November 3, 2021 - 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, 2021

☐	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 1, 2021, the registrant had 92,958,812 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)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	57

Item 4.	Controls and Procedures	57

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	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, 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 Securities and Exchange Commission (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, 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, 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 in response to changes in commodity prices or 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;

●

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;

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●

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

●

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

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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, 2021 and June 30, 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)


	September 30, 2021		December 31, 2020
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	107,413	$	169,039
Accounts receivable trade, net of allowance for credit losses of $6,065 and $9,157, respectively		185,693		129,392
Accounts receivable, related parties		131		69
Inventories		37,967		33,384
Prepaid expenses and other current assets		25,052		19,621
Total current assets		356,256		351,505
Property and equipment		892,872		878,902
Accumulated depreciation		(549,725)		(528,537)
Total property and equipment, net		343,147		350,365
Right-of-use assets, net		47,806		52,331
Other intangible assets, net		111,192		116,079
Other long-term assets, net		9,731		5,079
Total assets	$	868,132	$	875,359
Liabilities and Equity
Current liabilities
Accounts payable	$	26,655	$	12,995
Accrued accounts payable		34,663		21,359
Accounts payable and accrued expenses, related parties		1,478		519
Accrued salaries and benefits		12,987		16,279
Accrued insurance		9,881		9,788
Sales tax payable		1,662		1,415
Accrued expenses and other current liabilities		10,571		12,077
Current operating lease liabilities		14,153		14,019
Current portion of finance lease obligations		190		307
Total current liabilities		112,240		88,758
Long-term operating lease liabilities		54,143		60,984
Other long-term liabilities		32,788		19,735
Total liabilities		199,171		169,477
Commitments and contingencies (Note 9)
Class A common stock, $0.01 par value; 350,000,000 shares authorized and 92,056,219 shares issued and outstanding as of September 30, 2021; 350,000,000 shares authorized and 86,812,647 shares issued and outstanding as of December 31, 2020		921		868
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; no shares issued or outstanding as of September 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 September 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 September 30, 2021 and December 31, 2020		—		—
Additional paid-in capital		935,742		909,278
Accumulated deficit		(368,965)		(317,247)
Total stockholders’ equity		567,860		593,061
Noncontrolling interests		101,101		112,821
Total equity		668,961		705,882
Total liabilities and equity	$	868,132	$	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 September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Revenue
Water Services	$	112,474	$	54,516	$	253,348	$	259,834
Water Infrastructure		36,787		16,165		107,916		89,227
Oilfield Chemicals		55,372		30,561		148,228		122,705
Total revenue		204,633		101,242		509,492		471,766
Costs of revenue
Water Services		94,667		52,861		227,736		235,989
Water Infrastructure		28,494		12,816		81,130		74,500
Oilfield Chemicals		49,583		28,558		132,103		110,996
Other		—		30		—		37
Depreciation and amortization		22,904		23,877		65,572		75,567
Total costs of revenue		195,648		118,142		506,541		497,089
Gross profit (loss)		8,985		(16,900)		2,951		(25,323)
Operating expenses
Selling, general and administrative		22,044		15,955		57,828		58,902
Depreciation and amortization		562		685		1,835		2,204
Impairment of goodwill and trademark		—		—		—		276,016
Impairment and abandonment of property and equipment		—		—		—		7,910
Lease abandonment costs		154		672		480		2,493
Total operating expenses		22,760		17,312		60,143		347,525
Loss from operations		(13,775)		(34,212)		(57,192)		(372,848)
Other (expense) income
Gain (loss) on sales of property and equipment and divestitures, net		315		891		(1,921)		(1,727)
Interest expense, net		(419)		(789)		(1,254)		(1,633)
Foreign currency (loss) gain, net		(6)		13		1		(6)
Other expense, net		(222)		(2,364)		(956)		(4,805)
Loss before income tax benefit		(14,107)		(36,461)		(61,322)		(381,019)
Income tax benefit		32		201		211		495
Equity in losses of unconsolidated entities		(129)		—		(129)		—
Net loss		(14,204)		(36,260)		(61,240)		(380,524)
Less: net loss attributable to noncontrolling interests		2,160		5,719		9,522		59,823
Net loss attributable to Select Energy Services, Inc.	$	(12,044)	$	(30,541)	$	(51,718)	$	(320,701)

Net loss per share attributable to common stockholders (Note 15):
Class A—Basic	$	(0.14)	$	(0.36)	$	(0.60)	$	(3.76)
Class B—Basic	$	—	$	—	$	—	$	—

Net loss per share attributable to common stockholders (Note 15):
Class A—Diluted	$	(0.14)	$	(0.36)	$	(0.60)	$	(3.76)
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,
	2021		2020		2021		2020
Net loss	$	(14,204)	$	(36,260)	$	(61,240)	$	(380,524)
Comprehensive loss		(14,204)		(36,260)		(61,240)		(380,524)
Less: comprehensive loss attributable to noncontrolling interests		2,160		5,719		9,522		59,823
Comprehensive loss attributable to Select Energy Services, Inc.	$	(12,044)	$	(30,541)	$	(51,718)	$	(320,701)

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, 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	7,787		—	—		—		44		—		44		(1)		43
Equity-based compensation	—		—	—		—		5,290		—		5,290		958		6,248
Issuance of restricted shares	2,154,897		22	—		—		2,162		—		2,184		(2,185)		(1)
Other	738		—	—		—		5		—		5		—		5
Issuance of shares for acquisitions	3,600,000		36	—		—		20,627		—		20,663		(359)		20,304
Repurchase of common stock	(199,976)		(2)	—		—		(1,223)		—		(1,225)		19		(1,206)
Restricted shares forfeited	(319,874)		(3)	—		—		(332)		—		(335)		335		—
Noncontrolling interest in subsidiary	—		—	—		—		(140)		—		(140)		(934)		(1,074)
NCI income tax adjustment	—		—	—		—		31		—		31		(31)		—
Net loss	—		—	—		—		—		(51,718)		(51,718)		(9,522)		(61,240)
Balance as of September 30, 2021	92,056,219	$	921	16,221,101	$	162	$	935,742	$	(368,965)	$	567,860	$	101,101	$	668,961


	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	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

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, 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 June 30, 2021	88,160,703	$	882	16,221,101	$	162	$	912,872	$	(356,921)	$	556,995	$	103,551	$	660,546
ESPP shares issued	2,906		—	—		—		14		—		14		—		14
Equity-based compensation	—		—	—		—		1,957		—		1,957		345		2,302
Issuance of restricted shares	311,089		3	—		—		281		—		284		(285)		(1)
Issuance of shares for acquisitions	3,600,000		36	—		—		20,627		—		20,663		(359)		20,304
Restricted shares forfeited	(18,479)		—	—		—		(17)		—		(17)		17		—
NCI income tax adjustment	—		—	—		—		8		—		8		(8)		—
Net loss	—		—	—		—		—		(12,044)		(12,044)		(2,160)		(14,204)
Balance as of September 30, 2021	92,056,219	$	921	16,221,101	$	162	$	935,742	$	(368,965)	$	567,860	$	101,101	$	668,961

Class A

Class B

Stockholders

Class A

Class B

Additional

Total

Common

Form: 10-Q

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