Q2 2021 Select Energy Services Inc Earnings Call
[music].
Predicts and welcome to the select Energy services 2021 second 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 zero on your telephone keypad.
As a reminder, this conference is being recorded.
And it's now my pleasure to introduce your host, Chris George Vice President Investor Relations and treasurer. Thank.
Thank you Chris you may begin.
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 operational results for the second quarter of 2021.
With me today are John Schmitz, our founder Chairman, President and Chief Executive Officer, <unk>, <unk>, Senior Vice President and Chief Financial Officer, and Michael <unk> Executive Vice President and Chief operating Officer.
Before I turn the call low grab 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.
We'll also be a recorded telephonic replay available until August 18, 2021. The access information for this replay was also included in yesterday's earnings release.
Please note that the information reported on this call.
And it's only as of today August 4.2021, and therefore time sensitive information may no longer be accurate as of the time of the replay listening or transcript reading.
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 select management. However, various risks uncertainties and contingencies could cause our actual results performance or achievements to differ materially from those.
Breast and the statements made by management.
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 reports on form 10-Q to understand those risks uncertainties and contingencies.
And so please refer to our second quarter earnings announcement released yesterday for reconciliations of non-GAAP financial measures.
And now I'd like to turn the call over to our founder and Chairman President and CEO John Schmitz.
Thanks, Chris Good morning, and thank you for joining us.
And I am excited to be discussing select energy with you today.
We have been very active over the past few months and I am pleased with the progress we've made on executing our strategy.
We are continuing to strengthen our position as market leader and sustainable full lifecycle water and chemical solutions.
Since the first quarter, we realized notable achievements and each of our key strategic priority areas, which are first improving and bolstering the base business second advancing our technology ESG initiatives and diversification efforts.
Third executing on strategic M&A.
First off looking at the performance of the base business. The second quarter's financial results saw a notable growth and top line with a 12% revenue increase over the first quarter. This revenue growth was led by our oilfield chemicals at 23% and our water services with 19.
Percent, while our water infrastructure took a step back and the second quarter driven partly by the Bakken seasonality, we anticipate a very strong third quarter from from this segment.
On a consolidated basis margins held flat overall has cost pressures, including labor fuel and raw materials continue to weigh in on the margins looking forward, we are continuing to engage with our customers and they have had positive recent discussions around pricing improvements.
As a result, we expect to see margin uplift and our base business during the third quarter.
And the third quarter, we also expect to benefit from the increasing contributions from our recently announced recycling projects. The first 2 projects were completed late in the first quarter with a subsequent expansion of 1 of these projects just starting in the late in the second quarter.
Next 3 projects should be completed by the end of the third quarter, though their financial impact to the third quarter will be minimal.
These 5 projects total about $15 million of combined growth capital and provide more than 200000 barrels a day of recycling capacity.
They are supported by long term contract with key customers, which reinforces the strength of select platform to provide integrated solutions that rely on our expertise and water and chemistry.
These projects not only increase efficiency reduce costs and improve operational results for our customers, but they also help our customers achieve their sustainability goals and ESG targets by reducing their environmental impact through decreased freshwater use.
<unk> and decreased waste disposal.
With a solid commodity price and activity backdrop, a streamlined organization and a strong technology platform anchoring a market leading position I feel very good about the continued growth prospects and these base businesses and the third quarter.
And support of these base business improvements. We also continue to find new ways to diversify our capabilities and advance our initiatives around technology and sustainable solutions for our customers building on this we have further enhanced our portfolio of sustainable technologies with the ACA.
<unk> of all recovery and we also have signed an exclusive supply agreement with emissions Rx.
All recovery as a provider of unique patented biotechnology solutions for production and EUR application and will complement our existing production chemical initiatives. All recoveries novel solutions are derived from biodegradable inorganic nutrient.
<unk>, which provides an attractive environmental friendly solutions to our customer, while increasing overall well performance and improving returns.
We are also very focused on application for reducing emissions for our customers.
Accordingly, and I am excited about the partnership with emissions Rx.
This was a part of select ongoing effort to help our customers increase well site efficiency and safety, while reducing commissions to limit the overall environmental impact of oil and gas development.
Omission Rx combustor is help our customers capture reduce and ultimately and eliminate methane generated during flowback and production they.
And they do this and a more efficient and environmentally friendly manner than traditional oilfield practices, such as vapor release, our <unk> flaring at both the wellhead and production facilities, whether it's through automation and data capture our ESG oriented solutions technology will continue to play a critical role.
<unk> and our ability to provide better and more cost effective solutions for our customers.
Thinking about our diversification efforts more broadly we continue to advance opportunities to deploy our assets and expertise and new areas for industrial applications.
We are still developing a comprehensive long term strategy, but a key part of that strategy includes our recent hiring of Walt Dale as senior Vice President Industrial solutions.
Porting directly to Michael Starkey, Walt will oversee our industrial solutions development efforts. He brings a strong 20, plus year background and building and growing business and the industrial water and chemical space and I'm excited to be partnered with him to grow and execute on this opportunity for select.
Now I'd like to discuss our final key strategic area M&A.
As I emphasized on our last couple of calls select us and a very strong position to execute on strategic M&A, we are well positioned as a market leader and water and chemicals with significant operating leverage. We also have a debt free balance sheet, a strong cash position and.
And a public currency all of this provides a solid toolbox for us to work with.
Consolidation continues to be a key theme and the industry and is 1 of the most effective ways. We can look to improve profitability across the oil and gas industry and particularly the services landscape.
To that and I am excited to have recently closed the acquisition of complete energy services.
Complete as a business I know very well.
And I believe it is a good fit with select from both a service line and geographic standpoint.
We are getting a strong market, leading production service presence and the mid con and the Rockies a market, leading water transfer footprint and the DJ basin and the powder River basin.
And new key flow back customer relationships, and the Permian basin and the northeast.
Add onto that we've acquired a sizable produced water infrastructure footprint with over 300000 barrels per day of capacity and you've got a very attractive portfolio of assets to build off of complete existing disposal footprint provides significant optionality for broader.
<unk>, whether it's through the development of incremental gathering pipelines are more notably taking that produced water barrel has an alternate source to freshwater and developing produced water recycling infrastructure to meet our customers' needs.
On top of operational and strategic benefits. This deal provides attractive and immediate earnings accretion with more than a $100 million of annualized revenue and $10 million to $12 million of annualized EBITDA expected in 2021.
With more than 60% of that revenue coming from production related services and infrastructure. We are also adding and attractive delayed layer of revenue stability to our core completions oriented based businesses.
We anticipate revenue and cost synergies, resulting from this transaction, but we will be deliberate about how we approach the integration and the coming quarters Ulta.
Ultimately I am very excited about our recent M&A execution, a recycling projects and our other sustainable ability focused investments.
I also firmly believe we will continue to find additional opportunities ahead with growing activity stable commodity prices and improve the operational and financial performance and the third quarter and into next year the future remains exciting.
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.
The underlying base business took a big step forward in terms of gaining market share with accretive incremental margins and a recovering market low cost pressures also impacted the second quarter financial results as.
And as we execute on the new investments and acquisitions, John discussed, we expect to see meaningful accretion and our earnings along with strategic benefits all while maintaining our strong balance sheet.
Overall revenue growth of 12% quarter on quarter to $161 million encompass some divergence between our segments.
Water services, and chemicals, and especially strong quarters, both growing the top line around 20% well in excess of industry activity growth.
And our infrastructure, however declined 12% driven primarily by seasonal factors and short term breaks and activity and some of the areas served by our pipelines.
As I'll discuss in more detail shortly we expect a strong rebound and revenue for this segment in Q3.
Looking at the segments. The water services segment grew its revenues by 19% and its gross margins before DNA from 3% to around 8%.
We expect further upside and both of those numbers and the third quarter.
And the complete acquisition is the largest projected forward impact on this segment and brings more production weighting the balance the completions leverage of many of our services.
These assets along with activity and pricing gains lead us to expect revenue growth of over 30% and this segment for the third quarter and.
And regards to pricing gains, we expect margins progressing into the low to mid teens during the third quarter for water services, driven by recent pricing gains and moderating labor pressures.
We secured a number of pricing adjustments in recent months. So these were primarily in response to the rapid labor and fuel price escalation of the first half of the year.
With the exploration of extended unemployment benefits across most of our areas of operations and recently steadying vs. Escalating fuel prices 2 of the larger recent margin headwinds have diminished and intensity.
Additionally, we anticipate pricing adjustments continuing as industry activity and maintains its measured expansion.
While we don't yet anticipate reaching more normalized gross margins of 20 plus percent for this segment. During 2021, we expect Q3 will be a healthy step forward.
The water infrastructure, we expect meaningful improvement, resulting from the restoration and growth of pipeline volumes as well as the contribution of the acquisition of completes produced water infrastructure.
We expect 20% to 30% revenue growth for the segment with corresponding gross margin improvement into the mid 20% range.
And while initial revenues from our 3 more recently announced recycling projects should be recognized during the third quarter, you shouldnt be material relative to their expected full quarter run rates. Additionally, their startup costs will have some burden on the third quarter to partially offset the highly accretive impact of the expected increased high margin pipeline volume.
Despite continuing supply chain challenges the oilfield chemicals segment expanded gross margins by 3 percentage points and was again the top performing segment in terms of revenue growth.
And our customers increased reuse of produced water and our further development of recycling projects, coupled with our fluid match solutions are positive secular drivers long term for this segment.
With continued success and high utilization at our Midland plant and in order to meet growing demand and we've begun preparations to reopen and our Tyler manufacturing facility, which we temporarily closed during 2020.
We expect it to be online by the end of the third quarter with minimal revenue contribution during the quarter.
This facility will provide lower cost access to the midcon, Haynesville and Gulf coast regions and allow our primary manufacturing facility and Midland to gain further share and the Permian.
We expect modest mid single digit revenue growth with low double digit margins during Q3.
And the near term the current high utilization of our Midland facility. The reactivation cost of Tyler and continued raw materials pressure are expected to hinder this segment from taking a more meaningful step forward and Q3.
Once Tyler reopening costs are behind us, we anticipate resuming the strong first half growth trends for this segment and today's market.
Looking beyond the individual segment SG&A dropped from $19.9 to $15.9 primarily due to the absence of 1 off severance payment that hit Q1.
Complete currently runs about $2.5 million of quarterly SG&A, which will impact our third quarter SG&A.
Higher revenue resulted in a use of cash from net working capital of $12.6 million.
Combined with our targeted investments and recycling infrastructure led to free cash flow of negative $13.7 million for the second quarter we.
And we finished the quarter with $143 million of cash on hand, and $257 million of overall liquidity and no debt.
A complete acquisition that closed just after second quarter, and we'll use the combination of cash and equity with the $14 million of cash consideration largely funding the acquisition of approximately $13 million of working capital and the transaction.
Our intention remains to always maintain a strong balance sheet.
The elevated cash balance of recent quarters represents dry powder for value, creating opportunities rather than our long term target levels.
We expect to continue to deploy a balanced mix of cash and equity and 2 accretive opportunities both organic and M&A related.
Positive free cash flow also remains a core target, though the inherent impact of and ongoing integration has led us to adjust our positive free cash flow goal for 2021 to positive free cash flow for the second half of 2021.
As we take advantage of value, creating consolidation opportunities and our space. We also gained the ability to make infrastructure investments to tie these networks and with our own assets through organic development.
We have been and expect to continue to be successful developing recycling networks and the Permian, but we believe other basins are prime for these types of projects as well.
Targeted organic development around the acquired complete assets provides further future financial upside above and beyond the attractive initial financial metrics on acquisition.
Even with the acquisition our asset light business model and disciplined approach to capital investment allows us to maintain our same 2021 capex guidance of $30 million to $40 million with 15 to 20 million and targeted to growth opportunities.
We invested $6.1 million and net Capex and the second quarter for a total of $8.3 million for the first half of the year, while gaining market share.
That being said the third quarter since the higher Capex spend primarily to complete our recently announced recycling facilities.
The complete acquisition acquisitions should still fit at the high end of our previously guided depreciation expense of roughly to $80 to $85 million for the year with no changes to the minimal interest expense continued consistent with our current quarter and no material tax expense.
Looking at the broader macro landscape are larger public customers generally continue to operate within budget, while generating attractive returns and paying down debt.
Sustained resilient crude and natural gas prices both in terms of the rally in recent months and forward coverage on the strip has allowed our customers to lock in attractive hedges and provide us with early confidence and 2022 activity.
In parallel with this we serve many private companies some of them with very robust development programs.
Adding crews and rigs in light of the strong returns from the current Wty price offers.
And we see a very solid activity backdrop, and fully expect continued revenue and EBITDA growth and the back half of the year, both from the base business and the newly acquired operations.
Our strong technology, offering and market leading position further bolstered by our consolidation efforts and investments and water recycling and energy transition opportunities provides us with the ideal platform for continued improvement across revenue margins and return on equity with that I will 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 1 on your telephone keypad.
A confirmation tone will indicate your line is and the question queue.
You May press Star 2 if you would like to remove your question from the queue.
And for participants using speaker equipment, and it may be necessary to pick up your handset before pressing the star keys.
Our first question comes from Tom Curran with Seaport. Please proceed with your question.
Good morning.
Good morning, Tom.
First 1.2 part question for water services on a 30% plus sequential revenue growth you expect first when it comes to the anticipated gain and average realized pricing from <unk>, how much of that increase has already been implemented and.
And taken effect with customers and then second where are you at with staffing relative to the workforce would be required to achieve that level of utilization.
Sure. So Tom I would say a lot of that pricing increase has been implemented but that doesn't show up a lot of and the <unk> numbers. So June was a.
A month, where we had a notable number of pricing adjustments and those have continued into July and August.
So theres a little bit of difference and the run rate. We currently have or the run rate you're exiting second quarter with <unk>.
Versus the overall second quarter of revenue.
And as far as.
And the pace of those.
Price increases and labor cost inflation as I mentioned, it's moderated a bit recently.
Still an issue and will be an issue going forward for water services, it's more on the labor side and for chemical is more on the raw materials side.
But with better extended benefits running out and we wish.
See less urgency and a.
They are more steady.
Steady plateau of labor pressures versus the real sharp pressures we had earlier.
And sorry, Tom what was the second part of your question.
I mean, I think you mostly covered and we've just about in terms of.
Keep your current workforce size, where are you at today versus where you would need to be in order to achieve the level of utilization net euro <unk> guidance assumes.
And Tom This is Michael <unk>, I would say that we're largely there today.
Recently with us.
And with labor.
We've been able to secure people CDL drivers and some of the things that really haven't been available over the last few months and so our head count is trending up to support our estimates going forward.
Alright.
<unk>. Thank you for that Michael and then from <unk>.
Water infrastructure, just another 2 parter.
Would you please tell us how this seasonal impact and the Bakken this year compared to the pre 2020 norm for 2018 and 2019 and then could you also quantify the margin impact of starting up the recycling projects, just how many basis points to day collectively cost and division.
Yes, so I would say versus pre 2020, the seasonal impact was pretty severe for for the second quarter here and the Bakken.
We expect that to get better but.
Certainly that was an area that dropped off pretty notably as it does most years.
But this year this year may have been a little more.
Going forward as far as the recycling project cost.
Have a few basis points of impacts on the third quarter here.
Those projects are accretive and we expect them to be.
<unk> fully operational and running by the end of the quarter.
Youre not going to see that impacts really and the third quarter numbers other than the cost side, though.
Great. Thanks for taking my questions and I'll get back in the queue.
Thank you Tom.
Okay.
The next question is from Ian Macpherson of Piper Sandler. Please proceed with your question.
Good morning, everyone.
Good morning, good morning.
You mentioned that.
The complete and will mainly fall into water services I imagine there is a <unk>.
And over that does it.
Unpacking that inorganic layer as well as.
And most but not a full quarter contribution from.
From that acquisition can you describe to us what your organic topline growth and Q3 from your base business looks like and the third quarter.
Ballpark or 5%.
10% et cetera.
So chemicals of courses and.
And directly impacted by the complete acquisition on a third quarter revenue basis, although it certainly helps.
And support further chemical growth organically going forward.
If you take that $100 million annual run rate number and break it up and the quarterly.
You can see where we're falling out on a segment basis for the other 2.
Generally for services.
High single to low double digit organic ex complete growth.
Complete as I mentioned.
Overwhelmingly services oriented and the current.
Breakdown here going forward there is a lot of opportunity to invest on the infrastructure side. They have a good platform of assets.
And that are generally close together.
Those are piped others have the opportunity to be networks, and then to develop organically recycling infrastructure around them and so.
And that's where we see the.
And the bulk of the growth coming from.
But currently right now it is more services related but 60% levered to production versus completion so.
So it brings a little bit of a different mix into our services business.
And they are probably a little more stable and predictable longer term.
That's great. Thanks, Nick.
You've highlighted for us.
Really attractive economics on your your acquisitions, but also an organic 1 the organic side with the recycling projects both of them.
From where we sit appear to be pretty rapidly scalable from what you've announced so far can you speak to the opportunity the relative pipeline breadth of opportunity between building more recycling yourself versus.
Other deals that could be comparable or maybe larger potentially than and complete.
Yes. This is John.
There is other.
Potential acquisitions that have the same kind of ingredients that we just executed with complete which are assets that we can build.
Build off of.
And the infrastructural side through gathering lines and.
And.
Long term contracts around that asset base as well as the ability to add the new.
Position into that footprint of recycling again that recycling position that we've been able to execute and.
Described today is comes with long term contracts as well.
So we expect more of it and we're going to continue to look at it.
And as far as the organic piece of it.
Continue to have.
A lot of conversations around opportunities to put organic money to work and the conversion of.
Disposal to recycling and long term contracts around those so we expect that will put more money there and that pipeline is pretty strong.
Well, we'll look forward to see and next steps thanks for all the detail today.
Thanks Ian.
As a reminder, if you'd like to ask a question. Please press star 1 on your telephone keypad.
That concludes.
<unk>, our question and answer session I would like to turn the floor back over to John Schmitz for closing comments.
Yes, thanks, everybody for participating today.
And <unk>.
And I appreciate your time and your effort and the questions and we look forward to talking to you.
The next quarter.
And our progress and and our continuing development of the company. Thank you.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
Okay.
[music].
Yes.
Okay.
Okay.
And.
Okay.
And.
[music].
And.
And.
[music].