SELECT WATER SOLUTIONS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report, as well as the historical consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSecurities and Exchange Commission onFebruary 23, 2022 (our "2021 Form 10-K"). This discussion and analysis contains forward-looking statements based upon our current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors as described under "Cautionary Note Regarding Forward-Looking Statements" and other cautionary statements described under the heading "Risk Factors" included in our 2021 Form 10-K and this Quarterly Report on Form 10-Q. We assume no obligation to update any of these forward-looking statements.
This discussion relates to the three and nine months ended
Overview
We are a leading provider of comprehensive water-management and chemical solutions to the oil and gas industry inthe United States ("U.S."). As a leader in the water solutions industry, we place the utmost importance on safe, environmentally responsible management of oilfield water throughout the lifecycle of a well. Additionally, we believe that responsibly managing water resources through our operations to help conserve and protect the environment in the communities in which we operate is paramount to our continued success.
Sustainability
Select is committed to implementing a corporate strategy that supports the
long-term viability of our business model in a manner that focuses on our
people, our customers, the environment, and the communities in which we operate.
We believe this focus will help both us and our customers achieve their
short-term and long-term environmental, social and governance ("ESG") goals,
help us attract and retain top talent, maintain community support in our areas
of operations and further our efforts to generate stockholder returns. We
believe our commitment to foster a culture of corporate responsibility is an
important part of being a company with operations spanning the contiguous U.S.
Further, we believe being a good corporate steward is strategic to our growth in
the oil and gas industry and will better allow us to develop solutions that both
address the needs of our customers and contribute to sustainable business
practices. We compete with other solutions and service providers based on
various factors, including safety and operational performance, technological
innovation, process efficiencies and reputational awareness. We believe there is
a strong link between these corporate responsibility initiatives and our ability
to provide value in our industry.
We are one of the few public companies whose primary focus is on the management
of water and water logistics in the oil and gas development industry, with an
emphasis on driving efficient, environmentally responsible and economical
solutions that lower costs throughout the lifecycle of the well. We believe
water is a valuable resource and seek to enhance the long-term sustainability of
this resource between the needs of the oil and gas industry as well as other
industries and the general public. As a company, we provide access to various
sources of water as demanded by our customers and have significantly increased
our investments and focus on the recycling and reuse of produced water to meet
the industry's water demand and align our operations with the goals of our
customers. We have invested significantly in recent quarters in the development
of fixed recycling facilities that support the advancement of commercialized
produced water reuse solutions. By doing so, we strive to reduce both the amount
of produced water being reinjected into SWDs and our usage of fresh water. We
view our rather unique capabilities as an opportunity to transform water
management by leveraging our Oilfield Chemicals business to develop additional
produced water management solutions that increase our customers' ability to
reuse this produced water and add value to their operations.
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By implementing our innovative approach to water solutions, Select has become a leader in recycling produced water to be reused across multiple well completions.
Our strong company culture values commitments to all stakeholders, and we aim to create a work environment that fosters a diverse and inclusive company culture. Additionally, we prioritize safety in our operations through rigorous training, structured protocols, incentives and awards programs and ongoing automation of our operations where appropriate. Our prioritization of safety includes a commitment to safeguarding the communities in which we operate. We believe that proper alignment of our management and our board of directors with our shareholders is critical to creating long-term value, including the alignment of management compensation and incentive structures and the active engagement of a diverse, experienced and independent board of directors.
Recent Developments
OnSeptember 7, 2022 , the Company announced that our board of directors approved the initiation of a dividend program under which the Company intends to pay regular quarterly dividends. OnOctober 27, 2022 , our board of directors declared a quarterly cash dividend of$0.05 per share of Class A Common Stock to be paid onNovember 17, 2022 to shareholders of record as of the close of business onNovember 7, 2022 . A distribution of$0.05 per unit was also approved for those holders of units ofSES Holdings, LLC , who also hold an equal number of shares of Class B Common Stock of the Company, which is subject to the same payment and record dates. All future dividend payments are subject to quarterly review and approval by the board of directors. BetweenJuly 2021 andFebruary 2022 , Select completed five acquisitions. Collectively these acquisitions expanded our revenue base and service offerings with many of our key customers and increased our overall service offerings within multiple basins. Effectively integrating the acquired assets and operations is a major focus of ours for the remainder of 2022. Our integration and related efforts include, but are not limited to, increasing revenue through strategic market share gains, regional service line expansion, increased pricing, and achieving operational synergies. These operational synergies are expected to be realized by effectively connecting complementary assets with one another, pairing assets with related services, realizing cost synergies, and selling excess assets. OnFebruary 23, 2022 , the Company acquired Nuverra, an energy-focused environmental solutions company, providing environmental solutions, including the removal, treatment, recycling, transportation and disposal of restricted solids, fluids and hydrocarbons for exploration and production companies operating across theU.S. , including in the Bakken,Haynesville , Marcellus and Utica Shales. With the Nuverra transaction, we added more than 300,000 barrels per day of permitted daily disposal capacity inTexas ,Louisiana ,North Dakota ,Montana andOhio . When combined with our existing assets and other recent acquisitions, this brings our company-wide permitted daily disposal capacity to approximately 2.5 million barrels per day. The Complete Acquisition, Agua Libre and Basic Acquisition and HB Rentals Acquisition improved our financial results in the year endedDecember 31, 2021 , as well as our competitive positioning in the water solutions market. These acquisitions strengthened our geographic footprint and provided access to employee expertise as well as opportunities to expand our growing water recycling business into new areas. The acquisitions also increased our market share and added multiple opportunities for revenue and cost synergies. InFebruary 2022 ,Russia launched a large-scale invasion ofUkraine that has led to significant armed hostilities. As a result, theU.S. , theUnited Kingdom , the member states of theEuropean Union and other public and private actors have levied severe sanctions on Russian financial institutions, businesses and individuals. This conflict, and the resulting sanctions and concerns regarding global energy security, has contributed to significant increases and volatility in the prices for oil and natural gas, with the posted price for WTI reaching a high of$123.64 per barrel during the Current Period. Such volatility may lead to a more difficult investing and planning environment for us and our customers. While the near-term impact of these events resulted in higher oil and gas prices in the Current Period, the ultimate geopolitical and macroeconomic consequences of this invasion and associated sanctions cannot be predicted, and such events, or any further hostilities inUkraine or elsewhere, could severely impact the world economy and may adversely affect our financial condition. 41
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While the ongoing effects of the COVID-19 pandemic on our operations have decreased in recent quarters, this pandemic has had a material negative impact on our financial results. While we have seen economic recovery and higher oil prices through theCurrent Quarter and the Current Period, such negative impact may continue well beyond the containment of the pandemic until global GDP levels, associated oil demand and resulting oilfield activity fully rebound. While we have seen oilfield activity improve considerably and global inventories rapidly normalize with continued demand growth since the low point experienced in 2020, considerable uncertainty remains. Even with this recent recovery however, we cannot provide assurance that our assumptions used to estimate our future financial results will be correct, given the unpredictable nature of the current market environment after the recent elevated volatility in demand for oil and demand for our services. As a consequence, our ability to accurately forecast our activity and profitability is uncertain. As a result of reduced oil inventories driven by the economic recovery and oil demand growth in much of the world, as well as supply uncertainties heightened by theRussia /Ukraine war, oil and gas prices increased notably in theCurrent Quarter as compared to the Prior Quarter. During theCurrent Quarter , the average spot price of West Texas Intermediate crude oil was$93.06 versus an average price of$70.62 for the Prior Quarter. The averageHenry Hub natural gas spot price during theCurrent Quarter was$7.99 versus an average of$4.36 for the Prior Quarter. These price levels are supportive of our customers' drilling and completion programs in the major shale basins. Many of our customers have demonstrated their resolve to manage their capital spending to within budgets and cash flow from operations and increase redemptions of debt and/or returns of capital to investors. Additionally, consolidation among our customers can disrupt our market in the near-term and the resulting demand for our services. Overall however, the financial health of the oil and gas industry and many of our customers specifically, as reflected in debt metrics, recent capital raises, and equity valuations, greatly improved over the year endedDecember 31, 2021 and through the Current Period. From an operational standpoint, many of the recent trends still apply to ongoing unconventional oil and gas development. The continued trend towards multi-well pad development, executed within a limited time frame, has increased the overall complexity of well completions, while increasing fracturing efficiency and the use of lower-cost in-basin sand has decreased total costs for our customers. However, we note the continued efficiency gains in the well completions process can limit the days we spend on the wellsite and, therefore, negatively impact the total revenue opportunity for certain of our services utilizing day-rate pricing models. This multi-well pad development, combined with recent upstream acreage consolidation and the growing trends around the reuse applications of produced water provides a significant opportunity for companies like us that can deliver increasingly complex solutions for our E&P customers across the full completion and production lifecycle of wells. While these trends are most advanced in thePermian Basin , they are emerging in other basins as well. The trend of increased use of produced water will require additional chemical treatment solutions, and we have a dedicated team of specialists focused every day on developing and deploying innovative water treatment and reuse services for our customers. Our FluidMatch™ design solutions enable our customers to economically use these alternative sources to optimize their fluid systems by providing water profiling and fluid assessment services working towards real-time. This trend also supports more complex "on the fly" solutions that treat, proportion, and blend various streams of water and chemicals at the wellsite. This complexity favors service companies able to provide advanced technology solutions. Ultimately, we intend to play an important role in the advancement of water and chemical solutions that are designed to meet the sustainability goals of key stakeholders.
Our water logistics, treatment, and chemical application expertise, in combination with advanced technology solutions, are applicable to other industries beyond oil and gas. We are working to further commercialize our services in other businesses through our industrial solutions group.
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February 2021 Severe Weather
Severe winter weather inFebruary 2021 negatively impacted our Prior Period results, equating to approximately one lost week of operations across most of our locations, with extended raw material shortages that impacted our Oilfield Chemicals segment into March. We estimate that this negatively impacted Prior Period revenue by an amount ranging from$9 million to$12 million .
Our Segments
Our services are offered through three reportable segments: (i) Water Services; (ii) Water Infrastructure; and (iii) Oilfield Chemicals.
Water Services. The Water Services segment consists of the Company's services
businesses, including water transfer, flowback and well testing, fluids
? hauling, water containment and water network automation, primarily serving E&P
companies. Additionally, this segment includes the operations of our accommodations and rentals business. Water Infrastructure. The Water Infrastructure segment consists of the
Company's infrastructure assets, including operations associated with our water
? sourcing and pipeline infrastructure, our water recycling solutions, and our
produced water gathering systems and saltwater disposal wells, as well as
solids disposal facilities, primarily serving E&P companies. Oilfield Chemicals. The Oilfield Chemicals segment provides technical
solutions, products and expertise related to chemical applications in the oil
and gas industry. We develop, manufacture, manage logistics and provide a full
suite of chemicals used in hydraulic fracturing, stimulation, cementing,
? pipelines and well completions for customers ranging from pressure pumpers to
major integrated and independent oil and gas producers. This segment also
utilizes its chemical experience and lab testing capabilities to customize
tailored water treatment solutions designed to optimize the fracturing fluid
system in conjunction with the quality of water used in well completions.
How We Generate Revenue We currently generate the majority of our revenue through our water-management services associated with well completions, provided through our Water Services and Water Infrastructure segments. The majority of this revenue is realized through customer agreements with fixed pricing terms and is recognized when delivery of services is provided, generally at our customers' sites. While we have some long-term pricing arrangements, particularly in our Water Infrastructure segment, most of our water and water-related services are priced based on prevailing market conditions, giving due consideration to the specific requirements of the customer. We also generate revenue by providing completion and specialty chemicals through our Oilfield Chemicals segment. We invoice the majority of our Oilfield Chemicals customers for services provided based on the quantity of chemicals used or pursuant to short-term contracts as the customers' needs arise.
Costs of Conducting Our Business
The principal expenses involved in conducting our business are labor costs, vehicle and equipment costs (including depreciation, repair, rental and maintenance and leasing costs), raw materials and water sourcing costs and fuel costs. Our fixed costs are relatively low. Most of the costs of serving our customers are variable, i.e., they are incurred only when we provide water and water-related services, or chemicals and chemical-related services to our customers.
Labor costs associated with our employees and contract labor comprise the
largest portion of our costs of doing business. We incurred labor and
labor-related costs of
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for the Current Quarter , Prior Quarter, Current Period and Prior Period,
respectively. The majority of our recurring labor costs are variable and
dependent on the then-current market environment and are incurred only while we
are providing our operational services. We also incur costs to employ personnel
to sell and supervise our services and perform maintenance on our assets, which
is not directly tied to our level of business activity. Additionally, we incur
selling, general and administrative costs for compensation of our administrative
personnel at our field sites and in our operational and corporate headquarters,
as well as for third-party support, licensing and services.
We incur significant vehicle and equipment costs in connection with the services
we provide, including depreciation, repairs and maintenance, rental and leasing
costs. We incurred vehicle and equipment costs of $69.8 million , $43.0 million ,
$193.4 million and $113.6 million for the Current Quarter , Prior Quarter,
Current Period and Prior Period, respectively.
We incur raw material costs in manufacturing our chemical products, as well as
for water that we source for our customers. We incurred raw material costs of
$77.3 million , $55.3 million , $223.4 million and $145.8 million for the Current
Quarter , Prior Quarter, Current Period and Prior Period, respectively.
We incur variable transportation costs associated with our service lines,
predominately fuel and freight. We incurred fuel and freight costs of $31.0
million , $15.8 million , $86.9 million and $39.8 million for the Current Quarter ,
Prior Quarter, Current Period and Prior Period, respectively. Rising fuel prices
impact our transportation costs, which affect the pricing and demand for our
services and, therefore, our results of operations.
How We Evaluate Our Operations
We use a variety of operational and financial metrics to assess our performance. Among other measures, management considers each of the following:
? Revenue; ? Gross Profit; ? Gross Margins; ? EBITDA; and ? Adjusted EBITDA. Revenue We analyze our revenue and assess our performance by comparing actual monthly revenue to our internal projections and across periods. We also assess incremental changes in revenue compared to incremental changes in direct operating costs, and selling, general and administrative expenses across our reportable segments to identify potential areas for improvement, as well as to determine whether segment performance is meeting management's expectations.
Gross Profit
To measure our financial performance, we analyze our gross profit, which we
define as revenues less direct operating expenses (including depreciation and
amortization expenses). We believe gross profit provides insight into
profitability and the true operating performance of our assets. We also compare
gross profit to prior periods and across segments to identify trends as well as
underperforming segments.
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Gross Margins
Gross margins provide an important gauge of how effective we are at converting
revenue into profits. This metric works in tandem with gross profit to ensure
that we do not seek to increase gross profit at the expense of lower margins,
nor pursue higher gross margins at the expense of declining gross profits. We
track gross margins by segment and service line and compare them across prior
periods and across segments and service lines to identify trends as well as
underperforming segments.
EBITDA and Adjusted EBITDA
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income/(loss), plus interest expense, income taxes, and depreciation and 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 theU.S. ("GAAP"), plus non-cash losses on the sale of assets or subsidiaries, nonrecurring compensation expense, non-cash compensation expense, and nonrecurring 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/(minus) losses/(gains) on unconsolidated entities less bargain purchase gains from business combinations. The adjustments to EBITDA are generally consistent with such adjustments described in our Sustainability-Linked Credit Facility. See "-Comparison of Non-GAAP Financial Measures-EBITDA and Adjusted EBITDA" for more information and a reconciliation of EBITDA and Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.
Factors Affecting the Comparability of Our Results of Operations to Our Historical Results of Operations
Our future results of operations may not be comparable to our historical results of operations for the periods presented, primarily for the reasons described below and those described in "-Recent Developments" above.
Acquisition Activity
As described above, we continuously evaluate potential investments, particularly in water infrastructure and other water-related services and technology. To the extent we consummate acquisitions, any incremental revenues or expenses from such transactions are not included in our historical results of operations.
Between
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Results of Operations
The following tables set forth our results of operations for the periods presented, including revenue by segment.
Current Quarter Compared to the Prior Quarter
Three months ended September 30, Change
2022 2021 Dollars Percentage
(in thousands)
Revenue
Water Services $ 221,243 $ 112,474 $ 108,769 96.7 %
Water Infrastructure 74,396 36,787 37,609 102.2 %
Oilfield Chemicals 79,433 55,372 24,061 43.5 %
Total revenue 375,072 204,633 170,439 83.3 %
Costs of revenue
Water Services 170,845 94,667 76,178 80.5 %
Water Infrastructure 54,197 28,494 25,703 90.2 %
Oilfield Chemicals 64,519 49,583 14,936 30.1 %
Other (1) - (1) NMDepreciation and amortization 26,672
22,904 3,768 16.5 % Total costs of revenue 316,232 195,648 120,584 61.6 % Gross profit 58,840 8,985 49,855 554.9 % Operating expenses
Selling, general and administrative 29,782 22,044 7,738 35.1 % Depreciation and amortization 543
562 (19) (3.4) % Lease abandonment costs 83 154 (71) (46.1) % Total operating expenses 30,408 22,760 7,648 33.6 % Income (loss) from operations 28,432
(13,775) 42,207 306.4 %
Other income (expense) (Loss) gain on sales of property and equipment and divestitures, net (479) 315 (794) (252.1) % Interest expense, net (616) (419) (197) 47.0 % Foreign currency loss, net (6) (6) - NM Bargain purchase gain (3,273) - (3,273) NM Other 1,153 (222) 1,375 NM Income (loss) before income tax (expense) benefit 25,211 (14,107) 39,318 278.7 % Income tax (expense) benefit (276) 32 (308) NM Equity in losses of unconsolidated entities (218) (129) (89) NM Net income (loss) $ 24,717$ (14,204) $ 38,921 274.0 % Revenue Our revenue increased$170.4 million , or 83.3%, to$375.1 million for theCurrent Quarter compared to$204.6 million for the Prior Quarter. This increase was composed of a$108.8 million increase in Water Services revenue, a$37.6 million increase in Water Infrastructure revenue and a$24.1 million increase in Oilfield Chemicals revenue. These increases were driven primarily by higher demand for our services coupled with increased pricing in comparison to the Prior Quarter. Included in the increases in Water Services and Water Infrastructure were incremental revenue contributions from the Complete, Agua Libre and Basic, HB Rentals and Nuverra acquisitions. For theCurrent Quarter , our Water Services, Water Infrastructure and Oilfield Chemicals constituted 59.0%, 19.8% and 21.2% of our total revenue, respectively, compared to 55.0%, 18.0% and 27.0%, respectively, for the Prior Quarter. The revenue changes by reportable segment are as follows: 46
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Water Services. Revenue increased$108.8 million , or 96.7%, to$221.2 million for theCurrent Quarter compared to$112.5 million for the Prior Quarter. The increase was primarily attributable to higher demand for our services coupled with increase pricing in comparison to the Prior Quarter. The increase was also impacted by incremental revenue contributed by the Basic, HB Rentals and Nuverra acquisitions.
Water Infrastructure. Revenue increased by
Oilfield Chemicals. Revenue increased$24.1 million , or 43.5%, to$79.4 million for theCurrent Quarter compared to$55.4 million for the Prior Quarter. The increase was primarily attributable to higher demand for our services in comparison to the Prior Quarter.
Costs of Revenue
Costs of revenue increased$120.6 million , or 61.6%, to$316.2 million for theCurrent Quarter compared to$195.6 million for the Prior Quarter. The increase was primarily composed of a$76.2 million increase in Water Services costs, an$25.7 million increase in Water Infrastructure costs, and a$14.9 million increase in Oilfield Chemicals costs due to supporting the higher revenue-producing activity discussed above. Water Services. Costs of revenue increased$76.2 million , or 80.5%, to$170.8 million for theCurrent Quarter compared to$94.7 million for the Prior Quarter. Cost of revenue as a percent of revenue decreased from 84.2% to 77.2% due primarily to higher pricing and economies of scale from higher revenue activity. Water Infrastructure. Costs of revenue increased$25.7 million , or 90.2%, to$54.2 million for theCurrent Quarter compared to$28.5 million for the Prior Quarter. Cost of revenue as a percent of revenue decreased from 77.5% to 72.8% due primarily to a higher relative contribution of high-margin disposal revenue. Oilfield Chemicals. Costs of revenue increased$14.9 million , or 30.1%, to$64.5 million for theCurrent Quarter compared to$49.6 million for the Prior Quarter. Cost of revenue as a percent of revenue decreased from 89.5% to 81.2% due primarily to picking up additional market share for our portfolio of products. Depreciation and Amortization. Depreciation and amortization expense increased$3.8 million , or 16.5%, to$26.7 million for theCurrent Quarter compared to$22.9 million for the Prior Quarter, due primarily to a higher fixed asset base related to acquisitions occurring afterJune 30, 2021 .
Gross Profit
Gross profit was$58.8 million for theCurrent Quarter compared to$9.0 million for the Prior Quarter due primarily to higher revenue in all three segments resulting from increased activity levels. Gross profit increased by$32.6 million ,$11.9 million and$9.1 million in our Water Services, Water Infrastructure and Oilfield Chemicals segments, respectively. Partially offsetting the increase in gross profit was a$3.8 million increase in depreciation and amortization expense. Gross margin as a percent of revenue was 15.7% and 4.4% in theCurrent Quarter and Prior Quarter, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased$7.7 million , or 35.1%, to$29.8 million for theCurrent Quarter compared to$22.0 million for the Prior Quarter. The increase was due primarily to a$1.5 million increase in business development costs, a$1.5 million increase in equity-based compensation costs, a$1.3 million increase in incentive compensation cost, a$1.1 million increase in bad debt expense,$0.8 million in higher vehicle lease costs,$0.7 million higher wages and associated payroll taxes,$0.4 million higher information technology costs,$0.4 million higher research and development costs,$0.4 million of costs from the additional personnel and related back-office expenses as 47 Table of Contents
a result of our recent acquisitions and
Net Interest Expense
Net interest expense increased by$0.2 million , or 47.0%, to$0.6 million for theCurrent Quarter compared to$0.4 million in the Prior Quarter due primarily to lower interest income related to notes receivable that were converted to an equity-method investment during the Current Period and higher interest expense due to borrowings in theCurrent Quarter .
Bargain Purchase Gain
A reduction to bargain purchase gain of
Other
Other income was$1.2 million in theCurrent Quarter compared to an expense of$0.2 million in the Prior Quarter. During theCurrent Quarter , other income was primarily related to the sale of excess assets acquired in our recent acquisitions. During the Prior Quarter, other expense was primarily related to the mark-to-market of equity securities using the fair value option.
Net Income (Loss)
Net Income (loss) increased by$38.9 million , to a net income of$24.7 million for theCurrent Quarter compared to a net loss of$14.2 million for the Prior Quarter, driven primarily by increased revenue due to a gradual increase in demand for our services as well as contributions from our recent acquisitions. The Prior Quarter was negatively impacted by a significant reduction in demand for our services due to a gradual recovery following the onset of the COVID-19 pandemic. 48 Table of Contents
Current Period Compared to the Prior Period
Nine months ended September 30, Change
2022 2021 Dollars Percentage
(in thousands)
Revenue
Water Services $ 580,845 $ 253,348 $ 327,497 129.3 %
Water Infrastructure 193,234 107,916 85,318 79.1 %
Oilfield Chemicals 231,665 148,228 83,437 56.3 %
Total revenue 1,005,744 509,492 496,252 97.4 %
Costs of revenue
Water Services 465,951 227,736 238,215 104.6 %
Water Infrastructure 143,514 81,130 62,384 76.9 %
Oilfield Chemicals 194,670 132,103 62,567 47.4 %Depreciation and amortization 82,425
65,572 16,853 25.7 % Total costs of revenue 886,560 506,541 380,019 75.0 % Gross profit 119,184 2,951 116,233 3938.8 % Operating expenses
Selling, general and administrative 84,792 57,828 26,964 46.6 % Depreciation and amortization 1,636
1,835 (199) (10.8) % Lease abandonment costs 336 480 (144) (30.0) % Total operating expenses 86,764 60,143 26,621 NM Income (loss) from operations 32,420 (57,192) 89,612 NM Other income (expense) Gain (loss) on sales of property and equipment and divestitures, net 1,905 (1,921) 3,826 199.2 % Interest expense, net (1,830) (1,254) (576) 45.9 % Foreign currency (loss) gain, net (9)
1 (10) NM
Bargain purchase gain 13,768 - 13,768 NM
Other 2,277 (956) 3,233 NM
Income (loss) before income tax
(expense) benefit 48,531 (61,322) 109,853 179.1 %
Income tax (expense) benefit (672) 211 (883) NM
Equity in losses of unconsolidated
entities (576) (129) (447) NM
Net income (loss) $ 47,283 $ (61,240) $ 108,523 177.2 %
Revenue
Our revenue increased $496.3 million , or 97.4%, to $1.0 billion for the Current
Period compared to $509.5 million for the Prior Period. This increase was
composed of a $327.5 million increase in Water Services revenue, a $85.3 million
increase in Water Infrastructure revenue and a $83.4 million increase in
Oilfield Chemicals revenue. These increases were driven primarily by higher
demand for our services coupled with increased pricing in comparison to the
Prior Period. Included in the increases in Water Services and Water
Infrastructure were incremental revenue contributions from the Complete, Agua
Libre and Basic, HB Rentals and Nuverra acquisitions. For the Current Period,
our Water Services, Water Infrastructure and Oilfield Chemicals constituted
57.8%, 19.2% and 23.0% of our total revenue, respectively, compared to 49.7%,
21.2% and 29.1%, respectively, for the Prior Period. The revenue changes by
reportable segment are as follows:
Water Services. Revenue increased $327.5 million , or 129.3%, to $580.8 million
for the Current Period compared to $253.3 million for the Prior Period. The
increase was primarily attributable to higher demand for our services coupled
with increased pricing in comparison to the Prior Period. The increase was also
impacted by incremental revenue contributed by the Complete, Basic, HB Rentals
and Nuverra acquisitions.
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Water Infrastructure. Revenue increased by
Oilfield Chemicals. Revenue increased
Costs of Revenue
Costs of revenue increased$380.0 million , or 75.0%, to$886.6 million for the Current Period compared to$506.5 million for the Prior Period. The increase was primarily composed of a$238.2 million increase in Water Services costs, a$62.4 million increase in Water Infrastructure costs, and a$62.6 million increase in Oilfield Chemicals costs due to supporting the higher revenue-producing activity discussed above. Current Period inflation also impacted variable costs for labor, fuel and services. We were able to pass much of these increased costs to customers with surcharges and pricing increases. Water Services. Costs of revenue increased$238.2 million , or 104.6%, to$466.0 million for the Current Period compared to$227.7 million for the Prior Period. Cost of revenue as a percent of revenue decreased from 89.9% to 80.2% due primarily to economies of scale from higher revenue activity. Water Infrastructure. Costs of revenue increased$62.4 million , or 76.9%, to$143.5 million for the Current Period compared to$81.1 million for the Prior Period. Cost of revenue as a percent of revenue decreased from 75.2% to 74.3% due primarily to a higher relative contribution of high-margin disposal revenue. Oilfield Chemicals. Costs of revenue increased$62.6 million , or 47.4%, to$194.7 million for the Current Period compared to$132.1 million for the Prior Period. Cost of revenue as a percent of revenue decreased from 89.1% to 84.0% due primarily to higher utilization and cost absorption at our manufacturing facilities. Depreciation and Amortization. Depreciation and amortization expense increased$16.9 million , or 25.7%, to$82.4 million for the Current Period compared to$65.6 million for the Prior Period, due primarily to a higher fixed asset base related to acquisitions occurring afterJune 30, 2021 .
Gross Profit
Gross profit was$119.2 million for the Current Period compared to$3.0 million for the Prior Period due primarily to higher revenue in all three segments resulting from increased activity levels. Gross profit increased by$89.3 million ,$22.9 million and$20.9 million in our Water Services, Water Infrastructure and Oilfield Chemicals segments, respectively. Partially offsetting the increase in gross profit was a$16.9 million increase in depreciation and amortization expense. Gross margin as a percent of revenue was 11.9% and 0.6% in the Current Period and Prior Period, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased$27.0 million , or 46.6%, to$84.8 million for the Current Period compared to$57.8 million for the Prior Period. The increase was due primarily to$5.0 million higher wages and associated payroll taxes, a$4.8 million increase in equity-based compensation costs,$3.9 million of costs from the additional personnel and related back-office expenses as a result of our recent acquisitions, comprised of$1.2 million of personnel costs and$2.7 million of other back-office costs, a$3.1 million increase in incentive compensation cost,$2.9 million in higher vehicle lease costs, a$2.4 million increase in business development costs, a$2.4 million increase in bad debt expense, a$1.1 million increase in travel, meals and entertainment costs, a$1.0 million increase in information technology costs and$3.6 million from a combination of other expenses partially offset by$3.2 million in Prior Period severance expense. 50 Table of Contents Net Interest Expense Net interest expense increased by$0.6 million , or 45.9%, to$1.8 million for the Current Period compared to$1.3 million in the Prior Period due primarily to writing off unamortized deferred debt issuance costs in connection with amending and restating the Prior Credit Agreement in the Current Period, lower interest income related to notes receivable that were converted to an equity-method investment during the Current Period and higher interest expense due to borrowings in the Current Period.
Bargain Purchase Gain
Bargain purchase gain of$13.8 million in the Current Period was comprised of$7.1 million related to the Nuverra Acquisition and$6.7 million in adjustments related to acquisitions that occurred in 2021.
Other
Other income was$2.3 million in the Current Period compared to other expense of$1.0 million in the Prior Period. During the Current Period, other income was primarily related to the sale of excess assets and assignment to third parties of leased properties with asset retirement obligations acquired in our recent acquisitions. During the Prior Period, other expenses were primarily related to the mark-to-market of equity securities using the fair value option.
Net Income (Loss)
Net Income (loss) increased by$108.5 million , to a net income of$47.3 million for the Current Period compared to a net loss of$61.2 million for the Prior Period, driven primarily by increased revenue due to a gradual increase in demand for our services and a bargain purchase gain of$13.8 million . The Prior Period was negatively impacted by a significant reduction in demand for our services due to a gradual recovery following the onset of the COVID-19 pandemic.
Comparison of Non-GAAP Financial Measures
We view EBITDA and Adjusted EBITDA as important indicators of performance. We
define EBITDA as net income (loss), plus interest expense, income taxes, and
depreciation and 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/(minus) losses/(gains) on
unconsolidated entities less bargain purchase gains from business combinations.
The adjustments to EBITDA are generally consistent with such adjustments
described in our Sustainability-Linked Credit Facility. See "-Comparison of
Non-GAAP Financial Measures" for more information and a reconciliation of EBITDA
and Adjusted EBITDA to net income (loss), the most directly comparable financial
measure calculated and presented in accordance with GAAP.
Our board of directors, management and investors use EBITDA and Adjusted EBITDA
to assess our financial performance 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 items outside the control
of our management team. We present EBITDA and Adjusted EBITDA because we believe
they provide useful information regarding the factors and trends affecting our
business in addition to measures calculated under GAAP.
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Note Regarding Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are not financial measures presented in accordance
with GAAP. We believe that the presentation of these non-GAAP financial measures
will provide useful information to investors in assessing our financial
performance and results of operations. Net income is the GAAP measure most
directly comparable to EBITDA and Adjusted EBITDA. 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 the exclusion of some but not
all items that affect the most directly comparable GAAP financial measures. One
should not consider EBITDA or Adjusted EBITDA in isolation or as substitutes for
an analysis of our results as reported under GAAP. Because EBITDA and Adjusted
EBITDA 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.
The following table sets forth our 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, Nine months ended September 30,
2022 2021 2022 2021
(in thousands)
Net income (loss) $ 24,717 $ (14,204) $ 47,283 $ (61,240) Interest expense, net 616 419 1,830 1,254 Income tax expense (benefit) 276 (32) 672 (211) Depreciation and amortization 27,215 23,466 84,061 67,407 EBITDA 52,824 9,649 133,846 7,210 Non-cash compensation expenses 3,804 2,302 11,023 6,248 Nonrecurring severance expenses(1) - - - 3,225 Non-cash loss on sale of assets or subsidiaries(2) 1,608 189 3,141 3,036 Nonrecurring transaction costs(3) 965
2,709 7,461 3,270 Lease abandonment costs 83 154 336 480 Bargain purchase gain 3,273 - (13,768) - Equity in losses of unconsolidated entities 218 129 576 129 Foreign currency loss (gain), net 6
6 9 (1)
Adjusted EBITDA $ 62,781 $ 15,138 $ 142,624 $ 23,597
(1) For the Prior Period, these costs related to severance costs associated with
our former CEO.
(2) For all periods presented, the losses were due primarily to sales of real
estate and underutilized or obsolete property and equipment.
For all periods presented, these costs were due primarily to legal-related (3) due diligence costs as well as costs related to certain acquired
subsidiaries.
EBITDA was$52.8 million for theCurrent Quarter compared to$9.6 million for the Prior Quarter. The$43.2 million increase in EBITDA was driven primarily by an increase of$53.6 million in gross profit partially offset by a$7.7 million increase in selling, general and administrative costs and a bargain purchase gain reduction of$3.3 million in theCurrent Quarter . Adjusted EBITDA was$62.8 million for theCurrent Quarter compared to$15.1 million for the Prior Quarter. The$47.7 million increase is primarily attributable to the items discussed above. EBITDA was$133.8 million for the Current Period compared to$7.2 million for the Prior Period. The$126.6 million increase in EBITDA was driven primarily by an increase of$133.1 million in gross profit, a$13.8 million bargain purchase gain in the Current Period and a$3.8 million increase in net gains from asset sales partially offset by a$27.0 million increase in selling, general and administrative costs. Adjusted EBITDA was$142.6 million for the Current 52
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Period compared to
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash on hand, borrowing capacity under the Sustainability-Linked Credit Facility, cash flows from operations and proceeds from the sale of excess property and equipment. Our primary uses of capital have been to fund current operations, maintain our asset base, implement technological advancements, make capital expenditures to support organic growth, fund acquisitions and minority investments, and when appropriate, repurchase shares of Class A Common Stock in the open market. Depending on available opportunities, market conditions and other factors, we may also issue debt and equity securities in the future, if needed. As ofSeptember 30, 2022 , we had no outstanding bank debt and a positive net cash position. We prioritize sustained positive free cash flow and a strong balance sheet, and evaluate potential acquisitions and investments in the context of those priorities, in addition to the economics of the opportunity. We believe this approach provides us with additional flexibility to evaluate larger investments as well as improved resilience in a sustained downturn versus many of our peers. Based on our current cash and cash equivalents balance, operating cash flow, available borrowings under our Sustainability-Linked Credit Facility and the ongoing actions discussed above, we believe that we will be able to maintain sufficient liquidity to satisfy our obligations and remain in compliance with our existing debt covenants through the next twelve months and beyond, prior to giving effect to any future financing that may occur. We intend to finance most of our capital expenditures, contractual obligations and working capital needs with cash on hand, cash generated from operations and borrowings under our Sustainability-Linked Credit Facility. For a discussion of the Sustainability-Linked Credit Facility, see "-Sustainability-Linked Credit Facility" below. Although we cannot provide any assurance, we believe that our current cash balance, operating cash flow and available borrowings under our Sustainability-Linked Credit Facility will be sufficient to fund our operations for at least the next twelve months. As ofSeptember 30, 2022 , cash and cash equivalents totaled$13.2 million , and we had approximately$231.5 million of available borrowing capacity under our Sustainability-Linked Credit Facility. As ofSeptember 30, 2022 , the borrowing base under the Sustainability-Linked Credit Facility was$254.4 million , we had no outstanding borrowings and outstanding letters of credit totaled$22.9 million . As ofOctober 31, 2022 , we had no outstanding borrowings, the borrowing base under the Sustainability-Linked Credit Facility was$251.0 million , the outstanding letters of credit totaled$22.9 million , and the available borrowing capacity under the Sustainability-Linked Credit Facility was$228.1 million .
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Nine months ended September 30, Change
2022 2021 Dollars Percentage
(in thousands)
Net cash used in operating activities $
(2,107)
(29,493) (45,259) 15,766 34.8 %
Net cash used in financing activities (40,964) (2,475) (38,489) (1555.1) %
Subtotal (72,564) (61,630)
Effect of exchange rate changes on cash and cash equivalents (15) 4 (19) NM
Net decrease in cash, cash equivalents, and restricted cash
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Analysis of Cash Flow Changes between the Nine Months Ended
Operating Activities. Net cash used in operating activities was$2.1 million for the Current Period, compared to$13.9 million in the Prior Period. The$11.8 million decrease is comprised of an increase of$113.0 million of net income combined with non-cash adjustments, partially offset by$101.2 million of increased working capital primarily due to the timing of collecting trade receivables connected with increased revenue. Investing Activities. Net cash used in investing activities was$29.5 million for the Current Period, compared to$45.3 million for the Prior Period. The$15.8 million decrease in net cash used in investing activities was due primarily to$18.6 million spent in the Prior Period for acquisitions, a$14.9 million increase in proceeds received from sales of property and equipment and$6.9 million in cash and restricted cash received in the Nuverra Acquisition partially offset by a$20.9 million increase in purchases of property and equipment, a$3.5 million increase in investments and a$1.1 million working capital settlement in the Current Period related to a prior year acquisition. Financing Activities. Net cash used in financing activities was$41.0 million for the Current Period compared to$2.5 million for the Prior Period. The$38.5 million increase in cash used in financing activities was due primarily to net debt repayments of$18.8 million , a$18.8 million increase in repurchases of shares of Class A Common Stock during the Current Period compared to the Prior Period and$2.1 million in debt issuance costs in the Current Period.
Sustainability-Linked Credit Facility
OnMarch 17, 2022 (the "Restatement Date"),SES Holdings , a subsidiary of the Company, andSelect Energy Services, LLC ("Select LLC "), a wholly-owned subsidiary ofSES Holdings , entered into a$270.0 million amended and restated senior secured sustainability-linked revolving credit facility (the "Sustainability-Linked Credit Facility"), by and amongSES Holdings , as parent,Select LLC , as borrower and certain ofSES Holdings' subsidiaries, as guarantors, each of the lenders party thereto andWells Fargo Bank, N.A. , as administrative agent, issuing lender and swingline lender (the "Administrative Agent") (which amended and restated the Prior Credit Agreement datedNovember 1, 2017 ). The Sustainability-Linked Credit Facility also has a sublimit of$40.0 million for letters of credit and a sublimit of$27.0 million for swingline loans. Subject to obtaining commitments from existing or new lenders,Select LLC has the option to increase the maximum amount under the senior secured credit facility by$135.0 million during the first three years following the Restatement Date.
Refer to "Note 8-Debt" for further discussion of the Sustainability-Linked Credit Facility.
Contractual Obligations
Our contractual obligations include, among other things, our Sustainability-Linked Credit Facility and operating leases. Refer to "Note 6-Leases" in our 2021 Form 10-K for operating lease obligations as ofDecember 31, 2021 and "Note 8-Debt" in Part I, Item 1 of this Quarterly Report for an update to our Sustainability-Linked Credit Facility as ofSeptember 30, 2022 .
Critical Accounting Policies and Estimates
There were no changes to our critical accounting policies from those disclosed in our 2021 Form 10-K.
Recent Accounting Pronouncements
None.
Off-Balance-Sheet Arrangements
As ofSeptember 30, 2022 , we had no material off-balance-sheet arrangements. As such, we are not exposed to any material financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements. 54
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