Q1 2021 Select Energy Services Inc Earnings Call
Greetings and welcome to the select energy services first quarter earnings Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star.
<unk> zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Chris George. Please go ahead.
Thank you operator, and good morning, everyone. We appreciate you joining us for the select Energy conference call and webcast to review, our financial and operating results for the first quarter of 2021.
With me today are John Schmitz, our founder Chairman, President and Chief Executive Officer <unk> <unk>.
On your Vice President and Chief Financial Officer, and Michael <unk>, Executive Vice President and Chief operating Officer.
Before I turn the call over the 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 May 19, 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 may five 2021, and therefore time sensitive information may no longer be accurate as of the time of the replay listening or transcript reading and.
In addition, the comments made by management. During this 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 selects management. However, various risks uncertainties and contingencies could cause our actual results performance or achievements to differ materially.
Really from those expressed on the statements made by management the.
The listener is encouraged to read our annual report on form 10-K for the year ended December 31, 2020, our current reports on form 8-K, as well as our quarterly report on form 10-Q for the quarter ended March 31, 2021, which we expect to file later today to understand those risks uncertainties and contingencies.
Also please refer to our first quarter earnings announcement released yesterday for reconciliations of non-GAAP financial measures.
Now I'd like to turn the call over to our founder Chairman President and CEO John Schmitz.
Thanks, Chris Good morning, and thanks for joining us I'm excited to be discussing select with you today.
<unk> been back on the CEOC for about four months now I believe we continue to have good direction for executing and improving our strategy to strengthen the inset of part of our position as the market leader in sustainable full lifecycle of water and chemical solutions.
The primary strategic objective remains as outlined last quarter, we will drive value in this company.
First through improving and growing the base business and a recovering activity environment by creating value for our customer base with our integrated full lifecycle fluid match solutions, which should drive market share gains and gross margin improvements.
Second third of deploying our expertise in water and chemicals, both across the energy value chain and into other industrial applications as a value add solutions company.
Third through sourcing and evaluating strategic investment opportunities and M&A focused on consolidation diversification and advanced technology.
I'd like to start by addressing our progress toward each of these objectives before Nick takes you through the recent financial performance and outlook in more detail for.
First off looking at the performance of the base business. The first quarter's financial for results were challenged by severe winter weather that impacted operations in February.
That said, we saw revenue growth across each segment with the 8%.
<unk> revenue growth overall.
I'm certainly disappointed in the regression, we saw on terms of profitability.
While we have to realize the February weather hit select hard given our operating footprint, we still underperformed. However, we expect a solid recovery and further growth in quarter two.
Additionally, we continue to look for more ways to improve the business and doing so we recently completed in the organization realignment and the April led by the appointment of micro <unk> COO, Michael who I've asked to join US here today has been a longtime partner of mine.
Having joined select back in 2009 shortly after I founded the company. Michael has served in a number of leadership roles within the organization across both operations and finance most.
Lee serving as EVP corporate development sales and operational support.
With other previous leadership roles heading up our water infrastructure segment, our formal water solutions segment, and our corporate finance function as treasurer.
Michael will oversee all aspects of operations, including sales on technology with a high focus on integrating our efforts to support our fluid match approach to our sustainable full lifecycle of water and chemical solutions.
This realignment will also emphasized commercialization of our integrated solutions on a regional basis, ensuring we have the right people in.
In place to drive sales direct pricing.
<unk> cost and improve margins in every region.
This will allow us to <unk>.
First capitalize on our strong operating leverage to more efficiently take advantage of our large geographic footprint that covers all active unconventional basins.
Second to have real time visibility and control over our costs.
And finally to leverage our key position in advanced technology to drive our integration initiatives to capture more wallet share around sustainable full lifecycle of water and chemical fluid match solutions.
As an example of our efforts focus on leading position is showing up with two recent wins and we have commenced operation on these previous the announced recycling facilities. We have partnered with two blue chip operators in the core of the Permian basin to operate to water recycling facilities.
By the long term contracts these fixed infrastructure facilities streamline our customers' water logistics reduce their cost improve their results and help them achieve their ESG targets by reducing their environmental impact or decreased freshwater usage and decrease.
<unk> waste stream.
These recycling project began operation in the first quarter and are off to a very good start.
We have already seen success and further commercialization of these facilities with two more customers now either currently sending our contracted to sand volumes. During the second quarter. This is in addition to the base load volume set underwrote. The project has on added revenue driver. We're also pulling through.
Other service lines related to operating these facilities as well.
With a solid activity backdrop, a streamlined organization, a strong technology platform and a market leading position led by our substantial full lifecycle of water and chemicals fluid match solution I feel very good about our continued growth prospects in the quarter.
Ahead.
Looking at our two remaining strategic objectives.
I believe we made a small.
But unique investment in the first quarter that advances our efforts across both areas.
We are innovating and finding new ways to diversify our capabilities and drive our initiatives around energy transition as part of this effort. We are pleased to announce a strategic investment in ice thermal harvesting IC.
The new venture focused on providing zero emission Geo thermal electric power from flowback and produced water to the oil and gas industry as well as to index industrial customers across multiple sectors.
We are excited to collaborate with the ice team has both capital and strategic partners and look forward to the growth opportunities ahead for the business. We believe select has much to learn and much to offer to the energy transition and we will continue to evaluate ways to participate through organic and <unk>.
Inorganic growth opportunities.
Thinking about the industrial diversification more broadly we continue to advance the opportunities to deploy our assets and expertise into new areas, but we still are developing our long term strategy.
On the corporate development front, we will certainly continue to pursue smaller strategic investments and acquisition opportunities in areas, such as technology energy transition and ESG solutions. Additionally, there is still a broad set of M&A opportunities with both small.
On large scale value add opportunities.
Consolidation with meaningful cost synergies as well as opportunities to add strategic diversification and earnings stability.
We sit in a strong position in the marketplace with no bank debt strong cash flow capabilities and a substantial cash balance. In addition to this financial strength, we have the ability to lever.
Leverage our competitive strength has the oil and gas industries, leading sustainable water and chemical solutions provider to expand into new areas or other industries to take advantage of the energy transitions in ways that many of our competitors cannot.
We are very excited about our recent recycling and energy transition investments and we continue to believe that additional opportunities lie ahead.
We fully expect to see growing activity improved operational and financial performance in the second quarter and into the back half of the year.
With that I'll hand, it over to Nick to discuss the financial performance and outlook in more detail. Thank you John and good morning, everyone financially speaking the first quarter encompass three very different months January by and large represented a continuation of the recent fourth quarter momentum.
February saw a 25% decline in revenue with very little of corresponding decline in expenses due to the effects of the winter storm.
March's revenue snap back to essentially the level seen in January although chemicals raw material shortages endured due to the winter storms impact on Gulf coast production facilities and the cost of these raw materials spiked prior to our ability to pass those increases along to our customers.
Overall, given the incipient stages of the recovery. This monthly combination did not yield the results we expected for the first quarter.
While first quarter revenues increased 8% sequentially to $144 million consistent with our forecasted range adjusted EBITDA of approximately $1 million decline from last quarter's results.
I'll be referring to the impacts of the winter storm of few times as we go through the segment detail today to properly quantify it but one thing I want to make clear is that our general forward outlook remains the same <unk>.
Commodity prices are supportive activity is improving and we're continuing to gain market share while carefully targeting our investments.
As John outlined we are building water recycling networks, developing advanced integrated solutions and investing in energy transition opportunities all while growing our overall liquidity and maintaining our debt free balance sheet and healthy level of cash on hand.
All three of our segments grew revenues quarter over quarter, even after the weather impacts the.
The water infrastructure segment held steady maintaining its 30% margins, but for each of water services in oilfield chemicals the.
Freeze raw material supply disruptions and rising fuel cost decreased margins by 3% to four percentage points.
Based on the March and April trends and current visibility, we expect the water services segment to grow its revenues, 15% to 20% in the second quarter, while restoring margins into the double digits.
While rising fuel and labor cost represented a headwind increased activity on utilization automation efficiencies integrated sales efforts on the operational realignment John discussed are yielding benefits.
The competitive pressures in oversupply remain issues, but the environment is improving.
The water infrastructure segment, which recently more than doubled its revenue from Q3 to Q for advanced revenue modestly in the first quarter, while holding margins of 30%.
We anticipate revenue is holding relatively steady during the second quarter with increased recycling revenues offsetting declines in our Bakken pipeline volumes driven by the seasonal breakup period of North Dakota.
However, given the decreased contributions from our high margin Bakken pipeline as expected during Q2, we anticipate margins compressing to the mid twenties range during the second quarter.
Despite the supply chain challenges the oilfield chemicals segment grew revenue in Q1 by 12% the fastest of any segment.
With these recent disruptions behind us we expect even more rapid revenue growth from the second quarter and more importantly restoration of gross margins of 14% to 16%.
In addition to the supply chain disruptions, we saw surging raw materials costs during the first quarter due to higher feedstock prices for products, such as naphtha, and then again and yet higher prices as a result of significant supply chain capacity being knocked off line from the winter storm.
Our volumes and margins were constrained as a result of this but as of April we've been able to realize most of our key customer contracts to account for this higher input pricing.
With our in based on manufacturing capabilities dedicated customer base and success across multiple product lines. We anticipate very strong Q2 revenue growth of 20% to 30% along with those 14% to 16% gross margins on a reference.
Looking beyond the individual segment's SG&A grew during the first quarter, primarily due to the one off impact of executive severance hit in Q1, but should revert closer to $16 million to $17 million of quarter going forward, including the impact of non cash compensation.
Overall SG&A remains of critical focus areas. We seek further efficiencies. We believe our current support platform can sufficiently serve the needs of a growing business in the coming quarters, particularly as we continue to apply technology to streamline operations.
Putting it all together, we expect second quarter consolidated revenue growing to $160 million to $170 million with adjusted EBITDA margins of 5% to 7%.
From the second quarter onward, we see a very solid activity backdrop and fully expect continued revenue and EBITDA growth in the back half of the year driven by the continued efficiencies and wallet capture resulting from our streamlined organization integrated sales efforts strong technology platform and market leading position.
Led by our sustainable full lifecycle of water and chemicals fluid match solutions.
In terms of free cash flow, while the revenue increase in weather disruption led to some working capital headwinds in the first quarter, we expanded our overall liquidity by $12 million and finished the quarter with $160 million of cash on hand, $262 million of overall liquidity and no debt.
Our expectation remains that we will generate positive free cash flow for 2021, even as working capital increases along with revenue.
We have an asset light business and a disciplined approach to capital investment.
We invested just $2 2 million of net capex in the first quarter, while gaining market share maintain.
On maintaining our previously provided forecast of $10 million to $20 million targeted for potential growth opportunities, we are reducing our maintenance capex forecast downward, resulting in a full year net capex forecast of no more than $30 million to $40 million for all purposes.
Finally, we anticipate depreciation expense of roughly $80 million to $85 million for the year minimal interest expense consistent with our current quarter and no material tax expense.
We are actively and we'll continue to actively evaluate opportunities for investment in the acquisition, but will do so within a disciplined framework.
With that I'll turn it over to the operator for some Q&A operator.
Thank you we will now be conducting a question and answer session.
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.
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Our first question comes from Ian Macpherson with Simmons. Please go ahead.
Thanks, Good morning, you mentioned.
Yes, the visibility into continued.
Positive.
Improvement beyond the second quarter.
And recognizing that you're prosecuting.
Market wallet expansion.
Execution of uplift et cetera, and also has probably some seasonal.
Relief.
In the Bakken, but beyond those sort of company specific.
Ingredients.
How are you viewing the.
The general completions cadence from Q2, and the Q3, if you can.
Formulate any visibility on that yet at this point in time.
Sure So Ian.
Typically don't give give longer term guidance for the positive factors. We currently see the oil price is certainly very supportive as is the forward strip. So we see more and more of our customers' hedging out longer into the strip you've seen very positive results by and large from those customers this earning cycle.
Clearly they are generating cash and.
Able to.
Generate a high rate of return on their drilling and completion programs.
And finally, our conversations with these customers have been supportive as we look through to the the.
The second half of the year here, so putting those factors together.
Think about 15% to 20% cash.
Capex growth from the E&P side over Q4's pace.
And that's probably a higher number when you when you take into account the private companies and so we're not going to spend.
Spend a lot of money into that but the positive factors are there and we're prepared to grow with them.
Understood. Thanks, good to hear also.
Eric you've contracted some incremental volumes on the recycling projects on top of the.
The foundational commitments there so are those assets now.
Approaching for.
The contracted nameplate capacity does that greenlight further similar projects along those same lines or do you think debt.
Your next.
The strategic spend might be more M&A as opposed to the.
Comparable organic projects.
While we're certainly pleased with how those are performing and those are going to contribute a lot more revenue and margin in Q2 as theyre running for a full quarter and bringing in those third party volumes.
So those are attractive we have multiple ongoing discussions with other customers for similar type of projects. So I wouldn't.
I wouldn't be surprised if we had more announcements through the year with that growth Capex number that we mentioned.
But M&A is clearly on the table as well so I wouldn't want to.
<unk>, one direction or the other to say this is more likely or less likely there is.
Good discussions on opportunities on on multiple fronts.
Glad to see things are improving out there appreciate the comments.
Thanks, Nick I'll pass it over.
Thanks Ian.
Your next question comes from J B Lowe with Citi. Please go ahead.
Hey, good morning, guys.
Kind of of kind of a broader question on.
Kind of the strategic vision for the industrial solutions group plus the recycling I guess, if you kind of bucket those into.
Kind of of your ESG portfolio.
What how I guess, what percentage of revenue would you like to grow that business too.
And what do you think is feasible over the next few years.
To grow your exposure to those businesses.
Yes. So this is John.
As far as the the industrial.
Push that we have when we described and continue to execute on Amit you have two pieces inside this company.
Do you have for the first piece, which is unutilized assets and those assets really move waters for water deliver water.
We think those assets and have proved that those assets can be meaningful meaningfully applied to industries outside of the oil and gas business. So that's short term and we're very focused on it because we own the assets.
<unk> need the profit.
Longer term, we believe that if we.
Execute.
Making of matched.
Of water molecule with the right chemistry.
And enter and of reuse fashion taken away stream and creating the useful stream out of it we believe that.
Once we really prove that up and execute that well in the oil and gas space. We believe there is areas outside the.
Oil and gas space.
And inside the oil and gas base that we can expand that skill set in that.
That proven model the cross sell debt longer term, we're focused on that net.
And our description about that's the longer term plan, we're still working on it logically that's people and skill sets of knowledge of other industry. So we're very focused on.
Looking into and where does that apply on who needs to be our partner in applying it.
Okay.
One of the ask about the geothermal investment you've made.
Could you just kind of describe what what you guys would actually of what the company would actually be doing would it just be simple simple as.
I mean, you said it was for geothermal electric power to oil and gas companies would this just be like going out on drilling of geothermal.
<unk>.
Add of production facility, and then providing power of that way I guess, just some kind of details on what the company is actually planning on doing would be great. Yes, I appreciate that I'm going to let Michael score Archie talked to this investment it.
He was very involved in it and I think he can explain.
Relates to the.
Our synergies through our company of what we do to the oil and gas base, but on overall thesis for the <unk>.
Investment we made in it.
Sure So ice geothermal.
The start it's really a platform.
Two entrepreneurs that we know and are really excited to support and be partnered with their initial plan is the harvest keyed off produced and flowback water and use that for electricity on a near location and so logically there's a fit there with our well testing and flowback services to where we think we can help them.
Getting with the operator and execute on that plan now the strategy really goes beyond just harvesting heat from from flowback and produced water and moves into industrial and then other geothermal solutions as well.
Cool.
I'll have to dig into the whole of more.
Last one for me is just you guys mentioned consolidation opportunities and also you mentioned the Mega banks.
Gaining some market share can you just talk about which product lines, you think that consolidation the day most likely in the be something that you guys participate on and then the same question where are you guys gaining market share. Thanks.
Yes, I think we are gaining market share.
Both in our redirected the organization into the <unk>.
The regional or basin focus so we have put together teams that are very directed to certain areas logically one of those big areas of the Permian basin and how we can.
Bring value to the customer, but through that value, we're going to capture more of their spend.
You can think of water and chemistry, and how that fits together and how we make our two worlds come together on a regional basis, the especially in the Permian to do that recycle facilities that we described as the perfect example of that.
The capture of.
Of water and chemistry applied and then and then our director of service offerings that really are the highest margin when we match those services to the water itself on.
On it.
So the.
That is a really big focus on ours, but.
Outside of that logically there is.
<unk> needed consolidation in our space, we all know that our revenues are not anywhere close to what they were.
These revenues are across management teams and cost structures that need to come together and.
The franc.
A portion of that the go away so of the elimination factor through M&A as of now.
The really big need for the industry as well as the big target for select we think about it a lot. The last pieces. Our M&A is very focused on technology and advancement of of.
Sure.
A value add or on ESG, our capture of our and we.
We just seen that with ice and we continue to look for technologies of that way, we continue to do them.
In house.
As well as M&A so.
We're very focused on the potentials of technology through M&A as well, but.
The large transaction that has a lot of eliminations and it is something thats definitely on our screen as well J b on a segment level of market share I think I'd point, you to our chemicals division that had the.
Fastest revenue gain in Q1, and then looking at our Q2 guidance. There. We certainly anticipate some additional market share of pickups. There. So we've been very successful I think in meeting the demands of the industry and having.
The latest products our in basin manufacturing capability, I think allows us to be a little more nimble than the.
Larger diversified coastal suppliers.
And so that's an area, where we're very excited about in the near term here.
Yes, just touching on that real quick.
How much I guess, how much of the the WCS.
Acquisitions helped out on that front.
A lot and it's really when John talks about the bridge there of of treating.
Quarter.
Both mechanically and with chemicals and through our fluid match system.
<unk> is a key part of that bridge in kind of integrating the the full product offering here.
Okay. Thanks.
Thank you.
Again, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Daniel Burke with Johnson Rice of <unk> Company. Please go ahead.
Hey, good morning, guys.
Good morning.
Let's see.
The incrementals in the the water services guide for Q2 look pretty healthy.
Of course.
Of the ability or the benefit of.
Recovering from the weather event in Q1 as a contributor but it was encouraging to see mention of pricing improvement in the segment as well and I was wondering if you could expound a little bit about on what youre seeing in pricing in water services and then maybe give some generalized thoughts on wood incrementals in that business could look like in the second half of 'twenty one.
Yes, Daniel.
We have been able to start.
Asking for and getting pricing, but it's needed we all know that there is the.
The pressure on labor, we know fuel cost is went up.
As Nick described.
And as part of that the chemicals.
Getting pricing pressure through the <unk>.
<unk> commodity.
We need price and but we are.
Applying that through the the old and we're applying it to our customer base and we are getting price and it is needed price in this industry right now.
Nick you got.
Yes.
With the impacts of the storm the Incrementals are little little Wonky for Q2 here, but when we've talked about kind of of longer term growth in the second half of 30% to 40% is what we've seen historically and what we anticipate for that.
We have good operating leverage and a lot of our segments here.
The water services as John mentioned, if we are hiring people in putting equipment back to work then we will need incremental price to <unk>.
Tract of return on assets there and.
So those are all things that are pointing in the right direction.
Got it that's helpful and maybe I'll take a run at a question I think Ian already approached.
Nick I think last quarter, you talked about expecting 180 to 200 frac fleets in the back half of this year end.
Yes, there's a lot of maybe different places to source of that but we're probably knows and up against that type of level. At this point. So just thinking about your optimism for second half 'twenty one.
Continued growth.
If you upgrade your thoughts on completion activity versus a quarter ago or is this more about the market share gain potential you see out there.
Yes, our internal count is right on with the orders and we do anticipate getting over 200 here on the near future.
But where we're focused on the integrated service offerings.
Bringing more.
Alex and services to the well and driving margins that way, but activity growth is certainly helpful and we anticipate continued moderate activity growth.
Okay got it and then I'll Cram one last one in.
<unk>.
You guys have been like the rest of the industry very very cost focused for a long time this latest organizational realignment.
Any anything that debt you can bring to bear in terms of.
Of what that means in terms of of margin that youre able to achieve with this latest.
Restructuring you've implemented.
Yes, we believe there is on ability.
To put power.
And communications in place that the does both things one.
These are high variable cost businesses, so controlling the cost of the actual the job side or the yard level is very important to us and we believe this realignment.
Put some of that emphasis on being able to improve the gross margins in these businesses, which is needed as we all know the second pieces. Each one of these regions are basins in that wallet capture that Nick described and we've described and I of fluid match.
Between water and chemistry is made up differently. So the Permian is different in the northeast.
So we wanted to make sure that we put the right teams together in the right spots to make sure we can bring the value to the customer and capture of that wallet and drag through the services.
And we believe this realignment gives us that.
And our organization.
Got it okay. That's a helpful overview.
Great guys I'll leave it there thanks for the time.
Thank you. This concludes our question and answer session I will now turn the call over to John for closing remarks.
Yes, thanks, everybody for participating today.
And we look forward to talking to you again next quarter. Thank you.
This concludes our teleconference. You may disconnect your lines at this time and thank you for your participation.
Okay.
Yes.
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Yes.
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