Greetings, and welcome to the Select Energy Services Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Justin Briscoe, Vice President, Corporate Development..

[Technical Difficulty].

Ladies and gentlemen, our apologies. There was a technical issue. And once again I will now turn this call over to our host, Justin Briscoe, Vice President of Corporate Development. .

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Select Energy Services Conference Call and Webcast to review our second quarter 2017 results.

With me today are John Schmitz, our Chairman and Chief Executive Officer; Eric Mattson, Executive Vice President of Finance; and Gary Gillette, our Chief Financial Officer and Senior Vice President. .

Before I turn over the call, I have a few housekeeping items to cover. There will be a replay of today's call and it will be available via webcast on our website at selectenergyservices.com. There will also be a recorded replay available until August 11, 2017. And that information is included in yesterday's release.

Please note that the information reported on this call speaks only as of today, August 4, 2017. And therefore, you are advised that time-sensitive information may no longer be accurate as of the time of replay or transcript reading.

In addition, the comments made by management during this conference call may contain forward-looking statements within the meaning of the United States Federal Securities Laws. These forward-looking statements reflect the current views of Select Energy's management.

However, various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in the statements made by management.

The listener is encouraged to read our final IPO prospectus, quarterly reports on Form 10-Q, and current reports on Form 8-K to understand those risks, uncertainties and contingencies. And now, I would like to turn the call over to our Founder, Chairman and CEO, Mr. John Schmitz. .

Thank you, Justin, and good morning, everyone. And thanks for joining us on our second quarter 2017 conference call. As most of you know on July 18, we issued a press release and hosted a conference call the following morning to announce our agreement to merge with Rockwater Energy Solutions.

At that time, we also preannounced our preliminary second quarter results as well as Rockwater's preliminary second quarter results and provided anticipated revenue and adjusted EBITDA ranges for both companies.

I'm pleased to report that our second quarter numbers are now final and both our revenue and adjusted EBITDA results are modestly above the top end of the range that we provided on our merger call. Rockwater's second quarter numbers, while not yet final, we believe will be within the guidance range, we gave on July 18.

Gary will provide more detail on our numbers. But let me highlight just a few items for Select. .

Our second quarter revenue was $134.4 million, up 35% sequential from our first quarter 2017. Adjusted EBITDA was $27.3 million, up 98% from the first quarter with incremental margins of 39%. As we've stated in of our first quarter call, we exited March with good momentum and we saw that momentum continue throughout the second quarter.

We continue to see solid growth in the completions in the second quarter with the EIA reporting 21% sequential growth. However, this growth in completions continued to lag the 23% growth in the horizontal rig count during the quarter per Baker Hughes.

Accordingly, the DUC's, the drilled, uncompleted wells, have grown every month in 2017 with the current DUC count in excess of 6,000.

This is an indication that even if rig count growth slows, frac crew count should continue to increase as we are still seeing some operators, particularly small operators, delaying and pushing frac dates for lack of available crews. All 3 of our segments reported strong sequential growth in the quarter.

Our Water Solutions segment, in particular, which represents approximately 80% of our total revenue, was up 38% in revenue, while gross profit before depreciation and amortization was up 68% and our gross margin percentage was up a full 5% points sequentially over quarter 1.

While our merger with Rockwater is our major recent news, we have continued to look for opportunities on the pre-frac water portion of our business and have completed 2 small asset acquisitions since our IPO. The first acquisition of assets in intellectual property of Data Automated Water Systems, or DAWS.

DAWS is a company that specializes in equipment automation, specifically in the remote and automated activation of manifolds, which assists operations -- operators in precisely blending fresh and nonfreshwater sources to achieve a specific water mix for completions.

The second, Techstar, is a small Permian water transfer company with a good and loyal customer base. These 2 acquisitions were less than $10 million in total purchase price and were acquired with a combination of cash and stock.

We also have another small acquisition in the final negotiations and will continue to look for small tuck-in opportunities as they arise. Additionally, in second quarter, we had a full quarter of the operating results of our GRR acquisition, which we completed in March.

GRR is the New Mexico water sourcing and infrastructure company in the Northern Delaware basin and we are very pleased with its performance to date. Water demand is continuing to ramp in the Northern Delaware and we are actively pursuing additional water sources that we can tie into the extensive infrastructure that GRR has in place in the basin.

Additionally, as we said in our first quarter call, it is our plan to add our water transfer services across the GRR sourcing footprint. And we are pleased to have recently completed our first of several water transfer jobs in the area, jobs that would not have been won without GRR's source water.

We have continued to invest in our business as well on the CapEx side. We indicated in our quarter 1 call, a 2017 capital budget of $79 million, which was a combination in roughly equal amounts of maintenance CapEx, growth CapEx and what we refer to as catch-up CapEx, resulting from the intentional underspend in CapEx during the 2015, 2016 downturn..

Through the second quarter, we have spent $42 million in CapEx, primarily on the pre-frac water side of our business, including more than 180 miles of lay-flat hose, which increases our fleet by more than 1/3. Pre-frac water services will continue to be the primary area of spend in the back half of 2017.

Given the visibility we've seen thus far in the third quarter, we continue to feel that the back half of '17 looks very solid with no major indications from our customers that they will materially scale back their completion spending for the year.

Customer indications around potential 2018 are still very limited, but we believe that completion side of the budgets will stay strong. With that, let me turn it over to Eric. .

Thank you, John, and good morning. I'd like to provide a brief update on the Rockwater Merger. As John mentioned, Select performed somewhat above the upper end of the revenue and adjusted EBITDA guidance that we provided on our July call.

In the case of Rockwater, they have not yet finalized their results, but we believe both their revenue and adjusted EBITDA should be in the range that we previously provided. Given Select's actual Q2 performance and our expectations of Rockwater's results, our range for the combined Q2 adjusted EBITDA would move to $44 million to $45 million.

Earlier this week, we submitted the required Hart-Scott-Rodino antitrust filing to the FTC and Justice Department. So that process is now underway. In addition, we expect to file the required information statement to the SEC for their review in the coming weeks.

Depending on the outcome of both the antitrust and SEC review, the earliest we would expect to complete the merger would be the end of the third quarter, and any extended review process of either filing could delay that time frame. .

Additionally, we are working with Wells Fargo to further syndicate the $150 million asset-backed loan commitment that we received from them at signing.

We have received favorable responses from several lenders thus far, and are confident we will be able to increase the facility to $300 million, and be in a position to be fully documented and ready to close concurrent with the closing of the merger transaction. .

A quick word on pricing in our markets. We have not seen any material across the board, ability to increase price as the overall landscape remains competitive. We are able to get some improved pricing on a situational customer-by-customer basis or in a specific area, where labor and equipment are extremely tight.

And these tight increases would be in the 5% to 15% range. We will continue to push price as utilization of our equipment continues to increase. And with that, I would like to turn it over to Gary Gillette for a quick review of our second quarter financials. .

Thank you, Eric. And good morning, everyone. As John mentioned, we reported total revenues of $134.4 million for the second quarter of 2017, up 35% sequentially from the first quarter of 2017. Adjusted EBITDA was $27.3 million, up 98% from the first quarter with adjusted EBITDA incrementals of 39%.

The net loss for the quarter was $10.5 million, however, it is worth noting that the net loss includes $12.5 million of one-time phantom equity and other IPO-related compensation expenses..

Turning to our segment results, our Water Solutions segment generated revenues of $107.8 million in the second quarter compared to $78.4 million in the first quarter, an increase of 38%.

Segment gross profit before depreciation and amortization grew 68% to $29.8 million as compared to $17.8 million in the first quarter with incremental margins of 41%..

Peak, our accommodations and rental business unit, generated revenues of $13.3 million in the second quarter of 2017 compared to $9.5 million in the first quarter, an increase of 41%, against a horizontal rig count increase in the quarter of 23%.

The wellsite accommodation space continues to be in a state of flux, and Peak has made good progress on both the revenue and margin side. Gross profit, again, before depreciation and amortization, was $2.5 million at a gross margin of 19% compared to $1.6 million and 17% in the first quarter with incremental margins of 25%..

Now shifting over to our wellsite completion and construction services business unit, Affirm, generated revenues of $13.3 million in the second quarter of 2017, up 11% compared to $12 million in the first quarter.

Gross profit and gross margin before depreciation and amortization were $2.5 million and 18% compared to $1.6 million and 13% in the first quarter with incremental margins of 66%..

Now turning to the balance sheet and cash flow in the quarter. During the second quarter, we received net proceeds from our initial public offering of $128.5 million.

Significant uses of cash during the quarter, included the repayment of $34 million of debt that was incurred to complete the GRR acquisition in March; net CapEx during the quarter of $26.9 million, an increase in our working capital of $27.8 million; one-time phantom equity and other IPO-related compensation expenses of $12.5 million; and finally $6.5 million representing the cash portion of the 2 small acquisitions completed during the quarter..

We ended the quarter with no debt and cash on the balance sheet of $52.8 million. With that, we'd like to thank you for joining our second quarter earnings conference call. And now we'll open up the call to questions.

Operator?.

[Operator Instructions] Our first question comes from Thomas Curran with FBR Capital Markets. .

Starting with the transfer on the temporary side, could you tell us, where roughly Select's lay-flat hose utilization is at? And how it seems to compare to the rest of the market? And then specifically for the Techstar tuck-in, did that come with any lay-flat hose? And if so, how much?.

Tom, this is John. Lay-flat hose in the industry and in our company, Select, is high utilization. So we continue to, as you heard, invest in pre-frac water services and a large portion of that is lay-flat hose. As far as Techstar, Techstar was a small tuck-in. It was -- it had a good position in the Permian with a good customer base.

And yes, it came with lay-flat hose and some transfer pumps and other ancillary equipment that you use to lay the hose out. It was not a large amount of hose comparative to our 180 million of -- 180 miles in spend for CapEx.

The specific number on the amount of lay-flat that we had, I believe it was around 43 miles that was inside of the company, TechStar when we bought it. .

And how close are you -- maybe another way of approaching it, are you at the point yet with utilization where you're seeing pricing power specifically for the temporary transfer of product line broadly across basins? And if not, how close are you? When would you expect to hit that inflection point?.

Well, in certain areas, we have gotten price where there is short equipment -- high utilization to equipment or short equipment offering or labor is in high demand or high utilization. This market is a market that has a lot of competitors in it. So just judging by our high utilization of hose, there's still a lot of competitiveness in the marketplace.

But we are getting prices in certain areas, Tom, but not across the board. .

Okay, and then flipping to the permanent pipeline side. First, in the Bakken, would you share where Bakken utilization exited the quarter? I know you did that for us last quarter.

And whether the recent reversal in Bakken crude spreads from a WTI discount to an actual spread -- or to an actual premium this week, could that potentially accelerate activity there? And then in the Permian, where did GRR's share of revenues come in relative to your expectations for 2Q? You had shared an expectation for what its percentage contribution was going to be in 2Q? Could you just tell is where it came in relative to that expectation?.

Yes, sure. So let me tackle the Bakken first. We're not going to talk on specific volumes and given different assets -- individual assets for various reasons in the market as you'd understand. But our activity and results are very favorable in the first quarter and continue that month-over-month momentum.

So we have good strong momentum in our Charleston or Bakken assets in the fixed pipeline.

And then -- if you remember the Thompson pipeline, which would be our north -- on the north side of the lake, that would be the next development of the infrastructure to put that take point into the lake and that would draw development, and that is still on course and will get developed in the fourth quarter.

So we haven't seen slowdown in our activity in the Bakken. We continue to have good momentum there, that is in the eastern side of McKenzie County, as you know, and we have not seen a drop of activity in that area. On GRR, GRR's performance is definitely to our expectation.

Their asset base in Eddy and Lea County is very strong, we are getting good results out of our expectations and are seeing good numbers, and it has performed within the range we discussed on our last call. .

[Operator Instructions] Ladies and gentlemen, this concludes the question-and-answer portion of the call. I would now like to turn the call back over to management for final comments. .

Thank you, everyone, for joining us on our second quarter conference call. We look forward to connecting again with everyone soon. .

Thank you, this concludes today's conference. All parties may disconnect. Have a great day..