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Life-Cycle Water Solutions Provider to Oil & Gas Industry

Select Water Solutions provides integrated water solutions to customers in the oil and natural gas industry. Management’s mission is to provide full life-cycle solutions through three segments: Water Services, Water Infrastructure, and Chemical Technologies. Proprietary technology platforms provide customers with real-time data and help them maximize their ability to efficiently manage water needs. Customers include leading public and private E&P operators and pressure pumping providers in major US unconventional producing regions. Nearly 50% of 3Q23 revenue came from the Permian Basin. The US energy industry is increasingly committed to expanding the use of recycled produced water in drilling/completion activity to decrease the environmental stress it puts on water resources. Select’s Water Infrastructure and Chemical Technologies segments are meeting customers’ growing demand. Its integrated network of recycling capacity, pipelines, storage, and disposal assets provide water solutions throughout the life cycle of wells. Select is a consolidator in a fragmented industry. Over the last two years, it has closed more than a dozen strategic acquisitions, adding ~$400 million of annualized run-rate revenue and >$80 million of EBITDA. Infrastructure ownership also exposes the company to high-margin incremental system expansion opportunities. Management expects the recent trend of disproportionate Water Infrastructure growth to continue into 2024. Water infrastructure gross profit margin was 42.5% in 3Q23, making it Select’s highest-margin business. Our FY24 estimates imply that infrastructure could represent 33% of FY24 gross profit, an increase from 15% in FY22. Our estimates imply Select could deliver significant free cash flow in FY24, driven by growth in the Water Infrastructure segment. Our FY24 adjusted EBITDA estimate is $292 million, while our free cash flow estimate is $161 million. Select maintains a strong balance sheet, allowing management to prioritize returning cash to shareholders and invest capital to expand the business. As of September 30, 2023, the company had $25 million of cash and zero long-term debt. Select repurchased nearly $50 million of Class A shares during the first nine months of 2023. Between repurchases and the common stock dividend, management returned ~$75 million to shareholders during 2023, equating to a yield of 8.4% on the current share count. The current annualized dividend yield is 3.3% and ~$12 million remains on an existing share repurchase authorization. Select currently trades at 2.3x our FY24 adjusted EBITDA estimate. The transition to a durable cash flow stream underpinned by life-cycle water solutions provided by the high-margin infrastructure business could have a favorable impact on Select over time.