Select Energy Services, Inc. (WTTR) today announced the acquisitions of Breakwater and certain water gathering pipeline and disposal assets from Cypress, as well as its financial and operating results for the quarter ended September 30, 2022.
John Schmitz, Chairman of the Board, President and CEO, stated, "Our strong third quarter results, combined with our recent acquisitions, display our ability to execute on our strategy to improve and bolster the base business, advance our technology, sustainability and diversification efforts, and execute on strategic M&A. We progressed each of these initiatives while also commencing our previously announced regular quarterly dividend program. Reinforced by a steady activity backdrop, a challenging labor market and a tight equipment supply environment, we continue to capture market share and see pricing improvements across each of our segments. During the third quarter we achieved 12% sequential revenue growth and 59% incremental gross margins, resulting in significantly improved profitability with Net Income and Adjusted EBITDA growing 70% and 32%, respectively, quarter over quarter.
"Our Chemicals segment continues to produce record revenue and margins, we continue to improve efficiencies and gain market share in our Water Services segment, and our Water Infrastructure segment achieved quarterly revenue more than 10% above our previous pre-pandemic peak level. Overall, I'm very pleased with our financial and operational execution and believe we are well positioned to continue to improve the profitability of the business in the quarters to come.
"In addition to these improvements in the base business, we identified and completed the acquisition of Breakwater, a core Permian infrastructure, recycling and logistics business, to further our growth, consolidation and sustainability strategies, while our Cypress transaction adds to our infrastructure scale and development opportunities in the Bakken. With these additions, we have meaningfully enhanced our Water Infrastructure and Water Services footprints, and significantly expanded the capacity and reach of our sustainable recycling solutions. We expect to see immediately accretive benefits from both acquisitions and believe we have a meaningful opportunity to invest organically around the acquired operations and asset footprints as well.
"In Breakwater, we are acquiring one of the market leaders in advanced water recycling, infrastructure and logistics solutions focused in the Permian Basin. Importantly, we're also adding significant operational leadership depth to the organization and welcoming more than 300 new employees to the Select family. With a strategic portfolio of highly contracted recycling assets in the core of the Midland Basin, we believe Breakwater has developed one of the leading recycling footprints in the U.S. today. This footprint expands Select's recycling capabilities to nearly 3 million barrels of total daily capacity across fixed and mobile capabilities, while adding a number of new strategic customer relationships and strengthening existing relationships with new recycling opportunities. During the third quarter, we exceeded our full year 2022 target for produced water recycling volumes established in our sustainability-linked credit facility, while this acquisition positions us to quickly meet and meaningfully exceed our future targets as well. These recycling facilities also offer significant network flexibility via geographic and infrastructure interconnectedness, currently allowing for approximately 10 customers at any given time to deliver produced water and receive recycled water as demand ebbs and flows with their own activity needs, while reducing capital outlays and operating expenses for our customers.
"Through the Cypress acquisition, we've added a portfolio of strategic wastewater disposal facilities in North Dakota at an attractive value, further consolidating the Bakken region following our previous Agua Libre Midstream and Nuverra acquisitions. With more than 60% of the current volumes being delivered to these assets via contracted pipelines, we believe there is continued opportunity to expand and network the assets with our existing infrastructure footprint in the region.
"Additionally, I'm very confident in the strategic and clear financial benefits of these acquisitions. On a combined basis, the acquired operations from Breakwater and Cypress are expected to generate approximately $110 – $115 million of revenue and more than $30 million of Adjusted EBITDA on a 2022 full year basis, with a strong trajectory and room for growth in 2023.
"Ultimately, I am very pleased with our financial performance, supported by our recent acquisitions, pricing improvements, organic growth opportunities and our other strategic investments. I look forward to building upon our recent positive results, while meaningfully expanding our free cash flow generation in the quarters ahead. Supported by these factors, I am proud to have recently announced our first ever quarterly dividend payment of $0.05 per share for the third quarter of 2022. Returning capital to shareholders remains a core component of our overall capital allocation strategy and this represents an important commitment for Select," concluded Schmitz.
Consolidated Financial Information
Revenue for the third quarter of 2022 was $375.1 million as compared to $335.9 million in the second quarter of 2022 and $204.6 million in the third quarter of 2021. Net income for the third quarter of 2022 was $24.7 million as compared to $14.6 million in the second quarter of 2022 and a net loss of $14.2 million in the third quarter of 2021.
For the third quarter of 2022, gross profit was $58.8 million, as compared to $35.7 million in the second quarter of 2022 and $9.0 million in the third quarter of 2021. Total gross margin was 15.7% in the third quarter of 2022 as compared to 10.6% in the second quarter of 2022 and 4.4% in the third quarter of 2021. Gross margin before depreciation and amortization ("D&A") for the third quarter of 2022 was 22.8% as compared to 19.3% for the second quarter of 2022 and 15.6% for the third quarter of 2021.
Selling, general and administrative expense ("SG&A") during the third quarter of 2022 was $29.8 million as compared to $26.7 million during the second quarter of 2022 and $22.0 million during the third quarter of 2021. SG&A during the third and second quarters of 2022 and the third quarter of 2021 was impacted by non-recurring transaction costs of $0.7 million, $0.6 million and $2.4 million, respectively.
Adjusted EBITDA was $62.8 million in the third quarter of 2022 as compared to $47.7 million in the second quarter of 2022 and $15.1 million in the third quarter of 2021. Adjusted EBITDA during the third quarter of 2022 was impacted by a $3.3 million bargain purchase gain adjustment, $1.0 million of non-recurring transaction costs, $1.6 million of non-cash losses on asset sales, $0.1 million in lease abandonment costs, and $0.2 million in other adjustments. Non-cash compensation expense accounted for an additional $3.8 million adjustment during the third quarter of 2022. Please refer to the end of this release for reconciliations of gross profit before D&A (non-GAAP measure) to gross profit and of Adjusted EBITDA (non-GAAP measure) to net income (loss).
Business Segment Information
The Water Services segment generated revenues of $221.2 million in the third quarter of 2022 as compared to $196.0 million in the second quarter of 2022 and $112.5 million in the third quarter of 2021. Gross margin before D&A for Water Services was 22.8% in the third quarter of 2022 as compared to 19.4% in the second quarter of 2022 and 15.8% in the third quarter of 2021. Revenues for this segment improved 12.9% sequentially, supported by continued pricing improvements, resulting in strong 49% incremental gross margins before D&A. Looking at the fourth quarter of 2022, the Company expects to see relatively steady revenue and gross margins before D&A, as partial quarter contributions from Breakwater partially offset normal seasonal impacts to the base business.
The Water Infrastructure segment generated revenues of $74.4 million in the third quarter of 2022 as compared to $60.3 million in the second quarter of 2022 and $36.8 million in the third quarter of 2021. Gross margin before D&A for Water Infrastructure was 27.2% in the third quarter of 2022 as compared to 25.5% in the second quarter of 2022 and 22.5% in the third quarter of 2021. Revenues improved 23.4% sequentially, with 34% incremental gross margins before D&A, driven by significantly increased volumes at our recycling and disposal facilities, which more than offset modest decreases in our traditional water sourcing activities. For the fourth quarter of 2022, the Company anticipates low double digit percentage revenue growth, with gross margins before D&A in the high-20 percent range, as partial quarter contributions from our recent acquisitions complement our existing base business.
The Oilfield Chemicals segment generated revenues of $79.4 million in the third quarter of 2022 as compared to $79.6 million in the second quarter of 2022 and $55.4 million in the third quarter of 2021. Gross margin before D&A for Oilfield Chemicals was 18.8% in the third quarter of 2022 as compared to 14.6% in the second quarter of 2022 and 10.5% in the third quarter of 2021. While revenues held relatively flat sequentially, this segment generated significant margin improvement as the Company expanded its manufacturing focus on its higher margin, proprietary products to meet customer demand, while ceasing the manufacturing and distribution of several lower margin commoditized products. For the fourth quarter of 2022, the Company anticipates mid-single digit percentage revenue growth and relatively stable margins for the Oilfield Chemicals segment as the segment continues to perform well at its recent high water mark levels.
Cash Flow and Capital Expenditures
Cash flow from operations for the third quarter of 2022 was $5.4 million as compared to $11.1 million in the second quarter of 2022 and ($2.5) million in the third quarter of 2021. Cash flow from operations during the third quarter of 2022 was significantly impacted by a $54.2 million use of cash to fund the working capital needs of the business resulting from growing revenues and the systems integration efforts of recent acquisitions.
Net capital expenditures for the third quarter of 2022 were $16.1 million, comprised of $19.8 million of capital expenditures partially offset by $3.8 million of cash proceeds from asset sales, including the divestment of underutilized equipment and real estate from recently acquired businesses. Cash flow from operations less net capital expenditures was ($10.7) million during the third quarter of 2022.
Cash flow used in investing activities during the third quarter of 2022 included an incremental $2.5 million investment in ICE Thermal Solutions, LLC, while cash flow from financing activities accounted for $0.3 million of cash outflows.
Balance Sheet and Capital Structure
Total cash and cash equivalents were $13.2 million as of September 30, 2022 as compared to $25.7 million as of June 30, 2022. The Company had no borrowings outstanding under its sustainability-linked credit facility as of September 30, 2022 or June 30, 2022 or its prior credit facility as of December 31, 2021.
As of September 30, 2022 and June 30, 2022, the borrowing base under the sustainability-linked credit facility was $254.4 million and $216.5 million, respectively. The Company had available borrowing capacity under its sustainability-linked credit facility as of September 30, 2022 and June 30, 2022, of approximately $231.5 million and $195.6 million, respectively, after giving effect to $22.9 million and $20.9 million of outstanding letters of credit as of September 30, 2022 and June 30, 2022.
Total liquidity was $244.7 million as of September 30, 2022, as compared to $221.3 million as of June 30, 2022. The Company had 94,014,963 weighted average shares of Class A common stock outstanding and 16,221,101 weighted average shares of Class B common stock outstanding during the third quarter of 2022.
Breakwater Acquisition
On November 1, 2022, Select completed the acquisition of Breakwater Energy Partners, LLC through a stock-for-stock transaction. In connection with closing, Select issued a total of approximately 9.2 million shares of Select Class A common stock and repaid or assumed approximately $12.6 million of outstanding indebtedness and other obligations, subject to customary post-closing adjustments.
Breakwater is a leading provider of water infrastructure, recycling, transfer and disposal solutions to leading E&P customers in the Permian Basin, with complementary water logistics operations in the Eagle Ford Shale. Breakwater operates four commercial recycling facilities, supported by a portfolio of long-term contracts, with 0.6 million barrels per day of operational capacity. Breakwater has an incremental 1.4 million barrels per day of permitted recycling capacity available for development across its four currently operating fixed facilities as well as a fifth facility location yet to be developed. Additionally, Breakwater currently operates nine active modular recycling facilities with 1.5 million barrels per day of throughput capacity. These facilities are supported by 46 miles of gathering and distribution pipelines, 70,000 barrels per day of wastewater disposal capacity and 4.7 million barrels of storage capacity, with an additional 3.7 million barrels of permitted storage capacity available for development.
BofA Securities, Inc. acted as financial advisor and Vinson & Elkins acted as legal counsel to Select. Jefferies LLC acted as exclusive financial advisor and Locke Lord LLP acted as legal counsel to Breakwater.
Cypress Asset Acquisition
On November 1, 2022, Select completed the acquisition of a portfolio of water gathering pipeline and disposal assets in the Bakken Shale from Cypress Environmental Services, LLC. As consideration for the transaction, Select issued approximately 950,000 shares of Select Class A common stock. Cypress's water solutions operations consist of eight saltwater disposal facilities with daily permitted capacity of 85,000 barrels per day across North Dakota. The acquired business currently receives more than 60% of its daily volumes via pipelines and is supported by a number of long-term contracts with key customers in the region.
Conference Call
Select has scheduled a conference call on Thursday, November 3, 2022 at 11:00 a.m. Eastern time / 10:00 a.m. Central time. Please dial 201-389-0872 and ask for the Select Energy Services call at least 10 minutes prior to the start time of the call, or listen to the call live over the Internet by logging on to the website at the address https://investors.selectenergy.com/events-and-presentations/current. A telephonic replay of the conference call will be available through November 17, 2022 and may be accessed by calling 201-612-7415 using passcode 13733891#. A webcast archive will also be available at the link above shortly after the call and will be accessible for approximately 90 days.