Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

August 4, 2021

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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 June 30, 2021

or

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, 2021, the registrant had 91,760,703 shares of Class A common stock and 16,221,101 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)

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

37

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

55

Item 4.

Controls and Procedures

55

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

57

Item 1A.

Risk Factors

57

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

Item 3.

Defaults upon Senior Securities

57

Item 4.

Mine Safety Disclosures

57

Item 5.

Other Information

57

Item 6.

Exhibits

57

2

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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 in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 and 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:

actions taken by the Biden Administration, such as executive orders or new regulations, that may negatively impact the future production of oil and natural gas in the United States (“U.S.”) and may adversely affect our future operations;
the severity and duration of world health events, including the novel coronavirus (“COVID-19”) pandemic and its variants, which caused a sharp decline in economic activity in the U.S. 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 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 (“OPEC”) and Russia (together with OPEC 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;
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 reductions and potential additional reductions in capital expenditures by oil and gas producers in response to commodity prices and reduced demand;
operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, measures taken to protect the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions;
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;

3

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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 freshwater transfer, chemicals, carbon pricing, pipeline construction, taxation or emissions, leasing, permitting or drilling on federal lands and various other environmental matters;
regional impacts to our business, including our key infrastructure assets within the Bakken and the Northern Delaware portion of the Permian Basin;
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 decrease in the demand for our services in our core markets;
regulatory and related policy actions intended by federal, state and/or local governments to reduce fossil fuel use and associated carbon emissions, or to drive the substitution of renewable forms of energy for oil and gas, may over time reduce demand for oil and gas and therefore the demand for our services;
new or expanded regulations that materially limit our customers’ access to federal and state lands for oil and gas development, thereby reducing demand for our services in the affected areas;
growing demand for electric vehicles that result in reduced demand for gasoline and therefore the demand for our services;
our ability to hire and retain key management and employees, including skilled labor;
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;
acts of terrorism, war or political or civil unrest in the U.S. or elsewhere;
the ability to source certain raw materials globally on a timely basis from economically advantaged sources; and

4

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accidents, weather, natural disasters or other events affecting our business.

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 Report on Form 10-Q for the quarter ended March 31, 2021 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 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, 2021

December 31, 2020

    

(unaudited)

    

Assets

Current assets

 

Cash and cash equivalents

$

143,722

$

169,039

Accounts receivable trade, net of allowance for credit losses of $7,514 and $9,157, respectively

 

148,690

 

129,392

Accounts receivable, related parties

 

205

 

69

Inventories

 

38,546

 

33,384

Prepaid expenses and other current assets

 

24,852

 

19,621

Total current assets

 

356,015

 

351,505

Property and equipment

 

858,592

 

878,902

Accumulated depreciation

 

(541,021)

 

(528,537)

Total property and equipment, net

 

317,571

 

350,365

Right-of-use assets, net

47,509

52,331

Other intangible assets, net

 

110,846

 

116,079

Other long-term assets, net

 

7,922

 

5,079

Total assets

$

839,863

$

875,359

Liabilities and Equity

 

 

  

Current liabilities

 

 

  

Accounts payable

$

26,368

$

12,995

Accrued accounts payable

26,677

21,359

Accounts payable and accrued expenses, related parties

 

1,418

 

519

Accrued salaries and benefits

 

12,234

 

16,279

Accrued insurance

 

10,836

 

9,788

Sales tax payable

1,224

1,415

Accrued expenses and other current liabilities

 

9,638

 

12,077

Current operating lease liabilities

13,521

14,019

Current portion of finance lease obligations

 

267

 

307

Total current liabilities

 

102,183

 

88,758

Long-term operating lease liabilities

 

55,208

 

60,984

Other long-term liabilities

 

21,926

 

19,735

Total liabilities

 

179,317

 

169,477

Commitments and contingencies (Note 8)

 

 

  

Class A common stock, $0.01 par value; 350,000,000 shares authorized and 88,160,703 shares issued and outstanding as of June 30, 2021; 350,000,000 shares authorized and 86,812,647 shares issued and outstanding as of December 31, 2020

 

882

 

868

Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; no shares issued or outstanding as of June 30, 2021 and December 31, 2020

 

 

Class B common stock, $0.01 par value; 150,000,000 shares authorized and 16,221,101 shares issued and outstanding as of June 30, 2021 and December 31, 2020

 

162

 

162

Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares issued and outstanding as of June 30, 2021 and December 31, 2020

 

 

Additional paid-in capital

 

912,872

 

909,278

Accumulated deficit

 

(356,921)

 

(317,247)

Total stockholders’ equity

 

556,995

 

593,061

Noncontrolling interests

 

103,551

 

112,821

Total equity

 

660,546

 

705,882

Total liabilities and equity

$

839,863

$

875,359

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, 

    

2021

    

2020

    

2021

    

2020

Revenue

 

  

 

  

Water Services

$

76,651

$

55,807

$

140,874

$

205,318

Water Infrastructure

33,326

15,300

71,129

73,062

Oilfield Chemicals

 

51,140

 

21,132

92,856

92,144

Total revenue

 

161,117

 

92,239

304,859

370,524

Costs of revenue

 

  

 

  

Water Services

70,745

54,014

133,069

183,128

Water Infrastructure

26,237

13,871

52,636

61,684

Oilfield Chemicals

 

44,754

22,562

82,520

82,438

Other

 

3

7

Depreciation and amortization

 

21,018

25,508

42,668

51,690

Total costs of revenue

 

162,754

 

115,958

310,893

378,947

Gross loss

 

(1,637)

 

(23,719)

(6,034)

(8,423)

Operating expenses

 

  

 

  

Selling, general and administrative

 

15,890

17,658

35,784

42,947

Depreciation and amortization

 

624

834

1,273

1,519

Impairment of goodwill and trademark

 

276,016

Impairment and abandonment of property and equipment

4,726

7,910

Lease abandonment costs

 

222

868

326

1,821

Total operating expenses

 

16,736

 

24,086

37,383

330,213

Loss from operations

 

(18,373)

 

(47,805)

(43,417)

(338,636)

Other (expense) income

 

  

 

  

Losses on sales of property and equipment and divestitures, net

(1,657)

(2,183)

(2,236)

(2,618)

Interest expense, net

 

(400)

(513)

(835)

(844)

Foreign currency gain (loss), net

4

27

7

(19)

Other income (expense), net

 

895

(2,700)

(734)

(2,441)

Loss before income tax (expense) benefit

 

(19,531)

 

(53,174)

(47,215)

(344,558)

Income tax (expense) benefit

 

(84)

130

179

294

Net loss

 

(19,615)

 

(53,044)

(47,036)

(344,264)

Less: net loss attributable to noncontrolling interests

 

3,048

8,746

7,362

54,104

Net loss attributable to Select Energy Services, Inc.

$

(16,567)

$

(44,298)

$

(39,674)

$

(290,160)

Net loss per share attributable to common stockholders (Note 14):

 

Class A—Basic

$

(0.19)

$

(0.52)

$

(0.47)

$

(3.39)

Class B—Basic

$

$

$

$

Net loss per share attributable to common stockholders (Note 14):

 

Class A—Diluted

$

(0.19)

$

(0.52)

$

(0.47)

$

(3.39)

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, 

    

2021

    

2020

    

2021

    

2020

Net loss

$

(19,615)

$

(53,044)

$

(47,036)

$

(344,264)

Comprehensive loss

 

(19,615)

 

(53,044)

(47,036)

(344,264)

Less: comprehensive loss attributable to noncontrolling interests

 

3,048

 

8,746

7,362

54,104

Comprehensive loss attributable to Select Energy Services, Inc.

$

(16,567)

$

(44,298)

$

(39,674)

$

(290,160)

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, 2021 and 2020

(unaudited)

(in thousands, except share data)

Class A

Class B

Stockholders

Stockholders

Class A

Class B

Additional

Total

Common

Common

Paid-In

Accumulated

Stockholders’

Noncontrolling

   

Shares

   

Stock

   

Shares

   

Stock

   

Capital

   

Deficit

   

Equity

   

Interests

   

Total

Balance as of December 31, 2020

 

86,812,647

$

868

 

16,221,101

$

162

 

$

909,278

$

(317,247)

$

593,061

$

112,821

$

705,882

ESPP shares issued

4,881

30

30

(1)

29

Equity-based compensation

3,333

3,333

613

3,946

Issuance of restricted shares

 

1,843,808

19

1,881

1,900

(1,900)

Other

 

738

5

5

5

Repurchase of common stock

(199,976)

(2)

(1,223)

(1,225)

19

(1,206)

Restricted shares forfeited

(301,395)

(3)

(315)

(318)

318

Noncontrolling interest in subsidiary

 

(140)

(140)

(934)

(1,074)

NCI income tax adjustment

23

23

(23)

Net loss

 

(39,674)

(39,674)

(7,362)

(47,036)

Balance as of June 30, 2021

 

88,160,703

$

882

 

16,221,101

$

162

 

$

912,872

$

(356,921)

$

556,995

$

103,551

$

660,546

Class A

Class B

Stockholders

Stockholders

Retained

Class A

Class B

Additional

Earnings

Total

Common

Common

Paid-In

(Accumulated

Stockholders’

Noncontrolling

   

Shares

   

Stock

   

Shares

   

Stock

   

Capital

   

Deficit)

   

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

7,640

48

48

(4)

44

Equity-based compensation

1,530

1,530

286

1,816

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

(2,155,901)

(22)

(12,021)

(12,043)

1,405

(10,638)

Restricted shares forfeited

(340,328)

(3)

(508)

(511)

511

Noncontrolling interest in subsidiary

(133)

(133)

NCI income tax adjustment

8

8

(8)

Net loss

 

 

 

 

 

 

 

(290,160)

 

(290,160)

 

(54,104)

 

 

(344,264)

Balance as of June 30, 2020

 

86,883,049

$

869

 

16,221,101

$

162

 

$

906,164

$

(268,723)

$

638,472

$

121,165

$

759,637

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 June 30, 2021 and 2020

(unaudited)

(in thousands, except share data)

Class A

Class B

Stockholders

Stockholders

Class A

Class B

Additional

Total

Common

Common

Paid-In

Accumulated

Stockholders’

Noncontrolling

   

Shares

   

Stock

   

Shares

   

Stock

   

Capital

   

Deficit

   

Equity

   

Interests

   

Total

Balance as of March 31, 2021

 

87,856,767

$

879

 

16,221,101

$

162

 

$

910,688

$

(340,354)

$

571,375

$

106,574

$

677,949

ESPP shares issued

2,736

16

16

(1)

15

Equity-based compensation

2,131

2,131

393

2,524

Issuance of restricted shares

 

356,360

 

4

 

 

 

 

352

 

 

356

 

(356)

 

 

Other

 

738

 

 

 

 

 

5

 

 

5

 

 

 

5

Repurchase of common stock

(55,898)

(1)

(335)

(336)

4

(332)

NCI income tax adjustment

15

15

(15)

Net loss

 

 

 

 

 

 

 

(16,567)

 

(16,567)

 

(3,048)

 

 

(19,615)

Balance as of June 30, 2021

 

88,160,703

$

882

 

16,221,101

$

162

 

$

912,872

$

(356,921)

$

556,995

$

103,551

$

660,546

Class A

Class B

Stockholders

Stockholders

Class A

Class B

Additional

Total

Common

Common

Paid-In

Accumulated

Stockholders’

Noncontrolling

   

Shares

   

Stock

   

Shares

   

Stock

   

Capital

   

Deficit

   

Equity

   

Interests

   

Total

Balance as of March 31, 2020

 

87,991,839

$

880