November 4, 2020 - 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, 2020

☐	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 2, 2020, the registrant had 86,824,127 shares of Class A common stock and 16,221,101 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	44

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	62

Item 4.	Controls and Procedures	63

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	64

Item 1A.	Risk Factors	64

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

Item 3.	Defaults upon Senior Securities	66

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, 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 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, which has caused a sharp decline in economic activity in the United States and around the world, resulting in lower demand for oil and gas, oversupply and therefore lower oil and gas prices, to which our exploration and production (“E&P”) customers have responded by cutting capital spending, leading to fewer oil and gas well completions and thus reduced demand for our services, all of which has had, and will likely continue to have, a negative impact on our financial results;

●

actions taken by the members of the Organization of the Petroleum Exporting Countries 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;

●

operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions;

●

the potential deterioration of our customers’ financial condition, including defaults resulting from actual or potential insolvencies;

●

the level of capital spending and access to capital markets by oil and gas companies, including significant recent reductions and potential additional reductions in capital expenditures by oil and gas producers in response to commodity prices and dramatically reduced demand;

●

the degree to which consolidation among our customers’ may affect spending on U.S. drilling and completions in the near-term;

●

trends and volatility in oil and gas prices, and our ability to manage through such volatility;

●

our customers’ ability to complete and produce new wells;

●

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

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freshwater transfer, chemicals, carbon pricing, taxation or emissions, drilling on federal lands and various other 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 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 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;

●

the ability to source certain raw materials globally from economically advantaged sources;

●

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 our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, 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, 2020 and June 30, 2020, 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

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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.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SELECT ENERGY SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	September 30, 2020		December 31, 2019
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	185,438	$	79,268
Accounts receivable trade, net of allowance for credit losses of $9,731 and $5,773, respectively		92,148		267,628
Accounts receivable, related parties		595		4,677
Inventories		34,366		37,542
Prepaid expenses and other current assets		19,815		26,486
Total current assets		332,362		415,601
Property and equipment		907,980		1,015,379
Accumulated depreciation		(538,380)		(562,986)
Property and equipment held-for-sale, net		—		885
Total property and equipment, net		369,600		453,278
Right-of-use assets, net		57,402		70,635
Goodwill		—		266,934
Other intangible assets, net		118,801		136,952
Other assets, net		2,468		4,220
Total assets	$	880,633	$	1,347,620
Liabilities and Equity
Current liabilities
Accounts payable	$	11,037	$	35,686
Accrued accounts payable		13,058		47,547
Accounts payable and accrued expenses, related parties		300		2,789
Accrued salaries and benefits		14,811		20,079
Accrued insurance		10,227		8,843
Sales tax payable		678		2,119
Accrued expenses and other current liabilities		13,296		15,375
Current operating lease liabilities		14,611		19,315
Current portion of finance lease obligations		304		128
Total current liabilities		78,322		151,881
Long-term operating lease liabilities		64,217		72,143
Other long-term liabilities		12,698		10,784
Total liabilities		155,237		234,808
Commitments and contingencies (Note 10)
Class A common stock, $0.01 par value; 350,000,000 shares authorized and 86,824,127 shares issued and outstanding as of September 30, 2020; 350,000,000 shares authorized and 87,893,525 shares issued and outstanding as of December 31, 2019		868		879
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; no shares issued or outstanding as of September 30, 2020 and December 31, 2019		—		—
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, 2020 and December 31, 2019		162		162
Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares issued and outstanding as of September 30, 2020 and December 31, 2019		—		—
Additional paid-in capital		907,832		914,699
Accumulated (deficit) retained earnings		(299,264)		21,437
Total stockholders’ equity		609,598		937,177
Noncontrolling interests		115,798		175,635
Total equity		725,396		1,112,812
Total liabilities and equity	$	880,633	$	1,347,620

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,
	2020		2019		2020		2019
Revenue
Water Services	$	54,516	$	196,782	$	259,834	$	619,388
Water Infrastructure		16,165		63,953		89,227		169,279
Oilfield Chemicals		30,561		67,932		122,705		197,762
Other		—		301		—		29,072
Total revenue		101,242		328,968		471,766		1,015,501
Costs of revenue
Water Services		52,861		153,741		235,989		472,013
Water Infrastructure		12,816		46,748		74,500		126,634
Oilfield Chemicals		28,558		57,357		110,996		170,935
Other		30		1,865		37		30,365
Depreciation and amortization		23,877		28,263		75,567		88,624
Total costs of revenue		118,142		287,974		497,089		888,571
Gross (loss) profit		(16,900)		40,994		(25,323)		126,930
Operating expenses
Selling, general and administrative		15,955		27,280		58,902		86,953
Depreciation and amortization		685		952		2,204		2,858
Impairment of goodwill and trademark		—		—		276,016		4,396
Impairment and abandonment of property and equipment		—		49		7,910		942
Lease abandonment costs		672		238		2,493		1,494
Total operating expenses		17,312		28,519		347,525		96,643
(Loss) income from operations		(34,212)		12,475		(372,848)		30,287
Other income (expense)
Gains (losses) on sales of property and equipment and divestitures, net		891		(2,033)		(1,727)		(8,233)
Interest expense, net		(789)		(438)		(1,633)		(2,370)
Foreign currency gain (loss), net		13		(59)		(6)		268
Other expense, net		(2,364)		(272)		(4,805)		(62)
(Loss) income before income tax benefit (expense)		(36,461)		9,673		(381,019)		19,890
Income tax benefit (expense)		201		(2,501)		495		(3,250)
Net (loss) income		(36,260)		7,172		(380,524)		16,640
Less: net loss (income) attributable to noncontrolling interests		5,719		(1,793)		59,823		(3,926)
Net (loss) income attributable to Select Energy Services, Inc.	$	(30,541)	$	5,379	$	(320,701)	$	12,714

Net (loss) income per share attributable to common stockholders (Note 16):
Class A—Basic	$	(0.36)	$	0.07	$	(3.76)	$	0.16
Class B—Basic	$	—	$	—	$	—	$	—

Net (loss) income per share attributable to common stockholders (Note 16):
Class A—Diluted	$	(0.36)	$	0.07	$	(3.76)	$	0.16
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,
	2020		2019		2020		2019
Net (loss) income	$	(36,260)	$	7,172	$	(380,524)	$	16,640
Other comprehensive (loss) income
Foreign currency translation adjustment, net of tax of $0		—		380		—		368
Comprehensive (loss) income		(36,260)		7,552		(380,524)		17,008
Less: comprehensive loss (income) attributable to noncontrolling interests		5,719		(1,888)		59,823		(4,013)
Comprehensive (loss) income attributable to Select Energy Services, Inc.	$	(30,541)	$	5,664	$	(320,701)	$	12,995

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, 2020 and 2019

(unaudited)

(in thousands, except share data)


	Class A			Class B
	Stockholders			Stockholders					Accumulated		Accumulated
		Class A			Class B		Additional		(Deficit)		Other		Total
		Common			Common		Paid-In		Retained		Comprehensive		Stockholders’		Noncontrolling
	Shares	Stock		Shares	Stock		Capital		Earnings		Income		Equity		Interests		Total
Balance as of December 31, 2019	87,893,525	$	879	16,221,101	$	162	$	914,699	$	21,437	$	—	$	937,177	$	175,635	$	1,112,812
ESPP shares issued	10,834		—	—		—		65		—		—		65		(6)		59
Equity-based compensation	—		—	—		—		3,419		—		—		3,419		639		4,058
Issuance of restricted shares	1,477,488		15	—		—		2,407		—		—		2,422		(2,422)		—
Exercise of restricted stock units	625		—	—		—		1		—		—		1		(1)		—
Repurchase of common stock	(2,199,824)		(22)	—		—		(12,270)		—		—		(12,292)		1,416		(10,876)
Restricted shares forfeited	(358,521)		(4)	—		—		(527)		—		—		(531)		531		—
Noncontrolling interest in subsidiary	—		—	—		—		—		—		—		—		(133)		(133)
NCI income tax adjustment	—		—	—		—		38		—		—		38		(38)		—
Net loss	—		—	—		—		—		(320,701)		—		(320,701)		(59,823)		(380,524)
Balance as of September 30, 2020	86,824,127	$	868	16,221,101	$	162	$	907,832	$	(299,264)	$	—	$	609,598	$	115,798	$	725,396


	Class A			Class B
	Stockholders			Stockholders							Accumulated
		Class A			Class B		Additional				Other		Total
		Common			Common		Paid-In		Retained		Comprehensive		Stockholders’		Noncontrolling
	Shares	Stock		Shares	Stock		Capital		Earnings		Loss		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

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 three months ended September 30, 2020 and 2019

(unaudited)

(in thousands, except share data)


	Class A			Class B
	Stockholders			Stockholders					Accumulated		Accumulated
		Class A			Class B		Additional		(Deficit)		Other		Total
		Common			Common		Paid-In		Retained		Comprehensive		Stockholders’		Noncontrolling
	Shares	Stock		Shares	Stock		Capital		Earnings		Income		Equity		Interests		Total
Balance as of June 30, 2020	86,883,049	$	869	16,221,101	$	162	$	906,164	$	(268,723)	$	—	$	638,472	$	121,165	$	759,637
ESPP shares issued	3,194		—	—		—		17		—		—		17		(2)		15
Equity-based compensation	—		—	—		—		1,889		—		—		1,889		353		2,242
Repurchase of common stock	(43,923)		—	—		—		(249)		—		—		(249)		11		(238)
Restricted shares forfeited	(18,193)		(1)	—		—		(19)		—		—		(20)		20		—
NCI income tax adjustment	—		—	—		—		30		—		—		30		(30)		—
Net loss	—		—	—		—

Form: 10-Q

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