8-K: Select Water Solutions Reports Record 2023 Results, Expands Infrastructure

Select Water Solutions announced record full-year 2023 financial results, driven by significant growth in its Water Infrastructure segment and strategic acquisitions.

Summary

• Select Water Solutions reported record full-year 2023 consolidated revenue of $1.6 billion, a 14% increase year-over-year.
• The Water Infrastructure segment saw a substantial 84% year-over-year revenue increase, reaching $230 million.
• Operating cash flows for 2023 were $285.4 million, a significant increase of $252 million compared to the previous year.
• The company returned $86.7 million to shareholders through share repurchases ($61.8 million) and dividends ($24.9 million).
• Select announced four new business development projects, including the Thompson Pipeline in the Bakken region, a $25 million investment.
• Net income for 2023 was $79.2 million, compared to $54.9 million in 2022, benefiting from a $61.9 million release of a valuation allowance.
• Adjusted EBITDA for 2023 reached $258.3 million, up from $194.8 million in 2022.
• The company is targeting net capital expenditures of $140-$160 million for 2024, with a focus on Water Infrastructure projects.
• For 2024, the company expects Water Infrastructure segment revenues to grow by 30%-40% and gross profit by 40%-50%.

Sentiment

Score: 8

Explanation: The document conveys a very positive sentiment due to record financial results, strong growth in the Water Infrastructure segment, and strategic initiatives. While there are some challenges mentioned, the overall tone is optimistic and confident about future prospects.

Positives

• The company achieved record full-year revenue, net income, adjusted EBITDA, and operating cash flow in 2023.
• The Water Infrastructure segment experienced substantial growth in revenue and gross profit.
• The company successfully repaid all outstanding debt and built cash on the balance sheet by year-end 2023.
• Select increased its base dividend by 20% during the year and increased share repurchases.
• The company executed six bolt-on acquisitions during 2023.
• Free cash flow for the fourth quarter of 2023 nearly matched the Adjusted EBITDA for the quarter.
• The company anticipates continued growth in the Water Infrastructure segment, increasing the stability of cash flows.
• Select expects to generate a substantial amount of free cash flow during 2024.
• The company is well-positioned to capitalize on additional opportunities through M&A and organic infrastructure investments.

Negatives

• The Water Services and Chemical Technologies segments were impacted by industry activity declines in the fourth quarter of 2023.
• The company expects some modest friction to first-quarter margins due to acquisition integration.
• The company anticipates a decline in Water Services segment revenues year-over-year due to macro activity and consolidation efforts.
• The Chemical Technologies segment experienced greater than anticipated seasonal activity declines from certain key pressure pumping customers.
• The company experienced non-recurring inventory write-downs and insurance adjustments in the Chemical Technologies segment.
• The company expects consolidated Adjusted EBITDA of $52-$56 million for the first quarter of 2024 due to activity levels and operational consolidation activities.

Risks

• The company faces risks related to the integration of recent acquisitions.
• Commodity price and activity volatility could impact the company's performance.
• Natural gas price volatility and customer budget declines may affect the Water Services and Chemical Technologies segments.
• The company is exposed to risks related to global macroeconomic uncertainty, including the Russia-Ukraine war and the conflict in the Israel-Gaza region.
• Supply chain disruptions and actions by OPEC+ could impact the company's operations.
• Regulatory and policy actions intended to reduce fossil fuel use could reduce demand for the company's services.
• Advances in well-completion technologies could reduce demand for the company's services.

Future Outlook

The company anticipates continued growth in its Water Infrastructure segment, targeting a 30%-40% revenue increase and a 40%-50% gross profit increase in 2024. They also expect to generate substantial free cash flow and are evaluating potential consolidation or divestment of underperforming Water Services operations. The company aims to have more than 50% of its consolidated profitability from Water Infrastructure and Chemical Technologies during 2024, with Water Infrastructure potentially reaching 40%-50% of consolidated profitability by the end of 2025.

Management Comments

• The fourth quarter concluded a record-setting year for Select, with full year 2023 consolidated revenue, net income, adjusted EBITDA and operating cash flow all reaching record highs for the Company.
• We were able to fund a diverse capital allocation strategy throughout 2023, including funding our maintenance capex as well as our growth capex plans, particularly around our Water Infrastructure segment.
• Each of our segments saw year-over-year revenue and gross profit gains during 2023.
• We made tremendous progress accelerating the growth of our Water Infrastructure segment.
• Despite recent commodity price and activity volatility, we continue to experience increased demand for new infrastructure development opportunities across all basins.
• I am very confident in our strong backlog for both greenfield and brownfield infrastructure system projects.
• I believe we are well on a path to achieving our previously stated target of generating more than 50% of our consolidated profitability from Water Infrastructure and Chemical Technologies during 2024.
• I firmly trust in the infrastructure-oriented strategy we’ve undertaken and the incremental value it brings to our customers, our company and our shareholders.

Industry Context

This announcement highlights the increasing importance of water infrastructure in the energy sector, particularly in the face of water constraints and the need for sustainable solutions. Select's focus on expanding its Water Infrastructure segment aligns with the industry's growing demand for water management and recycling services. The company's strategic acquisitions and long-term contracts position it well to capitalize on these trends.

Comparison to Industry Standards

• Select's 84% year-over-year revenue growth in its Water Infrastructure segment significantly outpaces the growth rates of many traditional oilfield service companies, indicating a strong market position in this niche.
• The company's focus on long-term contracted infrastructure projects is similar to strategies employed by companies like Aris Water Solutions, which also emphasizes recurring revenue streams from water management.
• Select's adjusted EBITDA margin of 16.3% for 2023 is competitive with other water management companies, though specific comparisons would require a deeper analysis of peer group financials.
• The company's capital expenditure plans for 2024, targeting $140-$160 million, are substantial and reflect a commitment to growth, similar to other companies investing heavily in infrastructure development.
• The company's focus on water recycling and disposal aligns with industry trends towards sustainable water management practices, which is a key differentiator in the market.

Stakeholder Impact

• Shareholders will benefit from increased capital returns through share repurchases and dividends.
• Employees may experience changes due to acquisition integrations and potential consolidation efforts.
• Customers will benefit from expanded water infrastructure and services.
• Suppliers may see increased demand due to the company's growth initiatives.
• Creditors will benefit from the company's strong financial position and debt repayment.

Next Steps

• The company will continue to integrate recent acquisitions into its operations.
• Select will focus on executing its capital expenditure plans for 2024, particularly in the Water Infrastructure segment.
• The company will evaluate underperforming and non-strategic operations in the Water Services segment for potential consolidation or divestment.
• Select will continue to pursue organic growth and strategic M&A opportunities.
• The company will continue to monitor and manage the impact of commodity price volatility and other macroeconomic factors.

Key Dates

Keywords

Water Infrastructure, Water Services, Chemical Technologies, EBITDA, Revenue, Acquisitions, Capital Expenditures, Share Repurchases, Dividends, Oil and Gas, Permian Basin, Bakken, Recycling, Pipeline