Q4 2021 Select Energy Services Inc Earnings Call
Greetings and welcome to the select energy services fourth 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.
It is now my pleasure to introduce your host Mr. Chris George Vice President of Investor Relations and Treasurer. Thank you Mr. Chris George 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 fourth quarter of 2021.
With me today are John Schmitz, our founder Chairman, President and CEO , Nick <unk>, Senior Vice President and Chief Financial Officer, and Michael <unk> Executive Vice President and Chief operating 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 19, 2022. 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 23 2022.
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.
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.
So listen there is encouraged to read our annual report on Form 10-K , our current reports on form 8-K, as well as our quarterly reports on Form 10-Q to understand those risks uncertainties and contingencies.
Also please refer to our earnings announcement released yesterday for reconciliations of non-GAAP financial measures.
And now I'd like to turn the call over to our founder Chairman President and CEO John Schmidt.
Thanks, Chris Good morning, and thank you for joining us.
Excited to be discussing select energy again with you today.
Overall 2021 was very exciting for select having been back in the CEOC for a little over a year now I am pleased with the progress we've made on executing our strategy of improving and bolstering our base business advancing our technology, ESG and diversification efforts and execute.
On our strategic M&A.
I'd like to start by highlighting some of our 2021 achievements.
We finished the year with total revenues of $765 million and adjusted EBITDA of $50 million, while seeing revenue margins and adjusted EBITDA grow every quarter throughout the year.
On the technology and sustainability front, we continue to advance our water recycling efforts, we've invested in six facilities during 2021 backed by long term contracts.
This sets the stage for significant growth in our recycle volumes for 2022.
We are also having constructive conversations with our customers every day and I believe we will continue to build on our recent success with more long term contracted development opportunities in 2022.
We are also very active on the M&A front during 2021 as I've stated many times I believe consolidation is very important for this industry.
Through a combination of cash and stock consideration, we closed on the acquisitions of complete energy services.
Agua Libre midstream.
HB rentals and an ultra recovery during 2021.
Additionally, we are set to close on the acquisition of <unk> Environmental solutions.
In doing so we've added nearly 300 million of run rate revenues to an already growing base business and acquired strategic portfolio of infrastructure assets, including gathering and distribution pipelines disposal facilities and landfill operations and.
Importantly, we have also welcomed more than 1200, new skilled employees to the select family.
In a challenging economic environment, and a tight labor market.
These new team members will be critical to drive our continued success in 2022.
Through these consolidation opportunities, we have meaningfully improved and expanded our operation capabilities and geographic breadth.
I also believe we have a tremendous opportunity to create revenue synergies and capture cost savings, while improving our margin profile through increased efficiency and pricing gains across the business.
During 2021, we have also executed a number of strategic investments and partnerships with unique emerging technologies and energy transition platforms, including isothermal harvesting deep imaging technologies ESG solutions and emissions are.
As we look forward, we will continue to look for unique opportunities to invest in and advance our technology sustainability and diversification initiatives.
While the fourth quarter was relatively stable from an industry activity standpoint, our revenue growth well exceeded the industry activity growth. We continue to see the benefits of a strong commodity price backdrop overall with oil prices around $90 and natural gas prices have more than four.
Dollars.
I believe 2022 will be a strong year for the industry with North America onshore E&P budgets expect it to be up 25% to 35% year over year supported.
Supported by our continued investment in technology, our recent acquisitions and our strong balance sheet <unk> is well positioned to grow and succeed in 2022.
So lax leadership in water and chemical solutions.
Is driven by our operation reliability, our committed focus on safety and sustainability.
Our leading technology platform and our highly skilled and dedicated employee base that is now more than 3500 strong.
Our unique integrated platform of water and chemical solutions provides a truly differentiated value proposition for our customers and I look forward to continuing to provide them with the operational excellence they have come to rely on from select.
Speaking directly to the fourth quarter, we wrapped up the year with another strong showing with revenues, increasing 25% quarter over quarter and adjusted EBITDA growing by more than 70% to $26 million. In addition to the growth we've seen in the base business, we've already seen strong <unk>.
Contributions from our recent acquisitions. However, we still have much room for improvement as our operation integration strategy advances in the coming quarters.
I'll, let Nick speak to our first quarter and 2022 financial outlook in more detail, but I feel very good about our continued ability to grow the business meaningfully improve our pricing achieved cost synergies.
<unk> market share and generate free cash flow during 2022.
With the sizable portfolio of infrastructure assets. We recently acquired we are well positioned to continue to build around these assets and further develop unique sustainable solutions, including gathering pipelines and our water recycling and integrated fluid match solutions.
We remain very focused on growing our less cyclical production and industrial related revenues and adding contracted revenues through our recycling and pipeline infrastructure.
Ultimately this will further stabilize and enhance our cash flow generation capabilities differentiate select from its competitors and provide incremental capital allocation opportunities.
Again, I am very pleased with our recent acquisitions, our technology strategy, our recycling projects and our other strategic investments with growing activity strong commodity prices and improved operations and financial performance.
'twenty two is setting up to be a very exciting year for select.
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. We continue to gain steam on our strong financial recovery, adding 25% quarterly revenue growth, while expanding margins and reporting positive net income.
Our $255 million of fourth quarter revenue increased $50 million from the third quarter and $94 million from the second more.
More importantly, we are bringing more of this revenue through to the bottom line with adjusted EBITDA growth of over 70% to $26 4 million from $15 1 million in the third quarter and fourth quarter net income of $11 1 million from $14 2 million net loss in the third quarter.
To accomplish this we are successfully leveraging all three elements of our strategy as John outlined we.
We are driving recovery through our base businesses, gaining market share and strengthening margins our base businesses pre acquisitions grew revenue, 14% quarter over quarter, while the EIA and other third party sources estimate industry completion completions grew low single digits. The clearest example of this core business improvement came from our chemicals.
<unk>, which grew revenues by 22% quarter over quarter, while improving margins by two percentage points, even though none of our recent acquisitions directly benefited the chemical segment.
In regards to advancing our technology ESG initiatives and diversification efforts our latest three recycling projects that came online during the fourth quarter contributed to growth in both revenue and margins through the water infrastructure segment and will contribute further during 2022.
Overall in 2021, we recycled 25 million barrels of produced water through our fixed facilities and we expect to continue driving these volumes higher.
This recycling alleviates demand for freshwater sources in water stressed regions, while also limiting waste disposal, which is particularly important in areas where seismicity concerns.
Finally, I will touch on our strategic M&A, we believe we execute in each of these transactions at extremely attractive valuations.
We have begun to contribute materially to the bottom line the.
The integration is complete was largely accomplished during Q4, although we have additional efficiencies still to realize in regards to Agua Libre and HB rentals.
We expect to finish those integrations over the course of Q1 with increased margins going forward.
With the closing of the <unk> acquisition, we will gain complementary service capabilities and add strategic infrastructure assets across the Bakken Haynesville and northeast regions as well as future development opportunities for our consolidated water networks.
Additionally, we expect meaningful cost synergies, particularly given <unk> standalone public company costs.
Overall, we expect to have completed our integration and consolidation efforts for these acquisitions by the end of the summer, which should drive further profitability over the course of the year.
In addition to the anticipated cost synergies. We also expect additional revenue synergies going forward. These water infrastructure networks and assets bring additional development potential, especially in regards to linking and new gathering pipelines and recycling facilities.
Given the advanced state of current customer discussions around some of these recently acquired assets. We are confident in our ability to execute on additional projects during 2022.
Looking at the segments individually the water services segment grew its revenues by 25% in the fourth quarter, we're holding gross margins to between 15 and 16%.
Short term operational inefficiencies related to the acquisition and integration of basics production services operations obscured margin improvements and other legacy businesses.
Looking forward, we expect 5% to 10% revenue growth in the first quarter with slightly higher margins.
This revenue growth and margin improvement will come through a combination of pricing improvements market share gains the consolidation of basic operations and contributions from Nomura.
That said these margin improvements will be balanced by modest friction from the initial <unk> integration efforts in the coming weeks.
Water infrastructure revenue grew by 27% to $47 million in the fourth quarter driven by increased activity around our new Mexico pipeline additional recycled water volumes and contributions from newly acquired Agua Libre assets.
Additionally, gross margins increased by over three percentage points as well, we anticipate that activity growth combined with a full quarter contribution from these recycling facilities and additional contributions from the Agua Libre acquisition should result in a 10% to 15% revenue growth in the first quarter with gross margins in the mid to high 20%.
<unk>.
I touched on oilfield chemicals segments fourth quarter performance earlier, but to reiterate our recent research and development activities have led to new treatment technologies for produced water reuse that have gained additional traction and led to market share growth.
We expect chemicals to see revenues around the same level in the first quarter is the fourth with modestly higher gross margins as pricing improvements out distance higher higher raw material costs for oil linked polymers.
Our reactivated Tyler facility is performing well and enabled margin improvement through reduced freight costs during the fourth quarter.
Looking at SG&A transaction costs accounted for about $2 $3 million of our total SG&A of $25 million during the fourth quarter while.
While we likely will see additional transaction and integration related costs for another couple of quarters. We are targeting total SG&A of under 9% of revenue for the year as we continue to drive cost synergies across our existing platform from recent acquisitions.
Free cash flow in the fourth quarter came in at negative $6 4 million, while capex declined in the fourth quarter relative to the third our strong revenue growth required an incremental $23 million of cash usage for working capital overall.
Overall, our cash on hand decreased by about $22 million during the quarter to $86 million cash.
Cash was also impacted by the $16 $1 million of consideration used for the acquisition of the Agua Libre and HB rentals assets overall, our total liquidity at year end was $203 million with no bank debt and we expect this to increase over the course of 2022.
We've tried to judiciously balance the use of cash and stock and our recent acquisitions and our impending new Vera acquisition fits this model.
We will be issuing approximately $4, one 5 million shares as full consideration for the equity and anticipate retiring the approximately $19 million of Nomura bank debt with cash on hand for total consideration of around $50 million.
And bind with higher working capital needs amid continuing integration efforts. This will reduce our Q1 cash balance, but we expect solid free cash flow for the full year.
Looking towards 2022, the <unk> acquisition will partially contribute to Q1 results that we will still be integrating the business, which may result in near term inefficiencies through the first half of the year.
That said the incremental segment guidance I provided earlier combined with the positive macro environment.
It leaves us optimistic that quarterly adjusted EBITDA will continue to move sequentially higher from the 26 million seen in Q4 and.
And that we will generate solid net income in 2022.
In the fourth quarter, we were able to execute strong growth with just $4 1 million of net capex, finishing the year at just $28 million of net capex meaningfully under our original guidance.
We will continue to fund a large portion of our investments in infrastructure, such as gathering pipelines and water recycling facilities and other initiatives through asset sales from our acquisitions. We are constantly seeking to maximize return on assets and cash flow by optimizing our asset base consolidating operations exiting inefficient.
That cannot be economically consolidated and using a portion of that cash to exploit higher return opportunities we.
We anticipate 2022, net capex of $50 million to $70 million, depending on the ultimate execution of numerous contemplated contracted fixed infrastructure and recycling discussions with about half of that expected spend tied to maintenance capex.
The difficult steps, we previously took throughout the downturn in 2020, and 2021 have enabled us to better capitalize on the changing and improving environment of today, we will continue to make targeted investments to meet our customers' growing demand for sustainable water and chemical solutions consolidate a fragmented industry into stronger more dynamic networks and create enhanced.
Value for our investors through disciplined capital management.
Thank you and with that we'll open it up to questions operator.
Thank you we will now be conducting a question and answer session if.
If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment and may be necessary to pick up your handset before Christmas turkeys.
Please while we poll for questions.
Our first question comes from the line of Ian Macpherson with Piper Sandler. Please proceed with your question.
Hey, good morning, gentlemen.
Good morning, good morning.
Just a lot of moving pieces in recent months and quarters with acquisitions and congratulations on those.
It makes it a little bit.
Paul gear from the cheap seats here.
Respect to copying your your business on a sequential basis, but.
Obviously, the chemicals business outperforming the broader market and the margins was encouraging in Q4 and I Wonder if you could just speak generally for chemicals and water services.
How you are pricing negotiations are going on across the platform in this inflationary environment and how you see your.
Your pricing power in 2022, and in terms of being able to expand margins organically going forward.
If you think it's maybe more of a realistic ambition to maintain relevant expand margins organically.
And this is John .
Before we get to your question here and thanks for your question as you May have seen we just released our announcement that we closed in a very environmental solutions. This morning. So I just want to put that out there before we get started here with that we'll answer your question.
Sure So and we are having success pushing pricing both on the chemical side and with our water solutions.
Various business units.
One thing we're mindful of as we're still in an inflationary environment here.
So with that success, we are still seeing cost pressures on.
Labour side on the oil linked polymers.
And other raw materials here so.
We have been successful obviously our customers are.
And good results in this environment with WTO, where it is.
And we expect to continue to grow that margin, but we are addressing cost pressures as well and Ian This is Michael Starkey speaking specifically about chemicals.
As it relates to the fourth quarter, we saw interest in adoption of our specialty <unk>.
Those performed really well and treated produced and produced water and so we're seeing the market move more and more of that direction and we've seen a bigger demand for our products.
Complementary to that.
We're making good strides on specialty <unk>, we've been able to pull through some of our other products specifically scale and biocide. It has helped us increase the revenue on a per well basis.
Super. Thank you guys. John also just wonder if we could take into your M&A pipeline, you've been awfully busy recently closing on the Viera. This morning congratulations.
You were to scale the opportunity set for the year ahead relative to.
So much that you've already done recently.
How would you compare.
That opportunity set in and your attitude towards continuing to use the balance sheet too.
To grow the business.
Yeah Yeah.
And we continue to be.
Open when it comes to M&A opportunities, we feel like we.
Really you added strategic assets.
And geographic footprint.
As we think around <unk>.
Water and chemistry recycling and fixed pipeline systems, and we feel like we did it at a really deep value.
But we're going to judge M&A that way go forward, it's got to fit the mold of where we want to be in and what we want to do and we want to make sure that the return is proper.
Because we have a lot of opportunity in house now if you think about all of these assets we put together.
The different things that we can do around those assets and then as Michael said matching chemistry to what the industry is doing now with produced water and recycling. So.
M&A is on our mind, we watch it but it's got to be the value, we gotta get strategic assets, where we want them and we've got a lot of opportunities that we are discussing with customers today.
<unk>.
I think it would stand to reason that your sweet spot.
The bid ask spreads may be in the rearview mirror now, but would you disagree with that.
Hi.
It really if you think about it again.
Navy.
I'd ask as far as just Emma.
M&A in general, but when you put the strategic of match.
<unk>, our abilities of our asset base that we already have.
In and around more assets that could be on the market.
Potential M&A.
When you look at that in total will last where we really find deep value. Thanks.
Buying these assets likely bottom and we're going to continue to watch really closely.
And find more things of that nature.
Alright, Thank you gentlemen.
Thank you.
Yes.
Our next question comes from the line of J B Lowe with Citi. Please proceed with your question.
Hey, good morning, guys quick.
Quick question I don't know if you went through this on your prepared remarks, but in terms of water infrastructure.
And the visibility you guys have into the Bakken over the next couple of quarters I'm. Just wondering what do you expect that business line could do kind of in Q2 Q3.
So historically Q2 is the breakup season in the Bakken. So typically we do see some retreat there.
However, with Nomura coming into the fold here, we have picked up some great assets in the Bakken that can work with our our systems and infrastructure. There. So we expect longer term beyond Q2.
But we'll have some real opportunities to build out.
Broader network, there, but as you've noted Q2 historically with the Bakken is not.
At the peak of the year.
Fair enough.
Other question was just on.
It might be kind of a tough one given all the moving parts but.
What do you think your base business.
I guess it also depends on what you define as your base business, but kind of ex the integration costs that you guys expect over the next few quarters, what do you think.
Incrementals could do maybe on a segment by segment basis or just on a corporate basis. If you guys have any insight into that kind of ex the transat transaction charges.
Yeah. So historically, we've seen 30% Incrementals I think thats, a reasonable estimate to use going forward.
You mentioned that.
We feel from customer discussions and what our customers put out there that we'll see North America, capex up 25% to 35%.
We have seen and are continuing to see.
Additional pricing gains here that factors into the 25% to 35%.
So I'd say the pricing environment is stronger than usual when it comes to that 30% incremental but at the same time the cost inflation environment is also stronger than usual too so I think <unk>.
30% is a reasonable assumption to use across but we do have those benefits.
Finding cost synergies when we're when we're putting these businesses together so over the next six months.
We do have more cost synergies to <unk>.
Each year with not just new Vera, but also with Agua Libre acquisition in HB rentals.
Then as well.
Great. Thanks, Nick.
Thanks JB.
Our next question comes from the line of Tom Curran with Seaport.
<unk> partners. Please proceed with your question.
Good morning.
For water infrastructure on the base business side, you highlighted the contribution to sequential growth the northern Delaware pipelines by that ICD, specifically mean, the two big pre Frac systems legacy Grrr network and in the pipeline you build for that Super major anchor tenant.
For those two pre Frac pipelines could you tell us how utilization rose from <unk> to <unk> and what Youre expecting for 2022, what sort of volume mix do you expect between the anchor tenant and spot sales over the course of this year.
So.
Q4, we had we had really good volume for our anchor tenant which display some of the spot spill activity, we had kind of during the quarter as we look out to the rest of the year.
We're going to see the anchor tenant come down off of an annualized number from the Q4, but we do expect spot sales to pick up and have already had some of those awarded.
The one other thing I would note is that new Mexico like like many other markets are moving to more recycling and Thats an area that we are participating in and working on providing more recycled water solutions in that in that basin as well so while that could have some ability to bring down the pipeline volumes, we see it as <unk>.
An opportunity to increase overall revenue and margin.
Got it and then.
Turning to your existing opportunity set.
Produced water gathering and recycling facility.
Investment opportunities.
This is Andy.
And here I'm, specifically speaking to.
Seeing your existing growth capex budget that could take it.
Could determine where you come out and that net capex range between $15 million to $70 million, so just that existing opportunity set.
Does it mainly consist of projects that are similar in size and nature to the six we just see you execute call it $2 million to $5 million of cash.
Capex size range.
And.
Does it include any opportunities to simply purchase acquire an existing facility.
Currently owned by our customer.
So this is Michael I'll speak to kind of the opportunity set so we're involved in multiple discussions with multiple customers.
Largely in the Permian, but really across the infrastructure base that we've added around recycling and I expect that we're going to be able to deliver some of those solutions to the market, which is why we.
Provided that forecast in terms of the Capex Youre exactly right. What we're looking at would be kind of within the range that you mentioned.
And in terms of of acquisitions of.
Other of customer systems, or our competitor systems that would be outside of the Capex range we provided.
Got it and then Michael I guess my last one will be for you as well.
It's a two parter sort of a wishlist heading into 2022.
First for recycling.
What technology what area.
Are you focused on investing in.
Whether it's via bolt on acquisitions or what you already have in house.
Just going to develop further.
Randy.
Where are you focused.
That you want to expand.
Your capabilities in for recycling.
And then turning to the industrial solutions group.
What targets or strategy does Walt has for 2022.
Sure so on the recycling.
Our primary focus is around building out around our existing infrastructure footprint. So we've acquired considerable amount of assets from Agua Libre and now new Vera and we see opportunity around those assets to service their existing customers and nearby customers with those assets. There is also an opportunity for us to build.
Standalone systems like like we've done in the past in the Midland Basin.
From a geography half the rigs from the Midland Basin in the Permian Basin, and Thats, where the recycling is probably most prevalent on a volume standpoint. So we're focused there, but we're clearly looking beyond that we've got solutions that are involved in discussions.
Outside of outside of the West, Texas, New Mexico and outside of Texas in General.
As it relates to industrial solutions.
Walt is finished just market assessment. He has come up with this business plan and we're in the early stages of building a team and staffing of group is capable of executing that strategy.
And we're expecting to start make progress an adverse revenue and relates to begin beginning gaining momentum in the back half of this year.
Great. Thanks for taking all my questions Michael.
Thank you Tom.
And this concludes the question and answers portion of the call I would now like to hand, the call back over to John Smith for any final comments.
Sure Thanks, everybody for participating with US then.
Allowing us to discuss select the opportunities set we got in front of us for 'twenty, two and look forward to talking to you next quarter.
And ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
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