Q2 2022 Select Energy Services Inc Earnings Call
Greetings and welcome to select Energy 2022 second quarter earnings Conference call.
This time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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These stars needle on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host with George Senior Vice President.
Please go ahead, Sir 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 2022.
With me today are John Schmitz, our founder Chairman, President and Chief Executive Officer next week, as senior Vice President and Chief Financial Officer, and Michael Sharkey Executive Vice President and Chief operating Officer.
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 August 17, 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 August three 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. 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, 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.
Now I'd like to turn the call over to our founder Chairman President and CEO John Schmidt. Thanks.
Thanks, Chris Good morning, and thank you for joining us.
I'm excited to be discussing select energy again with you today.
The second quarter's results represent a meaningful step forward in the continued execution of our strategy of improving and bolstering our base business.
Advancing our technology sustainability and diversification efforts and executing on our strategic M&A.
The second quarter saw strong sequential revenue growth, increasing 14% quarter over quarter with our chemical segment, producing all time record revenues during the quarter.
Our water services segment saw quarterly revenues grow 20% during quarter, two getting back to levels not seen since quarter, one of 2019, well before the pandemic began.
Meanwhile, our infrastructure segment achieved quarterly revenues higher than the quarterly average of either 2018, our 2019 and within striking distance of all time highs.
Combined these revenue levels with our significant investments in technology continued operational efficiencies and consolidation benefits and we generated strong 83% growth in net income and 48% growth in adjusted EBITDA pair it altogether.
And I believe we are demonstrating that the industry activity and pricing does not need to fully recover to pre COVID-19 levels for select to get get back or exceed pre downturn levels of financial performance.
Even so it has become clear that U S. Unconventional resources will be the primary growth driver to supply global global energy needs over the next few years.
As the market continues to tighten we are well positioned to help meet that need through our advanced technology solutions strong balance sheet and the flexibility provided by our recent acquisitions.
Our asset light business model does not require large amounts of reactivation or maintenance Capex and we believe will generate substantial free cash flow through the cycle.
As we advance our market leadership, we continue to make progress on the integration efforts of our recent acquisitions and I believe we will continue to capture additional efficiencies and synergies in the second half of the year.
These integration efforts and continued rapid revenue and working capital growth impacted cash flow during the second quarter.
However, we are back to producing positive free cash flows and I feel confident in our ability to generate meaningful free cash flow during the second half of 2022.
On the sustainability front during the second quarter, we issued our inaugural sustainability report and I encourage listeners to give the report a full read which is available on our website.
As a market leader in sustainable water and chemical solutions, we take our commitment to water stewardship seriously. We're proud of the accomplishments. We've achieved achieved to date and remain confident in our ability to set the bar high with ambitious targets the water stir chip in the future.
To that end, we commenced operations at our two newest contracted fixed recycling facilities during the second quarter, adding an additional 75000 barrels per day of capacity.
This takes us to more than 600000 barrels per day of recycling capacity and puts us well on our way to achieving our full year 2022 recycling targets. Additionally, we continue to find new and creative opportunities to expand on our existing infrastructure footprint.
During the second quarter, we signed a five year agreement to connect and operators existing water distribution and gathering pipeline in the Upton County, Texas with two of our existing recycling facilities.
This interconnection will allow us to efficiently gather produced water <unk>.
<unk> recycled volumes between our two existing facilities and dispose of water when necessary.
This significantly expands the commercialization opportunities of the facilities and allows for more efficient management of water needs across multiple operators in the area.
We continue to see strong demand from our customers for the integration of our.
Water and our chemistry solutions and I believe we will continue to build on our recent success with more long term contracts and the infrastructure development opportunities in 2022 and beyond.
While the second quarter saw a meaningful double digit percentage increase in drilling activity completion activity continued to modestly lag during the period with a single digit percentage growth. However, we believe this activity ratio is starting to normalize and we expect to see more completion activity.
During the third quarter supported by a continue continued strong overall commodity price environment.
Underpinned by growing activity strong commodity prices further price increases and continued operational efficiency gains we expect to see further improvements to our financial performance, including meaningful free cash flow during the second half of 'twenty two.
Substantial free cash flow supported by a strong balance sheet healthy net income and a growing stream of contracted and production related cash flows will provide us with additional shareholder return options.
With these financial conditions in place, we will continue to evaluate incremental shareholder returns in the coming quarters.
This is a core priority to us and to many of our investors and I look forward to expanding on this in the near future.
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 as John outlined our financial performance continued its strong momentum during the second quarter with large gains across revenue adjusted EBITDA and net income all three of our segments increased both the revenue and margins.
Trajectory, both through the quarter and upon exit remains positive.
Our revenue grew by 14% from $295 million to $336 million.
While a full quarter of revenue from legacy <unk> assets boosted. This total the majority of the increase was derived from pricing and activity improvements.
While cost inflation remains a challenge pricing recovery has accelerated in recent months, even with recent commodity price pullbacks. Our customers are generally highly profitable in this commodity environment and recognize the value of our advanced technology brings especially around integrated water and chemistry solutions, such as water treatment reuse and.
<unk>.
These solutions leverage the combined firepower of our three business segments and have helped drive the chemicals segment in particular to its highest quarterly revenue and gross profits we have reported as a public company.
Gross margin for the company improved from eight 4% to 10, 6% in the second quarter and adjusted EBITDA increased 48% from $32 2 million to $47 $7 million net.
Net income of $14 6 million grew 83% from $8 million in the first quarter.
Despite working capital headwinds free cash flow returned to positive territory at $1 1 million.
An $11 1 million of cash flow from operations as the company continued its targeted recycling and infrastructure development program, while cycling out unneeded equipment and real estate related to our recent acquisitions at a favorable time in the market.
Investments in new recycling facilities and gathering pipelines among other core business assets led to gross capex of $15 5 million or net capex of $9 9 million after asset sales.
The $18 million of cash proceeds from the sale of excess noncore obsolete assets and equipment year to date from the acquisitions provides an attractive financing source for recycling and other integrated infrastructure investments like the one John mentioned.
While the pace of these asset sales will slow during the second half of the year, we continue to have additional opportunities, particularly on the real estate side.
We retained our net cash position with $25 $7 million on hand, and no bank debt and have more than $220 million of total liquidity when considering our sustainability linked asset backed lending facility.
We expect to accelerate our free cash flow generation over the back half of the year as we complete the integration of these acquisitions.
Overall, our integration and consolidation efforts are proceeding on course.
We are realizing cost synergies through rationalized footprint, both in the field, where margins are increasing as well as in corporate support where SG&A declined $1 6 million quarter over quarter.
We've largely executed on the identified SG&A cost savings and have turned our focus increasingly to improving operational efficiencies and enhancing revenue by making targeted investments that utilize our portfolio of complementary infrastructure assets there.
There are significant growth opportunities here through adding recycling facilities pipe gathering systems and capacity enhancements.
Water recycling volumes continued to grow and we are on pace to exceed our 2022 target of one 3 billion gallons are 31 million barrels.
Turning to the individual segments, the water services segment exceeded our expectations in the second quarter growing its revenues by 20% to $196 million, while advancing gross margins over three percentage points to 19, 4%.
About 30% of the $32 million revenue growth was derived from the full quarter presence of Nomura assets versus a little over a month of activity in the first quarter. While the segment benefited more broadly from pricing improvements that took place from late Q1 onward looking.
Looking forward to the third quarter, we expect mid to high single digit revenue growth supported by activity growth and continued pricing gains with margins, reaching 20% on fuel costs relief, coupled with pricing improvements and continued operational efficiencies.
Water infrastructure revenue increased by 3% to just over $60 million in the second quarter with higher recycled volumes offset by seasonal strength in the Bakken.
Legacy Newberry assets, most notably the Haynesville pipeline gathering system added about $6 million of revenue relative to the abbreviated contribution during the first quarter.
Margins increased to 25, 5% in Q2 through the increased recycled volumes and accretive Newberry assets and we anticipate margins in the high 20% range, primarily due to recovery in pipeline and related pipeline logistics activity.
We forecast that these trends should drive third quarter revenue growth in the mid single digit percent range, while new recycling as well as brownfield investments should continue to propel accretive growth over the future quarters.
The chemicals segment continued its revenue expansion, increasing by 10% to nearly $80 million margins grew slightly to 14, 6% for the second quarter with raw materials still an area of focus.
This segment does not include any assets from the recent acquisitions and with its recent rapid organic growth over the last few quarters, we expect third quarter revenue to consolidate slightly higher than that of the second quarter.
On the gross margin side, we forecast advancement beyond 15%.
SG&A for the quarter declined to $26 7 million from $28 3 million due to a reduction in transaction costs as well as realizing integration synergies.
We achieved our targeted reduction of SG&A below an 8% of revenue threshold and we expect to remain under that threshold. Despite the inflationary pressures in this environment.
We expect to invest roughly 15% to $20 million of gross capex per quarter in the back half of the year offset by asset sales, a little below $5 million per quarter.
If realized this should put us at the low end or even slightly below our previously estimated net capex range of $45 million to $60 million for the year.
Generating robust free cash flow will be our top priority for the remainder of 2022.
As we move into the final innings of the integration work, we expect to see a reduction of working capital along with continued improvements in profitability.
We did not execute any buybacks or other forms of shareholder returns during the second quarter, but as John noted as we prove out this free cash flow underpinned with healthy levels of net income.
Evaluating additional shareholder return options becomes a greater priority.
Our pronounce gains across multiple critical financial metrics illustrates both the strong macroeconomic backdrop as well as the game select is making with our customers at a time of rapid change in the energy industry.
Our sustainable full lifecycle water solutions integrated with advanced chemistry capabilities are truly unique in our space and we expect to further capitalize on our market leadership in the quarters to come.
Thank you and with that we'll open it up to questions operator.
Thank you very much.
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One moment, please pull for questions.
Yeah.
My first question is from the line of Don Please.
Johnson Rice. Please go ahead.
Good morning, gentlemen, how are you all today.
Good morning doing well.
I wanted to touch on pricing I mean, obviously theres been a lot of pricing uplift in.
With demand over the last couple of quarters, but where do you see pricing as we move into the back half of 'twenty. Two 'twenty three do you see things stabilizing or do you think that there is significant uplift potential.
As we kind of move into 'twenty three.
Sure Dan This is Michael scarred, Yeah, I'll take the first part of that so pricing. Thus far this year has largely been to cover our costs, we've seen a pretty significant increase in fuel and labor and then the raw materials on the chemical side.
I think we certainly kept up with pricing so far this year for the back half of the year Theres kind of two factors. One is how do we expect those.
Inflationary pressures to continue and then what do we see with supply demand imbalance in terms of our cost.
Think fuel is going to be relatively flat for Q3.
Raw materials, we're forecasting relatively flat for Q3 on the labor side, we think we're going to continue to see inflationary pressures. There. So thats something that were targeting to make sure that we're able to pass through to our customers and then looking at the market to see where there is a supply demand imbalance and and who were able to work for at a fair price.
So I would expect us to continue to get price in Q3, and that's going to be in part because of the reasons I mentioned, but also what John covered in his remarks about increased completion activity, which is one of our primary drivers.
Don if you looked at our customers' results, they're doing very well.
Great commodity price environment for them.
So you are seeing in the first quarter reports in the second quarter very high profitability.
As well as some upward capex movements.
Acknowledgment of further pricing increases so that.
<unk> supports our view there.
And.
As as it kind of goes to pricing on the other side of the fence.
As your recycling picks up can you give us I don't know if you have the number in front of you. The just the percentage of freshwater sourcing that youre displacing from your recycling efforts because I know you probably.
Charge, the takeaway water and then.
Charged back when you when you give that fresh water back to a more recycled water back to I'm, just trying to get a sense of what the what the potential uplift is and how much you are displacing today from a freshwater sourcing perspective.
Right, so our recycling and in sourcing of produced water relative to fresh and brackish water is kind of continue to to shift over the last year or two.
Really on seeing an increase in the treated produced and produced water.
Quarter over quarter basis.
I don't have the exact figure in front of me, but for.
For.
For the current quarter award, we're going to be moving about 35 to 40 million barrels.
Produced water that would be directly replacing freshwater.
Okay.
Definitely picking up for sure and just one final one for me I mean, everybody knows about the demand in the in the Permian Basin.
And how that moves into 'twenty three but can you talk about your other areas may be mid continent, and the Rockies and what the demand picture looks like there for further growth.
Is this are you talking about recycling or just the general demand just just general demand because I know a majority of the rig count is in the Permian today I just didn't know what the infrastructure needs would be in those other areas that you operate.
Sure. So you are absolutely correct. The majority of the revenue as the rig count is in the Permian.
And Thats an area that we're very active in spending a lot of time and our primary focus.
But but everywhere right now is pretty active into nick's points, the economics, whether it's oil or gas at attractive really across our footprint. So we're seeing increased demand for all of our services for services for <unk> and for infrastructure, We obviously announced that we went live on their <unk>.
Cycling project in Colorado, which was a step out for us.
From the Permian and we're evaluating other infrastructure projects really across our footprint today.
I appreciate the color I'll turn it back to get back in queue.
Thank you.
Our next question comes from the line of Tom Gilman.
Force Research partners. Please go ahead.
Good morning.
Good morning.
Nick.
When it comes to the realization of synergies and cost savings across the acquisition. It seems as if you were on track to exit the quarter with about 5% left to go and complete in May.
Mainly consisting of streamlining some final yards in locations and then a significant amount left to execute new barrier with around 10% remaining on targeted staff reductions and then several operational and back office cash slipped.
Could you just update us on.
Where each stands now and.
What you think.
Hi, it's the most bang for the Buck to be delivered.
What remains.
Sure Tom I think the way you outlined the acquisitions there as far as the specific companies is largely accurate.
Think about overall synergy realization in three phases.
Parallel to each other the <unk>.
First one which is the shortest is that back office rationalization. So.
Putting the companies together and integrating the processes. There is a lag there on cash flow, but as far as the SG&A costs.
We're in the late innings on that certainly a lot of progress there and we've been very aggressive.
One on in the field the operational efficiencies.
Understanding the best footprint, we have in the field and where to serve customers earlier than what.
What operations, we can sell off in terms of real estate and equipment.
That we've made a lot of progress on as well you have seen our asset sales in the first half of the year of about $18 million there.
So, we're getting more and more efficient, but probably have.
Some more opportunity there ahead of us versus an SG&A and finally I think the third most important one here is the revenue synergies.
We're making those investments John talked about it a.
Tie in project, there, but theres a lot of networking opportunity among the assets. We've acquired there is a lot of opportunity to.
Generate operating leverage with minimal new investment around the current utilization profile.
So that's the one where it's the biggest dollar opportunity long term, but also probably where were earliest in realizing that.
Helpful.
It was a comprehensive update I was looking for and then.
For water services, where is utilization of your lay flat hose inventory today versus where it peaked in 2018 and then at the industry level, what's your sense of utilization levels.
From from Lucius the tightest for the major water services assets Im thinking lay flat hose containment assets, and then flowback and well testing systems.
So Tom I don't have the exact utilization compared to 2018 on the assets off hand, but what I would say is really so far this year, we've been looking at utilization more as the utilization of labor and less of the utilization of equipment labor has been labor has been tight we haven't been able to expand with the market to.
Keep up with the demand and so that's been the largest constraint.
However, really starting in this last quarter and I expect to continue in Q3 that starting to shift where you are having equipment become a constraining factor for us and for the industry in general and in <unk>, just because we haven't had a ton of investment since 2014 or in some cases 2014.
So we are getting tight on equipment really across.
Services.
And so that's another one where labor is still tight but equipment starting to constrain as well.
Thankfully, we do have a little more flexibility on the infrastructure side and on the chemical side Lara.
Largely to our in basin chemical manufacturing, we can expand that we have room to grow and we can expand organically if needed and then on the infrastructure side. We got some really good people with the acquisitions of complete Agua Libre A&D Vera but.
Almost as important we have an asset base that in our view was underutilized and so we've really been working to Nick's point to expand that so there is capacity on the infrastructure side today.
Great.
And then as my last one Michael I have you.
I'll direct this one to you as well.
As Youre looking at 2023 could you give us a preliminary.
View of your goals for the industrial solutions group.
Sure so.
We're very committed to expanding into industrial solutions and really the revenue diversification.
We continue to focus on it organically our focus is really around water and chemistry, and that's where we think we have.
Core competency and a strategic advantage to we're looking to expand that.
You would know Tom maybe it really hasnt come as fast as we initially hoped for this year and I think that's partially due to limitations on people and equipment.
But we're still we're still very focused on it and I expect that we will have meaningful movement.
In industrials in 2023.
We're pushing for it this year, but I think 2020 threes when we can start to talk about it and to really highlight what we've been able to accomplish.
Sounds good thank you for taking my questions.
Thank you Tom.
Thank you.
Our next question comes from John Daniel.
Daniel Energy partners. Please go ahead.
Hey, good morning, guys.
<unk>.
John This might sound like Crazy question, but you are very experienced and you live in the backyard as the Barnett for you so I'm.
Back in the Glory days model.
And all of that going on there what are you seeing right now.
For your business is there what's the opportunity here.
Youre talking about just the Barnett Joan is that what youre asking.
That area, yes, Sir just.
This is not so much trying to select what your views on it first and then to select.
It remains the biggest movement and we all know it is that the assets have changed hands into right different companies and they become primary so there's new <unk>.
Activity.
Related to that asset changing hands.
And there is new.
There is also new people that are.
Executing that activity John that showed up in the basin.
There was a lot of wells that really didn't have a lot of attention.
For a four five year period.
And that renewed attention, whether it's a producing well is shut in well a re completion or are actually in new drill.
That activity is way different than the Barnett today than it was.
Before these cars right.
But do you see it isn't I mean is there much of an opportunity over the next one to two years.
And that market for you and the industry, Yes, we're still very.
Well positioned in that respect.
We're seeing actually increased activity.
In.
Well testing of our water transfer our opportunity surrounding the refractor new drills.
Please.
So it's a good position for us, it's still a smaller market compared to sure almost anything.
And the only thing I would I would add to that is obviously, the most mature market and.
Cost have come down and competitors have exited and so I don't see a lot of competition. Returning so if you do have a good position either with services or infrastructure when you get that uptick in activity.
It becomes a decent little market like John said.
And we shouldn't have to you shouldnt be as much competition, just because of the activity just hasnt been there over the last couple of years.
That's what I was thinking okay, turning to a market that's a little bit bigger in the Permian.
The five year tie and agreement that you all had.
How many opportunities that exist out there for you to do.
Interconnecting various facilities is that a one off or is there do you see more opportunity.
It's definitely not a one off John So that was a greenfield project recycling project for us and the way that those work as we generally have one or in some cases to customers underwrite. The project economics and then the goal is to expand those to offset operators to really.
Service the area, which you haven't underwritten by SKU, but the idea is to fully commercialize the system, while giving priority to your cornerstone customer our anchor tenant.
And so whether it's a greenfield project for an existing underutilized if you've been talking to the Permian for us that would largely be in Agua Libre asset.
There is a lot more opportunity to further commercialize tie into other operators or other operator systems and it's something that we're actively focused on daily and it really develop a team focused on the team specific to the Permian focus on those opportunities.
Yes, Sir.
Something that that.
Israel and primarily is because we did these transactions we now have.
Sure.
Positions, where we got additional assets.
In.
Good growth.
Places across the United States, where drilling rigs are running.
Completions are happening in new waters coming online and we now have.
Four disposal wells out of four different transactions, along with the disposal wells, we had and that footprint is a different footprint and the value of those assets between each other and interconnect our recycling opportunity.
Or.
Just logistics.
<unk> is way different than it was I mean, if you think about this company and what it ran at its high back in 18, you look at that asset base. You think of what was sold off what was developed and then you think about these four transactions and look at that asset base today that asset base is a lot there.
Different to a positive and being able to create value in both revenue and profits as well as value to the customer base.
And application.
Early days and I suspect Okay. Two more for me and then I'll turn it over just a follow up on this agreement.
Can you speak to what type of.
Capital is required to do to do a project like this.
And knowing that it varies based on distance and so forth, but just curious.
Sure so.
And you're exactly right.
Absolutely dependent on distance.
The capital for this particular project was was very minor.
We're in close proximity to another operator system and so it was under half a million Bucks.
Very good Okay, and then final one for me just moving over to the chemical side.
Can you just briefly speak to any challenges getting product on the supply chain and what youre seeing in terms of the inflationary pressures there.
Turning to <unk>.
Good question I tried to address it a little earlier, but the.
The chemical raw material supply chain has been a real challenge I mean, we've seen no limitations on on raw materials, we've seen extreme price variability.
It's been tough this year, but it really dates back to kind of the freeze of last year. The market has just been out of whack in some respects.
I would say that our technology team has worked really hard to reformulate around shortages and make sure that we have the availability of our core products and we've been pretty successful at doing that.
In terms of pricing.
Generally speaking the raw materials are down slightly from their peak, but we're still expecting for Q3 of them did raw materials to be flat relative to Q2.
Fortunately as you've kind of seen in the margins, we've been able to navigate around raw material shortages or in the revenue rather than the margin we have been able to pass through much of these raw materials through to our customers.
Fair enough. Thank you for all the color. Thanks have a good day guys. Thank.
Thank you John .
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to John Schmidt.
For closing remarks.
Yes, thanks, everybody for participating today as you can tell we like.
Talking about select and we look forward to talking to you next quarter in around our opportunities and asset base. Thank you.
Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Okay.
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