Select Water Solutions(US:WTTR)2023-02-22 21:31Part I Item 1. Business Select Energy Services is a leading U.S. provider of water-management and chemical solutions for the oil and gas industry, operating through Water Services, Water Infrastructure, and Oilfield Chemicals segments - Select Energy Services is a leading provider of water-management and chemical solutions to the U.S. oil and gas industry, operating across all major unconventional basins3638 Revenue Contribution by Segment (2022 vs. 2021) | Segment | 2022 Revenue Contribution (%) | 2021 Revenue Contribution (%) | | :--- | :--- | :--- | | Water Services | 58% | 52% | | Water Infrastructure | 19% | 19% | | Oilfield Chemicals | 23% | 28% | - The company has a strong position in the Permian Basin, which accounted for approximately 47% of its revenue in 202268 - Recent growth has been supported by seven business combinations, an asset acquisition, and a joint venture buyout, enhancing the company's market position and recycling solutions53 Description of Business Segments This section details the core operations and technological focus of the Water Services, Water Infrastructure, and Oilfield Chemicals segments - Water Services: Provides services for new well completions and ongoing production, including water transfer, flowback and well testing, fluids hauling, water containment, and accommodations. This segment utilizes proprietary technology like WaterONE™ and AquaView® for automation and monitoring889394 - Water Infrastructure: Develops and operates semi-permanent and permanent infrastructure for water sourcing, recycling, and disposal. This includes pipelines, recycling facilities, and saltwater disposal wells (SWDs) with a focus on reducing truck hauling and increasing water reuse102104113 - Oilfield Chemicals: Develops, manufactures, and provides a full suite of chemicals for hydraulic fracturing and well completions. The segment offers customized solutions through its FluidMatch™ service and operates in-basin manufacturing facilities to reduce transportation costs117118 Human Capital The company emphasizes employee safety, diversity, and had over 4,000 employees as of December 31, 2022 - As of December 31, 2022, the company had more than 4,000 employees62 - The company focuses on employee safety through comprehensive training, safety programs, and empowering personnel with stop-work authority (SWA)63 - Diversity initiatives are a focus, with over 45% of the workforce comprised of ethnic minorities and 12% being female63 Environmental and Occupational Safety and Health Matters Operations are subject to stringent environmental and safety regulations, including those for water disposal and climate change, posing compliance and cost risks - The company's operations are subject to stringent federal, state, and local environmental laws (e.g., RCRA, CWA, SDWA, CAA) and occupational safety regulations (OSHA), which can impose substantial liabilities and compliance costs130131 - Regulations concerning saltwater disposal wells and induced seismicity, particularly in Texas and Oklahoma, could lead to restrictions or shutdowns of disposal wells, impacting operations148149150 - Climate change regulations and initiatives, including the Inflation Reduction Act of 2022 (IRA 2022), pose risks by potentially increasing customer costs (e.g., methane fees) and accelerating the transition away from fossil fuels, which could reduce demand for the company's services160162164 Item 1A. Risk Factors The company faces significant risks from volatile oil and gas markets, operational challenges from acquisitions, stringent environmental regulations, and complex capital structure obligations - Business & Market Risks: Demand is directly tied to oil and gas capital spending, which is volatile. Inflation, rising interest rates, and potential recessions could increase costs and reduce customer spending. The company's concentration in the Permian Basin (47% of 2022 revenue) makes it vulnerable to regional issues195206216 - Regulatory & Compliance Risks: Laws related to hydraulic fracturing, water sourcing, and disposal-induced seismicity could increase costs and restrict customer operations. Climate change initiatives, like the IRA 2022, may impose new costs (e.g., methane fees) and accelerate the transition to renewable energy, reducing long-term demand270274214 - Acquisition & Integration Risks: Failure to successfully integrate recently acquired businesses, such as Breakwater, could prevent the realization of anticipated benefits and lead to unforeseen expenses and operational disruptions208209 - Capital Structure & Organizational Risks: The company is a holding company dependent on distributions from its subsidiary (SES Holdings) to pay taxes, dividends, and cover expenses. It is required to make potentially significant payments under Tax Receivable Agreements for certain tax benefits, which could be accelerated in a change of control319320323 Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None348 Item 2. Properties The company operates 154 properties, including leased offices and owned/leased facilities across its operating regions, as of December 31, 2022 Leased and Owned Properties by Segment (as of Dec 31, 2022) | Region | Water Services | Water Infrastructure | Oilfield Chemicals | Corporate & Other | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Leased | 58 | 20 | 3 | 4 | 85 | | Owned | 41 | 22 | 6 | — | 69 | | Total | 99 | 42 | 9 | 4 | 154 | Item 3. Legal Proceedings The company is not currently involved in any legal proceedings expected to materially adversely affect its financial position - The company states that no current legal proceedings are expected to have a material adverse effect on its financial position, results of operations, or cash flows352 Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable353 Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock trades on the NYSE under 'WTTR', initiated a quarterly dividend in 2022, and has an active share repurchase program - The company's Class A common stock is listed on the New York Stock Exchange (NYSE) under the ticker symbol "WTTR"355 - On September 7, 2022, the company initiated a quarterly dividend program, declaring a cash dividend of $0.05 per share of Class A common stock356 - The company has a share repurchase program of up to $25.0 million, with approximately $8.6 million remaining available for purchase as of December 31, 2022366 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue increased 81.5% to $1.4 billion in 2022, shifting from a net loss to a net income of $54.9 million, driven by demand, pricing, and acquisitions Key Financial Results (2022 vs. 2021) | Metric | 2022 | 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $1,387.4 M | $764.6 M | +81.5% | | Gross Profit | $160.8 M | $20.9 M | +670.6% | | Net Income (Loss) | $54.9 M | $(50.1) M | +209.5% | | Adjusted EBITDA | $194.8 M | $50.0 M | +289.8% | - The significant increase in revenue and profitability was primarily driven by higher demand for services, improved pricing, and incremental revenue from multiple acquisitions completed between July 2021 and December 2022411373 - Net cash provided by operating activities was $33.2 million in 2022, a $49.5 million improvement from the $16.2 million used in 2021, primarily due to higher net income, partially offset by increased working capital needs443 - As of December 31, 2022, the company had $7.3 million in cash and $206.1 million of available borrowing capacity under its Sustainability-Linked Credit Facility439 Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's market risk is primarily tied to volatile oil and gas commodity prices impacting customer spending, and interest rate risk on its variable-rate credit facility - The main market risk is the dependency on capital spending by oil and gas companies, which is influenced by volatile oil and gas prices464 - The company has interest rate risk associated with its Sustainability-Linked Credit Facility, as borrowings are based on variable index rates plus an applicable margin465467 Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2022, 2021, and 2020, along with the independent auditor's report - This section includes the consolidated financial statements and supplementary data, which begin on page F-1 of the report468 Notes to Consolidated Financial Statements Key notes detail significant acquisitions, revenue disaggregation by region, debt obligations, and income tax information including NOL carryforwards - Acquisitions (Note 3): The company completed several major acquisitions in 2022, including Breakwater ($105.3 million consideration), Cypress ($9.2 million), and Nuverra ($35.9 million), significantly expanding its water logistics, infrastructure, and disposal assets594602605 - Revenue (Note 5): Revenue is disaggregated by geographic region, with the Permian Basin being the largest, contributing $646.2 million (47%) of total revenue in 2022637 - Debt (Note 10): The company entered into a $270.0 million Sustainability-Linked Credit Facility in March 2022. As of Dec 31, 2022, $16.0 million was outstanding with an interest rate of 8.25%665678 - Income Taxes (Note 15): As of Dec 31, 2022, the company had approximately $886.3 million of U.S. federal net operating loss (NOL) carryforwards, though a significant portion ($410.4 million) is expected to expire unused due to Section 382 limitations740 Item 9A. Controls and Procedures Management and auditors concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, excluding a recent acquisition - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022471 - Management concluded that internal control over financial reporting was effective as of December 31, 2022. The independent auditor, Grant Thornton LLP, also issued an unqualified opinion on the effectiveness of internal control475481 - The evaluation of internal controls excluded the business of Breakwater Energy Services, LLC, acquired on November 1, 2022, as permitted by the SEC474 Part III Items 10-14 Information for Items 10 through 14 is incorporated by reference from the company's definitive proxy statement for the 2023 annual meeting of stockholders - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the registrant's definitive proxy statement for the 2023 annual meeting of stockholders493494495 Part IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including various agreements and certifications - This section provides a list of all financial statements and exhibits filed with the Form 10-K, including credit agreements, equity incentive plans, and various certifications499500503