Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

July 31, 2024

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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 June 30, 2024

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 July 29, 2024, the registrant had 102,796,012 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

41

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

58

Item 4.

Controls and Procedures

58

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

60

Item 4.

Mine Safety Disclosures

60

Item 5.

Other Information

60

Item 6.

Exhibits

60

2

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (the “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact, included in this Quarterly Report regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “preliminary,” “forecast,” and similar expressions or variations are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” included in our most recent Annual Report on Form 10-K, 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, including heightened tensions with Iran, inflation and elevated interest rates, and potential energy insecurity in Europe, each of which may decrease demand for oil and natural gas or contribute to volatility in the prices for oil and natural gas, which may decrease demand for our services;
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 an increase in hostilities in the Middle East;
changes in global political or economic conditions, generally, including as a result of the fall 2024 United States presidential election and any resultant political and economic uncertainty, including the rate of inflation and potential economic recession;
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, including any delays and/or supply chain disruptions due to increased hostilities in the Middle East;
the impact of central bank policy actions, such as sustained, elevated rates of interest in response to high rates of inflation, and disruptions in the bank and capital markets;
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, including the recent consolidation in the Permian Basin;
trends and volatility in oil and gas prices, and our ability to manage through such volatility;

3

Table of Contents

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;
actions taken by federal and 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;
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 exploration and production (“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, the conflict in the Israel-Gaza region and/or other instability and hostilities in the Middle East;

4

Table of Contents

the severity and duration of world health events and any resulting impact on commodity prices and supply and demand considerations;
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.

5

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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, 2024

December 31, 2023

    

(unaudited)

    

Assets

Current assets

 

Cash and cash equivalents

$

16,417

$

57,083

Accounts receivable trade, net of allowance for credit losses of $5,914 and $5,318, respectively

 

295,115

 

322,611

Accounts receivable, related parties

 

98

 

171

Inventories

 

37,501

 

38,653

Prepaid expenses and other current assets

 

35,142

 

35,541

Total current assets

 

384,273

 

454,059

Property and equipment

 

1,312,239

 

1,144,989

Accumulated depreciation

 

(663,284)

 

(627,408)

Total property and equipment, net

 

648,955

 

517,581

Right-of-use assets, net

42,293

39,504

Goodwill

 

36,664

 

4,683

Other intangible assets, net

 

126,834

 

116,189

Deferred tax assets, net

54,529

 

61,617

Other long-term assets

 

29,572

 

24,557

Total assets

$

1,323,120

$

1,218,190

Liabilities and Equity

 

 

  

Current liabilities

 

 

  

Accounts payable

$

36,746

$

42,582

Accrued accounts payable

72,493

66,182

Accounts payable and accrued expenses, related parties

 

3,251

 

4,086

Accrued salaries and benefits

 

24,342

 

28,401

Accrued insurance

 

17,399

 

19,720

Sales tax payable

2,493

1,397

Current portion of tax receivable agreements liabilities

469

469

Accrued expenses and other current liabilities

 

38,282

 

33,511

Current operating lease liabilities

16,934

15,005

Current portion of finance lease obligations

 

199

 

194

Total current liabilities

 

212,608

 

211,547

Long-term tax receivable agreements liabilities

37,718

 

37,718

Long-term operating lease liabilities

 

37,938

 

37,799

Long-term debt

 

90,000

 

Other long-term liabilities

 

42,726

 

38,954

Total liabilities

 

420,990

 

326,018

Commitments and contingencies (Note 9)

 

 

  

Class A common stock, $0.01 par value; 350,000,000 shares authorized and 102,799,602 shares issued and outstanding as of June 30, 2024; 350,000,000 shares authorized and 102,172,863 shares issued and outstanding as of December 31, 2023

 

1,028

 

1,022

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, 2024 and December 31, 2023

 

162

 

162

Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares issued and outstanding as of June 30, 2024 and December 31, 2023

 

 

Additional paid-in capital

 

1,001,123

 

1,008,095

Accumulated deficit

 

(220,298)

 

(236,791)

Total stockholders’ equity

 

782,015

 

772,488

Noncontrolling interests

 

120,115

 

119,684

Total equity

 

902,130

 

892,172

Total liabilities and equity

$

1,323,120

$

1,218,190

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

6

Table of Contents

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, 

    

2024

    

2023

    

2024

    

2023

Revenue

 

  

 

  

Water Services

$

230,008

$

264,597

$

458,315

$

539,275

Water Infrastructure

68,564

55,277

132,072

110,743

Chemical Technologies

 

66,559

 

84,754

141,292

171,202

Total revenue

 

365,131

 

404,628

731,679

821,220

Costs of revenue

 

  

 

  

Water Services

178,308

206,576

359,840

426,517

Water Infrastructure

33,581

34,392

67,273

68,726

Chemical Technologies

 

55,641

67,303

117,396

137,012

Depreciation, amortization and accretion

 

37,445

35,183

74,337

68,126

Total costs of revenue

 

304,975

 

343,454

618,846

700,381

Gross profit

 

60,156

 

61,174

112,833

120,839

Operating expenses

 

  

 

  

Selling, general and administrative

 

38,981

34,335

82,961

70,164

Depreciation and amortization

 

748

739

2,006

1,334

Impairments and abandonments

 

46

356

91

11,522

Lease abandonment costs

 

17

9

406

85

Total operating expenses

 

39,792

 

35,439

85,464

83,105

Income from operations

 

20,364

 

25,735

27,369

37,734

Other income (expense)

 

  

 

  

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

382

(1,246)

707

1,665

Interest expense, net

 

(2,026)

(2,042)

(3,298)

(3,525)

Other

 

42

873

(240)

1,715

Income before income tax expense and equity in gains (losses) of unconsolidated entities

 

18,762

 

23,320

24,538

37,589

Income tax expense

 

(3,959)

(387)

(5,411)

(585)

Equity in gains (losses) of unconsolidated entities

96

(372)

(353)

(738)

Net income

 

14,899

 

22,561

18,774

36,266

Less: net income attributable to noncontrolling interests

 

(2,031)

(2,446)

(2,281)

(3,804)

Net income attributable to Select Water Solutions, Inc.

$

12,868

$

20,115

$

16,493

$

32,462

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

 

Class A—Basic

$

0.13

$

0.20

$

0.17

$

0.31

Class B—Basic

$

$

$

$

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

 

Class A—Diluted

$

0.13

$

0.20

$

0.16

$

0.31

Class B—Diluted

$

$

$

$

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

7

Table of Contents

SELECT WATER SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)

Three months ended June 30, 

Six months ended June 30, 

    

2024

    

2023

    

2024

    

2023

Net income

$

14,899

$

22,561

$

18,774

$

36,266

Comprehensive income

 

14,899

 

22,561

18,774

36,266

Less: comprehensive income attributable to noncontrolling interests

 

(2,031)

 

(2,446)

(2,281)

(3,804)

Comprehensive income attributable to Select Water Solutions, Inc.

$

12,868

$

20,115

$

16,493

$

32,462

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

8

Table of Contents

SELECT WATER SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the six months ended June 30, 2024 and 2023

(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, 2023

 

102,172,863

$

1,022

 

16,221,101

$

162

 

$

1,008,095

$

(236,791)

$

772,488

$

119,684

$

892,172

Equity-based compensation

 

 

10,845

10,845

1,715

12,560

Issuance of restricted shares

 

1,231,832

12

 

 

1,250

1,262

(1,262)

Stock options exercised

 

129,716

1

 

 

(1)

Repurchase of common stock

(964,718)

(9)

 

 

(7,022)

(7,031)

(121)

(7,152)

Restricted shares forfeited

(74,008)

(1)

 

 

(75)

(76)

76

Performance shares vested

303,917

3

 

 

308

311

(311)

Dividend and distribution declared:

Class A common stock ($0.06 per share)

(11,933)

(11,933)

(11,933)

Unvested restricted stock ($0.06 per share)

(344)

(344)

(344)

Class B common stock ($0.06 per share)

(1,947)

(1,947)

Net income

 

 

 

16,493

16,493

2,281

18,774

Balance as of June 30, 2024

 

102,799,602

$

1,028

 

16,221,101

$

162

 

$

1,001,123

$

(220,298)

$

782,015

$

120,115

$

902,130

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

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

9

Table of Contents

SELECT WATER SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the three months ended June 30, 2024 and 2023

(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, 2024

 

102,705,260

$

1,027

 

16,221,101

$

162

 

$

1,001,967

$

(233,166)

$

769,990

$

118,331

$

888,321

Equity-based compensation