Select Energy Services Earnings Call: Growth Amid Challenges

Select Energy Services ((WTTR)) has held its Q3 earnings call. Read on for the main highlights of the call.

Select Energy Services recently held its earnings call, revealing a mixed sentiment. The company celebrated significant achievements, such as securing long-term contracts and growth in its Chemical Technologies segment, bolstered by strong cash flow management. However, challenges in the Water Services segment and increased SG&A costs slightly dampened the overall positive outlook.

Strong Water Infrastructure Contracts

Select Energy Services has made substantial progress in its Water Infrastructure segment, securing several new midstream contracts in the Permian Basin. This expansion adds over 65,000 additional acres under long-term dedication, with nearly 800,000 additional acres expected to be under dedication by 2025.

Chemical Technologies Growth

The Chemical Technologies segment reported a robust performance, achieving a sequential revenue increase of 13% and gross margins before D&A of 19.9%. This growth translated into a 29% increase in gross profit before D&A, highlighting the segment’s strong market position and operational efficiency.

Mineral Extraction Initiative

In a strategic move, Select Energy Services announced the groundbreaking of Texas’ first commercial produced water lithium extraction facility. This initiative is expected to generate royalty payments of $2.5 million per year starting in early 2027, with projections to ramp up to $5 million annually.

Resilient Cash Flow

The company demonstrated strong cash flow management, with cash flow from operating activities reaching $72 million, surpassing adjusted EBITDA. This resilience underscores the company’s effective financial strategies and operational efficiency.

Decline in Water Services Revenue

Despite the overall positive developments, the Water Services segment experienced a revenue decline of approximately 23% sequentially. This drop was attributed to the divestment of legacy trucking operations and lower customer activity.

Decreased Water Infrastructure Revenue

Water Infrastructure revenue decreased by 2.5%, primarily due to reduced skim oil sales and lower realized oil prices. However, disposal and recycling volumes remained stable, mitigating some of the revenue impacts.

Increased SG&A Costs

The company’s SG&A costs rose to $42 million during the third quarter, driven by severance and deal costs, including those from the Omni transaction. This increase reflects the company’s strategic investments and restructuring efforts.

Forward-Looking Guidance

Looking ahead, Select Energy Services provided optimistic guidance, projecting a 10% growth in the Water Infrastructure segment in Q4 and over 20% in 2026. The Chemical Technologies segment is expected to continue its upward trajectory with a 13% revenue increase and improved gross margins. Despite a 23% revenue decline in Water Services, margins are anticipated to improve to 19-20% in Q4. The company also plans to expand its recycled water operations significantly and has secured a new water transfer contract covering 300,000 acres.

In summary, Select Energy Services’ earnings call presented a balanced view of its current performance and future prospects. While the company faces challenges in certain segments, its strategic advancements and robust cash flow management provide a solid foundation for future growth. Investors and stakeholders can look forward to continued expansion and innovation in the company’s core areas.