Select Water Solutions, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Water Infrastructure: Secured incremental contracts to enhance long-term water infrastructure scale and cash flow. Recycled nearly 1 million barrels of water per day in the Permian Basin. Signed new midstream contracts in the Permian Basin, adding over 65,000 acres under long-term dedication. Expanding disposal capacity to complement recycling footprint and working on beneficial reuse solutions.
• Chemical Technologies: Saw market share gains driven by new product development, with sequential revenue increase of 13% and significant margin improvement.
• Other Initiatives: Groundbreaking of Texas' first commercial produced water lithium extraction facility in the Haynesville Shale. Progress on municipal and industrial projects in Colorado. Growth in distributed power solution demand for peak rental.

Segment Performance

• Water Infrastructure: Revenue decreased 2.5% in Q3 with margins of 53%. Expected 10% revenue and gross profit growth in Q4 compared to Q3, and more than 20% annual growth in 2026. Revenue was impacted by reduced skim oil sales and lower realized oil prices, but disposal and recycling volumes were steady.
• Water Services: Revenue decreased ~23% sequentially in Q3 due to divestment of legacy trucking operations and lower customer activity. Expected low to mid-single digit sequential revenue declines in Q4 with margins before D&A improving to 19%–20%.
• Chemical Technologies: Achieved a 13% sequential revenue increase in Q3 with gross margins before D&A of 19.9% and gross profit before D&A up 29%. Expected steady revenue in Q4 with margins of 18%–20%.

Guidance

• Water Infrastructure expects 10% revenue and gross profit growth in Q4 compared to Q3, and more than 20% annual growth in 2026.
• Chemical Technologies expects steady revenue in Q4 with margins of 18%–20%.
• Adjusted EBITDA expected to be $60 million to $64 million in Q4 2025.
• Net CapEx guidance revised to $250 million to $275 million for 2025, up from prior guidance.

Risks

• Market activity levels that could impact certain offerings.
• Commodity price fluctuations affecting revenue and margins.
• Regulatory uncertainties related to beneficial reuse and mineral extraction.
• Competition in the water infrastructure and disposal space.

Question and Answer

Q: Congrats on a nice result and continuing to advance the ball on contracting water infrastructure. Curious how positioned on disposal versus recycling volume.

A: John Schmitz stated disposal is backstopping the network, with opportunities to buy stranded assets to fit within water balancing equations.

Q: Appreciate that, John. And the other kind of exciting thing, I think, or at least really interesting is the mineral extraction and you kind of mentioned beneficial reuse. Maybe just talk about kind of what inning you're in, in the beneficial reuse.

A: Michael Lyons stated they're in early innings of creating revenue around beneficial reuse, with concrete plans to monetize portfolio and working with partners on technical and commercial aspects.

Q: Congrats on Chemical Technologies' bright spot. How do you think you can keep market share gains?

A: Chris George stated new product development driven by customer efficiency needs, technical requirements around chemistry for wellbores and fracs, and integration with recycling capabilities are drivers of continued market share gains.

Q: On water infrastructure growth next year, break down new projects vs existing assets utilization.

A: Chris George stated it's a combination of new projects coming online and commercialization of investments made in 2025, with a steady cadence of growth throughout 2026.

Q: On lithium extraction opportunities across portfolio, any additional color?

A: Michael Lyons stated well over 1 million barrels of water move through their infrastructure daily, with prioritized opportunities in recycling facilities and potential margin contribution up to $15M by 2030 from royalty streams.

Q: Question about building out Northern Delaware infrastructure and how it factors into contracts.

A: John Schmitz stated their infrastructure in Lea County and Eddy County allows optionality between recycling and disposal, giving a leg up over competitors by providing surety of taking water and recycling first.

Q: Question about water transfer and logistics service contract and integrated approach.

A: Michael Skarke stated the integrated approach is enabled by water infrastructure contracts, with their automation capabilities and asset base making them a logical choice for operators, leveraging a best-in-class water transfer offering.

Q: Question about Water Services margin profile moving into 2026.

A: Chris George stated margin improvement is a priority, with opportunities to integrate services with infrastructure to improve margins and return to mid-20s in the near term.

Q: Question about M&A environment and competitive landscape in Delaware.

A: Michael Skarke stated they're recycling first providers with a superior economic model, having built a robust system in Northern Delaware to be market leaders in total water management, keeping them competitive regardless of consolidation.

Q: Question about beneficial reuse commercialization.

A: Michael Skarke and Michael Lyons stated beneficial reuse is in early stages, with current opportunities involving industrial and chemical customers using treated water, and longer-term goals including land application, with Select uniquely positioned in this space.