Select Energy Services Reports Third Quarter 2019 Financial Results And Operational Updates

Increased quarterly revenue 2% sequentially to $329.0 million during the third quarter of 2019

Generated operating cash flow of $67.5 million in the third quarter of 2019

Acquired the well chemical services division of Baker Hughes Company ("WCS") for $10.4 million

Repurchased 1.44 million Class A shares for $11.9 million in the third quarter of 2019

HOUSTON, Nov. 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 quarter ended September 30, 2019.

Revenue for the third quarter of 2019 was $329.0 million as compared to $323.9 million in the second quarter of 2019 and $397.0 million in the third quarter of 2018. Revenue in the third quarter of 2019 was impacted by the divestment of certain non-core operations that contributed an incremental $7.2 million of revenue in the second quarter of 2019 and an incremental $33.6 million in the third quarter of 2018. Net income for the third quarter of 2019 was $7.2 million compared to $8.1 million in the second quarter of 2019 and $31.3 million in the third quarter of 2018.

Gross profit was $41.0 million in the third quarter of 2019 compared to $39.9 million in the second quarter of 2019 and $59.4 million in the third quarter of 2018. Total gross margin for Select was 12.5% in the third quarter of 2019 as compared to 12.3% in the second quarter of 2019 and 15.0% in the third quarter of 2018. Gross margin before depreciation and amortization ("D&A") for the third quarter of 2019 was 21.1% compared to 21.2% for the second quarter of 2019 and 23.0% for the third quarter of 2018.

Adjusted EBITDA was $48.9 million, or 14.9% of revenue in the third quarter of 2019, as compared to $51.6 million or 15.9% of revenue in the second quarter of 2019 and $73.7 million or 18.6% of revenue in the third 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 continued to deliver strong free cash flow. With over $67 million of operating cash flow in the quarter, we funded our capital program, including the build out of our Northern Delaware pipeline, executed a small but strategic acquisition and returned capital to shareholders via a modest share repurchase initiative, all while continuing to build cash on the balance sheet.

"The recent WCS acquisition furthers our strategy to support the increased use of produced water in well completions. This business is an industry-leading provider of advanced water treatment solutions throughout the full water life cycle, including specialized stimulation flow assurance and integrity additives and treatment monitoring services throughout the U.S. land market. As the industry continues to advance the reuse of produced water in frac fluid systems, we believe this business provides an attractive opportunity to further bridge the service capabilities and relationships of our existing water business with our robust chemicals expertise. Additionally, this acquisition establishes a strong strategic sourcing relationship with one of the preeminent chemical manufacturers in the industry to expand our overall product offerings to our customers.

"Operationally, I'm pleased with the resilience of our overall business in the context of a tough market. Strong performance in our Water Infrastructure and Oilfield Chemicals segments drove sequential consolidated revenue growth while protecting our overall gross margins.

"Looking forward, based on lower anticipated activity levels in the near term, we have further reduced our full year capital expenditure guidance to a range of $100 million to $110 million relative to our most recent range of $120 million to $140 million. This guidance includes the $40 million allocated to our Northern Delaware Pipeline project, which is progressing on budget and is expected to be online in the fourth quarter. Our strong cash flow from operations and disciplined capital approach allowed us to achieve the bottom end of our full year free cash flow guidance range a quarter ahead of schedule, and we expect to finish the year above the top end of our full year free cash flow guidance provided at the beginning of the year.

"With our debt-free balance sheet and seven consecutive quarters of free cash flow generation since the Rockwater merger, we are well positioned to manage what will be a challenging market ahead of us.  We will protect our strong balance sheet while continuing to focus on expanding our capabilities that enable us to bring full life-cycle solutions to our customers. We will continue evaluating investments in infrastructure, as well as in technologies that support our operational efficiency initiatives and service differentiation, such as WCS, all while keeping a disciplined approach to capital allocation," concluded Ladhani.

Business Segment Information

The Water Services segment generated revenues of $196.8 million in the third quarter of 2019, as compared to $202.0 million in the second quarter of 2019 and $233.5 million in the third quarter of 2018.  Gross margin before D&A for Water Services was 21.9% in the third quarter of 2019 as compared to 23.2% in the second quarter of 2019 and 23.9% in the third quarter of 2018. The sequential decline in revenue and gross margin before D&A was driven largely by a full quarter impact of pricing pressures that began during the second quarter, particularly in our water transfer and rentals businesses. 

The Water Infrastructure segment generated revenues of $64.0 million in the third quarter of 2019 as compared to $51.7 million in the second quarter of 2019 and $65.9 million in the third quarter of 2018. Gross margin before D&A for Water Infrastructure was 26.9% in the third quarter of 2019 as compared to 25.6% in the second quarter of 2019 and 35.8% in the third quarter of 2018.  The sequential growth in revenues and gross margin before D&A in the third quarter of 2019 was driven primarily by increased volumes on our high-margin Bakken Pipelines as well as increased volumes and improved margin performance of our Northern Delaware water sourcing infrastructure.

The Oilfield Chemicals segment generated revenues of $67.9 million in the third quarter of 2019, as compared to $63.0 million in the second quarter of 2019 and $64.0 million during the third quarter of 2018.  Gross margin before D&A for Oilfield Chemicals was 15.6% in the third quarter of 2019 as compared to 14.2% in the second quarter of 2019 and 11.7% in the third 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 residual wind-down impacts of the non-core businesses that were largely divested and wound down during the first half of 2019, generated revenues of $0.3 million in the third quarter of 2019, down from $7.2 million in the second quarter of 2019 and $33.6 million in the third quarter of 2018. The "Other" category contributed gross loss before D&A of $1.6 million in the third quarter of 2019 as compared to gross loss before D&A of $0.3 million in the second quarter of 2019 and gross profit before D&A of $4.3 million in the third quarter of 2018. The negative contribution during the third quarter was driven primarily by residual site remediation costs related to the wind-down of our Canadian operations.

Select's consolidated Adjusted EBITDA during the quarter includes $9.6 million of non-recurring or non-cash adjustments, including $3.6 million of loss on sales of subsidiaries and other assets, primarily related to non-cash losses incurred from the sale of remaining Canadian and sand hauling assets and the sale of certain underutilized assets within the Water Services segment, $2.0 million of transaction costs, primarily related to the site remediation costs in Canada, and $0.3 million of lease abandonment and impairment costs. Non-cash compensation expense accounted for an additional $3.6 million adjustment and foreign currency losses related to Canadian operations produced a net impact of $0.1 million.

Cash Flow and Balance Sheet

Cash flow from operations for the third quarter of 2019 was $67.5 million as compared to $38.1 million in the second quarter of 2019 and $60.3 million in the third quarter of 2018.  Cash flow from operations during the third quarter of 2019 included a $24.4 million contribution from working capital.  Capital expenditures for the third quarter of 2019 were $25.4 million, net of ordinary course asset sales of $3.5 million.  This figure includes approximately $5.0 million of capital expenditures related to ongoing development activities in the Northern Delaware Basin.  Cash flow from operations less capex, net of asset sales, was $42.1 million during the third quarter.

Other net cash uses during the third quarter included $11.9 million to fund the repurchase of approximately 1.44 million shares of our Class A common stock and $10.7 million for acquisitions and divestitures, including $10.4 million for the acquisition of WCS, the well chemical services division of Baker Hughes Company. The WCS acquisition closed on September 30, 2019 and therefore did not contribute to our third quarter results. Going forward, WCS results will be reported as a part of our Oilfield Chemicals segment.

Total liquidity was $251.5 million as of September 30, 2019, as compared to $221.9 million as of December 31, 2018.  The Company had no outstanding borrowings under the Company's revolving credit facility as of September 30, 2019, compared to $45.0 million as of December 31, 2018.  As of September 30, 2019, the Company had approximately $208.5 million of available borrowing capacity under its revolving credit facility, after giving effect to $19.9 million of outstanding letters of credit.  Total cash and cash equivalents were $43.0 million at September 30, 2019 as compared to $17.2 million at December 31, 2018.

Conference Call

Select has scheduled a conference call on Thursday, November 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 November 21, 2019 and may be accessed by calling 201-612-7415 using passcode 13694670#.  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 September 30, 


Nine months ended September 30, 




2019


2018


2019


2018


Revenue














Water services


$

196,782


$

233,503


$

619,388


$

685,687


Water infrastructure



63,953



65,878



169,279



175,662


Oilfield chemicals



67,932



63,985



197,762



192,422


Other



301



33,604



29,072



112,841


Total revenue



328,968



396,970



1,015,501



1,166,612


Costs of revenue














Water services



153,741



177,643



472,013



518,844


Water infrastructure



46,748



42,324



126,634



120,304


Oilfield chemicals



57,357



56,473



170,935



172,057


Other



1,865



29,280



30,365



98,153


Depreciation and amortization



28,263



31,853



88,624



93,180


Total costs of revenue



287,974



337,573



888,571



1,002,538


Gross profit



40,994



59,397



126,930



164,074


Operating expenses














Selling, general and administrative



27,280



25,110



86,953



77,662


Depreciation and amortization



952



984



2,858



2,332


Impairment of goodwill







4,396




Impairment of property and equipment



49





942



2,282


Impairment of cost-method investment









2,000


Lease abandonment costs



238



1,045



1,494



4,142


Total operating expenses



28,519



27,139



96,643



88,418


Income from operations



12,475



32,258



30,287



75,656


Other income (expense)














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



(2,033)



1,458



(8,233)



2,959


Interest expense, net



(438)



(1,322)



(2,370)



(3,815)


Foreign currency (loss) gain, net



(59)



248



268



(492)


Other (expense) income, net



(272)



40



(62)



140


Income before income tax expense



9,673



32,682



19,890



74,448


Income tax expense



(2,501)



(1,415)



(3,250)



(2,027)


Net income



7,172



31,267



16,640



72,421


Less: net income attributable to noncontrolling interests



(1,793)



(8,316)



(3,926)



(22,409)


Net income attributable to Select Energy Services, Inc.


$

5,379


$

22,951


$

12,714


$

50,012
















Net income per share attributable to common stockholders:














Class A—Basic


$

0.07


$

0.29


$

0.16


$

0.69


Class A-2—Basic


$


$


$


$

0.69


Class B—Basic


$


$


$


$
















Net income per share attributable to common stockholders:














Class A—Diluted


$

0.07


$

0.29


$

0.16


$

0.69


Class A-2—Diluted


$


$


$


$

0.69


Class B—Diluted


$


$


$


$




























 

SELECT ENERGY SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

 (in thousands, except share data)











September 30, 2019


December 31, 2018




(unaudited)




Assets








Current assets








Cash and cash equivalents


$

42,999


$

17,237


Accounts receivable trade, net of allowance for doubtful accounts of $5,392 and $5,329, respectively



310,730



341,711


Accounts receivable, related parties



5,493



1,119


Inventories



39,613



44,992


Prepaid expenses and other current assets



26,233



27,093


Total current assets



425,068



432,152


Property and equipment



1,084,096



1,114,378


Accumulated depreciation



(617,740)



(611,530)


Property and equipment held-for-sale, net



890




Total property and equipment, net



467,246



502,848


Right-of-use assets



73,138




Goodwill



266,934



273,801


Other intangible assets, net



139,969



148,377


Other assets



4,502



3,427


Total assets


$

1,376,857


$

1,360,605


Liabilities and Equity








Current liabilities








Accounts payable


$

38,530


$

53,847


Accrued accounts payable



51,209



62,536


Accounts payable and accrued expenses, related parties



3,297



5,056


Accrued salaries and benefits



25,761



22,113


Accrued insurance



13,367



14,849


Sales tax payable



1,185



5,820


Accrued expenses and other current liabilities



12,784



14,560


Current operating lease liabilities



19,488




Current portion of finance lease obligations



248



938


Total current liabilities



165,869



179,719


Long-term operating lease liabilities



72,672



16,752


Other long-term liabilities



12,197



8,361


Long-term debt





45,000


Total liabilities



250,738



249,832










Class A common stock, $0.01 par value; 350,000,000 shares authorized; 86,321,013 and 78,956,555 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively



863



790


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






Class B common stock, $0.01 par value; 150,000,000 shares authorized; 18,461,975 and 26,026,843 shares issued and outstanding as of September 30, 2019 and December 31, 2018 respectively



185



260


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






Additional paid-in capital



893,293



813,599


Retained earnings



31,367



18,653


Accumulated other comprehensive deficit





(368)


Total stockholders' equity



925,708



832,934


Noncontrolling interests



200,411



277,839


Total equity



1,126,119



1,110,773


Total liabilities and equity


$

1,376,857


$

1,360,605
















 

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)










Nine months ended September 30, 




2019


2018


Cash flows from operating activities








Net income


$

16,640


$

72,421


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








Depreciation and amortization



91,482



95,512


Net loss (gain) on disposal of property and equipment



4,971



(2,959)


Bad debt expense



1,764



1,430


Amortization of debt issuance costs



516



516


Inventory write-down



228



430


Equity-based compensation



11,874



8,030


Impairment of goodwill



4,396




Impairment of property and equipment



942



2,282


Impairment of cost-method investment





2,000


Loss on divestitures



3,262




Other operating items, net



259



971


Changes in operating assets and liabilities








Accounts receivable



14,835



(46,010)


Prepaid expenses and other assets



9,774



(7,950)


Accounts payable and accrued liabilities



(18,727)



(2,043)


Net cash provided by operating activities



142,216



124,630


Cash flows from investing activities








Working capital settlement



691




Proceeds received from divestitures



24,927




Purchase of property and equipment



(86,374)



(109,500)


Acquisitions, net of cash received



(10,400)



(1,953)


Proceeds received from sales of property and equipment



13,958



9,363


Net cash used in investing activities



(57,198)



(102,090)


Cash flows from financing activities








Borrowings from revolving line of credit



5,000



45,000


Payments on long-term debt



(50,000)



(55,000)


Payments of finance lease obligations



(743)



(1,517)


Proceeds from share issuance



110



731


Distributions to noncontrolling interests, net



(349)



(506)


Repurchase of common stock



(13,401)



(877)


Net cash used in financing activities



(59,383)



(12,169)


Effect of exchange rate changes on cash



127



(95)


Net increase in cash and cash equivalents



25,762



10,276


Cash and cash equivalents, beginning of period



17,237



2,774


Cash and cash equivalents, end of period


$

42,999


$

13,050
















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 non-cash losses 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,




September 30, 2019


June 30, 2019


September 30, 2018




(unaudited)




(in thousands)






Net income


$

7,172


$

8,068


$

31,267


Interest expense



438



839



1,322


Income tax expense



2,501



571



1,415


Depreciation and amortization



29,215



29,749



32,837


EBITDA



39,326



39,227



66,841


Impairment of property and equipment



49



374




Lease abandonment costs



238



183



1,045


Non-recurring severance expenses







495


Non-recurring transaction costs



2,025



412



2,645


Non-cash compensation expenses



3,566



4,129



2,565


Non-cash loss on sale of assets or subsidiaries



3,648



7,314



315


Foreign currency (gain) loss



59



(67)



(248)


Inventory write-down







36


Adjusted EBITDA


$

48,911


$

51,572


$

73,694






















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,



September 30, 2019


June 30, 2019


September 30, 2018



(unaudited)



(in thousands)

Gross profit by segment










Water services


$

23,622


$

25,837


$

35,875

Water infrastructure



10,796



7,181



17,593

Oilfield chemicals



8,140



7,203



5,397

Other



(1,564)



(282)



532

As reported gross profit



40,994



39,939



59,397











Plus depreciation and amortization










Water services



19,419



21,023



19,987

Water infrastructure



6,409



6,073



5,960

Oilfield chemicals



2,435



1,747



2,115

Other







3,791

Total depreciation and amortization



28,263



28,843



31,853











Gross profit before D&A


$

69,257


$

68,782


$

91,250











Gross Profit before D&A by segment










Water services



43,041



46,860



55,862

Water infrastructure



17,205



13,254



23,553

Oilfield chemicals



10,575



8,950



7,512

Other



(1,564)



(282)



4,323

Total gross profit before D&A


$

69,257


$

68,782


$

91,250











Gross Margin before D&A by segment










Water services



21.9%



23.2%



23.9%

Water infrastructure



26.9%



25.6%



35.8%

Oilfield chemicals



15.6%



14.2%



11.7%

Other



(519.6)%



(3.9)%



12.9%

Total gross margin before D&A



21.1%



21.2%



23.0%

 

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.

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