Is Select Energy Services Still Worth The Wait?

|
About: Select Energy Services (WTTR)
by: Kenrun Investments

Summary

With the Permian completion declines during the latter half of Q3, a 1% revenue increase Q/Q is a testament to Select's customer loyalty and quality of service.

Net income up 25% sequentially was 7.41% above expectations.

Net margin improved by 25% Q3 vs Q2.

Long term debt was cut by 18.75% Q3 vs Q2 and by 31% within just the last 4 months.

Not long after I wrote my first exclusive SeekingAlpha article, I promised my followers a second SA exclusive article highlighting a second great growth stock, but in spite of all of my digging, I’ve yet to find anything as promising as I what I’ve addressed in my first article Is Select Energy Undervalued?

In that SA article I pointed out that adding post frac water services will provide Select Energy Services (WTTR) with greater opportunities to attract top-tier accounts, that their mergers are beginning to create economies of scale and that their proprietary AquaView and AquaLogic along with their chemical manufacturing at their Midland plant will give Select a competitive edge. I also pointed out that revenue, margin and cash flow will continue to grow quarter over quarter and that Select is selling at a bargain.

Since then, price has done nothing but drop. Was I wrong? Is Select a bad investment? Yesterday, Select's Q3 results were released and I think the numbers bear me out.

First the Bad News

Revenue for Q3, which many speculated would be up 10% or more sequentially was a disappointment, up a mere 1% to $397.0 million vs $393M in Q2, but with Select reporting a decline in completion activities in the Permian during the latter half of Q3, I feel that revenue up 1% sequentially is a testament to their customer loyalty and quality of service.

Now the Great News

A tribute to their superb fiscal management, Select’s Q3 net income of $31.3M grew 25% sequentially to $0.29/share which was 7.41% above Zacks quarter estimate of $.27.

Select’s Q3 statement indicates net margin in Q3 continues to grow as well, improving also by a strong 25% vs Q2 (Select’s Q3 statement reported Q3 revenue of $397.0 million and a net income of $31.3M which yields a net margin of 7.88% vs their Q2 revenue of $393 and a net income of $25M which yields a net margin of 6.3%).

Long term debt in Q3 was cut by 18.75% sequentially from $80M to $65M and debt was reduced another $10M since then to $55M. That’s a 31% reduction in long term debt within just the last 4 months.

Stockholder equity also continues to rise each quarter. Cumulatively, for the last three quarters, stockholder equity increased 31% from $656.1 M to $861.340M and cash and equivalents increased 480% from $2.7M to $13M.

The Risks Remain the Same

There are a lot of existing and a few new players entering the post frac market and margins are thin; and more are beginning to enter the more profitable pre frac side as well. If Select slips in cost estimates, it could stunt or temporarily reverse their margin growth. Permian take away issues continue to hamper growth and if WTI should move below $50/bbl, it could push down revenue and margins.

Select Is Financially Sound

...getting stronger with each quarter and their administration is fiscally adept. They choose their clients carefully, target top tier clients and take on only the most profitable jobs. Revenue continues to grow quarter over quarter even while the Permian continues to be challenging but first and foremost: management is laser focused on growing margins and obtaining and retaining top shelf clients to insure ongoing solid investor returns quarter after quarter. Based in all the major North American basins Select can and does, for example, recruit new and increase existing customer allegiance by continuing to service them even as they move from basin to basin and still remain profitable.

Price is Still a Bargain

If Q3 revenue, margin and EPS simply remained constant for the next three quarters – in other words assuming no new growth at all, not so much as one new account nor even experiencing any existing client growth whatsoever nor any Permian turnaround of any kind - a PE of 10 would equate to $11.60 a share, a PE of 12 would be $13.92/share and a PE of 15 would be $17.40. Any growth at all from any basin would push those numbers higher.

What I Know and Don't Know

I know that for each of the last 3 quarters, Select has increased in value Q over Q sequentially and if it continues, price will eventually rise to reflect it's true value. Although I know what will happen, what I don't know is when it will happen. Is it still worth the wait? Based upon what I know? I think so.

Disclosure: I am/we are long WTTR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: If you'd like to be made aware of my future analyses and opinion of WTTR and other companies, click the "Follow" link next to my name at the top of this page.