Select Water Solutions (ticker unspecified), a key player in the water management industry, showcased significant growth in its third-quarter earnings call on November 6, 2024. The company reported a 20% increase in third-quarter revenues and a 33% rise in gross profit before depreciation and amortization (D&A) compared to the second quarter of 2024.
Year-over-year figures were even more impressive, with revenue up by 40% and gross profit surging by 99% compared to the third quarter of 2023. The earnings call, led by Vice President Garrett Williams, CEO John Schmitz, and CFO Chris George, presented a positive outlook for the company despite expected seasonal declines in the fourth quarter.
Key Takeaways
- Third-quarter revenues increased by 20% sequentially and 40% year-over-year.
- Gross profit before D&A rose by 33% from Q2 2024 and 99% from Q3 2023.
- The Water Infrastructure segment reported record revenues of $82 million with a 57% gross margin.
- The company secured 25,000 acres under long-term contracts in the Permian Basin and two pipeline agreements in the Bakken.
- A disposal acquisition in the Northern Delaware Basin added 10,000 barrels per day of capacity.
- Select Water Solutions expects Q4 margins to remain strong at 51%-54% despite an anticipated 10%-15% revenue decline in the Water Infrastructure segment.
- Net income for Q3 2024 stood at $19 million, with an adjusted EBITDA of $73 million, surpassing guidance.
- The quarterly dividend increased by 17% to $0.07 per share.
- Approximately $150 million is allocated for growth capital in the water infrastructure segment to enhance revenue and profitability.
Company Outlook
- Select Water Solutions anticipates achieving record adjusted EBITDA for 2024 and significant growth in 2025.
- The company is focused on expanding its infrastructure network and enhancing its production base.
- Investments are being made to improve operations, such as converting a New Mexico recycling facility and a freshwater pipeline.
- The company aims for a free cash flow conversion of around 25% of adjusted EBITDA for 4Q 2024.
Bearish Highlights
- Seasonal slowdowns and operational downtime are expected to affect the Water Services and Chemical Technologies segments.
- Water infrastructure revenue is projected to decline 10%-15% sequentially due to planned downtime.
Bullish Highlights
- The Water Services segment exceeded revenue expectations with a 2% growth in Q3.
- The Chemical Technology segment is expected to see revenue and margin increases in Q4.
- New product wins in chemical technologies are anticipated to enhance market share, particularly in the Permian Basin.
Misses
- No specific misses were mentioned in the provided summary.
Q&A Highlights
- The company discussed strategies to enhance manufacturing throughput and target a margin profile in the mid- to high teens.
- Executives highlighted the potential for increased utilization of existing assets and efficient integration for attractive returns.
- Ongoing expansions in the Northern Delaware were discussed, focusing on capacity, utilization, and securing long-term contracts.
Select Water Solutions’ earnings call painted a picture of a company on the rise, with strategic investments, long-term contracts, and a focus on enhancing its service base positioning it for continued growth and robust shareholder returns. Despite some anticipated seasonal challenges, the company’s leadership remains optimistic about the future, driven by ongoing projects and an expanding infrastructure network.
InvestingPro Insights
Select Water Solutions (WTTR) continues to demonstrate strong financial performance, aligning with several key metrics and insights from InvestingPro. The company’s impressive year-over-year revenue growth of 40% and gross profit surge of 99% are reflected in its robust market position, with a market capitalization of $1.64 billion.
InvestingPro data shows that WTTR is trading near its 52-week high, with a price at 99.78% of its peak. This aligns with the company’s positive outlook and record-breaking performance discussed in the earnings call. The stock’s total return of 54.48% over the past year further underscores the company’s strong market performance.
An InvestingPro Tip highlights that WTTR has raised its dividend for three consecutive years, which is consistent with the 17% increase in quarterly dividend to $0.07 per share announced in the earnings call. This demonstrates the company’s commitment to returning value to shareholders. The current dividend yield stands at 2.52%, offering an attractive income proposition for investors.
Another relevant InvestingPro Tip indicates that WTTR operates with a moderate level of debt, which is crucial for maintaining financial flexibility as the company invests in growth initiatives, such as the $150 million allocated for the water infrastructure segment.
For investors seeking a more comprehensive analysis, InvestingPro offers 6 additional tips that could provide deeper insights into WTTR’s financial health and future prospects. These additional tips, available with an InvestingPro subscription, could be valuable for understanding the full potential of Select Water Solutions in the evolving water management industry.
Full transcript – Select Energy Services Inc (NYSE:) Q3 2024:
Operator: Ladies and gentlemen, good morning, and welcome to the Select Water Solutions Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. 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 Water Solutions conference call and webcast to review our financial and operational results for the third quarter of 2024. With me today are John Schmitz, our Founder, Chairman, President and Chief Executive Officer; Michael Skarke, Executive Vice President and Chief Operating Officer; and Chris George, Executive Vice President and Chief Financial Officer. Before I turn the call over to John, I have a few housekeeping items to cover. A replay of today’s call will be available via webcast and accessible from our website at selectwater.com. 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 replay listening or transcript reading. 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 laws. These forward-looking statements reflect the current views of Select’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. 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 report 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 Schmitz: Thanks, Garrett. Good morning, and thank you for joining us. 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. On a consolidated basis, we were able to grow revenues, improve gross margins and increased net income compared to the second quarter. Despite activity pullbacks and the broader macro environment as revenue and margin outperformance in our Water Infrastructure segment continued to fuel our unique growth story. 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 D&A by 33% compared to the second quarter of 2024. And on a year-over-year basis, the third quarter delivered 40% growth in revenue and 99% growth in gross profit before D&A compared to the third quarter of 2023. 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. Underpinning our performance is a combination of improved operations, organic recycling and disposal infrastructure projects and highly strategic accretive acquisitions. On the operational side, we continue to increase base utilization, driving increased margins, resulting in a 57% gross margins before D&A for our Water Infrastructure segment this quarter. On the project front, we continue to add new organic business development wins. In the third quarter, we entered into multiple new long-term contracts, adding an additional 25,000 acres under long-term dedication in the Permian Basin, an additional 57,000 acres under right of first refusal. In addition to our Permian wins, we also executed 2 new pipeline connection agreements in the Bakken in the third quarter, further exemplifying our industry-leading footprint spanning all major Lower 48 land basins. 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. Select remains the clear market leader in produced water recycling with the growing pipeline and disposal network supporting our full life cycle solutions. 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. 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. 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. 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. 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. All of these initiatives have combined to contribute to the margin gains in excess of the guided range and consecutive quarters. 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, we remain confident in our ability to deliver on the headline goals we set out for 2024. 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. 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, 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. From the Chemical Technologies segment, the entirety of the revenue impact in the third quarter resulted from decreased activity with our legacy pressure pumping customers. We continue, however, to generate strong free cash flow out of this segment, and we have clear visibility and market share gains and revenue growth in the fourth quarter with our E&P customers, supported by our new product development and technology performance. 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 Technologies segment. Additionally, we will see the impact of certain Asia Pacific operational downtime that will impact our water transfer, sourcing, recycling and pipeline business associated with certain ongoing capital projects in the Northern Delaware Basin. Importantly, though, we have been working 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. 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. However, with the new projects in place in the first and second quarters of 2025, we expect to see strong rebound in the first quarter and further growth across the remainder of 2025 has the improved and expanded networks come online. These projects will serve as the central artery for our Northern Delaware operations, creating fully integrated water balancing capabilities across a sizable network connecting Northern and Southern New Mexico. Following the completion of these latest projects, 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 by approximately 175 miles of large diameter pipeline interconnections. In summary, our core focus is on continuing to grow and expand our production base and long-term contracted revenue within our Water Infrastructure segment. I believe all of our operational improvements organic projects and acquisitions year-to-date align with this strategy. The headwinds outlined for the fourth quarter are temporary and our ongoing capital projects and initiatives will provide additional 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. 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 trends seen in the industry. We believe there will be growing demand for creative and increasingly complex full life cycle solutions. 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. 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. 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. 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 continue to execute on our strategic objectives in our Water Infrastructure segment. 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. While commodity prices and industry activity have presented challenges to our Water Services and Chemical Technologies segments, our consolidated company remains very well positioned to achieve the milestones we set out at the beginning of the year. 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. We also continue to build a more infrastructure-based production-levered full life cycle water company that aligns our future profitability and cash flow generation with critical secular growth drivers unique to our business. 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. 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 completions. Combination of stable disposal volumes, growing solid waste management volumes and significantly increased recycling volumes, 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. 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. 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. On a relative basis, gross margin before D&A increased to 57% during Q3, an increase of 6 percentage points compared to Q2 and a 17 percentage point increase from the third quarter of 2023. 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%. Looking at the fourth quarter, we expect to see water infrastructure revenue decline 10% to 15% sequentially. While there is some seasonal impact expected to this segment, our disposal and solid revenues and volume 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. 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. 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. This pipeline will provide a crucial trunk line interconnection between our current Northern and Southern recycling systems across New Mexico. 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. Overall, this significantly enhances the unique nature and long-term economic potential of our Northern Delaware Basin infrastructure footprint. Even with the short-term operational disruption, we expect margins to stay strong at 51% to 54% in the fourth quarter. 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, representing tremendous progress for the business even with the fourth quarter limitations. Looking a bit further out, we continue to believe that with a very strong project and deal backlog, water infrastructure remains on track to become the largest segment component of our profitability during the first half of 2025 and by the end of 2025 should account for more than 50% of the company’s profitability as previously guided underpinned by more repeatable, predictable, high-margin and long-term contracted profit streams. 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. Switching to the water services segment, 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. Revenue gains during the quarter were driven in part by strong net gains in our Permian water transfer operations though we did see margins come down modestly. 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. We anticipate revenue to decline by 10% to 15% with margins before D&A expected to hold steady at the 20% to 21% range. We continue to believe we can push margins further into the mid-20s looking forward into 2025. On the chemical technology side, activity impacted demand levels during the quarter, especially with our pressure pumping customers, which drove the sequential revenue decline. Accordingly, the decreased volumes in the quarter resulted in a lower absorption rate through our manufacturing plants, delivering lower gross margins of 12.4%. 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. 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% range in the fourth quarter. Looking at other cost reduction efforts, SG&A during the third quarter decreased by more than 4% or $1.7 million relative to the second quarter. 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. In the fourth quarter, we expect SG&A to continue to trend near 10% of revenue overall. Altogether, for the third quarter of 2024, we generated net income of $19 million and adjusted EBITDA of $73 million, an increase of $3.1 million relative to the second quarter and ahead of our guidance range of $66 million to $70 million. For the fourth quarter, we expect consolidated adjusted EBITDA of between $60 million to $62 million as seasonal fourth quarter impacts to our Water Services segment, combined with the planned operational downtime in Water Infrastructure are partially offset by revenue and profitability recovery in our Chemical Technologies segment. Driven by the substantial growth in our Water Infrastructure segment over the course of 2024, our Water Infrastructure and Chemical Technologies segments combined for more than 53% of consolidated gross profit during the third quarter as targeted. And more importantly, having already reached approximately 46% of our overall profitability during Q3 2024, Water Infrastructure is on a great path for continued growth well into next year. Looking at the balance sheet, we ended the third quarter with $80 million of outstanding borrowings, a $10 million reduction from the prior quarter. With $52 million of operating cash flow generated during Q3 and $20 million of free cash flow, we were able to reduce our net debt even after the $9 million of acquisitions, $7 million of dividends and $35 million of CapEx during the quarter. Our working capital management remains strong with our total working capital at the end of the third quarter, representing approximately 12% of our revenue. We increased our liquidity in the third quarter and continue to have a very conservative balance sheet overall. 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. We have increased balance sheet and capital return optionality, and we’ll continue to monitor what makes the most sense for our company and shareholders as our unique opportunities continue at pace. While 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. This is demonstrated with the recent announcement of a 17% increase to our quarterly dividend payment to $0.07 per share. 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. 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. Quarterly depreciation, amortization and accretion modestly increased to $40 million in the third quarter attributable to additional capital deployment. And 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. 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. 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. 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 million to $190 million. Even with the increased net CapEx 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% of our adjusted EBITDA into free cash flow. Importantly, I’d reiterate that the vast majority of our CapEx is going towards contracted and long-lived infrastructure projects. 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. Our capital-light operating model provides us with tremendous optionality to fund not only our growth opportunities, but future shareholder returns as well. Looking into 2025, we are poised to continue growing our Water Infrastructure segment through strategic investment that is supported by the steady high cash conversion out of our Water Services and Chemical Technologies segment as well as the highly accretive water infrastructure projects we expect to bring online during the year. I’d like to wrap-up by once again thanking all of our employees for their hard work and continued support. And with that, I’d like to open it up to questions. Operator?
Operator: Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] The first question comes from the line of Jim Rollyson from Raymond (NS:) James. Please go ahead.
Jim Rollyson: Hey good morning gents and congrats on outstanding performance in Water Infrastructure. John, you set out with the 50% margin goal in that segment quite a while back for 2025, obviously, have exceeded it this year. Kind of curious as you look — you’ve talked about the margin and the profile of these long-term contracted projects embedded in what 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? Because it seems like you’re not — even with the pullback in 4Q, you’re still looking at healthy margins. I’m kind of curious how you see the margin trajectory over the next handful of quarters?
John Schmitz: Yes, Jim, thanks for the nice remarks. Yes, the infrastructure piece and the investment piece is and what we start off with is completely still intact. And when you think about the margin base of our goal was 50% and we just printed a 57% and 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 margins that are greater than other water balancing margins as you either recycle a barrel and deliver it for a frac job or you turn that barrel into storage or you send that barrel to a disposal. 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.
Chris George: Yeah. I mean one thing I might add to it, Jim. When we think about what’s been driving the efficiency so far, it’s really kind of a combination of factors. The asset base we have in place today still has utilization, potential to increase overtime. And every incremental barrel we can pull-through that existing platform, can come through at a high incremental margin profile. We’ve been able to integrate assets, I think, efficiently as well, probably more efficiently than we were expecting from kind of a timeline standpoint. And then the underwriting, we continue to execute on from a new contract perspective continues to be additive to the segment overall. So I think that we still generate obviously a very attractive return anywhere in that 50% to 60% kind of range John spoke to, but we definitely feel good about where we’re at now and things that we can maintain or find opportunities to continue to improve those levels over the next year or two.
Jim Rollyson: Yeah. That’s fantastic. And maybe as a follow-up, Chris, so if you take ignoring the noise in the fourth quarter with some of the transition things that are going on, 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, how does that kind of flex up your revenue run rate in that business? Like by the time we get to 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.
John Schmitz: Yeah. Maybe the way I’d speak to it, Jim, is really looking at the capital investment opportunities is kind of a base driver of that growth. We do obviously have utilization uplift that we can execute on organically without a lot of material capital investment. But the $150 million or so of growth capital that we’ve got slated to go into that segment over the course of the year and into early part of next year is obviously going to be driving a key opportunity for that both revenue and more importantly, profitability growth. And that return framework that we’re putting into place around that capital dollar is consistent with what we’ve spoken to before, around that three to four-year, cash-on-cash with opportunities to continue to improve that with commercialization and incremental utilization uplift. So thinking about it as a return framework similar to that alongside a mid-to-high-50s 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.
Jim Rollyson: Pretty significant growth. Thanks for the color.
John Schmitz: Thanks, Jim.
Operator: Thank you. The next question comes from the line of Bobby Brooks from Northland Capital Markets. Please go ahead.
Bobby Brooks: Hi, good morning, guys. Thank you for taking my question. First thing I wanted to — I just wanted to get a sense of how much of an impact to fourth quarter EBITDA. Are those two facilities Delaware being taken off-line? Is that pretty — is that — I know you kind of spoke about it a little bit more in the prepared remarks, but can you think about that $10 million step down that sequential step down from the third quarter EBITDA all stemming from – 0all stemming from that? Or how much maybe is just kind of the seasonal slowdown.
John Schmitz: Yes. It’s really kind of broken down into the segment components, Bobby. But on the infrastructure side, the majority of that decline is going to come from those kind of asset-specific downtime issues. So that’s going to be over half of that revenue decline in the fourth quarter coming from those specific assets. 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 solid management volumes to remain steady to the third quarter in Q4. So it’s really coming from those asset areas. The services side of the business is going to have more specific seasonal impact to it. You will see some kind of affiliated impact to that segment from particularly our last mile logistics and water transfer business in the Permian Basin that we have that supports those infrastructure assets, 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 think it’s fair to say that given the high-margin profile of that infrastructure segment and those discrete impacts, over half of that kind of decline is coming out of that specific kind of downtime issue.
Bobby Brooks: Okay. Got it. Thank you for that help. And then I know you guys mentioned some new product wins in chemical technologies with E&P customers. I was just — could you just discuss where — kind of where those are occurring and why those wins occurred? And do you think that’s something repeatable going forward?
Michael Skarke: Sure, Bobby. This is Michael. So we had some challenges this past quarter with the pressure pump and the kind of some softness there, as John alluded to. We’ve really focused our team in targeting more of the E&P operators directly. 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 In terms of where it’s coming from, it’s not one region. It’s really across our footprint. But as you would expect, the majority of the wins are coming in the firm. That’s where we’re seeing the most strength in the business right now.
Bobby Brooks: Okay. Got it. And then I was just curious on the pull forward activity in water infrastructure. I would have assumed that, that would be kind of a continuing benefit going forward given that, that’s more focused on production activities, but then in the prepared remarks, you guys mentioned and in the press release, you mentioned of activity reduction in the fourth quarter for the expected activity reduction in 4Q for water infrastructure is partially driven by that pull forward work. So just given that am I right to think that, that pull forward in demand that happened in 3Q was maybe more associated with completion works by E&P or my off base? I’m just trying to understand that.
Michael Skarke: Yes. It’s good question, Bobby. And you’re right. The pull forward was weighted to the completions side of that, particularly associated with the pipeline that we’re converting, that was historically a freshwater distribution pipeline selling – 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. And so that activity that we pulled forward was managing kind of development schedules in conversation with our customers to make sure we’re not impacting activity or development planning for that asset. And then the other asset is a recycling facility where we had activity on the reuse and delivery side coming out of that facility that was – that is also managing on the completion space. So that is the primary impact there, but it also provides kind of the flexibility for us to ensure we continue to support the customer. But also gives us the chance to get the assets fully upgraded and integrate it into the network more broadly without disrupting the customers’ near-term profiles.
Bobby Brooks: Got it. And just to piggyback on that, and last one for me. Is just what are the expected outcomes for the New Mexico recycling plant transition to an integrated system. 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 capacity to the facility itself to handle more of a complex workload? Just any color on that.
John Schmitz: 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, standalone facilities are beholden upon the completion activity in their immediate vicinity. When you start having them interconnected, you can move water from one area to the next and really help you balance the long insures. 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.
Michael Skarke: Yes. And that interconnection provides that geographic reach, but it also provides enhanced ability to provide that synthetic disposal through that footprint for that barrel coming in on a production base, but having more geographic reach and footprint allows you to have more ability to meet completion demand on the other side of that system to really manage that water balance more efficiently over a broader geographic footprint and more importantly, for more customers.
John Schmitz: And in regards to the pipeline, obviously converting a system from a freshwater system, produced water handling, produce new life into that asset and extends 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.
Bobby Brooks: That’s terrific color. It makes a lot of sense. Thank you guys for taking the questions and hats off on a great quarter.
John Schmitz: Thank you, Bobby.
Operator: The next question is from the line of Tom Curran from Seaport Research Partners. Please go ahead. 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.
John Schmitz: Good morning, Tom.
Tom Curran: Chris, for your 2025 outlook for consolidated EBITDA to rebound to $73 million or higher as of 1Q and then ramp from there. What are you assuming for annual completions activity in terms of the year-over-year change? However you want to measure it in terms of spending, track activity, completion volumes. Just in that outlook, what are you assuming year-over-year changes in the annual level of completions?
Chris George: From an overall industry kind of activity outlook, Tom, we’re assuming a pretty neutral overall environment maybe modestly down. We’re not expecting a material change year-over-year. You’ll probably have a trajectory to that activity over the course of the year coming out of a seasonal Q4 period and into the first half of 2025. But on a full year-over-year basis, expecting it to be pretty steady to slightly down.
Tom Curran: Got it. And it’s pretty clear to all of us just how much have you 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?
Chris George: Yeah, it’s a good question. I think on the chemical side, we’ve obviously seen an impact here more recently from the activity and customer-specific items we discuss as we continue to get some of those new product wins and enhance the manufacturing throughput of those plants, you’re able to pull through some pretty clear uplift on that manufacturing absorption base. So we certainly think that 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 and recover some of those volumes that we think are available to us. On the services side, you’re going to maintain a pretty high overall correlation to the activity environment. That said, I think we’re going to be pretty focused on ensuring that we can continue to capture value out of our infrastructure footprint through utilizing that service base that we have, particularly our last mile logistics and containment service lines, integrating those into our full life cycle solutions and have a pretty high focus on integrating those into our contracted footprint as well. So I think that there is upside to the overall activity environment to that services base. As we continue to build out this infrastructure footprint that is going to provide some idiosyncratic growth beyond the activity environment. But it will still obviously maintain a fairly good correlation to the completions environment overall.
Tom Curran: Got it. And then just finally, for EBITDA to free cash flow conversion, can you give us an idea of what you’re expecting for both 4Q and then 1Q as you rebound?
Chris George: Yeah. 4Q should be a pretty neutral quarter on a free cash flow basis overall, looking to kind of come in full year at that 25% of adjusted EBITDA at the bottom kind of into the previous guide. Looking forward into 2025, the free cash flow outlook will be strongly dependent upon our ability to continue to add and execute additional contract opportunities that build on the backlog of growth, particularly in water infrastructure. We think there’s still a very good strong backlog of opportunities there that continues 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. And so that will obviously be a key driver of where our free cash flow outlook comes out for the year next year. But as we said earlier, if you look at the business on a maintenance-only standpoint, we’re talking about a pull-through of 80%-plus cash flow generation before that growth CapEx. So, we expect to maintain that 80-plus percent out of the base business, 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.
Tom Curran: Got it. Thanks for you guys hitting that, that nice to see the ongoing re-rating of the stock. It’s well justified and overdue. Thank you for taking my questions.
Chris George: Thanks, Tom.
Operator: The next question comes from the line of Don Crist from Johnson Rice. Please go ahead.
Don Crist: Good morning, guys. How are you all?
Chris George: Hey. Good, Don.
Don Crist: 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 do you have like a utilization 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 that how much additional flexibility you’ll have for years to come potentially?
Michael Skarke: Yes. Don, 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 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. 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 is constrained. We’re adding to it from an expansion standpoint and the needs for our services are just becoming more and more apparent as we grow and invest in that system. 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. 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 going to remain in front of the demand that we’re seeing from our customers and in the basin in general. And so we think we have a lot of room to run with what we have in place today. The pipe that we’re putting in is oversized, and so it’s all large diameter pipe that will support multiple customers. 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 bouncing out the water. 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 upgrade or make any sort of maintenance to continue to keep up with the market.
Don Crist: I appreciate all the color. All — everything else has been asked. I’ll turn it back.
Michael Skarke: Thank you, Don.
Operator: The next question comes from the line of Jeff Robertson from Water Tower Research. Please go ahead.
Jeff Robertson: Thanks. Good morning. Michael, a quick couple of questions on the new contracts in the Northern Delaware, I think you have a 10-year to 20-year contract, you talked about in the press release. Are you seeing operators more inclined to do long-term agreements with select because of your water balancing capability?
Michael Skarke: Because of our water balancing capability and the assets we have on the ground, we’re able to provide certainty that we can handle their water needs for 10-plus years, and they’re happy to lock in the 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 get that contractual support as we make these investments and build up the systems.
Chris George: And maybe to put some anecdotal data points around it. If you think about one of our more recent recycling facilities we’ve put in place in the Delaware Basin, thinking about that anchor tenant and the water balancing application that we can bring to bear with additional third parties. One of those assets, we’ve seen about 75% of the volumes come into the facility on a produced water basis for 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 on a new commercialized basis. So that ability to really broadly add to that, not only inflow of volumes with third parties, but more importantly, to create that demand for the outflow of a treated barrel and really get that water balancing managed efficiently across 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 produce apparel.
John Schmitz: 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, the relationships we have and the ability we have to water balance to make sure we’re matching longs and shorts across the region and not across a single operator or two operators.
Jeff Robertson: In simple terms, is it fair to think that you’re basically taking high margin cash flow for water infrastructure and reinvesting or compounding it into investments that increase utilization, which generate it sounds like even higher margin cash flow. So the margin protection or the margin upside is pretty permanent?
John Schmitz: Some of it’s investing in increased utilization, Jeff, but some of it’s obviously also going into pure expansion and growth. So we can certainly use that asset base that we have in place, continue to tie in and brownfield invest around that to not only increase existing asset utilization, but more importantly, we can continue to expand the breadth, reach and I think stability of an asset over a broader geographic footprint and a longer duration period of time.
Chris George: 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 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.
John Schmitz: And if you think about how we continue to build out the footprint, it’s through these long-term contracts, no different than our customer’s think of it. What we’re really doing is also adding inventory to the business over time. So through these acreage dedications and right of first refusal agreements, we’re adding hundreds of thousands of acres of dedication, which adds long-term inventory to the asset base over 10 plus years here forward. So it’s continuing to add not only near-term momentum in utilization and margin, but it’s adding to the times return and the longevity profile of the business over time.
Jeff Robertson: I guess, Chris, that longevity profile of earnings growth and your earnings and cash flow generation capacity of the company, it really what underpins an attractive shareholder return program.
Chris George: Yes. I mean the more we can continue to build out this capability and contracted revenue base, adding more production levered revenues over time, which you’ve continued to see, 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.
Jeff Robertson: And lastly, since the election was yesterday in 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 business?
John Schmitz: This is John. The way I’d say it is the administration support for the industry is a blessing for our customers, and we need customers. And so it brings values to their acreage, it brings value to their longer-term views and intensity for us as the business is selects in. Our position on regulatory is we really deal with states and various localized some federal, but most regulatory application in our space is positive at the moment of trying to figure out what are balancing a beneficial reuse and what we could do with a waste stream to a usable stream.
Chris George: I think the general trends around the regulatory environment are around trying to find solutions around managing the produced water waste stream in the industry overall. So that state, local and regional level of oversight is really where we spend most of our time. We obviously understand and stay close to the potential impacts of 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 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.
John Schmitz: We should point out a big portion of our revenue does come from the Permian Basin, about half, and the Permian Basin does have some effects from all the water injection they’re dealing with. As far as Select is concerned, we have not had any effect other than the effect on more need for recycling and pressure on our ability to water balance and move water and reuse water properly.
Jeff Robertson: Thank you, John.
Operator: 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.
Operator: Thank you. The conference of Select Water Solutions has now concluded. Thank you for your participation. You may now disconnect your lines.
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