May 3, 2023 - 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 March 31, 2023

☐	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 May 2, 2023, the registrant had 105,563,415 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	34

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	46

Item 4.	Controls and Procedures	47

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	48

Item 1A.	Risk Factors	48

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 3.	Defaults Upon Senior Securities	49

Item 4.	Mine Safety Disclosures	49

Item 5.	Other Information	49

Item 6.	Exhibits	49

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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 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:

●

global economic distress resulting from sustained Russia-Ukraine war and related economic sanctions, rising interest rates, and potential energy insecurity in Europe which may decrease demand for oil and demand for our services or contribute to volatility in the prices for oil and natural gas;

●

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;

●

actions taken by the Biden Administration or state governments, such as executive orders or new or expanded regulations, that may negatively impact the future production of oil and natural gas in the U.S. or our customers’ access to federal and state lands for oil and gas development operations, thereby reducing demand for our services in the affected areas;

●

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;

●

the ability to source certain raw materials and other critical components or manufactured products globally on a timely basis from economically advantaged sources;

●

the impact of disruptions in the bank and capital markets, including those resulting from the inability to access liquidity by banking and financial services firms;

●

the severity and duration of world health events, including the novel coronavirus (“COVID-19”) pandemic and its variants, and associated repercussions and operational challenges to supply and demand for oil and natural gas and the economy generally;

●

any new or additional measures required by national, state or local governments to combat COVID-19, such as a COVID-19 vaccine mandate, which if enacted, could reduce labor availability or add additional operational costs as we may experience constraints on our workforce and the workforce of our supply chain, which could have a negative impact on our operations;

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●

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

●

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;

●

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, the Northern Delaware and Midland Basin portions of the Permian Basin, and the Haynesville;

●

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, including as a result of the Inflation Reduction Act of 2022 (“IRA 2022”) or otherwise;

●

changes in global political or economic conditions, generally, and in the markets we serve, including the rate of inflation and potential economic recession;

●

growing demand for electric vehicles that may 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, including as a result of recent increases in cost of capital resulting from Federal Reserve policies and otherwise;

●

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 Sustainability-Linked Credit Facility (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;

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●

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;

●

acts of terrorism, war or political or civil unrest in the U.S. or elsewhere, such as the Russia-Ukraine war and/or political instability in the Middle East;

●

accidents, weather, natural disasters 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)


	March 31, 2023		December 31, 2022
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	6,028	$	7,322
Accounts receivable trade, net of allowance for credit losses of $6,009 and $4,918, respectively		492,613		429,983
Accounts receivable, related parties		607		5,087
Inventories		40,846		41,164
Prepaid expenses and other current assets		39,774		34,380
Total current assets		579,868		517,936
Property and equipment		1,112,899		1,084,005
Accumulated depreciation		(597,861)		(584,451)
Total property and equipment, net		515,038		499,554
Right-of-use assets, net		44,562		47,662
Other intangible assets, net		125,799		138,800
Other long-term assets, net		19,985		18,901
Total assets	$	1,285,252	$	1,222,853
Liabilities and Equity
Current liabilities
Accounts payable	$	77,585	$	61,539
Accrued accounts payable		75,625		67,462
Accounts payable and accrued expenses, related parties		4,469		3,305
Accrued salaries and benefits		15,431		28,686
Accrued insurance		23,503		26,180
Sales tax payable		4,036		3,056
Accrued expenses and other current liabilities		19,783		23,292
Current operating lease liabilities		16,898		17,751
Current portion of finance lease obligations		19		19
Total current liabilities		237,349		231,290
Long-term operating lease liabilities		43,372		46,388
Long-term debt		75,500		16,000
Other long-term liabilities		45,696		45,447
Total liabilities		401,917		339,125
Commitments and contingencies (Note 9)
Class A common stock, $0.01 par value; 350,000,000 shares authorized and 108,981,323 shares issued and outstanding as of March 31, 2023; 350,000,000 shares authorized and 109,389,528 shares issued and outstanding as of December 31, 2022		1,090		1,094
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; no shares issued or outstanding as of March 31, 2023 and December 31, 2022		—		—
Class B common stock, $0.01 par value; 150,000,000 shares authorized and 16,221,101 shares issued and outstanding as of March 31, 2023 and December 31, 2022		162		162
Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares issued and outstanding as of March 31, 2023 and December 31, 2022		—		—
Additional paid-in capital		1,063,149		1,075,915
Accumulated deficit		(298,847)		(311,194)
Total stockholders’ equity		765,554		765,977
Noncontrolling interests		117,781		117,751
Total equity		883,335		883,728
Total liabilities and equity	$	1,285,252	$	1,222,853

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 March 31,
	2023		2022
Revenue
Water Services	$	228,597	$	163,606
Water Infrastructure		101,547		58,554
Oilfield Chemicals		86,448		72,609
Total revenue		416,592		294,769
Costs of revenue
Water Services		181,699		137,046
Water Infrastructure		72,576		44,378
Oilfield Chemicals		69,709		62,163
Depreciation and amortization		32,943		26,500
Total costs of revenue		356,927		270,087
Gross profit		59,665		24,682
Operating expenses
Selling, general and administrative		35,829		28,315
Depreciation and amortization		595		567
Impairments and abandonments		11,166		—
Lease abandonment costs		76		91
Total operating expenses		47,666		28,973
Income (loss) from operations		11,999		(4,291)
Other income (expense)
Gain on sales of property and equipment and divestitures, net		2,911		1,653
Interest expense, net		(1,483)		(720)
Foreign currency (loss) gain, net		(4)		3
Bargain purchase gain		—		11,434
Other		846		249
Income before income tax expense		14,269		8,328
Income tax expense		(198)		(214)
Equity in losses of unconsolidated entities		(366)		(129)
Net income		13,705		7,985
Less: net income attributable to noncontrolling interests		(1,358)		(1,183)
Net income attributable to Select Energy Services, Inc.	$	12,347	$	6,802

Net income per share attributable to common stockholders (Note 15):
Class A—Basic	$	0.12	$	0.07
Class B—Basic	$	—	$	—

Net income per share attributable to common stockholders (Note 15):
Class A—Diluted	$	0.12	$	0.07
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 March 31,
	2023		2022
Net income	$	13,705	$	7,985
Comprehensive income		13,705		7,985
Less: comprehensive income attributable to noncontrolling interests		(1,358)		(1,183)
Comprehensive income attributable to Select Energy Services, Inc.	$	12,347	$	6,802

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 March 31, 2023 and 2022

(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, 2022	109,389,528	$	1,094	16,221,101	$	162	$	1,075,915	$	(311,194)	$	765,977	$	117,751	$	883,728
Equity-based compensation	—		—	—		—		2,581		—		2,581		383		2,964
Issuance of restricted shares	1,275,859		13	—		—		1,155		—		1,168		(1,168)		—
Repurchase of common stock	(1,657,203)		(17)	—		—		(11,019)		—		(11,036)		101		(10,935)
Restricted shares forfeited	(26,861)		—	—		—		(25)		—		(25)		25		—
Contributions from noncontrolling interests	—		—	—		—		—		—		—		153		153
NCI income tax adjustment	—		—	—		—		11		—		11		(11)		—
Dividend and distribution declared:
Class A common stock ($0.05 per share)	—		—	—		—		(5,258)		—		(5,258)		—		(5,258)
Unvested restricted stock ($0.05 per share)	—		—	—		—		(211)		—		(211)		—		(211)
Class B common stock ($0.05 per share)	—		—	—		—		—		—		—		(811)		(811)
Net income	—		—	—		—		—		12,347		12,347		1,358		13,705
Balance as of March 31, 2023	108,981,323	$	1,090	16,221,101	$	162	$	1,063,149	$	(298,847)	$	765,554	$	117,781	$	883,335


	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, 2021	94,172,920	$	942	16,221,101	$	162	$	950,464	$	(359,472)	$	592,096	$	103,078	$	695,174
ESPP shares issued	1,549		—	—		—		11		—		11		1		12
Equity-based compensation	—		—	—		—		2,805		—		2,805		470		3,275
Issuance of restricted shares	2,337,795		23	—		—		2,049		—		2,072		(2,072)		—
Stock options exercised	70,000		1	—		—		583		—		584		24		608
Issuance of shares for acquisitions	4,203,323		42	—		—		34,456		—		34,498		1,356		35,854
Repurchase of common stock	(2,660,328)		(27)	—		—		(19,080)		—		(19,107)		(409)		(19,516)
Restricted shares forfeited	(14,140)		—	—		—		(13)		—		(13)		13		—
NCI income tax adjustment	—		—	—		—		7		—		7		(7)		—
Net income	—		—	—		—		—		6,802		6,802		1,183		7,985
Balance as of March 31, 2022	98,111,119	$	981	16,221,101	$	162	$	971,282	$	(352,670)	$	619,755	$	103,637	$	723,392

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 CASH FLOWS

(unaudited)

(in thousands)


	Three months ended March 31,
	2023		2022
Cash flows from operating activities
Net income	$	13,705	$	7,985
Adjustments to reconcile net income to net cash used in operating activities
Depreciation and amortization		33,538		27,067
Gain on disposal of property and equipment and divestitures		(2,911)		(1,653)
Equity in losses of unconsolidated entities		366		129
Bad debt expense		1,975		571
Amortization of debt issuance costs		122		294
Inventory adjustments		75		—
Equity-based compensation		2,964		3,275
Impairments and abandonments		11,166		—
Bargain purchase gain		—		(11,434)
Unrealized loss on short-term investment		—		40
Other operating items, net		(442)		99
Changes in operating assets and liabilities
Accounts receivable		(64,922)		(46,622)
Prepaid expenses and other assets		(5,431)		4,554
Accounts payable and accrued liabilities		(8,221)		(2,855)
Net cash used in operating activities		(18,016)		(18,550)
Cash flows from investing activities
Purchase of property and equipment		(27,885)		(15,463)
Purchase of equity-method investments		—		(3,467)
Collection of note receivable		—		184
Distribution from cost method investment		—		20
Acquisitions, net of cash and restricted cash received		(9,418)		6,941
Proceeds received from sales of property and equipment		6,724		12,123
Other		—		(429)
Net cash used in investing activities		(30,579)		(91)
Cash flows from financing activities
Borrowings from revolving line of credit		76,750		20,000
Payments on revolving line of credit		(17,250)		(20,000)
Payments on current and long-term debt		—		(18,780)
Payments of finance lease obligations		(5)		(61)
Payment of debt issuance costs		—		(2,031)
Dividends and distributions paid		(6,206)		—
Proceeds from share issuance		—		12
Contributions from noncontrolling interests		4,950		—
Repurchase of common stock		(10,935)		(18,908)
Net cash provided by (used in) financing activities		47,304		(39,768)
Effect of exchange rate changes on cash		(3)		7
Net decrease in cash, cash equivalents and restricted cash		(1,294)		(58,402)
Cash, cash equivalents and restricted cash, beginning of period		7,322		85,801
Cash, cash equivalents and restricted cash, end of period	$	6,028	$	27,399
Supplemental cash flow disclosure:
Cash paid for interest	$	1,119	$	402
Cash refunds received for income taxes, net	$	—	$	(721)
Supplemental disclosure of noncash investing activities:
Issuance of shares for acquisitions	$	—	$	35,854
Capital expenditures included in accounts payable and accrued liabilities	$	31,398	$	14,922

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

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SELECT ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1—BUSINESS AND BASIS OF PRESENTATION

Description of the business: Select Energy Services, Inc. (“we,” “Select Inc.” or the “Company”) was incorporated as a Delaware corporation on November 21, 2016. The Company is a holding company whose sole material asset consists of common units (“SES Holdings LLC Units”) in SES Holdings, LLC (“SES Holdings”). On February 21, 2023, the Company announced its intent to rebrand itself under the new name Select Water Solutions, Inc. during the first half of 2023.

We are a leading provider of sustainable water-management and chemical solutions to the energy industry in the United States (“U.S.”). As a leader in the water solutions industry, we place the utmost importance on safe, environmentally responsible management of oilfield water throughout the lifecycle of a well. Additionally, we believe that responsibly managing water resources through our operations to help conserve and protect the environment in the communities in which we operate is paramount to our continued success.

Class A and Class B common stock: As of March 31, 2023, the Company had both Class A and Class B common shares issued and outstanding. Holders of shares of our Class A common stock, par value $0.01 per share (“Class A common stock”) and Class B common stock, par value $0.01 per share (“Class B common stock”) are entitled to one vote per share and vote together as a single class on all matters presented to our stockholders for their vote or approval.

Exchange rights: Under the Eighth Amended and Restated Limited Liability Company Agreement of SES Holdings (the “SES Holdings LLC Agreement”), SES Legacy Holdings LLC (“Legacy Owner Holdco”) and its permitted transferees have the right (an “Exchange Right”) to cause SES Holdings to acquire all or a portion of its SES Holdings LLC Units for, at SES Holdings’ election, (i) shares of Class A common stock at an exchange ratio of one share of Class A common stock for each SES Holdings LLC Unit exchanged, subject to conversion rate adjustments for stock splits, stock dividends, reclassification and other similar transactions or (ii) cash in an amount equal to the Cash Election Value (as defined within the SES Holdings LLC Agreement) of such Class A common stock. Alternatively, upon the exercise of any Exchange Right, Select Inc. has the right (the “Call Right”) to acquire the tendered SES Holdings LLC Units from the exchanging unitholder for, at its election, (i) the number of shares of Class A common stock the exchanging unitholder would have received under the Exchange Right or (ii) cash in an amount equal to the Cash Election Value of such Class A common stock. In connection with any exchange of SES Holdings LLC Units pursuant to an Exchange Right or Call Right, the corresponding number of shares of Class B common stock will be cancelled.

Basis of presentation: The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”) and pursuant to the rules and regulations of the SEC. These unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with GAAP.

This Quarterly Report relates to the three months ended March 31, 2023 (the “Current Quarter”) and the three months ended March 31, 2022 (the “Prior Quarter”). The Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”), filed with the SEC on February 22, 2023, includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Quarterly Report. All material adjustments (consisting solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. The results for the Current Quarter may not be indicative of the results to be expected for the full year.

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The unaudited interim consolidated financial statements include the accounts of the Company and all of its majority-owned or controlled subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

For investments in subsidiaries that are not wholly owned, but where the Company exercises control, the equity held by the minority owners and their portion of net income or loss are reflected as noncontrolling interests. Investments in entities in which the Company exercises significant influence over operating and financial policies are accounted for using the equity-method, and investments in entities for which the Company does not have significant control or influence are accounted for using the cost method or other appropriate basis as applicable. As of March 31, 2023, the Company had three equity-method investments. The Company’s investments are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. When circumstances indicate that the fair value of its investment is less than its carrying value and the reduction in value is other than temporary, the reduction in value is recognized in earnings. Our investments in unconsolidated entities are summarized below and are included in the assets of our Water Services segment:


	Year				As of March 31,	As of December 31,
Type of Investment	attained	Accounting method	Balance Sheet Location	2023		2022

				(in thousands)
21% minority interest	2020	Equity-method	Other long-term assets, net		4,484		4,686
40% minority interest	2021	Equity-method	Other long-term assets, net		4,732		4,985
48% minority interest	2021	Equity-method	Other long-term assets, net		3,535		3,446

Dividends: On both January 27 and April 25, 2023, our board of directors declared a cash dividend of $0.05 per share of Class A common stock. A distribution of $0.05 per unit was also approved for those holders of units of SES Holdings, LLC, who also hold an equal number of shares of Class B common stock of the Company, which was subject to the same payment and record dates. During the Current Quarter, the Company paid $5.3 million in dividends accounted for as a reduction to additional paid-in capital, $0.8 million of distributions accounted for as a reduction to noncontrolling interests and $0.1 million as a reduction to accrued expenses and other current liabilities. As of March 31, 2023, the Company had a $0.3 million dividends payable balance included in accrued expenses and other current liabilities and other long-term liabilities in connection with unvested restricted stock awards. All future dividend payments are subject to quarterly review and approval by the board of directors.

Segment reporting: The Company has three reportable segments. Reportable segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company’s current reportable segments are Water Services, Water Infrastructure, and Oilfield Chemicals. See “Note 16—Segment Information” for additional information.

The Water Services segment consists of the Company’s services businesses, including water transfer, flowback and well testing, fluids hauling, water monitoring, water containment and water network automation, primarily serving exploration and production (“E&P”) companies. Additionally, this segment includes the operations of our accommodations and rentals business.

The Water Infrastructure segment consists of the Company’s infrastructure assets, including operations associated with our water sourcing and pipeline infrastructure, our water recycling solutions, and our produced water gathering systems and saltwater disposal wells, as well as solids disposal facilities, primarily serving E&P companies.

The Oilfield Chemicals segment provides technical solutions, products and expertise related to chemical applications in the oil and gas industry. We develop, manufacture, manage logistics and provide a full suite of chemicals used in hydraulic fracturing, stimulation, cementing and well completions for customers ranging from pressure pumpers to major integrated and independent oil and gas producers. This segment also utilizes its chemical experience and lab testing capabilities to customize tailored water treatment solutions designed to optimize the fracturing fluid system in conjunction with the quality of water used in well completions.

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NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies: The Company’s significant accounting policies are disclosed in Note 2 of the consolidated financial statements for the year ended December 31, 2022, included in the 2022 Form 10-K.

Use of estimates: The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

On an ongoing basis, the Company evaluates its estimates, including those related to the recoverability of long-lived assets and intangibles, useful lives used in depreciation and amortization, uncollectible accounts receivable, inventory reserve, income taxes, self-insurance liabilities, share-based compensation, contingent liabilities, lease-related reasonably certain option exercise assessments, and the incremental borrowing rate for leases. The Company bases its estimates on historical and other pertinent information that are believed to be reasonable under the circumstances. The accounting estimates used in the preparation of the consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes.

Allowance for credit losses: The Company’s allowance for credit losses relates to trade accounts receivable. The Company treats trade accounts receivable as one portfolio and records an initial allowance calculated as a percentage of revenue recognized based on a combination of historical information and future expectations. Additionally, the Company adjusts this allowance based on specific information in connection with aged receivables. Historically, most bad debt has been incurred when a customer’s financial condition significantly deteriorates, which in some cases leads to bankruptcy. Market volatility is highly uncertain and, as such, the impact on expected losses is subject to significant judgment and may cause variability in the Company’s allowance for credit losses in future periods.

The change in the allowance for credit losses is as follows:


	Three months ended March 31, 2023
	(in thousands)
Balance as of December 31, 2022	$	4,918
Increase to allowance based on a percentage of revenue		835
Adjustment based on aged receivable analysis		1,140
Charge-offs		(886)
Recoveries		2
Balance as of March 31, 2023	$	6,009

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Asset retirement obligations: The Company’s asset retirement obligations (“ARO”) relate to disposal facilities with obligations for plugging wells, removing surface equipment, and returning land to its pre-drilling condition. The following table describes the changes to the Company’s ARO liability for the Current Quarter:



	Three months ended March 31, 2023
	(in thousands)
Balance as of December 31, 2022	$	43,576
Accretion expense, included in depreciation and amortization expense		256
Acquired AROs		975
Divested		(222)
Payments		(1,602)
Balance as of March 31, 2023	$	42,983

Short-term ARO liability		2,725
Long-term ARO liability		40,258
Balance as of March 31, 2023	$	42,983

We review the adequacy of our ARO liabilities whenever indicators suggest that the estimated cash flows underlying the liabilities have changed. The Company’s ARO liabilities are included in accrued expenses and other current liabilities and other long-term liabilities in the accompanying consolidated balance sheets.

Lessor Income: The Company is a lessor for a nominal number of owned facilities and also recognizes income related to multiple facility subleases that are accounted for as follows:


		Three months ended March 31,
		2023		2022

		(in thousands)
Category	Classification
Lessor income	Costs of revenue	$	77	$	116
Sublease income	Lease abandonment costs and Costs of revenue		384		346

The Company also generates short-term equipment rental revenue. See “Note 4—Revenue” for a discussion of revenue recognition for the accommodations and rentals business.

NOTE 3—ACQUISITIONS

Business combinations

Asset Acquisitions

During the Current Quarter, Select acquired certain assets, revenue-producing contracts and associated liabilities in the Midland Basin from multiple entities for $9.4 million inclusive of $0.2 million of acquisition-related costs. The allocation of the purchase price for these assets was a combined $7.5 million in property and equipment, $1.0 million in water inventory, $1.9 million in customer relationships and $1.0 million in asset retirement obligations and other liabilities. Many of the assets acquired are adjacent to the Big Spring Recycling System (“BSRS”), with connectivity into BSRS providing future revenue and cost synergies.

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Breakwater Acquisition

On November 1, 2022, the Company completed the acquisition of Breakwater Energy Services, LLC. (“Breakwater”) in a stock-for-stock transaction for total consideration of $105.3 million based on the closing price of the Company’s shares of Class A common stock on October 31, 2022 (the “Breakwater Acquisition”). The consideration transferred consisted of 9,181,144 shares of Class A common stock, $10.5 million of debt that was paid off at closing as part of consideration exchanged, $3.8 million in change-of-control payments and $2.4 million in seller transaction costs. The acquisition strengthened Select’s geographic footprint with a unique set of water logistics and infrastructure assets, particularly in the Permian region.

The Breakwater Acquisition was accounted for as a business combination under the acquisition method of accounting. When determining the fair values of assets acquired and liabilities assumed, management made estimates, judgments and assumptions. The Company has engaged third-party valuation experts to assist in the purchase price allocation. These estimates, judgments and assumptions and valuation of the property and equipment acquired, intangible assets, current assets, current liabilities and long-term liabilities have not been finalized as of March 31, 2023. The business combination accounting is preliminary due to the continuing efforts to validate the working capital acquired, the existence and condition of the property and equipment acquired as well as the value assigned to the intangible assets. The assets acquired and liabilities assumed are included in the Company’s Water Services and Water Infrastructure segments. The Company incurred $1.4 million of transaction-related costs related to this acquisition in the Current Quarter and such costs are included in selling, general and administrative within the consolidated statements of operations.

The following table summarizes the consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed as of the date of acquisition:


Preliminary purchase price allocation	As Reported as of December 31, 2022		Current Quarter Adjustment		Amount

Consideration transferred	(in thousands)
Class A common stock (9,181,144 shares)⁽¹⁾	$	88,598	$	(410)	$	88,188
Cash paid		16,701		—		16,701
Total consideration transferred		105,299		(410)		104,889
Less: identifiable assets acquired and liabilities assumed
Working capital		22,633		(410)		22,223
Property and equipment		78,912		—		78,912
Right-of-use assets		180		—		180
Customer relationships		35,558		—		35,558
Other long-term assets		120		—		120
Long-term debt		(1,979)		—		(1,979)
Long-term lease liabilities		(

Form: 10-Q

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