Select Energy Services Announces Second Quarter 2019 Financial Results and Operational Updates


Aug 6, 2019

HOUSTON, Aug. 6, 2019 /PRNewswire/ — Select Energy Services, Inc. (NYSE: WTTR) (“Select” or “the Company”), a leading provider of water management and chemical solutions to the U.S. unconventional oil and gas industry, today announced results for the second quarter ended June 30, 2019.

Revenue for the second quarter of 2019 was $323.9 million as compared to $362.6 million in the first quarter of 2019 and $393.2 million in the second quarter of 2018. Revenue in the second quarter of 2019 was impacted by the divestment of certain non-core operations that contributed an incremental $14.4 million of revenue in the first quarter of 2019 and an incremental $31.6 million in the second quarter of 2018. Net income for the second quarter of 2019 was $8.1 million, which was negatively impacted by several non-recurring charges, largely related to completing the divestment of non-core operations, compared to $1.4 million in the first quarter of 2019 and $25.0 million in the second quarter of 2018.

Gross profit was $39.9 million in the second quarter of 2019 compared to $46.0 million in the first quarter of 2019 and $56.7 million in the second quarter of 2018. Total gross margin for Select was 12.3% in the second quarter of 2019 as compared to 12.7% in the first quarter of 2019 and 14.4% in the second quarter of 2018. Gross margin before depreciation and amortization (“D&A”) for the second quarter of 2019 was 21.2% compared to 21.4% for the first quarter of 2019 and 22.2% for the second quarter of 2018.

Adjusted EBITDA was $51.6 million or 15.9% of revenue in the second quarter of 2019 as compared to $53.4 million or 14.7% of revenue in the first quarter of 2019 and $68.2 million or 17.3% of revenue in the second quarter of 2018.  Please refer to the end of this release for reconciliations of gross profit before D&A (non-GAAP measure) to gross profit and of Adjusted EBITDA (non-GAAP measure) to net income.

Holli Ladhani, President and CEO, stated, “The team did a good job executing on our strategic objectives during the quarter. Our Northern Delaware Pipeline project is progressing on time and on budget as we continue to advance our additional commercialization discussions. The recently expanded Midland chemicals manufacturing facility hit full stride, leading to improving margins for the Oilfield Chemicals segment, and we completed the divestitures of our non-core operations within the expected range of proceeds. We accomplished all of this while further augmenting a best-in-class balance sheet, concluding the quarter with a net cash balance.

“While 2019 is shaping up to be a tough year for the oilfield services industry, we are taking action to weather the storm. We remain focused on the things we can control, such as costs, customer service, capital discipline, and maintaining a strong balance sheet. Despite pricing pressures that led to a sequential decline in revenue, our consolidated Adjusted EBITDA margins improved in the second quarter. In short, we are adapting to market conditions, and continue to deliver value with more efficiency.  

“In addition to our continued focus on costs, we will be judicious in putting additional capital to work this year. Our priorities will be the completion of our Northern Delaware Pipeline project, investing in technology to both advance our service offerings and improve our operational efficiencies as well as investing to maintain our existing asset base. Given current industry conditions, we have revisited our capital budget for 2019, and have reduced it to a range of $120 million to $140 million relative to the range of $140 million to $160 million previously provided. Even after investing in our operations, I remain confident our ongoing business will generate meaningful free cash flow and reiterate our previous unallocated free cash flow expectations.”

“I’m also optimistic about our ability to continue to source and execute attractive infrastructure investment opportunities and strategic acquisitions. As we navigate a market that requires ever greater efficiency from service providers, our breadth of capabilities and pristine balance sheet enable us to bring full life cycle solutions to our customers. We also believe our positive net cash position and strong free cash flow generation should provide unique advantages in the current environment,” concluded Ladhani.

Business Segment Information

The Water Services segment generated revenues of $202.0 million in the second quarter of 2019, as compared to $220.6 million in the first quarter of 2019 and $234.0 million in the second quarter of 2018.  Gross margin before D&A for Water Services was 23.2% in the second quarter of 2019 as compared to 26.1% in the first quarter of 2019 and 24.5% in the second quarter of 2018. The sequential decline in revenue and gross margin before D&A was driven largely by pricing pressures during the quarter. 

The Water Infrastructure segment generated revenues of $51.7 million in the second quarter of 2019 as compared to $53.6 million in the first quarter of 2019 and $55.7 million in the second quarter of 2018.  The sequential decline in revenues was driven primarily by decreased volumes through the Company’s Bakken Pipelines from key customers. Much of these volumes were deferred to the third quarter, and the Company expects activity on these pipelines to increase in the third quarter. Gross margin before D&A for Water Infrastructure was 25.6% in the second quarter of 2019 as compared to 22.7% in the first quarter of 2019 and 32.0% in the second quarter of 2018.  The improvement in sequential gross margin before D&A in the second quarter of 2019 was driven primarily by reduced costs in the Northern Delaware infrastructure operations from first quarter seasonal impacts as well as improved profitability in the water sourcing and gathering and disposal operations.

The Oilfield Chemicals segment generated revenues of $63.0 million in the second quarter of 2019, as compared to $66.8 million in the first quarter of 2019 and $64.8 million during the second quarter of 2018.  Gross margin before D&A for Oilfield Chemicals was 14.2% in the second quarter of 2019 as compared to 10.9% in the first quarter of 2019 and 9.7% in the second quarter of 2018.  The segment continues to see strong demand for its friction reducer product lines, with sequential margin growth driven by decreased freight costs as a result of expanding in-basin friction reducer manufacturing and improved inventory management.

The “Other” category, which contains the results of non-core operations that were in the process of being divested and wound down, generated revenues of $7.2 million in the second quarter of 2019, down from $21.6 million in the first quarter of 2019 and $38.8 million in the second quarter of 2018. The “Other” category contributed gross loss before D&A of ($0.3) million in the second quarter of 2019 as compared to gross profit of $0.6 million in the first quarter of 2019 and $5.6 million in the second quarter of 2018. With the divestments and wind down of the remaining non-core operations completed during the second quarter, these revenues and gross profit contributions should be immaterial moving forward.

Select’s consolidated Adjusted EBITDA during the quarter includes $8.3 million of adjustments primarily related to non-recurring and non-cash items from the divestments of portions of non-core businesses, including $7.3 million of loss on sales of subsidiaries and other assets, primarily associated with the sale of the remaining Canadian operations, $0.4 million of asset impairments related to Canada, $0.4 million of transaction costs, and $0.2 million of lease abandonment costs largely related to the former Affirm operations. Non-cash compensation expense accounted for an additional $4.1 million adjustment and foreign currency gains related to Canadian operations produced a net impact of ($0.1) million.

Cash Flow and Balance Sheet

Cash flow from operations for the second quarter of 2019 was $38.1 million.  Capital expenditures for the second quarter of 2019 were $17.9 million, net of ordinary course asset sales of $3.1 million.  This figure includes approximately $9.0 million of capital expenditures related to ongoing development activities in the Northern Delaware Basin.  Cash flow from operations less cash flow from investing activities was $33.7 million during the second quarter. Cash flow from investing activities includes non-ordinary course net proceeds of approximately $13.5 million during the second quarter of 2019 related to divestment activities.

Total liquidity was $263.8 million as of June 30, 2019, as compared to $221.9 million as of December 31, 2018.  Following the repayment of $25.0 million of borrowings during the second quarter, the Company had no remaining outstanding borrowings under the Company’s revolving credit facility as of June 30, 2019, compared to $45.0 million as of December 31, 2018.  As of June 30, 2019, the Company had approximately $240.0 million of available borrowing capacity under its revolving credit facility, after giving effect to $16.4 million of outstanding letters of credit.  Total cash and cash equivalents were $23.8 million at June 30, 2019 as compared to $17.2 million at December 31, 2018.

Conference Call

Select has scheduled a conference call on Wednesday, August 7, 2019 at 10:00 a.m. Eastern time / 9:00 a.m. Central time.  Please dial 201-389-0872 and ask for the Select Energy Services call at least 10 minutes prior to the start time of the call, or listen to the call live over the Internet by logging on to the website at the address http://investors.selectenergyservices.com/events-and-presentations.  A telephonic replay of the conference call will be available through August 21, 2019 and may be accessed by calling 201-612-7415 using passcode 13692088#.  A webcast archive will also be available at the link above shortly after the call and will be accessible for approximately 90 days. 

About Select Energy Services, Inc.

Select Energy Services, Inc. (“Select”) is a leading provider of total water management and chemical solutions to the unconventional oil and gas industry in the United States.  Select provides for the sourcing and transfer of water, both by permanent pipeline and temporary hose, prior to its use in the drilling and completion activities associated with hydraulic fracturing, as well as complementary water-related services that support oil and gas well completion and production activities, including containment, monitoring, treatment and recycling, flowback, hauling, gathering and disposal.  Select, under its Rockwater Energy Solutions brand, develops and manufactures a full suite of specialty chemicals used in the well completion process and production chemicals used to enhance performance over the producing life of a well.  Select currently provides services to exploration and production companies and oilfield service companies operating in all the major shale and producing basins in the United States.  For more information, please visit Select’s website, http://www.selectenergyservices.com.

Cautionary Statement Regarding Forward-Looking Statements

All statements in this communication other than statements of historical facts are forward-looking statements which contain our current expectations about our future results.  We have attempted to identify any forward-looking statements by using words such as “expect,” “will,” “estimate” and other similar expressions.  Although we believe that the expectations reflected, and the assumptions or bases underlying our forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct.  Such statements are not guarantees of future performance or events and are subject to known and unknown risks and uncertainties that could cause our actual results, events or financial positions to differ materially from those included within or implied by such forward-looking statements. Factors that could materially impact such forward-looking statements include, but are not limited to, the factors discussed or referenced in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2018 and in any subsequently filed quarterly reports on Form 10-Q or current reports on Form 8-K.  Investors should not place undue reliance on our forward-looking statements.  Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, unless required by law.

WTTR-ER

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share data)

Three Months Ended June 30, 

Six Months Ended June 30,

2019

2018

2019

2018

Revenue

Water services

$

202,011

$

233,954

$

422,606

$

452,184

Water infrastructure

51,710

55,727

105,326

109,784

Oilfield chemicals

63,001

64,807

129,830

128,437

Other

7,165

38,759

28,771

79,237

Total revenue

323,887

393,247

686,533

769,642

Costs of revenue

Water services

155,151

176,571

318,272

341,201

Water infrastructure

38,456

37,884

79,886

77,980

Oilfield chemicals

54,051

58,500

113,578

115,584

Other

7,447

33,119

28,500

68,873

Depreciation and amortization

28,843

30,445

60,361

61,327

Total costs of revenue

283,948

336,519

600,597

664,965

Gross profit

39,939

56,728

85,936

104,677

Operating expenses

Selling, general and administrative

27,297

26,871

59,673

52,552

Depreciation and amortization

906

807

1,906

1,348

Impairment of goodwill

4,396

Impairment of property and equipment

374

2,282

893

2,282

Impairment of cost-method investment

2,000

Lease abandonment costs

183

1,973

1,256

3,097

Total operating expenses

28,760

31,933

68,124

61,279

Income from operations

11,179

24,795

17,812

43,398

Other income (expense)

(Losses) gains on sales of property and equipment, net

(1,709)

2,056

(6,200)

1,502

Interest expense, net

(839)

(1,342)

(1,932)

(2,493)

Foreign currency gain (loss), net

67

(340)

327

(740)

Other expense income, net

(59)

4

210

100

Income before income tax expense

8,639

25,173

10,217

41,767

Income tax expense

(571)

(150)

(749)

(612)

Net income

8,068

25,023

9,468

41,155

Less: net income attributable to noncontrolling interests

(1,868)

(8,060)

(2,133)

(14,093)

Net income attributable to Select Energy Services, Inc.

$

6,200

$

16,963

$

7,335

$

27,062

Net income per share attributable to common stockholders:

Class A—Basic

$

0.08

$

0.24

$

0.09

$

0.40

Class A-2—Basic

$

$

$

$

0.40

Class B—Basic

$

$

$

$

Net income per share attributable to common stockholders:

Class A—Diluted

$

0.08

$

0.24

$

0.09

$

0.39

Class A-2—Diluted

$

$

$

$

0.39

Class B—Diluted

$

$

$

$

 

SELECT ENERGY SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

 (in thousands, except share data)

June 30, 2019

December 31, 2018

(unaudited)

Assets

Current assets

Cash and cash equivalents

$

23,818

$

17,237

Accounts receivable trade, net of allowance for doubtful accounts of $4,921 and $5,329, respectively

324,918

341,711

Accounts receivable, related parties

3,105

1,119

Inventories

39,952

44,992

Prepaid expenses and other current assets

29,435

27,093

Total current assets

421,228

432,152

Property and equipment

1,069,496

1,114,378

Accumulated depreciation

(603,191)

(611,530)

Property and equipment held-for-sale, net

1,906

Total property and equipment, net

468,211

502,848

Right-of-use assets

75,302

Goodwill

266,934

273,801

Other intangible assets, net

142,438

148,377

Other assets

3,064

3,427

Total assets

$

1,377,177

$

1,360,605

Liabilities and Equity

Current liabilities

Accounts payable

$

53,107

$

53,847

Accrued accounts payable

43,311

62,536

Accounts payable and accrued expenses, related parties

3,417

5,056

Accrued salaries and benefits

16,734

22,113

Accrued insurance

15,799

14,849

Sales tax payable

1,282

5,820

Accrued expenses and other current liabilities

10,615

14,560

Current operating lease liabilities

19,553

Current portion of finance lease obligations

421

938

Total current liabilities

164,239

179,719

Long-term operating lease liabilities

75,169

16,752

Other long-term liabilities

10,921

8,361

Long-term debt

45,000

Total liabilities

250,329

249,832

Commitments and contingencies

Class A common stock, $0.01 par value; 350,000,000 shares authorized; 80,176,078 and 78,956,555 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively

802

790

Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized, no shares issued or outstanding as of June 30, 2019 and December 31, 2018

Class B common stock, $0.01 par value; 150,000,000 shares authorized; 26,026,843 shares issued and outstanding as of June 30, 2019 and December 31, 2018

260

260

Preferred stock, $0.01 par value; 50,000,000 shares authorized and no shares issued and outstanding as of June 30, 2019 and December 31, 2018

Additional paid-in capital

821,968

813,599

Retained earnings

25,988

18,653

Accumulated other comprehensive deficit

(380)

(368)

Total stockholders’ equity

848,638

832,934

Noncontrolling interests

278,210

277,839

Total equity

1,126,848

1,110,773

Total liabilities and equity

$

1,377,177

$

1,360,605

 

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

Six months ended June 30, 

2019

2018

Cash flows from operating activities

Net income

$

9,468

$

41,155

Adjustments to reconcile net income to net cash provided by operating activities

Depreciation and amortization

62,267

62,675

Net loss (gain) on disposal of property and equipment

2,794

(1,503)

Bad debt expense

1,312

876

Amortization of debt issuance costs

344

344

Inventory write-down

209

394

Equity-based compensation

8,308

5,465

Impairment of goodwill

4,396

Impairment of property and equipment

893

2,282

Impairment of cost-method investment

2,000

Loss on divestitures

3,406

Other operating items, net

(178)

(103)

Changes in operating assets and liabilities

Accounts receivable

3,346

(46,057)

Prepaid expenses and other assets

1,245

(17,848)

Accounts payable and accrued liabilities

(23,075)

14,625

Net cash provided by operating activities

74,735

64,305

Cash flows from investing activities

Working capital settlement

691

Proceeds received from divestitures

25,259

Purchase of property and equipment

(57,513)

(63,050)

Proceeds received from sale of property and equipment

10,507

3,953

Net cash used in investing activities

(21,056)

(59,097)

Cash flows from financing activities

Borrowings from revolving line of credit

5,000

25,000

Payments on long-term debt

(50,000)

(20,000)

Payments of finance lease obligations

(549)

(1,029)

Proceeds from share issuance

56

431

Distributions to noncontrolling interests, net

(225)

(280)

Repurchase of common stock

(1,516)

(657)

Net cash (used in) provided by financing activities

(47,234)

3,465

Effect of exchange rate changes on cash

136

(146)

Net increase in cash and cash equivalents

6,581

8,527

Cash and cash equivalents, beginning of period

17,237

2,774

Cash and cash equivalents, end of period

$

23,818

$

11,301

Supplemental cash flow disclosure:

Cash paid for interest

$

2,024

$

1,959

Cash paid (refunds received) for income taxes

$

204

$

(1,188)

Comparison of Non-GAAP Financial Measures

EBITDA, Adjusted EBITDA, gross profit before depreciation and amortization (D&A) and gross margin before D&A are not financial measures presented in accordance with GAAP. We define EBITDA as net income, plus interest expense, taxes and depreciation & amortization. We define Adjusted EBITDA as EBITDA plus/(minus) loss/(income) from discontinued operations, plus any impairment charges or asset write-offs pursuant to GAAP, plus/(minus) non-cash losses/(gains) on the sale of assets or subsidiaries, non-recurring compensation expense, non-cash compensation expense, and non-recurring or unusual expenses or charges, including severance expenses, transaction costs, or facilities-related exit and disposal-related expenditures, plus/(minus) foreign currency losses/(gains) and plus any inventory write-downs. We define gross profit before D&A as revenue less cost of revenue, excluding cost of sales D&A expense. We define gross margin before D&A as gross profit before D&A divided by revenue. EBITDA, Adjusted EBITDA, gross profit before D&A and gross margin before D&A are supplemental non-GAAP financial measures that we believe provide useful information to external users of our financial statements, such as industry analysts, investors, lenders and rating agencies because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization) and non-recurring items outside the control of our management team. We present EBITDA, Adjusted EBITDA, gross profit before D&A and gross margin before D&A because we believe they provide useful information regarding the factors and trends affecting our business in addition to measures calculated under GAAP.

Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. Gross profit is the GAAP measure most directly comparable to gross profit before D&A. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as an analytical tool due to exclusion of some but not all items that affect the most directly comparable GAAP financial measures. You should not consider EBITDA, Adjusted EBITDA or gross profit before D&A in isolation or as substitutes for an analysis of our results as reported under GAAP. Because EBITDA, Adjusted EBITDA and gross profit before D&A may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. For further discussion, please see “Item 6. Selected Financial Data” in our Annual Report on Form 10-K for the year ended December 31, 2018.

The following tables present a reconciliation of EBITDA and Adjusted EBITDA to our net income (loss), which is the most directly comparable GAAP measure for the periods presented:

Three months ended,

June 30, 2019

March 31, 2019

June 30, 2018

(unaudited)

(in thousands)

Net income

$

8,068

$

1,400

$

25,023

Interest expense

839

1,093

1,342

Income tax expense

571

178

150

Depreciation and amortization

29,749

32,518

31,252

EBITDA

39,227

35,189

57,767

Impairment of goodwill

4,396

Impairment of property and equipment

374

519

2,282

Lease abandonment costs

183

1,073

1,973

Non-recurring severance expenses

1,680

Non-recurring transaction costs

412

662

2,481

Non-cash compensation expenses

4,129

4,179

2,984

Non-cash loss on sale of assets or subsidiaries

7,314

5,906

249

Foreign currency (gain) loss

(67)

(260)

340

Inventory write-down

75

128

Adjusted EBITDA

$

51,572

$

53,419

$

68,204

The following tables present a reconciliation of gross profit before D&A to total gross profit, which is the most directly comparable GAAP measure, and a calculation of gross margin before D&A for the periods presented:

Three months ended,

June 30, 2019

March 31, 2019

June 30, 2018

(unaudited)

(in thousands)

Gross profit by segment

Water services

$

25,837

$

36,212

$

38,435

Water infrastructure

7,181

6,097

12,624

Oilfield chemicals

7,203

4,849

3,484

Other

(282)

(1,161)

2,185

As reported gross profit

39,939

45,997

56,728

Plus depreciation and amortization

Water services

21,023

21,262

18,948

Water infrastructure

6,073

6,089

5,219

Oilfield chemicals

1,747

2,453

2,823

Other

1,714

3,455

Total depreciation and amortization

28,843

31,518

30,445

Gross profit before D&A

$

68,782

$

77,515

$

87,173

Gross Profit before D&A by segment

Water services

46,860

57,474

57,383

Water infrastructure

13,254

12,186

17,843

Oilfield chemicals

8,950

7,302

6,307

Other

(282)

553

5,640

Total gross profit before D&A

$

68,782

$

77,515

$

87,173

Gross Margin before D&A by segment

Water services

23.2%

26.1%

24.5%

Water infrastructure

25.6%

22.7%

32.0%

Oilfield chemicals

14.2%

10.9%

9.7%

Other

(3.9)%

2.6%

14.6%

Total gross margin before D&A

21.2%

21.4%

22.2%

 

Contacts:

Select Energy Services 

Chris George – VP, Investor Relations & Treasurer

(713) 296-1073

IR@selectenergyservices.com

Dennard Lascar Investor Relations

Ken Dennard / Lisa Elliott

713-529-6600

WTTR@dennardlascar.com

 

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SOURCE Select Energy Services, Inc.