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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to ________________

Commission File Number 001-38066

SELECT ENERGY SERVICES, INC.

(Exact name of registrant as specified in its charter)

Delaware

81-4561945

(State of incorporation)

(IRS Employer

Identification Number)

1233 W. Loop South, Suite 1400

Houston, TX

77027

(Address of principal executive offices)

(Zip Code)

(713) 235-9500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Class A common stock, par value $0.01 per share

WTTR

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.

Indicate by check mark whether the registrant is a shell company.   Yes      No  

As of October 31, 2022, the registrant had 98,102,383 shares of Class A common stock and 16,221,101 shares of Class B common stock outstanding.

SELECT ENERGY SERVICES, INC.

TABLE OF CONTENTS

Page

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

40

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

55

Item 4.

Controls and Procedures

55

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

57

Item 1A.

Risk Factors

57

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

Item 3.

Defaults Upon Senior Securities

57

Item 4.

Mine Safety Disclosures

57

Item 5.

Other Information

57

Item 6.

Exhibits

57

2

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (the “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact, included in this Quarterly Report regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “preliminary,” “forecast,” and similar expressions or variations are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” included in our most recent Annual Report on Form 10-K, in our subsequently filed Quarterly Reports on Form 10-Q, under the heading “Part II—Item 1A. Risk Factors” in this Quarterly Report and those set forth from time to time in our other filings with the Securities and Exchange Commission (the “SEC”). These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.

Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:

the severity and duration of world health events, including the novel coronavirus (“COVID-19”) pandemic and its variants, and associated repercussions to supply and demand for oil and natural gas and the economy generally;
global economic distress resulting from sustained Russia-Ukraine war and related economic sanctions, rising interest rates, and potential energy shortages in Europe which may decrease demand for oil and demand for our services or contribute to volatility in the prices for oil and natural gas;
actions taken by the members of the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia (together with OPEC and other allied producing countries, “OPEC+”) with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with announced supply limitations;
actions taken by the Biden Administration or state governments, such as executive orders or new or expanded regulations, that may negatively impact the future production of oil and natural gas in the United States (“U.S.”) or our customers’ access to federal and state lands for oil and gas development operations, thereby reducing demand for our services in the affected areas;
the level of capital spending and access to capital markets by oil and gas companies in response to changes in commodity prices or reduced demand;
the ability to source certain raw materials and other critical components or manufactured products globally on a timely basis from economically advantaged sources;
operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, measures taken to protect the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions;
any new or additional measures required by national, state or local governments to combat COVID-19, such as a COVID-19 vaccine mandate, which if enacted, could reduce labor availability or add additional operational costs as we may experience constraints on our workforce and the workforce of our supply chain, which could have a negative impact on our operations;

3

the potential deterioration of our customers’ financial condition, including defaults resulting from actual or potential insolvencies;
the degree to which consolidation among our customers may affect spending on U.S. drilling and completions;
trends and volatility in oil and gas prices, and our ability to manage through such volatility;
the impact of current and future laws, rulings and governmental regulations, including those related to hydraulic fracturing, accessing water, disposing of wastewater, transferring produced water, interstate freshwater transfer, chemicals, carbon pricing, pipeline construction, taxation or emissions, leasing, permitting or drilling on federal lands and various other environmental matters;
regional impacts to our business, including our key infrastructure assets within the Bakken, the Northern Delaware portion of the Permian Basin, and the Haynesville;
capacity constraints on regional oil, natural gas and water gathering, processing and pipeline systems that result in a slowdown or delay in drilling and completion activity, and thus a decrease in the demand for our services in our core markets;
regulatory and related policy actions intended by federal, state and/or local governments to reduce fossil fuel use and associated carbon emissions, or to drive the substitution of renewable forms of energy for oil and gas, may over time reduce demand for oil and gas and therefore the demand for our services;
growing demand for electric vehicles that may result in reduced demand for gasoline and therefore the demand for our services;
our ability to hire and retain key management and employees, including skilled labor;
our access to capital to fund expansions, acquisitions and our working capital needs and our ability to obtain debt or equity financing on satisfactory terms;
our health, safety and environmental performance;
the impact of competition on our operations;
the degree to which our exploration and production (“E&P”) customers may elect to operate their water-management services in-house rather than source these services from companies like us;
our level of indebtedness and our ability to comply with covenants contained in our Sustainability-Linked Credit Facility (as defined herein) or future debt instruments;
delays or restrictions in obtaining permits by us or our customers;
constraints in supply or availability of equipment used in our business;
the impact of advances or changes in well-completion technologies or practices that result in reduced demand for our services, either on a volumetric or time basis;
changes in global political or economic conditions, generally, and in the markets we serve, including the rate of inflation and potential economic recession;

4

acts of terrorism, war or political or civil unrest in the U.S. or elsewhere;
accidents, weather, natural disasters or other events affecting our business; and
the other risks identified in our most recent Annual Report on Form 10-K and under the headings “Part I—Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II—Item 1A. Risk Factors” in this Quarterly Report.

These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could have material adverse effects on our future results. Our future results will depend upon various other risks and uncertainties, including those described under the heading “Part I―Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K and under the heading “Part II―Item 1A. Risk Factors” in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022, and this Quarterly Report. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. All forward-looking statements attributable to us are qualified in their entirety by this cautionary note.

5

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SELECT ENERGY SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

September 30, 2022

December 31, 2021

    

(unaudited)

    

Assets

Current assets

 

Cash and cash equivalents

$

13,222

$

85,801

Accounts receivable trade, net of allowance for credit losses of $4,891 and $4,401, respectively

 

388,797

 

232,824

Accounts receivable, related parties

 

303

 

219

Inventories

 

40,314

 

44,456

Prepaid expenses and other current assets

 

37,334

 

31,486

Total current assets

 

479,970

 

394,786

Property and equipment

 

1,018,402

 

943,515

Accumulated depreciation

 

(591,340)

 

(551,727)

Total property and equipment, net

 

427,062

 

391,788

Right-of-use assets, net

48,275

47,732

Other intangible assets, net

 

100,455

 

108,472

Other long-term assets, net

 

16,639

 

7,414

Total assets

$

1,072,401

$

950,192

Liabilities and Equity

 

 

  

Current liabilities

 

 

  

Accounts payable

$

55,844

$

36,049

Accrued accounts payable

64,861

52,051

Accounts payable and accrued expenses, related parties

 

3,775

 

1,939

Accrued salaries and benefits

 

21,704

 

22,233

Accrued insurance

 

21,520

 

13,408

Sales tax payable

2,863

2,706

Accrued expenses and other current liabilities

 

21,957

 

19,544

Current operating lease liabilities

16,957

13,997

Current portion of finance lease obligations

 

19

 

113

Total current liabilities

 

209,500

 

162,040

Long-term operating lease liabilities

 

48,552

 

53,198

Other long-term liabilities

 

44,947

 

39,780

Total liabilities

 

302,999

 

255,018

Commitments and contingencies (Note 9)

 

 

  

Class A common stock, $0.01 par value; 350,000,000 shares authorized and 98,097,930 shares issued and outstanding as of September 30, 2022; 350,000,000 shares authorized and 94,172,920 shares issued and outstanding as of December 31, 2021

 

981

 

942

Class A-2 common stock, $0.01 par value; 40,000,000 shares authorized; no shares issued or outstanding as of September 30, 2022 and December 31, 2021

 

 

Class B common stock, $0.01 par value; 150,000,000 shares authorized and 16,221,101 shares issued and outstanding as of September 30, 2022 and December 31, 2021

 

162

 

162

Preferred stock, $0.01 par value; 50,000,000 shares authorized; no shares issued and outstanding as of September 30, 2022 and December 31, 2021

 

 

Additional paid-in capital

 

977,063

 

950,464

Accumulated deficit

 

(318,843)

 

(359,472)

Total stockholders’ equity

 

659,363

 

592,096

Noncontrolling interests

 

110,039

 

103,078

Total equity

 

769,402

 

695,174

Total liabilities and equity

$

1,072,401

$

950,192

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

6

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share data)

Three months ended September 30, 

Nine months ended September 30, 

    

2022

    

2021

    

2022

    

2021

Revenue

 

  

 

  

Water Services

$

221,243

$

112,474

$

580,845

$

253,348

Water Infrastructure

74,396

36,787

193,234

107,916

Oilfield Chemicals

 

79,433

 

55,372

231,665

148,228

Total revenue

 

375,072

 

204,633

1,005,744

509,492

Costs of revenue

 

  

 

  

Water Services

170,845

94,667

465,951

227,736

Water Infrastructure

54,197

28,494

143,514

81,130

Oilfield Chemicals

 

64,519

49,583

194,670

132,103

Other

 

(1)

Depreciation and amortization

 

26,672

22,904

82,425

65,572

Total costs of revenue

 

316,232

 

195,648

886,560

506,541

Gross profit

 

58,840

 

8,985

119,184

2,951

Operating expenses

 

  

 

  

Selling, general and administrative

 

29,782

22,044

84,792

57,828

Depreciation and amortization

 

543

562

1,636

1,835

Lease abandonment costs

 

83

154

336

480

Total operating expenses

 

30,408

 

22,760

86,764

60,143

Income (loss) from operations

 

28,432

 

(13,775)

32,420

(57,192)

Other income (expense)

 

  

 

  

(Loss) gain on sales of property and equipment and divestitures, net

(479)

315

1,905

(1,921)

Interest expense, net

 

(616)

(419)

(1,830)

(1,254)

Foreign currency (loss) gain, net

(6)

(6)

(9)

1

Bargain purchase gain

(3,273)

13,768

Other

 

1,153

(222)

2,277

(956)

Income (loss) before income tax (expense) benefit

 

25,211

 

(14,107)

48,531

(61,322)

Income tax (expense) benefit

 

(276)

32

(672)

211

Equity in losses of unconsolidated entities

(218)

(129)

(576)

(129)

Net income (loss)

 

24,717

 

(14,204)

47,283

(61,240)

Less: net (income) loss attributable to noncontrolling interests

 

(3,393)

2,160

(6,654)

9,522

Net income (loss) attributable to Select Energy Services, Inc.

$

21,324

$

(12,044)

$

40,629

$

(51,718)

Net income (loss) per share attributable to common stockholders (Note 15):

 

Class A—Basic

$

0.23

$

(0.14)

$

0.44

$

(0.60)

Class B—Basic

$

$

$

$

Net income (loss) per share attributable to common stockholders (Note 15):

 

Class A—Diluted

$

0.22

$

(0.14)

$

0.43

$

(0.60)

Class B—Diluted

$

$

$

$

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

7

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)

Three months ended September 30, 

Nine months ended September 30, 

    

2022

    

2021

    

2022

    

2021

Net income (loss)

$

24,717

$

(14,204)

$

47,283

$

(61,240)

Comprehensive income (loss)

 

24,717

 

(14,204)

47,283

(61,240)

Less: comprehensive (income) loss attributable to noncontrolling interests

 

(3,393)

 

2,160

(6,654)

9,522

Comprehensive income (loss) attributable to Select Energy Services, Inc.

$

21,324

$

(12,044)

$

40,629

$

(51,718)

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

8

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the nine months ended September 30, 2022 and 2021

(unaudited)

Class A

Class B

Stockholders

Stockholders

Class A

Class B

Additional

Total

Common

Common

Paid-In

Accumulated

Stockholders’

Noncontrolling

   

Shares

   

Stock

   

Shares

   

Stock

   

Capital

   

Deficit

   

Equity

   

Interests

   

Total

Balance as of December 31, 2021

 

94,172,920

$

942

 

16,221,101

$

162

 

$

950,464

$

(359,472)

$

592,096

$

103,078

$

695,174

ESPP shares issued

4,681

 

 

34

34

1

35

Equity-based compensation

 

 

9,454

9,454

1,569

11,023

Issuance of restricted shares

 

2,529,231

25

 

 

2,220

2,245

(2,245)

Stock options exercised

 

70,000

1

 

 

583

584

24

608

Issuance of shares for acquisitions

4,203,323

42

 

 

34,456

34,498

1,356

35,854

Repurchase of common stock

(2,794,983)

(28)

 

 

(20,109)

(20,137)

(438)

(20,575)

Restricted shares forfeited

(87,242)

(1)

 

 

(78)

(79)

79

NCI income tax adjustment

 

 

39

39

(39)

Net income

 

 

 

40,629

40,629

6,654

47,283

Balance as of September 30, 2022

 

98,097,930

$

981

 

16,221,101

$

162

 

$

977,063

$

(318,843)

$

659,363

$

110,039

$

769,402

Class A

Class B

Stockholders

Stockholders

Class A

Class B

Additional

Total

Common

Common

Paid-In

Accumulated

Stockholders’

Noncontrolling

   

Shares

   

Stock

   

Shares

   

Stock

   

Capital

   

Deficit

   

Equity

   

Interests

   

Total

Balance as of December 31, 2020

 

86,812,647

$

868

 

16,221,101

$

162

 

$

909,278

$

(317,247)

$

593,061

$

112,821

$

705,882

ESPP shares issued

7,787

44

44

(1)

43

Equity-based compensation

5,290

5,290

958

6,248

Issuance of restricted shares

2,154,897

22

2,162

2,184

(2,185)

(1)

Issuance of shares for acquisitions

3,600,000

36

20,627

20,663

(359)

20,304

Other

738

5

5

5

Repurchase of common stock

(199,976)

(2)

(1,223)

(1,225)

19

(1,206)

Restricted shares forfeited

(319,874)

(3)

(332)

(335)

335

Noncontrolling interest in subsidiary

(140)

(140)

(934)

(1,074)

NCI income tax adjustment

31

31

(31)

Net loss

 

 

 

 

 

 

 

(51,718)

 

(51,718)

 

(9,522)

 

 

(61,240)

Balance as of September 30, 2021

 

92,056,219

$

921

 

16,221,101

$

162

 

$

935,742

$

(368,965)

$

567,860

$

101,101

$

668,961

The accompanying notes to consolidated financial statements are an integral part of these financial statements

9

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the three months ended September 30, 2022 and 2021

(unaudited)

(in thousands, except share data)

Class A

Class B

Stockholders

Stockholders

Class A

Class B

Additional

Total

Common

Common

Paid-In

Accumulated

Stockholders’

Noncontrolling

   

Shares

   

Stock

   

Shares

   

Stock

   

Capital

   

Deficit

   

Equity

   

Interests

   

Total

Balance as of June 30, 2022

 

98,160,573

$

982

 

16,221,101

$

162

 

$

974,066

$

(340,167)

$

635,043

$

106,102

$

741,145

ESPP shares issued

1,541

10

10

10

Equity-based compensation

3,265

3,265

539

3,804

Repurchase of common stock

(40,060)

(1)

(268)

(269)

(2)

(271)

Restricted shares forfeited

(24,124)

(22)

(22)

22

NCI income tax adjustment

12

12

(15)

(3)

Net income

 

 

 

 

 

 

 

21,324

 

21,324

 

3,393

 

 

24,717

Balance as of September 30, 2022

 

98,097,930

$

981

 

16,221,101

$

162

 

$

977,063

$

(318,843)

$

659,363

$

110,039

$

769,402

Class A

Class B

Stockholders

Stockholders

Class A

Class B

Additional

Total

Common

Common

Paid-In

Accumulated

Stockholders’

Noncontrolling

   

Shares

   

Stock

   

Shares

   

Stock

   

Capital

   

Deficit

   

Equity

   

Interests

   

Total

Balance as of June 30, 2021

 

88,160,703

$

882

 

16,221,101

$

162

 

$

912,872

$

(356,921)

$

556,995

$

103,551

$

660,546

ESPP shares issued

2,906

14

14

14

Equity-based compensation

1,957

1,957

345

2,302

Issuance of restricted shares

311,089

3

281

284

(285)

(1)

Issuance of shares for acquisitions

3,600,000

36

20,627

20,663

(359)

20,304

Restricted shares forfeited

(18,479)

(17)

(17)

17

NCI income tax adjustment

8

8

(8)

Net loss

 

 

 

 

 

 

 

(12,044)

 

(12,044)

 

(2,160)

 

 

(14,204)

Balance as of September 30, 2021

 

92,056,219

$

921

 

16,221,101

$

162

 

$

935,742

$

(368,965)

$

567,860

$

101,101

$

668,961

The accompanying notes to consolidated financial statements are an integral part of these financial statements

10

SELECT ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

Nine months ended September 30, 

    

2022

    

2021

Cash flows from operating activities

 

Net income (loss)

$

47,283

$

(61,240)

Adjustments to reconcile net income (loss) to net cash used in operating activities

 

 

Depreciation and amortization

 

84,061

 

67,407

(Gain) loss on disposal of property and equipment and divestitures

 

(1,905)

 

1,921

Equity in losses of unconsolidated entities

576

129

Bad debt expense (recovery)

 

2,091

 

(651)

Amortization of debt issuance costs

 

539

 

516

Inventory adjustments

(612)

139

Equity-based compensation

 

11,023

 

6,248

Bargain purchase gain

 

(13,768)

 

Unrealized loss on short-term investment

1,406

Other operating items, net

 

(710)

 

(309)

Changes in operating assets and liabilities

 

 

Accounts receivable

 

(141,468)

 

(32,509)

Prepaid expenses and other assets

 

(200)

 

(10,284)

Accounts payable and accrued liabilities

 

10,983

 

13,331

Net cash used in operating activities

 

(2,107)

 

(13,896)

Cash flows from investing activities

 

 

Purchase of property and equipment

 

(50,815)

 

(29,925)

Investment in note receivable

 

(1,101)

Purchase of equity-method investments

(6,767)

 

(2,200)

Collection of note receivable

184

 

Distribution from cost method investment

60

120

Acquisitions, net of cash and restricted cash received

 

5,707

 

(18,644)

Proceeds received from sales of property and equipment

 

21,433

 

6,491

Proceeds received from divestitures

705

 

Net cash used in investing activities

 

(29,493)

 

(45,259)

Cash flows from financing activities

 

 

Borrowings from revolving line of credit

82,000

Payments on revolving line of credit

 

(82,000)

 

Payments on long-term debt

 

(18,780)

 

Payments of finance lease obligations

(108)

(238)

Payment of debt issuance costs

 

(2,144)

 

Proceeds from share issuance

35

43

Distributions to noncontrolling interests

 

 

(1,074)

Repurchase of common stock

 

(19,967)

 

(1,206)

Net cash used in financing activities

 

(40,964)

 

(2,475)

Effect of exchange rate changes on cash

 

(15)

 

4

Net decrease in cash and cash equivalents

 

(72,579)

 

(61,626)

Cash and cash equivalents, beginning of period

 

85,801

 

169,039

Cash and cash equivalents, end of period

$

13,222

$

107,413

Supplemental cash flow disclosure:

 

 

Cash paid for interest

$

1,255

$

1,108

Cash refunds received for income taxes, net

$

(452)

$

(927)

Supplemental disclosure of noncash investing activities:

 

 

Issuance of shares for acquisitions

$

35,854

$

20,304

Conversion of notes receivable to equity-method investment

$

4,442

$

Capital expenditures included in accounts payable and accrued liabilities

$

19,896

$

8,433

The accompanying notes to consolidated financial statements are an integral part of these financial statements.

11

SELECT ENERGY SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1—BUSINESS AND BASIS OF PRESENTATION

Description of the business: Select Energy Services, Inc. (“we,” “Select Inc.” or the “Company”) was incorporated as a Delaware corporation on November 21, 2016. The Company is a holding company whose sole material asset consists of common units (“SES Holdings LLC Units”) in SES Holdings, LLC (“SES Holdings”).

We are a leading provider of comprehensive water-management and chemical solutions to the oil and gas industry in the U.S. As a leader in the water solutions industry, we place the utmost importance on safe, environmentally responsible management of oilfield water throughout the lifecycle of a well. Additionally, we believe that responsibly managing water resources through our operations to help conserve and protect the environment in the communities in which we operate is paramount to our continued success.

Class A and Class B Common Stock:  As of September 30, 2022, the Company had both Class A and Class B common shares issued and outstanding. Holders of shares of our Class A common stock, par value $0.01 per share (“Class A Common Stock”) and Class B common stock, par value $0.01 per share (“Class B Common Stock”) are entitled to one vote per share and vote together as a single class on all matters presented to our stockholders for their vote or approval.

Exchange rights: Under the Eighth Amended and Restated Limited Liability Company Agreement of SES Holdings (the “SES Holdings LLC Agreement”), SES Legacy Holdings LLC (“Legacy Owner Holdco”) and its permitted transferees have the right (an “Exchange Right”) to cause SES Holdings to acquire all or a portion of its SES Holdings LLC Units for, at SES Holdings’ election, (i) shares of Class A Common Stock at an exchange ratio of one share of Class A Common Stock for each SES Holdings LLC Unit exchanged, subject to conversion rate adjustments for stock splits, stock dividends, reclassification and other similar transactions or (ii) cash in an amount equal to the Cash Election Value (as defined within the SES Holdings LLC Agreement) of such Class A Common Stock. Alternatively, upon the exercise of any Exchange Right, Select Inc. has the right (the “Call Right”) to acquire the tendered SES Holdings LLC Units from the exchanging unitholder for, at its election, (i) the number of shares of Class A Common Stock the exchanging unitholder would have received under the Exchange Right or (ii) cash in an amount equal to the Cash Election Value of such Class A Common Stock. In connection with any exchange of SES Holdings LLC Units pursuant to an Exchange Right or Call Right, the corresponding number of shares of Class B Common Stock will be cancelled.

Basis of presentation: The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”) and pursuant to the rules and regulations of the SEC. These unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with GAAP.

This Quarterly Report relates to the three and nine months ended September 30, 2022 (the “Current Quarter” and the “Current Period”, respectively) and the three and nine months ended September 30, 2021 (the “Prior Quarter” and the “Prior Period”, respectively). The Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”), filed with the SEC on February 23, 2022, includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Quarterly Report. All material adjustments (consisting solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. The results for the Current Quarter and Current Period may not be indicative of the results to be expected for the full year, in part due to the war between Russia and Ukraine, the continuing effects of the COVID-19 pandemic and large variations in oil and natural gas prices during the Current Quarter and Current Period.

12

The unaudited interim consolidated financial statements include the accounts of the Company and all of its majority-owned or controlled subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

For investments in subsidiaries that are not wholly owned, but where the Company exercises control, the equity held by the minority owners and their portion of net income or loss are reflected as noncontrolling interests. Investments in entities in which the Company exercises significant influence over operating and financial policies are accounted for using the equity-method, and investments in entities for which the Company does not have significant control or influence are accounted for using the cost method or other appropriate basis as applicable. As of September 30, 2022, the Company had three equity-method investments and one cost-method investment. The Company’s investments are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. When circumstances indicate that the fair value of its investment is less than its carrying value and the reduction in value is other than temporary, the reduction in value is recognized in earnings. Our investments in unconsolidated entities are summarized below and are included in the assets of our Water Services segment:

Year

As of September 30, 

As of December 31,

Type of Investment

attained

Accounting method

Balance Sheet Location

2022

 

2021

(in thousands)

20% minority interest

2011

Cost-method

Other long-term assets, net

$

60

$

120

Notes receivable (1)

2020

Amortized cost basis

Other long-term assets, net

4,446

21% minority interest (1)

2021

Equity-method

Other long-term assets, net

4,608

40% minority interest (2)

2021

Equity-method

Other long-term assets, net

5,313

1,779

49% minority interest (3)

2021

Equity-method

Other long-term assets, net

2,633

142

(1) Investment in notes receivable converted to equity-method investment during the Current Period.
(2) Ownership percentage increased in the Current Period due to additional contributions. Minority interest was 33% as of December 31, 2021.
(3) Ownership percentage increased in the Current Period due to additional contributions. Minority interest was 45% as of December 31, 2021.

Segment reporting: The Company has three reportable segments. Reportable segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company’s current reportable segments are Water Services, Water Infrastructure, and Oilfield Chemicals. See “Note 16—Segment Information” for additional information.

The Water Services segment consists of the Company’s services businesses, including water transfer, flowback and well testing, fluids hauling, water containment and water network automation, primarily serving E&P companies. Additionally, this segment includes the operations of our accommodations and rentals business. 

The Water Infrastructure segment consists of the Company’s infrastructure assets, including operations associated with our water sourcing and pipeline infrastructure, our water recycling solutions, and our produced water gathering systems and saltwater disposal wells, as well as solids disposal facilities, primarily serving E&P companies.

The Oilfield Chemicals segment provides technical solutions, products and expertise related to chemical applications in the oil and gas industry. We develop, manufacture, manage logistics and provide a full suite of chemicals used in hydraulic fracturing, stimulation, cementing, pipelines and well completions for customers ranging from pressure pumpers to major integrated and independent oil and gas producers. This segment also utilizes its chemical experience and lab testing capabilities to customize tailored water treatment solutions designed to optimize the fracturing fluid system in conjunction with the quality of water used in well completions.

Reclassifications:  Certain reclassifications have been made to the Company’s prior period consolidated financial information to conform to the current year presentation. These presentation changes did not impact the Company’s consolidated net income, consolidated cash flows, total assets, total liabilities or total stockholders’ equity.

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NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies: The Company’s significant accounting policies are disclosed in Note 2 of the consolidated financial statements for the year ended December 31, 2021, included in the 2021 Form 10-K.

Use of estimates: The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

On an ongoing basis, the Company evaluates its estimates, including those related to the recoverability of long-lived assets and intangibles, useful lives used in depreciation and amortization, uncollectible accounts receivable, inventory reserve, income taxes, self-insurance liabilities, share-based compensation, contingent liabilities, lease-related reasonably certain option exercise assessments, and the incremental borrowing rate for leases. The Company bases its estimates on historical and other pertinent information that are believed to be reasonable under the circumstances. The accounting estimates used in the preparation of the consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes.

Allowance for credit losses: The Company’s allowance for credit losses relates to trade accounts receivable. The Company treats trade accounts receivable as one portfolio and records an initial allowance calculated as a percentage of revenue recognized based on a combination of historical information and future expectations. Additionally, the Company adjusts this allowance based on specific information in connection with aged receivables. Historically, most bad debt has been incurred when a customer’s financial condition significantly deteriorates, which in some cases leads to bankruptcy. Market volatility is highly uncertain and, as such, the impact on expected losses is subject to significant judgment and may cause variability in the Company’s allowance for credit losses in future periods.

The change in the allowance for credit losses is as follows:

Nine months ended September 30, 2022

(in thousands)

Balance as of December 31, 2021

$

4,401

Increase to allowance based on a percentage of revenue

 

2,016

Charge-offs

(1,555)

Recoveries

29

Balance as of September 30, 2022

$

4,891

14

Asset retirement obligations:  The Company’s asset retirement obligations (“ARO”) relate to disposal facilities with obligations for plugging wells, removing surface equipment, and returning land to its pre-drilling condition. The following table describes the changes to the Company’s ARO liability for the Current Period:

    

Nine months ended September 30, 2022

 

(in thousands)

Balance as of December 31, 2021

 

$

29,551

Accretion expense, included in depreciation and amortization expense

 

855

Acquired AROs

 

13,029

Divested

(1,490)

Payments

(779)

Balance as of September 30, 2022

 

$

41,166

Short-term ARO liability

4,490

Long-term ARO liability

36,676

Balance as of September 30, 2022

$

41,166

We review the adequacy of our ARO liabilities whenever indicators suggest that the estimated cash flows underlying the liabilities have changed. The Company’s ARO liabilities are included in accrued expenses and other current liabilities and other long-term liabilities in the accompanying consolidated balance sheets.

Lessor Income: The Company is a lessor for a nominal number of owned facilities and also recognizes income related to multiple facility subleases that are accounted for as follows:

Three months ended September 30,