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Infrastructure Expansion Expected to Increase Predictability

We hosted a fireside chat with Chairman, President, and CEO John Schmitz and CFO Chris George on May 22, 2024. We discussed Select Water Solutions’ strategic shift toward building up the Water Infrastructure segment’s capacity to drive increased profitability and predictability for the company. This report contains a transcript of the conversation, which can be accessed on demand. The link is accessible in our full report. Select provides water management solutions to meet the needs of oil & gas producers over the entire life cycle of their wells. The company’s three reporting segments are Water Infrastructure, Water Services, and Chemistry Technologies. During 1Q24, Water Infrastructure accounted for 17% of total revenue and 33% of gross profit before DD&A. Demand for the water management solutions Select provides is driven by oil & gas production growth in major US producing regions. US oil and natural gas production growth goes hand-in-hand with growing produced water volumes, creating opportunities for Select to add value by recycling a portion of the wastewater stream into a product that can displace freshwater in completion activity and mitigate some of the environmental impact of oil & gas development. Management’s strategic priority is building out the Water Infrastructure segment, which is underpinned by long-term contractual revenue. Water Infrastructure is Select’s highest-margin segment. During 1Q24, gross profit margin before DD&A was 46.9%, far outpacing Water Services (20.5%) and Chemistry Technologies (17.4%). The total company gross margin was 24.4%. Management is funding a portion of the infrastructure growth with free cash flow generated in the Services and Chemistry segments. Select is expanding the infrastructure segment through a combination of acquisitions and organic capital investments. So far in 2024, five acquisitions totaling ~$138 million have expanded the company’s disposal capacity and solids handling business. The organic pipeline includes ~$100 million of projects that will enhance the solutions Select provides customers. Integrated networks of pipelines, recycling, and disposal facilities allow Select to provide comprehensive solutions to customers and improve the economic return on their investments. Select’s technology platforms increase operational efficiency during the well completion process and decrease the risk of spills. For customers, technology lowers cost and enables Select to meet their needs on increasingly complex projects. Disproportionate Water Infrastructure growth is expected to increase Select’s exposure to contractual revenue streams with durations up to 15 years and lessen exposure to transactional completions-oriented business. Over time, the shift is expected to increase the company’s earnings and adjusted EBITDA stability and predictability with positive implications for the company.