Future looking ominous for Select Energy after $122 Million IPO

The US stock markets have been busy this April, with companies launching IPOs that stack up to the billions in cumulative value. There have been winners in the market such as the biopharmaceutical Tocagen, tech magnate Snap Inc. among others. These companies have surpassed expectations in their first IPOs. And as with any other sector in life, winners have always been balanced by losers, and it is sad to note that Select Energy has been one of these in its IPO launch.

Select Energy (NYSE: WTTR) is a water service provider for E&P companies based in Texas, US. With over 1,700 employees, the company provides water service to oil and gas firms in the State of Texas as they conduct hydraulic fracturing in oilfields. Select Energy services are pre-fracking. It does things like treating and containing flow back water though the services also run to post-fracking ones such as monitoring, hauling and disposal of waste fluid. The company is highly dynamic. you’d even be surprised to know that it has won several innovation awards in the past decade because of that.

The oil and gas industry is an unstable market at the best of times, but the past year has been particularly trying. E&P companies have felt the worst of it with the demand for oil falling behind as a result of overproduction. Falling oil prices has slowed down oil drilling processes for E&P firms in the States. They’ve also subsequently cut down on business for oil and gas supported industries such as Select Energy.

The 2016-2017 oil glut had already made Select Energy a risky bet for any potential investor. The company reported a drop in revenue from $535.57 million at the close of 2015 to $302.39 million by the end of 2016. That almost $200 million drop didn’t go unnoticed. Similarly, Select Energy’s income fell from $51.87 debited gross to $313.95 in credit. A $12.2 million 2015 record in profit became a $44.1 million report in loss. Worse yet, the losses incurred are set to recur through 2017 and for the near future.

Select Energy opened its IPO with an offering of $14 per share, below its $15-$18 range filing with the SEC. With the sale of 8.7 million common shares the company stands to raise an approximate $122 million should underwriters exercise their right to a 1.305 million share overallotment. The amount Select Energy will ultimately rake in will be well below the previous target of $175 million.

Joint managers on the IPO include Citigroup, Wells Fargo Securities, JP Morgan, Deutsche Bank, Simmons & Co., RBC Capital Market and BofA Merill Lynch.

If you were an investor, the Select Energy group’s disappointing IPO may have raised a few red flags about the future of the company. Already the company is struggling to recoup its massive losses and flailing revenues. The lower revenue stream would make it more difficult for Select Energy to cover its debt. Not to mention run its recently acquired assets in the Permian Basin.

Select Energy has been in a similar situation before. In 2016, the company sold 16.1 million of its common shares in a private placement to cover its indebtedness and refurbish its operating capital. The increased cash flow worked for them then, maybe it’ll work again.