Q3 2024 Select Water Solutions Inc Earnings Call
Ladies and gentlemen, good morning and welcome to the select potter solutions, third water 2020 4 earnings consensus call.
Speaker Change: 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 or pre-desistance during the conference, please press star and zero on your telephone keypad.
As a reminder, this conference is being recorded.
Speaker Change: It is now my pleasure to introduce your host, Garrett Williams, Vice President, Corporate Finance and Investor Relations Please go ahead sir
Garrett Williams: Thank you, operator. And good morning, everyone. We appreciate you joining us for Select Law Solutions Conference Call and webcast for a VR financial and operational result for the third quarter of 2024.
Garrett Williams: When we today are John Schmitz, our founder, Chairman, President and Chief Executive Officer, Michael Skarky, Executive Vice President and Chief Operating Officer, and Chris George, Executive Vice President and Chief Financial Officer.
Thank you. Thank you. Thank you.
Speaker Change: Before I turn the call over to John, I have a few housekeeping items to cover.
Speaker Change: A replay of today's call will be available by webcast and accessible from our website at selectwater.com.
Speaker Change: There will also be a recorded telephonic replay available until November 20, 2024. The access information for this replay was also included in yesterday's earnings release.
Please note that the information reported on this call speaks only as of today, November 6, 2024, and therefore, time sensitive information may no longer be accurate as of the time of the replayed listening or transcript reading.
Speaker Change: 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.
Speaker Change: These forward-looking statements reflect the current views of SLOAC's management. However, various risks, uncertainties, and contingencies could cause actual results, performance, or achievements to differ materially from those expressed in the statements made by management.
Speaker Change: 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 yesterday for reconciliations of non-GAAP financial measures. Now, I would like to turn the call over to John.
John: Thanks, Garrett. Good morning and thank you for joining us.
John: I am pleased to be discussing Select Water Solutions again with you today. During the third quarter, Select delivered another quarter of continued margin improvement and profitability gains while generating solid free cash flow.
John: On a consolidated basis, we were able to grow revenues, improve gross margins,
John: and increased net income compared to the second quarter. Despite activity pullbacks in the broader macro environment, as revenue and margin outperformance in our water infrastructure segment continued to fuel our unique growth story.
Thank you for watching!
In addition to these operational gains, we were able to reduce SG&A during the third quarter, supporting net income growth of 26% compared to the second quarter.
At a segment level, we grew water infrastructure revenues by 20% and gross profit before DNA by 33% compared to the second quarter of 2024.
John: And on a year-over-year basis, the third quarter delivered 40% growth in revenue and 99% growth in gross profits before DNA compared to the third quarter of 2023.
John: We play a critical role in the market, and I am very pleased to see our continued execution resulting in another quarter of record high revenue and gross profit for the segment.
John: Underpinning our performance is a combination of improved operations, organic recycling, and disposal infrastructure projects, and highly strategic accretive acquisitions.
John: On the operational side, we continue to increase base utilization, driving increased margins, resulting in a 57% gross margins before DNA for our water infrastructure segment this quarter.
John: On the project front, we continue to add new organic business development WINS.
John: In the third quarter, we entered into multiple new long-term contracts.
John: adding an additional 25,000 acres under long-term dedication in the Permian Basin, an additional 57,000 acres under right of first refusal.
John: In addition to our Permian wins, we also executed two new pipeline connection agreements in the Bach and in the third quarter.
John: further exemplifying our industry leading footprint spanning all major lower 48 land basins.
John: Importantly, these new contracts build off of our current infrastructure, connecting new and existing assets, producing both scale and coverage that is not easily replicated.
John: Select remains the clear market leader in produced water recycling with the growing pipeline and disposal network supporting our full lifecycle solutions.
John: I look forward to getting these new facilities up and running by the first half of 2025 alongside our other active projects already under construction.
John: Late in the third quarter, we also completed a small disposal acquisition in the northern Delaware Basin, bolstering our capacity in our fastest growing operating area.
John: This facility adds approximately 10,000 barrels per day of disposal capacity in a strategic location with interconnectivity to our ongoing organic water infrastructure developments in the region.
John: Looking forward, our business development backlog has continued to increase in both size and certainty, and we will continue to negotiate a number of other near-term opportunities.
John: I am very confident that we will see additional long-term contracts get to the finish line throughout the rest of 2024 and into 2025.
John: All of these initiatives have combined to contribute
John: to the margin gains in excess of the guided range in consecutive quarters.
John: Chris will cover the financial items in more detail but on the heels of this strong margin outperformance and pull forward activity in our water infrastructure and service segments.
John: We remain confident in our ability to deliver on the headline goals we set out for 2024.
John: This includes record-setting annual adjusted EBITDA for the company and more than 50% of the company's profitability coming from the water infrastructure and chemical technologies.
John: Looking at the water services and chemical segments, while the activity outlook has become more challenging in recent months, there remain opportunities to reduce our maintenance capital.
John: gain market share and improve our operational efficiency. On the water services side, these efforts should support consolidated margin improvement over the coming quarters and steady free cash flow generations.
John: From the chemical technology segment, the entirety of the revenue impact in the third quarter resulted from decreased activity with our legacy pressure pumping customers.
John: We continue, however, to generate strong free cash flow out of this segment, and we have clear visibility in market share gains and revenue growth in the fourth quarter with our E&P customers, supported by our new product development and technology performance.
John: Thank you for watching!
John: Looking ahead to the fourth quarter overall, we do anticipate, however, that the seasonal activity slowdown in the fourth quarter will impact the water service segment, offset by revenue and margin recovery in our chemical technology segment.
John: Additionally, we will see the impact of certain asset-specific operational downtime that will impact our water transfer, sourcing, recycling, and pipeline business associated with certain ongoing capital projects in the Northern Delaware Basin.
John: Importantly, though,
John: We have been working
John: in close coordination and discussions with our customers to avoid any disruption to their development schedules. In fact, we were able to pull forward certain activity and revenues into the third quarter, which benefited the outperformance of the segment during the period.
John: That said, we will see a short-term downward financial impact from these ongoing construction projects and facility upgrades during the fourth quarter to both our water services and water infrastructure segments.
John: However...
John: We expect to see strong rebound in the first quarter, and further growth across the remainder of 2025 as the improved and expanded networks come online.
John: These projects will serve as the central artery for our northern Delaware operations.
Speaker Change: creating fully integrated water balancing capabilities across a sizable network connecting northern and southern New Mexico.
John: Following the completion of these latest projects,
John: Our Northern Delaware Network will soon encompass more than 1 million barrels per day of water recycling capacity and nearly 13 million barrels of produced water storage interconnected
John: by approximately 175 miles of large diameter pipeline interconnections.
John: In summary, our core focus is on continuing to grow and expand our production-based and long-term contracted revenue within our water infrastructure segment.
John: I believe all of our operational improvements, organic projects, and acquisitions year-to-date align with this strategy.
John: The headwinds outlined for the fourth quarter are temporary, and our ongoing capital projects and initiatives will provide additional...
John: opportunities beginning in the first quarter of 2025. Ultimately, our conviction around the growth trajectory of the company throughout the rest of 2025 remains high.
John: Our E&P customers continue to extract value through industry consolidation and operational efficiency, and we believe Select is well positioned to capitalize on the strategic and operating trend seen in the industry.
John: We believe there will be growing demand for creative and increasingly complex full life-cycle solutions.
John: This requires high-quality partners with the size, scope, and networks to serve the largest operators and consolidators in these efforts, supporting continued growth opportunities for Select.
John: I am very pleased with our team's ability to deliver increasing consolidated operating margins during a period of reduced activity and challenging industry trends.
John: We are well positioned to continue to generate free cash flow and a strong return on assets while returning capital to the shareholders and investing in and growing the business.
Speaker Change: I'll now hand it over to Chris to review our third quarter financial results and remaining 2024 outlook in a bit more detail. Chris?
Chris George: Thank you, John, and good morning, everyone. During the third quarter, we achieved growth in our overall profitability, generating solid free cash flow, and continued to execute on our strategic objectives in our water infrastructure segment.
John: Accordingly, our water infrastructure segment continued its steady growth trajectory, once again achieving record high quarterly revenue and gross profit results during the third quarter.
John: While commodity prices and industry activity have presented challenges to our water services and chemical technology segments, our consolidated company remains very well positioned to achieve the milestones we set out at the beginning of the year.
John: For example, we remain on track towards achieving record adjusted EBITDA and adjusted EBITDA margins while handling record volumes in our growing water infrastructure business.
John: We also continue to build a more infrastructure-based, production-levered, full-life cycle water company that aligns our future profitability and cashflow generation with critical secular growth drivers unique to our business.
John: Even though the North American Lower 48 Activity Landscape may experience muted growth in the near term, we expect our unique business model and successful water infrastructure investments to deliver outsized growth throughout 2025.
John: Our water infrastructure segment continues to benefit from the increased utilization of existing assets, the integration and networking of strategic acquisitions, as well as the overall secular industry trends, which require increased recycling, highly automated water networks, and increasingly high volume and complex well completion.
John: Combination of stable disposal volumes.
John: growing solids waste management volumes, and significantly increased recycling volumes.
John: Partially driven by the pull-forward of activity John referenced earlier, generated an above-expectations revenue growth of 20% to $82 million during the third quarter.
John: Gross profit for the third quarter, which we customarily provide in terms of prior to depreciation, amortization, and accretion, improved to $47 million for water infrastructure.
John: This represents an increase of 33% compared to Q2, and a tremendous 99% growth rate from where we were in the third quarter of 2023.
John: On a relative basis, gross margin before DNA increased to 57% during Q3, an increase of 6 percentage points compared to Q2.
John: and a 17 percentage point increase from the third quarter of 2023.
John: We are proud of the margin outperformance we have been able to deliver year-to-date, and despite the lower activity expected in the fourth quarter and temporary downtime as we transition certain assets, we still expect to deliver another strong margin quarter in excess of 50%.
John: Looking at the fourth quarter, we expect to see water infrastructure revenue decline 10 to 15 percent sequentially.
John: Well, there is some seasonal impact expected to this segment.
John: Our disposal and solids revenues and volumes should stay steady, and the majority of this revenue decline is attributable to the planned operational downtime at two of our five highest revenue dollar facilities from 2024 year-to-date, and we expect to reverse this in the first quarter of 2025 as the new project initiatives are completed.
John: More specifically, we are planning downtime at one of our New Mexico recycling facilities as we transition this facility's operations into an integrated system that will be online in the first or second quarter of 2025.
John: Additionally, we will also be taking offline an existing large diameter freshwater distribution pipeline in the northern Delaware Basin to convert the asset into a treated produced water distribution line.
John: This pipeline will provide a crucial trunkline interconnection between our current northern and southern recycling systems across New Mexico.
John: This larger and more interconnected system will provide significant operational and capital efficiency for Select, while supporting key customers to further transition towards recycling and reuse solutions.
John: Overall, this significantly enhances the unique nature and long-term economic potential of our northern Delaware Basin infrastructure footprint.
John: Even with the short-term operational disruption, we expect margins to stay strong at 51 to 54 percent in the fourth quarter.
John: Looking at the full year, we expect full year recycling and disposal volumes to grow more than 30% on a combined year-over-year basis.
John: representing tremendous progress for the business even with the fourth quarter limitations.
John: Looking a bit further out, we continue to believe that with a very strong project and deal backlog,
John: underpinned by more repeatable, predictable, high-margin and long-term contracted profit streams.
John: We expect strong margins to continue and anticipate this segment will see a nice step up in activity in Q1 2025 to levels comparable to Q3 2024 or better with upward trajectory from there.
John: Switching to the water services segment.
John: We exceeded our third quarter revenue expectations and were able to outperform activity levels as well, growing revenues by about 2% against a modest decline in overall completions activity.
John: Revenue gains during the quarter were driven in part by strong net gains in our Permian water transfer operations.
John: though we did see margins come down modestly.
John: Looking to the fourth quarter for water services, we will see the impact of seasonality and consolidation initiatives along with certain asset specific activity reductions in our water transfer and sourcing businesses associated with the capital project build-out in the northern Delaware Basin.
John: We anticipate revenue to decline by 10 to 15 percent with margins before DNA expected to hold steady at the 20 to 21 percent range.
John: We continue to believe we can push margins further into the mid-20s looking forward into 2025.
John: On the chemical technology side, activity impacted demand levels during the quarter.
John: especially with our pressure pumping customers which drove the sequential revenue decline.
John: Accordingly, the decreased volumes in the quarter resulted in a lower absorption rate through our manufacturing plants, delivering lower gross margins of 12.4%.
John: However, in the fourth quarter, we anticipate revenue and margins to increase sequentially driven by new product development and customer wins, particularly with our E&P customers that are focused on more complex reuse water solutions.
John: Increased manufacturing throughput in the fourth quarter should support margin improvement as well. We anticipate revenue to increase by mid-single-digit percentages, with margins improving to the 14 to 16 percent range in the fourth quarter.
John: Looking at other cost reduction efforts, SG&A during the third quarter decreased by more than 4% or 1.7 million dollars relative to the second quarter.
John: While the transaction-related costs have slowed compared to the first half of the year, we will continue to incur a small balance of transaction and integration-related costs during the fourth quarter, similar to Q3.
John: Thank you.
John: In the fourth quarter, we expect SG&A to continue to trend near 10% of revenue overall.
John: Thank you.
John: Altogether, for the third quarter of 2024, we generated a net income of $19 million and adjusted EBITDA of $73 million, an increase of $3.1 million relative to the second quarter.
John: For the fourth quarter we expect consolidated adjusted EBITDA between 60 to 62 million dollars as seasonal fourth quarter impacts to our water services segment.
John: combined with the planned operational downtime in water infrastructure.
John: are partially offset by revenue and profitability recovery in our chemical technology sector.
John: Driven by the substantial growth in our water infrastructure segment over the course of 2024, our water infrastructure and chemical technology segments combined for more than 53 percent of consolidated gross profit during the third quarter is targeted.
John: And more importantly, having already reached approximately 46% of our overall profitability during Q3-24, water infrastructure is on a great path for continued growth well into next year.
John: Looking at the balance sheet, we ended the third quarter with $80 million of outstanding borrowings, a $10 million reduction from the prior quarter.
John: Our working capital management remains strong, with our total working capital at the end of the third quarter representing approximately 12% of our revenue.
John: We increased our liquidity in the third quarter and continue to have a very conservative balance sheet overall.
John: We will remain disciplined in our use of leverage, but with the growing contribution of our higher-margin, production-levered and contracted revenue streams and solid cash flow outlook.
John: We have increased balance sheet and capital return optionality and will continue to monitor what makes the most sense for our company and shareholders as our unique opportunities continue apace.
John: Well, we have lessened the focus on share repurchases this year as we continue to contract accretive infrastructure investment opportunities. We remain committed to returning capital to shareholders overall.
John: This is demonstrated with the recent announcement of a 17% increase to our quarterly dividend payment to $0.07 per share.
John: On an annual basis, our dividend and distributions paid should total approximately $30 million for total capital return to shareholders of about $40 million during 2024.
John: and we plan to continue to evaluate our dividend on an annual basis at a minimum alongside our growth outlook and other capital allocation priorities.
John: Quarterly depreciation, amortization, and accretion modestly increased to 40 million dollars in the third quarter attributable to additional capital deployment.
John: An interest expense was relatively flat in the quarter as we were able to reduce the balance outstanding on our sustainability linked lending facility attributable to excess free cash flow.
Speaker Change: Thank you for watching!
Speaker Change: Our income tax expense moved up modestly alongside our growing pre-tax income as well, maintaining an effective tax rate in the low 20% range.
Speaker Change: Net CapEx of $31 million in Q3 represented a step down from $46 million in Q2, but given the additional recent long-term contract wins that we mentioned earlier, we expect growth CapEx to increase in the fourth quarter.
Speaker Change: We continue to improve our maintenance capital efficiency, and even with the newly announced growth CapEx projects, we expect to come in on the low end of the previously guided net capital expenditure range of $170 to $190 million.
Speaker Change: Even with the increased Net Cap Ex Outlook in the fourth quarter we still expect to see free cash flow come in within range on the year though on the lower end of our target of pulling through 25 to 30 percent of our adjusted EBITDA into free cash flow.
Speaker Change: Importantly, I'd reiterate that the vast majority of our CapEx is going towards contracted and long-lived infrastructure projects.
Speaker Change: And if you were to look at a maintenance CapEx only view, we expect to generate a more than 80% free cash flow yield on our adjusted EBITDA before growth CapEx.
Speaker Change: Our capitolite operating model provides us with tremendous optionality to fund not only our growth opportunities, but future shareholder returns as well.
Speaker Change: Thank you for watching!
Speaker Change: Looking into 2025, we are poised to continue growing our water infrastructure sector through strategic investment that is supported by the steady, high cash conversion out of our water services and chemical technology segments.
Speaker Change: as well as the highly accreted water infrastructure projects we expect to bring online during the year.
Speaker Change: I'd like to wrap up by once again thanking all of our employees for their hard work and continued support.
Speaker Change: And with that, I'd like to open it up to questions.
Speaker Change: operator
Speaker Change: Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Speaker Change: You may press star and 2 if you'd like to remove your question from the queue.
Speaker Change: Ladies and gentlemen, we will wait for a moment while we poll for questions.
Speaker Change: The first question comes from the line of Jim Rolison from Raymond James. Please go ahead.
Jim Rolison: Hey good morning gents and congrats on a outstanding performance in water infrastructure.
Jim Rolison: John, you set out with this 50% margin goal in that segment quite a while back for 2025, obviously have hit it, have exceeded it this year.
Speaker Change: Kind of curious as you look, you know, you've talked about just the margin and profile of these long-term contracted projects
Speaker Change: embedded in what's your CapEx decisions and pricing and all that. Just kind of curious as you look forward over the next year or two, from this 56, 57% kind of margin range, like where do we go from here? Cause it seems like.
Speaker Change: You're not even with the pull back and forth you you're still looking at healthy margins I'm kind of curious how you see the margin trajectory over the next handful of quarters
Speaker Change: Yeah, Jim, thanks for the nice remarks.
Speaker Change: Yeah, the infrastructure piece and the investment thesis...
Speaker Change: And what we start off with is completely still intact. And when you think about the margin base of...
Speaker Change: of
Speaker Change: Our goal was 50, and we just printed a 57.
Speaker Change: We continue to see really good movement in being added assets to this whole opportunity to water balance. And some of those assets and some of those movements produce...
Speaker Change: that are greater than, you know, other water balancing margins as you either, you know, recycle a barrel and deliver it for a frac job or you.
Speaker Change: turn that barrel into storage or you, you know, send that barrel to a disposal.
Speaker Change: It's just different margin profiles, but within that 50% to 60% is where we're thinking this long-term infrastructure business works, and some of it works at the higher end.
Speaker Change: It's really kind of a combination of factors. The asset base we have in place today still has...
Speaker Change: you know, utilization, you know.
Speaker Change: potential to increase over time and every incremental barrel.
Speaker Change: we can pull through that existing platform, you know, can come through at a high incremental margin profile. We've been able to integrate assets, you know, I think efficiently as well, probably more efficiently than we were, you know, expecting from kind of a timeline standpoint. And then the underwriting we continue to execute on from a new contract perspective continues to be.
Speaker Change: additive to the segment overall. So, you know, I think that we still generate obviously a very attractive return, you know, anywhere in that 50 to 60% kind of range John spoke to, but we definitely feel, you know, good about where we're at now and.
Speaker Change: think that we can maintain or find opportunities to continue to improve those levels over the next year or two.
Speaker Change: You know ignoring the noise in the fourth quarter with some of the transition things that are going on
Speaker Change: If you look at 3Q as kind of a base for water infrastructure, and then you layer on the contracts you've announced over the last couple of quarters, and obviously you continue to add to, but just taking the ones you know that you have in hand right now,
Speaker Change: How does that kind of flex up your revenue run rate in that business? Like, by the time we get to, you know, late next year when all these projects are actually online and running, where do you think that revenue run rate is at that point before you add more contracts to it, I'm sure?
Speaker Change: yeah maybe the way I'd speak to it Jim is
Speaker Change: really looking at the capital investment opportunities as kind of a base driver of that growth. You know, we do obviously have utilization uplift that we can execute on organically without, you know.
Speaker Change: a lot of material capital investment, but you know the 150 million or so of growth capital that we've got, you know slated to go into that
Speaker Change: segment over you know over the course of the year and in the early part of next year is obviously going to be driving a you know a key opportunity for for that both revenue and more importantly profitability growth.
Speaker Change: and that return framework that we're putting into place around that, you know, capital dollars is, you know, consistent with what we've, you know, spoken to before around that three to four year cash on cash with opportunities to continue to improve that.
Speaker Change: you know that with commercialization and incremental utilization uplift. So thinking about it as a you know
Speaker Change: is a return framework similar to that alongside, you know, a mid to, you know, high 50s, you know, margin profile kind of gives you the guardrails to kind of look at the outlook in next year and I think there's ways we continue to add on to that.
Speaker Change: Pretty significant growth. Thanks for the color.
Speaker Change: Thanks, John.
Speaker Change: Thank you. The next question comes from the line of Bobby Brooks from Northland Capital Markets. Please go ahead.
Bobby Brooks: Thank you.
Bobby Brooks: Hey, good morning guys. Thank you for taking my question.
Bobby Brooks: First thing I wanted to, I just wanted to get a sense of how much of an impact of fourth quarter EBITDA are those two facilities in the Delaware being taken offline? Is that pretty, is that, I know you kind of spoke about a little bit more in the prepared remarks, but can you think about that $10 million step down?
Bobby Brooks: That's a pencil step down from the third quarter, all stemming from that, or how much maybe is just kind of the seasonal slowdown.
Speaker Change: Yeah.
Speaker Change: It's really kind of broken down into the segment components, Bobby, but on the infrastructure side, the majority of that
Speaker Change: decline is going to come from those kind of asset-specific
Speaker Change: you know, downtime issues. So that's going to be, you know, over half of that revenue decline in the, you know, in the fourth quarter coming from those specific assets.
Speaker Change: You'll see some seasonal impact to that segment but it's obviously got more stability to it overall and we fully expect our disposal and solids management volumes to remain steady.
Speaker Change: to the third quarter in Q4. So it's really coming from those, you know, those asset areas. The services side of the business is gonna have more, you know, specific seasonal impact to it. You will see some kind of affiliated impact to that segment from, you know, particularly our last mile logistics and water transfer business.
Speaker Change: in the Permian Basin that we have that supports those infrastructure assets.
Speaker Change: But you are going to have more seasonal impact directly to that segment. Obviously, chemicals is a counterbalance to that with some recovery expected in Q4. But I'd certainly, you know...
Speaker Change: I think it's fair to say that given the high margin profile of that infrastructure segment and those discrete impacts, you know, over half of that kind of decline is coming out of that specific kind of downtime issue.
Speaker Change: Okay, got it. Thank you for that help. And then I know you guys mentioned some new product wins and chemical technologies with EMP customers. I just, could you just discuss where, where those are occurring and why those wins occurred and do you think that's something repeatable going forward?
Speaker Change: Sure, Bobby, this is Michael.
Speaker Change: So we had some challenges this past quarter with the pressure pumper and kind of some softness there as John alluded to
Speaker Change: We've really focused our team in targeting more of the EMP operators directly.
Speaker Change: And we think we're taking market share through our products and through that direct conversation with the operators. And that part of the business has just been a little more resilient.
Speaker Change: in terms of where it's coming from. It's not one region, it's really across our footprint. But as you would expect, a majority of the wins are coming in the farming. That's where we're seeing the most strength in the business right now.
Speaker Change: Okay, got it. And then, I was just curious, so the pulled forward activity, water infrastructure,
Speaker Change: I would have assumed that that would be kind of a continuing benefit going forward given that that's more focused on
Speaker Change: production activities, but then in the prepared remarks you guys mentioned and in the press release you mentioned.
Speaker Change: of activity reduction in the fourth quarter for the expected activity reduction in 4Q4 water infrastructure is partially driven by that pull forward work.
Speaker Change: So just given that, am I right to think that that pull forward and demand that happened in 3Q was maybe more associated with completion works by EMP or am I off base? I'm just trying to understand that.
Speaker Change: Yeah, no, it's a good question, Bobby, and you're right. The pull forward was weighted to the completions side of that, particularly associated with the...
Speaker Change: The pipeline that we're converting, that was historically a fresh water distribution pipeline, you know, selling...
Speaker Change: Selling volumes into the completions activity, and that's been a great asset for us for many number of years, but we've got a great opportunity to convert that into a production distribution line for treated water.
Speaker Change: You know that activity that we pulled forward was managing kind of development schedules in conversation with our customers to make sure we're not impacting
Speaker Change: you know activity or development planning for that asset and then the other asset is is a recycling facility where you know we had activity on the reuse and delivery side coming out of that facility that was you know it was also managing you know on the completion space.
Speaker Change: so that that is the, you know...
Speaker Change: The primary impact there, but it also provides, you know, kind of the flexibility for us to, you know, to ensure we continue to support the customer but
Speaker Change: also gives us the chance to, you know, get the assets fully upgraded and integrated into the network more broadly, you know, without disrupting the customer's near-term profiles.
Speaker Change: Got it. And just to piggyback on that, and that's one for me, is just what are the expected outcomes for the New Mexico Recycling Plant transition to an integrated system?
Speaker Change: Just maybe some more clarity on what an integrated system means here. Does that mean connecting it to your larger network of infrastructure, or maybe it's adding new capacities to the facility itself to handle more of a complex workload? Just any color on that.
Speaker Change: No, it's really around connecting everything and increasing the utilization on all facilities because you can move water from different parts of the region. So as we think about it, stay-alone facilities are beholden upon the completion activity in their immediate vicinity.
Speaker Change: When you start having them interconnected, you can move water from one area to the next and really help you balance the long and shorts.
Speaker Change: And so we're very focused on building systems, connecting systems, and making networks so that we can increase utilization and really maximize recycling and minimize disposal.
Speaker Change: Yeah, and that interconnection provides
Speaker Change: You know that geographic reach but it also provides in you know enhanced ability to provide that synthetic disposal through that you know footprint
Speaker Change: for that barrel coming in on a production base.
Speaker Change: But having more, you know, geographic reach and footprint allows you to have more ability to meet completion demand on the other side of that system to really
Speaker Change: Manage that water balance more efficiently over a broader geographic footprint and more importantly for more customers in regards to the pipeline Obviously converting a system from a freshwater system produce water handling breeze new life into that asset and extends
Speaker Change: the long-term value of it. But this one was even more than that, because it really allows us to connect kind of the northern end of our New Mexico system to the southern end of our New Mexico system, which really allows us to move water north to south and south to north.
Speaker Change: That's terrific, Tyler. It makes a lot of sense. Thank you guys for taking the questions and hats off on the great quarter. Thank you, Bobby.
Speaker Change: and John Smith. Thank you.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Tom Curran from Seaport Research Partners, please go ahead.
Speaker Change: Thank you for watching!
Speaker Change: Tom, your line is unmuted from our end. If you can please unmute from your end and proceed with your question.
Tom Curran: Sorry about that, guys. Good morning. Morning, Tom.
Speaker Change: Crescent.
Speaker Change: for your 2025 Outlook.
Speaker Change: for Consolidated EBITDA to rebound to, you know, $73 million or higher as of 1Q and then ramp from there.
Speaker Change: What are you assuming for annual completions activity, in terms of the year-over-year change? You know, however you want to measure it, in terms of spending, crack activity, completion volumes. Just in that outlook, what are you assuming the year-over-year change is in the annual level of completions?
Speaker Change: From an overall industry kind of activity outlook, Tom, we're assuming a pretty, you know.
Speaker Change: you know into the first half of 2025 but on a full year-over-year basis expecting it to you know be pretty steady to you know slightly down
Tom Curran: Got it. And, you know, it's pretty clear to all of us just how much heavy lifting the continued expansion in the water infrastructure margin can deliver. But in that kind of environment, Chris, what are you expecting for the sequential progression in water services and completion technology margins over 2025?
Speaker Change: Yeah, it's a good question. You know, I think on the chemical side, you know, we've obviously seen a, you know, an impact here more recently from, you know, from the activity and in customer specific, you know.
Speaker Change: items we discussed, you know, as we continue to get some of those new product wins and enhance the manufacturing, you know, throughput of those plants.
Speaker Change: You were able to pull through, you know, some pretty clear uplift on that.
Speaker Change: manufacturing absorption base so you know we certainly think that
Speaker Change: getting that margin profile back up into the mid to high teens is a good near-term objective for that business as we continue to look to grow.
Speaker Change: and recover some of those you know those volumes that we think are you know available to us. On the services side you're going to maintain a you know a pretty high overall correlation to the activity environment.
Speaker Change: That said, you know, I think we're gonna be pretty focused on ensuring that we can continue to capture value out of our infrastructure footprint through, you know, utilizing that service base that we have, particularly our last mile logistics and, you know, containment.
Speaker Change: service lines, integrating those into our, you know, full lifecycle solutions and have a pretty high focus on integrating those into our contracted.
Speaker Change: footprint as well. So I think that there's upside to the overall activity environment to that services base.
Speaker Change: as we continue to build out this infrastructure footprint that you know is going to provide some idiosyncratic growth beyond the activity environment but it will still obviously maintain a you know a fairly good correlation to the completions environment overall.
Speaker Change: Thank you for watching!
Speaker Change: Got it. And then just finally, for EBITDA to pre-cash flow conversion, can you give us an idea of what you're expecting for both 4Q and then 1Q as you rebound?
Speaker Change: Looking forward into 2025.
Speaker Change: The, you know, the free cash flow outlook will be, you know, strongly dependent upon our ability to continue to add and execute additional, you know, contract opportunities that build on the backlog of growth, you know, particularly in water infrastructure. We think there's still a very good, you know, strong backlog of opportunities there that continues to.
Speaker Change: to grow and the conversations continue to resonate with the customer base. So I think that you should probably expect to see a pretty similar pace of growth capital investment in 2025 that you see in 2024.
Speaker Change: and so that will obviously be a...
Speaker Change: You know a key driver of where our free cash flow outlook comes out for the year next year But as we said earlier if you you know look at the business on a maintenance only standpoint You know we're talking about you know a pull through of 80 plus percent You know cash flow generation before that growth capital, so you know we expect to maintain that 80 plus percent out of the base business
Speaker Change: and we'll be focused on how we allocate the capital from there for both new growth opportunities organically, continued opportunities to add bolt-on inorganic assets to the footprint, and then obviously continue to look at shareholder returns out of that cash flow base.
Speaker Change: Got it, thanks for revisiting that. Nice to see the ongoing rewriting of the SOC. It's well justified and overdue. Thanks for taking my questions.
Speaker Change: Thanks, Tom.
Speaker Change: The next question comes from the line of Don Christ from Johnson Rice. Please go ahead.
Don Christ: Morning, guys. How are y'all?
Don Christ: Hey, good job.
Don Christ: So I wanted to follow up on the Northern Delaware expansion and I'll ask this way two different ways and you can answer it how you want but
Don Christ: Do you have like a utilization?
Don Christ: percentage once you complete the expansion? Or asked another way, do you have several years worth of potential water growth on that system before you have to spend any additional capital? Just trying to drive at how much additional flexibility you'll have for for years to come, potentially.
Michael Skarky: Yeah, this is Michael. I'll answer it in a bit of a roundabout way. I'd start by just saying that the intensity and efficiency that the industry is seeing...
Speaker Change: is really a benefit to us on the infrastructure side. So that every barrel that you're using, the increase in rate, the increase in volume from modern completions, we're generating revenue on a per barrel basis, and so it's just all upside to us.
Speaker Change: So, we're really excited about the trends we're seeing in the northern Delaware. And in terms of our system, I mean, we're basically adding to it each quarter, but we're not adding to it because the system's constrained, we're adding to it from an expansion standpoint and the needs for our services.
Speaker Change: are just becoming more and more apparent as we grow and invest in that system.
Speaker Change: And so I expect that to continue, as Chris alluded to, with what we think we can do next year in terms of spending a similar amount of capital.
Speaker Change: In terms of the specific utilization on the system, we still have capacity on this system. We're redeploying assets this quarter to make sure that we're preserving capacity and gonna remain in front of the demand that we're seeing from our customers.
Speaker Change: in the basin in general. And so we think we have a lot of room to run with what we have in place today.
Speaker Change: The pipe that we're putting in is oversized, and so it's all large diameter pipe that will support multiple customers.
Speaker Change: So while we do have a model that we build around an anchor tenant, we reserve ample capacity for other operators to jump in and support the longs and shorts when we're balancing out the water.
Speaker Change: So all things kind of sum up here. We're really excited about the position. We think it's a market-leading position. We've invested heavily. We're going to continue to invest heavily, and we think we have a lot of room to run before we'll have to, you know, upgrade or make any sort of maintenance to continue to keep up with the market.
Speaker Change: I appreciate all the color. Everything else has been asked. I'll turn it back.
Speaker Change: Thank you, Don.
Speaker Change: The next question comes from the line of Jeff Robertson from Watertower Research. Please go ahead.
Jeff Robertson: Thanks, good morning. Michael, a couple of questions on the new contracts in the northern Delaware. I think you have a 10-year and a 20-year contract you talked about in the press release. Are you seeing operators
Jeff Robertson: Are you more inclined to do long-term agreements with SELECT because of your water balancing capability?
Speaker Change: Because of our water balancing capability and the assets we have on the ground, we're able to provide
Speaker Change: certainty that we can handle their water needs for, you know, 10 plus years.
Speaker Change: and they're happy to lock in that space on our system and the rates today plus annual inflation for that duration as well. So we've been very pleased in our ability to...
Speaker Change: get that contractual support as we make these investments and build up the system.
Speaker Change: and maybe to kind of...
Speaker Change: put some anecdotal, you know, data points around it. If you if you think about one of our more recent recycling facilities we put in place in the the Delaware Basin.
Speaker Change: You know, thinking about that anchor tenant and the water balancing application that we can bring to bear with additional third parties. You know, one of those assets, we've seen about 75% of the volumes come into the facility on a produced water basis for...
Speaker Change: of Synthetic Disposal come from that anchor tenant, but the inverse on the treated barrels on the outflow being redeployed into new activity, you've seen about 60% of that demand for the treated barrels coming out of the facility go to other third parties.
Speaker Change: on a new, commercialized basis.
Speaker Change: so that that ability to really
Speaker Change: you know, broadly add to that, you know, not only inflow of volumes with third parties, but more importantly, to create that demand for the outflow of a treated barrel.
Speaker Change: and really get that water balancing managed efficiently across, you know.
Speaker Change: not only one, but two, three, four, five operators really creates an efficiency out of that asset base that not only creates value to the customer, but improves our margin profile and gives us more visibility and flexibility into managing the budget.
Speaker Change: produce apparel. And that example is not unique, I mean that's something we see across our facilities and it really speaks to the importance of the interconnections that we have.
Speaker Change: The relationships we have and the ability we have to water balance and make sure we're matching longs and shorts across the region and not across a single operator or two operators.
Speaker Change: In simple terms, is it...
Speaker Change: It's fair to think that you're basically taking high margin cash flow from water infrastructure and reinvesting or compounding it into
Speaker Change: investments that increase utilization which generate it sounds like even higher margin cash flow so the margin protection or the margin upside is is pretty permanent
Speaker Change: Some of it's investing in increased utilization, Jeff, but some of it's obviously also going into pure expansion and growth.
Speaker Change: so you know we can certainly use that you know asset base that we have in place continue to kind of tie in and brownfield invest around that to not only increase you know existing asset utilization but you know more importantly we can continue to expand the breadth reach and
Speaker Change: and I think stability of an asset over a broader geographic footprint and a longer duration period of time. And backing out from just infrastructure, we also have a services business and a chemical business that are throwing off free cash flow and we're able to take that and invest in infrastructure as well, which is great.
Speaker Change: is part of the reason we've been able to spend as much capex and secure the contracts we have while maintaining a very low leverage position.
Speaker Change: and you know if you think about how we continue to build out the footprint it's through these long-term contracts you know no different than our customers you know think of it what we're really doing is also adding inventory to the you know to the business over time
Speaker Change: So through these acreage dedications and right of first refusal agreements, we're adding, you know, hundreds of thousands of acres of dedication, which adds long term inventory to the asset base, you know, over, you know,
Speaker Change: you know 10 plus years here forward. So it's continuing to add you know not only you know near-term you know momentum and utilization and margin, but it's adding to the time's return and the longevity profile of the business over time.
Speaker Change: I guess, Chris, that longevity profile of earnings growth and your earnings and cash flow generation capacity of the company is really what underpins an attractive shareholder return program.
Chris George: Yeah, I mean, the more we can continue to build out this, you know, this capability and contracted revenue base, adding, you know, more production levered revenues, you know, over time, which you've continued to see.
Speaker Change: It's going to give us, I think, a lot more flexibility around how to manage the capital structure of the business and look at shareholder returns over time as well.
Speaker Change: Lastly, since the election was yesterday and the results early this morning, do you see any regulatory areas that could be altered or changed in a new administration that would have a major impact on Select's business?
Speaker Change: Yeah, this is John.
Speaker Change: And so it brings values to their acreage. It brings value to their longer-term views and intensity. For us as, you know, the businesses selects in, our
Speaker Change: Our position on regulatory is, you know, we really deal with states and, you know, various...
Speaker Change: localized. Some federal, but you know most regulatory application in our space is positive.
Speaker Change: at the moment of trying to figure out water balancing, beneficial reuse, and what we can do with a waste stream.
Speaker Change: you know, to a usable stream, so.
Speaker Change: Yeah, I think the general trends around, you know, the regulatory environment are around trying to find solutions around managing, you know, the produced water waste stream and the industry overall. So that state, local, and regional level of oversight is really where we spend most of our time. You know, we obviously, you know, understand and...
Speaker Change: and stay close to the potential impacts of the you know the federal regulatory environment but I think that's more to John's point of a customer direct impact and we focus more on that you know localized level where water is really a tangible tactical resource that impacts the communities that we operate in and that's how we think about it.
Speaker Change: You know, we wouldn't.
Speaker Change: Yeah, we should point out, you know, a big portion of our revenue does come from the Permian Basin, about half, and, you know, the Permian Basin...
Speaker Change: does have some effects from all the water injection.
Speaker Change: Thank you, John.
John Schmitz: Thanks, Jeff.
Speaker Change: Thank you. Ladies and gentlemen, this concludes our question and answer session. I will now hand the conference over to John Schmitz for his closing comments.
John Schmitz: Thank you to everyone that joined our earnings call today and for your continued support and interest in learning more about Select Water Solutions. I look forward to speaking with you again next quarter.
Speaker Change: Thank you.
Speaker Change: Thank you. The conference of Select Water Solutions has now concluded. Thank you for your participation. You may now disconnect your lines.
Speaker Change: All these things are based on influence of other people. All these things are based on influence of other people.