August 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 June 30, 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 WATER SOLUTIONS, 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)

Select Energy Services, Inc.

(Former name, former address and former fiscal year, if changed since last report)

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 July 31, 2023, the registrant had 103,779,577 shares of Class A common stock and 16,221,101 shares of Class B common stock outstanding.

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SELECT WATER SOLUTIONS, 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	55

Item 4.	Controls and Procedures	55

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	56

Item 1A.	Risk Factors	56

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 3.	Defaults Upon Senior Securities	57

Item 4.	Mine Safety Disclosures	57

Item 5.	Other Information	57

Item 6.	Exhibits	57

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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 central bank policy actions and disruptions in the bank and capital markets, including those resulting from bank failures and the inability to access liquidity by banking and financial services firms;

●

the severity and duration of world health events, including the recent coronavirus (“COVID-19”) pandemic and associated repercussions, including actions taken by governmental authorities and other third parties in response thereto, and operational challenges to supply and demand for oil and natural gas and the economy generally;

●

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;

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●

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 sustained 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;

●

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

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●

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 WATER SOLUTIONS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	June 30, 2023		December 31, 2022
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	10,562	$	7,322
Accounts receivable trade, net of allowance for credit losses of $5,961 and $4,918, respectively		430,765		429,983
Accounts receivable, related parties		290		5,087
Inventories		42,893		41,164
Prepaid expenses and other current assets		36,483		34,380
Total current assets		520,993		517,936
Property and equipment		1,120,626		1,084,005
Accumulated depreciation		(609,392)		(584,451)
Total property and equipment, net		511,234		499,554
Right-of-use assets, net		41,923		47,662
Goodwill		4,683		—
Other intangible assets, net		125,514		138,800
Other long-term assets, net		22,745		18,901
Total assets	$	1,227,092	$	1,222,853
Liabilities and Equity
Current liabilities
Accounts payable	$	47,387	$	61,539
Accrued accounts payable		75,872		67,462
Accounts payable and accrued expenses, related parties		3,057		3,305
Accrued salaries and benefits		24,613		28,686
Accrued insurance		17,714		26,180
Sales tax payable		3,655		3,056
Accrued expenses and other current liabilities		19,301		23,292
Current operating lease liabilities		16,162		17,751
Current portion of finance lease obligations		15		19
Total current liabilities		207,776		231,290
Long-term operating lease liabilities		40,712		46,388
Long-term debt		65,000		16,000
Other long-term liabilities		49,651		45,447
Total liabilities		363,139		339,125
Commitments and contingencies (Note 9)
Class A common stock, $0.01 par value; 350,000,000 shares authorized and 103,799,815 shares issued and outstanding as of June 30, 2023; 350,000,000 shares authorized and 109,389,528 shares issued and outstanding as of December 31, 2022		1,038		1,094
Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; no shares issued or outstanding as of June 30, 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 June 30, 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 June 30, 2023 and December 31, 2022		—		—
Additional paid-in capital		1,023,370		1,075,915
Accumulated deficit		(278,732)		(311,194)
Total stockholders’ equity		745,838		765,977
Noncontrolling interests		118,115		117,751
Total equity		863,953		883,728
Total liabilities and equity	$	1,227,092	$	1,222,853

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

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SELECT WATER SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share data)


	Three months ended June 30,				Six months ended June 30,
	2023		2022		2023		2022
Revenue
Water Services	$	264,597	$	230,502	$	539,275	$	429,122
Water Infrastructure		55,277		25,778		110,743		49,318
Chemical Technologies		84,754		79,623		171,202		152,232
Total revenue		404,628		335,903		821,220		630,672
Costs of revenue
Water Services		206,576		187,675		426,517		353,391
Water Infrastructure		34,392		15,324		68,726		31,032
Chemical Technologies		67,303		67,988		137,012		130,151
Other		—		1		—		1
Depreciation and amortization		35,183		29,253		68,126		55,753
Total costs of revenue		343,454		300,241		700,381		570,328
Gross profit		61,174		35,662		120,839		60,344
Operating expenses
Selling, general and administrative		34,335		26,695		70,164		55,010
Depreciation and amortization		739		526		1,334		1,093
Impairments and abandonments		356		—		11,522		—
Lease abandonment costs		9		162		85		253
Total operating expenses		35,439		27,383		83,105		56,356
Income from operations		25,735		8,279		37,734		3,988
Other income (expense)
(Loss) gain on sales of property and equipment and divestitures, net		(1,246)		731		1,665		2,384
Interest expense, net		(2,042)		(494)		(3,525)		(1,214)
Foreign currency gain (loss), net		1		(6)		(3)		(3)
Bargain purchase gain		—		5,607		—		17,041
Other		872		875		1,718		1,124
Income before income tax expense		23,320		14,992		37,589		23,320
Income tax expense		(387)		(182)		(585)		(396)
Equity in losses of unconsolidated entities		(372)		(229)		(738)		(358)
Net income		22,561		14,581		36,266		22,566
Less: net income attributable to noncontrolling interests		(2,446)		(2,078)		(3,804)		(3,261)
Net income attributable to Select Water Solutions, Inc.	$	20,115	$	12,503	$	32,462	$	19,305

Net income per share attributable to common stockholders (Note 15):
Class A—Basic	$	0.20	$	0.13	$	0.31	$	0.21
Class B—Basic	$	—	$	—	$	—	$	—

Net income per share attributable to common stockholders (Note 15):
Class A—Diluted	$	0.20	$	0.13	$	0.31	$	0.20
Class B—Diluted	$	—	$	—	$	—	$	—

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

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SELECT WATER SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)


	Three months ended June 30,				Six months ended June 30,
	2023		2022		2023		2022
Net income	$	22,561	$	14,581	$	36,266	$	22,566
Comprehensive income		22,561		14,581		36,266		22,566
Less: comprehensive income attributable to noncontrolling interests		(2,446)		(2,078)		(3,804)		(3,261)
Comprehensive income attributable to Select Water Solutions, Inc.	$	20,115	$	12,503	$	32,462	$	19,305

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

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SELECT WATER SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the six months ended June 30, 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	—		—	—		—		6,744		—		6,744		1,029		7,773
Issuance of restricted shares	1,460,944		15	—		—		1,330		—		1,345		(1,345)		—
Issuance of shares for acquisitions	(48,688)		—	—		—		(401)		—		(401)		(9)		(410)
Repurchase of common stock	(6,950,850)		(70)	—		—		(49,505)		—		(49,575)		(54)		(49,629)
Restricted shares forfeited	(51,119)		(1)	—		—		(47)		—		(48)		48		—
Distributions to noncontrolling interests	—		—	—		—		—		—		—		(1,581)		(1,581)
Contributions from noncontrolling interests	—		—	—		—		—		—		—		153		153
NCI income tax adjustment	—		—	—		—		59		—		59		(59)		—
Dividend and distribution declared:
Class A common stock ($0.05 per share)	—		—	—		—		(10,300)		—		(10,300)		—		(10,300)
Unvested restricted stock ($0.05 per share)	—		—	—		—		(425)		—		(425)		—		(425)
Class B common stock ($0.05 per share)	—		—	—		—		—		—		—		(1,622)		(1,622)
Net income	—		—	—		—		—		32,462		32,462		3,804		36,266
Balance as of June 30, 2023	103,799,815	$	1,038	16,221,101	$	162	$	1,023,370	$	(278,732)	$	745,838	$	118,115	$	863,953


	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	3,140		—	—		—		24		—		24		1		25
Equity-based compensation	—		—	—		—		6,189		—		6,189		1,030		7,219
Issuance of restricted shares	2,529,231		25	—		—		2,220		—		2,245		(2,245)		—
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	(2,754,923)		(27)	—		—		(19,841)		—		(19,868)		(436)		(20,304)
Restricted shares forfeited	(63,118)		(1)	—		—		(56)		—		(57)		57		—
NCI income tax adjustment	—		—	—		—		27		—		27		(24)		3
Net income	—		—	—		—		—		19,305		19,305		3,261		22,566
Balance as of June 30, 2022	98,160,573	$	982	16,221,101	$	162	$	974,066	$	(340,167)	$	635,043	$	106,102	$	741,145

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

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SELECT WATER SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the three months ended June 30, 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 March 31, 2023	108,981,323	$	1,090	16,221,101	$	162	$	1,063,149	$	(298,847)	$	765,554	$	117,781	$	883,335
Equity-based compensation	—		—	—		—		4,163		—		4,163		646		4,809
Issuance of restricted shares	185,085		2	—		—		175		—		177		(177)		—
Issuance of shares for acquisitions	(48,688)		—	—		—		(401)		—		(401)		(9)		(410)
Repurchase of common stock	(5,293,647)		(54)	—		—		(38,486)		—		(38,540)		(155)		(38,695)
Restricted shares forfeited	(24,258)		—	—		—		(22)		—		(22)		23		1
Distributions to noncontrolling interests	—		—	—		—		—		—

Form: 10-Q

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