Earnings call: Select Water Solutions reported a net income increase to $15 million

Select Water Solutions (NYSE: WTTR) has announced its financial outcomes for the second quarter of 2024, highlighting progress in key performance indicators and strategic growth through acquisitions. The company reported a net income increase to $15 million and an adjusted EBITDA climb to $69.5 million. Operating margins improved, and the water infrastructure segment achieved record revenue and gross profit, with margins before depreciation and amortization reaching 51%. Despite challenges in the chemical technology segment due to decreased industry activity, the company expects steady growth and margin improvement in the water infrastructure segment and continued cost reduction in other segments.

Key Takeaways

• Net income rose by $11 million, and adjusted EBITDA increased by $10 million.
• Water infrastructure segment reported record-high revenue and gross profit with 51% margins before D&A.
• Strategic acquisitions and new contracts boost water recycling and storage projects.
• Water services segment saw modest revenue growth and improved margins.
• Chemical technology segment faced decreased volumes, leading to lower gross margins of 16.4%.
• Company forecasts steady demand from direct-to-operator E&P customers, with flat to modestly down revenues expected.
• Consolidated adjusted EBITDA projected to be between $66 million and $70 million for the third quarter.
• Quarterly dividend maintained at $0.06 per share.

Company Outlook

• Select Water Solutions anticipates continued growth in the water infrastructure segment.
• The company plans to maintain its focus on margin accretive decisions.
• Water infrastructure and chemical technology segments are expected to contribute 50% to consolidated gross profit by year-end.

Bearish Highlights

• Revenues from the legacy fluids hauling service line continue to decline.
• Chemical technology segment struggles with decreased industry activity levels and lower manufacturing volumes.

Bullish Highlights

• Water infrastructure segment achieved a 50% margin ahead of schedule, driven by increased utilization and cost reductions.
• Revenue growth in water infrastructure came from both organic development and acquisitions.
• The company has doubled the average annual revenue per recycled barrel in 2022 and increased it by about 50% in 2023.

Misses

• The delay in the Thompson Pipeline project will impact revenue expectations for the year.

Q&A Highlights

• Disposal wells in the Northeast are smaller than those in the Permian, with different capacities and pricing, but the company's valuation strategy remains consistent across regions.
• The company's assets serve for volume disposal, water gathering, and exchange systems, which can be used for water balancing and recycling.
• The upcoming Northern Delaware system expansion will triple capacity and is not dedicated to a single operator, allowing utilization by multiple operators and significant financial impact.

Select Water Solutions remains committed to capitalizing on its strong position in water infrastructure and recycling, while navigating the challenges in other segments. With a strategic focus on acquisitions and organic growth, the company is poised to enhance shareholder value and strengthen its market position in the water management industry.

InvestingPro Insights

Select Water Solutions has shown notable financial performance in the second quarter of 2024, and examining real-time data from InvestingPro can provide investors with a deeper understanding of the company's current market standing. Here are some key metrics and tips:

InvestingPro Data:

• The company's Market Cap stands at $1.41 billion, reflecting its substantial size in the water management industry.

• A P/E Ratio of 19.46, with an adjusted P/E ratio for the last twelve months as of Q1 2024 at 16.33, indicates that the company is trading at a potentially attractive valuation relative to its earnings.

• Revenue growth for the last twelve months as of Q1 2024 is at a modest 1.73%, showing a stable increase in sales.

InvestingPro Tips:

• Select Water Solutions is trading at a low P/E ratio relative to near-term earnings growth, which may be an indicator of an undervalued stock in the eyes of some investors.

• The company has experienced a significant return over the last week, with a 1 Week Price Total Return of 8.62%, suggesting a strong recent performance in the market.

For investors seeking more insights, there are additional InvestingPro Tips available at https://www.investing.com/pro/WTTR. These tips can provide further guidance on the company's financial health and market performance, including its moderate level of debt, liquidity position, and analysts' profitability predictions for the year.

Select Water Solutions' focus on strategic growth and operational efficiency is reflected in these metrics and tips, offering investors a clearer picture of the company's potential for sustained success in the dynamic water management sector.

Full transcript - Select Energy Services (NYSE:WTTR) Q2 2024:

Operator: Greetings and welcome to the Select Water Solutions Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris George, Executive Vice President & Chief Financial Officer. Thank you, Chris. You may begin.

Chris George: Thank you, operator. And good morning, everyone. We appreciate you joining us for Select Water Solutions conference call and webcast to review our financial and operational results for the second quarter of 2024. With me today are John Schmitz, our Founder, Chairman, President and Chief Executive Officer, and Michael Skarke, Executive Vice President & Chief Operating Officer. Before I turn the call over to John, I have a few housekeeping items to cover. A replay of today's call will be available by webcast and accessible from our website at selectwater.com. There will also be a recorded telephonic replay available until August 14, 2024. The access information for this replay was also included in yesterday's earnings release. Please note that the information reported on this call speaks only as of today, July 31st, 2024, and therefore time-sensitive information may no longer be accurate as of the time of the replay listening 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'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 by management. Listeners are encouraged to read our annual report on Form 10-K, our current reports on Form 8-K, as well as our quarterly reports on Form 10-Q to understand those risks, uncertainties and contingencies. Please refer to our earnings announcement released yesterday for reconciliations of non-GAAP financial measures. Now I'd like to turn the call over to John.

John Schmitz: Thanks, Chris. Good morning, and thank you for joining us. I'm pleased to be discussing Select Water Solutions again with you today. During the second quarter, we continued to make progress on our key objectives such as improving our consolidated operating margins, generating strong free cash flow and executing on our water infrastructure strategy. On a consolidated basis, we were able to improve gross margins by 2 percentage points sequentially. In addition to these operational gains, we reduced SG&A by 11% during the second quarter, allowing us to grow net income by $11 million and adjusted EBITDA by $10 million on a flat consolidated revenue relative to the first quarter. At a segment level, we grew water infrastructure revenues by 8% and gross profit before D&A by 17% sequentially. I'm very pleased with the continued progress we have made toward the execution of our water infrastructure growth and margin improvement strategy, resulting in another quarter of record-high revenue and gross profit for the segment. Our accretive acquisitions and recent organic recycling and disposal infrastructure projects have delivered steady performance and we continue to increase the utilization of legacy assets as well. In addition to the revenue gains, more importantly, we have made tremendous progress in improving the profitability of the segment, increasing gross margins before D&A for water infrastructure to 51% during the second quarter. In doing so, we have been able to achieve the 50% margin target we set for this segment much earlier than we planned. Looking at the water services and chemical segments, while the activity outlook has become more challenging in recent months, I'm confident we can continue to find ways to reduce our maintenance capital, gain market share and improve our operational efficiency. These efforts support continued consolidated margin improvements across the business and steady free cash flow generation. On the M&A front, in addition to the previously announced April acquisition of Trinity Environmental Services, we completed the acquisition of additional disposal assets in the Northeast region during the second quarter. On a combined basis, these strategic acquisitions added more than 615,000 barrels per day of permitted disposal capacity primarily in the Permian. This includes 25 active disposal wells, one well in development and 10 additional disposal permits available for future development. Including our first quarter deals, we have now completed acquisitions in six of our seven primary operating regions this year, adding substantial scale to our leading infrastructure platforms across the lower 48. While we continue to grow our water infrastructure business through acquisitions, we also continue to grow through new organic business development. During the second quarter, we signed multiple new contracts with leading operators that added new acreage dedication in the Northern Delaware Basin. These agreements contributed more than 30,000 acres of additional primary dedication and another 110,000 acres under right of first refusal for potential future development projects. This brings the Northern Delaware System to a total of more than 90,000 acres under combined dedication and more than 200,000 acres under right of first refusal. These contracts underwrite the construction of up to 360,000 barrels per day of incremental water recycling capacity and 4 million barrels of storage and will significantly expand the capacity and geographic footprint of our Northern Delaware System. Select remains the clear market leader in produced water recycling and I look forward to getting these new facilities up and running by the first quarter of 2025. More importantly, I'm excited to create the value for our customers through these new projects and I remain grateful for their continued trust and selects ability to provide them with safe, efficient and sustainable full life cycle water solutions. As I mentioned last quarter, our business development opportunity set has continued to increase in size and certainty. We continue to negotiate a number of other potential projects and looking forward, I'm very confident that we will continue to see additional long-term contracts get to the finish line throughout the rest of 2024 and into 2025. As demonstrated by the breadth and quality of our recent acquisitions and projects, I believe that Select's operational and geographic diversity is one of our core strengths and competitive differentiators. This diversity provides us with a wide array of capital allocation prospects and optionality that allows us to make the best decision to drive long term shareholder value. While we continue to refine our water services and chemical technology segments, our core focus is on continuing to grow and expand our production-based and long-term contracted revenue within our water infrastructure segment. I believe each of these recent acquisitions and projects align with this strategy. Chris will discuss the second quarter's financial performance in more detail. But overall, I'm pleased with our team's ability to deliver increasing consolidated operating margins during a period of reduced activity and changing industry trends. We are well positioned to continue to generate free cash flow and a strong return on assets while returning capital to our shareholders and investing and growing in our business. At this point, I'll hand it back to Chris to review our second quarter financial results and remaining 2024 outlook in a bit more detail. Chris?

Chris George: Thank you, John. During the second quarter, we saw solid growth in our overall profitability, generated strong free cash flow and continued to execute on strategic acquisitions to support our water infrastructure growth strategy. Accordingly, our water infrastructure segment continued its steady growth trajectory, once again achieving record high quarterly revenue and gross profit results during the second quarter. While oil prices have generally held steady at levels that provide an attractive economic return for our customers, natural gas prices have been more challenging, pressuring overall activity levels in the first half of the year. Our water services and chemical technology segments have seen the impact of these activity levels, particularly on the completion side. However, with the support of our latest strategic initiatives and continued growth in water infrastructure, we generally remain on track towards achieving our key 2024 objectives. Furthermore, Select's ongoing transition to a more infrastructure-based, production-levered, full-lifecycle water company continues to align our future profitability and cash flow generation with critical secular growth drivers unique to our business, particularly as we continue to add more long-term contracts into the portfolio, such as the large 15-year acreage dedication agreement we entered into in the northern Delaware Basin during Q2, which significantly expanded our partnership with a core customer in the region. The industry continues to seek creative solutions for the challenges created by growing produced water volumes, including increasing induced seismicity. We believe Select is well positioned to be a leading driver of our industry's ability to solve these challenges through increasing produced water recycling, expanded infrastructure networks and strategic commercial water balancing. Additionally, as our EMP customers continue to extract value through industry consolidation, we believe there will be growing demand for high-quality partners with the size, scope and networks to serve the largest operators and consolidators, supporting continued growth opportunities for Select. During Q2, the water infrastructure segment benefited from these trends. Seeing increased utilization of existing assets, as well as the benefit of multiple strategic acquisitions. We increased both recycling and disposal volumes during the second quarter, generating revenue growth of approximately 8% to $69 million. Although revenue came in slightly lower than expected, gross margins significantly outperformed our expectations. Q2 still delivered strong sequential revenue growth and more importantly, the water infrastructure segment gross profit, which we customarily provide in terms of prior to depreciation, amortization and accretion, improved to $35 million. This represents an increase of 17% compared to Q1 and a tremendous 67% growth rate from where we were just one year ago. On a relative basis, gross margin before D&A increased to 51% during Q2. An increase of 4 percentage points compared to Q1 and a 13 percentage point increase from where we were a year ago. We are excited about the significant improvements we've made in the profitability of this segment in such a short period of time and reaching the 50% margin target ahead of plan was a terrific achievement for the team. We have also been able to efficiently integrate acquired assets into the portfolio, while reducing costs along the way and believe our ongoing projects under construction and under future development provide additional long-term opportunity to drive further margin improvement. In the immediate near term, we expect to see comparably steady mid to high single-digit percentage revenue growth during Q3, supported by our recent acquisitions and enhanced utilization of existing assets and steady gross margins of 50% to 52%. While we originally expected to see a small contribution from our new Thompson pipeline in the Bakken region during the third quarter. Certain permitting delays have impacted the construction timeline, though we still fully anticipate the pipeline coming online by the end of 2024. Looking out more medium term, we continue to believe that with a very strong project and deal backlog, water infrastructure remains on track to become the largest component of our profitability by the end of 2025, underpinned by repeatable, predictable, high margin and contracted revenue streams. Though we may see some seasonal impacts to margins in the fourth quarter, we otherwise expect to maintain and potentially improve upon this 50-plus percent margin profile for the segment moving forward into 2025. Our continued new project wins in the Northern Delaware demonstrate our ability to add value to our existing infrastructure networks through incremental networking and commercialization. These expanded systems will deliver enhanced utilization and water balancing capabilities that will make these projects highly accretive and we look forward to executing more contracts in the quarters to come. Switching to the water services segment, we were able to outperform both industry activity levels and our own internal expectations, modestly growing revenues by about 1%, while improving margins by 2 percentage points to 22.5%. Revenue gains during the quarter were driven in part by traditional water sourcing volumes. Notably, we were able to pull forward key water sourcing opportunities with both our future Thompson Pipeline, Anchor Tenant in the Bakken, as well as two key customers in the Northern Delaware. In the Northern Delaware, these are the same two customers we just signed new contracts with to develop additional infrastructure projects in the region and in the short term, we will supplement their ongoing activities with traditional water sourcing ahead of the new recycling facilities getting up and running in early 2025. Offsetting these gains is the continued trimming of revenues from other areas of the business, notably our legacy fluids hauling service line. This remains an area where we continue to focus on cost efficiency and consolidation opportunities as we continue to increase the amount of volume we transport via pipeline over time. These efforts also act as the primary driver for what is expected to be a mid-to-high single-digit revenue decline in Q3 for water services. Though we expect to maintain margins in the 22% to 23% range in spite of additional yard closure costs. We continue to believe that we can push margins further over time and remain vigilant in our search for efficiency in this segment. On the chemical technology side, we certainly had a more challenging second quarter. With the continued decrease in overall industry activity levels, we saw a roughly 9% decline in our manufacturing volumes during the quarter rather than the modest growth we anticipated. Accordingly, the decreased volumes resulted in a lower absorption rate through our manufacturing plants delivering slightly lower gross margins of 16.4%. Looking at the third quarter, while we expect to see steady overall volume demand from our direct-to-operator E&P customers, we are seeing continued activity reductions from some of our pressure-pumping customers. There are a number of additional completion crews that have been identified for idling during Q3 that had been utilizing our high-margin full chemical suite. In response, we believe we have a path towards recouping these recently retreated volumes. However, until we do, we likely will see a constrained ability to get margins back to our target of 20% in the near term. In the meantime, we are undertaking a number of cost-reduction initiatives that are expected to be completed by the end of the year. For the third quarter, we anticipate flat to modestly down low single-digit percentage revenues with margins in the 14% to 16% range. Looking at other cost reduction efforts, SG&A during the second quarter decreased by more than 11% or $5 million relative to the first quarter. While the transaction-related costs have slowed compared to earlier in the year, with acquisitions continuing throughout Q2, we will continue to incur a modest balance of transaction and integration-related costs during the third quarter. Looking forward, we expect SG&A to continue to train closer to 10% of revenue during the back half of the year. Altogether, for the second quarter of 2024, we generated a net income of $15 million and adjusted EBITDA of $69.5 million during the second quarter. A substantial increase of $10 million relative to the first quarter and ahead of our guidance of $64 to $68 million. For the third quarter, we expect consolidated, adjusted EBITDA of between $66 million and $70 million, relatively steady to Q2 as continued water infrastructure gains are offset by some of the ongoing consolidation and elimination efforts in the water services segment. Driven by the substantial growth in our water infrastructure segment over the course of 2024, we continue to believe we will see our water infrastructure and chemical technology segments reach 50% of consolidated gross profit by the end of the year as expected. And water infrastructure is on a great path for continued growth well into 2025. Now, looking at the balance sheet, we utilized our sustainability linked credit facility in addition to cash on hand to help fund an additional $41 million of acquisitions during Q2, ending the second quarter with $90 million of outstanding borrowings. With $83 million dollars of operating cash flow generated during Q2, we were able to materially limit our net debt increase during the quarter to a mere $12 million, even after the $41 million of acquisitions and $49 million of CapEx during the quarter. Operating cash flow actually exceeded adjusted EBITDA for the third time in the last four quarters, as we continued to make tremendous progress and further reducing our working capital. Pushing total working capital below 11% of revenue and decreasing accounts receivable days outstanding to 72 days for the period, a substantial decrease from a year ago. These efforts still leave us with ample liquidity and a very conservative balance sheet. We will remain disciplined in our use of leverage, but with the growing contribution of our higher margin production levered and contracted revenue streams, we have good visibility into our ability to repay these outstanding borrowings in a relatively short period of time, should we so choose, while still generating cash flow to fund the growth of the business organically. Additionally, we remain committed to returning capital to shareholders with our quarterly dividend of $0.06 per share, equating to $15 million of capital returned to shareholders so far, a year today. Quarterly depreciation, amortization and accretion remain fairly steady, though this could increase closer to $40 million per quarter by the end of the year with additional capital deployment. As expected, quarterly interest expense ticked up modestly during Q2 as we employed our sustainability-linked lending facility to execute our recent acquisitions. And our income tax expense moved up modestly alongside our growing pre-tax income as well at around a 21% effective rate as anticipated. Net CapEx of $46 million represented a decent step up during Q2 as our organic water infrastructure growth CapEx accelerates. Given the additional recent long-term contract wins that we mentioned earlier, growth CapEx will increase in the back half of the year. However, we also remain quite disciplined in our approach to maintenance spending and believe we will see a $10 to $20 million reduction in maintenance CapEx on the year. Put together, we now expect full-year net CapEx of $170 million to $190 million in 2024, an increase of $30 million net. With our reduced maintenance CapEx targets, we continue to expect each of our water services and chemical technology segments to provide strong cash flows at low capital intensity during 2024, returning a combined 70% to 80% of their profits and free cash flow after CapEx, helping to fund our latest contracted water infrastructure growth projects. Even with the increased net CapEx outlook, we still expect to modestly build on the $41 million of free cash flow we generated in the first half of the year with an updated target of pulling through 25% to 35% of our adjusted EBITDA in the free cash flow for the full year of 2024, after accounting for all maintenance and growth CapEx back. We have a tremendous amount of opportunity still ahead of us and I look forward to continuing to execute on our strategy. I'd like to wrap up by once again thanking all of our employees for their hard work and continued support, especially those that were impacted by the recent severe weather events around Texas, including Hurricane Beryl. With that, I'd like to open it up to questions. Operator?

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first questions come from the line of Luke Lemoine with Piper Sandler. Please proceed with your question.

Luke Lemoine: Hi, good morning. You all detailed the two new projects in Delaware and the growth CapEx associated with that. You all have a variety of projects here that you've been investing in over-time and it looks like next year you could as well. How do you balance this and how should we think about the returns? A lot of other North America Service companies and they don't have the growth lag that you do. So, I just kind a thinking about incremental CapEx, incremental projects, can you just help frame the returns and how we should think about this?

Michael Skarke: Sure, Luke. This is Michael Skarke. A couple of thoughts there. I think part of the growth profile is really the core focus we've got around infrastructure and probably more specifically recycling as it relates to the Northern Delaware. There's a bit of a secular tailwind there as we're looking at competing with traditional freshwater sourcing and disposal and the challenges that exist in that area. So, we're seeing a lot of traction there. The returns are really consistent with what we've said in the past. We're trying to get a three-year return on our capital under the underwritten contract with the ability to connect it beyond that with other operators to improve upon that return. Most of the projects we've announced, unfortunately, there's a long lead time as I know we've discussed in the past. And So, we're looking to try to get those on by the end of the year. But we are expecting a meaningful contribution from the capital we'll spend this year for next year. And then, as we build out that system and that network, we're finding projects, really, we get more projects. More opportunities, more extensions, more connections, more optionality with operators, all of that is what's really driving our backlog and really the enthusiasm we have around water infrastructure as we look forward to 2025.

Chris George: Luke, maybe a couple of points I'll add on to that, to your question specifically around the allocation of capital, the returns and particularly how that compares to maybe the competitive landscape. And I think one of the unique things about Select as a platform, we are a rapidly growing growth platform around infrastructure, but we are able to self-fund a lot of that capital outlay through the strength of our leading platform around water services and chemicals. The diversified platform we have all across the U.S. as well gives us quite a bit of flexibility and optionality to look at different basins and different components of the infrastructure supply chain as well to really find the best opportunities. But to Michael's point, I mean, clearly the expertise we have around recycling and our ability to integrate that with the logistical application of services is definitely providing us some clear differentiated project wins and success there. But I think the underwriting support, whether it's infrastructure around disposal, recycling facilities or pipelines, we generally take a similar approach towards our underwriting economics, kind of across the board in that segment. And we're seeing that on the solid side as well with some of our more recent entry into that part of the business. So, it's definitely a rapidly growing capital allocation point for us in terms of making some of those decisions. But our ability to self-fund a lot of that out of the base business and utilize the liquidity we have in the facilities has been quite effective for us here recently, although the pace of that is obviously picking up here in the back-up of the year, but for the right reasons.

Luke Lemoine: Okay. And then the water infrastructure margins. I mean, it's hopped over the 50% mark, which is pretty important. And it happened a lot sooner than we expected. I'm not sure about if you guys expected it this soon as well. But could you just talk about kind of what drove the acceleration there and allow that to happen quicker than expected?

Chris George: Sure. So certainly, was very pleased to see us get to that 50% point here in the first half of the year. We were striving to get there potentially in 24, but certainly targeting, getting there by 25. So, pleased with the pace of our ability to get there in the second quarter. It was contributed, a couple of things contributed to that, when you think about the incremental utilization of existing capacity within the base infrastructure business, every incremental barrel of throughput through a piece of fixed pipe or a facility provides a pretty attractive incremental margin. And we were able to drive revenue growth in the first half of the year through both, organic business development as well as bringing on a creative acquisition that contributed to the segment on a margin basis that's the tire of where we've been. We've been able to take costs out of some of the recent acquisitions faster than anticipated. So, there's still a little bit of work to get them integrated into the networks, particularly out in East Texas. But generally speaking, the assets that we've been able to bring into the system, we've been able to utilize quickly and get some costs out sooner than we anticipated. So, all of that's really contributing. But I think first and foremost, it's just the continued ability to drive volumetric throughput through the assets at a higher rate. And we expect to see a material continued pace of that. And into Q3 here that I think should stabilize those margins above 50% and give us clear visibility into continuing to take those further over the next year or so.

Luke Lemoine: Okay. Got it. I'll turn it back. Thanks.

Chris George: Excellent.

Operator: Thank you. Our next questions come from the line of Jim Rollyson with Raymond James. Please proceed with your questions.

Jim Rollyson: Hey, good morning, guys. Just maybe circling back on water infrastructure. Chris, you talked about just this quarter didn't quite get to the sequential growth you originally hoped for. And you talked about Thompson Pipeline as it relates to third-quarter guidance. But if I recall correctly, kind of start of the year you were thinking water infrastructure revenues were probably going to be up somewhere between 30% and 40%. I'm curious if you still think that given the kind of delay in the Thompson Pipeline, because obviously that implies a pretty big step up in 4Q if and when that hits.

Chris George: Yes, that's a good question, Jim. I'd say that the Thompson pushing into the fourth quarter is certainly going to impact the top-line contribution expectations for the year. So probably coming in towards the bottom end of that guide. But I think importantly, the profitability has improved at such a pace that we're likely tracking towards something that at the top end or potentially exceeding the top end of the growth on the profit side, which was expected to be 40% to 50% year-over-year growth. So, I think we're in a position we might be able to push above the top end of that range on the profitability side. So, on a gross dollar basis, still on track or potentially ahead of where we expected to be at this point, even if the top line is going to be a little lower than we might have liked. But obviously, that's really just a timing question of getting some of those assets up and running. And certainly, once they come online in Q4 and the new projects in Q1, we should see a pretty heady pace of growth in the next six to nine months from those new projects. And those should continue to be additive to the margin profile as well.

Jim Rollyson: Absolutely. Yes, appreciate that. I just want to make sure we get the timing right. And then on that, you're kind of leaning into growth CapEx as opportunities are there for contracted high return projects. I realize this is probably an ongoing moving target. But if you kind of add up all of the projects you have contracted for now, plus the recent M&A, when all this is on, let's say it's 1Q or ramping up into second half of next year, what kind of revenue run rate do you already have visibility on for water infrastructure? Just trying to understand how this unpacks as we go in through 2025 based on what you already have kind of in hand today.

Chris George: Yes, it's a good question, Jim. Obviously, with the dollars we're spending in the back half of this year, there's not going to be a ton of contribution from a revenue standpoint from those projects until we get into 2025. And there'll be a continued pace of that spend in the first half of next year. I think that from an overall growth capital standpoint, I think we have a pretty high level of confidence towards seeing a comparable level of growth spend next year that we see this year with additional contract wins. In terms of thinking about how that starts to pull through the top line and translates into a growth rate, I think you can generally think about the growth capital we're actively deploying now based on the announced projects, as well as kind of the four-year guide. Take that three-year cash-on-cash approach from our organic capital deployment and 50-plus percent gross margin and that's going to be a pretty good way to think about the timing of that capital contributing to the overall growth.

Jim Rollyson: Yes, got it. Appreciate that. I'll turn it back. Thank you.

Operator: Thank you. Our next question has come from the line of Jeff Robertson with Water Tower Research. Please proceed with your question.

Jeff Robertson: Thanks. Chris, just to follow-up on the margins, if you're ahead on margins in water infrastructure, should we think that you'll accelerate your goal of getting to the plus 50% on gross profitability before year-end 2025?

Chris George: I think it certainly gives us an opportunity, Jeff, to get there faster and obviously with the activity environment, providing a little more of a governor on the completion’s parts of the business around services and chemicals, it provides an additional layer of profit-weighting out of infrastructure in the relative near-term. I'd say that based on the backlog of projects we see and the timeline of when we expect to get those projects underwritten and deployed, I think that's still an appropriate way to kind of frame our expectations here. But certainly, as we look into 2025, I think there's an opportunity for us to pull that timing forward potentially, Jeff, but it would certainly require some additional contracts getting under our belt here in the back half of this year.

Jeff Robertson: And as you think about the business over the next several years, with an increasing share of revenue and cash flow being underwritten by long-term infrastructure projects, does that impact the way you think about capital budgeting and cash return to shareholders plan and just the ability to compound that growth into continuing to expand the water infrastructure segment?

Chris George: Yes. No, it's a great question. We certainly think that we've got an ability to deploy the growth capital we have in front of us this year out of free cash flow. We've been able to grow the dividend over the last year. We were quite active from a repurchase standpoint last year. A little bit more constrained from a buyback standpoint this year, as we've been picking up the pace of the organic capital deployment. Looking out 12 months from now, I think that getting more underwritten contracts in the books is definitely going to give us more optionality and flexibility into how we underwrite the business, both in terms of taking a look at the capital structure on the balance sheet, as well as the stability and opportunity for shareholder return growth. So, I think for now, we've certainly shifted focus from an M&A standpoint in the first half of the year towards an organic capital deployment standpoint in the back half of this year. We remain with a $21 million authorization on the share repurchase that we'll continue to have for tactical deployment. But I think the pace of opportunity in front of us from an organic project standpoint is picking up at a rate that that's the best opportunity for us to put good capital to work here if we can continue to add long-term, 10-year, 15-year underwritten contracts for new growth in water infrastructure.

Michael Skarke: And I think that's a really important point. I mean, our strategy is working. We've been really more successful at growing water infrastructure revenue and profitability than we anticipated so far. And we really are focused on and going to continue to execute that strategy. And it's fueled by driving more volume through existing systems and networks as Chris mentioned. And also, as I mentioned earlier, the fact that as we expand our system networks, we're seeing more and more deals that are just expansions of those existing systems. So, we're really excited about kind of the opportunity to drive further growth despite what is a softer uncertain macro environment.

Chris George: And maybe to your specific question around contracts, Jeff, probably around half of the infrastructure segment today is supported by long-term contract and looking forward into next year. That should, with the new projects coming online, make up a substantial majority of that segment's revenue and profitability by the time we get to the end of 2025. So, having that visibility into a growing segment with a large base of underwritten contracts is definitely going to give us that optionality to make different decisions. But ultimately, it's going to give us the opportunity to make good decisions.

Jeff Robertson: Thank you.

Operator: Thank you. Our next questions come from the line of Tom Curran with Seaport Research Partners. Please proceed with your questions.

Tom Curran: Good morning.

Chris George: Hi, Tom.

Tom Curran: Chris, by my calculations, the water infrastructure division is average annual revenue per recycled barrel. So, this is excluding chemical technologies on the flat revenue. Just for that water infrastructure division, my calculations say that annual average revenue per recycled barrel doubled in 2022 and then rose roughly another 50% in 2023. Assuming my math is accurate enough, could you break down those steps up in revenue intensity by key driver contribution? And then do you expect that uptrend to continue into 2025?

Chris George: Yes, it's certainly an interesting way to look at it, Tom. We have seen a very rapid pace of growth from a top line standpoint and a volumetric standpoint across both the recycling and the disposal side of the business. From a disposal standpoint, we've obviously been adding to that part of the business through acquisition this year, whereas on the recycling side has been adding more through organic project development. So, we're adding from kind of both parts of the strategic channels there. From an actual recycling rate of growth, we saw a substantial growth up to in excess of 250 million barrels recycled in 2023. And we think that that's going to continue to pick up a rapid pace of growth, similar to some of the things you were talking about, Tom. I think that looking forward, the contracts that we just announced are really recycling-based facilities bill out. So, we should see the pace of growth in recycling be the majority of the driver into 25. Whereas this year that split last year was more recycling weighted. This year is probably going to be more disposal weighted with the acquisitions and the continued utilization of those assets as we network them into the system. So, I think you're probably going to have an inversion of that growth this year, reverting back to being a recycling heavy weighted growth next year.

Michael Skarke: Maybe Tom, just to put a finer point on it, what Chris said, from a disposal capacity, the acquisitions we've made have given us about a 30% uplift in our available capacity. And on the recycling, the announcements we just had in the script and earnings, that's going to expand our fixed facilities, which I think is what you referenced, capacity by 20%. So, from today to really first quarter, kind of mid-late first quarter next year, we should have a 20% uplift in our fixed facility capacity for recycling.

Chris George: And that's obviously on a capacity basis, but we've got obviously an ability to pull through increased utilization of the existing asset base that provides us quite a bit of opportunity to grow at a rate comparable or higher.

Michael Skarke: And that's really where the interconnections come into play in the system expansions. That's the importance of those two.

Chris George: Yes.

Tom Curran: Got it. Yes, I was more trying to dig into sort of disaggregating by anchor tenant ramp, then scaling up the facility further by tying in additional customers and then maybe pushing pricing as you proved yourself and your market reputation's expanded, but I could dig into that more with you in a follow-up call. Just, Michael, regarding the Water Infrastructure Division's organic opportunity set, for the premium projects that you're most optimistic about winning, can you give us an idea what the rough split is between the Midland and Northern Delaware and then what percentage of those high-probability awards? Again, the ones you're most confident about getting across the finish line here over the second half, how many of those include fixed recycling capacity, whether it's a brownfield expansion or new-build construction?

Michael Skarke: Sure. So, we've got a diverse footprint, Tom, as you know and are really excited about that. I think John mentioned that the operational and geographic diversity is one of our strengths and differentiators, and he's exactly right. I mean, we got, we've executed business development opportunities in five basins. We've had strategic M&A in six, so we're really focused everywhere, but the Northern Delaware is where we're primarily focused. It's where we announce these two deals. It's where the majority of our high confidence business development opportunities set lies. Most of that is around the water recycling and that's just where the market is trending and where the market leader in water recycling. We have kind of first mover advantage but frankly it's become a core competency of ours. And so, it's a real strength and it's something that we're looking to advance and capitalize on and that's why you're seeing the increase in CapEx, that's why you're seeing the increase in contracts and that's where I suspect we will continue to execute over the back half of this year.

John Schmitz: Hi, Tom, this is John. One thing to add about the Upper Delaware to Michael's point, I mean, two counties in Mexico, it's really developing as it relates to coming off freshwater and getting on produced recycled water. It's really developing in water exchange. It's heavily weighted to needing the solutions that Select has. So, it demands really the capital and the solutions for this acreage to be developed and developed correctly. So, we feel really strong about our position in the Northern Delaware.

Tom Curran: Got it. And the last one for me and I would love to hear all three of you weigh in on this but on the solid’s management front, how would you describe Select's strategy at this point and the full scope of what you seek to do commercially in advancing wastewater treatment and cleanup toward or ever closer to economically viable, beneficial reuse specifically for solids management? Do you plan to stick with just separation and disposal for now or do you already intend to expand into extracting and monetizing valuable mineral deposits like lithium, cadmium and bromine?

Michael Skarke: Tom, this is Michael. I'll take a shot. I think that was probably a three- or four-part question so you'll have to bear with me as I wade through it. So, starting with solids management, I mean, from an operational and financial perspective it really fits nicely with water infrastructure. The financial profile, the returns, the operations, the employee intensity all matches very well. It allows us to manage the total waste stream and we're excited to be able to provide that total solution for our customer. It leverages in the existing water infrastructure footprint so we're really pleased with what we've acquired so far and I think we would look to kind of strategically expand that if the right opportunity were to arise. Beneficial reuse we really think of is separate from solids management. There's certainly a component of it. We have a very strong team focused on it. We're partnered with a very large operator and a joint development agreement. We had a successful field trial earlier this year and are gearing up for another one, another trial, the back half of this year. So, it's something we've invested real time and money in the last couple of years and are continuing to do so. Our primary focus on that is really taking cost out of the system. The challenge there is not the technical feasibility but more the economic effectiveness and so we're focused on reducing both CapEx and OpEx in that system. Obviously while still developing reliable and adaptable system to the changing water qualities. So that's not something that we've talked a lot about but it is something we're going to continue to work on and we do think the market is heading that direction and we're going to be ready for it. The last part, at least the one that I recall, was around mineral extraction. That's again something that we're paying attention to. We know that there are several different elements that exist in produced water that do have economic viability. We've measured it across our extensive footprint and are working and engaged with companies to see what that would look like in terms of extracting it, who would do what, what the economics would be. But -- that's still similar to beneficial reuse in the earlier stages of becoming a true economic solution. But it's something that we're obviously aware of, we're evaluating and seeing what role we would play.

Chris George: Maybe a couple of things I'd add to it, Tom. To Michael's point around the cost management side of beneficial reuse and your point around solids, one of the things that you ultimately have come to bear when you're treating water to a beneficial reuse level of quality is you generally have a freshwater quality on one side and a heavy concentrated brine on the other side, as well as solids that have to be managed. It provides a more vertically integrated cost management approach if we have that solids piece as an integrated part of a solution. That concentrated brine that you get on the backside also provides more optionality around looking at that mineral extraction as a part of that system that's already necessary for that water treatment to get to a beneficial treatment quality. So, it does provide a full opportunity set as you go across the different applications of how you might approach this. We're certainly looking at that on an integrated basis as well as analyzing the various technologies and the various geographic discrepancies between what those water qualities look like and the demand for both the waste stream management as well as the extraction.

Tom Curran: Got it. Thank you for all the very thoughtful answers.

Operator: Thank you. Our next question has come from the line of Bobby Brooks with Northland Capital Markets. Please proceed with your question.

Bobby Brooks: Hi, good morning, guys. Thank you for taking my question. First one that I've got is just, could you help quantify how much of a revenue headwind were the divestments and consolidations of non-core assets within water services? The segment was up slightly sequentially above the low single-digit decline guide that you guys had given. Just looking for a little bit more color on what drove the strength and are those factors causing the strength in the second quarter expected to dissipate in the third quarter given the mid to high single-digit decline or maybe that decline is more a factor of divestment that you are looking to execute? Just looking for color on that.

Chris George: Yes, good question, Bobby. So, if you think about the -- obviously we, I think, outperformed what we thought we'd be able to do in the second quarter and that was largely on the back of the pull forward of some water sourcing opportunities that we were able to get with our kind of key infrastructure contracts and customers. So, we were able to do that in both the Delaware side of things as well as up in North Dakota with the customer off that Thompson system to kind of meet their completions demand in the near term as we get those projects continued to build out over the next couple of quarters. So that was the substantial driver of what got us to growth, to counteract what continues to be some active consolidation efforts as we've kind of mentioned primarily around the more commoditized application of fluids hauling. Everything that we can do to get a piece of water onto pipe is obviously a high-margin benefit to the company. And so, there's definitely an application of approach towards continuing to focus on getting volumes off of truck and onto pipe over time. And you'll continue to see that as we build out the systems. But year to date, if you look at the last six months, really the kind of entire majority of the volume or the revenue dollars we've seen come off the segment from a water services standpoint year to date, relative to Q4 are out of that fluids hauling segment. So, we've seen quite a bit of stability in other parts of services, particularly around our water transfer and logistics business, that's pretty core to supporting the overall efforts around infrastructure. And so, we'll continue to focus on what that might look like over the back half of the year here. But overall, the decisions we're making should ultimately be margin accretive to the segment over time. And I think that they're beneficial to the overall strategic efforts of getting that volume put on pipe over time and into our infrastructure network.

Bobby Brooks: Got it. Appreciate that call out. Then switching to water infrastructure, obviously a nice 8% sequential revenue growth there. You guys have talked about, you mentioned increased utilization, but in terms of the driving factor there, but you guys also had a couple of acquisitions, right, that would have contributed there. So, I was just looking to get a sense on how much of that growth was through organic development or increased utilization of legacy assets versus inorganic acquisitions growth there?

Chris George: Yes, for the second quarter, the gross profit gains in infrastructure was about a 50-50 split contribution from additional acquisitions and contribution from organic growth and enhanced utilization of the existing asset base. On a year-to-date basis, you've taken the first quarter into account, it's certainly going to have a higher weighting towards acquisition, probably more of a 75-25 split on a year-to-date basis. But I would say that even though the back half of the year will continue to be focused around the organic project build-out, there's still quite a bit of utilization enhancement we can get out of the acquired assets. There's a little bit of effort and undertaking to get those networked into the system. And as we get those networked, it's going to give us quite a bit of opportunity to enhance the utilization of those acquired assets. That's really the strategic reason for a number of these deals. And so, I think looking forward, we'll be able to drive utilization improvement across the business, but that'll be both on the existing assets as well as the recently acquired assets beyond what we've been able to see on a kind of day one or quarter forward basis from the recent deals.

Bobby Brooks: Got it. And when you're saying the split, you're comparatively -- comparative on the year-to-date, are you comparing that to first half '23 comparatively, right?

Chris George: Good question. I was comparing that sequentially coming off of Q4. So, picking up the first acquisitions in the early part of January in 2024. And that relative split was on a sequential basis looking at Q4 of '23 forward into Q1 and the first half of year on a consolidated basis.

Bobby Brooks: Got it. Thanks for that clarification. And just last question for me is on the PR, you mentioned how the Northern Delaware System expansion will effectively triple the capacity of your current system there. So, my question is, is all of that added capacity already dedicated to certain long-term production agreements? And essentially, when that's up and running in the first quarter of 2025, its utilization is going to already be at 100%. And if that is so, all that is all the added capacity that will be you -- I'm sorry. And if that's so, where all the added capacity is going to be utilized once it's up and running? Does the tripling in capacity essentially translate to a tripling in terms of financial impact?

Michael Skarke: Bobby, this is Michael. To talk about the operational side of it, so all of that capacity is not dedicated to a single operator. So, when we underwrite these projects, we underwrite somewhere between a third and really probably closer to a half of the capacity by the cornerstone customer. And they're going to have the right of first refusal on the asset. But then we work to commercialize it, the remaining portion. And so, we do expect the anchor tenant to come online in Q1 and really ramp up in Q2 as we work through some of the early inefficiencies of building a system. But we do expect to have additional excess capacity and meaningful excess capacity on the system that we would commercialize with offset operators in the area.

Chris George: And Bobby, one of the clear strategic benefits and value adds to the customer of getting these recycling facilities up and running is it provides effectively a disposal off ramp for the produced water that they need to manage and get rid of. But it also provides an opportunity to match and manage water in the marketplace to the completion demand across multiple operators. So, it really is a water-balancing effort to bring in multiple operators into those assets so that you have steady pace of production coming into the system from multiple operators. And then that provides optionality to redeploy that treated barrel back towards new development across multiple operators as well. And the more you can add that flexibility with additional operators, it creates a more effective balanced network overall.

Bobby Brooks: Got it. That's a very virtuous cycle. I appreciate the time. Congrats on the good quarter and I'll return back to the queue.

Chris George: Thanks, Bobby.

Michael Skarke: Thank you, Bobby.

Operator: Thank you. [Operator Instructions]. Our next questions come from the line of John Daniel with Daniel Energy Partners. Please proceed with your question.

John Daniel: Hi, guys. Thank you for keeping this call going. And I'm going to apologize in advance for my water 101 questions. But when you look at the expansion you've got in the Northern Delaware to the dedication of 81,000 acres and then the right of first refusal for 162,000 extra, do you have at this point visibility into the customer's activity levels for '25? And if you do, are they simply moving assets, rigs and so forth from one area to the other? Or is it incremental gains if you were to exercise that 162?

Chris George: So, when we enter an agreement like this, John, we partner with the operator. We need to understand their long-term development plan as well as their near-term needs to make sure that we're sizing the system correctly. We're building it out to where they need it built out first. And so, we're really partnered with the operator. So, we do get regular schedules, drilling schedules. Obviously, they change. And we're working to accommodate those changes. But this is a long-term planning with our customer. And so, we know what they're doing in 2025 and beyond.

John Schmitz: Yes, it's a material change to the relationship and a partnership approach there, John. And as it relates to the active acreage dedicated as well as the opportunity and the look towards the Delaware for acreage, those are active ongoing dialogues that are underway. So, it's really around how do we meet the needs of their current schedules and what they have visibility into over the visible period of 12 months, 24 months and then how do we think about what that translates into around the larger acreage footprint as they also potentially add acreage from their own acquisition opportunities in the future as well.

Michael Skarke: And we see the Delaware is important because it really once you have the system just expanding it a little bit here or there is a natural solution for both us and the operator. Again, speaking to the importance of balancing long and short within the operator but for other operators as well as Chris mentioned. And so, we're really looking to see how that our customers’ needs expanding grow within the dedicated interest but within the larger Delaware period as well so that we can expand our system to take care of those customers and offset operators as well.

Chris George: And John mentioned it earlier as well but I mean frankly these solutions are becoming critical to the customer's ability to even develop the acreage they have in some of these areas particularly in Northern New Mexico. So, I think that it's changed the way that they approach water it's changed the way that we partner with them around water and it changes the way they evaluate opportunities to grow further on their own side. So, we definitely are focused on how we match those solutions to their needs and what they see as their opportunity.

John Schmitz: When I think about it you know when we say dedicated we got to know where they're going to drill, how many they're going to drill, what time they're going to do that and we are full contact and what kind conversations planning with them as we get that dedicated position as we invest that money that we wrap around that three-year cash on cash or 50 plus gross margin but that Delaware for stuff that is really holding hands to make sure that we can plan the system out in the future to bring that value to them and to make sure that we can move that water properly and we don't duplicate the asset base that's already been put in place because of poor planning.

John Daniel: Okay. And then just a few more and if you want to hang up on me that's cool but the -- when you talk about constructing the multiple recycling facilities and the upgrades is that for the 81,000 acres or is that for the 81 plus to 162?

Chris George: That would just be for the 81, John. So, the Delaware acreage would be incremental and well beyond that so that's additional long-term development potential for us.

John Daniel: Got it. Okay. Turn into the acquisitions I recognize not all SWD facilities are created equally but when you look at the compare sort of the northeast where you get one active well and one uncompleted one and you essentially buy that for $9 million and you compare that to say the Trinity deal where you got 22 SWDs and a lot of other stuff. Is there -- I assume there's differences in volumes the capacity for well or is this perhaps suggestive that just the Northeast market is structurally better than the Permian?

John Schmitz: I wouldn't say that it's better than the Permian, John it's just different. The disposal wells in the Northeast are considerably smaller than the ones in the Permian. So, you can have a 15, 20, 25,000 barrel a day disposal well in the Permian you don't have anything like that in the Northeast you're going to have a 3 or 5,000 barrel a day well and that might be a good well. The pricing is materially different in the Northeast in the Permian. I mean those are probably two of the most extreme markets that we participate in. And it gets back to the volume of the well. So, they're just fundamentally different markets. It's -- you can compare disposal wells within a basin of similar depth. It's much more challenging to compare disposal wells in different basins, particularly if they have different depths. What I would say that is consistent though is how we've made the acquisitions. Whether it's the Northeast or East Texas or the Permian, we're pretty consistent in our valuation. We're going to make sure that it is a creative on a historic and go forward basis. And that's really the case, whether it's a $9 million acquisition or a $22 million acquisition.

John Daniel: That's all I want to -- thank you for --

John Schmitz: Yes, John.

Michael Skarke: John, on the -- when you're buying disposal wells, this company is a little bit different in some respect because if you think about it, we got three different ways of looking at it. One, just needed volume in a certain area. They need to be able to dispose water that they're creating as they complete these wells in certain areas. But then we have pretty large pipe systems now that gather water and take it to a place that you can dispose of it in higher volumes or at lower cost to bring value to that customer. Get it off a truck, get it on pipe and actually save money disposing of it. But what we've realized and probably this is developed under our nose, is that we also now have these systems that are really water exchange systems. You dispose, you have a capacity of disposal that these wells fit into that are needed sometimes, but not all times because sometimes that piece of water is getting recycled and it's a needed recycled barrel for completion. So, it becomes a water exchange system of water balancing. And these assets fit into those equations in all three ways.

John Daniel: Got it. Okay. Well, congrats. Thanks for letting me get on the call and congrats on the hitting the 50% margin threshold.

Michael Skarke: Thank you, John.

John Schmitz: Thanks, John.

Operator: Thank you. This now concludes our question-and-answer session. I would now like to turn the floor back over to John Schmitz for closing remarks.

John Schmitz: Thank you to everyone that joined our earning's call today and for your continued support and interest in learning more about Select Water Solutions. I look forward to speaking to you again next quarter.

Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a wonderful day.

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