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More Fractures = More Water as Select, Rockwater Merge to Boost U.S. Market Share

Texas-based operators Select Energy Services Inc. and Rockwater Energy Solutions Inc. have joined the parade of oilfield services (OFS) operators merging to build market share, agreeing to a stock-for-stock merger to create one of the biggest water solutions providers in the U.S. onshore oil and gas industry.

Under terms of the merger, Gainesville, TX-based Select Energy agreed to issue nearly 38 million shares of common stock in exchange for all of the outstanding shares of privately held Rockwater, based in Houston.

Once completed, Select shareholders would own about 64.4% of the combined company; Rockwater shareholders would own 35.6%. Post-merger, Crestview Partners would be the largest shareholder, followed by SCF Partners and Select CEO John Schmitz.

"This is a very exciting opportunity to combine two companies that are highly focused on the challenge of providing world-class water-related services to the major shale basins,” said Schmitz, who is to become executive chairman of the combined company.

Select’s water services include permanent/temporary pipeline solutions before drilling and completion activities are done using hydraulic fracturing (fracking). It also offers support services for completion/production, including water containment, monitoring, treatment, flowback, hauling and disposal.

“As we are experiencing a strong recovery in many of our markets, we have the opportunity to combine our equipment, management teams and over 3,200 field personnel to provide more comprehensive services to our customers,” Schmitz said. “I believe the combined expertise and scale we are creating in this merger will generate substantial benefits for Select and our shareholders."

Rockwater provides complementary chemical products and expertise related to water solutions, including sourcing, transfer, treatment and storage; flowback and well testing; fluids conditioning and recycling; and field fluids logistics. The company also manufactures a suite of specialty chemicals used in the well completion process, along with production chemicals used to enhance performance over the producing life of a well.

“We are combining two entrepreneurial companies with similar cultures and aspirations,” said Rockwall CEO Holli Ladhani, who is to become president/CEO of the combined company. “Our service lines are very complementary and as the industry continues to relentlessly increase frack intensity, the demand for creative solutions to water-related issues is expected to grow significantly as well.  We intend to be at the forefront in providing those solutions."

All water-related services of the combined company would consolidate under the Select brand name, while Rockwater's chemicals business unit is retaining the Rockwater brand name.

Both companies’ shareholders have approved of the merger plan, with completion expected by the end of September.

In updated internal financial projections as part of the merger analysis, Rockwater said its stand-alone revenue for 2Q2017 is estimated at $178-180 million. Select's stand-alone revenue is forecast to be $132-134 million. The combined company's pro forma annualized revenue based on expected 2Q2017 results is expected to be $1.2-1.3 billion, with about 70% of the revenue derived from water solutions, 16% from chemical services, and 14% from other services including Select's Peak and Affirm business units. Additionally, the combined company expects to realize consolidation benefits of $15-20 million on an annualized basis, fully realized in 2018.

Select’s board would increase to nine members with the addition of four Rockwater members. The audit and compensation committees would be chaired by existing Select board members while the nominating and governance committee is to be chaired by a Rockwater nominated director.

Simmons & Co. International, Energy Specialists of Piper Jaffray & Co., acted as financial adviser and Vinson & Elkins LLP acted as legal adviser for Select. Rockwater had Wells Fargo Securities LLC acted as financial adviser and Baker Botts LLP as legal adviser.

Analysts with Tudor, Pickering, Holt & Co. said the deal made strategic sense as it creates a vertically integrated water solutions player in the OFS space. The combination essentially would be “fully integrated across the value chain…

“As proppant volumes and lateral lengths grow, so too do water...and completion chemicals volumes...Bottom line, this is a logical marriage that creates a sizable OFS investment...exposed to increasing well intensity via water.”

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