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PART I
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information in this Annual Report on Form 10-K 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 Annual Report regarding our strategy, future operations, financial position, risks, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward‑looking statements. When used in this Annual 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. When considering forward‑looking statements, you should keep in mind the cautionary statements included in this Annual Report. 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 ultimate outcome and results of integrating our operations with the operations of Rockwater (as defined herein);
•the effects of our business combination with Rockwater, including the combined company’s future financial condition, results of operations, strategy and plans;
•potential adverse reactions or changes to business relationships resulting from the completion of the Rockwater Merger (as defined herein);
•expected benefits from the Rockwater Merger and the ability of the combined company to realize those benefits;
•the results of any merger‑related litigation, settlements and investigations;
•the level of capital spending by U.S. and Canadian oil and gas companies;
•trends and volatility in oil and gas prices;
•demand for our services;
•regional impacts to our business, including our key infrastructure assets within the Bakken;
•our level of indebtedness and our ability to comply with covenants contained in our Credit Agreement (as defined herein) or future debt instruments;
•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 safety performance;
•the impact of current and future laws, rulings and governmental regulations, including those related to hydraulic fracturing, accessing water, disposing of wastewater and various environmental matters;
•our ability to retain key management and employees;
•the impacts of competition on our operations;
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•our ability to hire and retain skilled labor;
•delays or restrictions in obtaining permits by us or our customers;
•constraints in supply or availability of equipment used in our business;
•the impacts of advancements in drilling and well service technologies;
•changes in global political or economic conditions, generally, and in the markets we serve;
•accidents, weather, seasonality or other events affecting our business; and
•the other risks identified in this Annual Report including, without limitation, those under the headings “Item 1A. Risk Factors,” “Item 1. Business,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) and “Item 13. Certain Relationships and Related Transactions, and Director Independence.”
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 elsewhere in this Annual 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 statement.
References Within This Annual Report
As used in Part I of this Annual Report on Form 10-K, unless the context otherwise requires, references to the ”Company,” ”we,” ”our,” ”us” or similar expressions refer (1) for time periods prior to our December 2016 private placement of 16,100,000 shares of our Class A-1 common stock at $20.00 per share (the “Select 144A Offering”) and the related corporate reorganization transactions to Select Energy Services, LLC (“Select LLC”) and SES Holdings, LLC (“SES Holdings”) and their consolidated subsidiaries, (2) for time periods after the Select 144A Offering and the related corporate reorganization transactions and prior to the Rockwater Merger and the related corporate reorganization transactions, to Select Energy Services, Inc. (“Select Inc.”) and its consolidated subsidiaries and (3) after the Rockwater Merger and the related corporate reorganization transactions, to Select Inc. and its consolidated subsidiaries, including those subsidiaries acquired in the Rockwater Merger. Additionally, prior to the consummation of the Rockwater Merger and the related corporate reorganization transactions, “Rockwater” refers to Rockwater Energy Solutions, Inc. and its consolidated subsidiaries and “Rockwater LLC” refers to Rockwater Energy Solutions, LLC and its consolidated subsidiaries. Following the consummation of Rockwater Merger and the related corporate reorganization transactions “Rockwater” refers to Select Energy Solutions (RW), Inc. and its consolidated subsidiaries and “Rockwater LLC” refers to Rockwater Energy Solutions, LLC and its consolidated subsidiaries.
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ITEM 1. BUSINESS
We are a leading provider of total water management and chemical solutions to the unconventional oil and gas industry in the United States and Western Canada. We were formed as a Delaware corporation in November 2016. Within the major shale plays in the United States, we believe we are a market leader in sourcing, transfer (both by permanent pipeline and temporary hose) and temporary containment of water prior to its use in drilling and completion activities associated with hydraulic fracture stimulation or “fracking,” which we collectively refer to as “pre‑frac water services”. In addition, we provide testing and flowback services immediately following the well completion. In most of our areas of operations, we also provide additional complementary water‑related services that support oil and gas well completion and production activities, including monitoring, treatment, hauling, water recycling and disposal. We also manufacture a full suite of specialty chemicals used in well completions, and we provide chemicals needed by our customers to help increase oil and gas production and lower costs over the extended life of a typical well. We have historically generated a substantial majority of our revenues through providing total water solutions to our customers, and we believe we are the only company that provides total water solutions together with complementary chemical products and related expertise, which we believe gives us a unique competitive advantage in our industry.
Water is essential to the development and completion of unconventional oil and gas wells, where producers rely on fracking to stimulate the production of oil and gas from dense subsurface rock formations. The volume of water required to economically produce tight oil and gas reserves in the United States and Canada has grown more than tenfold over the past five years. Water and related services comprise a large and growing portion of our customers’ drilling and completion costs. In support of new well development, we source, transfer, provide containment of and treat the water used by our customers in the well completion process. The fracking process involves the injection of large volumes of water and proppant (typically sand) together with chemicals under high pressure, through a cased and cemented wellbore into targeted subsurface formations thousands of feet below ground to fracture the surrounding rock. Our completion chemicals are blended with water to improve the transport and placement of proppant in targeted zones within the producing formation. The induced fractures near the wellbore allow hydrocarbons to flow into the wellbore for extraction. Our team of chemists and research and development personnel work with our customers to optimize the frac fluid system. Up to fifty percent of the water pumped into the well during the fracking process returns as “flowback” during the first several weeks following the well completion process, and a large percentage of the remainder, plus pre‑existing water in the formation, is recovered as produced water over the life of the well. This flowback and produced water must be captured, contained and either disposed of in an environmentally safe manner, or treated and recycled for reuse in subsequent frack jobs. We provide services that support the operator’s management of flowback and produced water. After the fracking process is completed, we provide a variety of services related to the initial phase of the flowback and production operations that complement the longer‑term oil and gas production activities, including designing and executing chemical treatment programs to improve well productivity, extend the useful life of wells and reduce production costs.