November 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 September 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 November 4, 2019, the registrant had 85,907,211 shares of Class A common stock and 18,461,975 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	46

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	64

Item 4.	Controls and Procedures	65

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	66

Item 1A.	Risk Factors	66

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66

Item 3.	Defaults upon Senior Securities	67

Item 4.	Mine Safety Disclosures	67

Item 5.	Other Information	67

Item 6.	Exhibits	67

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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;

●

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;

●

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 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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●

our level of indebtedness and our ability to comply with covenants contained in our Credit Agreement (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;

●

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, 2019		December 31, 2018
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	42,999	$	17,237
Accounts receivable trade, net of allowance for doubtful accounts of $5,392 and $5,329, respectively		310,730		341,711
Accounts receivable, related parties		5,493		1,119
Inventories		39,613		44,992
Prepaid expenses and other current assets		26,233		27,093
Total current assets		425,068		432,152
Property and equipment		1,084,096		1,114,378
Accumulated depreciation		(617,740)		(611,530)
Property and equipment held-for-sale, net		890		—
Total property and equipment, net		467,246		502,848
Right-of-use assets		73,138		—
Goodwill		266,934		273,801
Other intangible assets, net		139,969		148,377
Other assets		4,502		3,427
Total assets	$	1,376,857	$	1,360,605
Liabilities and Equity
Current liabilities
Accounts payable	$	38,530	$	53,847
Accrued accounts payable		51,209		62,536
Accounts payable and accrued expenses, related parties		3,297		5,056
Accrued salaries and benefits		25,761		22,113
Accrued insurance		13,367		14,849
Sales tax payable		1,185		5,820
Accrued expenses and other current liabilities		12,784		14,560
Current operating lease liabilities		19,488		—
Current portion of finance lease obligations		248		938
Total current liabilities		165,869		179,719
Long-term operating lease liabilities		72,672		16,752
Other long-term liabilities		12,197		8,361
Long-term debt		—		45,000
Total liabilities		250,738		249,832
Commitments and contingencies (Note 10)
Class A common stock, $0.01 par value; 350,000,000 shares authorized; 86,321,013 and 78,956,555 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively		863		790
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; no shares issued or outstanding as of September 30, 2019 and December 31, 2018		—		—
Class B common stock, $0.01 par value; 150,000,000 shares authorized; 18,461,975 and 26,026,843 shares issued and outstanding as of September 30, 2019 and December 31, 2018 respectively		185		260
Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares issued and outstanding as of September 30, 2019 and December 31, 2018		—		—
Additional paid-in capital		893,293		813,599
Retained earnings		31,367		18,653
Accumulated other comprehensive deficit		—		(368)
Total stockholders’ equity		925,708		832,934
Noncontrolling interests		200,411		277,839
Total equity		1,126,119		1,110,773
Total liabilities and equity	$	1,376,857	$	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 September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Revenue
Water services	$	196,782	$	233,503	$	619,388	$	685,687
Water infrastructure		63,953		65,878		169,279		175,662
Oilfield chemicals		67,932		63,985		197,762		192,422
Other		301		33,604		29,072		112,841
Total revenue		328,968		396,970		1,015,501		1,166,612
Costs of revenue
Water services		153,741		177,643		472,013		518,844
Water infrastructure		46,748		42,324		126,634		120,304
Oilfield chemicals		57,357		56,473		170,935		172,057
Other		1,865		29,280		30,365		98,153
Depreciation and amortization		28,263		31,853		88,624		93,180
Total costs of revenue		287,974		337,573		888,571		1,002,538
Gross profit		40,994		59,397		126,930		164,074
Operating expenses
Selling, general and administrative		27,280		25,110		86,953		77,662
Depreciation and amortization		952		984		2,858		2,332
Impairment of goodwill		—		—		4,396		—
Impairment of property and equipment		49		—		942		2,282
Impairment of cost-method investment		—		—		—		2,000
Lease abandonment costs		238		1,045		1,494		4,142
Total operating expenses		28,519		27,139		96,643		88,418
Income from operations		12,475		32,258		30,287		75,656
Other income (expense)
(Losses) gains on sales of property and equipment, net		(2,033)		1,458		(8,233)		2,959
Interest expense, net		(438)		(1,322)		(2,370)		(3,815)
Foreign currency (loss) gain, net		(59)		248		268		(492)
Other (expense) income, net		(272)		40		(62)		140
Income before income tax expense		9,673		32,682		19,890		74,448
Income tax expense		(2,501)		(1,415)		(3,250)		(2,027)
Net income		7,172		31,267		16,640		72,421
Less: net income attributable to noncontrolling interests		(1,793)		(8,316)		(3,926)		(22,409)
Net income attributable to Select Energy Services, Inc.	$	5,379	$	22,951	$	12,714	$	50,012

Net income per share attributable to common stockholders (Note 16):
Class A—Basic	$	0.07	$	0.29	$	0.16	$	0.69
Class A-2—Basic	$	—	$	—	$	—	$	0.69
Class B—Basic	$	—	$	—	$	—	$	—

Net income per share attributable to common stockholders (Note 16):
Class A—Diluted	$	0.07	$	0.29	$	0.16	$	0.69
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

(unaudited)

(in thousands)


	Three Months Ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Net income	$	7,172	$	31,267	$	16,640	$	72,421
Other comprehensive income
Foreign currency translation adjustment, net of tax of $0		380		131		368		(319)
Comprehensive income		7,552		31,398		17,008		72,102
Less: comprehensive income attributable to noncontrolling interests		(1,888)		(8,351)		(4,013)		(22,310)
Comprehensive income attributable to Select Energy Services, Inc.	$	5,664	$	23,047	$	12,995	$	49,792

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, 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
Conversion of Class B to Class A	7,564,868		75	—		—	(7,564,868)		(75)	—		—		82,706		—		—		82,706		(82,706)		—
ESPP shares issued	8,746		—	—		—	—		—	—		—		79		—		—		79		1		80
Equity-based compensation	—		—	—		—	—		—	—		—		9,045		—		—		9,045		2,829		11,874
Issuance of restricted shares	1,391,479		14	—		—	—		—	—		—		3,590		—		—		3,604		(3,604)		—
Exercise of restricted stock units	1,250		—	—		—	—		—	—		—		4		—		—		4		(4)		—
Stock options exercised	5,282		—	—		—	—		—	—		—		84		—		—		84		(54)		30
Repurchase of common stock	(1,597,150)		(16)	—		—	—		—	—		—		(15,886)		—		—		(15,902)		2,501		(13,401)
Restricted shares forfeited	(10,017)		—	—		—	—		—	—		—		(36)		—		—		(36)		36		—
Distributions to noncontrolling interests, net	—		—	—		—	—		—	—		—		—		—		—		—		(349)		(349)
NCI income tax adjustment	—		—	—		—	—		—	—		—		89		—		—		89		(89)		—
Foreign currency translation adjustment	—		—	—		—	—		—	—		—		19		—		368		387		85		472
Net income	—		—	—		—	—		—	—		—		—		12,714		—		12,714		3,926		16,640
Balance as of September 30, 2019	86,321,013	$	863	—	$	—	18,461,975	$	185	—	$	—	$	893,293	$	31,367	$	—	$	925,708	$	200,411	$	1,126,119


	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	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	—		—	—		—	—		—	—		—	<

Form: 10-Q

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