Q4 2020 Select Energy Services Inc Earnings Call
Greetings and welcome to select the select energy services Twenty-twenty 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. If anyone should require operator assistance during the conference. Please press star.
Sorry zero on your telephone keypad as a reminder, this conference is being recorded I would now let's turn the conference over to Chris George VP Investor Relations and Treasurer.
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 Smith, our chairman and Chief Executive Officer, and Nick <unk>, Senior Vice President and Chief Financial Officer.
Before I turn the call over I have a few housekeeping items to cover a replay of today's call will be available by webcast and accessible from our website at select energy Dot com.
There will also be a recorded telephonic replay available until March 10, 2021. The access information for this replay was also included in yesterday's earnings release.
Please note that the information reported on this call speaks only as of today February 24, 2021, and therefore time sensitive information may no longer be accurate as of the time on the replay listening or transcript reading.
In addition, the comments made by management during the conference call May contain forward looking statements within the meaning of the United States Federal Securities laws.
These forward looking statements reflect the current views of select management, however, various risks uncertainties and contingencies could cause our actual results performance or achievements to differ materially from those expressed in the statements made by management.
The listener is encouraged to read our annual report on form 10-K for the year ended December 31, 2019, our subsequent quarterly reports on form 10-Q, and our current reports on form 8-K as well as our annual report on form 10-K for the year ended December 31, 2020, which we expect to file this week to understand those risks uncertainties and contingent.
Ts.
Also please refer to our fourth quarter earnings announcement released yesterday for reconciliations of non-GAAP financial measures.
With that I'd like to turn the call over to our founder Chairman and CEO John Schmitz.
Thanks, Chris Good morning.
And thanks, everybody for joining today.
I am pleased to be discussing select with you again.
On the CEO.
As many of you are aware I founded the company nearly 15 years ago and I am 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 make 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 its sustainable reuse lifecycle.
And third we have a deep customer relationships across our operational footprint covering all active basins. This put select and excellent position to expand and execute our integrated water and chemical solutions in this recovery and changing market.
To advance and capture share we have integrated our sales team focused our marketing efforts and reorganized our operational execution to drive cross selling and most importantly provide real value on water and chemical solutions to our customers.
These are what drive the near term growth of our existing business in the oil and gas space.
We are also focused on what possibilities for the long term future holds.
With our knowledge and know how of how to capture the leading water and chemical solutions position. We believe we can explain expand this into new areas of energy transition and the industries outside the oil and gas.
As we all know water is vital to the health economy, and social well being of our communities that we all work and live in select is focused directly on developing sustainable water solutions with a commitment to conserve and reuse.
We have a team inside select that works at this every day developing innovative water treatment solutions that we can make an unusable water source that is in the right place logistically and turn that into a usable source, which is where the value add is.
We then couple that non water quality to the right chemistry to get the best results for our customers and communities alike.
If you step back and look at it our customers have to manage around 20 billion barrels of produced water. A year. We are focused on that volume and the cost of operations to bring effective solutions to reduce cost repurposed to reuse and bring environmental positive outcomes.
In short select will play an important role in building the water and chemical solutions that are designed to meet the sustainability goals of all our stakeholders.
Including our customers employees shareholders and local communities.
Now I'm going on I turn the floor over to Nick to walk you through some select financials and provide some thoughts on the go forward.
And then before we take your questions I'll spend some time discussing some thoughts around our longer term strategy and opportunity for us to capture dollars and grow profitability Nick Thank.
Thank you John and good morning, everyone.
Fourth quarter marked the continued progression of the monthly improvements we've seen since June and returned to solidly positive adjusted EBITDA territory adjust.
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 one.
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.
As activity return, our key pipeline, serving core tier one acreage in both the northern Delaware and the Bakken the large recoveries in volume throughput.
Our fixed pipelines have significant operating leverage and strong margins, which positively impacted the quarter's results, while allowing us to pull through other related logistics work at very good margins.
Looking at free cash flow, while 32% revenue increase quarter on quarter led to some working capital headwinds in Q4, we generated $103 million of free cash flow for the year exceeding our original 2020 target stated on this call last year, even after all the difficulties that impacted the year.
For the last three years through that drastically different environment.
We generated nearly $290 million of free cash flow, allowing us to pay off our revolver balance make a number of significant investments in the business and maintain our assets and return capital to shareholders, while still building a sizable cash balance.
We finished the year with $169 million of cash no debt and approximately $250 million of liquidity, providing us with a very strong balance sheet to approach the opportunities we see in front of us.
Usually I spend more time, covering the individual segment drivers that impacted our quarter and while the fourth quarter was certainly a big step forward that I'd be happy to talk more about I think our investors and research analysts would be better served using this time to hear more from John about our vision for the company and getting into the Q&A around that vision.
Given that Chris and I will be happy to follow up with everyone on the call here, who would like to dive deeper into the quarter, who to call or E mail one of us.
I would like to mention that we finished the year with some of our best safety metrics ever as a company and this resulted in significant savings at year end, roughly $2 million relative to our insurance and workers' comp accruals.
We're proud of our safety programs and our employees relentless focus on our operating ever more safely, especially through such a challenging year.
Now I'll cover some of the forward looking guidance on trends, we see in our businesses.
We have a good deal momentum coming into Q1, and the rest of the year in Q4, we increased revenue and margins across our segments pulling through attractive, 40% incrementals and while from a purely operational perspective Q1 continues to advance over Q4. There are a couple of factors that may limit overall Q1, adjusted EBITDA to modestly.
Though the Q4 number.
First the recent severe polar vortex has had a tremendous impact on so many of our employees and communities, especially in Texas, but also on many of the other areas, we operate including Oklahoma, Louisiana, North Dakota, and New Mexico our.
Our priority is last week were primarily around ensuring the safety of our employees and their families as well as our customers well integrity.
This weather event has demonstrated some of the challenges around our country's legacy infrastructure and the importance on maintaining a diversified energy supply chain in particular, the essential role of natural gas will need to play as the base and transition fuel.
Looking to the immediate impact that severe weather significantly limited our ongoing commercial activities around the well site while.
While a bit early to project the full impact of the recent event, we saw a temporary shutdown of activity in many areas we operate in.
Generally for an event like this our cost structure doesn't change much on a weekly basis, given many of the challenges our employees based on location and across the organization, but the revenue in the affected areas effectively skips a week and this will have a meaningful but temporary impact on the quarter's financial results.
Looking to the first quarter now currently we believe revenues will still be up somewhere between 5% to 10% the margins will likely see a modest compression and water services and water infrastructure. This is primarily due to the recent weather impacts along with the non recurrence of some of the positive Q4 factors while on oilfield chemicals recent rapid increases.
And oil linked raw materials costs will have a near term lagging impact before the pass through pricing adjustments are realized in Q2.
Looking at SG&A through our rapid cost cutting efforts SG&A levels were down 33% year on year from 2019 to 2020.
And the Q4 2020 run rate, 40% below that of Q1 2020.
Even after the one off impact of executive severance hitting the first quarter, we're still unlikely to grow SG&A on a year on year basis in 2021 relative to 2020, and we aim to get SG&A as a percentage of revenue back into single digits by the end of 2021.
As we look out at some of the key metrics over the entirety of the year, we forecast $20 million to $30 million for maintenance Capex and already announced projects with another $10 million to $20 million targeted for potential growth opportunities similar to the recycling projects, we announced recently.
We expect to continue to generate positive free cash flow in 2021, so if the market recovers faster than we anticipate working capital will build and could be a headwind for a period of time, particularly in the first half of the year.
Speaking to our market expectations, we believe that <unk> price near $60, a barrel provides attractive economics for our customers to deliver a positive free cash flow to their investors delever balance sheets and continued to add drilling and completions activity in a disciplined way.
There are many factors outside of our control over the course of the year such as future oil prices. The containment of COVID-19 worldwide and an economic overall economic recovery, but as we sit here today, we see continued positive monthly operational progression setting aside the recent weather issues impacting February.
With the current forward curve and assumed president economic recovery, we expect active frac crews to advance toward the 180 to 200 crew count range in the back half of the year and believe the remainder of 2021, we'll see a significant progression from our Q4 and Q1 adjusted EBITDA levels.
We anticipate these earnings will come from not only our existing businesses, but a number of exciting new initiatives for more on those I'll turn it back over to John to talk about our strategy and vision John.
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 is right sized and we 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 oil field 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 on dollar capture per job.
This focus is what will allow select gift 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 all our 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 the 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 to the industrial applications.
Third we will pursue strategic and accretive M&A in a prudent and disciplined way.
As market as a market leader select worked from majors large independents and private companies just as investors are looking for companies that can deliver ESG solutions internally. Our customers are looking for partners that can help them in meeting their ESG targets.
Select checks those boxes select as one of the few companies that can deliver on the industry's demand for a fully integrated and sustainable water and chemical solutions.
Which allows our customers to address and execute around the critical on growing need to reduce their environmental impact and deliver on ESG.
The number one priority is to capitalize on our leading position and sustainable water and chemical solutions. This is who we are and this is what we do.
To this point select just recently announced partnerships for recycling facilities with two blue chip operators with core Permian positions, which allow streamline water logistics reduce costs and improves the ESG capture through reduced environmental <unk>.
<unk>. This is select core and we believe more customers and projects will come our way to achieve this sustainability targets needed in the industry today.
Select has also performed well on carbon reduction through our automation and specialized flow back technology, capturing on reducing methane emissions on site.
If we look back on the innovative temporary and fixed pipeline solutions, we brought to the industry over the last decade, we have reduced gasoline and diesel exhaust by reducing trucking operations, increasing safety decreasing traffic congestion, saying we believe.
From where the industry was to where we are today select has the effect of reducing <unk>, an amount that would equal the effect of more than 150000 acres of forest annually over this same time period.
Select automation monitoring data capture and real time analytics have provided and continue to provide bill controls last fuel consumption safety improvements and cost reduction or more with less.
We are helping our customers reduce risk optum.
Optimize water and control quality and matched chemistry to that water, allowing for better planning that produces best results.
As our customers focus on vendors that can deliver solutions to their ESG on energy transition efforts, we will take profitable market share select already deploy solar power on the majority of our automation fleet and we continue to look for ways to build solutions to replace diesel with natural.
Gas electric our solar powered solution.
Our chemicals team is developing uses of renewable raw materials and biodegradable chemistry.
While always focusing on water reuse solutions.
So we have a lot of good things related to where we are in the oil and gas space today, but I fully believe that our people knowledge chemistry technology and assets can be taken into other industries.
To focus on this opportunity we formed the industrial solutions group in 2020.
There is a large addressable industrial market for what we've learned and developed in the oilfield for sustainable water and chemical solutions I believe it fits in as needed and more industries.
For example, last year, we won a contract to provide a range of sustainable water solutions with an industrial paper company that ultimately became a top 10 revenue generator for 2020.
Given this success, we will continue to use our expertise and knowledge and water logistics chemical manufacturing automation research and development and fluid management to advance new opportunity opportunities across large industrial market.
This leads me to our final strategic piece M&A.
Select is very focused on in our M&A and we have a strong M&A track record. We are now receiving a lot of inbound opportunities given our balance sheet and public currency, but again what is important is the real strength of our position of sustainable water and chemical solutions.
We believe there is a massive inefficiency on the market given that there are 80% less rigs running today than in 2014, and only 8% fewer public oilfield service companies there needs to be consolidation, but to be clear, we will be focused on disciplined.
Select has always focused on technology as you can see with our recent investment in deep imaging technology.
Which we believe allows us to learn more through their real time reservoir evaluation.
On our how our water and chemical solutions can advance and improve.
So our M&A focus is centered on doing more with less.
Advanced technology.
Cost of.
Revenue synergies contracted predictable and protected revenue streams and energy transition in ESG solutions. All of this should lead select in our effort to create stability on our shareholder return profile.
With that my primary focus is to drive value smart value.
The market is always changing so we have to change with it to create more value first with what we got and where we got it and then expanding into new areas.
To simplify number one grow the base business.
Number two use our expertise in water and chemical goals to drive and create new value add opportunity number three execute on strategic accretive and protected M&A.
So I'll leave you with this as shareholders or potential shareholders I, one 6 million or so shares of this company and have never sold a share I am your partner and my primary focus is to drive real value to the shareholders customers and employees.
It's derived platform with the right people.
We got what we need today on our base business and footprint, but very importantly, we believe we can take this into other areas of opportunity exciting times lie ahead, and with that lets us open it for questions operator.
Thank you if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is on the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our first question comes from Sean <unk> with Jpmorgan. Please go ahead.
Thank you good morning.
Thanks, John.
So I'm going 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.
It's been a difficult business to model, but theres, obviously been a lot of external factors last couple of years that have influenced that.
So how should we think about the capacity for that business today relative to what utilization look like maybe we could distinguish between the Bakken versus.
On the Delaware.
Just what that Delta look like on the course.
Fourth quarter, how that should influence our expectations for 'twenty, one and beyond in terms of.
With the existing infrastructure, what can the business do today versus what is it doing.
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.
Net upturn in that activity level.
But you saw it outsized on our business due to the locations of our pipeline and the real core tier one acreage and so are our pipelines and the related logistics services also those pipelines.
The major driver of the game there.
We do expect that performance to continue, especially on 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 an adjacent months, probably youll 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.
They are increasing their volumes and so that should continue.
To drive results going forward here.
Okay fair enough.
And then in terms of these new revenue opportunities you are 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 like <unk>.
But more about how that specific example, transplant and how that can help us understand better.
Less traditional opportunities that you're pursuing.
Sure John I'll take that one.
No it wasn't chemical application it was water.
Synergy and we participated in.
The <unk>.
The ability to.
Bring value to that to an industrial.
On paper mill plant.
In the manner that we manage their water form so we performed various.
On <unk>.
Things that we do every day on the oilfield, whether it's movement of water containment of water.
Oh, all the various things that we do every day, we did that in a meaningful way for an outside oil and gas industry.
Ward.
And how we got it is because we actually had the day.
Ability with equipment the skill set the knowhow.
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.
And so just to clarify so I mean, we're using personal lay flat hose and we're in a lot of your operations look a lot like your existing business, but we're just delivering it to.
A different type of customer.
That is correct.
First of all brought various skill sets on the pieces of equipment that we use every day on the oil and gas industry.
In a manner that.
The solution to the customer, but yes, it was centrifugal as lay flat storage.
<unk> devices.
Monitoring devices.
Yes, really the treatment and logistics piece, it's applicable throughout a number of industries.
Paper is one of those in.
But there are certainly others and we can.
Use that skill sets to develop and have more of these going forward here.
And last year from a clarification from me was it was geographically.
And your customer in the geographic region, where you're.
Most of your upstream oil and gas operations are somewhere outside.
That one was in an area there is oil and gas activity and we do have.
Our footprint there.
We're active in the oil and gas space.
Yeah.
FID in the sense of logistics as well as our ability.
On 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 operation.
Very interesting.
Thanks for the feedback.
Thanks, John Thank you once again, if you would like to ask a question. Please press star one on your telephone keypad. Our next question comes from Tom Curran with B Riley. Please go ahead.
Good morning.
Good morning.
John when it comes to your vision for what the ideal version of integration between water solutions and chemicals it looks like what.
Sexually should the next phase entail.
And what should be the specific value creation or synergies associated with that next stage of.
Better optimized integration.
So Tom Thanks.
Yes.
For joining in the question.
The reality is is we have a base business today that has a very large relationship between.
Water wall of water quality and the chemistry, that's applied to that so if you think of this.
Day.
If it's water in a pit that potentially will be used for a frac job that water.
As a certain type of water and it's going to have chemicals applied to make it the right piece of water to get ready to Frac with then you move into the actual Frac base.
Youre, adding chemicals for the Frac job itself going downhole into that water.
We.
Logically participate there then you get on the backside after the Frac job and you think about the drill out or the completion cycle EBIT. So the chemistry that's used in the.
The fluids or the water that is used during the drill out pace.
To be able to efficiently.
And effectively complete the well we participate in that space and the last piece, where we participate Tom is is in the.
Produced water treatment for reuse.
Important piece for us because that is potentially a source water and.
Our value add that we get net so the biggest thing is our base business phase one so how can we.
Bringing together the effects of what we do every day, but we didn't really have linked up together either in them.
Pre treatment of water getting ready for a frac.
The chemicals on the water used to frac the chemicals on the water used to complete.
And then how can we repurpose this water in the produce side of the world.
Be able to make it where we can frac with it again on it that's the synergy first step Tom.
So returning to and.
More fully realizing the average.
<unk> strategic rationale behind the Rockwood or energy solutions acquisition.
That is correct and to bring that together in a couple of 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 that chemistry to that stabilized water and its quality.
Both drive cost to the to.
To the job because that water is not stable you could be applying too much chemical or non enough chemical and you can either affect both the cost of the job as well as the effectiveness of the job.
<unk> of the job, so bringing that together to make sure that we.
Can bring value and couple it together.
Really big piece of the first step of our base business growth.
Great and then turning to.
The industrial solutions group and the opportunity set there.
Two part question first.
John did this.
Industrial paper mill.
Project did it end up using or put it.
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.
Reactivation of either that idled pipeline in the 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.
Yes first of all I would say that we are.
Fairly early we believe that the reality of the synergy is there we believe our skill sets our people our knowledge base.
Lee will fit.
John.
Into the industrial space outside of the oil and gas business because the same dynamics that we do in the oil and gas base exists there.
But to your question about whether that idle pipeline.
Any idled pipeline in the company. It was not part of that paper mill solution that we.
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 the absolutely could be part of a value add industrial solution outside of the oil and gas zone.
We fully believe that as long along with all our skill sets and assets and knowledge base.
<unk> to match chemistry.
Our sources and pipelines could be part of that too Tom.
Thanks for taking my questions John.
Thank you Sir John.
Once again, if you would like to ask a question. Please press star one on your telephone keypad.
Thank you I would like to turn the floor over to management for final comments.
Thank.
Thank you 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.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.