Free Cash Flow Funds Accretive Growth
Select Water Solutions provides a suite of solutions to meet the full life cycle water needs of customers in nearly every major producing region in the US. In 2023, the Permian region contributed 48% of total revenue. Select’s business is segmented in three reportable segments: Water Infrastructure, Water Services, and Chemical Technologies. Water Infrastructure revenue grew 84% Y/Y in 2023. Infrastructure gross profit (before depreciation and amortization) was 39.9% in 2023, compared with 21.1% for Water Services and 18.7% for Chemical Technologies. Growing industry demand for sustainable produced water recycling/reuse solutions is driving demand for the infrastructure solutions Select provides. The Water Infrastructure segment is supported by integrated networks serving regional customers with more than 1,000 miles of pipelines that support ~3 million barrels of water treatment/recycling capacity, more than 13 million barrels of produced water storage capacity, and more than 20 million barrels of fresh/brackish water storage capacity, and 2 MMb/d of permitted disposal capacity. Water Infrastructure revenue is supported by long-term customer contracts that often include acreage dedications. Management is focused on consolidating infrastructure assets and developing organic projects to increase Select’s ability to meet customers’ long-term water needs. Shifting the business mix to long-term contract-based revenue streams could increase the company’s earnings and adjusted EBITDA visibility over time. The company is targeting the Infrastructure segment to reach an annual gross profit contribution run rate of 50% by the end of 2025. Select is leveraging the free cash flow generated in the Water Services and Chemical Technologies segments to fund infrastructure growth opportunities through organic projects and acquisitions. So far in 2024, Select has announced three transactions valued at ~$90 million to expand Water Infrastructure opportunities in the Haynesville Shale and Rocky Mountain regions and an agreement for a new water distribution pipeline system serving a customer in the Bakken oil play in North Dakota. Our FY24 estimates are predicated on a 28% Y/Y increase in Water Infrastructure revenue offset by Y/Y declines in Water Services and Chemical Technologies. Our 2024 adjusted EBITDA estimate is $263 million, a 2% Y/Y gain, while our 2024 adjusted EBITDA margin is 16.7%, a 45-bp gain. Select is committed to returning cash to shareholders. During 2023, the company returned $86.7 million through a combination of common stock dividends and share repurchases. Our estimates imply a solid free cash flow profile in 2024 and 2025 to fund the company’s expansion plans and further returns to shareholders.Select Energy Services is a provider of water-management solutions. The company's segments are: Water Services, which provides the services to support new oil and gas well completions as well as ongoing production over the life of the well, including water transfer, flowback and well testing; Water Infrastructure, which develops, builds and operates infrastructure solutions to support both new oil and gas well development; and Oilfield Chemicals, which develops, manufactures and provides a suite of completion and production chemical products, water treatment solutions and services utilized in hydraulic fracturing, stimulation, cementing and related well completion and production processes.
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