Q4 2023 Select Water Solutions Inc Earnings Call

Greetings and welcome to the select water solutions 2023 fourth quarter and year end earnings conference call.

time. This is a question and answer session. A reminder that, Thank you. You may be dismissed.

At this time all participants are in a listen only mode.

A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Chris George Senior Vice President corporate development Investor Relations and sustainability.

Operator: Thank you, operator, and good morning, everyone. We appreciate you joining us on the Select Water Solutions conference call and webcast to review our financial and operational results for the fourth quarter and full year of 2023. With me today are John Schmitz, our Founder, Chairman, President, and Chief Executive Officer; Nick Swyka, Senior Vice President and Chief Financial Officer; and Michael Skarkey, Executive Vice President and 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 March 6th, 2024.

You may begin.

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 fourth quarter and full year of 2023.

With me today are John Schmidt, our founder Chairman, President and Chief Executive Officer, Nick <unk>, Senior Vice President and Chief Financial Officer, and Michael Starkey Executive Vice President and 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 select water Dot com.

There will also be a recorded telephonic replay available until March six 2020 for the access information for this replay was also included in yesterday's earnings release.

Operator: 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, February 21, 2024. Therefore, time-sensitive information may no longer be accurate as of the time of the replay listening or transcript recording.

Please note that the information reported on this call speaks only as of today February 21 2024.

And therefore time sensitive information may no longer be accurate as of the time of the replay listening or transcript reading.

Operator: 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 law. 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 made by management.

In addition, the comments made by management during this conference call.

They contain forward looking statements within the meaning of the United States Federal Securities laws.

These forward looking statements reflect the current views of select management, however, various risks uncertainties and contingencies could cause our actual results performance or achievements to differ materially from those expressed in the statements made by management.

Operator: The listener is 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... As a reminder, the company made certain changes to its segment reporting structure during the second quarter of 2026. These changes were driven by several operational and strategic factors; however, the changes in segment reporting have no impact on the company's historical financial position, results of operations, or cash flow. Prior periods have been recast to include the water sourcing and temporary water logistics operations within the water services segment and remove these results of operations from the water infrastructure sector.

The listener is 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.

As a reminder, the company made certain changes to its segment reporting structure. During the second quarter of 2023. These changes were driven by several operational and strategic factors. However, the changes in segment reporting have no impact on the company's historical financial position results of operations or cash flows.

Prior periods have been recast to include the water sourcing and temporary water logistics operations within the water services segment and remove these results of operations from the water infrastructure segment.

Operator: Historical segment information recasted to conform to the new reporting structure is available as supplemental financial information in the investor sections of the company's website, at www.investors.selectwater.com; please refer to the company's current report on Form 8K filed with the SEC concurrently with our earnings release for additional information. Now I'd like to turn the call over to our founder, chairman, president, and CEO, John Schmitz. Thanks,

Historical segment information recast to conform to the new reporting structure is available as supplemental financial information in the investors section of the company's website.

At Www dot investors select water dot com.

Please refer to the company's current report on form 8-K filed with the SEC concurrent with our earnings release for additional information now.

Now I'd like to turn the call over to our founder Chairman President and CEO judgments.

Thanks, Chris Good morning, and thank you for joining us I am pleased to be discussing select water solutions again with you today.

John D. Schmitz: Good morning, and thank you for joining us. I am pleased to be discussing Select Water Solutions again with you today. Overall, 2023 was a record-setting year for Select. I'd like to start by highlighting some of our key achievements over the past year, and we'll let Nick speak about the fourth quarter in a bit more detail. During 2023, we grew revenues by 14% and adjusted EBITDA by 33% year-over-year, finishing the year with total revenues of approximately $1.6 billion and adjusted EBITDA of $258 million. As importantly, we also finished the year with record net income, earnings per share, and free cash flow. Each of our segments saw year-over-year revenue and gross profit gains during 2023. Most critically, we made tremendous progress accelerating the growth and profitability of our water infrastructure segment.

Overall 2023 was a record setting year for select I'd.

I'd like to start by highlighting some of our key achievements over the past year, and we will let Nick speak to the fourth quarter and a bit more detail.

During 2023, we grew revenues by 14% and adjusted EBITDA by 33% year over year, finishing the year with total revenues of approximately $1 6 billion and adjusted EBITDA of 258 million.

As importantly, we also finished the year with record net income earnings per share and free cash flow.

Each of our segments saw year over year revenue and gross profit gains during 2023.

Most critically we made tremendous progress accelerating the growth and profitability of our water infrastructure segment with contributions from a number of acquisitions in late 2022, and early 'twenty two 'twenty three as well as organic projects that came online.

John D. Schmitz: With contributions from a number of acquisitions in late 2022 and early 2023, as well as organic projects that came online throughout the year, we grew water infrastructure revenue by 84% and gross profit by 162% during 2023 as compared to 2022. Operationally, we significantly exceeded our expectations by growing recycled volumes by more than 100% year-over-year, while disposal volumes and systems utilization increased materially as well.

Throughout the year, we grew water infrastructure revenue by 84% and gross profit by 162% during 2023 has compared to 2022.

Operationally, we significantly exceeded our expectations by growing recycled volumes by more than 100% year over year, while disposal volumes and systems utilization increased materially as well. We also continue to find ways to capture Mark.

John D. Schmitz: We also continue to find ways to capture market share and improve the efficiency of our capital light water services and chemical technology segments, growing gross margins by more than 200 basis points in each segment during 2023 and generating a significant amount of cash flow from these segments to fund our growth strategy. With record operating cash flow, we were able to fund a diverse capital allocation strategy throughout 2023, including funding our modest maintenance CapEx needs, expediting our growth CapEx plans, particularly around our water infrastructure segment, increasing our base dividend by 20% during the year, expanding our share repurchase program, and also executing six small bolt-on acquisitions. Importantly, we were able to execute these capital allocation priorities while also repaying all of our outstanding debt throughout the year and building a substantial $57 million cash position on the balance sheet at year end.

Share and improve the efficiency of our capital light water services and chemical technology segments growing gross margins by more than 200 basis points in each segment during 2023 and generating a significant amount of cash flow from these <unk>.

<unk> to fund our growth strategy.

With record operating cash flow, we were able to fund a diverse capital allocation strategy throughout 2023, including funding our modest maintenance capex needs.

Expediting our growth Capex plans, particularly around our water infrastructure segment.

Increasing our base dividend by 20% during the year.

Expanding our share repurchase program, while also executing six small bolt on acquisitions.

Importantly, we were all we were able to execute these capital allocation priorities, while also repaying.

All of our outstanding debt throughout the year and building a substantial 57 million cash position on the balance sheet at year end.

John D. Schmitz: The strength of our recent financial performance, including the strong free cash flow generation from our water services and chemical technology segments, positioned us to continue to execute a number of strategic priorities already in 2024, including funding a trio of additional strategic asset acquisitions during the first quarter of 2024, while also announcing a number of additional organic capital projects. The recent acquisitions of Tri-State and Iron Mountain in Haynesville, as well as additional disposal and recycling assets in the Rockies, provide accretive operations and further development potential for two of our critical regional infrastructure networks. The addition of the slurry and solid treatment facilities also expands the scope of select capabilities in the Hainesville region, broadening our full lifecycle waste stream management capabilities for our customers and adding incremental value across our Performa position in the basin.

The strength of our recent financial performance, including the strong free cash flow generation from our water services and chemical technology segments position us to continue to execute a number of strategic priorities already in 'twenty 'twenty four including funding a.

Trio of additional strategic asset acquisitions during the first quarter of 2024, while also announcing a number of additional organic capital projects. The recent acquisitions for Tri State and Iron Mountain in the Haynesville as well as additional dispose.

On recycling assets in the Rockies provide accretive operations and further development potential for two of our critical regional infrastructure networks.

The addition of the slurry and solid treatment facilities also expand the scope of select capabilities in the Haynesville region.

Broadening our full lifecycle waste stream management capabilities for our customers and adding incremental value across our pro forma position in the basin.

John D. Schmitz: Importantly, each deal fits our near-term strategy to grow and expand our production-based and contracted revenues within our water infrastructure segment. Most significantly, following our latest acquisition, we expect more than 90% of our Haynesville revenues to be production-oriented during 2024, representing stability in the basin that may face near-term drilling and completion activity disruption from recent natural gas price volatility. As a company, we expect to see more than a third of our overall revenues come from production-related activities in 2024. This is a tremendous strategic shift for our business in the span of only a few years, as less than 10% of our revenues were production-weighted during our previous peak revenue years.

Importantly, each deal fits our near term strategy to grow and expand our production base and contracted revenues within our water infrastructure segment.

Most significantly following our latest acquisition, we expect more than 90% of our haynesville revenues to be production oriented during 'twenty 'twenty four representing stability in the basin that may face near term drilling and completion activity disruption from <unk>.

Natural gas price volatility.

Has the company, we expect to see more than a third of our overall revenues come from production related activities during 2024.

This is a tremendous strategic shift for our business in the span of only a few years has less than 10% of our revenues where production weighted during our previous peak revenue years.

John D. Schmitz: From an organic project standpoint, I am pleased to get several additional long-term contracts to the finish line in recent months. In the Permian, we were able to add substantial incremental acreage dedication to one of our largest Midland Basin recycling facilities, while we added additional contracted pipeline connections into our recently completed flagship Delaware Basin recycling facility. In the Northeast, we added additional acreage dedication with a targeted minimum volume commitment to supplement the long-term income stream of an existing disposal asset. However, the largest project, both from a capital spend and a long-term value creation standpoint, is our Thompson Pipeline System in the Bakken. This project is supported by a 225,000 acre dedication from a blue chip operator in the region. This pipeline will utilize the third and last remaining federal permit we have off of Lake Sakakawea in North Dakota.

From an organic projects stamp point I am pleased to get several additional long term contracts to the finish line in recent months in the Permian, we were able to add substantial incremental acreage dedication to one of our largest Midland basin recycling facilities.

While we added additional contracted pipeline connections into our recently completed flagship Delaware Basin recycling facility in the North East we added additional acreage dedication with a targeted minimum volume commitment to supplement the long term income stream of an.

Listing disposal asset.

The largest project both from a capital span and long term value creation standpoint, however, as our Thompson pipeline system in the Bakken.

This project is supported by a 225000 acre dedication from our Blue chip operator in the region. This pipeline will utilize the third and last remaining federal permit we have off of lakes Akaka, We're in North Dakota.

John D. Schmitz: As many of you may recall, this has been a very lengthy permitting and business development effort, but I am very pleased we've been able to partner with a premier operator in the region to underwrite the development of the system, which should come online late in the summer of 2024. While the Permian clearly remains the largest portion of our business and the greatest area for additional opportunities, so far this year, we've already announced new projects and acquisitions in the Hainesville, Northeast, Rockies, and Bakken regions in addition to the Permian. Additionally, these opportunities have encompassed a comprehensive range of SELECT's capabilities, including water recycling, pipeline distributions, gathering and disposal, water transfer, fluid handling, and solid waste management.

As many of you may recall this has been a very lengthy permitting and business development effort, but I am very pleased we've been able to partner with a premier operator in the region to underwrite the development of the system, which should come online late summer of 2024.

While the Permian clearly remains the largest portion of our business and the greatest area for additional opportunities. So far this year, we've already announced new projects and acquisitions in the Haynesville northeast Rockies and Bakken regions. In addition to the Permian.

Additionally, these opportunities have encompassed a comprehensive range of select capabilities, including a water recycling pie.

<unk> distributions gathering and disposal water transfer fluids handling and solid waste management despite.

John D. Schmitz: Despite recent commodity price and activity volatility, we continue to experience increased demand for new infrastructure development opportunities across all basins as water infrastructure constraints remain a significant challenge for our customers. I believe Select's operational and geographic diversity is one of our core strengths, providing us with an array of capital allocation prospects that allow us to make the best decisions to drive long-term shareholder value across a portfolio of opportunities. With a very strong backlog of additional greenfield, brownfield, and bolt-on infrastructure systems projects and acquisitions, Select's water infrastructure segment is positioned to be one of the fastest growing infrastructure franchises in the industry. Accordingly, we expect to see annual water infrastructure segment revenues grow by 30 to 40% during 2024, with segment gross profits growing by 40 to 50% on a year-over-year basis. We expect about half the segment growth to come from M&A and the remaining half to come from organic projects.

Despite recent commodity price and activity volatility we continue to experience increased demand for new infrastructure development opportunities across all basins has water infrastructure constraints remain a significant challenge for our customers I believe celexa.

Operational and geographic diversity is one of our core strengths, providing us with an array of capital allocation prospects that allow us to make the best decisions to drive long term shareholder value across a portfolio of opportunities with.

With a very strong backlog of additional greenfield brownfield and bolt on infrastructure systems projects and acquisitions. So Lex water infrastructure segment is positioned to be one of the fastest growing infrastructure franchises in the industry.

Accordingly, we expect to see annual water infrastructure segment revenues grow by 30%, 40%. During 2024 with segment gross profit is growing by 40% to 50% year on a year over year basis, we expect about half the segment growth to come from M&A.

And the remaining half to come from organic projects with.

John D. Schmitz: With continued organic growth and other potential strategic efforts, I believe we could potentially see water infrastructure gross profits reach as high as 50% of our consolidated profitability on a standalone basis by the end of 2025. Similar to the growth in our production-weighted revenues, this would represent a significant achievement for a segment that represented a mere 7% of the company's profitability during our previous peak revenue year in 2018. While we maintain a high level of conviction around the continued growth opportunities in our water infrastructure segment, and the oil prices remain attractive at current levels for our customers, recent volatility in the natural gas prices and anticipated declines in our customers' budget on a year-over-year basis are likely to have impacts to the completions-weighted revenues within our water services and chemical technology segment, that we believe we can continue to find opportunity to improve the margin profile of each segment on a year-over-year basis in 2024.

With continued organic growth and other potential strategic efforts I believe we could potentially see water infrastructure gross profits reach as high as 50% of our consolidated profitability on a standalone basis by the end of 2025.

Similar to the growth in our production weighted revenues. This would represent a significant achievement for a segment that represented a mere 7% of the company's profitability during our previous peak revenue year in 2018.

While we maintain a high level of conviction around the continued growth opportunities in our water infrastructure segment and the oil prices remain attractive at current levels for our customers recent volatility in the natural gas prices and anticipated declines in our customers' budget on a.

The year over year basis are likely to have the impacts to the completions weighted revenues within our water services and chemical technology segments, though we believe we can continue to find opportunities to improve the margin profile of each segment on a year over year basis in <unk>.

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John D. Schmitz: Additionally, as we look for ways to further improve our margins and stabilize our cash flows, we will continue to evaluate our water services segment, in particular for underperforming our non-strategic locations for potential consolidation during 2024, which when combined with the modest declining macroactivity outlook will drive water service segment revenues down on a year-over-year basis. Our water services business remains critical to our overall success as we must drive free cash flow and a strong return on assets from this segment. If there are yards or components of this segment that we determine cannot achieve these objectives, we will look to redeploy those personnel, resources, and capital into other regions or parts of our business that can.

Additionally, as we look for ways to further improve our margins and stabilize our cash flows we will continue to evaluate our water services segment in particular for underperforming or non strategic locations for potential consolidation during 'twenty 'twenty four.

Which when combined with the modest declining macro activity outlook will drive water service segment revenues down on a year over year basis.

Our water services business remains critical to our overall success as we must drive free cash flow and strong return on assets out of this segment.

If there are yards are components of this segment that we determined cannot achieve these objectives, we will look to redeploy those personnel resources and capital into other regions or parts of our business that can.

John D. Schmitz: We expect our water services and chemical technology segments to generate more than 70% to 80% of their gross profit in free cash flow, providing a very attractive source of capital funding for our water infrastructure growth initiatives. Accordingly, driven by the substantial continued growth in our water infrastructure segment over the course of 2024, we firmly anticipate growing our adjusted EBITDA on a year-over-year basis during 2024 and expect to pull through at least 40% of this adjusted EBITDA into free cash flow after accounting for all maintenance and growth capex, providing substantial optionality for additional strategic initiatives or incremental shareholder returns. We will remain attentive to every dollar of capital we deploy, and with this free cash flow, we will prioritize capital allocation to the most strategic areas of our business, especially where we have the most opportunity to grow our production-weighted and long-term contracted revenues, expand our proprietary application of automation, chemistry, or recycling technologies, and integrate full life-cycle water infrastructure and chemistry solutions around our existing water infrastructure asset base. I firmly believe in the infrastructure growth strategy we've undertaken recently, which I believe best positions Select to drive long-term shareholder value. And ultimately, I believe that Select remains uniquely positioned in a competitive energy landscape to advance the integration of water and chemical technology solutions with high-margin, long-term contracted infrastructure.

We expect our water services and chemical technology segments to generate more than 70% to 80% of the their gross profit into free cash flow, providing a very attractive source of capital funding for our water infrastructure growth initiatives accordingly, driven by this.

Substantial continued growth in our water infrastructure segment over the course of 'twenty 'twenty four we firmly anticipate growing our adjusted EBITDA on a year over year basis during 2024 and expect to pull through at least 40% of this adjusted EBITDA into free cash flow.

After accounting for all maintenance and growth Capex, providing substantial optionality for additional strategic initiatives are incremental shareholder returns.

We will remain attentive to every dollar of capital, we deploy and with this free cash flow, we will prioritize capital allocation to the most strategic areas of our business, especially where we have the most opportunity to grow our production weighted and a long term contracted revenues.

Expand our proprietary application of automation chemistry, a recycling technologies and integrate full lifecycle water infrastructure and chemistry solutions around our existing water infrastructure asset base I firmly believe in the infrastructure growth strategy, we bought her.

<unk> recently, which I believe best positioned select to drive long term shareholder value and ultimately I believe that select remains uniquely positioned in a competitive energy landscape to advance the integration of water and chemical technology solutions with high.

Margin long term contracted infrastructure.

John D. Schmitz: I am very excited about what the future holds for Select and look forward to executing on this vision during 2024. At this point, I'll hand it over to Nick to speak about our financial results and 2024 outlook in a bit more detail.

I am very excited about what the future holds for select and look forward to executing on this vision during 2024.

At this point I'll hand, it over to Nick to speak about our financial results and 2024 outlook in a bit more detail Nick thank.

Nicholas L. Swyka: Thank you, John, and good morning, everyone. As John mentioned, 2023 marked a record year for Select across many annual financial metrics. These include $1.6 billion of revenue, $74.4 million of net income, and $0.73 earnings per share.

Thank you John and good morning, everyone. As John mentioned 2023 marked a record year for select across many annual financial metrics. These include one $6 billion of revenue $74 $4 million of net income 70, <unk> earnings per share 258.

Nicholas L. Swyka: $258 million of adjusted EBITDA, and finally $285 million of cash provided by operating activity. These record financial results enabled us to provide $87 million of total returns to shareholders over the course of the year, raise our quarterly dividend by 20%, and retire our outstanding debt balance, finishing the year in a strong net cash position and with $307 million of liquidity. Importantly, we achieved this success despite a steady headwind from declining levels of drilling and completions activity over the back half of the year.

Dollars of adjusted EBITDA, and finally $285 million of cash provided by operating activities. These.

These record financial results enabled us to provide $87 million of total returns to shareholders over the course of the year raised our quarterly dividend by 20% and retire our outstanding debt balance, finishing the year in a strong net cash position and with $307 million of liquidity.

Importantly, we achieved this success, despite a steady headwind from declining levels of drilling and completions activity over the back half of the year.

Nicholas L. Swyka: Select's ongoing transition to a more infrastructure-based, production-levered, full-life cycle water company has aligned our profitability and cash flow generation with critical secular growth drivers unique to our business. Increased water recycling by our customers, infrastructure networks that balance water supply and demand across customers and regions, and industry consolidation that demands high quality partners with the size, scope, and networks to serve the largest operators all continue to benefit Select water solutions, even as activity levels have soft While the more completions-levered water services and chemical technologies segments were ultimately impacted by industry activity declines, the fourth quarter saw continued revenue and profitability gains in the water infrastructure segment. During Q4, the water infrastructure segment increased revenue by more than 4% to $60.8 million, and gross margins, which we customarily provide in terms of prior to depreciation and amortization, increased by over 300 basis points to 43%.

<unk> ongoing transition to a more infrastructure base production Levered full lifecycle water company.

Wind, our profitability and cash flow generation with critical secular growth drivers unique to our business.

Increased water recycling by our customers' infrastructure networks, the balanced water supply and demand across customers and regions and industry consolidation that demands high quality partners with the size scope and networks to serve the largest operators all continue to benefit select water solutions, even as activity levels.

<unk> have soften with recent commodity price volatility.

While the more completions levered water services in chemical technologies segments were ultimately impacted by industry activity declines the fourth quarter saw continued revenue and profitability gains in the water infrastructure segment.

During Q4, the water infrastructure segment increased revenue by more than 4% to $60 8 million and gross margins, which we customarily provide in terms of prior to depreciation and amortization increased by over 300 basis points to 43%.

Nicholas L. Swyka: The projects we announced yesterday exemplify our ability to add value to our existing infrastructure networks through steady incremental commercialization. We have a long history of unique access and usage agreements across many regions, which, in the case of the Thompson pipeline, put us in an exclusive position to execute a new greenfield project backed by a long-term contract. For the recycling network expansions on both the Delaware and Midland sides of the Permian, our existing systems comprising large acreage and multi-customer gathering, recycling, transmission, and disposal create both optionality and additional contracting opportunities with new and existing infrastructure customers. These expanded networks will see enhanced utilization and water balancing capabilities that make the expansions highly accretive. And finally, even in gas basins like the Marcellus and Utica, long-term water gathering and disposal agreements from steady production sources remain an attractive growth option.

The projects, we announced yesterday exemplify our ability to add value to our existing infrastructure networks through steady incremental commercialization.

We have a long history of unique access and usage agreements across many regions, which in the case of the Thompson pipeline put us in an exclusive position to execute our new Greenfield project backed by a long term contract for.

The recycling network expansions on both the Delaware and Midland sides of the Permian, our existing systems, comprising large acreage in multi customer gathering recycling transmission transmission and disposal create both optionality and additional contracting opportunities with new and existing infrastructure customers.

These expanded networks will see enhanced utilization in water balancing capabilities that make the expansions highly accretive.

And finally, even in gas basins like the Marcellus and Utica long term water gathering and disposal agreements from steady production sources remain an attractive growth option.

Nicholas L. Swyka: In addition to these organic growth opportunities, we also announced three recent infrastructure acquisitions across multiple basins in January. These are not economically distressed entities similar to our previous acquisition wave, but rather discrete, underutilized, or highly contracted assets located within the footprint of two of our regional infrastructure networks. Well, in the first quarter, we'll see some expenses related to integration and standardization of these newly acquired assets, pushing the expected gross margin on water infrastructure down slightly to 39 to 42 percent; expect revenues to move higher by mid-single-digit percentage. As we move through the year, we expect gross margins to resume their upward trajectory into the mid to high 40s as we connect these acquired assets to our network to boost utilization, bring on new projects like the ones We may also elect to move forward with additional acquisitions where we see discrete assets with the ability to provide accretive economics to our existing network.

In addition to these organic growth opportunities. We also announced three recent infrastructure acquisitions across multiple basins in January.

These are not economically distressed entities similar to our previous acquisition wave, but rather discrete underutilized or highly contracted assets located within the footprint of two of our regional infrastructure networks.

While the first quarter, we will see some expenses related to integration and standardization of these newly acquired assets pushing the expected gross margin in water infrastructure down slightly to 39% to 42%, we expect revenues to move higher by mid single digit percentages.

As we move through the year, we expect gross margins to resume their upward trajectory into the mid to high Forty's as we connect to these acquired assets to our network to boost utilization, bringing on new projects like the ones announced yesterday and continue to execute on our backlog of additional projects currently under discussion.

We may also elect to move forward with additional acquisitions, where we see discrete assets with the ability to provide accretive economics to our existing networks.

Nicholas L. Swyka: As John mentioned, we believe an aspirational but achievable goal for this segment is to reach 50% of our overall corporate gross profit contribution by the end of 2025, underpinned by repeatable, predictable, high-margin revenue streams. The growing weight of these higher-margin revenue streams allows us to provide additional certainty around return of capital to shareholders. We returned nearly 10% of our current market cap in cash to shareholders in 2023 in the form of dividends, distributions, and buyback. In the fourth quarter, we raised our quarterly dividend by 20% to $0.06 a share while completing another $12 million in share buyback.

As John mentioned, we believe an aspirational, but achievable goal for this segment is to reach 50% of our overall corporate gross profit contribution by the end of 2025 underpinned by repeatable predictable high margin revenue streams.

The growing weight of these higher margin revenue streams allows us to provide additional certainty around return of capital to shareholders.

We returned nearly 10% of our current market cap in cash to shareholders in 2023 in the form of dividends distributions and buybacks in the fourth quarter, we raised our quarterly dividend by 20% to six cents a share while completing another $12 million of share buybacks.

Nicholas L. Swyka: While we remain open to tactical buybacks from within cash flow and a strong balance sheet, in the near term, we are prioritizing execution on infrastructure projects and potential incremental asset bolt-ons as a use of capital, while we maintain our commitment to the recently increased regular dividend to fund these investments alongside capital returns. Our water services and chemical technology segments each provide strong cashflows at low capital intensity, returning 70-80% of profits and cash flows after CapEx, as John noted. The fourth quarter of the water services segment outperformed overall industry activity data with revenues declining by 4% against a decline in completions activity of about 8% per the EIA, while margins increased by nearly 200 basis points due to our cost management and margin enhancement efforts.

While we remain open to tactical buybacks from within cash flow and a strong balance sheet in the near term, we are prioritizing execution on infrastructure projects and potential incremental asset bolt ons as a use of capital while we maintain our commitment to the recently increased regular dividend.

Funding investments alongside capital returns, our water services and chemical technologies segments, each provide strong cash flow with low capital intensity, returning 70% to 80% of profits and cash flows after capex as John noted.

In the fourth quarter, the water services segment outperformed overall industry activity data with revenues declining by 4% against the decline in completions activity of about 8% for the EIA, while margins increased by nearly 200 basis points with our cost management and margin enhancement efforts.

Nicholas L. Swyka: With continued activity, volatility, and some operational consolidation underway, we expect a modest mid-single-digit percentage step back in first quarter revenue, with margins in the 19 to 21 percent range, followed by additional margin improvement later in the year. Chemical Technologies revenue declined by a bit over 8% sequentially in Q4, relatively in line with activity levels, with margins down 6 points to 14%.

With continued activity volatility in some operational consolidation underway, we expect a modest mid single digit percentage step back in first quarter revenue with margins in the 19% to 21% range followed by additional margin improvement later in the year.

Chemical technologies revenue declined by a bit over 8% sequentially in Q4 relatively in line with activity levels with margins down six points to 14%.

Nicholas L. Swyka: The business was impacted by a bit over $2 million of legacy production chemicals inventory write-downs and year-end insurance adjustments, accounting for about three percentage points of the gross margin decline. Even so, the results here came in below our expectations for the fourth quarter, even after accounting for the items I referenced. We expect both revenue and margins to improve modestly for this segment in the first quarter due to certain key customer activity increases and cost realignments to match manufacturing throughput. While fourth-quarter SG&A increased by $7.4 million to $46 million, the majority of this, or $6.2 million, related to higher transaction and rebranding costs in the fourth quarter relative to the third. We expect SG&A to decline to the low $40 million range in the first quarter as our rebranding initiative winds down, though transaction costs related to our recent acquisitions will remain.

The business was impacted by a bit over $2 million of legacy production chemicals inventory write downs and yearend insurance adjustments accounting for about three percentage points of the gross margin decline.

Even so the results here came in below our expectations for the fourth quarter, even after accounting for the items I referenced we expect both revenue and margins to improve modestly for this segment in the first quarter due to certain key customer activity increases and cost realignments to match manufacturing throughput.

While fourth quarter SG&A increased by $7 4 million to 46 million. The majority of this or $6 2 million related to higher transaction and rebranding costs in the fourth quarter relative to the third week.

We expect SG&A to decline to the low $40 million range in the first quarter as our rebranding initiative winds down though transaction costs related to our recent acquisitions will remain.

Nicholas L. Swyka: All together, for the first quarter of 2024, we expect consolidated adjusted EBITDA of $52 to $56 million, as customer activity and operational consolidation activities impact our water services segment, and short-term integration-related costs from our new acquisitions affect the quarter as well. However, driven by the substantial continued growth in our water infrastructure segment over the course of 2024 and anticipated margin improvement in our services and chemicals segments, we firmly anticipate growing our adjusted EBITDA on a year-over-year basis during 2024. The fourth quarter also saw multiple sizable tax-related impacts. Select growth and sustained profitability in recent years have triggered an assessment that our long-standing net operating loss carry forwards covered by our tax receivable agreements Concurrently, we have recognized a deferred tax asset related to future tax savings and a TRA liability in our quarterly and annual financial statements. These adjustments reflect forward-looking assessments informed by independent third-party advisors and may change as time progresses and company financial performance and capital spending evolve. They also may be impacted by changes to the U.S. tax code.

Altogether for the first quarter of 2024, we expect consolidated adjusted EBITDA of $52 million to $56 million.

Customer activity and operational consolidation activities impact our water services segment and short term integration related costs from our new acquisitions affect the quarter as well how's.

However, driven by the substantial continued growth in our water infrastructure segment over the course of 2024 and anticipated margin improvement in our services and chemical segments, we firmly anticipate growing our adjusted EBITDA on a year over year basis during 2024.

The fourth quarter also saw multiple sizable tax related impacts <unk>.

<unk> growing and sustained profitability in recent years has triggered an assessment that our longstanding net operating loss carryforwards covered by our tax receivable agreements or TRA is likely to provide a benefit to the company under reasonably evaluated forward looking projections in the next few years.

Currently we have recognized a deferred tax asset related to future tax savings in the TRA liability into our quarterly and annual financial statements.

These adjustments reflect forward looking assessments informed by independent third party advisors and May change as time progresses, and company financial performance and capital spending evolves.

They also may be impacted by changes to the U S tax code.

Nicholas L. Swyka: I encourage all listeners to review our 2022 annual 10K financial report, found on our website, as well as our 2023 10K, which should be made available this week, to understand our tax attributes and the TRA in greater detail. Our fourth quarter net income of $27.6 million was positively benefited by a $61.9 million release of evaluation allowance associated with deferred tax assets, partially offset by a tax-receivable agreement's expense While we anticipate cash tax payments in 2024 to be a relatively modest four to six million dollars, including state taxes, our book tax expense percentage applied to pre-tax operating income is likely to increase to the low 20 percent range. From an accounting perspective, this forecasted tax expense would primarily impact existing deferred tax assets in 2024 prior to becoming a cash outlay in future years.

I encourage all listeners to review our 2022 annual 10-K financial report found on our website as well as our 2023 10-K, which should be made available this week to understand our tax attributes and the TRA in greater detail.

Our fourth quarter net income of $27 $6 million was positively benefited by a $61 9 million release of a valuation allowance associated with deferred tax assets, partially offset by attacks by tax receivable agreements expense of $38 2 million.

While we anticipate cash tax payments in 2024 to be a relatively modest $4 million to $6 million, including state taxes.

Our book tax expense percentage applied to pretax operating income is likely to increase to the low 20% range.

From an accounting perspective, this forecasted tax expense would primarily impact existing deferred tax assets in 2024 prior to becoming a cash outlay in future years.

Nicholas L. Swyka: Depreciation and amortization, I expect, will continue in the mid to high $30 million range quarterly, modestly increased from recent acquisitions in organic infrastructure development. And quarterly interest expense should increase to 2 to 3 million dollars per quarter as we employ our sustainability-linked lending facility to execute our recent acquisitions. This facility provides an attractive cost of capital for us, and we will continue to see the interest rate reduction benefits of outperforming our sustainability KPIs for water recycling and employee safety targets for the second consecutive year since the facility's initiative. Fourth quarter net capex of $28 million. We finished the year at $118 million, just below our previous guidance of $120 to $130 million.

Depreciation and amortization I expect we will continue in the mid to high $30 million range quarterly modestly increase from recent acquisitions and organic infrastructure development.

Quarterly interest expense should increase to $2 million to $3 million per quarter as we employ our sustainability linked lending facility to execute our recent acquisitions.

This facility provides an attractive cost of capital for us and we will continue to see the interest rate reduction benefits of outperforming our sustainability kpis for water recycling and employee safety targets for the second consecutive year since the facility's initiation.

With fourth quarter net capex of $28 million.

We finished the year at $118 million just below our previous guidance of $120 million to $130 million. We are entering 2024 with a healthy ongoing project backlog and additional development opportunities related to the recent acquisitions and expect $140 million to $160 million of net capex in 2024.

Nicholas L. Swyka: We are entering 2024 with a healthy ongoing project backlog and additional development opportunities related to the recent acquisition, and we expect $140 to $160 million of net capex in 2024. We anticipate $50 million to $60 million of this capex going towards ongoing maintenance and about $15 million going towards margin improvement initiatives. The remaining largest component of this overall spend is for growth CapEx, which is heavily weighted towards infrastructure growth projects.

We anticipate $50 million to $60 million of this capex going towards ongoing maintenance and about $15 million going towards margin improvement initiatives. The.

The remaining largest component of this overall spend is for growth capex, which is heavily weighted towards infrastructure growth projects.

Nicholas L. Swyka: Additionally, we anticipate generating 10 to 20 million dollars in proceeds from asset sales to net against this gross CapEx spend during the year in 2020. As we've outlined, we expect to exceed our 2023 adjusted EBITDA in 2024 and convert more than 40% of those dollars into free cash flow from operations after capital expenditures. As we move forward with our vision of growing long-lived, high-return water infrastructure and shareholder value in 2024, I'd like to conclude with a couple of our accomplished financial goals from 2023. We reduced our accounts receivable balances over the course of the year by over $110 million, or $170 million from the end of Q1.

Additionally, we anticipate generating 10% to $20 million proceeds from asset sales to net against this gross capex spend during the year in 2024.

As we've outlined we expect to exceed our 2023 adjusted EBITDA in 2024 and convert more than 40% of those dollars into free cash flow from operations after capex.

As we move forward with our vision of growing long lived high return water infrastructure and shareholder value in 2024, I'd like to conclude with a couple of our accomplished financial goals from 2023.

We reduced our accounts receivable balances over the course of the year by over $110 million or $170 million from the end of Q1.

Nicholas L. Swyka: At the end of the year, not just debt-free, but with $57 million of cash on hand. During 2023, we converted nearly two-thirds of our adjusted EBITDA into free cash flow to the bottom line while investing the dollars needed to grow water and infrastructure profitability by over 160% year-on-year. This success is due to sustained, dedicated performance across many select teams, both support and operations, to integrate and realize value from our investments and translate that value to dollars in the door. I'd like to thank them for their hard work, and with that, open it up to questions. Operator? Gentlemen,

And ended the year, not just debt free, but with $57 million of cash on hand.

During 2023, we converted nearly two thirds of our adjusted EBITDA into free cash flow to the bottom line, while investing the dollars needed to grow water and infrastructure profitability by over a 160% year on year. This success is due to sustained dedicated performance across many select teams, both support and operations to integrate and realize value from.

Our investments and translate that value to dollars in the door.

I'd like to thank them for their hard work and with that I'll open it up to questions operator.

Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.

If you'd like to ask a question you May press star one on your telephone keypad.

Jim Raleigh: Confirmation total: indicate your line, Press Start, for participation. I'm sorry to pick up your, Our first question..., on the line of Jim Raleigh, with Raymond. Please proceed with your questions, and certainly a great year from a free cash flow and capital return perspective. John, on your comments, when I look at water infrastructure, which is clearly the growth driver here with a lot of outlook for incremental capital projects, it's all backed by contracts. You're kind of talking about, you know, mid single-digit growth in the first quarter for revenues but 30 to 40% growth for the full year. Can you maybe just kind of lay out the timeline of how, you know, the combination of M&A that you recently completed plus growth projects, you know, how that kind of drives revenues throughout the course of the year? Just trying to think about how we step up from here. modest growth in one queue to getting to 30 to 40% for the full year.

Confirmation tone will indicate your line.

Is there any question queue you May press star two if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the starkey.

Our first question comes from the line of Jim Robinson.

With Raymond James. Please proceed with your question.

Hey, guys and certainly a great year from a free cash flow and capital return perspective John.

John on your comments when I look at water infrastructure, which is clearly the growth driver here with a lot of outlook for incremental capital projects. This all backed by contract Youre kind of talking about you know mid single digit growth in the first quarter for revenues, but 30% to 40% growth for the <unk>.

Full year can you, maybe just kind of lay out the timeline of how you know the combination of M&A that you recently completed plus growth projects, how that kind of drives revenues throughout the course of the year just trying to think about how we step up from modest growth in <unk> to getting to the 30% to 40% for the full year.

Sure.

John D. Schmitz: Yeah, so some of these, you know, M&A things that we've done or assets that are being utilized in order, are performing well within the guidance that we're applying here, and that has an effect. Some of the M&A or assets that, once they're in our system, they will provide that kind of margin improvement and stability as well, but we have to, you know, lay pipe to hook them up or to make them part of the system, if you will. If you just look at our general, you know, organic application. It's all gonna be from four months to eight months, the time you approve the AFE, get the right to start building the facility, laying the pipe, and then, you know, bringing that system online and then getting the utilization fully up to speed.

Yes so.

Jim It's a combination.

Some of these.

M&A things that we've done or assets that are.

All are being utilized.

Are performing well within the guidance that we are.

We're applying here.

And in fact, some of some of them some of the M&A.

Or assets that.

Once they are in our system, they will provide that kind of.

Margin improvement and stability as well, but we have to lay pipe to hook them up or to make them part of the system.

If you will.

If you just look at our general.

Organic application.

It's all going to be from four months to eight months the time you.

Approve the ASC get the right to start building the facility laying the pipe.

And then bring in that system online in that and then getting the utilization.

Fully fully up to speed, so it's going to be a progression across the whole year.

John D. Schmitz: So it's going to be a progression across the whole year to get the margin improvement that we're looking for, but in a shorter period, we think that we can get that up in the 40 and 45 and headed toward our goal of 50 as we walk through this period of development and interconnection. But I'm going to let Michael speak on it a little bit too, Jim, to make sure he is direct with me on the operational side of the company. Yeah, thank you, John. So, Jim, as an example, the Thompson Pipeline that we announced, you know, that's not going to contribute in the first half of this year, but we do expect it to be a meaningful contributor in the second half of this year. And that's not to say that that's the difference, but that's just an example.

To get the margin improvement that we're looking for but we think shorter period, we think that we can get that up in the 40%.

And 45 and headed toward our goal of 50 has as we walk through this this period of development and interconnection, but I'm going to let Michael speak.

Speak on it a little bit too Jim to make sure.

He is direct with me on the operational side of the company. Yes. Thank you John So Jim as an example, the Thompson pipeline that we announced that's not going to contribute in the first half of this year, but we do expect it to be a meaningful contributor in the back half of the year and that's not to say that's the difference, but that's just an example, because we have.

Michael Skarkey: We have a number of other projects that we're working on and expect to come to fruition that we think would be contributing in the back half of the year as well. So it's really just kind of a steady ramp as we integrate the assets we've acquired, increase their utilization and expand upon the assets we acquired, and then we're successful in executing the construction projects that we've already announced, as well as some that we hope to announce in future quarters. I got it.

There are other projects that we're working on and expect to come to fruition that we think would be contributing in the back half of the year as well. So it's really just kind of a steady ramp as we integrate the assets. We've acquired we increase the utilization and expand upon the assets. We acquired and then were successful and execute.

The construction projects that we've already announced as well as some that we hope to announce in future quarters.

Michael Skarkey: So it's something like a pretty ratable step up throughout the course of the year as that stuff hits. And with all the new kinds of project announcements, it's kind of an ongoing growth story from that perspective. I presume the contracting strategy that you guys have had for some time on payback periods is still in place as you talk about things like the Thompson Pipeline Project and, you know, the Delaware Basin Recycling Project, etc. Is that kind of contracting strategy and implied margin and payback period embedded there still something we should expect? That's correct.

Got it so it sounds like a pretty ratable step up throughout the course of the year or is that stuff hits.

And with all the new kind of project announcements that you said, it's kind of an ongoing.

Growth story from that perspective, I presume the contracting strategy that you guys have had for some time on payback periods is still in place as you talk about things like the Thompson pipeline project and the.

The Delaware Basin recycling project et cetera that that kind of contracting strategy an implied margin.

And payback period embedded there is still it's still something we should expect that.

Correct. It's the same it's the same investment thesis we've had.

Michael Skarkey: It's the same investment thesis we've had. You know, all of the projects we're bringing on are created from a margin standpoint. And you're seeing us kind of bounce around our footprint because we really have asset optionality between recycling and distribution and gathering and disposal. We've got geographic, you know, geographic diversification across our footprint. So we're really looking for, you know, the right project, the right investment, the right strategic fit, and we'll do it organically or inorganically.

All of the projects, we're bringing on are accretive from a margin standpoint, and youre seeing is kind of bounce around our footprint, because we really have asset optionality between recycling and distribution and gathering and disposal you've got geographic.

Geographic diversification across our footprint. So we're really looking for the right projects the right investment the right strategic fit and we will do it organically or inorganically and so it's really trying to make sure that we have the right solution across a pretty wide arrangement of investment opportunities.

Michael Skarkey: And so it's really trying to make sure that we have the right solution across a pretty wide range of investment opportunities. And Jim, I'd add that on an expansion opportunity, those are even more accretive. So you have Thompson and Greenfield, large dollars, great margins, living within those contracting guidelines we set, but when we talk about the Midland Basin expansion, the Delaware Basin network expansion, those are very quick paybacks because you have a smaller capital outlay but higher utilization on the system from that. And then just one last question, Nick, last year you obviously got a lot of benefit from getting your working capital efficiency kind of down to where you wanted it and certainly contributed a lot to the free cash flow. Maybe as you switch into 24, as you mentioned in the press release, you won't get those same incremental working capital benefits.

And so.

On our expansion opportunity those are those are even more accretive. So you have the Thompson Greenfield large dollars great margin living within those contracting guidelines, we said, but when we talk about the Midland Basin expansion and the Delaware Basin network expansion.

A very quick paybacks, because you have a smaller capital outlay, but higher utilization on the system from that.

Right and then just one last question Nick.

Last year, you, obviously got a lot of benefit from <unk>.

Getting your working capital efficiency kind of down to where you want it and certainly contributed a lot to the free cash flow maybe as you switch into 'twenty four I think you mentioned in the press release.

You won't get those same incremental working capital benefits so.

Nicholas L. Swyka: So, you know, how are you thinking about free cash flow absolute or maybe relative to your 2023 levels? I know you gave the 40% flow through from EBITDA, but you didn't give us full-year EBITDA. So, I'm just kind of trying to understand how you're thinking about year-over-year free cash flow.

How are you thinking about free cash flow and in absolute or maybe relative to.

Your 2023 levels I know you gave the 40% flow through from from EBITDA, but you didn't give us full year EBITA. So I'm just kind of trying to understand how you're thinking about year over year free cash flow.

No a good observation, Jim so certainly cash flow and returns to shareholders are a core priority to us.

Nicholas L. Swyka: So certainly, cash flow and returns to shareholders are a core priority for us. I did not give the full-year EBITDA guidance, but from that trajectory, you can assume that we are indicating higher growth through the quarters, and that's backed by the infrastructure projects that we listed, as well as Michael said, the ones that are currently under discussion, and the incremental investments we're making in the acquisitions that take those assets we've acquired at very reasonable prices and then boost their utilization through connecting them to our network. So, correct, we don't have the same working capital opportunity this year. That's a positive reflection on the overall health and efficiency of the company and the continued opportunity to generate substantial free cash flow. With our strong balance sheet, we'll have multiple options to not just invest that free cash flow in highly accretive infrastructure, long lives, and contracted. Investments there but also continue our legacy of nearly $90 million in 2023 of shareholder returns through regular dividends and a tactical share buyback. So that's all on the table, and we'll continue progressing with that. I got it.

<unk> did not give the full year EBITDA guidance, but I think from that trajectory.

You can you can.

You can assume that we are indicating a higher adjusted EBITDA through the quarters and thats backed by the infrastructure projects that we've listed as well as Michael said.

Ones that are currently on discussion.

The incremental investments, we're making in the acquisitions.

Take those assets we've acquired at a.

Very reasonable prices and then boost the utilization through connecting them to our networks. So.

Correct, we don't have the same working capital opportunity. This year, that's a positive reflection on the overall health and efficiency of the company but.

But we do see.

Continued opportunity to generate substantial free cash flow and with our strong balance sheet will have multiple options to not just invest that free cash flow in highly accretive.

Infrastructure long lives contracted.

Investments there, but also continue our legacy of new nearly $90 million in 2023 of shareholder returns through our regular dividend through tactical share buybacks. So that's all on the table and we will continue progressing that.

Jim Raleigh: Thanks for entertaining my questions, guys. Thanks, Jim. Our next question comes from the line of Tom Curran. Good morning, guys.

Got it thanks for taking my questions guys.

Thank you Jim.

Our next question comes from the line of Tom Curran with Seaport Research Partners. Please proceed with your question.

Good morning, guys.

Thomas Curran: A few questions on your water infrastructure operation, the Bakken. Is it the anchor tenant behind this contracted build-out of the Point Thompson branch? a historical user of either of the other pipelines, the Charleston or Iverson branch, and then would you expect any of the customers on that Bakken sourcing and prefab water transfer network to lead to Produce Water Handling or Recycling opportunities in the Bakken and just, you know, where are you at in the Bakken in general on the produce water handling or recycling side in terms of opportunities? Sure, Tom. This is Michael.

<unk> dollars in the door indeed.

A few questions on your water infrastructure operation in the Bakken.

He is the anchor tenant behind this contracted buildout of the point Thomson branch a historical user of either of the other pipelines and Charleston are Iverson branch and then would you expect.

Any of the.

Customers on that Bakken sourcing and pre Frac water transfer network.

To lead to.

Produced water handling or recycling.

Opportunities in the Bakken and just.

Where are you at in the Bakken in general on the produced water handling and recycling side in terms of opportunities.

Sure. John This is Michael I'll take the first cut at it so very astute question Youre showing your tenure with the company by this question.

Michael Skarkey: I'll take the first cut at it. So, a very astute question. You're showing your tenure with the company with this question. The short answer is yes.

Short answer is yes, the customer they were contracting that's going to underwrite the Thompson for US is one of the legacy <unk>.

Michael Skarkey: The customer that we're contracting that's going to underwrite the Thompson for us is one of the legacy customers under our Charleston system and is a long-term relationship for us in North Dakota. You know, we are excited about the opportunity. It's been in the works for a very long time.

Customers under our Charleston system, and as a long term relation for us Lisa Flores in North Dakota.

We are excited about the opportunity it's been in the works for a very long time, it's the right solution for them, it's going to allow them to unlock a lot of the acreage north of the river the Lake.

Michael Skarkey: It's the right solution for them because it's going to allow them to unlock a lot of the acreage north of the river or the lake. And we're going to be able to provide the water and provide the water transfer. So, it's an infrastructure service solution that we're excited about. And we think that we'll have the opportunity to continue to expand it beyond, you know, that anchor tenant. In terms of the second question around produced water, you know, North Dakota, as I think we've talked about in the past, is one of the more challenging basins to migrate toward produced water. Part of it is the constituents of the flow back and produced water.

We're going to be able to provide the water and provide the water transfer. So it's an infrastructure service solution that we're excited about.

And we think that will have the opportunity to continue to expand it beyond that anchor tenant.

In terms of the second question around produced water.

North Dakota is I think we've talked in the past is one of the more challenging basins.

To migrate towards produced water part of it is.

The constituents of the flowback and produced water part of it is state regulations on.

Michael Skarkey: Part of it is state regulations on transferring that water, but we do expect to see produced water reuse occur in North Dakota like we're seeing, frankly, in every other basin. And I think despite this, you know, contracted position, we are well positioned to serve our customers there just like we're doing everywhere else. So, I would still say it's an opportunity for us to help those customers in North Dakota.

Transferring that water.

But we do expect to see.

Produced water reuse occur in North Dakota, like we're seeing frankly in every other basin.

And I think despite this.

Contracted position, we are well positioned to serve our customers. There just like we're doing everywhere else. So I.

I would still say, it's an opportunity for us.

To help those customers on those in North Dakota.

Michael Skarkey: And then, Michael, I'll stick with you for my second one as well, a bit of a step out here to a longer-term topic. But, you know, on the topic of service water discharge staying to rivers and creeks and potential beneficial reuse, such as for agriculture, the states of Colorado, New Mexico, and Texas have each formed a produce water consortium to study where the science and technology are at and consider whether it's become sufficiently viable to propose regulatory changes as the time starts to arrive. I know that Select has been involved in several aspects of this R&D, including, you know, multiple smaller-scale pilot projects. Would you just update us on when and where you might see the first meaningful commercial opportunities related to surface water discharge and or beneficial reuse? And then what is Select currently focused on to help the industry reach the point at which that necessary level of treatment and filtration can be done economically at its scale? Now, a great question, Tom.

Got it and then.

Michael I'll stick with you for my second one is well within it.

Step out here due to a longer term topics.

On the topic of surface water discharge staying to rivers and creeks and potential beneficial reuse that just for agriculture. The state of Colorado, New Mexico, and Texas have each formed a produced water consortium to study, where the science and technology are at and consider whether it's become sufficiently viable to propose.

Regulatory changes.

At a time starting to arrive.

<unk> has been involved in several aspects of this R&D, including multiple smaller scale pilot projects would you just update us on.

And where you might see the first meaningful commercial opportunities related to surface water discharge <unk> beneficial reuse and then what select is currently focused on to help the industry reached a point at which that necessary level of treatment infiltration can be done economically and at scale.

Yes, great Great question, Tom So we're aware of all of the organizations that consortium that you mentioned, where active members and all of them. We have a very strong and seasoned technical team. This participating in those commissions just try to make sure that select in the industry arrives at the right spot.

Michael Skarkey: So we're aware of all the organizations and consortiums that you mentioned. We're active members in all of them. We have a very strong and seasoned technical team that's participating in those commissions to try to make sure that Select and the industry arrive at the right spot. You know, we've got an R&D team that's invested millions of dollars over the last couple of years to try to make sure that we're aware of the leading solutions in the market and working to drive the cost down. It really has not been a technical issue.

We've got an R&D team that's invested.

Millions of dollars over the last couple of years.

Try to make sure that we're aware of the leading solutions in the market.

And working to drive the cost out it really has not been a technical issue. It's been a cost issue and a reliability issue. So we've been working hard to try to bring the capital costs as well as the operating costs down to something that might not necessarily compete with disposal, but provides a certainty and so if you think about an insurance premium on top of disposal it could be.

Michael Skarkey: It's been a cost issue and a reliability issue. So we've been working hard to try to bring the capital costs as well as the operating costs down to something that might not necessarily compete with disposal but provides certainty. And so if you think about an insurance premium on top of disposal, it could be viewed as somewhat economical. We're working with a number of operators on that. We haven't done many press releases.

Viewed as somewhat economic.

We're working with a number of operators on that we haven't done many press releases and I don't think you will because it still is kind of in the R&D phase for us.

Michael Skarkey: And I don't think you will, because it's still kind of in the R&D phase for us. But we're very active. We're a participant. I think we'll be one of the leaders in the space that brings these solutions to the market. We're looking at multiple technologies, and there are really three technologies that people believe are viable. And we're participating in studies in all three. In terms of your last question, where we will see that first, I still think it'll be the Permian.

We're very active we're a participant I think will be one of the leaders in the space that brings the solutions to the market.

We're looking at multiple and there is really three technologies that people believe are viable and we're participating in studies in all three in terms of your last question, where we will see that first I still think it'll be the Permian basin.

Michael Skarkey: That's where you have the largest amount of produced water coming out per barrel of oil. You've got the most benches, you know, as of recently, you've had the most induced seismicity. And so for a number of reasons, and from an economic standpoint, it's going to be one of the most competitive areas. So for a number of reasons, I think that's going to be where you'll see the most, the majority of the pilots, and they will be a first mover to this solution, much like they were a first mover around the produced water region. Very helpful and thorough answer, Michael. Thank you. I'll turn it back. Our next question comes from the line of Jeff Robertson. Water Tower

That's where you have.

The largest amount of produced water coming out per barrel of oil you've got the most benches.

As of recently <unk> had the most induced seismicity and so for a number of reasons and from an economic standpoint. It is going to be one of the most competitive area. So from a number of reasons I think that's gonna be where you'll see the majority of the pilots and they will be a first mover to this solution much like they were a first mover around produced water reuse.

Very helpful thorough answer Michael Thank you I'll turn it back.

Our next question comes from the line of Jeff Robertson with water Tower Research. Please proceed with your question.

Jeffrey Woolf Robertson: Thank you for your questions. Thank you. Good morning, John. You talked about the notion that select businesses will transition over time to more and more, long-term revenue backed by contracts. Can you talk about how the system integrations that you all have in various producing basins really underpin that idea of being able to help operators balance their supply-demand needs? Sure.

Thank you good morning, John you talked about the notion that select business will transition over time to more and more.

Long term revenue backed by contracts did you can you talk about.

How the system integrations that you all have in various producing basins really underpins that idea of being able to help operators balanced their supply demand needs.

Sure.

John D. Schmitz: You know, the way I think about it and where the value is really driven toward sustainability or or reduced cost to the operator is when it becomes a system with optionality. So you know, a system of gathering large quantities with an effective choice of where that volume could be driven to, whether it's disposal, recycling, out of basin, you know, movement across other asset bases becomes part of the system. And when it does, it really brings them real value to either a lease operating expense or through authority for expenditures on the drilling completion side of the business on it. So that's the way that we really have been able to come up with these ideals, opportunities, conversations that turn into contracts as we've taken all these assets out of these different transactions and started building systems out of them with real value added or choices to be made with that volume of water. Maybe I could just expand on that, Jeff, a little bit.

The way I'd think about it and where the value is really.

Uh huh.

Driven toward.

The sustainability or.

Our reduced cost to the operator is when it becomes a system with optionality. So.

Our system of <unk>.

Gathering large quantities with.

With the effect of choice of where that volume could be.

Driven to whether its disposal recycle.

Out of base movement across other <unk>.

Asset basis become it becomes part of the system and when it does it really brings in a real value to either lease operating expense or through <unk>.

<unk> for expenditures on the drilling completion side of the business on it so that that's the way that.

We really haven't been able to come up with these ideals opportunities.

Conversations that turned into contracts.

It has we've taken all of these assets out of these different transactions and started building systems out of them with real value add are choices to be made with that volume of water.

Maybe just to expand on that Jeff a little bit I mean, we really like the infrastructure of the contracted cash flow the production related cash flow from infrastructures.

Michael Skarkey: I mean, we really like the infrastructure, the contracted cash flow, the production-related cash flow from infrastructure. That's why it's been a strategic initiative of ours to grow that. We like the ability to provide that along with the service to provide the full solution. So it's an infrastructure service solution. And we've had a really strong service business historically, but as John mentioned a few minutes ago, at our previous revenue peak, infrastructure was 7% of gross profit. And this year, we expect infrastructure chemicals to be north of 50%, and infrastructure alone to be 50%.

Why it's been a strategic initiative of ours to grow that we like the ability to provide that along with the service to provide the full solution. So it's an infrastructure service solution.

And we've had a really strong service business historically, but as John mentioned here, a few minutes ago and our previous revenue peak infrastructure was 7% of gross profit and in this year, we expect infrastructure chemicals to be north of 50% and infrastructure alone would be 50%. So we're really looking to expand that and then once we have that built out it will just provide the <unk>.

Michael Skarkey: So we're really looking to expand that. And then once we have that built out, it'll just provide the optionality that Nick spoke to earlier, as well as the ability for us to have kind of contracted and uncontracted volumes flowing through our system. So that's really the archetype of what we're working on. GOVERNMENT OF BIRMINGHAM, What's that, Jeff? Sorry.

Optionality that Nick spoke to earlier as well as the ability for us to have kind of contracted and unconstructed volumes flowing through our system. So that's really the archetype of what we're working on.

Okay and Michael.

With that Jeff sorry.

Jeffrey Woolf Robertson: I was gonna say does the pricing volatility, you mentioned pricing volatility and obviously affecting the operator's budget. But does pricing volatility and consolidation have an impact on the type of conversations Select has with its customers over the duration of contracts or how contracts are structured? Not necessarily. I don't think that's the case.

He was going to say does the pricing <unk>, you mentioned pricing volatility and obviously affecting operator budgets, but does pricing volatility and consolidation is it.

Having an impact on the type of conversations select has with its customers over the duration of contracts or how contracts are structured.

Not necessarily I don't think Thats. The case I mean, there are implications for consolidations for sure.

Michael Skarkey: I mean, there are implications for consolidations for sure. You know, we're, if you look at our customer base, we work for everyone, but we have a bias toward the larger operators. And so consolidation is something that, you know, we certainly welcome because we believe scale seeks out scale. And a lot of times, the larger operators are ones that are really looking ahead, kind of, at a long-term solution. And so what allows us to have a very productive conversation around, you know, an expansive or extensive economic... asset expansion, excuse me, or expansion of existing assets. And when we do that, we obviously need a partner to underwrite it.

If you look at our customer base, we work for everyone, but we have a bias towards the larger operators and so consolidation is something that we certainly welcome because we believe scale seeks out scale.

And a lot of times the larger operators are ones that are really looking ahead kind of at a long term solution and so it allows us to have a very productive conversation around.

And expansive her extensive economic alright.

Asset expansion excuse me.

Or an existing or expansion of existing assets.

And when we do that we obviously need a partner to underwrite. It. So we're having those conversations I think with more consolidation there will be more of those to be had.

Michael Skarkey: So we're having those conversations. I think with more consolidation, there will be more of those conversations to be had. Yeah, Jeff, one thing that I'd add to Michael's. I mean, there is consolidation. There is movement.

Yes, Jeff one thing that I'd add to Michael's Yeah. I mean, there is consolidation there is movement, we're all watching it daily.

Michael Skarkey: We're all watching it, feeling it, but what we're very focused on is how we can do something that will bring value, and when we bring value. We want to make sure that we share in that value properly. We believe there's value in these systems, and we prove that and continue to find opportunities to prove it, and we also believe there's real value in being able to pull those services through that contract, just like Michael talked about in the system we're putting on the north side of Lake Sakakawea. Water transfer will be part of that overall solution, which is valuable to that acreage and that customer. Thanks.

Feeling it.

But what we're very focused on is how we can do something that will bring value.

And when we bring value.

We want to make sure that we share in that value properly.

We believe there is value in these systems and we prove that and continue to find opportunity to prove it.

And we also bring there we believe there is real value in being able to breathe.

Pull those services through that contract just like Michael talked about in.

The system, we're putting on the north side of legacy <unk> water transfer will be part of that overall solution, which is a value to that acreage in that customer.

Jeffrey Woolf Robertson: And the last question you just on some of the adjusted EBITDA outlook for 2024 that you mentioned, does that outlook only include the three acquisitions you announced in the first quarter? Or are you factoring in the expectation of other acquisitions? And how are you talking about 2024 just at Yugatak?

Thanks, and last question just on the some of the adjusted EBITDA outlook for 2024 that you mentioned does that outlook only includes the three acquisitions.

<unk> announced in the first quarter or are you factoring in the expectation of.

Other acquisitions.

And how you are talking about 2024 adjusted EBITA.

Nicholas L. Swyka: No, Jeff, that's purely the acquisitions we've made and then the projects we've given here. Now, in our overall growth CapEx for water infrastructure, we have a number of projects under discussion. If they all come to fruition, that CapEx number would move higher. If none of them do, then that would move lower.

No Jeff that's purely the acquisitions we've made.

And then the projects we've given here now on our overall growth Capex for water infrastructure, we have a number of projects under discussion.

If they all come to fruition.

Capex number would move higher if none of them do then that would move lower certainly don't expect either of those.

Nicholas L. Swyka: Certainly, don't expect either of them to happen, but we do anticipate that a number of conversions of new infrastructure projects that we look forward to announcing in the next few quarters and most of those that are announced over the next quarter or two will have some impact. Thank you. Go to www.selectenergy.com to learn more. John Daniel with Daniel

It comes there.

But we do we do anticipate that a number of conversions of new infrastructure projects. So we look forward to announcing in the next few quarters.

Most of those that are announced over the next quarter or two we will have some impact in 2024.

Thank you.

Our next question comes from the line of John Daniel with Daniel Energy Partners. Please proceed with your question.

Hi can you hear me okay.

Hey, John.

Just one question I'm curious if you're starting to see.

John Daniel: I'm curious if you're starting to see any signs of distressed opportunities from a consolidation perspective, particularly in places like Hainesville? Yeah, this is John. Yeah, John. Yeah. And I would say the acquisitions and the opportunities have ingredients in them, of in various ways. But, you know, the, The downturn or the activity, traction that we're seeing right now has definitely had a positive effect on those conversations as we go forward, but we'd also tell you that a lot of these assets that you're watching us do, they really fit into our system extremely well, and their value is either getting diluted by these systems, or their value could be enhanced, but they got to be part of the system, and that's driving these conversations as well, John.

Any signs of distressed opportunities from our core.

Consolidation perspective, particularly in places like the Haynesville.

Yeah. This is John John.

I would say there is the the.

<unk> and the opportunities.

Ingredients in them.

In various ways, but.

The downturn or the activity.

Traction that we're seeing right now is definitely had a.

A positive effect on those conversations.

As we go forward, but we would also tell you that a lot of these assets that you are watching us do they really fit into our system extremely well and they or.

Their value is either getting diluted by these systems or their value is could be enhanced but they've got to be part of the system and thats driving these conversations as well John.

John D. Schmitz: Okay, that's all I had. Thank you for including me. All right. There are no further questions. At this time, I'd like to hand the call back to John Schmitz for closing. Yeah, thanks to everyone for joining the call and for your interest in learning more about Select Water Solutions. I look forward to speaking with you again next quarter, and have a wonderful day.

Okay.

It's all I had thank you for including me.

Hey, Brett.

Okay.

There are no further questions at this time I'd like to hand, the call back to Josh Smith for closing remarks.

Yes, thanks to everyone for joining the call and your interest in learning more about select water solutions.

I look forward to speaking with you again next quarter.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.