August 7, 2019 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

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, 2019

☐	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 August 2, 2019, the registrant had 80,177,766 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	39

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	56

Item 4.	Controls and Procedures	57

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	58

Item 1A.	Risk Factors	58

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58

Item 3.	Defaults upon Senior Securities	59

Item 4.	Mine Safety Disclosures	59

Item 5.	Other Information	59

Item 6.	Exhibits	59

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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 and access to capital markets by oil and gas companies;

●

trends and volatility in oil and gas prices;

●

demand for our services;

●

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 slowdown or delay in the demand for our services in our core markets;

●

our ability to retain key management and employees;

●

our ability to hire and retain skilled labor;

●

regional impacts to our business, including our key infrastructure assets within the Bakken and northern Delaware formation of the Permian Basin;

●

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 freshwater 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;

●

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

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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, either on a volumetric or time basis;

●

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)


	June 30, 2019		December 31, 2018
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	23,818	$	17,237
Accounts receivable trade, net of allowance for doubtful accounts of $4,921 and $5,329, respectively		324,918		341,711
Accounts receivable, related parties		3,105		1,119
Inventories		39,952		44,992
Prepaid expenses and other current assets		29,435		27,093
Total current assets		421,228		432,152
Property and equipment		1,069,496		1,114,378
Accumulated depreciation		(603,191)		(611,530)
Property and equipment held-for-sale, net		1,906		—
Total property and equipment, net		468,211		502,848
Right-of-use assets		75,302		—
Goodwill		266,934		273,801
Other intangible assets, net		142,438		148,377
Other assets		3,064		3,427
Total assets	$	1,377,177	$	1,360,605
Liabilities and Equity
Current liabilities
Accounts payable	$	53,107	$	53,847
Accrued accounts payable		43,311		62,536
Accounts payable and accrued expenses, related parties		3,417		5,056
Accrued salaries and benefits		16,734		22,113
Accrued insurance		15,799		14,849
Sales tax payable		1,282		5,820
Accrued expenses and other current liabilities		10,615		14,560
Current operating lease liabilities		19,553		—
Current portion of finance lease obligations		421		938
Total current liabilities		164,239		179,719
Long-term operating lease liabilities		75,169		16,752
Other long-term liabilities		10,921		8,361
Long-term debt		—		45,000
Total liabilities		250,329		249,832
Commitments and contingencies (Note 10)
Class A common stock, $0.01 par value; 350,000,000 shares authorized; 80,176,078 and 78,956,555 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively		802		790
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; no shares issued or outstanding as of June 30, 2019 and December 31, 2018		—		—
Class B common stock, $0.01 par value; 150,000,000 shares authorized; 26,026,843 shares issued and outstanding as of June 30, 2019 and December 31, 2018		260		260
Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares issued and outstanding as of June 30, 2019 and December 31, 2018		—		—
Additional paid-in capital		821,968		813,599
Retained earnings		25,988		18,653
Accumulated other comprehensive deficit		(380)		(368)
Total stockholders’ equity		848,638		832,934
Noncontrolling interests		278,210		277,839
Total equity		1,126,848		1,110,773
Total liabilities and equity	$	1,377,177	$	1,360,605

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 June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Revenue
Water services	$	202,011	$	233,954	$	422,606	$	452,184
Water infrastructure		51,710		55,727		105,326		109,784
Oilfield chemicals		63,001		64,807		129,830		128,437
Other		7,165		38,759		28,771		79,237
Total revenue		323,887		393,247		686,533		769,642
Costs of revenue
Water services		155,151		176,571		318,272		341,201
Water infrastructure		38,456		37,884		79,886		77,980
Oilfield chemicals		54,051		58,500		113,578		115,584
Other		7,447		33,119		28,500		68,873
Depreciation and amortization		28,843		30,445		60,361		61,327
Total costs of revenue		283,948		336,519		600,597		664,965
Gross profit		39,939		56,728		85,936		104,677
Operating expenses
Selling, general and administrative		27,297		26,871		59,673		52,552
Depreciation and amortization		906		807		1,906		1,348
Impairment of goodwill		—		—		4,396		—
Impairment of property and equipment		374		2,282		893		2,282
Impairment of cost-method investment		—		—		—		2,000
Lease abandonment costs		183		1,973		1,256		3,097
Total operating expenses		28,760		31,933		68,124		61,279
Income from operations		11,179		24,795		17,812		43,398
Other income (expense)
(Losses) gains on sales of property and equipment, net		(1,709)		2,056		(6,200)		1,502
Interest expense, net		(839)		(1,342)		(1,932)		(2,493)
Foreign currency gain (loss), net		67		(340)		327		(740)
Other (expense) income, net		(59)		4		210		100
Income before income tax expense		8,639		25,173		10,217		41,767
Income tax expense		(571)		(150)		(749)		(612)
Net income		8,068		25,023		9,468		41,155
Less: net income attributable to noncontrolling interests		(1,868)		(8,060)		(2,133)		(14,093)
Net income attributable to Select Energy Services, Inc.	$	6,200	$	16,963	$	7,335	$	27,062

Net income per share attributable to common stockholders (Note 16):
Class A—Basic	$	0.08	$	0.24	$	0.09	$	0.40
Class A-2—Basic	$	—	$	—	$	—	$	0.40
Class B—Basic	$	—	$	—	$	—	$	—

Net income per share attributable to common stockholders (Note 16):
Class A—Diluted	$	0.08	$	0.24	$	0.09	$	0.39
Class A-2—Diluted	$	—	$	—	$	—	$	0.39
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

(unaudited)

(in thousands)


	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Net income	$	8,068	$	25,023	$	9,468	$	41,155
Other comprehensive income
Foreign currency translation adjustment, net of tax of $0		(66)		(191)		(12)		(450)
Comprehensive income		8,002		24,832		9,456		40,705
Less: comprehensive income attributable to noncontrolling interests		(1,853)		(7,998)		(2,130)		(13,939)
Comprehensive income attributable to Select Energy Services, Inc.	$	6,149	$	16,834	$	7,326	$	26,766

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 six months ended June 30, 2019 and 2018

(unaudited)

(in thousands, except share data)


	Class A			Class A-2			Class B			Preferred							Accumulated
	Stockholders			Stockholders			Stockholders			Stockholders							Other
		Class A			Class A-2			Class B					Additional				Comprehensive		Total
		Common			Common			Common			Preferred		Paid-In		Retained		Income		Stockholders’		Noncontrolling
	Shares	Stock		Shares	Stock		Shares	Stock		Shares	Stock		Capital		Earnings		(Deficit)		Equity		Interests		Total
Balance as of December 31, 2018	78,956,555	$	790	—	$	—	26,026,843	$	260	—	$	—	$	813,599	$	18,653	$	(368)	$	832,934	$	277,839	$	1,110,773
ESPP shares issued	5,667		—	—		—	—		—	—		—		58		—		—		58		(2)		56
Equity-based compensation	—		—	—		—	—		—	—		—		6,271		—		—		6,271		2,037		8,308
Issuance of restricted shares	1,373,930		14	—		—	—		—	—		—		3,549		—		—		3,563		(3,563)		—
Exercise of restricted stock units	1,250		—	—		—	—		—	—		—		4		—		—		4		(4)		—
Repurchase of common stock	(152,502)		(2)	—		—	—		—	—		—		(1,539)		—		—		(1,541)		25		(1,516)
Restricted shares forfeited	(8,822)		—	—		—	—		—	—		—		(23)		—		—		(23)		23		—
Distributions to noncontrolling interests, net	—		—	—		—	—		—	—		—		—		—		—		—		(225)		(225)
NCI income tax adjustment	—		—	—		—	—		—	—		—		49		—		—		49		(49)		—
Foreign currency translation adjustment	—		—	—		—	—		—	—		—		—		—		(12)		(12)		(4)		(16)
Net income	—		—	—		—	—		—	—		—		—		7,335		—		7,335		2,133		9,468
Balance as of June 30, 2019	80,176,078	$	802	—	$	—	26,026,843	$	260	—	$	—	$	821,968	$	25,988	$	(380)	$	848,638	$	278,210	$	1,126,848


	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)		(Deficit)		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)		—	—

Form: 10-Q

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