Select Energy Services, Inc.
Q4 2020 Earnings Call Transcript

Published: 24 Feb 2021

[Operator:]

Greetings, and welcome to Select Energy Services 2020 Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to Chris George, VP, Investor Relations and Treasurer.

[Chris George:]

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Select Energy Services conference call and webcast to review our financial and operational results for the fourth quarter of 2020. With me today are John Schmitz, our Chairman and Chief Executive Officer; and Nick Swyka, Senior Vice President and Chief Financial Officer.

[John Schmitz:]

Thanks, Chris. Good morning, and thanks, everybody, for joining today. I am pleased to be discussing Select with you again as the CEO. As many of you are aware, I founded the company nearly 15 years ago, and I'm excited to be back on the job full time. Since stepping back into the CEO role, I have visited many of the regions in person, and I will meet all of them very soon. I have had a lot of meetings with customers and employees, discussing our company and ongoing business. These meetings made a few things very clear to me. First, we have a strong leading position in all things around water and chemical solutions and are very focused on improving and growing this position through value-add solutions for our customers. Second, our integrated solutions, technology and research and development continue to strengthen our position and advance the water market towards a sustainable reuse life cycle. And third, we have a deep customer relationships across our operational footprint covering all active basins. This puts Select in an excellent position to expand and execute our integrated water and chemical solutions in this recovery and changing market.

[Nick Swyka:]

Thank you, John, and good morning, everyone. The fourth quarter marked the continued progression of the monthly improvements we've seen since June and to return to solidly positive adjusted EBITDA territory. Adjusted EBITDA of $10.2 million finished just above our previously forecast range of $8 million to $10 million provided in our press release dated February 1, while revenues of $133 million and net loss of $21.2 million finished within the ranges provided. Q4 incremental margins were around 40% or more, both on a consolidated basis and across each segment. While water services and chemicals saw revenue grow along with market activity, the biggest driver was the water infrastructure segment with revenue growing 125% and gross margins getting back above 30% for the first time since the third quarter of 2018.

[John Schmitz:]

Thanks, Nick. Before we talk about where we can take our company, let's make sure we understand where we are today with our base business. 2020 was a tough year for the oil and gas space. We all know that. But with that said, Select has rightsized and will continue to focus on cost out or doing more with less. We're always thinking about operational leverage. Select is a leader in sustainable water and chemical solutions for the oilfield, and we are fully focused on finding synergies between these water and chemical positions to bring value-add solutions to our customer base and capture market share, both in number of jobs, but also in dollar capture per job. This focus is what will allow Select to get back to run rates and profitability that we had in the past. It might be a smaller market, but we're going to have more of it. Select is capital-, asset-light business. We built it that way, and it has performed well to generate free cash flow. We have no major deferral maintenance issues unlike so many others out there with challenged balance sheets. This asset base and our service skills are flexible and do not care if customers are developing oil or gas. Also it's largely mobile on wheels, meaning we will go to where the activity is. We feel strongly that these assets and skills can and will be part of the energy transitions for our current customers and new customers alike. Looking forward, our growth path is focused on advancing our strategy as a sustainable water and chemical solutions company through three primary ways. First, we will continue to focus on growing and improving our base business that is already in place to create value for our customers and profitable revenue for us through advancing our integrated services, technology and experience to outcomes that are positive for ESG and energy transition strategies. Second, we will use our extensive water and chemical expertise to expand our footprint through the energy value chain and into industrial applications. Third, we will pursue strategic and accretive M&A in a prudent and disciplined way.

[Operator:]

Our first question comes from Sean Meakim with JPMorgan. Please go ahead.

[Sean Meakim:]

So I want to start with a little bit of context in the fourth quarter and really how it helps us think about the infrastructure business going forward. So I was a little bit surprised to see the magnitude of the improvement in volumes there. I found it's been a little bit a difficult business to model, but there's obviously been a lot of external factors the last couple of years that have influenced that. So how should we think about the capacity for that business today relative to what utilization looked like, and maybe we could distinguish between the Bakken versus the Delaware, just what that delta looked like over the course the fourth quarter? How that should influence our expectations for '21 and beyond in terms of what the existing infrastructure, what can the business do today versus what is it doing?

[Nick Swyka:]

Sure, Sean. So as you know, the second and third quarter had very low demand for completions and very few frac crews. So the fourth quarter really represented an upturn in that activity level, but you saw it outsized in our business due to the locations of our pipeline in the real core Tier 1 acreage. And so our pipelines and the related logistics services of those pipelines were the major driver of the gain there. We do expect that performance to continue, especially in a macro environment that continues to improve. Second quarter typically is a little weaker in the Bakken. You see the breakup season there and typically, operators slow down a little bit. So second quarter and adjacent months, probably you'll see less volumes on our Bakken pipeline system. But the Permian continues to go strong, absent the weather issues of the past week. We have both the anchor customer there and other big customers that are increasing their volumes. And so that should continue to drive results going forward here.

[Sean Meakim:]

And then in terms of these new revenue opportunities you're pursuing, and you mentioned an industrial customer becoming a top 10 contributor to revenue last year. Clearly, there's a lot of questions for us here to understand what those opportunities look like, but I'll just start that dialogue here. So can you just talk about how that transpired, that specific customer as an example? In other words, I didn't quite catch, was that part of the chemicals business? If you're providing water sourcing, how does that engagement shape compared to your traditional upstream services? I'd like to understand a little bit more about how that specific example transpired and how that can help us understand better these less traditional opportunities that you're pursuing.

[John Schmitz:]

Sure, Sean. I'll take that one. No, it wasn't a chemical application. It was a water synergy, and we participated in the ability to bring value to an industrial paper mill plant in the manner that we managed their water forum. So we performed various things that we do every day in the oilfield, whether it's movement of water, containment of water. All the various things that we do every day, we did that in a meaningful way for an outside oil and gas industry for it. And how we got it is because we actually had the ability with equipment, the skill set, the know-how to be able to step into that situation and bring that value to them. So that's how we landed the customer, if you will.

[Sean Meakim:]

And so just to clarify. So I mean, we're using traditional lay flat hose and where a lot of your operations looks a lot like your existing business, but you're just delivering it to a different type of customer.

[John Schmitz:]

That is correct. We, first of all, brought various skill sets and the pieces of equipment that we use every day in the oil and gas industry in a manner that brought the solution to the customer. But yes, it was centrificals, lay flat, storage, movement devices, monitoring devices.

[Nick Swyka:]

Really, the treatment and logistics piece, it's applicable throughout a number of industries. And so paper is one of those and -- but there are certainly others, and we can use that skill sets to develop and have more of these going forward here.

[Sean Meakim:]

And last piece of clarification for me. Was it -- was geographically -- is the customer in the geographic region of where your -- most of your upstream oil and gas operations are or somewhere outside?

[John Schmitz:]

That one was in an area there is oil and gas activity, and we do have a footprint there, and we're active in the oil and gas space. It fit in the sense of logistics as well as our ability in the treatment side of how you treat water, how you move water, how you contain it, all the various things that we do every day. But yes, it was in an area that we already had established operations.

[Operator:]

Our next question comes from Tom Curran with B. Riley. Please go ahead.

[Tom Curran:]

John, when it comes to your vision for what the ideal version of integration between water solutions and chemicals looks like, what conceptually should the next phase entail? And what should be the specific value creation or synergies associated with that next stage of better optimized integration?

[John Schmitz:]

So Tom, thanks for joining in the question. The reality is, we have a base business today that has a very large relationship between water quality and the chemistry that's applied to that. So if you think of this today, if it's water in a pit that potentially will be used for a frac job, that water is a certain type of water, and it's going to have chemicals applied to it to make it the right piece of water to get ready to frac with. Then you move into the actual frac phase where you're adding chemicals for the frac job itself going downhole into that water. We logically participate there. Then you get on the back side after the frac job and you think about the drill out or the completion cycle of it. So the chemistry that's used in the fluids or the water that is used during the drill out phase to be able to efficiently and effectively complete the well. We participate in that space. And the last piece where we participate, Tom, is in the produced water treatment for reuse. That's a very important piece for us because that is potentially a source water and a value-add that we get. So the biggest thing is our base business Phase I. So how can we bring together the effects of what we do every day, but we didn't really have them linked up together, either in the pretreatment of water getting ready for a frac, the chemicals in the water used to frac, the chemicals in the water used to complete. And then how can we repurpose this water in the produced side of the world to be able to make it where we can frac with it again on it. That's the synergy, first step, Tom.

[Tom Curran:]

So returning to and more fully realizing the original strategic rationale behind the Rockwater Energy Solutions acquisition.

[John Schmitz:]

That is correct and to bring that together and couple them. And actually if you really think about it, Tom, it's really important what the water looks like, what type it is and that it stays consistent. You don't want that water changing. And then matching the chemistry to that stabilized water in its quality to both drive cost to the job because if that water is not stable, you could be applying too much chemical or not enough chemical, and you can either affect both the cost of the job as well as the effectiveness of the job, the results of the job. So bringing that together to make sure that we can bring value and couple it together is a really big piece of the first step of our base business, Tom.

[Tom Curran:]

Great. And then turning to the Industrial Solutions group and the opportunities set there. Two-part question. First, John, did this industrial paper mill project, did it end up using or could it lead to a reactivation of the idle pipeline that you have in the Haynesville? And whether it's this specific project or just the industrial opportunity set more broadly going forward, could it lead to a reactivation of either that idle pipeline Haynesville or the one in the SCOOP/STACK, is the first part of that question? And then the second is turning to the M&A effort. Would you be open to and are you currently evaluating prospects that would expand the Industrial Solutions group?

[John Schmitz:]

Yes. First of all, I would say that we're fairly early. We believe that the reality of the synergy is there. We believe our skill sets, our people, our knowledge base really will fit into the industrial space outside of the oil and gas business because of the same dynamics that what we do in the oil and gas space exists there. But to your question about whether that idle pipeline or any idle pipeline in the company, it was not part of that paper mill solution that we brought to the customer or got hired to do. We do believe, whether it's our water sources or our pipeline facilities, whether they're idle or active, we believe they absolutely could be part of a value-add industrial solution outside of the oil and gas, Tom. We fully believe that. Along with all our skill sets and assets and knowledge base and ability to match chemistry, but our sources and pipelines could be part of that, too, Tom.

[Operator:]

Thank you. I would like to turn the floor over to management for final comments.

[John Schmitz:]

Sure. Just thank everybody for joining the call. And again, we're looking forward to what we're able to do with this company, both with the base business as well as being able to use our skills assets people to enter other places outside of the oil and gas industry as well. So thank you all.

[Operator:]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.