# Select Water Solutions, Inc. (WTTR) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Select Water Solutions, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1693256/000155837024001437/wttr-20231231x10k.htm
Accession: 0001558370-24-001437
Filing date: 2024-02-21
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/WTTR/
All MD&A years: /company/WTTR/mda/
Previous year: /company/WTTR/mda/fy2022/ (FY 2022)
Next year: /company/WTTR/mda/fy2024/ (FY 2024)

ITEM 7.              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto in Part II, Item 8. “Financial Statements and Supplementary Data”. This discussion and analysis contains forward-looking statements based on our current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors as described under “Cautionary Note Regarding Forward-Looking Statements” and Part I, Item 1A. “Risk Factors.” We assume no obligation to update any of these forward-looking statements.

Overview

We are a leading provider of sustainable water-management and chemical solutions to the energy 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.

In many regions of the country, there has been growing concern about the volumes of water required for new oil and gas well completions, as well as volumes of water injected into subterranean zones where seismicity can be triggered. Working with our customers and local communities, we strive to be an industry leader in the development of sustainable cost-effective alternatives to fresh water. Specifically, we offer solutions through our infrastructure networks that enable our E&P customers to gather, treat and reuse produced water, thereby reducing the demand for freshwater while also reducing the volumes of saltwater that must be disposed by injection. In many areas, we have also acquired sources of non-potable water, such as brackish water or municipal or industrial effluent. Through our expertise in chemical technologies and our FluidMatch™ design solutions, we provide water profiling and fluid assessment services for our customers to support the optimization of their fluid systems, enabling the economic use of these alternative sources. We also work with our E&P customers to lower their emissions through methane combustion technology, and reduce the environmental footprint of their operations through the use of temporary hose and permanent pipeline systems, which are supported by extensive monitoring and automation technology solutions that provide safer and more efficient water resource management. These solutions significantly reduce the demand for trucking operations, thereby reducing gasoline and diesel exhaust emissions, increasing safety and decreasing traffic congestion in nearby communities.

Recent Trends and Outlook

On January 29, 2024, we announced the acquisition of strategic water infrastructure assets in the Haynesville Shale and Rockies regions for approximately $90 million of aggregate cash consideration. These acquisitions encompassed the gathering and disposal assets and operations of Tri-State Water Logistics, LLC, the fluids and solids treatment and disposal assets and operations of Iron Mountain Energy, LLC, and produced water gathering and disposal infrastructure and additional permitted disposal and recycling capacity in the Rockies region. These acquisitions will add approximately 450,000 barrels per day of permitted disposal capacity to our Water Infrastructure segment across 21 saltwater disposal wells, two slurry injection wells and a solids treatment facility. The disposal assets are supported by a significant portfolio of interconnected gathering pipelines, strategic surface acreage and right-of-way, and multiple long-term pipeline gathering and dedication contracts.

​

Select is prioritizing investments in water infrastructure projects, which often bring a more predictable and steady revenue stream through long-term contracts. These investments typically produce higher gross margins and also foster stronger partnerships with customers, as Select becomes an integral partner in ensuring well integrity for ongoing customer production. The focus is on integrated solutions that enhance contracted infrastructure projects with logistics services and chemical solutions, and expanding our value provided to the customer. Our approach, historically and as we

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head into 2024, has been to streamline operations and offer a more comprehensive and valuable overall package to customers built around optimizing the entire water lifecycle as such integrated solutions to drive revenue growth and enhance overall value to clients.

​

Effective June 1, 2023, our chief operating decision maker began to strategically view and manage certain water sourcing and transfer operations, previously included in our Water Infrastructure segment, as part of our Water Services segment. These changes were driven by a number of factors, including the preponderance of our water sourcing business that integrates with our water transfer operations, the continued transition of completions water demand from fresh and brackish water to recycled water, as well as the diversifying demand for these water transfer services beyond the immediate vicinity of our pipeline infrastructure. Due to these changes, we believe the Water Services segment management is best suited to manage these operations. As a result of these changes, we anticipate more efficient sharing and utilization of resources and to realize potential synergies. Prior periods have been recast to include the water sourcing and transfer operations within the Water Services segment and remove the results of those operations from the Water Infrastructure segment.

Concurrently, the Company also decided to rename its Oilfield Chemicals segment as Chemical Technologies. This change was based on a number of factors, including the continued success of our chemicals business in delivering customized, specialty chemicals products developed through our own research and development efforts and the de-emphasis of certain traditional commoditized chemistry products within the oil and gas industry, as well as the continued investments in time and resources we make to manufacture and sell our specialty chemical products into non-oilfield industrial-related applications. We believe these segment changes better align the business with the current and future state of the Company’s operations, capital allocations and strategic objectives. This change was a naming convention only change that did not impact any numbers for all years presented.

​

On May 8, 2023, we announced that our stockholders approved the Company’s Fifth Amended and Restated Certificate of Incorporation, which, among other things, changed the name of the Company from Select Energy Services, Inc. to Select Water Solutions, Inc. to reflect our strategic focus as a water-first company. We retained our current stock ticker “WTTR” trading on the New York Stock Exchange.

​

The armed conflict between Ukraine and Russia continued throughout 2023, and additional conflicts arose in Israel and elsewhere in the Middle East. As a result of the Russian invasion of the Ukraine, the U.S., the United Kingdom, the member states of the European Union and other public and private actors have sustained severe sanctions on Russian financial institutions, businesses and individuals. In October 2023, Hamas militants conducted attacks in Israel and an armed conflict has ensued between Israel and Hamas. The ensuing conflict has resulted in increased hostilities and instability in oil and gas producing regions in the Middle East as well as in key adjacent shipping lanes. In tandem with such conflict, the Houthi movement, which controls parts of Yemen, has targeted and launched numerous attacks on Israeli, American and international commercial marine vessels in the Red Sea, resulting in many shipping companies re-routing to avoid the region altogether and worsening existing supply chain issues, including delays in supplier deliveries, extended lead times and increased cost of freight, insurance and materials. The potential for an international conflict with Iran, a major oil producer, the Houthi movement in Yemen or the Hezbollah movement in Lebanon has been perceived by many to have increased due to continued increasing hostilities in the Middle East. The Russia-Ukraine conflict, and the resulting sanctions and concerns regarding global energy security, has contributed to, and the conflict in the Israel-Gaza region and any heightened hostilities in the Middle East may contribute to, increases and volatility in the prices for oil and natural gas. Such volatility, coupled with an increased cost of capital, due, in part to higher rates of inflation and interest rates, may lead to a more difficult investing and planning environment for us and our customers. The ultimate geopolitical and macroeconomic consequences of these conflicts and associated sanctions and/or international responses cannot be predicted, and such events, or any further hostilities elsewhere, could severely impact the world economy and may adversely affect our financial condition. An end to these conflicts and an easing or elimination of the related sanctions and/or international response could result in a significant fall in commodity prices as hydrocarbons become more readily accessible in global markets, which could have an adverse effect on our customers, and therefore adversely affect our customers’ demand for our services. An intensification of that conflict could also have an adverse effect on our customers and their demand for our services.

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In addition, OPEC+ countries announced production cuts of around 1.16 million barrels per day in April 2023, bringing its total volume cuts to 3.66 million barrels per day since 2021. A number of other production cuts have followed, most recently, in November 2023, OPEC+ announced voluntary output cuts totaling 2.2 million barrels per day into the first quarter of 2024, including an additional cut of 900,000 barrels per day. Although OPEC+ increased its output in December 2023 due to, among other things, the ongoing conflicts in the Middle East, OPEC+ may, at its discretion, continue to decrease, or increase, production, which will continue to impact crude oil and natural gas price volatility. The actions of OPEC+ countries with respect to oil production levels and announcements of potential changes in such levels, including agreement on and compliance with production targets, may result in volatility in the industry in which we and our customers operate. The average price of West Texas Intermediate (“WTI”) crude oil decreased in 2023 versus 2022 as a result of increased production coupled with a moderate decrease in global demand. During the year ended December 31, 2023, the average spot price of WTI crude oil was $77.58 versus an average price of $94.90 for the year ended December 31, 2022. While WTI price levels declined during 2023 relative to 2022, these WTI price levels remain supportive of our customers’ drilling and completion programs in the major shale basins. The average Henry Hub natural gas spot price during the year ended December 31, 2023, was $2.54 versus an average of $6.42 for the year ended December 31, 2022. Henry Hub natural gas price levels in 2023 have declined materially relative to 2022 and have negatively impacted activity levels, resulting in incremental development activity cuts.

​

While the ongoing effects of the COVID-19 pandemic on our operations have largely ended, some impacts related to the COVID-19 pandemic, such as increased inflation and supply chain constraints, have resulted in higher interest rates and cost of capital, which in turn increase the risk of economic stagnation or an economic recession. The pandemic had a material negative impact on our financial results for prior periods and may affect the comparability of our results.

​

Many of our customers have demonstrated their resolve to manage their capital spending within budgets and cash flow from operations and increase redemptions of debt and/or returns of capital to investors. Additionally, consolidation among our customers, such as the current consolidation of E&P companies in the Permian Basin, can disrupt our market in the near term and the resulting demand for our services. Overall however, the financial health of the oil and gas industry and many of our customers specifically, as reflected in debt metrics, recent capital raises, and equity valuations, has greatly improved over the course of the year ended December 31, 2022, and through the year ended December 31, 2023.

​

When one customer acquires another, it can lead to larger blocks of consolidated development and production acreage, which can increase the demand for our longer term integrated full water lifecycle solutions. This consolidation may streamline operations, as Select can offer integrated solutions to clients with larger water volumes to manage in certain areas. The Company's position in the market may strengthen, as it becomes an essential partner for long term production integrity in larger, more comprehensive water projects. However, it also means Select must meet the changing needs and structures of these consolidated entities to maintain and grow these relationships. While customers involved in acquisitions may initially slow activity to focus on integration and portfolio management, we believe Select is well-positioned to meet the increased responsibilities of overall water management, including water reuse, recycling, transmitting and balancing across customers and regions, and ultimately disposal, for these larger customers and blocks of contiguous acreage.

​

While the financial health of the broader oil and gas industry has continued to improve, the potential inability of broader banking and other financial services firms to access liquidity has at times resulted in significant disruptions to global markets. Central bank policy actions, bank failures and associated liquidity risks and other factors may negatively impact the value of our equity and that of our customers, and may reduce our and their ability to access liquidity in the bank and capital markets or result in capital being available on less favorable terms, which could negatively affect our financial condition and that of our customers.

​

From an operational standpoint, many of the recent trends still apply to ongoing unconventional oil and gas development. The continued trend towards multi-well pad development, executed within a limited time frame, combined with service price inflation and high interest rates, has increased the overall intensity, complexity and cost of well completions, while increasing fracturing efficiency and the use of lower-cost in-basin sand has decreased total costs for our customers. However, we note the continued efficiency gains in the well completions process can limit the days we

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spend on the wellsite and, therefore, negatively impact the total revenue opportunity for certain of our services utilizing day-rate pricing models.

​

This multi-well pad development, combined with recent upstream acreage consolidation and corporate mergers as well as the growing trends around the recycling and reuse applications of produced water provides a significant opportunity for companies like us that can deliver increasingly complex solutions for our E&P customers across large swathes of acreage through our regional infrastructure networks, delivering solutions for the full completion and production lifecycle of wells. While these trends have advanced the most in the Permian Basin to date, they are emerging in other basins as well.

​

The increased reuse of produced water requires additional chemical treatment solutions. We have a dedicated team of specialists focused every day on developing and deploying innovative water treatment and reuse services for our customers. Our FluidMatch™ design solutions enable our customers to economically use these alternative sources to optimize their fluid systems by providing water profiling and fluid assessment services working towards real-time. This trend also supports more complex “on-the-fly” solutions that treat, proportion, and blend various streams of water and chemicals at the wellsite. This complexity favors service companies that are able to provide advanced technology solutions. Ultimately, we intend to play an important role in the advancement of water and chemical solutions that are designed to meet the sustainability goals of key stakeholders.

​

Our water logistics, treatment, and chemical application expertise, in combination with advanced technology solutions, are applicable to other industries beyond oil and gas. We are working to further commercialize our services in other businesses and industries through our industrial solutions group.

Our Segments

Our services are offered through three reportable segments: (i) Water Services; (ii) Water Infrastructure; and (iii) Chemical Technologies.

[[GREPCENT_TABLE]]
[["","\u25cf","Water Services. The Water Services segment consists of the Company\u2019s services businesses, including water sourcing, water transfer, flowback and well testing, fluids hauling, water monitoring, water containment and water network automation, primarily serving E&P companies. Additionally, this segment includes the operations of our accommodations and rentals business."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Water Infrastructure. The Water Infrastructure segment consists of the Company\u2019s fixed infrastructure assets, including operations associated with our water distribution pipeline infrastructure, our water recycling solutions, and our produced water gathering systems and SWDs, as well as solids disposal facilities, primarily serving E&P companies."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Chemical Technologies. The Chemical Technologies 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 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."]]
[[/GREPCENT_TABLE]]

How We Generate Revenue

We currently generate most of our revenue through our water-management services associated with well completions as well as ongoing produced water management, provided through our Water Services and Water Infrastructure segments. Most of this revenue is realized through customer agreements with fixed pricing terms and is recognized when delivery of services is provided, generally at our customers’ sites. While we have some long-term pricing arrangements, particularly in our Water Infrastructure segment, most of our water and water-related services are priced based on prevailing market conditions, giving due consideration to the customer’s specific requirements.

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We also generate revenue by providing completion and specialty chemicals through our Chemical Technologies segment. We invoice the majority of our Chemical Technologies customers for services provided based on the quantity of chemicals used or pursuant to short-term contracts as customer needs arise.

Costs of Conducting Our Business

The principal expenses involved in conducting our business are labor costs, vehicle and equipment costs (including depreciation, rental, repair and maintenance and leasing costs), raw materials and water sourcing costs and fuel costs. Our fixed costs are relatively low. Most of the costs of serving our customers are variable, i.e., they are incurred only when we provide water and water-related services, or chemicals and chemical-related services to our customers.

​

Labor costs associated with our employees and contract labor comprise the largest portion of our costs of doing business. We incurred labor and labor-related costs of $554.4 million, $476.2 million and $285.7 million for the years ended December 31, 2023, 2022 and 2021, respectively. The majority of our recurring labor costs are variable and dependent on the market environment and are incurred only while we are providing our operational services. We also incur costs to employ personnel to ensure safe operations, sell and supervise our services and perform maintenance on our assets, which is not directly tied to our level of business activity. Additionally, we incur selling, general and administrative costs for compensation of our administrative personnel at our field sites and in our operational and corporate headquarters, as well as for third-party support, licensing and services.

We incur significant vehicle and equipment costs in connection with the services we provide, including depreciation, repairs and maintenance, rental and leasing costs. We incurred vehicle and equipment costs of $318.9 million, $266.6 million and $165.1 million for the years ended December 31, 2023, 2022 and 2021, respectively.

We incur raw material costs in manufacturing our chemical products, as well as for water that we source for our customers. We incurred raw material costs of $300.7 million, $300.8 million and $209.7 million for the years ended December 31, 2023, 2022 and 2021, respectively.

We incur variable transportation costs associated with our service lines, predominately fuel and freight. We incurred fuel and freight costs of $115.7 million, $118.1 million and $58.5 million for the years ended December 31, 2023, 2022 and 2021, respectively. Rising fuel prices impact our transportation costs, which affect the results of our operations.

How We Evaluate Our Operations

​

We use a variety of operational and financial metrics to assess our performance. Among other measures, management considers each of the following:

[[GREPCENT_TABLE]]
[["","\u25cf","Revenue;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Gross Profit;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Gross Margins;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","EBITDA; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Adjusted EBITDA."]]
[[/GREPCENT_TABLE]]

Revenue

We analyze our revenue and assess our performance by comparing actual monthly revenue to our internal projections and across periods. We also assess incremental changes in revenue compared to incremental changes in direct operating costs and selling, general and administrative expenses across our reportable segments to identify

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potential areas for improvement, as well as to determine whether segment performance is meeting management’s expectations.

Gross Profit

To measure our financial performance, we analyze our gross profit, which we define as revenues less direct operating expenses (including depreciation and amortization expenses). We believe gross profit provides insight into profitability and the true operating performance of our assets. We also compare gross profit to prior periods and across segments to identify trends as well as underperforming segments.

Gross Margins

Gross margins provide an important gauge of how effective we are at converting revenue into profits. This metric works in tandem with gross profit to ensure that we do not seek to increase gross profit at the expense of lower margins, nor pursue higher gross margins at the expense of declining gross profits. We track gross margins by segment and service line and compare them across prior periods and across segments and service lines to identify trends as well as underperforming segments.

EBITDA and Adjusted EBITDA

We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income/(loss), plus interest expense, income taxes, and depreciation and amortization. We define Adjusted EBITDA as EBITDA plus/(minus) loss/(income) from discontinued operations, plus any impairment and abandonment charges or asset write-offs pursuant to generally accepted accounting principles in the U.S. (“GAAP”), plus non-cash losses on the sale of assets or subsidiaries, non-recurring compensation expense, non-cash compensation expense, and non-recurring or unusual expenses or charges, including severance expenses, transaction costs, or facilities-related exit and disposal-related expenditures, plus/(minus) foreign currency losses/(gains), plus/(minus) losses/(gains) on unconsolidated entities and plus tax receivable agreements expense less bargain purchase gains from business combinations. The adjustments to EBITDA are generally consistent with such adjustments described in our Sustainability-Linked Credit Facility. See “—Comparison of Non-GAAP Financial Measures—EBITDA and Adjusted EBITDA” for more information and a reconciliation of EBITDA and Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.

Factors Affecting the Comparability of Our Results of Operations to Our Historical Results of Operations

Our future results of operations may not be comparable to our historical results of operations for the periods presented, primarily for the reasons described below and those described in “—Recent Trends and Outlook” above.

Acquisition Activity

As described above, we continuously evaluate potential investments, particularly in water infrastructure and other water-related services and technology. To the extent we consummate acquisitions, any incremental revenues or expenses from such transactions are not included in our historical results of operations.

Between January 2022 and June 2023, we completed three business combinations, four asset acquisitions and the buyout of all noncontrolling interests in a recycling system joint venture, including the acquisitions of Breakwater, Cypress and Nuverra among others. Our historical financial statements for periods prior to the respective date each acquisition was completed do not include the results of operations of that acquisition. See “—Recent Developments” and “Note 3—Acquisitions” for a description of these transactions.

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Results of Operations

The following table sets forth our results of operations, including revenue by segment, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 is set forth in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

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[[/GREPCENT_TABLE]]

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Revenue

Our revenue increased $197.9 million, or 14.3%, to $1.6 billion for the year ended December 31, 2023, compared to $1.4 billion for the year ended December 31, 2022. The increase was composed of an $88.4 million increase in Water Services revenue, a $104.7 million increase in Water Infrastructure revenue and a $4.8 million increase in Chemical Technologies revenue. These increases were driven primarily by higher demand for our services

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coupled with increased pricing in comparison to the year ended December 31, 2022. Included in the increases in Water Services and Water Infrastructure were incremental revenue contributions from the Breakwater, Nuverra, Cypress and other asset acquisitions. For the year ended December 31, 2023, our Water Services, Water Infrastructure and Chemical Technologies revenues constituted 65.2%, 14.5% and 20.3% of our total revenue, respectively, compared to 68.1%, 9.0% and 22.9%, respectively, for the year ended December 31, 2022. The revenue changes by reportable segment are as follows:

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Water Services. Revenue increased $88.4 million, or 9.4%, to $1.0 billion for the year ended December 31, 2023, compared to $944.5 million for the year ended December 31, 2022. The increase was primarily attributable to incremental revenue contributions from the Breakwater acquisition and higher demand for our services coupled with increased pricing in comparison to the year ended December 31, 2022. The increase in demand was due to market activity increases across most of our areas of operations, market share gains in the Permian Basin in our poly and containment business line and new service offerings in our accommodations and rentals business line.

Water Infrastructure. Revenue increased by $104.7 million, or 83.6%, to $230.0 million for the year ended December 31, 2023, compared to $125.3 million for the year ended December 31, 2022. The increase was primarily attributable to incremental revenue contributed by Breakwater, Nuverra, Cypress and other asset acquisitions. Revenue during the year ended December 31, 2023 also benefitted by the ramp-up of recycling and treatment operations associated with two long-term agreements in the Rockies region and one long-term agreement in the Permian region.

Chemical Technologies. Revenue increased $4.8 million, or 1.5%, to $322.5 million for the year ended December 31, 2023 compared to $317.6 million for the year ended December 31, 2022. The increase was primarily attributable to higher demand for our services in comparison to the year ended December 31, 2022 and was not directly impacted by acquisition activity.

Costs of Revenue

Costs of revenue increased $127.0 million, or 10.4%, to $1.4 billion for the year ended December 31, 2023, compared to $1.2 billion for the year ended December 31, 2022. The increase was comprised of a $50.0 million increase in Water Services costs and a $55.3 million increase in Water Infrastructure costs due to supporting the higher revenue-producing activity discussed above partially offset by a $3.6 million decrease in Chemical Technologies costs. Depreciation and amortization expense also increased by $25.3 million.

Water Services. Costs of revenue increased $50.0 million, or 6.5%, to $814.6 million for the year ended December 31, 2023, compared to $764.6 million for the year ended December 31, 2022. Cost of revenue as a percent of revenue decreased to 78.9% from 80.9%, due primarily to higher pricing for our services and economies of scale from higher revenue activity.

Water Infrastructure. Costs of revenue increased $55.3 million, or 66.6%, to $138.2 million for the year ended December 31, 2023, compared to $82.9 million for the year ended December 31, 2022. Cost of revenue as a percent of revenue decreased to 60.1% from 66.2%, due primarily to increased water treatment and recycling margins, which were favorably impacted by the Breakwater acquisition and the ramp-up of three long-term treatment and recycling agreements.

Chemical Technologies. Costs of revenue decreased $3.6 million, or 1.3%, to $262.1 million for the year ended December 31, 2023, compared to $265.6 million for the year ended December 31, 2022. Cost of revenue as a percent of revenue decreased to 81.3% from 83.6%, due primarily to realizing additional higher-margin market share within our portfolio of products as well as manufacturing process efficiencies.

Depreciation and Amortization. Depreciation and amortization expense increased $25.3 million, or 22.3%, to $138.8 million for the year ended December 31, 2023, compared to $113.5 million for the year ended December 31, 2022, due primarily to a higher fixed asset base related to the Breakwater acquisition and investments in pipeline and recycling infrastructure in our Water Infrastructure segment.

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Gross Profit

Gross profit was $231.7 million for the year ended December 31, 2023 compared to $160.8 million for the year ended December 31, 2022. Gross profit increased by $38.4 million in our Water Services segment, $49.4 million in our Water Infrastructure segment and $8.4 million in our Chemical Technologies segment. Partially offsetting the increase in gross profit was a $25.3 million increase in depreciation and amortization expense. Gross margin as a percent of revenue was 14.6% and 11.6% during the years ended December 31, 2023 and December 31, 2022, respectively.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $36.6 million, or 30.8%, to $155.5 million for the year ended December 31, 2023, compared to $118.9 million for the year ended December 31, 2022. The increase was due primarily to $14.7 million in rebranding costs, $9.5 million in higher wages, associated payroll taxes and employer 401(k) match contributions, a $6.6 million increase in legal and professional fees, a $3.2 million increase in bad debt expense, a $3.0 million increase in incentive and equity-based compensation cost, $2.0 million in higher contract labor, $1.9 million in higher information technology costs, and $1.8 million from a combination of other expenses partially offset by a $3.0 million decrease in transaction costs, a $2.4 million decrease in vehicle lease costs, and a $0.6 million decrease in insurance costs.

Impairments and Abandonments

We recorded $11.1 million of trademark abandonment in the Chemical Technologies segment during the year ended December 31, 2023. Also, we recorded $1.4 million of abandonment that was primarily attributable to abandoned property and equipment and $0.1 million of impairment in our Water Services segment to write-off the remaining value of a cost-method investment. We did not record any impairments and abandonments during the year ended December 31, 2022.

Net Interest Expense

Net interest expense increased by $1.7 million, or 62.7%, to $4.4 million for the year ended December 31, 2023, compared to $2.7 million for the year ended December 31, 2022, due primarily to higher average borrowings on our Sustainability-Linked Credit Facility and higher interest rates during the year ended December 31, 2023 prior to repaying such borrowings.

Bargain Purchase Gain

A bargain purchase gain of $13.4 million in 2022 was comprised of $6.7 million related to the Nuverra acquisition and $6.7 million in adjustments related to acquisitions that occurred in 2021. The Nuverra acquisition resulted in a bargain purchase gain as Nuverra was experiencing financial distress and actively evaluating strategic alternatives leading up to the transaction. We did not record any bargain purchase gain during the year ended December 31, 2023.

​

Tax Receivable Agreements Expense

As of December 31, 2023, we determined that we were in a position to reasonably estimate the amount of the liability associated with the Tax Receivable Agreements and determined that future payment under the terms of the Tax Receivable Agreements were probable, and therefore recorded expense of $38.2 million as of December 31, 2023.

​

Other

Other income was $2.4 million for the year ended December 31, 2023, compared to $4.7 million for the year ended December 31, 2022. The $2.3 million decrease is primarily due to the removal of the $1.1 million UltRecovery contingent consideration liability in 2022.

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Net Income

Net Income increased by $24.4 million, to a net income of $79.2 million for the year ended December 31, 2023 compared to $54.9 million for the year ended December 31, 2022, driven primarily by the release of a valuation allowance associated with deferred tax assets, increased revenue with improved margins, including contributions from our recent acquisitions, partially offset by tax receivable agreements expense, an increase in selling, general and administrative expenses and the abandonment costs referenced above.

​

Comparison of Non-GAAP Financial Measures

We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income (loss), plus interest expense, income taxes, and depreciation and amortization. We define Adjusted EBITDA, as EBITDA plus/(minus) loss/(income) from discontinued operations, plus any impairment and abandonment charges or asset write-offs pursuant to GAAP, plus non-cash losses on the sale of assets or subsidiaries, non-recurring compensation expense, non-cash compensation expense, and non-recurring or unusual expenses or charges, including severance expenses, transaction costs, or facilities-related exit and disposal-related expenditures, plus/(minus) foreign currency losses/(gains), plus/(minus) losses/(gains) on unconsolidated entities and plus tax receivable agreements expense less bargain purchase gains from business combinations. The adjustments to EBITDA are generally consistent with such adjustments described in our Sustainability-Linked Credit Facility. See “—Note Regarding Non-GAAP Financial Measures” for more information and a reconciliation of EBITDA and Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.

Our board of directors, management and investors use EBITDA and Adjusted EBITDA to assess our financial performance because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization) and items outside the control of our management team. We present EBITDA and Adjusted EBITDA because we believe they provide useful information regarding the factors and trends affecting our business in addition to measures calculated under GAAP.

Note Regarding Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial performance and results of operations. Net income is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as an analytical tool due to the exclusion of some but not all items that affect the most directly comparable GAAP financial measures. One should not consider EBITDA or Adjusted EBITDA in isolation or as substitutes for an analysis of our results as reported under GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

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The following table sets forth our reconciliation of EBITDA and Adjusted EBITDA to our net (loss) income, which is the most directly comparable GAAP measure, for the years ended December 31, 2023 and 2022. The reconciliation of EBITDA and Adjusted EBITDA for the years ended December 31, 2022 and 2021 is set forth in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["(1)","For all periods presented, the losses were primarily due to sales of real estate and underutilized, excess or obsolete property and equipment."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","For all periods presented, these costs were primarily legal-related due diligence costs as well as costs related to certain acquired subsidiaries and rebranding costs."]]
[[/GREPCENT_TABLE]]

EBITDA was $164.5 million for the year ended December 31, 2023 compared to $174.2 million for the year ended December 31, 2022. The $9.7 million decrease in EBITDA was driven primarily by $38.2 million in tax receivable agreements expense in 2023, a $36.6 million increase in selling, general and administrative expense in 2023, a $13.4 million bargain purchase gain in 2022 and abandonment costs of $12.6 million in 2023 partially offset by an increase of $96.2 million in gross profit. Adjusted EBITDA was $258.3 million for the year ended December 31, 2023 compared to $194.8 million for the year ended December 31, 2022. The $63.5 million increase is primarily attributable to the items discussed above.

Liquidity and Capital Resources

Overview

Our primary sources of liquidity are cash on hand, borrowing capacity under the Sustainability-Linked Credit Facility, cash flows from operations and proceeds from the sale of excess property and equipment. Our primary uses of capital have been to fund current operations, maintain our asset base, implement technological advancements, make capital expenditures to support organic growth, fund acquisitions and minority investments, pay dividends and distributions, and when appropriate, repurchase shares of Class A common stock in the open market. Depending on available opportunities, market conditions and other factors, we may also issue debt and equity securities, in the future, if needed.

As of December 31, 2023, we had no outstanding bank debt. We prioritize sustained positive free cash flow and a strong balance sheet, and evaluate potential acquisitions and investments in the context of those priorities, in addition to the economics of the opportunity. We believe this approach provides us with additional flexibility to evaluate larger investments as well as improved resilience in a sustained downturn versus many of our peers.

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Based on our current cash and cash equivalents balance, operating cash flow, available borrowings under our Sustainability-Linked Credit Facility and the ongoing actions discussed above, we believe that we will be able to maintain sufficient liquidity to satisfy our obligations and remain in compliance with our existing debt covenants through the next twelve months and beyond, prior to giving effect to any future financing that may occur.

​

We intend to finance most of our capital expenditures, contractual obligations and working capital needs with cash on hand, cash generated from operations and borrowings under our Sustainability-Linked Credit Facility. For a discussion of the Sustainability-Linked Credit Facility, see “—Sustainability-Linked Credit Facility” below. Although we cannot provide any assurance, we believe that our current cash balance, operating cash flow and available borrowings under our Sustainability-Linked Credit Facility will be sufficient to fund our operations for at least the next twelve months.

​

During the fourth quarter of 2022, we initiated a quarterly dividend and distribution program of $0.05 per share and $0.05 per unit for holders of Class A and Class B shares, respectively. We paid quarterly dividends at the same rate through the third quarter of 2023, then the board of directors increased the quarterly dividend paid on November 17, 2023 to $0.06 per share and $0.06 per unit for holders of Class A and Class B shares, respectively. This program resulted in a financing outflow of $24.9 million and $6.0 million during the years ended December 31, 2023 and 2022, respectively. This quarterly dividend program is expected to continue into 2024 and beyond. All future dividend payments are subject to quarterly review and approval by our board of directors.

​

As of December 31, 2023, cash and cash equivalents totaled $57.1 million and we had approximately $250.3 million of available borrowing capacity under our Sustainability-Linked Credit Facility. As of December 31, 2023, the borrowing base under the Sustainability-Linked Credit Facility was $267.4 million, we had zero in outstanding borrowings, and outstanding letters of credit totaled $17.1 million. As of February 19, 2024, we had $55.0 million in outstanding indebtedness, the borrowing base under the Sustainability-Linked Credit Facility was $218.4 million, the outstanding letters of credit totaled $17.1 million, and the available borrowing capacity under the Sustainability-Linked Credit Facility was $146.3 million.

​

In 2022, our trade accounts receivable experienced a notable surge, rising from $232.8 million to $430.0 million. This increase was attributed to multiple factors, including the growth in our revenue, the addition of receivables from acquired entities, and the complexities encountered during the integration of these acquisitions. During 2023, in parallel with integration efforts related to previously acquired companies, we implemented enhancements to our billing and collection processes, yielding tangible benefits. These improvements resulted in a more efficient management of our working capital, thereby augmenting our generation of cash. This increased cash flow provides us with greater flexibility to reinvest in our business or return capital to our shareholders.

​

As of December 31, 2023, we had no material off-balance sheet arrangements. As such, we are not exposed to any material financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.

​

Our contractual obligations include, among other things, our Sustainability-Linked Credit Facility and operating leases. Refer to “Note 6—Leases” for operating lease obligations as of December 31, 2023 and “Note 10—Debt” for an update to our Sustainability-Linked Credit Facility as of December 31, 2023.

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Cash Flows

​

The following table summarizes our cash flows for the years ended December 31, 2023 and 2022. The summary of our cash flows for the years ended December 31, 2022 and 2021 is set forth in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Cash Flow Changes Between the Years Ended December 31, 2023 and 2022

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[[/GREPCENT_TABLE]]

​

Operating Activities. Net cash provided by operating activities was $285.4 million for the year ended December 31, 2023, compared to $33.2 million for the year ended December 31, 2022. The $252.1 million improvement is comprised of an increase of $64.5 million of net income combined with non-cash adjustments and $187.6 million of decreased working capital primarily due to collecting trade receivables favorably impacted by improvements in the billing and collection process. These trade receivables were previously elevated due to the factors noted above.

Investing Activities. Net cash used in investing activities was $137.2 million for the year ended December 31, 2023, compared to $53.2 million for the year ended December 31, 2022. The $83.9 million increase in net cash used in investing activities was due primarily to a $64.0 million increase in purchases of property and equipment, a $14.4 million decrease in proceeds received from sales of property and equipment and an increase of $10.7 million spent for acquisitions, net of cash and restricted cash received partially offset by a decrease of $7.2 million in investments made in non-controlled entities.

Financing Activities. Net cash used in financing activities was $98.4 million for the year ended December 31, 2023, compared to $58.5 million for the year ended December 31, 2022. The $40.0 million increase in net cash used in financing activities was due primarily to a $41.6 million increase in repurchases of shares of Class A common stock, an $18.9 million increase in dividends paid and debt repayments net of borrowings increasing $9.9 million partially offset by a $22.0 million purchase of noncontrolling interests in 2022 resulting in 100% ownership of the Big Spring Recycling System, which includes significant pipeline, storage, recycling and disposal infrastructure assets in the Midland Basin, $6.3 million of cash received net of cash paid from/to noncontrolling interest holders during the year ended December 31, 2023, and $2.1 million in debt issuance costs paid during the year ended December 31, 2022.

Sustainability-Linked Credit Facility

On March 17, 2022 (the “Restatement Date”), SES Holdings and Select Water Solutions, LLC (“Select LLC”), formerly Select Energy Services, LLC and a wholly-owned subsidiary of SES Holdings, entered into a $270.0 million amended and restated senior secured sustainability-linked revolving credit facility (the “Sustainability-Linked Credit Facility”), by and among SES Holdings, as parent, Select LLC, as borrower and certain of SES Holdings’ subsidiaries, as guarantors, each of the lenders party thereto and Wells Fargo Bank, N.A., as administrative agent, issuing lender and swingline lender (the “Administrative Agent”) (which amended and restated the Prior Credit Agreement dated November 1, 2017). The Sustainability-Linked Credit Facility also has a sublimit of $40.0 million for letters of credit and a sublimit of $27.0 million for swingline loans. Subject to obtaining commitments from existing or new lenders, Select LLC has the option to increase the maximum amount under the senior secured credit facility by $135.0 million during the first three years following the Restatement Date.

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Our Sustainability-Linked Credit Facility also contains a sustainability adjustments feature that could result in up to a 0.05% increase or reduction to the effective interest rate pursuant to an Applicable Sustainability Margin Adjustment depending on Select LLC’s ability to meet certain sustainability targets and thresholds starting in 2022. For each calendar year, the “Applicable Sustainability Margin Adjustment” will equal the number of basis points (whether positive, negative or zero) equal to the sum of (i) the Applicable Water Stewardship Fee Adjustment plus (ii) Applicable Health and Safety Fee Adjustment (each as defined in the Sustainability-Linked Credit Facility.

The “Applicable Water Stewardship Fee Adjustment" is based on Select LLC’s ability to (i) remain above the Water Stewardship Threshold and (ii) reach the Water Stewardship Target, both metrics which are measured by the total number of barrels of recycled produced water recycled by SES Holdings and its Subsidiaries. The “Applicable Employee Health and Safety Fee Adjustment" is based on Select LLC’s ability to (i) remain above the Employee Health and Safety Threshold and (ii) reach the Employee Health and Safety Target, both metrics which are measured by the total recordable incident rates of employees with respect to SES Holdings and its Subsidiaries.

Refer to “Note 10—Debt” for further discussion of the Sustainability-Linked Credit Facility.

Critical Accounting Policies and 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 disclosures about any 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. Our critical accounting policies are described below to provide a better understanding of how we develop our assumptions and judgments about future events and related estimations and how they can impact our financial statements. The following accounting policies involve critical accounting estimates because they are dependent on our judgment and assumptions about matters that are inherently uncertain.

We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and assumptions about future events and their effects are subject to uncertainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained, and as the business environment in which we operate changes. We believe the current assumptions, judgments and estimates used to determine amounts reflected in our consolidated financial statements are appropriate, however, actual results may differ under different conditions. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in this Annual Report.

Other intangible assets: The purchase price of acquired businesses is allocated to its identifiable assets and liabilities based upon estimated fair values as of the acquisition date. Other intangible assets are initially recorded at their fair values. Other intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Intangible assets with finite useful lives are amortized either on a straight-line basis over the asset’s estimated useful life or on a basis that reflects the pattern in which the economic benefits of the intangible assets are realized.

Impairment of long-lived assets and intangible assets: Long-lived assets, such as property and equipment and finite-lived intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Recoverability is measured by a comparison of their carrying amount to the estimated undiscounted cash flows to be generated by those assets. If the undiscounted cash flows are less than the carrying amount, we record impairment losses for the excess of their carrying value over the estimated fair value. Fair value is determined, in part, by the estimated cash flows to be generated by those assets. Our cash flow estimates are based upon, among other things, historical results adjusted to reflect our best estimate of future market rates, utilization levels, and operating performance. Development of future cash flows also requires management to make assumptions and to apply judgment, including the timing of future expected cash flows, using the appropriate discount rates and determining salvage values. The estimate of fair value represents our best estimates of these factors based on current

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industry trends and reference to market transactions and is subject to variability. Assets are generally grouped at the lowest level of identifiable cash flows. We operate within the oilfield service industry, and the cyclical nature of the oil and gas industry that we serve and our estimates of the period over which future cash flows will be generated, as well as the predictability of these cash flows, can have a significant impact on the estimated fair value of these assets and, in periods of prolonged down cycles, may result in impairment charges. Changes to our key assumptions related to future performance, market conditions and other economic factors could adversely affect our impairment valuation.

Retentions: We assume risk of loss through deductibles and self-insured retentions, up to certain levels for losses related to general liability, workers’ compensation and employer’s liability, vehicle liability, and health insurance. Our exposure (i.e., the self-insured retention or deductible) per occurrence is $0.5 million for general liability, $0.25 million for workers’ compensation and employer’s liability, $0.25 million for auto liability and $0.3 million for health insurance. We also have an excess loss policy over these coverages with a limit of $100.0 million in the aggregate. Management reviews its estimates of reported and unreported claims and provides for losses through reserves. We use actuarial estimates to record our liability for future periods. If the number of claims or the costs associated with those claims were to increase significantly over our estimates, additional charges to earnings could be necessary to cover required payments. As of December 31, 2023, we estimate the range of exposure to be from $16.2 million to $19.2 million and have recorded liabilities of $17.3 million, which represents management’s best estimate of probable loss related to workers’ compensation and employer’s liability, and auto liability. Additionally, as of December 31, 2023, accrued health insurance and accrued general liabilities were $6.7 million and $1.3 million, respectively.

Tax Receivable Agreements: We intend to fund any obligation under the Tax Receivable Agreements with cash from operations or borrowings under our Sustainability-Linked Credit Facility. With respect to obligations under each of our Tax Receivable Agreements (except in cases where we elect to terminate the Tax Receivable Agreements early, the Tax Receivable Agreements are terminated early due to certain mergers or other changes of control or we have available cash but fail to make payments when due), generally we may elect to defer payments due under the Tax Receivable Agreements if we do not have available cash to satisfy our payment obligations under the Tax Receivable Agreements or if our contractual obligations limit our ability to make these payments. Any such deferred payments under the Tax Receivable Agreements generally will accrue interest.

We account for any amounts payable under the Tax Receivable Agreements in accordance with Accounting Standards Codification (“ASC”) Topic 450, Contingencies. For a discussion regarding an acceleration

of the amounts payable under the Tax Receivable Agreements if we elect to terminate the Tax Receivable Agreements

early or they are terminated early due to our failure to honor a material obligation thereunder or due to certain mergers,

asset sales, other forms of business combinations or other changes of control and the potential impact of such an acceleration and the potential impact of such acceleration, please read Part I, Item 1A. “Risk Factors – Risks Related to Our Organizational Structure. In certain cases, payments under the Tax Receivable Agreements may be accelerated and/or significantly exceed the actual benefits, if any, we realize in respect of the tax attributes subject to the Tax Receivable Agreements.

We have assessed the amount of any liability under the Tax Receivable Agreements required under the provisions of ASC 450 in connection with preparing the consolidated financial statements. As of December 31, 2023, we determined that we were in a position to reasonably estimate an amount of liability associated with the Tax Receivable Agreements and determined that future payments under the terms of the Tax Receivable Agreements were probable, and therefore recorded liabilities of $38.2 million as of December 31, 2023. Prior to this, we had determined that we were not in a position to reasonably estimate such amount and that future payments were not probable. The projection of future taxable income and utilization of tax attributes associated with the Tax Receivable Agreements involve estimates which require significant judgment. The amount of the Company’s actual taxable income, passage of future legislation, or consummation of significant transactions in the future may significantly impact the liability related to the Tax Receivable Agreements.

Realizability of Deferred Tax Assets: We establish valuation allowances when necessary to reduce deferred tax assets to the amounts more likely than not to be realized. Deferred income tax assets are evaluated quarterly to determine if valuation allowances are required or should be adjusted. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for

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each applicable tax jurisdiction. The assessment regarding whether a valuation allowance is required or should be adjusted is based on an evaluation of possible sources of taxable income and also considers all available positive and negative evidence factors. Our accounting for the realization of deferred tax assets incorporates, amongst other factors, our best estimate of future events. Changes in our current estimates, due to unanticipated market conditions, governmental legislative actions or events, could have a material effect on our ability to utilize deferred tax assets. As of December 31, 2023, valuation allowances against deferred tax assets were $112 million. See “Note 15—Income Taxes” for additional information.  

​

Recent Accounting Pronouncements

Refer to “Note 2—Significant Accounting Policies” for recent accounting pronouncements.

​