5,514		9,880
Issuance of shares for initial public offering	10,005,000		100	—		—	—		—	—		—	—		—		87,835		—		—		87,935		40,569		128,504
Equity-based compensation	—		—	—		—	—		—	—		—	—		—		788		—		—		788		993		1,781
Distributions to noncontrolling interests, net	—

Form: 10-Q

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