Select Water Solutions Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 8 speakers on the call.

Operator

Greetings, and welcome to the Select Water Solutions Second Quarter 2023 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris George.

Operator

Please, you may begin.

Speaker 1

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 Q2 of 2023. With me today are John Schmitz, our Founder, Chairman, President and Chief Executive Officer Nick Zwieke, Senior Vice President and Chief Financial Sir, and Michael Skarky, Executive Vice President and Chief Operating Officer. Before I turn the call over to John, I have a few housekeeping items to cover. A replay of today's call will be available by webcast and accessible from our website at selectwater.com.

Speaker 1

There will also be a recorded telephonic replay available until August 17, 2023. 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, August 3, 2023, 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.

Speaker 1

However, Various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener is encouraged to read our annual report on Form 10 ks, our current reports on Form 8 ks as well as our quarterly reports on Form 10 Q to understand those risks, uncertainties and contingencies. Please refer to our earnings announcement released yesterday for reconciliations of non GAAP financial measures. Additionally, as was outlined in our earnings release, Starting on June 1, 2023, the company made certain changes to its segment reporting structure. These changes were driven by several factors, which John and Nick will discuss in more detail.

Speaker 1

Changes in segment reporting have no impact on the company's historical consolidated financial position, Results of operations or cash flows. However, prior periods have been recast to include the water sourcing and temporary water logistics operations within the water service segment and remove the results of those operations from the Water Infrastructure segment. Historical segment information recasted to conform to the new reporting structure is available as supplemental financial information in the Investors section of the company's website at www.investors.

Speaker 2

Selectwater

Speaker 1

.com. Please refer to the company's current report on Form 8 ks filed with the SEC concurrent with our earnings release for additional information. Now I'd like to turn the call over to our Founder, Chairman, President and CEO, John Schmitz.

Speaker 3

Thanks, Chris. Good morning and thank you for joining us. I'm pleased to be discussing Select Water Solutions again with you today. The 2nd quarter saw strong margin improvements, Meaningful free cash flow generation and higher net income and adjusted EBITDA. Our continued focus on operation integration An improved efficiency across the business along with the strength and resilience of our infrastructure and specialty Chemistry Solutions led to a 4% sequential growth in our gross profit before D and A.

Speaker 3

While we saw a modestly declining rig and completion activity environment over the course of the second quarter, We still were able to grow net income by 65% sequentially to $23,000,000 And increased adjusted EBITDA to $70,000,000 a 4% increase relative to the Q1 of 2023. On the cash flow side of things, I am pleased with the progress we made during the Q2. Nick can touch on the components in a bit more detail, But our focused effort to reduce our working capital are paying off and help deliver $102,000,000 of cash flow from operations during the Q2. Adjusting for the $36,000,000 of net CapEx spent during the quarter, We were able to pull through about $66,000,000 of free cash flow nearly matching our adjusted EBITDA for the period. We continue to make additional strides in this working capital reduction effort, but still have a meaningful room for improvement.

Speaker 3

I expect to see more progress on reducing working capital over the back half of the year, providing a significant opportunity For generating outsized free cash flow. Strong free cash flow provides us with many attractive For capital allocation. During the second quarter, we returned about $44,000,000 to Shareholders through dividends and buybacks funded $36,000,000 of net CapEx Heavily weighted toward our contracted recycling and pipeline infrastructure projects and Closed on a small bolt on $4,000,000 water containment asset acquisition. And ultimately, we were still able to reduce our outstanding borrowings by $10,500,000 We already have repaid a meaningful portion of our remaining outstanding borrowings during the Q3 to date, and I Fully expect to have a debt free balance sheet with a growing cash position again by year end. Replenishing our cash war chest will provide us with ample opportunities to review our capital allocation priorities, Including additional shareholder returns.

Speaker 3

During the Q2 alone, we were able to repurchase 5% Of the outstanding A shares in addition to paying our 3rd quarterly dividend And we will continue to weigh capital returns against other growth projects and M and A opportunities. We remain steadfast in our vision to be the recognized leader and trusted partner in sustainable water management solutions. And we believe our continued dedication to achieving operational excellence across the entire organization We'll further enhance that vision. Operationally, 2023 is a very important year for us, Having closed on more than a dozen acquisitions over the last 2 years, combined with the rapid pace of market activity growth Coming out of the pandemic, we needed to prioritize 1st and foremost safety, Employee retention, satisfying customers and job and project execution. However, as the pace of activity growth has abated and the deal activity has slowed, we have transitioned our Strategic efforts, our focus for 2023 is on acquisition integration, Improving efficiencies and operational excellence across the organization and executing on infrastructure projects and free cash flow generation.

Speaker 3

We look closely at the entire scope and scale of the company and where appropriate made determinations to consolidate facilities or relocate assets across our areas of operations from certain non core service locations. We remain attentive to every dollar of capital we deploy And we'll prioritize capital allocation to the most strategic areas of the business, especially where we have the most opportunity To add proprietary applications of automation, chemistry or recycling technology and integrate full lifecycle water infrastructure and chemistry solutions around our existing asset base. We also continue to think hard about who we work for and where we work for them. We must continue to bring value to our Customers at all times, but we'll continue to prioritize investing in those customers that are seeking long term Value added partnerships versus call out services. With our strategic infrastructure footprint, We are well positioned to strengthen the contractual relations we have with our customers and expand the scope of integrated water and chemical solutions we are able to provide around the infrastructure base.

Speaker 3

While there is still more to accomplish, we have seen these efforts payoff across the company and our customer base with gross margins improving by 160 basis points on a consolidated basis During the Q2, even with the modest revenue declines that resulted from the macro activity adjustments and limited yard closures. In a similar manner, we continue to think about what makes the most sense from a segment leadership and reporting standpoint. Accordingly, during the Q2, we made the determination to reallocate our legacy water sourcing business and certain temporary water logistics operations from our water infrastructure segment into our water services segment. These changes will allow us to better manage our operation and more efficiently deploy capital across the organization. For water services, these changes add operations that are more closely aligned with that segment's Core completions oriented service offerings and job execution excellence around the wellsite.

Speaker 3

For the Water Infrastructure segment, this change will further focus the segment so that all of its revenues Are now being derived from core infrastructure solutions, namely recycling and reuse facilities, Contracted pipelines and production levered disposal facilities. Importantly, these solutions are nearly All under long term contracts are our production related in nature, generating high gross margins And adding more stability and duration to the segment's operations than ever before. Additionally, this realignment will free up our water infrastructure leadership to fully dedicate their efforts to our highest priority growth areas around brownfield pipeline and disposal projects and greenfield recycling facilities. We have already had tremendous success in 2023 with $34,000,000 of contracted projects Underwritten so far this year. The project backlog remains very strong and we expect Expected to come online during the late Q3 Q4, I'm excited about the growth prospects Of the segment looking into 2024.

Speaker 3

There were many reasons for us to implement the segment realignment And I believe the changes made will provide clear visibility over time into the financial performance of the business and to the key components that drive the business. We will continue to review what makes sense for the business, But ultimately, I think these changes will provide a better alignment to implement additional operational KPIs that can be tracked and reported against providing for additional transparency and accountability. Select has always been at the forefront of driving the advancement of automation and other technology developments within the water solutions industry. As the evolution toward produced water reuse continues to take hold, It is clear that Select's sustainable water and specialty chemical solutions will be a critical part of driving the industry Transition. Importantly, Select is uniquely positioned to deploy these technology and chemistry solutions around a growing contracted infrastructure footprint.

Speaker 3

Long term, having care, Custody and control over an increased portfolio of produced water barrels regardless of the ultimate use We'll provide a strategic advantage specifically to advance the commercialization and technology advancement Of recycling and reuse towards sustainable full lifecycle or beneficial reuse solutions. As we continue to progress these key initiatives, I encourage listeners to review Select's 2022 Sustainability Report For additional details on Select's commitment to sustainability and support of all our stakeholders, Our achievements to date and our targets for the future. This report was published earlier this month and can be found in the sustainability section of our website. Additionally, as our rebranding efforts continue Successfully across the organization, it is becoming more and more clear that there are a significant amount of The more we can highlight the consistent message and visibility to our customers around the entire scope of Select's capabilities and the value add potential that our solutions create, the more opportunity we will have. To get paid for the full value we provide, to earn long term contracts and to become better Certainly, we remain front and center.

Speaker 3

Supported by our recent acquisitions and business development projects, We have seen a rapid pace of growth in our core recycling business. In fact, Water Infrastructure's gross Profit during the first half of twenty twenty three on a recasted basis already matched its full year total for 2022. To put it in perspective, as a percentage of consolidated gross profit before D and A, Water Infrastructure has grown from about 7% of the total company gross profit in 2018 So about 25% expected for the Q3 of 2023 on a recasted basis. When combined with our specialty chemistry business, I expect that by 2024, more than 50% of the profitability of Production weighted disposal facilities and specialty chemistry manufacturing. That is a significant evolution in Select's Business that provides a lot of optionality when looking at the future growth opportunities, financing considerations And shareholder return potential.

Speaker 3

I am very excited about what the future holds for Select And look forward to further executing on this vision through additional profitability growth, shareholder returns And strategic execution in the coming quarters. At this point, I'll let Nick speak to our 2nd quarter results and second half outlook in a bit more detail, but we are firmly focused on the initiatives I've discussed And I look forward to unlocking a meaningful amount of cash during the second half of twenty twenty three and beyond. Nick?

Speaker 4

Thank you, John, and good morning, everyone. Our focus on cash generation and operational efficiency paid off in the 2nd quarter with a strong free cash softened during the quarter. Our business model meets the market's need for advanced sustainable water solutions benefited by proprietary chemistry technology and we expect to continue growing our profitability even at today's lower rig count and completions activity. To streamline our operations and investment decisions, We've pruned legacy freshwater sourcing and temporary water logistics operations from the Water Infrastructure segment moving into Water Services And focused our Water Infrastructure segment purely on the full water lifecycle through fixed assets. We invest in contracted water networks around our multi basin fixed infrastructure connected by gathering and distribution pipelines, recycling and treatment facilities And disposal solutions.

Speaker 4

While this segment realignment doesn't impact our consolidated historical financials Or represent a major overhaul of our day to day operations, we expect it will provide additional transparency and accountability for investors around the impact of our growth investments in Water Infrastructure. The bulk of our growth capital investments remain targeted towards this reconstituted segment With an advantageous margin profile that should grow as these investments reach their operational go live dates. As John mentioned, we made tremendous progress on select departments to integrate our recent acquisitions, implement new technologies and consolidate a rebranding of our various businesses into select water solutions. Accounts receivable declined by $62,000,000 during the quarter and our previous target of reducing AR by $75,000,000 between Q1 year end has now been raised to $100,000,000 With this target, we expect Furthermore, the strong cash flow momentum we currently enjoy should continue as the rebranding legwork is completed and new technology continues to be deployed. With this robust free cash flow, we executed over $38,000,000 of open market share repurchases on top of our regular quarterly dividend, Leaving around $10,000,000 of remaining authorization.

Speaker 4

We approach share buybacks opportunistically to maximize shareholder value In parallel with market dislocations like the recent regional bank reversal. With that philosophy in mind, we don't plan on repeating share quarterly dividend and we plan to reevaluate that level following our upcoming August payout. With our expectation ample free cash flow over the back half of the year, a growing stream of contracted and production levered high margin revenue and our robust liquidity profile, we hope to further our commitment to consistent and growing shareholder returns over time. Now looking at the income statement, Select Water Solutions 2nd quarter revenue declined sequentially by 3% to $405,000,000 However, Our efficiency efforts and further business and product optimization carried additional dollars to the bottom line through higher gross margins. Net income increased from $13,700,000 to $22,600,000 sequentially and adjusted EBITDA increased to nearly $70,000,000 $67,000,000 in the Q1.

Speaker 4

While declines in completions activity along with rig count through the 2nd quarter present some macro headwinds, We believe we can continue to advance the overall profitability of the company into the back half of the year. Commodity prices have recently strengthened And our consumers generally remain highly profitable and well capitalized. We have seen pricing remain steady We do not anticipate any material pricing movement based on activity levels. Additionally, some of the projects we announced last quarter We'll begin to make an impact in the 3rd and 4th quarters, though the bulk of the growth will come early in 2024. Sustainable and reliable Produced water management remains a core priority for our customers and supported by Select's uniquely positioned multi basin solutions with a massive volumetric We have a number of potential incremental infrastructure projects in various phases of development that we expect to announce in coming quarters.

Speaker 4

Now walking through the updated segments. Water Services revenue declined by $10,000,000 sequentially or a little less than 4%. We prioritized higher profitability over top line growth, targeting a limited rationalization of underperforming locations and a lower completions activity environment. We still have opportunities to integrate overlapping locations and are likely to continue closing or consolidating certain locations that have not fully benefited from the recovery over the course of the year and redeploy those assets or sell them to generate cash that could be more efficiently deployed elsewhere. With this strategy in mind to maximize return on investment, we expect a low to mid single digit percentage revenue decline, Our Recalibrated Water Infrastructure segment delivered steady performance from the base of a very strong Q1.

Speaker 4

We believe the 3rd quarter should see gains in both revenue By mid single digit percentages as well as gross margins before D and A of 200 to 400 basis points. Removing the water sourcing and logistics operations from this segment provides a clearer view of the margins and scale of our water reuse and recycling infrastructure. With expected gross margins moving above the 40% range for the Q3, we expect continued accretive margin progression as previously announced projects and future projects come online later this year and into 2024. Chemical Technologies segment reached another all time high gross margin level exceeding 20% with continued success in specialty chemistry sales. We expect steady results in the 3rd quarter as market share gains offset lower industry activity relative to the 2nd quarter.

Speaker 4

Consolidated SG and A decreased sequentially to $34,300,000 from $35,800,000 due primarily to a $1,000,000 decrease in transaction and rebranding costs. I expect the back half of the year will deliver around $35,000,000 per quarter of and A given the ongoing rebranding efforts that conclude at the end of the year. We have broken ground on most of the various infrastructure projects Our 2023 net CapEx forecast remains within its previous range with a tightening of that range to $100,000,000 to $130,000,000 after giving effect to roughly $20,000,000 in expected full year asset sales. I'm pleased that with our heightened cash flows, we were able to pay down our We expect depreciation and amortization expense to continue at around $35,000,000 per quarter and tax expense to remain minimal through 2023. We added $27,000,000 of liquidity during the quarter to finish with $193,000,000 of total liquidity.

Speaker 4

Select is accomplishing our core 2023 priorities, including boosting our operating margins and generating substantial free cash flow. After several years of accretive acquisitions and dynamic growth, we are now extracting additional margin and profitability out of our existing market leading footprint, While deploying enhanced cash flow into long lives, high return infrastructure investments and increased shareholder returns. We're ideally positioned to achieve these goals and enter 2024 stronger than ever. Thank you. And with that, we'll open it up to questions.

Speaker 4

Operator?

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from Jim Rolfson, Raymond James.

Speaker 5

Good morning, guys.

Speaker 4

Morning, Jim.

Speaker 5

Great to see the progress this quarter and kind of across all the fronts on margins and Cash flow generation and free cash flow generation. Kind of circling back to something you said a minute ago, Nick, On the we think about margins for water infrastructure, as we're classified now, which it looks like you'll be able to actually show the growth A little more isolated than maybe the way it was reported before, but we're north of 40% margins kind of guiding obviously pretty stout growth Sequentially, but up to 200 to 400 basis points. As I think about that business, when the new projects Start hitting late 3Q, 4Q and really impact next year. Just maybe some sense of where can that low 40s Percent margin go to, I mean, or is that something that as these projects hit, I know you've said margin accretive, but Is that something that's in the mid-40s and the high-40s? Just maybe some sense of how that looks and any color you might provide just on How you all are thinking about incremental revenue opportunity for that business just based on what you have already underway?

Speaker 4

Sure, Jim. Thank you. So as we look forward in that Water Infrastructure segment, I'd like to be at a 50% run rate At some point, late 2024. Now how do we get there? We announced $34,000,000 of infrastructure projects in our last call.

Speaker 4

As you know, we like to underwrite contracted projects with a 3 year payback window with additional upside potential From 3rd parties or expansions. So you do a little bit of math there and that gives you a pretty healthy EBITDA, dollars 10,000,000, 12,000,000 plus Just from those projects alone, we do expect to come back and detail some additional projects over the next quarter and into the Back half of the year here that will add to that and add to it at accretive margins of 50% or better. So that's the real growth engine here of when we look forward taking that segment from around 40% where it is today To an exit rate of around 50% with additional optionality as we continue to expand these networks, As we continue to bring recycling, not just in the Permian, but in other basins and develop many of the assets that we've acquired over the past Couple of years.

Speaker 2

Jim, this is Michael. Just to expand on something that Nick said in terms of timing, which is part of your question. When you think about it, when we execute a contract to underwrite an infrastructure build out, most of our build outs are going to take and it varies on the project, but 7 to 9 months. And then once construction is complete, then you have to work through the operational and commercial issues, and that can take a little bit of time as well. And then at that point, you're going to really See the full run rate of that project contribution.

Speaker 5

Kind of steady, absent new projects that kind of like sounds Steady ramp as we go through the next few quarters. And you obviously highlighted there's still opportunity out there In Permian and elsewhere, are we talking kind of similar sized projects to what you guys have been Underwriting over the last 18 months or so? Or are there any larger, more material projects on top of this? It's kind of been Hitting singles, doubles and obviously great margins on top of that, but just curious as you have rebranded and people are starting to see what You guys are capable of if there is actually any larger sized opportunities as well.

Speaker 2

And as John mentioned, We are pretty confident that we're going to be able to deliver more projects in the back half of the year. We're getting a lot of interest, whether it's through the rebrand or just Executing for our customers, we're getting a lot of interest on projects really in all basins across our footprint. They range from small deals to quite large deals, bigger than anything we've announced. I would say the average is still kind of Within the range of what we're talking about, something that looks like a $6,000,000 to $10,000,000 build up, but there are definitely things that are smaller and larger and It's my hope and expectation that we'll be able to deliver on both.

Speaker 5

Fantastic. And just one last question. John, on the M and A front, you guys were extremely busy consolidating a bunch of things at pretty attractive prices. And then you've kind of spent a good chunk of this year focused on integrating everything overhauling the business and the rebranding efforts. Curious just what the outlook or opportunity set is for M and A as you kind of get past the integration phase, Given that you guys are obviously going to be generating a lot of free cash flow and probably can't rebuy your shares buy all your shares back

Speaker 2

We were busy and we did put a lot of transactions together, a lot of companies, but most importantly, what we put together is a footprint of this Asset base, across really across the Lower forty eight, but in some areas, it's really number one position. And the opportunity around that asset base that we put together, Jim, is the opportunity we're really, really focused on. If you ask me if there's M and A, as long as it fits within that asset base and that opportunity To enhance that, if there's a way to extend or add volumes or bring something to the table that is a very good Opportunity for capital both for our customers and us, we're all for it. But right now we are very focused on this infrastructure asset base that we put together because it's very unique. And To Michael's point, there is a lot of conversation.

Speaker 2

There's a lot of opportunity outside of the ones we've announced already. And they are some of them are large in size, but a lot of them are small. And the small Either pipelines to bring water to the asset base that we have in place or Hook up the asset base to each other to become more of a network versus a singular. Some of them things are very quick paybacks. They're not 36 month paybacks and there's a large quantity of that.

Speaker 2

And I would also add to, yes, the rebranding is very important because it tells us tells our customer base, our investors, someone ourselves, Who we are and what we are, but really the network and the asset base we put together is really what's driving the Opportunities of either just pipeline infrastructure or overlaying water recycling Facilities long term contracts over this concentrated water position we put together now.

Speaker 5

Yes. Sounds like a great place to deploy capital. Great to see the progress. Thank you, guys.

Speaker 2

Thanks, Jim.

Operator

Our next question comes from Luke LeBlanc with Piper.

Speaker 6

Hey, good morning.

Speaker 2

Good morning, Luke. Good morning. Jim tackled the Water Infrastructure margin question. I guess, in Water This is nice margin improvement there even with the revs ticking down and 3Q has the same outlook with revs now modestly, but margins up. Can you talk about Some of the operational improvements and efficiencies you're seeing and maybe where margins can go even in a flattish environment.

Speaker 2

It sounded like some of this might have Closing down on profitable occasions and continue to kind of rationalize the asset base, but any commentary around that would be helpful. Sure. So just directly to hit the margins, our near term goal for water services is the mid-20s with longer term in the high-20s. Really the drivers in that is further integration. And part of that further integration is the consolidation and potentially elimination Some of the yards that are 1, not strategic to our integrated water and chemical thesis and 2, Unprofitable or moderately profitable.

Speaker 2

And as we look to consolidate or rationalize that, It could have some downward pressure on revenue, but we're expecting margins to be flat or even improved by that activity. So that was the and the other piece beyond the integration is really just operational efficiency. I mean, We're removed from COVID now far enough. We've built back the organization to where it needs to be. And we need to really bring in the discipline that's Required to execute a services business every day and get efficiencies.

Speaker 2

So we're doing a number of things. One of the things that we brought on A robust supply chain group to help us leverage the buying powers across all segments. But there's a number of just Every day blocking and tackling things that we need to do better across services to hit those medium and Long term service margins. And the one final thing I would say and add to kind of improving margins is really around technology. We've been very committed to automation and implementing technology to provide a safer, More certain and more cost effective solution for our customers.

Speaker 2

I think we've done a pretty good job of that in some areas, but there's still A number of places that we can implement Furgus Technology, which will drive profit to the bottom line. So those are really what we're focused on in services, Luke. Great. Got it. Perfect.

Speaker 2

Thanks a bunch.

Operator

The next question is from Tom Curran with Seaport Global Securities.

Speaker 6

Thank you. Good morning, guys. For Water Infrastructure, the division entered this year with 15 sites online and operating. Would you provide us with a quantified estimate of how close those 15 are now to having maxed out their structural revenue generation potential through Adding customers and tying in new branches. Just for those existing 15, are we at 80%, 90%, How far along are they?

Speaker 2

So on the sites, it really comes down to individual points We can have some sites that are full out for a period of time, but that's typically not sustained. If you were to just apply a butter knife across them, I would say that we still have meaningful excess capacity. So I would say somewhere in the 50% to 60 Percent range in terms of utilization. And those are a lot of the projects that we're working on is looking to tie in more customers so that we can leverage that capacity. And to the extent that we start to bump up against capacity, many of them are modular in nature, so that we can Expand that, and we have expanded.

Speaker 2

We'll continue to expand it to meet the needs of our customers in the market. Yes, Tom. One thing I'd add to that is, as we've been able to Continue to develop this asset base and overlay these projects on top of this asset base. It's really turned into an opportunity of individual asset to a more broad based system. And that system has a major effect on capacity increase as you think about moving water to needed Places are removing water from produced places and across recycling or disposal assets.

Speaker 2

So The actual putting them together allows for capacity to increase meaningfully Because you're not limited by the single system utilization, so that you're able to work through kind of the highs and lows and peak shape somewhat. Tom, one last thing with it. It's really becoming to develop itself really well now. But because of these systems or assets or overlaying recycling on top of large produced water volumes That we've been able to do. It's also allowed us now to think about how we go to market or how we Really have a relationship between the water services business and the specialized chemistry business Through this footprint of infrastructure, it's very different.

Speaker 2

And we think there's great opportunities whether it's a margin Expansion or added services or bringing specialized chemistry into the mix.

Speaker 6

That all makes sense. And then two more questions in the line of inquiry here on Water Infrastructure's I believe you had been pursuing a total of 12 projects as of your last update that you gave us. Could you update us on that number? Has it held the same, increased, have any dropped out? And then of the current total number that you're chasing, how many of those entail full lifecycle recycling facilities?

Speaker 2

So the number is obviously fluid. Deals can come and go and you never really know if it's going to cross the finish line until you get Q Signature on the Generally speaking, the opportunity set some have fallen out, but the opportunity set has increased from where it was last time. So we would be above that today and at least half or better would be kind of full lifecycle water projects. So there's a that's we're focused on everything around our existing footprint as it ties into the infrastructure and the water chemistry Components that we've talked about from big to small, but really what we're getting a lot of interest in is that full lifecycle solution. And again, It starts in the Permian because that's where so much of the produced water is, but we're having those conversations across our footprint.

Speaker 6

Wow, that's not surprising, but sounds very promising. I'll return to the queue.

Operator

The next question is from John Daniel with Daniel Energy Partners.

Speaker 7

Good morning. Just a few completely random questions here. I guess the first one would be, if all of the projects that you're evaluating Were to be realized, what type of CapEx could that look like next year?

Speaker 4

Yes. John, certainly, we hope to get better handle on that heading into next year's kind of budget for you. We if they were all realized, it would be a number that's much larger than today, for much larger than 2023 certainly. We do have opportunities that are larger, as Michael mentioned, and ones that are similar to the ones we've been announced most recently. What's important to us, it will be within cash flow.

Speaker 4

So we pursue high return projects. We pursue it With knowing that Select, we control, we have care and custody over an immense volume of water nationwide. We can recycle that water. We can dispose it. We can move it across basins, across customers.

Speaker 4

Ultimately, we hope to be able to use that water in beneficial reuse. And that's really what all these projects are furthering is that goal, that system and the ability to Drive greater economics through better connectivity. So we do have potential to expand. We also have potential to Apply some of our solutions beyond oil and gas and beyond what we've traditionally done. We're going to be very thoughtful and judicious about that, of course, but A lot of exciting things on the horizon that I hope to get into more in future calls.

Speaker 7

Got it. No, I really was driving the question. I'm trying to get a sense for whether you think The demand for all of your services is actually accelerating relative to growth you might have experienced in the last year or so. So

Speaker 2

Yes. As Michael mentioned,

Speaker 4

we have certainly more projects under discussion than we did 6 months ago. And that's a long term contracted projects When we talk about those.

Speaker 2

John, before we get off that subject, because I don't know if it's a direct to your question, but I believe it's An answer related to it. What we are finding is as we build out this opportunity set And the water infrastructure, it adds to the ability for us to do more services. And that more services could be around that Actual facility as well as the interaction between the facility and the job. And it is driving Something different than what we had before as we develop it, John. And the same thing would be true for the chemistry component, Really around the recycling piece.

Speaker 2

But as you put in more recycling facilities and you're managing that produced water and making it usable frac water again, applying select chemistry to that, which really focuses and specialize on matching complex water With the right chemistry, there's an augmentation effect there as well. So it services and the chemistry piece.

Speaker 7

Fair enough. Interesting. I'll have to follow-up the offline on that to learn more. On the projects or At this point, I know you said you're there in all the in various different geographic basins, but I'm curious if you're seeing Any new potential projects in new areas outside of where you presently operate?

Speaker 2

Short answer is yes.

Speaker 4

Okay.

Speaker 2

I mean the distribution is still largely focused on the Permian because that's where so much Of the activity in the produced water is. But we're seeing in areas where we've been in the past like the DJ as well as in new areas where we haven't We don't have projects or haven't announced them. So I think you're seeing other basins continue to Russell with some of the produced water challenges and the reuse opportunity or challenge, however you want to think about it, And kind of catch up on that front. And so we get really excited about it, one, because it presents an infrastructure opportunity for us, really oftentimes A brownfield around our existing asset base, the newly acquired asset base, but also on the chemistry side, as you start to embrace more of the reuse, There's more complex chemistry that's associated with that and that's kind of our bread and butter.

Speaker 4

And John, typically we'll have operations in those areas, but just We may not yet have recycling facilities or major infrastructure projects in those areas, but

Speaker 2

we're not

Speaker 4

Can you go into Alaska or offshore or anything here?

Speaker 2

Yes. I should have specified in our existing footprint. John, Before we get off that subject, because it's again, I believe it adds to your question or As a point of effect to your question, you take Our position in the Haynesville shale with what we got out of the Nuvera transaction, that pipeline system and that Disposal network that we continue to hook together and add to has probably a big piece of the backlog that Michael's talking about. But and they're really projects to continue to hook it together or add disposal or Lay a pipe to more produced water that's being hauled and it's a good backlog. But the interesting thing is the Haynesville contracted, but we actually are adding 2 in the Haynesville right now.

Speaker 2

And if Haynesville got active and it become an opportunity for recycle, we have a large quantity of water that Centralized with a network that you can deliver back out to second to third. Okay.

Speaker 7

Interesting. And I guess I'll go to my final question, which is admittedly a bit of a nerdy question. But when you think back to like the old Water business, going back a lot of the fluid hauling trucks. I'm just curious how many trucks are running on the road today versus what you might have had 4 to 5 years ago? And then on that fleet, what's the opportunity set to maybe have CNG powered Factors or electric?

Speaker 7

That's it for me.

Speaker 2

John and I are looking at each other on this one, John. I told you I was going to No, it's a great question. I haven't thought about it in a while. I mean, I probably need to follow-up with To get you something that you can really sink your teeth in. But if you when I

Speaker 4

think about it, all of

Speaker 2

the frac water was being delivered by truck back in the day. Yes. So now granted the frac sizes are smaller, but that is a lot of trucks. And the pipeline infrastructure for the produced water and flowback was Limited or non existent as well. And so you've taken all of the frac water today is being delivered by Hose are pipe and a majority, at least in most basins, if not all, Except for the Northeast is going to be the flowback in producer is going to come through pipe.

Speaker 2

So the amount of trucks that we've eliminated as an industry is Substantial. And there's still a lot of trucks out there and there's always going to be a need for them in certain aspects. But the reduction is pretty dramatic. In terms of CNG, we've looked at CNG and LNG over the years. Part of the challenges you're well aware of, there's the economic piece, but there's also just the logistics.

Speaker 2

And so you really have to kind of put that infrastructure in yourself at Sure. You are to

Speaker 1

make it

Speaker 2

work. And just make sure that you're really disciplined and thoughtful about your route planning. Hey, John. Before we get off that subject, I think it's really important to be very clear. Tank Trucks in the oilfield has a place And that place is still getting executed today and they will continue to have a place.

Speaker 2

They are a service component and they haul produced water In a meaningful way that's not hooked to pipe today.

Speaker 7

Right.

Speaker 2

The other answer and it would not be Compress Natural Gas answer directly to you. But we believe Select believes that the technology and advancement of automation And technology through the cab or through the motor of those trucks has not been advanced to the position it's going to be advanced to. And that will bring a different type of truck application as we go forward.

Speaker 7

Fair enough. Thank you for indulging my questions this morning. Thank

Operator

you. The next question is from Jeff Robertson with Water Tower Research.

Speaker 2

Thank you. Good morning. Just a question as operators Push where they can for longer laterals and larger completion jobs. Does that present an opportunity Obviously, on the volume side for what you all can do for customers, but does it also present an opportunity for you to provide higher margin Solutions to customers? Yes.

Speaker 2

This is John. I'll take it and try to answer it. Longer laterals And activities around completion, whether it's simulfrac Longer laterals are more complicated water opportunities to the wellsite, Multiple services, recycling, automated manifolds, automated pumps, those jobs are getting very technical now. And that is a very good position for Select to be in as those jobs continue to get more technical Because of use of water, the utilization or the efficiency that Is it demanded by our customer in a 24 hour period and the complexity of that? So it's a plus for us, but yes, it complicates things.

Speaker 2

Does that play into your hand or your strength just to what Select can deliver to the customers for site management? Yes. It plays into Select's thesis, but it also plays into Select's history because if you look back across The last 10 years have slick water or large quantity water fracs have developed and simul fracs has developed and pad drilling and longer lateral. The complexity of that job is what we really built our technology around. So AquaView, Automation, pump technology, eight sources for a big job that needs to be brought into The solution of delivery, it's really what our backbone is about.

Speaker 2

Thank you for taking my questions.

Operator

This concludes our question and answer session. I would like to turn the floor back over to John Schmidt for closing comments, please.

Speaker 2

Thank you, operator. And thanks for everybody for joining the call today and giving us the interest in learning more about Select Water Solutions.

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Earnings Conference Call
Select Water Solutions Q2 2023
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