Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

November 1, 2023

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Table of Contents

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, 2023

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 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)

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 October 30, 2023, the registrant had 103,916,906 shares of Class A common stock and 16,221,101 shares of Class B common stock outstanding.

Table of Contents

SELECT WATER SOLUTIONS, 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

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, including that resulting from the sustained Russia-Ukraine war and related economic sanctions, the conflict in the Israel-Gaza region and continued hostilities in the Middle East, rising interest rates, and potential energy insecurity in Europe, each of 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, which may be exacerbated by the recent Middle East conflict;
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 coronavirus (“COVID-19”) pandemic and associated repercussions, and any resulting impact on commodity prices and supply and demand considerations;
the potential deterioration of our customers’ financial condition, including defaults resulting from actual or potential insolvencies;

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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 refined products deriving from crude oil such as gasoline and diesel fuel, 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;

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acts of terrorism, war or political or civil unrest in the U.S. or elsewhere, such as the Russia-Ukraine war, the conflict in the Israel-Gaza region and/or other 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 WATER SOLUTIONS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

September 30, 2023

December 31, 2022

    

(unaudited)

    

Assets

Current assets

 

Cash and cash equivalents

$

25,043

$

7,322

Accounts receivable trade, net of allowance for credit losses of $5,762 and $4,918, respectively

 

355,532

 

429,983

Accounts receivable, related parties

 

287

 

5,087

Inventories

 

44,880

 

41,164

Prepaid expenses and other current assets

 

44,490

 

34,380

Total current assets

 

470,232

 

517,936

Property and equipment

 

1,151,654

 

1,084,005

Accumulated depreciation

 

(628,293)

 

(584,451)

Total property and equipment, net

 

523,361

 

499,554

Right-of-use assets, net

39,950

47,662

Goodwill

 

4,683

 

Other intangible assets, net

 

120,851

 

138,800

Other long-term assets, net

 

23,411

 

18,901

Total assets

$

1,182,488

$

1,222,853

Liabilities and Equity

 

 

  

Current liabilities

 

 

  

Accounts payable

$

54,500

$

61,539

Accrued accounts payable

74,302

67,462

Accounts payable and accrued expenses, related parties

 

3,554

 

3,305

Accrued salaries and benefits

 

20,573

 

28,686

Accrued insurance

 

20,244

 

26,180

Sales tax payable

3,074

3,056

Accrued expenses and other current liabilities

 

29,061

 

23,292

Current operating lease liabilities

15,274

17,751

Current portion of finance lease obligations

 

87

 

19

Total current liabilities

 

220,669

 

231,290

Long-term operating lease liabilities

 

38,837

 

46,388

Long-term debt

 

 

16,000

Other long-term liabilities

 

43,983

 

45,447

Total liabilities

 

303,489

 

339,125

Commitments and contingencies (Note 9)

 

 

  

Class A common stock, $0.01 par value; 350,000,000 shares authorized and 103,917,951 shares issued and outstanding as of September 30, 2023; 350,000,000 shares authorized and 109,389,528 shares issued and outstanding as of December 31, 2022

 

1,039

 

1,094

Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; no shares issued or outstanding as of September 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 September 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 September 30, 2023 and December 31, 2022

 

 

Additional paid-in capital

 

1,022,406

 

1,075,915

Accumulated deficit

 

(264,386)

 

(311,194)

Total stockholders’ equity

 

759,221

 

765,977

Noncontrolling interests

 

119,778

 

117,751

Total equity

 

878,999

 

883,728

Total liabilities and equity

$

1,182,488

$

1,222,853

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

6

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SELECT WATER SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share data)

Three months ended September 30, 

Nine months ended September 30, 

    

2023

    

2022

    

2023

    

2022

Revenue

 

  

 

  

Water Services

$

251,870

$

264,271

$

791,145

$

693,393

Water Infrastructure

58,375

31,368

169,118

80,686

Chemical Technologies

 

79,028

 

79,433

250,230

231,665

Total revenue

 

389,273

 

375,072

1,210,493

1,005,744

Costs of revenue

 

  

 

  

Water Services

200,361

204,650

626,878

558,041

Water Infrastructure

34,992

20,392

103,718

51,424

Chemical Technologies

 

63,005

64,519

200,017

194,670

Other

 

(1)

Depreciation and amortization

 

34,650

26,672

102,776

82,425

Total costs of revenue

 

333,008

 

316,232

1,033,389

886,560

Gross profit

 

56,265

 

58,840

177,104

119,184

Operating expenses

 

  

 

  

Selling, general and administrative

 

38,983

29,782

109,147

84,792

Depreciation and amortization

 

512

543

1,846

1,636

Impairments and abandonments

 

32

11,554

Lease abandonment costs

 

(12)

83

73

336

Total operating expenses

 

39,515

 

30,408

122,620

86,764

Income from operations

 

16,750

 

28,432

54,484

32,420

Other income (expense)

 

  

 

  

Gain (loss) on sales of property and equipment and divestitures, net

23

(479)

1,688

1,905

Interest expense, net

 

(765)

(616)

(4,290)

(1,830)

Foreign currency loss, net

(1)

(6)

(4)

(9)

Bargain purchase gain

(3,273)

13,768

Other

 

768

1,153

2,486

2,277

Income before income tax expense

 

16,775

 

25,211

54,364

48,531

Income tax expense

 

(483)

(276)

(1,068)

(672)

Equity in losses of unconsolidated entities

(978)

(218)

(1,716)

(576)

Net income

 

15,314

 

24,717

51,580

47,283

Less: net income attributable to noncontrolling interests

 

(968)

(3,393)

(4,772)

(6,654)

Net income attributable to Select Water Solutions, Inc.

$

14,346

$

21,324

$

46,808

$

40,629

Net income per share attributable to common stockholders (Note 15):

 

Class A—Basic

$

0.14

$

0.23

$

0.46

$

0.44

Class B—Basic

$

$

$

$

Net income per share attributable to common stockholders (Note 15):

 

Class A—Diluted

$

0.14

$

0.22

$

0.45

$

0.43

Class B—Diluted

$

$

$

$

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

7

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SELECT WATER SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)

Three months ended September 30, 

Nine months ended September 30, 

    

2023

    

2022

    

2023

    

2022

Net income

$

15,314

$

24,717

$

51,580

$

47,283

Comprehensive income

 

15,314

 

24,717

51,580

47,283

Less: comprehensive income attributable to noncontrolling interests

 

(968)

 

(3,393)

(4,772)

(6,654)

Comprehensive income attributable to Select Water Solutions, Inc.

$

14,346

$

21,324

$

46,808

$

40,629

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 nine months ended September 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

 

 

11,080

11,080

1,707

12,787

Issuance of restricted shares

 

1,633,849

16

 

 

1,449

1,465

(1,465)

Issuance of shares for acquisitions

(48,688)

 

 

(401)

(401)

(9)

(410)

Repurchase of common stock

(6,984,375)

(70)

 

 

(49,747)

(49,817)

(88)

(49,905)

Restricted shares forfeited

(72,363)

(1)

 

 

(46)

(47)

47

Distributions to noncontrolling interests

 

 

 

(1,581)

(1,581)

Contributions from noncontrolling interests

1,153

1,153

NCI income tax adjustment

 

 

76

76

(76)

Dividend and distribution declared:

Class A common stock ($0.05 per share)

(15,287)

(15,287)

(15,287)

Unvested restricted stock ($0.05 per share)

(633)

(633)

(633)

Class B common stock ($0.05 per share)

(2,433)

(2,433)

Net income

 

 

 

46,808

46,808

4,772

51,580

Balance as of September 30, 2023

 

103,917,951

$

1,039

 

16,221,101

$

162

 

$

1,022,406

$

(264,386)

$

759,221

$

119,778

$

878,999

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

4,681

34

34

1

35

Equity-based compensation

9,454

9,454

1,569

11,023

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

(2,794,983)

(28)

(20,109)

(20,137)

(438)

(20,575)

Restricted shares forfeited

(87,242)

(1)

(78)

(79)

79

NCI income tax adjustment

39

39

(39)

Net income

 

 

 

 

 

 

 

40,629

 

40,629

 

6,654

 

 

47,283

Balance as of September 30, 2022

 

98,097,930

$

981

 

16,221,101

$

162

 

$

977,063

$

(318,843)

$

659,363

$

110,039

$

769,402

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 September 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 June 30, 2023

 

103,799,815

$

1,038

 

16,221,101

$

162

 

$

1,023,370

$

(278,732)

$

745,838

$

118,115

$

863,953

Equity-based compensation

4,336

4,336

678

5,014

Issuance of restricted shares

 

172,905

 

1

 

 

 

 

119

 

 

120

 

(120)

 

 

Repurchase of common stock

(33,525)

1

(242)

(241)

(34)

(275)

Restricted shares forfeited

(21,244)

(1)

1