Q1 2025 Select Water Solutions Inc Earnings Call

Speaker Change: Greetings and welcome to the Select Water Solutions 2025 Burst Quarter Earnings Conference

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

Speaker Change: It is now my pleasure to introduce your host, Garrett Williams, Vice President of Corporate Finance and Investor Relations. Thank you, sir. You may begin.

Garrett Williams: Thank you, operator. Good morning, everyone. We appreciate you joining us for Select at the Water Solutions Conference call on the webcast for the AR Financial and operation results for the first quarter of 2025.

Speaker Change: With me today, our John Schmitz, our founder, chairman, president and chief executive officer, Chris George, executive vice president and chief financial officer, Michael Skarke, executive vice president and chief operating officer, and Mike Lyons, executive vice president and chief strategy and technology officer.

Speaker Change: Before I turn the call over, John , I have a fuse house keeping items to cover. 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 teleponic replay available until May 21st, 2025. The access information for this replay was also included in yesterday's current release.

Speaker Change: Please note that the information reported on this call specifically only as of today may 7, 2025 and therefore time-sensitive information may no longer be accurate as of the time of the replay listening or transcript reading.

Speaker Change: In addition, the comments made by Management Bearing 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 view of select management. However, various risks and certain needs and continuities could call their actual results, performance or achievements to differ materially from those expressed in the statements made by management.

Speaker Change: The listeners encouraged to read our annual report on form 10K, or current reports on form 8K, as well as our quarterly reports on form 10Q to understand those risks, uncertainties and contingencies.

Speaker Change: Please refer to our earnings announcement released yesterday for reconcilations 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. I am pleased to be discussing select water solutions again with you today.

John: The first quarter of 2025 was a strong start to the year for Select.

John: I'd like to start with some of the key first quarter highlights and overview of the several large contracts we recently secured and other strategic and market updates.

John: Then I'll hand it over to Chris to discuss the first quarter results and four outlook in more detail.

Chris: In the first quarter, we increased revenue by 7% outpacing the general macro environment, increased adjusted EBITDA by 14% and improved consolidated gross margins by 1% each point.

Chris: We achieve strong revenue growth of 21% in chemical technologies and 8% in water services while maintaining a strong 54% gross margins in water infrastructure.

Chris: In addition to these operational gains, we reduced consolidated SGNA by 6% and grew that income by 12 million.

Chris: Water infrastructure saw an increase in both recycling and disposal volumes in the first quarter. A trend we anticipate will continue into the second quarter.

Chris: While revenue was modestly down sequentially, this was consistent with our expectation and was driven entirely by reduced revenues from our legacy freshwater pipeline assets.

Chris: This includes a 40 mile fresh water pipeline in the northern Delaware that was taken offline in order to convert the asset to transport produced water.

Chris: This pipeline has since been integrated into our expanding Northern Delaware Network and will provide tremendous operational and strategic benefits as the primary North South trunk line for this system.

Since the start of the year...

for Large Gathering, Recycling, Distribution, and Disposal Projects.

Chris: that significantly add to our contracted and dedicated acreage position and provide substantial long-term revenue potential.

Chris: These latest contract awards add to our industry leading recycling footprint and further advance the weighting of our profitability coming from contracted and full-life cycle and production with weighted revenues.

Chris: Specifically looking at the Northern Delaware Basin in New Mexico, we have quickly developed a leading water infrastructure network.

Chris: with the recent winds taking our total contracted footprint in the basin to more than 1 million acres under dedication or right of first refusal agreements in this basin alone. [inaudible]

Chris: with industry-leading ENP partners give us confidence that these infrastructure assets will be strong contributors to our earnings, not only in light 25, but well into the future years to come.

Chris: While macro pressure and potential activity dislocations caused by the recent tariff and global trade announcements have been major topics as of late,

Chris: We are well positioned with a diversified print across all major U.S. unconventional basins.

Chris: This includes a rapidly growing asset base in the Permian Basin, as well as market-leading positions in natural gas basins such as the Hainesville and the Marcellus Utica which we expect to demonstrate resilience this year.

Looking closer at the latest contract awards awards.

Chris: The largest of the new agreements is an 11 year contract supporting the largest single capital project in the history of this company.

Chris: encompassing water recycling, storage, disposal, and both gathering and distribution pipelines in the Northern Delaware Basin and Eddie County for existing key customers in the region.

Chris: This agreement adds more than 265,000 additional dedicated and right-of-first refusal acres supporting the customer's long-term development plans in the basin.

Chris: Importantly, this project builds off the value of our Existing Lee County Infrastructure Network and will add approximately 100 miles of incremental, large diameter pipelines to our existing network.

Chris: This build-out will provide a critical east-west expansion into Eddie County and will allow us to fully maximize our water balancing and full-life cycle of water capabilities across a much broader geographic footprint.

Furthermore,

Chris: We also capitalized on our existing right-of-first refusal agreements with this same customer exercising our rights to convert an additional 25,000 acres into long-term dedication supported by adding an incremental 14 miles of large diameter pipeline build-out.

Chris: Upon the completion of these recently awarded projects, we will have more than 1.3 million barrels per day of recycling through-put capacity in the Northern Delaware Basin, supported by long-term contracts with blue chip operators.

Chris: On a performance basis, New Mexico will now represent 54% of our total fixed recycling capacity, a significant achievement for us over the last two years.

Chris: Additionally, in the first quarter, we executed an agreement to expand our infrastructure on the Central Basin platform recycling project. We announced last quarter with a large public EMP Operator.

Chris: The previous announced Greenfield recycling facility and the Central Basin platform added a 124,000 acre dedication and is now being interconnected with

Chris: 22 miles of parallel produced water gathering and produced water distribution pipelines.

Chris: Finally, we are also highly encouraged by the long-term growth opportunities in our agricultural, industrial, and municipal water pursuits.

Chris: and have continued to progress our AV forms investments has planned with the additional senior water rights acquisition during the first quarter.

Chris: These opportunities should provide further stability and steady earnings to the select for decades to come once fully developed over the next two to three years.

Chris: Now looking at the rest of the business, our water services and chemical technology segments continue to pride. Strong source of free cash flow for us.

Chris: With these two segments continuing to generate strong conversion of 70% or greater of their growth profit to free cash flow, helping to fund our water infrastructure growth plans.

Chris: While we expect revenue to decrease sequentially for these two segments, we actually expect them to generate more free cash flow in the second quarter of 2025 relative to the first quarter due to the improved margins and reduced maintenance capital required during the quarter. [inaudible]

Chris: Looking forward, we do expect a lower commodity price and supply chain missile.

Chris: This location is resulting from the tariff and trade related uncertainty to impact the only gas industry overall.

Chris: However, we believe the direct impacts on Select will be limited in near term and we expect continued growth in our consolidated adjustity of 6-12% during the second quarter.

Chris: While we haven't seen a material impact to the overall activity levels yet, all prices at current levels could drive decreases in activity through the second half of the year. We are fully preparing for the potential impact.

Chris: to the more completions-oriented parts of our business largely within the services and chemicals.

Chris: However, we have built significant resilience into the business and recent years.

Chris: with our Strategic Focus on Water Infrastructure Growth, increasing full-life cycle and production-weighted revenues, the strength of our contract portfolio and uniqueness of our acreage in inventory we have underwritten.

Chris: Looking back over the last 24 months, we're very proud of the contract and asset base we have put together in a relatively short period of time, and this gives us strong confidence in our positioning as we look ahead.

Chris: At this point, I'll hand it over to Chris to speak to our financial results and an outlook in a bit more detail Chris

Chris: Thank you, John , and good morning, everyone. Select made great strides in the first quarter, which included strong revenue adjusted EBITDA and net income growth, very healthy water infrastructure, gross margins before DNAF 54 percent.

Chris: Significant new water infrastructure contract wins, including sizable additional accrued dedication to the Prairie and Basin.

Chris: Our first strategic partnership to support ultra long-term municipal industrial and agricultural water supply in Colorado.

Chris: The rollout of our new ERP system across the company and the closing of our new five-year sustainability linked credit facility, including $300 million of revolver commitment and $250 million

Chris: The additional capital and liquidity provided through our new credit facility provides a prudent source of financing to support our additional water infrastructure project wins and the initiation of our large scale senior water rights investment to Colorado.

Chris: Untaining a disciplined approach to the use of leverage has been a core tenant of Select over our history and has benefited us during times of cyclical stress in the market.

Chris: We firmly expect to maintain this discipline and with the continued free cash flow generation from our base businesses and our enhanced overall liquidity, we are well-positioned to fund our capital projects while maintaining a conservative leverage profile in a variety of market

Chris: Looking at our recent first quarter segment performance in more detail, as I mentioned earlier water infrastructure maintain a strong 54% gross margin before DNA during the period.

Chris: While our freshwater pipeline business declined approximately $8 million in revenue during the quarter, continued gains in our strategic recycling and disposal divisions limited the reduction for the overall segment to $4 million sequentially.

Chris: As John touched on earlier, a large driver of the impact was from our large diameter freshwater pipeline in New Mexico that we have now successfully converted into a produce water line tied into our expanded infrastructure network in the region.

. . . .

In addition, they're growing our recycling and disposal volumes sequentially [inaudible]

Chris: We also achieved a single facility record, 500,000 barrel per day peak recycling rate at one of our northern Delaware recycling facilities in Lee County during the first quarter.

Chris: This improved array helped us achieve a new monthly record during March for total barrels recycled at a single facility.

Chris: with several projects set to come online for our water infrastructure business during the second quarter.

Chris: We expect a revenue to increase double digit percentages in Q2, with margins remaining above 50%

Chris: While the overall macroeconomic outlook lays on the market overall, we still expect a continued growth trajectory for water infrastructure over the second half of the year, compared to the first half of the year.

Chris: On a full year-over-year basis, we believe we are currently still tracking within, albeit towards a 15% lower end of our previously-guided range for both revenue and gross profit growth for the segment in 2025.

Chris: as we contemplate the potential impacts on near-term activity levels from a lower commodity price environment.

Chris: Importantly, though, with our latest new contract awards, we are adding additional capital projects that should continue to provide a further level of growth for this segment in the 2026 and beyond.

Chris: A testament to our water infrastructure strategy overall and the strength of its future earnings potential.

Chris: Switching over to water services, this segment saw revenues increased by about 8% sequentially.

Chris: Driven primarily by improved activity levels coming out of the seasonal fourth quarter and strong gains in our water transfer business in the end of the season.

Chris: This was at the higher end of our expected revenue guidance and our gross margins before DNA and services increased to 19.5 percent during Q1, a meaningful improvement compared to 16.4 percent in the fourth quarter.

Chris: While we expect a 5% to 10% revenue decline in the second quarter for water services, as we see decreased traditional fresh water sourcing sales and legacy trucking revenues resulting from ongoing operational consolidation decisions [inaudible]

Chris: We expect these decisions to support a creative gains for the segment, driving gross margins to improve further into the 20 to 22% range in Q2.

Chris: On the chemical technology side, the segment sells strong sequential revenue growth of 21% during the first quarter

Chris: Well exceeding our guided expectations driven by continued new product development, key customer wins and ongoing market share gains.

Chris: During the second quarter, its variable activity levels modestly impact the business. We expect revenue to decrease mid-single-digit percentages, but expect to sustain relatively steady 14% to 16% gross margins during the second quarter.

[inaudible]

Chris: Looking back on a consolidated basis, and the first quarter, S-GNA decreased $37 million or just under 10% of revenue.

Chris: We expect SGNA to stay at 10 new 11% of revenue in the second quarter of 2025 . . .

Chris: Altogether, we saw a consolidated adjustment of $64 million during the first quarter of 2025, just above the high end of our guidance, largely resulting from the stronger than expected margin performance in our water infrastructure segment.

Chris: and outsize top-line performance from our water services and chemical technology segments.

Chris: The second quarter of 2025, we expect an uplift in consolidated adjusted EBITDA to $68 to $72 million, as strong sequential increases in the water infrastructure segment, more than offset anticipated declines in water services and chemical technologies.

Thank you.

Chris: While activity declines in the second half of the year may further impact the outlook for our more completions oriented water services and chemical technologies businesses after Q2.

Chris: We are confident in the continued growth prospects for a water infrastructure business and the additional resilience that our latest contract awards will bring.

Chris: With new projects slated to come online throughout the next 12 months, we expected to drive continued growth in the 2026 and beyond for the water infrastructure set.

Chris: Looking at our other costs for the first quarter, depreciation, amortization and accretion remained fairly steady in Q1 at approximately $40 million.

Chris: We expect DNA to remain in the low $40 million range per quarter, though modestly increasing from continued organic infrastructure investment and recent bolt-on acquisitions.

Chris: Interest expense increased sequentially in conjunction with incremental borrowings under our new sustainability link credit facility, and we expect it to remain at the $4 to $5 million range per quarter.

Chris: In the first quarter, we spent approximately $48 million of Catholics primarily in support of water infrastructure projects.

Chris: and is demonstrated by the announced project awards on today's call, we are seeing our large backlog materializing into actionable contracts.

Chris: Following the recent project wins, we now expect $2255 million of net capex in 2025 up from $170 million to $190 million.

Chris: We maintain our expectation of $50 million to $60 million of these CAPEX going towards ongoing maintenance and margin improvement initiatives.

Chris: Absent the sizeable growth capital outweighs, our business maintains a very maintenance-like capital model and we have significant free cash flow generating capabilities and flexibility to manage this maintenance spend in accordance with market conditions without impacting our overall operational performance.

Chris: While the additional growth capex will reduce our free cash flow expectations on the year, we believe these contracted capital projects are highly accretive investments that will greatly benefit select from many years to come.

Chris: Altogether, we are also adjusting our free cash flow expectation for the year, the 5% to 15% conversion rate relative to our adjusted even though. [inaudible]

Chris: During the first quarter, we also deployed $86 million towards various acquisition and investment opportunities.

Chris: We deployed $14 million to acquire multiple disposal assets in the Midland Basin and key pipeline assets in the Delaware Basin each strategically supporting our existing recycling and disposal networks.

Chris: Additionally, as mentioned on our last call, we completed the initial $62 million funding of our investment in AB Farms during the first quarter, supporting the consolidation of a large portfolio of land, water, and storage rights in Colorado.

Chris: We were pleased to further support the business with an incremental $10 million investment during the quarter to add additional senior water rights to the portfolio.

Chris: taking our total investment to date up to $72 million and thereby increasing our ownership to the partnership to 39%

Chris: Accordingly, our remaining future capital commitments for the partnership are now $74 million, which we expect to deploy over the next one the three years.

Chris: We are very excited about the long-term water supply opportunities in this region and the economic development and jobs growth that these rides can create.

Chris: We look forward to partnering with various agricultural, industrial and municipal partners in the region for the overall benefit of the Arkansas River Valley and the state of Colorado at large.

Chris: Another notable achievement for Select in the first quarter of 2025 was the successful implementation of our new ERP system across the four company.

Chris: Having previously rolled out the new system for our chemicals business more than a year ago, we're excited to do it now have the system integrated across all of our water related operations as well.

Chris: While we expect this system will allow us to yield more efficiencies over time, in the first quarter we did see the impact to operating cash flows from an

Chris: However, we fully expect these higher working capital levels to update in the coming quarters to more normalized levels releasing cash over the remainder of the year.

Chris: As we think about our overall capital allocation framework, we maintain our prioritization of adding long-term contracts, full-life cycle and production-weighted revenues, and generally finding ways we can deliver a long-term resiliency, a creative growth, and strong returns to our water solutions platform.

Chris: In summary, during the first quarter of 2025, we had a number of key milestones, advanced strategic initiatives, and improved our overall financial performance.

Chris: Perhaps more importantly, even as we face economic uncertainty in a period of potential activity volatility, we have positioned the company with strong liquidity, resilient earning streams, and growing contract coverage, spanning the best rock in the lower 48. [inaudible]

Chris: With that, I'll hand it over to the operator for any questions. Operator [inaudible]

Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line in the question queue. You may press star 2 if you would like to remove your question from the queue. Thank you.

Speaker Change: For participants using speaker equipment, it may be necessary to pick up your hands up before pressing the star keys.

Speaker Change: Once again, if you would like to ask a question, press star one on your telephone keypads. When moment please, while we pull for questions.

Speaker Change: Thank you. Our first question comes from a line of Bobby Brooks with Northling Capital. Please proceed with your question.

Bobby Brooks: Hey, good morning guys. Thank you for taking my question. First, I just wanted to touch on you guys mentioned how the water your water infrastructure footprint is really aligned with growth areas in the Permian and more specifically where there.

Bobby Brooks: There's very low break even. So just with that in mind, I'd assume you haven't seen much of an activity pullback in those areas. I just wanted to make sure I'm thinking about this right.

Bobby Brooks: Hey, Bobby, this is Michael Skarke, that's correct. We have not seen any pullback today. So it's not to say that we won't see it further based on what operators do, but

Bobby Brooks: We feel really good about the assets we've put in place, we feel really good about the contracts, we feel really good about the rock that we've underwritten to support this capital investments.

Speaker Change: Got it. And then just switching gears to the AV Farms Colorado Project, I think this is something I continue to feel like this is really fascinating development for you and expanding outside the traditional energy market.

Speaker Change: But just the question that I had with it is from the our side of the table, what is kind of the upcoming...

Speaker Change: Cadillus, or pieces that you need to accomplish before eventually seeing it become a rather new, generating opportunity.

Garrett Williams: Thanks, Bobby. Great question. So, at the moment, we're really engaging everybody in the region, all the relevant stakeholders. I think we're seeing demand actually be stronger than anticipated, and we have LOIs in place with several potential off-takers and customers.

Garrett Williams: and so I think really where we're focused is actively discussing with them getting terms in place.

Garrett Williams: and I think very much on track to meet the previously announced earnings potential of the asset.

Garrett Williams: I think we're pretty bullish on timing, but of course more details to come once we get those deals signed.

Garrett Williams: So there's more wood to chop here certainly but this is going to be a fantastic asset for us and for the local partners that we're engaging. I mean it creates a tremendous amount of economic growth and jobs locally and it really fits a much needed shortfall in the market overall so we're really excited and we're focused on getting these early contracts in place that will fundamentally underpin the asset for decades to come following that. [inaudible]

Speaker Change: Got it. That's super helpful, Colin. Just to make sure I'm understanding it correctly, it seems like then...

Speaker Change: You won't, stuff won't move forward in terms of construction and kind of connecting these assets and building them up until there's customer offtake agreements underpinning them. Is that the right kind of cadence of it?

Speaker Change: It's exactly in line with what we had outlined before. We're, again, super optimistic on the asset.

Speaker Change: Thank you. I appreciate it looking forward to hosting you guys in a couple of weeks here on the fireside chat our turn of the queue.

Speaker Change: Our next question comes from line of Tom Curran with Seaport Global. Please receive your question.

Good morning guys.

Alentom, Houston.

following up on A.B. Farmer's

Speaker Change: Could you speak to the roles that CNA companies is taking, both commercially when it comes to the Illinois as you're working on?

and then operationally and M-

Speaker Change: Specifically on the operational side, you know, if we fast forward two or three years from now, what wing you've

Speaker Change: Invested remaining so many 4 million, you've committed, you've moved to a 56% majority L.P. state and then you know consolidated A.V.F.

Speaker Change: How should CNA's operational role evolve along the way? Do you expect to select to sort of

Speaker Change: Become evermore directly involved, operationally sort of learned from CNA. Over the next two to three years we'll we'll see in a continue to have

Speaker Change: You know, a dominant or lead operation role, even after you've hit 56% and can solve it, it could be just exposed on that force.

Speaker Change: Yeah, sure, thanks Tom. So I think we're treating this very much as the partnership that it is. So I think we all play a role in commercializing the asset. I think longer term.

Speaker Change: Certainly the plan and aligned with all of our partners is that Select will own and operate this asset.

Speaker Change: So we were part of our core capabilities that we're bringing to the table is around.

You know, operating [inaudible]

Speaker Change: Deep, very attractive reservoirs, operating pipelines as needed, operating and doing the day-to-day water movements.

I mean, that's something that's been core...

Speaker Change: across our services business for a long time and it's something we do.

Speaker Change: extensively in our infrastructure business, which is why this asset is such a great fit for us now and for the decades to come.

Speaker Change: because that system is a large system and it demands an operator that has the capabilities that we bring.

Speaker Change: It's both up front, we're doing our standard commercialization of the asset, which we're very good at, and then on the back end.

Speaker Change: If we signed a multi-decade contract, we are absolutely 100% committed to operating that asset in the long term, and we're very good at it, so that's part of the reason why we're here and why it's such a core fit.

Speaker Change: and just so I'm clear, then, you know, I know CNA in particular has been a pioneer in lease following, you know, and it may bring some really unique, you know, differentiated expertise to that aspect.

Speaker Change: of ABF. It is the expectation that at some point select will also take over that.

Speaker Change: That aspect of ABF and sort of get up to speed on everything involved with least following.

Speaker Change: Yeah, I mean, every aspect of the deal is something that we're comfortable with, and again, we brought the partners to the table because of...

Speaker Change: their capabilities. So I think, you know, to your specific point, everybody around the table for this deal plays a part. And I think we will certainly be the long-term owner operator in all respects here.

You know, happy to follow up that.

Speaker Change: Got it. No, that that was helpful clarification thanks to them Mike and then

Turning to Water Infrastructure [inaudible]

Speaker Change: Could you speak to how your anchor-tenant contracts are structured when it comes to inflation and construction costs from raw materials, especially for large-time or their pipe? Are there provisions in there to protect you, you know, that explicitly refer to tariffs?

Speaker Change: Yeah, speaking on tariffs to start just more broadly, Tom, we don't expect a material impact on water infrastructure as a result of tariffs across escalations.

for Water Infrastructure, our supply chain is domestic.

Speaker Change: and the pipelines are polyethylene and not steel. And so we've run all of our projects back through kind of updated cost estimates and we're not going to see any material changes. So our economics on the projects are intact and as underwritten.

Speaker Change: Great to hear. Last one for me, similar, but for the Chemical Technology Division, could you elaborate on CTs, supply soon, how localized is it, and to the extent it does realize on inputs that are imported, you know, what's in these are the exposure.

Yeah, fair question, Tom. Obviously, being a—

Chemicals Manufacturing Business There Is A Supply Chain No.

Speaker Change: of raw materials that is an important part of managing the operational cost structure of that business.

Speaker Change: We've been particularly, you know, coming out of the pandemic quite focused on, you know, adding resiliency to that supply chain and we domesticated the vast majority of that supply chain into the U.S. and reduce our overall.

Speaker Change: and international product sourcing to less than 50% with what's about half of that coming out of China. Obviously, if you think about based raw materials, a number of those are oil-based, and so

Speaker Change: Any lower pricing on the oil side will actually benefit pricing on certain raw materials.

Speaker Change: and that can be managed against some of the other potential-

Speaker Change: You know, costs we might see through. I think it's less of a direct impact for us overall and more of an impact on other large scale manufacturers of beds, raw materials that we may source from.

Speaker Change: as well. Net and net, we don't expect anything to be materially disruptive to our near-term outlook. We've got a lot of resiliency in the supply chain, and our team's done a really great job over the last few years of bringing

Speaker Change: The vast majority of that state side, and even over the last 12 months, we've actually been focused on

Speaker Change: Adding additional vertical integration into our manufacturing capabilities with some of our own based raw materials.

Speaker Change: That was a focus for us last year and that's something that's actually allowed us to increase the overall manufacturing capacity of our plant to near record levels here as we integrated some of those raw materials into our own base manufacturing.

Speaker Change: Makes sense. Thank you for taking my questions, Michael and Chris, I'll get back in the queue.

Thanks, Tom.

Speaker Change: Our next question comes from line of dawn, Chris with Johnson Rice. Please continue with your question.

Good morning guys, so y'all are doing well [inaudible]

Dawn Christ: I had a question around water infrastructure kind of behind, or looking forward past the second quarter. I went back and tried to count how many projects you have under construction right now and kind of lost count.

As we look kind of towards the back half of

25 and into 26.

Speaker Change: Do you think you can kind of maintain a double digit growth per quarter or somewhere near that as all these projects come on? I mean obviously you're spending a lot of capital now I don't know.

Speaker Change: That'll be, and these projects will be completed somewhat around year end. Just kind of curious is you give us a little guidance on how that looks going into 26. Thanks.

Speaker Change: Yeah, good question, Donald. I'll maybe hit a couple of items and then let Michael add on if need be because we think about the financial trajectory out of water infrastructure. Sure.

Speaker Change: As we previously mentioned, you would expect to see a good trajectory coming out of the first quarter into Q2 and further into Q3.

Speaker Change: We expect that full year growth rate of that 15% or so to translate into subsequent

Speaker Change: Growth into 2026 on a base case, and that Q3 run rate should be something that lends itself to, you know, materially above that 15%. So as you look forward to 2026, you've got an established kind of base load of growth that's supporting the business and you've now supplemented that with additional projects.

Speaker Change: being layered on here with the latest announcements. So yeah, looking forward into 26, we expect to see something that...

Speaker Change: You know, market conditions notwithstanding think probably looks pretty comparable to 2025 on an overall trajectory of growth on both the top line and the bottom line and maintaining a margin profile in that 50 plus percent range.

Speaker Change: It may be just to speak to a couple of points a little more specifically into the large project we just announced that's going to really contribute in 2026 I'm we're trying to get it online in the fourth quarter this year there might be a small benefit we'll see but that's really going to be end up lit for 2026 [inaudible]

Speaker Change: And to your point, none of you know, we have been very successful at finding creative projects and it's really because the recycling first model we put forth is it's just a period economic model for our customer.

Speaker Change: and we're, as I mentioned, we're underwriting the rock. It's some of the best geology in the United States.

Speaker Change: and each here are creative deals, and there's still more of them out there that the backlog is not what it was last quarter because we just converted

Speaker Change: Over 100 million, but there's still more opportunities and I think you'll see us continue to pursue those and be well-positioned to capture and add real growth.

Speaker Change: to what is a very unique system in the Northern Delaware? Yeah, and maybe a couple of final things add on, you know, we previously indicated we thought we had a comparable opportunity to deploy, you know, similar growth capital next year that we were going to deploy this year. We've pulled forward some of that.

Speaker Change: You know, in the end of this year, based on the pace, we were able to execute on some of these additional contracts. So, some of that's a pull forward from a, you know, a success standpoint in getting these contracts in place. I think we are. [inaudible]

Speaker Change: you know, optimistic that we're going to be able to backfill that.

Speaker Change: with even further opportunities. What we're talking about from a guidance standpoint in a base case outlook is really...

Speaker Change: based on the initial anchored tenant underwritings, and there's a lot of commercialization opportunity to come.

Speaker Change: from there. And the more we expand this network, the more capable we'll be with broad geographic coverage and water balancing capabilities that we'll add to that commercialization.

Speaker Change: I appreciate all that color and and if I could just ask one kind of macro question, I mean obviously there's some uncertainty out there right now so

Speaker Change: and we don't know what happens as we go into the back half of the year, but in your experience, you know, in past down cycles, have you seen a shift towards kind of recompletes?

Speaker Change: and other kind of activity that may be smaller dollar rather than drill in a whole pad to keep production up from these ENPs and are you seeing any kind of indications that that could be the [inaudible]

Speaker Change: The shift in activity as we kind of move to the back after the year.

John Schmitz.

Speaker Change: The way I would answer it is, you know, in the past and not.

Speaker Change: and the length of the time that I spent in this industry.

Usually, downturns are commodity price compression.

A lot of focus gets on the…

Speaker Change: The asset that's already available to manage an increase because that's the best dollars.

that you can apply. Bye. And...

Speaker Change: The second thing I would add to that, and it's probably different more today than it used to be before unconventional, is that, you know

The amount of your inventory that you can…

Speaker Change: Managed to the best of your ability for a higher commodity for us.

Speaker Change: and the return profile in the first part of that world's life is very important I think today.

Speaker Change: That probably wasn't in the 80s and 90s, but today it really is a very important piece so I think you will see the dollars that will get spent be reallocated and really thought through through the current base [inaudible]

Speaker Change: Assets whether it's reconciliation or you know get the most out of what you got as well as protect your inventory.

Speaker Change: Right, and kind of what I was driving at is you could see a pickup in the back end or kind of make cotton in areas and kind of away from the Permian, which would obviously benefit you on the other side of the business.

Speaker Change: Yeah, I mean, we think about it all the time. I have an RF.

Speaker Change: Exposure from gas to oil is extremely good, or our exposure to...

Some of the best rock.

Whether it's in the parliament or in the United States.

Speaker Change: and our exposure to, and we actually get affected by this, to re-completion, whether it's

Speaker Change: You know, even Barnett, I mean, we actually get good exposure to the re-completions of current asset base.

Speaker Change: just because of our footprint, because of our gas, the oil and where we started. We started in the very early stages of these plays and thereby we got good exposure and good content to...

You know, re-completion opportunities.

Speaker Change: I appreciate the color, John . I appreciate it. Thanks. I'll turn it back to the to the opera I appreciate it.

Thanks, Donald.

Speaker Change: Our next question comes from line Blake McLean with Daniel Energy. Please proceed with your question.

Hey, good morning, you're. [inaudible]

Morning, Blake. Morning.

Speaker Change: Yeah, I'd like to just kind of stay on that high level macro conversation and I was hoping you guys could expand a little bit on the opportunity set in some of those drag <expletive> basins.

Speaker Change: How are you seeing activity levels through conversations with customers evolving in the back cap of this year and into 26 in places like the Hainesville and the Marseille?

Speaker Change: Yeah, but like this is Michael. So we've got a really strong footprint and the infrastructure side of both the Hainesville and the Marcellus, we're going to be the largest.

Speaker Change: Disposal Provider in both those basins. We've seen activity pick up this year relative to last year and the outlook is certainly, this stage is more consistent and more favorable than some of the weakness we're seeing in some of the old plays. [inaudible]

Speaker Change: So those are going to be areas of focus for us, you know, this year and should be areas of strength for us.

Speaker Change: That makes sense. Anything you would point out as differentiated between the Hainesville and the more self, I mean, you would see it more, you would expect to see a little bit more activity uplift. The Hainesville near-term, just curious if there's any color you would provide on that.

Speaker Change: Yeah, I mean, I think that certainly as we look at the next couple of year outlook, the growth and LNG off-takes that's coming to bear with both the head-on.

Speaker Change: Well underway and recently permitted projects is certainly going to be I think a substantial growth driver for the Hainesville from a demand standpoint. And we're certainly seeing a number of customers think through their next couple of year development planning and some of the conversations we're having around the offtake for the produced water.

Speaker Change: is certainly, I think, clamping in the, in the hateful side in particular.

Speaker Change: Got it. Thank you for that. And then maybe just another sort of bigger picture question. You guys have obviously been active in the M&A market. What does the current environment look like there? How or how is some of the noise in in a lot of things with regard to the macro economic environment impacting that and how do you guys think about that versus all of the organic growth opportunities you've got in front of you? [inaudible]

Yeah, this is John , like, uh...

Speaker Change: You know, I would say it has it relates to Select. We continue to see more asset opportunity. We think of it as in the name, but we're really buying.

Speaker Change: Strategic, clearly located assets that really fit in a positive way throughout our networks. And those assets...

have become.

you know, somewhat isolated and

Speaker Change: They become opportunities for us as they become isolated and we think we'll see more of that, we'll probably see more of it really in a down cycle like this.

Speaker Change: that the potential of, you know, lesser activity if that's where we end up in the second half but so we still think there's, you know, good, we'd call it M&A but it's really asset purchases for Select.

Speaker Change: Yeah, I'd say first and foremost, the priority from a capital allocation standpoint remains on the organic backlog of new projects and getting those contracts in place.

Speaker Change: If we can supplement those projects with bolt-on acquisitions, that's a great opportunity for us and we're often doing that at below replacement costs.

more tractively than a greenfield dollar.

Speaker Change: and so that's something that will continue to stay focused on. We just talked about our basin footprint across the U.S. as we think about capital allocation. We've got great opportunities to look at every basin of the U.S. at those types of opportunities and it gives us a whole lot of...

Speaker Change: Clarity and conviction around making the right capital allocation choices that are competitive across the whole scope of our footprint. But first and foremost, we're really excited about the latest contracts in the backlog we have to build out that water infrastructure base over the next.

Speaker Change: 12 months or so and hope that there's more to come behind that that can continue to be an creative use of the battle dollar.

Understood. Thank you guys very much for the time.

Thank you, Blake.

Speaker Change: Our next question comes from a line of Jeff Robertson with Water Tower Research. Please receive with your question.

Jeff Robertson: Thank you. To follow up on the commentary around natural gas stations in particular, a place like the Hainesville

Michael, how much upside is there from? But, um...

Jeff Robertson: Greater Capacity Utilization, and is there a point you get to where there are opportunities for? [inaudible]

Jeff Robertson: New Growth Capital Projects, like what you do, like what you've done in some of the oil basins where you're actually putting into infrastructure and pipelines and integrating it into systems with disposal and recycling.

That's a great question, Jeff. The short answer is yes.

Jeff Robertson: So we have existing capacity on our system in the Hainesville and just as a reminder, I think we have a very unique asset in the Hainesville. We have an asset to gathering pipeline that

Jeff Robertson: Starts in the heart of the soda parish where the Hainesville and we pick up water all the way along into positive with it.

in the Skulls of Wells, where we're working on.

Jeff Robertson: Always working on using some of that for recycling as well, so it's a very unique asset that I don't think could be easily replicated at all.

Jeff Robertson: We've had projects in the past where they expanded that pipeline, kind of wide-off or teed-off to reach new acreage and service new customers. And those are conversations that are always ongoing and are certainly things that we would look to do as the hands will...

Jeff Robertson: Stabilizers rose this year and certainly in preparation for the LNG expected all taken in a few years to come.

Jeff Robertson: So, expanding the existing asset is something that we're looking at, something we're actively doing right now, and I do expect we'll see more of, and in terms of existing capacity, we are not at capacity on the pipeline or from disposal standpoint.

Jeff Robertson: and so we do have the ability to support our operator partners.

as they pick up, pick effect in the year and a half greater production.

Jeff Robertson: And as a reminder, we executed on a couple of acquisitions last year to add additional disposal capacity to that pipeline network.

Jeff Robertson: to ensure we had the ability to grow with basin. [inaudible]

Jeff Robertson: So now I feel like we're in a position to grow.

Jeff Robertson: Creatively on every incremental barrel of utilization we can put through that system but the ability to tie in further gathering infrastructure and add that under contract is something that we're going to be very focused on and our ability to invest that capital from a brown field. We're going to put through that system and we're going to put through that system and we're going to put through

Jeff Robertson: standpoint is it's going to be quite a creative win in if we do that.

Jeff Robertson: Can you provide any color on how the margin uplift from increasing capacity utilization on those assets would compare to some of the other opportunities across the asset base?

Jeff Robertson: Well, from a return-on assets, that's going to be the most attractive dollar you can push through. In terms of just the accretion on the financial margin, it's highly accretive, and it would be add or above what we would see from any of our new organic projects.

Speaker Change: It's just briefly, Michael, in the Northern Delaware Basin, if you did see a much of a change in activity from completion activity

Speaker Change: Would that cause any issues for your desk balancing operation, I'm sorry water balancing operations on those systems?

Speaker Change: There's two points that I think are really important, Jeff, and the first is [inaudible]

Speaker Change: You can have to lean on a larger system so that you can access more operators, more acreage and more completion activity and that's exactly what we're building out. We're building out a system

Speaker Change: and we converted a freshwater pipeline that runs north-south for the majority of New Mexico. We're building out an east-west pipeline that's going to go from the far eastern edge of the formation of the far western edges to both large diner of pipelines.

and our goal is to be able to...

Speaker Change: Effect and to serve all of the northern end of the northern Delaware. And so what we can do is we can move water from one end of the basin to the other to make sure that we're meeting our customers' needs and we're managing that.

Speaker Change: So I think that's a really important point and it's something that is largely unique to what we've built and then on the second piece

Speaker Change: Recycling, as I mentioned earlier, it's a superior economic model for our customers. It is a meaningful cost savings to traditional...

to split this bull's-old and sourcing a fresh water.

Speaker Change: and I think that cost savings is more important now than it is at $100 oil.

Speaker Change: So while we're delivering, while we're building out the assistance, we have operators who are calling us saying, hey, we know you're laying a line here, we want to tie in. We would like to be able to provide, you know, interruptible service along their lines so that we can take advantage of, you know, reduced price compared to the traditional model.

Speaker Change: So, is activity something we're watching? Absolutely something we're watching. But we feel really good about the savings that we can deliver our customers, we feel really good about the network, the contractual positions we have, both firm contracts and the ruptures.

Now maybe there's that from us.

Speaker Change: From a technology standpoint, we have a digital twin of these systems.

Speaker Change: and we engage with our customers all the time. I mean, we're in most cases able to forecast six and 12 months out in terms of both water that we're receiving and the jobs that will, you know, run down the pits.

Sorry.

Our team has proven to be extremely capable at...

finding these potential issues.

Speaker Change: Much before they'd become problems. And frankly, what we see a lot of is...

Speaker Change: These, you know, forecasted issues become opportunity because we're able to balance the basin pretty effectively. So I think just piggybacking on Michael's point there, I think this very large system is a core asset.

Thank you.

Thank you, Jeff.

Speaker Change: Our next question is a follow-up question from Bobby Brooks with Northland Capital. Please receive with your question.

Bobbie Brooks: He just won a quick one for me. The net obviously guys moved up the net capex guidance and you said that mentioned how the maintenance capex is saying the same. I just wanted to confirm, I think the last time you talked about that net capex number you previously mentioned 10 to 20 million in asset sales, is that still the case?

Bobbie Brooks: From a base case standpoint, Bobby, we expect to continue to have opportunities to see some asset sales net against that. I would say that there's always additional opportunities there to monetize underutilized components of the business or things that

Bobbie Brooks: May not be a needed figure forward. And then that maintenance spin that you mentioned can be quite flexible if if marketing conditions weren't without impacting the operational capabilities of the business. So

Bobbie Brooks: You know, if you look at the overall capital program, you know, we're absent the sizable growth capital, we're talking about a, you know.

Bobbie Brooks: 70 to 80 percent potential free cash flow yields on our adjusted EBITDAF from a base maintenance standpoint. So, yes, we're increasing our CAPEX and accordingly that's going to reduce free cash flow but this isn't very attractive.

Bobbie Brooks: set of opportunities for us. It's going to anchor the company for, you know.

Bobbie Brooks: many years to come, and so we're very excited about the opportunity to deploy that capital to the extent that growth capital was not there. There's a significant free cash flow generating capability in the business both within our traditional services and chemicals businesses that help underwrite our growth here and allow us to maintain a very disciplined balance sheet.

but that water infrastructure business.

Bobbie Brooks: to the extent that growth capital is not there. It's an extremely high margin low maintenance capital business that generates a lot of cash on its own. So we're excited about deploying the capital near term, but even more excited over the cash flow, generating capabilities of these assets for the next time.

Speaker Change: and I'm Matt Kucinich. I'm Matt Schmitz. I'll see you next time.

Bobbie Brooks: Yeah, I can for sure see one of the excitement behind that makes a lot of sense. Thank you guys for your return to the queue.

Speaker Change: This now concludes our question and answer session. I would now like to turn the floor back over to Mr. Schmitz for closing comments.

Speaker Change: Thanks, everyone, for joining the call. We appreciate your continued support and interest in learning more about Select Water Solutions. I look forward to speaking to you again next quarter.

Speaker Change: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lives at this time. Thank you for your participation and have a wonderful day.