0001558370-23-007856.txt : 20230503 0001558370-23-007856.hdr.sgml : 20230503 20230503163108 ACCESSION NUMBER: 0001558370-23-007856 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 86 CONFORMED PERIOD OF REPORT: 20230331 FILED AS OF DATE: 20230503 DATE AS OF CHANGE: 20230503 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Select Energy Services, Inc. CENTRAL INDEX KEY: 0001693256 STANDARD INDUSTRIAL CLASSIFICATION: OIL, GAS FIELD SERVICES, NBC [1389] IRS NUMBER: 814561945 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38066 FILM NUMBER: 23884570 BUSINESS ADDRESS: STREET 1: 1233 W LOOP SOUTH, SUITE 1400 CITY: HOUSTON STATE: TX ZIP: 77027 BUSINESS PHONE: (713) 235-9500 MAIL ADDRESS: STREET 1: 1233 W LOOP SOUTH, SUITE 1400 CITY: HOUSTON STATE: TX ZIP: 77027 10-Q 1 wttr-20230331x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to ________________

Commission File Number 001-38066

SELECT ENERGY SERVICES, INC.

(Exact name of registrant as specified in its charter)

Delaware

81-4561945

(State of incorporation)

(IRS Employer

Identification Number)

1233 W. Loop South, Suite 1400

Houston, TX

77027

(Address of principal executive offices)

(Zip Code)

(713) 235-9500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Class A common stock, par value $0.01 per share

WTTR

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.

Indicate by check mark whether the registrant is a shell company.   Yes      No  

As of May 2, 2023, the registrant had 105,563,415 shares of Class A common stock and 16,221,101 shares of Class B common stock outstanding.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (the “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact, included in this Quarterly Report regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “preliminary,” “forecast,” and similar expressions or variations are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” included in our most recent Annual Report on Form 10-K, in this Quarterly Report and those set forth from time to time in our other filings with the Securities and Exchange Commission (the “SEC”). These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.

Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:

global economic distress resulting from sustained Russia-Ukraine war and related economic sanctions, rising interest rates, and potential energy insecurity in Europe which may decrease demand for oil and demand for our services or contribute to volatility in the prices for oil and natural gas;
actions taken by the members of the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia (together with OPEC and other allied producing countries, “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 announced supply limitations;
actions taken by the Biden Administration or state governments, such as executive orders or new or expanded regulations, that may negatively impact the future production of oil and natural gas in the U.S. or our customers’ access to federal and state lands for oil and gas development operations, thereby reducing demand for our services in the affected areas;
the level of capital spending and access to capital markets by oil and gas companies in response to changes in commodity prices or reduced demand;
the ability to source certain raw materials and other critical components or manufactured products globally on a timely basis from economically advantaged sources;
the impact of disruptions in the bank and capital markets, including those resulting from the inability to access liquidity by banking and financial services firms;
the severity and duration of world health events, including the novel coronavirus (“COVID-19”) pandemic and its variants, and associated repercussions and operational challenges to supply and demand for oil and natural gas and the economy generally;
any new or additional measures required by national, state or local governments to combat COVID-19, such as a COVID-19 vaccine mandate, which if enacted, could reduce labor availability or add additional operational costs as we may experience constraints on our workforce and the workforce of our supply chain, which could have a negative impact on our operations;

3

the potential deterioration of our customers’ financial condition, including defaults resulting from actual or potential insolvencies;
the degree to which consolidation among our customers may affect spending on U.S. drilling and completions;
trends and volatility in oil and gas prices, and our ability to manage through such volatility;
the impact of current and future laws, rulings and governmental regulations, including those related to hydraulic fracturing, accessing water, disposing of wastewater, transferring produced water, interstate freshwater transfer, chemicals, carbon pricing, pipeline construction, taxation or emissions, leasing, permitting or drilling on federal lands and various other environmental matters;
regional impacts to our business, including our key infrastructure assets within the Bakken, the Northern Delaware and Midland Basin portions of the Permian Basin, and the Haynesville;
capacity constraints on regional oil, natural gas and water gathering, processing and pipeline systems that result in a slowdown or delay in drilling and completion activity, and thus a decrease in the demand for our services in our core markets;
regulatory and related policy actions intended by federal, state and/or local governments to reduce fossil fuel use and associated carbon emissions, or to drive the substitution of renewable forms of energy for oil and gas, may over time reduce demand for oil and gas and therefore the demand for our services, including as a result of the Inflation Reduction Act of 2022 (“IRA 2022”) or otherwise;
changes in global political or economic conditions, generally, and in the markets we serve, including the rate of inflation and potential economic recession;
growing demand for electric vehicles that may result in reduced demand for gasoline and therefore the demand for our services;
our ability to hire and retain key management and employees, including skilled labor;
our access to capital to fund expansions, acquisitions and our working capital needs and our ability to obtain debt or equity financing on satisfactory terms, including as a result of recent increases in cost of capital resulting from Federal Reserve policies and otherwise;
our health, safety and environmental performance;
the impact of competition on our operations;
the degree to which our E&P customers may elect to operate their water-management services in-house rather than source these services from companies like us;
our level of indebtedness and our ability to comply with covenants contained in our Sustainability-Linked Credit Facility (as defined herein) or future debt instruments;
delays or restrictions in obtaining permits by us or our customers;
constraints in supply or availability of equipment used in our business;

4

the impact of advances or changes in well-completion technologies or practices that result in reduced demand for our services, either on a volumetric or time basis;
acts of terrorism, war or political or civil unrest in the U.S. or elsewhere, such as the Russia-Ukraine war and/or political instability in the Middle East;
accidents, weather, natural disasters or other events affecting our business; and
the other risks identified in our most recent Annual Report on Form 10-K and under the headings “Part I—Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II—Item 1A. Risk Factors” in this Quarterly Report.

These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could have material adverse effects on our future results. Our future results will depend upon various other risks and uncertainties, including those described under the heading “Part I―Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K and under the heading “Part II―Item 1A. Risk Factors” in this Quarterly Report. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. All forward-looking statements attributable to us are qualified in their entirety by this cautionary note.

5

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SELECT ENERGY SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

March 31, 2023

December 31, 2022

    

(unaudited)

    

Assets

Current assets

 

Cash and cash equivalents

$

6,028

$

7,322

Accounts receivable trade, net of allowance for credit losses of $6,009 and $4,918, respectively

 

492,613

 

429,983

Accounts receivable, related parties

 

607

 

5,087

Inventories

 

40,846

 

41,164

Prepaid expenses and other current assets

 

39,774

 

34,380

Total current assets

 

579,868

 

517,936

Property and equipment

 

1,112,899

 

1,084,005

Accumulated depreciation

 

(597,861)

 

(584,451)

Total property and equipment, net

 

515,038

 

499,554

Right-of-use assets, net

44,562

47,662

Other intangible assets, net

 

125,799

 

138,800

Other long-term assets, net

 

19,985

 

18,901

Total assets

$

1,285,252

$

1,222,853

Liabilities and Equity

 

 

  

Current liabilities

 

 

  

Accounts payable

$

77,585

$

61,539

Accrued accounts payable

75,625

67,462

Accounts payable and accrued expenses, related parties

 

4,469

 

3,305

Accrued salaries and benefits

 

15,431

 

28,686

Accrued insurance

 

23,503

 

26,180

Sales tax payable

4,036

3,056

Accrued expenses and other current liabilities

 

19,783

 

23,292

Current operating lease liabilities

16,898

17,751

Current portion of finance lease obligations

 

19

 

19

Total current liabilities

 

237,349

 

231,290

Long-term operating lease liabilities

 

43,372

 

46,388

Long-term debt

 

75,500

 

16,000

Other long-term liabilities

 

45,696

 

45,447

Total liabilities

 

401,917

 

339,125

Commitments and contingencies (Note 9)

 

 

  

Class A common stock, $0.01 par value; 350,000,000 shares authorized and 108,981,323 shares issued and outstanding as of March 31, 2023; 350,000,000 shares authorized and 109,389,528 shares issued and outstanding as of December 31, 2022

 

1,090

 

1,094

Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; no shares issued or outstanding as of March 31, 2023 and December 31, 2022

 

 

Class B common stock, $0.01 par value; 150,000,000 shares authorized and 16,221,101 shares issued and outstanding as of March 31, 2023 and December 31, 2022

 

162

 

162

Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares issued and outstanding as of March 31, 2023 and December 31, 2022

 

 

Additional paid-in capital

 

1,063,149

 

1,075,915

Accumulated deficit

 

(298,847)

 

(311,194)

Total stockholders’ equity

 

765,554

 

765,977

Noncontrolling interests

 

117,781

 

117,751

Total equity

 

883,335

 

883,728

Total liabilities and equity

$

1,285,252

$

1,222,853

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

6

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share data)

Three months ended March 31, 

    

2023

    

2022

    

Revenue

 

  

 

  

Water Services

$

228,597

$

163,606

Water Infrastructure

101,547

58,554

Oilfield Chemicals

 

86,448

 

72,609

Total revenue

 

416,592

 

294,769

Costs of revenue

 

  

 

  

Water Services

181,699

137,046

Water Infrastructure

72,576

44,378

Oilfield Chemicals

 

69,709

62,163

Depreciation and amortization

 

32,943

26,500

Total costs of revenue

 

356,927

 

270,087

Gross profit

 

59,665

 

24,682

Operating expenses

 

  

 

  

Selling, general and administrative

 

35,829

28,315

Depreciation and amortization

 

595

567

Impairments and abandonments

 

11,166

Lease abandonment costs

 

76

91

Total operating expenses

 

47,666

 

28,973

Income (loss) from operations

 

11,999

 

(4,291)

Other income (expense)

 

  

 

  

Gain on sales of property and equipment and divestitures, net

2,911

1,653

Interest expense, net

 

(1,483)

(720)

Foreign currency (loss) gain, net

(4)

3

Bargain purchase gain

11,434

Other

 

846

249

Income before income tax expense

 

14,269

 

8,328

Income tax expense

 

(198)

(214)

Equity in losses of unconsolidated entities

(366)

(129)

Net income

 

13,705

 

7,985

Less: net income attributable to noncontrolling interests

 

(1,358)

(1,183)

Net income attributable to Select Energy Services, Inc.

$

12,347

$

6,802

Net income per share attributable to common stockholders (Note 15):

 

Class A—Basic

$

0.12

$

0.07

Class B—Basic

$

$

Net income per share attributable to common stockholders (Note 15):

 

Class A—Diluted

$

0.12

$

0.07

Class B—Diluted

$

$

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

7

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)

Three months ended March 31, 

    

2023

    

2022

    

Net income

$

13,705

$

7,985

Comprehensive income

 

13,705

 

7,985

Less: comprehensive income attributable to noncontrolling interests

 

(1,358)

 

(1,183)

Comprehensive income attributable to Select Energy Services, Inc.

$

12,347

$

6,802

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

8

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the three months ended March 31, 2023 and 2022

(unaudited)

(in thousands, except share data)

Class A

Class B

Stockholders

Stockholders

Class A

Class B

Additional

Total

Common

Common

Paid-In

Accumulated

Stockholders’

Noncontrolling

   

Shares

   

Stock

   

Shares

   

Stock

   

Capital

   

Deficit

   

Equity

   

Interests

   

Total

Balance as of December 31, 2022

 

109,389,528

$

1,094

 

16,221,101

$

162

 

$

1,075,915

$

(311,194)

$

765,977

$

117,751

$

883,728

Equity-based compensation

2,581

2,581

383

2,964

Issuance of restricted shares

 

1,275,859

 

13

 

 

 

 

1,155

 

 

1,168

 

(1,168)

 

 

Repurchase of common stock

(1,657,203)

(17)

(11,019)

(11,036)

101

(10,935)

Restricted shares forfeited

(26,861)

(25)

(25)

25

Contributions from noncontrolling interests

153

153

NCI income tax adjustment

11

11

(11)

Dividend and distribution declared:

Class A common stock ($0.05 per share)

(5,258)

(5,258)

(5,258)

Unvested restricted stock ($0.05 per share)

(211)

(211)

(211)

Class B common stock ($0.05 per share)

(811)

(811)

Net income

 

 

 

 

 

 

 

12,347

 

12,347

 

1,358

 

 

13,705

Balance as of March 31, 2023

 

108,981,323

$

1,090

 

16,221,101

$

162

 

$

1,063,149

$

(298,847)

$

765,554

$

117,781

$

883,335

Class A

Class B

Stockholders

Stockholders

Class A

Class B

Additional

Total

Common

Common

Paid-In

Accumulated

Stockholders’

Noncontrolling

   

Shares

   

Stock

   

Shares

   

Stock

   

Capital

   

Deficit

   

Equity

   

Interests

   

Total

Balance as of December 31, 2021

 

94,172,920

$

942

 

16,221,101

$

162

 

$

950,464

$

(359,472)

$

592,096

$

103,078

$

695,174

ESPP shares issued

1,549

11

11

1

12

Equity-based compensation

2,805

2,805

470

3,275

Issuance of restricted shares

2,337,795

23

2,049

2,072

(2,072)

Stock options exercised

70,000

1

583

584

24

608

Issuance of shares for acquisitions

4,203,323

42

34,456

34,498

1,356

35,854

Repurchase of common stock

(2,660,328)

(27)

(19,080)

(19,107)

(409)

(19,516)

Restricted shares forfeited

(14,140)

(13)

(13)

13

NCI income tax adjustment

7

7

(7)

Net income

 

 

 

 

 

 

 

6,802

 

6,802

 

1,183

 

 

7,985

Balance as of March 31, 2022

 

98,111,119

$

981

 

16,221,101

$

162

 

$

971,282

$

(352,670)

$

619,755

$

103,637

$

723,392

The accompanying notes to consolidated financial statements are an integral part of these financial statements

9

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

Three months ended March 31, 

    

2023

    

2022

Cash flows from operating activities

 

Net income

$

13,705

$

7,985

Adjustments to reconcile net income to net cash used in operating activities

 

 

Depreciation and amortization

 

33,538

 

27,067

Gain on disposal of property and equipment and divestitures

 

(2,911)

 

(1,653)

Equity in losses of unconsolidated entities

366

129

Bad debt expense

 

1,975

 

571

Amortization of debt issuance costs

 

122

 

294

Inventory adjustments

75

Equity-based compensation

 

2,964

 

3,275

Impairments and abandonments

 

11,166

 

Bargain purchase gain

 

 

(11,434)

Unrealized loss on short-term investment

40

Other operating items, net

 

(442)

 

99

Changes in operating assets and liabilities

 

 

Accounts receivable

 

(64,922)

 

(46,622)

Prepaid expenses and other assets

 

(5,431)

 

4,554

Accounts payable and accrued liabilities

 

(8,221)

 

(2,855)

Net cash used in operating activities

 

(18,016)

 

(18,550)

Cash flows from investing activities

 

 

Purchase of property and equipment

 

(27,885)

 

(15,463)

Purchase of equity-method investments

 

(3,467)

Collection of note receivable

 

184

Distribution from cost method investment

20

Acquisitions, net of cash and restricted cash received

 

(9,418)

 

6,941

Proceeds received from sales of property and equipment

 

6,724

 

12,123

Other

 

(429)

Net cash used in investing activities

 

(30,579)

 

(91)

Cash flows from financing activities

 

 

Borrowings from revolving line of credit

76,750

20,000

Payments on revolving line of credit

 

(17,250)

 

(20,000)

Payments on current and long-term debt

 

 

(18,780)

Payments of finance lease obligations

(5)

(61)

Payment of debt issuance costs

 

 

(2,031)

Dividends and distributions paid

 

(6,206)

 

Proceeds from share issuance

12

Contributions from noncontrolling interests

 

4,950

 

Repurchase of common stock

 

(10,935)

 

(18,908)

Net cash provided by (used in) financing activities

 

47,304

 

(39,768)

Effect of exchange rate changes on cash

 

(3)

 

7

Net decrease in cash, cash equivalents and restricted cash

 

(1,294)

 

(58,402)

Cash, cash equivalents and restricted cash, beginning of period

 

7,322

 

85,801

Cash, cash equivalents and restricted cash, end of period

$

6,028

$

27,399

Supplemental cash flow disclosure:

 

 

Cash paid for interest

$

1,119

$

402

Cash refunds received for income taxes, net

$

$

(721)

Supplemental disclosure of noncash investing activities:

 

 

Issuance of shares for acquisitions

$

$

35,854

Capital expenditures included in accounts payable and accrued liabilities

$

31,398

$

14,922

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

10

SELECT ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1—BUSINESS AND BASIS OF PRESENTATION

Description of the business: Select Energy Services, Inc. (“we,” “Select Inc.” or the “Company”) was incorporated as a Delaware corporation on November 21, 2016. The Company is a holding company whose sole material asset consists of common units (“SES Holdings LLC Units”) in SES Holdings, LLC (“SES Holdings”). On February 21, 2023, the Company announced its intent to rebrand itself under the new name Select Water Solutions, Inc. during the first half of 2023.

We are a leading provider of sustainable water-management and chemical solutions to the energy industry in the 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.

Class A and Class B common stock:  As of March 31, 2023, the Company had both Class A and Class B common shares issued and outstanding. Holders of shares of our Class A common stock, par value $0.01 per share (“Class A common stock”) and Class B common stock, par value $0.01 per share (“Class B common stock”) are entitled to one vote per share and vote together as a single class on all matters presented to our stockholders for their vote or approval.

Exchange rights: Under the Eighth Amended and Restated Limited Liability Company Agreement of SES Holdings (the “SES Holdings LLC Agreement”), SES Legacy Holdings LLC (“Legacy Owner Holdco”) and its permitted transferees have the right (an “Exchange Right”) to cause SES Holdings to acquire all or a portion of its SES Holdings LLC Units for, at SES Holdings’ election, (i) shares of Class A common stock at an exchange ratio of one share of Class A common stock for each SES Holdings LLC Unit exchanged, subject to conversion rate adjustments for stock splits, stock dividends, reclassification and other similar transactions or (ii) cash in an amount equal to the Cash Election Value (as defined within the SES Holdings LLC Agreement) of such Class A common stock. Alternatively, upon the exercise of any Exchange Right, Select Inc. has the right (the “Call Right”) to acquire the tendered SES Holdings LLC Units from the exchanging unitholder for, at its election, (i) the number of shares of Class A common stock the exchanging unitholder would have received under the Exchange Right or (ii) cash in an amount equal to the Cash Election Value of such Class A common stock. In connection with any exchange of SES Holdings LLC Units pursuant to an Exchange Right or Call Right, the corresponding number of shares of Class B common stock will be cancelled.

Basis of presentation: The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”) and pursuant to the rules and regulations of the SEC. These unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with GAAP.

This Quarterly Report relates to the three months ended March 31, 2023 (the “Current Quarter”) and the three months ended March 31, 2022 (the “Prior Quarter”). The Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”), filed with the SEC on February 22, 2023, includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Quarterly Report. All material adjustments (consisting solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. The results for the Current Quarter may not be indicative of the results to be expected for the full year.

11

The unaudited interim consolidated financial statements include the accounts of the Company and all of its majority-owned or controlled subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

For investments in subsidiaries that are not wholly owned, but where the Company exercises control, the equity held by the minority owners and their portion of net income or loss are reflected as noncontrolling interests. Investments in entities in which the Company exercises significant influence over operating and financial policies are accounted for using the equity-method, and investments in entities for which the Company does not have significant control or influence are accounted for using the cost method or other appropriate basis as applicable. As of March 31, 2023, the Company had three equity-method investments. The Company’s investments are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. When circumstances indicate that the fair value of its investment is less than its carrying value and the reduction in value is other than temporary, the reduction in value is recognized in earnings. Our investments in unconsolidated entities are summarized below and are included in the assets of our Water Services segment:

Year

As of March 31, 

As of December 31,

Type of Investment

attained

Accounting method

Balance Sheet Location

2023

 

2022

(in thousands)

21% minority interest

2020

Equity-method

Other long-term assets, net

4,484

4,686

40% minority interest

2021

Equity-method

Other long-term assets, net

4,732

4,985

48% minority interest

2021

Equity-method

Other long-term assets, net

3,535

3,446

Dividends: On both January 27 and April 25, 2023, our board of directors declared a cash dividend of $0.05 per share of Class A common stock. A distribution of $0.05 per unit was also approved for those holders of units of SES Holdings, LLC, who also hold an equal number of shares of Class B common stock of the Company, which was subject to the same payment and record dates. During the Current Quarter, the Company paid $5.3 million in dividends accounted for as a reduction to additional paid-in capital, $0.8 million of distributions accounted for as a reduction to noncontrolling interests and $0.1 million as a reduction to accrued expenses and other current liabilities. As of March 31, 2023, the Company had a $0.3 million dividends payable balance included in accrued expenses and other current liabilities and other long-term liabilities in connection with unvested restricted stock awards. All future dividend payments are subject to quarterly review and approval by the board of directors.

Segment reporting: The Company has three reportable segments. Reportable segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company’s current reportable segments are Water Services, Water Infrastructure, and Oilfield Chemicals. See “Note 16—Segment Information” for additional information.

The Water Services segment consists of the Company’s services businesses, including water transfer, flowback and well testing, fluids hauling, water monitoring, water containment and water network automation, primarily serving exploration and production (“E&P”) companies. Additionally, this segment includes the operations of our accommodations and rentals business. 

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.

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 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.

12

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies: The Company’s significant accounting policies are disclosed in Note 2 of the consolidated financial statements for the year ended December 31, 2022, included in the 2022 Form 10-K.

Use of estimates: The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

On an ongoing basis, the Company evaluates its estimates, including those related to the recoverability of long-lived assets and intangibles, useful lives used in depreciation and amortization, uncollectible accounts receivable, inventory reserve, income taxes, self-insurance liabilities, share-based compensation, contingent liabilities, lease-related reasonably certain option exercise assessments, and the incremental borrowing rate for leases. The Company bases its estimates on historical and other pertinent information that are believed to be reasonable under the circumstances. The accounting estimates used in the preparation of the consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes.

Allowance for credit losses: The Company’s allowance for credit losses relates to trade accounts receivable. The Company treats trade accounts receivable as one portfolio and records an initial allowance calculated as a percentage of revenue recognized based on a combination of historical information and future expectations. Additionally, the Company adjusts this allowance based on specific information in connection with aged receivables. Historically, most bad debt has been incurred when a customer’s financial condition significantly deteriorates, which in some cases leads to bankruptcy. Market volatility is highly uncertain and, as such, the impact on expected losses is subject to significant judgment and may cause variability in the Company’s allowance for credit losses in future periods.

The change in the allowance for credit losses is as follows:

Three months ended March 31, 2023

(in thousands)

Balance as of December 31, 2022

$

4,918

Increase to allowance based on a percentage of revenue

 

835

Adjustment based on aged receivable analysis

 

1,140

Charge-offs

(886)

Recoveries

2

Balance as of March 31, 2023

$

6,009

13

Asset retirement obligations:  The Company’s asset retirement obligations (“ARO”) relate to disposal facilities with obligations for plugging wells, removing surface equipment, and returning land to its pre-drilling condition. The following table describes the changes to the Company’s ARO liability for the Current Quarter:

    

Three months ended March 31, 2023

 

(in thousands)

Balance as of December 31, 2022

 

$

43,576

Accretion expense, included in depreciation and amortization expense

 

256

Acquired AROs

 

975

Divested

(222)

Payments

(1,602)

Balance as of March 31, 2023

 

$

42,983

Short-term ARO liability

2,725

Long-term ARO liability

40,258

Balance as of March 31, 2023

$

42,983

We review the adequacy of our ARO liabilities whenever indicators suggest that the estimated cash flows underlying the liabilities have changed. The Company’s ARO liabilities are included in accrued expenses and other current liabilities and other long-term liabilities in the accompanying consolidated balance sheets.

Lessor Income: The Company is a lessor for a nominal number of owned facilities and also recognizes income related to multiple facility subleases that are accounted for as follows:

Three months ended March 31, 

    

2023

    

2022

(in thousands)

Category

Classification

Lessor income

Costs of revenue

$

77

$

116

Sublease income

Lease abandonment costs and Costs of revenue

384

346

The Company also generates short-term equipment rental revenue. See “Note 4—Revenue” for a discussion of revenue recognition for the accommodations and rentals business.

NOTE 3—ACQUISITIONS

Business combinations

Asset Acquisitions

During the Current Quarter, Select acquired certain assets, revenue-producing contracts and associated liabilities in the Midland Basin from multiple entities for $9.4 million inclusive of $0.2 million of acquisition-related costs. The allocation of the purchase price for these assets was a combined $7.5 million in property and equipment, $1.0 million in water inventory, $1.9 million in customer relationships and $1.0 million in asset retirement obligations and other liabilities. Many of the assets acquired are adjacent to the Big Spring Recycling System (“BSRS”), with connectivity into BSRS providing future revenue and cost synergies. 

14

Breakwater Acquisition

On November 1, 2022, the Company completed the acquisition of Breakwater Energy Services, LLC. (“Breakwater”) in a stock-for-stock transaction for total consideration of $105.3 million based on the closing price of the Company’s shares of Class A common stock on October 31, 2022 (the “Breakwater Acquisition”). The consideration transferred consisted of 9,181,144 shares of Class A common stock, $10.5 million of debt that was paid off at closing as part of consideration exchanged, $3.8 million in change-of-control payments and $2.4 million in seller transaction costs. The acquisition strengthened Select’s geographic footprint with a unique set of water logistics and infrastructure assets, particularly in the Permian region.

The Breakwater Acquisition was accounted for as a business combination under the acquisition method of accounting. When determining the fair values of assets acquired and liabilities assumed, management made estimates, judgments and assumptions. The Company has engaged third-party valuation experts to assist in the purchase price allocation. These estimates, judgments and assumptions and valuation of the property and equipment acquired, intangible assets, current assets, current liabilities and long-term liabilities have not been finalized as of March 31, 2023. The business combination accounting is preliminary due to the continuing efforts to validate the working capital acquired, the existence and condition of the property and equipment acquired as well as the value assigned to the intangible assets. The assets acquired and liabilities assumed are included in the Company’s Water Services and Water Infrastructure segments. The Company incurred $1.4 million of transaction-related costs related to this acquisition in the Current Quarter and such costs are included in selling, general and administrative within the consolidated statements of operations.

The following table summarizes the consideration transferred and the estimated fair value of identified assets acquired and liabilities assumed as of the date of acquisition:

Preliminary purchase price allocation

As Reported as of December 31, 2022

Current Quarter Adjustment

Amount

Consideration transferred

(in thousands)

Class A common stock (9,181,144 shares)(1)

$

88,598

$

(410)

$

88,188

Cash paid

16,701

16,701

Total consideration transferred

 

105,299

(410)

104,889

Less: identifiable assets acquired and liabilities assumed

 

Working capital

 

22,633

(410)

22,223

Property and equipment

 

78,912

78,912

Right-of-use assets

 

180

180

Customer relationships

35,558

35,558

Other long-term assets

120

120

Long-term debt

(1,979)

(1,979)

Long-term lease liabilities

(125)

(125)

Noncontrolling interest(2)

(30,000)