Select Energy Services Reports Fourth Quarter And Fiscal Year 2019 Financial Results And Operational Updates

HOUSTON, Feb. 24, 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 fourth quarter and fiscal year ended December 31, 2019.

Holli Ladhani, President and CEO, stated, "We advanced our strategy throughout the year by divesting our non-core businesses, paying down our debt balance in full, completing our New Mexico pipeline system, adding incremental chemicals manufacturing capacity in the Permian basin, acquiring a strategic water treatment business and returning cash to shareholders via open market share repurchases, all while continuing to generate and build cash on the balance sheet.

"We finished 2019 with another strong free cash flow quarter and significantly exceeded the top end of our full year free cash flow target. We were disciplined in our approach to capital allocation throughout 2019, generating consistent free cash flow and further enhancing our financial flexibility. With our debt-free balance sheet, we are well positioned to capitalize on opportunities as they arise and navigate the potentially volatile market ahead of us. 

"Looking forward, while we expect full year activity to decline year-over-year, we have already seen activity pick up in the early part of 2020 and expect improvements across all three segments in the first quarter. Absent signals of further increases in activity levels, we will invest our capital judiciously, with a capital expenditure range of $55 million to $70 million expected in 2020. We will continue to target a balanced capital allocation strategy including the evaluation of opportunistic and strategic growth focused on expanding our ability to bring full life-cycle solutions to our customers, as well as in technologies that support our operational efficiency initiatives and service differentiation," concluded Ladhani.

Summary Financial Information

Revenue for fiscal year 2019 was $1.29 billion as compared to $1.53 billion in fiscal year 2018.  Revenue for the fourth quarter of 2019 was $276.1 million as compared to $329.0 million in the third quarter of 2019 and $362.3 million in the fourth quarter of 2018. Revenue in the fiscal year 2019 and fourth quarter of 2019 were impacted by the divestment of certain non-core operations that contributed an incremental $29.4 million of revenue in the fourth quarter of 2018 and an incremental $142.2 million in fiscal year 2018. Net income for fiscal year 2019 was $4.1 million as compared to net income of $54.3 million in fiscal year 2018. Net loss for the fourth quarter of 2019 was $12.5 million compared to net income of $7.2 million in the third quarter of 2019 and net loss of $18.1 million in the fourth quarter of 2018.

Gross profit was $21.8 million in the fourth quarter of 2019 compared to $41.0 million in the third quarter of 2019 and $34.4 million in the fourth quarter of 2018. Total gross margin for Select was 7.9% in the fourth quarter of 2019 as compared to 12.5% in the third quarter of 2019 and 9.5% in the fourth quarter of 2018. Gross margin before depreciation and amortization ("D&A") for the fourth quarter of 2019 was 18.1% compared to 21.1% for the third quarter of 2019 and 19.8% for the fourth quarter of 2018.

Gross profit for fiscal year 2019 was $148.7 million as compared to $198.5 million in fiscal year 2018, and gross margin was 11.5% in fiscal year 2019 as compared to 13.0% in fiscal year 2018.  Gross margin before D&A for fiscal year 2019 was 20.6% as compared to 21.5% for fiscal year 2018.

Adjusted EBITDA was $28.8 million, or 10.4% of revenue in the fourth quarter of 2019, as compared to $48.9 million or 14.9% of revenue in the third quarter of 2019 and $56.1 million or 15.5% of revenue in the fourth quarter of 2018.  Adjusted EBITDA for fiscal year 2019 was $182.7 million as compared to $257.6 million in fiscal year 2018.  Please refer to the end of this release for reconciliations of gross profit before D&A and gross margin before D&A (non-GAAP measures) to gross profit and of Adjusted EBITDA (non-GAAP measure) to net income.

Business Segment Information

The Water Services segment generated revenues of $152.9 million in the fourth quarter of 2019, as compared to $196.8 million in the third quarter of 2019 and $211.1 million in the fourth quarter of 2018.  Gross margin before D&A for Water Services was 17.3% in the fourth quarter of 2019 as compared to 21.9% in the third quarter of 2019 and 22.9% in the fourth quarter of 2018. The sequential decline in revenue and gross margin before D&A was largely attributable to meaningful seasonal activity declines in the quarter driven by weather, holidays and our customers having exhausted their capital budgets throughout the quarter. The year over year decline was largely driven by lower completions activity and pricing from our customers in 2019 relative to 2018.

The Water Infrastructure segment generated revenues of $52.3 million in the fourth quarter of 2019 as compared to $64.0 million in the third quarter of 2019 and $54.5 million in the fourth quarter of 2018. Gross margin before D&A for Water Infrastructure was 22.9% in the fourth quarter of 2019 as compared to 26.9% in the third quarter of 2019 and 27.0% in the fourth quarter of 2018.  The decline in revenues and gross margin before D&A in the fourth quarter of 2019 was driven primarily by decreased non-pipeline water sourcing volumes associated with seasonal activity declines as well as increased costs associated with the Company's legacy New Mexico sourcing and logistics operations prior to the Northern Delaware pipeline coming online late in the fourth quarter of 2019.

The Oilfield Chemicals segment generated revenues of $70.9 million in the fourth quarter of 2019, as compared to $67.9 million in the third quarter of 2019 and $67.4 million during the fourth quarter of 2018.  Gross margin before D&A for Oilfield Chemicals was 16.0% in the fourth quarter of 2019 as compared to 15.6% in the third quarter of 2019 and 8.9% in the fourth quarter of 2018.  The revenue growth in the fourth quarter of 2019 was driven primarily by incremental contributions from the Well Chemical Services business ("WCS"), which we acquired from Baker Hughes Company on September 30, 2019. The meaningful year-over-year improvement in margins was driven by continued demand for our higher margin friction reducer product lines combined with the transportation cost savings from our Midland plant expansion.

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 no revenues during the fourth quarter of 2019 relative to $0.3 million in the third quarter of 2019 and $29.4 million in the fourth quarter of 2018. The "Other" category contributed gross profit before D&A of $0.1 million in the fourth quarter of 2019 as compared to gross loss before D&A of $1.6 million in the third quarter of 2019 and gross profit before D&A of $2.7 million in the fourth quarter of 2018. The Company does not expect any material contributions from these operations going forward.

Select's consolidated Adjusted EBITDA during the quarter includes $13.1 million of non-recurring or non-cash adjustments, including $4.8 million of loss on sales of subsidiaries and other assets, primarily related to non-cash losses incurred from the sale of certain underutilized assets within the Water Services segment, $2.8 million of asset impairment charges for underutilized assets, $1.6 million of transaction costs, primarily related to a legacy Rockwater liability accrual and deal costs from the acquisition of WCS, and $0.6 million of lease abandonment and impairment costs. Non-cash compensation expense accounted for an additional $3.6 million adjustment and other items produced a net impact of ($0.3) million.

Cash Flow and Balance Sheet

Cash flow from operations for the fourth quarter of 2019 was $61.7 million as compared to $67.5 million in the third quarter of 2019 and $107.8 million in the fourth quarter of 2018.  Cash flow from operations during the fourth quarter of 2019 included a $34.3 million contribution from working capital.  Cash flow from operations for the fiscal year 2019 was $203.9 million compared to $232.4 million during fiscal year 2018. Capital expenditures for the fourth quarter of 2019 were $20.5 million, net of ordinary course asset sales of $3.3 million.  Capital expenditures for the fiscal year 2019 were $98.1 million, net of ordinary course asset sales of $12.0 million, a reduction of 35% as compared to $151.4 million for the fiscal year 2018, net of ordinary course asset sales of $14.0 million.  Cash flow from operations less capex, net of asset sales, was $41.2 million during the fourth quarter and $105.8 million during the fiscal year 2019.

Other net cash uses during the fourth quarter included $4.9 million to fund the open market repurchase of approximately 0.66 million shares of Class A common stock. For fiscal year 2019, we repurchased approximately 2.18 million of Class A common stock for $17.5 million in the open market.

Total liquidity was $274.0 million as of December 31, 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 December 31, 2019, compared to $45.0 million as of December 31, 2018.  As of December 31, 2019, the Company had approximately $194.7 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 $79.3 million at December 31, 2019 as compared to $17.2 million at December 31, 2018.

Conference Call

Select has scheduled a conference call on Tuesday, February 25, 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 March 10, 2020 and may be accessed by calling 201-612-7415 using passcode 13697812#.  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 comprehensive water management and chemical solutions to the 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 most recent Annual Report on Form 10-K 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.

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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. The adjustments to EBITDA are generally consistent with such adjustments described in our Credit Facility regarding compliance with covenants thereunder. 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, which we expect to file with the SEC on or before the applicable filing deadline.

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:

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: 

SOURCE Select Energy Services, Inc.

Related Links

http://www.selectenergyservices.com