Select Energy Services Reports Second Quarter 2020 Financial Results And Operational Updates
HOUSTON, Aug. 4, 2020 /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 June 30, 2020.
Revenue for the second quarter of 2020 was $92.2 million as compared to $278.3 million in the first quarter of 2020 and $323.9 million in the second quarter of 2019. Net loss for the second quarter of 2020 was $53.0 million compared to a net loss of $291.2 million in the first quarter of 2020 and net income of $8.1 million in the second quarter of 2019.
Gross loss was $23.7 million in the second quarter of 2020 compared to gross profit of $15.3 million in the first quarter of 2020 and $39.9 million in the second quarter of 2019. Total gross margin for Select was (25.7%) in the second quarter of 2020 as compared to 5.5% in the first quarter of 2020 and 12.3% in the second quarter of 2019. Gross margin before depreciation and amortization ("D&A") for the second quarter of 2020 was 1.9% compared to 14.9% for the first quarter of 2020 and 21.2% for the second quarter of 2019. Gross margin before D&A was impacted by $3.9 million of non-recurring costs during the second quarter, including severance and yard closure costs, among others.
Adjusted EBITDA was ($8.3) million in the second quarter of 2020 as compared to $23.7 million in the first quarter of 2020 and $51.6 million in the second quarter of 2019. 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, "As we look back on the second quarter, I'd first like to thank our employees for their continued dedication during what has been one of the most challenging periods we've ever been through, both for our company and our industry as a whole. Our thoughts are with all those that have been affected by COVID-19, particularly our employees, our industry colleagues and their families and all of the professionals leading the response to this pandemic.
"Select's performance in the second quarter, while clearly challenged, reflects the team's ability to take the difficult actions necessary to protect the business and safeguard the strong balance sheet we've worked so hard to establish. While it is always challenging to manage costs downward as quickly as activity can drop, the rapid pace of the declines in the second quarter was particularly trying. However, I am confident that the cost savings measures we've taken will allow us to operate in a manner that protects our balance sheet and cash flows heading into the back half of the year. These measures should also allow us to continue providing the superior service quality that our customers expect, delivering innovative solutions to meet our customers' needs and ultimately generating long-term returns for our investors. We are taking key steps to further our leadership as the industry's premier water solutions and oilfield chemicals provider and are positioning the business to capitalize on the opportunities ahead.
"During 2019, we proved that our business model can deliver substantial free cash flow, even after making strategic investments supporting targeted growth areas like Water Infrastructure. In 2020, we're demonstrating the agility of our business model to adapt and respond to changing market conditions. Even in the face of significant revenue declines, we held decremental margins to approximately 20% at both the segment gross margin and Adjusted EBITDA levels. While we previously targeted annualized SG&A savings of approximately 30% relative to our fourth quarter 2019 run-rate, with the team's focused execution, we're well ahead of schedule and we've already achieved savings beyond this target. We currently expect savings of 40-45% relative to our fourth quarter 2019 run-rate to be fully realized in the third quarter of 2020.
"Additionally, we achieved significant cash flow from operations during the second quarter, driven primarily by collections, and were able to substantially reduce our pace of capital spending. Our capital discipline, combined with asset sales, resulted in effectively zero net capital expenditures during the quarter. This resulted in cash flow from operations less capex, net of asset sales, of $56 million during the second quarter or $97 million for the first half of the year. While we do not expect this level of free cash flow to continue over the back half of the year, we have cash on the balance sheet of $166 million and no bank debt as of June 30(th), which positions us very well to both protect the business and capitalize on opportunities created by the current market dislocation.
"There will certainly be challenges in the industry for quarters to come, but I am confident Select is well positioned to meet them. We are navigating these volatile times from a position of strength as the market leader for our services, with an incredible employee base, and an enviable balance sheet with significant liquidity. Just as we've done in the past, we will continue to be disciplined and patient, but are optimistic we will identify opportunities to enhance our position in the market and create value for our shareholders in these turbulent times," concluded Ladhani.
Business Segment Information
The Water Services segment generated revenues of $55.8 million in the second quarter of 2020, as compared to $149.5 million in the first quarter of 2020 and $202.0 million in the second quarter of 2019. Gross margin before D&A for Water Services was 3.2% in the second quarter of 2020 as compared to 13.6% in the first quarter of 2020 and 23.2% in the second quarter of 2019. Revenues were significantly impacted by the declines in activity that began in March and generally decreased in line with activity levels across each of our areas of operation. Gross margin before D&A was meaningfully impacted by non-recurring costs during the quarter, including $1.4 million of severance costs and $0.7 million of yard closure costs.
The Water Infrastructure segment generated revenues of $15.3 million in the second quarter of 2020 as compared to $57.8 million in the first quarter of 2020 and $51.7 million in the second quarter of 2019. Gross margin before D&A for Water Infrastructure was 9.3% in the second quarter of 2020 as compared to 17.2% in the first quarter of 2020 and 25.6% in the second quarter of 2019. Revenues were significantly impacted by the declines in activity that began in March, particularly in the Bakken, where our revenues fell 87% sequentially. Gross margin before D&A in the second quarter of 2020 was also impacted by non-recurring severance costs of $0.2 million.
The Oilfield Chemicals segment generated revenues of $21.1 million in the second quarter of 2020, as compared to $71.0 million in the first quarter of 2020 and $63.0 million in the second quarter of 2019. Gross margin before D&A for Oilfield Chemicals was (6.8%) in the second quarter of 2020 as compared to 15.7% in the first quarter of 2020 and 14.2% in the second quarter of 2019. While revenue declines were generally in line with the overall activity declines seen in the quarter, gross margins were challenged by pricing concessions and the carried cost of inventory balances purchased prior to the recent market dislocation resulting in higher costs of sales. Additionally, this segment was impacted during the second quarter by inventory adjustments and reserve additions of $0.6 million, non-recurring severance costs of $0.5 million, and yard closure and equipment rental return costs of $0.5 million, including costs associated with idling our Tyler manufacturing facility to consolidate production in Midland.
Select's consolidated Adjusted EBITDA during the quarter includes $18.0 million of non-recurring or non-cash adjustments, including $4.7 million of asset impairment charges, $3.9 million in loss on sale of assets, $3.7 million of non-recurring severance costs relating to the reduction of headcount during the quarter, $2.6 million of transaction costs, $1.0 million of yard closure costs, and $0.9 million in lease abandonment costs. Non-cash compensation expense accounted for an additional $1.2 million adjustment.
Cash Flow and Balance Sheet
Cash flow from operations for the second quarter of 2020 was $56.0 million as compared to $46.7 million in the first quarter of 2020 and $38.1 million in the second quarter of 2019. Cash flow from operations during the second quarter of 2020 included a $71.9 million contribution from net working capital changes. Capital expenditures for the second quarter of 2020 were $5.1 million, which, combined with ordinary course asset sales during the quarter of $5.2 million, resulted in a slight net positive cash inflow from investing activities during the second quarter. Cash flow from operations less capex, net of asset sales, was $56.1 million during the second quarter. Other net cash uses during the second quarter included $3.8 million to fund the open market repurchase of 1,139,729 million shares of our Class A common stock, at an average price of $3.36. For the second quarter of 2020, we had 84,937,043 weighted average Class A shares outstanding and 16,221,101 weighted average Class B shares outstanding.
Total liquidity was $261.9 million as of June 30, 2020, as compared to $274.0 million as of December 31, 2019. The Company had no borrowings outstanding under its revolving credit facility as of June 30, 2020 and December 31, 2019. As of June 30, 2020, and December 31, 2019, the borrowing base under the revolving credit facility was $111.1 million and $214.6 million, respectively. The borrowing capacity under the revolving credit facility was reduced by outstanding letters of credit of $15.6 million and $19.9 million as of June 30, 2020 and December 31, 2019, respectively. As of June 30, 2020, the Company had approximately $95.5 million of available borrowing capacity under its revolving credit facility, after giving effect to the $15.6 million of outstanding letters of credit. The reduction in available borrowing capacity since year end resulted from the meaningful reductions in accounts receivable during the second quarter, due primarily to collections and decreased activity levels, which generated additional cash on hand. Total cash and cash equivalents were $166.4 million as of June 30, 2020 as compared to $79.3 million as of December 31, 2019.
Conference Call
Select has scheduled a conference call on Wednesday, August 5, 2020 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 19, 2020 and may be accessed by calling 201-612-7415 using passcode 13706828#. 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 severity and duration of world health events, including the COVID-19 pandemic, related economic repercussions and the resulting severe disruption in the oil and gas industry and negative impact on demand for oil and gas, which is negatively impacting our business; the current significant surplus in the supply of oil and actions by the members of 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 supply limitations; operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions; the level of capital spending and access to capital markets by oil and gas companies, including significant recent reductions and potential additional reductions in capital expenditures by oil and gas producers in response to commodity prices and dramatically reduced demand; trends and volatility in oil and gas prices, and our ability to manage through such volatility; and other factors discussed or referenced in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2019, our Quarterly Reports on Form 10-Q for the three months ended March 31, 2020 and June 30, 2020, 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,
2020 2019 2020 2019
Revenue
Water Services $
55,807 $
202,011 $
205,318 $
422,606
Water Infrastructure 15,300 51,710 73,062 105,326
Oilfield Chemicals 21,132 63,001 92,144 129,830
Other 7,165 28,771
Total revenue 92,239 323,887 370,524 686,533
Costs of revenue
Water Services 54,014 155,151 183,128 318,272
Water Infrastructure 13,871 38,456 61,684 79,886
Oilfield Chemicals 22,562 54,051 82,438 113,578
Other 3 7,447 7 28,500
Depreciation and amortization 25,508 28,843 51,690 60,361
Total costs of revenue 115,958 283,948 378,947 600,597
Gross (loss) profit (23,719) 39,939 (8,423) 85,936
Operating expenses
Selling, general and administrative 17,658 27,297 42,947 59,673
Depreciation and amortization 834 906 1,519 1,906
Impairment of goodwill and
trademark 276,016 4,396
Impairment and abandonment of
property and equipment 4,726 374 7,910 893
Lease abandonment costs 868 183 1,821 1,256
Total operating expenses 24,086 28,760 330,213 68,124
(Loss) income from operations (47,805) 11,179 (338,636) 17,812
Other expense
Losses on sales of property and
equipment and divestitures, net (2,183) (1,709) (2,618) (6,200)
Interest expense, net (513) (839) (844) (1,932)
Foreign currency gain (loss), net 27 67 (19) 327
Other (expense) income, net (2,700) (59) (2,441) 210
(Loss) income before income tax
benefit (expense) (53,174) 8,639 (344,558) 10,217
Income tax benefit (expense) 130 (571) 294 (749)
Net (loss) income (53,044) 8,068 (344,264) 9,468
Less: net loss (income)
attributable to noncontrolling
interests 8,746 (1,868) 54,104 (2,133)
Net (loss) income attributable to
Select Energy Services, Inc. $
(44,298) $
6,200 $
(290,160) $
7,335
Net (loss) income per share
attributable to common
stockholders:
Class A-Basic $
(0.52) $
0.08 $
(3.39) $
0.09
Class B-Basic
$
$
$
$
Net (loss) income per share
attributable to common
stockholders:
Class A-Diluted $
(0.52) $
0.08 $
(3.39) $
0.09
Class B-Diluted
$
$
$
$
SELECT ENERGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, 2020 December 31, 2019
(unaudited)
Assets
Current assets
Cash and cash equivalents $
166,407 $
79,268
Accounts receivable trade, net of
allowance for credit losses of $9,474
and $5,773, respectively 105,465 267,628
Accounts receivable, related parties 1,649 4,677
Inventories 38,186 37,542
Prepaid expenses and other current
assets 22,790 26,486
Total current assets 334,497 415,601
Property and equipment 930,308 1,015,379
Accumulated depreciation (537,323) (562,986)
Property and equipment held-for-sale,
net 885
Total property and equipment, net 392,985 453,278
Right-of-use assets, net 59,431 70,635
Goodwill 266,934
Other intangible assets, net 121,761 136,952
Other assets, net 2,640 4,220
Total assets $
911,314 $
1,347,620
Liabilities and Equity
Current liabilities
Accounts payable $
11,151 $
35,686
Accrued accounts payable 13,248 47,547
Accounts payable and accrued expenses,
related parties 240 2,789
Accrued salaries and benefits 10,624 20,079
Accrued insurance 10,379 8,843
Sales tax payable 1,014 2,119
Accrued expenses and other current
liabilities 12,957 15,375
Current operating lease liabilities 14,746 19,315
Current portion of finance lease
obligations 297 128
Total current liabilities 74,656 151,881
Long-term operating lease liabilities 65,928 72,143
Other long-term liabilities 11,093 10,784
Total liabilities 151,677 234,808
Class A common stock, $0.01 par value;
350,000,000 shares authorized and
86,883,049 shares issued 869 879
and outstanding as of June 30, 2020;
350,000,000 shares authorized and
87,893,525 shares issued and
outstanding as of December 31, 2019
Class A-2 common stock, $0.01 par
value; 40,000,000 shares authorized; no
shares issued or outstanding
as of June 30, 2020 and December 31,
2019
Class B common stock, $0.01 par value;
150,000,000 shares authorized and
16,221,101 shares issued and 162 162
outstanding as of June 30, 2020;
150,000,000 shares authorized and
16,221,101 shares issued and
outstanding
as of December 31, 2019
Preferred stock, $0.01 par value;
50,000,000 shares authorized; no shares
issued and outstanding as of June 30,
2020 and December 31, 2019
Additional paid-in capital 906,164 914,699
Accumulated (deficit) retained earnings (268,723) 21,437
Total stockholders' equity 638,472 937,177
Noncontrolling interests 121,165 175,635
Total equity 759,637 1,112,812
Total liabilities and equity $
911,314 $
1,347,620
SELECT ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Six months ended June 30,
2020 2019
Cash flows from operating activities
Net (loss) income $
(344,264) $
9,468
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities
Depreciation and amortization 53,209 62,267
Net loss on disposal of property and
equipment 2,207 2,794
Bad debt expense 4,810 1,312
Amortization of debt issuance costs 344 344
Inventory write-downs 566 209
Equity-based compensation 1,816 8,308
Impairment of goodwill and trademark 276,016 4,396
Impairment and abandonment of property
and equipment 7,910 893
Loss on divestitures 411 3,406
Other operating items, net 404 (178)
Changes in operating assets and
liabilities
Accounts receivable 160,204 3,346
Prepaid expenses and other assets 3,276 1,245
Accounts payable and accrued
liabilities (64,176) (23,075)
Net cash provided by operating
activities 102,733 74,735
Cash flows from investing activities
Working capital settlement 691
Proceeds received from divestitures 197 25,259
Purchase of property and equipment (16,461) (57,513)
Proceeds received from sales of
property and equipment 11,015 10,507
Net cash used in investing activities (5,249) (21,056)
Cash flows from financing activities
Borrowings from revolving line of
credit 5,000
Payments on long-term debt (50,000)
Payments of finance lease obligations (121) (549)
Proceeds from share issuance 44 56
Contributions from (distributions to)
noncontrolling interests 383 (225)
Repurchase of common stock (10,638) (1,516)
Net cash used in financing activities (10,332) (47,234)
Effect of exchange rate changes on cash (13) 136
Net increase in cash and cash
equivalents 87,139 6,581
Cash and cash equivalents, beginning of
period 79,268 17,237
Cash and cash equivalents, end of
period $
166,407 $
23,818
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 accounting principles generally accepted in the U.S. ("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, 2019.
The following table presents 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, Six months ended June 30,
2020 2019 2020 2019
(in thousands)
Net (loss) income $
(53,044) $
8,068 $
(344,264) $
9,468
Interest expense, net 513 839 844 1,932
Income tax (benefit)
expense (130) 571 (294) 749
Depreciation and
amortization 26,342 29,749 53,209 62,267
EBITDA (26,319) 39,227 (290,505) 74,416
Impairment of goodwill
and trademark 276,016 4,396
Non-recurring
severance expenses 3,666 7,168 1,680
Impairment and
abandonment of
property and equipment 4,726 374 7,910 893
Yard closure costs
related to
consolidating
operations 1,011 2,961
Non-cash loss on sale
of assets or
subsidiaries 3,874 7,314 5,501 13,220
Lease abandonment costs 868 183 1,821 1,256
Non-cash compensation
expenses 1,242 4,129 1,816 8,308
Foreign currency (gain)
loss, net (27) (67) 19 (327)
Non-recurring
transaction costs 2,611 412 2,623 1,074
Inventory write-down 75
Adjusted EBITDA $
(8,348) $
51,572 $
15,330 $
104,991
The following table presents 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, 2020 March 31, 2020 June 30, 2019
(unaudited)
(in thousands)
Gross (loss) profit by
segment
Water services $
(14,088) $
3,241 $
25,837
Water infrastructure (5,594) 2,921 7,181
Oilfield chemicals (4,034) 9,138 7,203
Other (3) (4) (282)
As reported gross (loss)
profit (23,719) 15,296 39,939
Plus depreciation and
amortization
Water services 15,881 17,156 21,023
Water infrastructure 7,023 7,028 6,073
Oilfield chemicals 2,604 1,998 1,747
Other
Total depreciation and
amortization 25,508 26,182 28,843
Gross profit before D&A $
1,789 $
41,478 $
68,782
Gross profit (loss) before
D&A by segment
Water services 1,793 20,397 46,860
Water infrastructure 1,429 9,949 13,254
Oilfield chemicals (1,430) 11,136 8,950
Other (3) (4) (282)
Total gross profit before
D&A $
1,789 $
41,478 $
68,782
Gross margin before D&A by
segment
Water services 3.2% 13.6% 23.2%
Water infrastructure 9.3% 17.2% 25.6%
Oilfield chemicals (6.8%) 15.7% 14.2%
Other
n/a
n/a (3.9%)
Total gross margin before
D&A 1.9% 14.9% 21.2%
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.
