8-K: Select Water Solutions Reports Solid Q1 2024 Results Driven by Infrastructure Growth

Select Water Solutions announced its first quarter 2024 financial results, highlighting growth in its Water Infrastructure segment and strategic acquisitions.

Summary

• Select Water Solutions reported a revenue of $367 million for the first quarter of 2024.
• The Water Infrastructure segment saw a 4% sequential increase in revenue from the fourth quarter of 2023 and a 14% increase from the first quarter of 2023, reaching $64 million.
• Adjusted EBITDA improved by 3% sequentially compared to the previous quarter.
• The company completed acquisitions of landfill assets in the Bakken region and Trinity Environmental Services, a water disposal and waste solutions company, for a total of $29.4 million in cash.
• Multiple new pipeline gathering, recycling, and disposal infrastructure projects were contracted in the Permian Basin and Haynesville regions.
• Net income for the quarter was $3.9 million, compared to $27.6 million in the previous quarter and $13.7 million in the first quarter of 2023.
• Gross profit was $52.7 million, with a total gross margin of 14.4%.
• Adjusted EBITDA for the quarter was $59.8 million.
• The company expects Adjusted EBITDA to increase to between $64 and $68 million in the second quarter of 2024.
• Select anticipates generating more than 50% of its consolidated profitability from Water Infrastructure and Chemical Technologies during 2024.
• Free cash flow for the first quarter was $3.5 million.
• The company expects to pull through more than 40% of its Adjusted EBITDA into free cash flow during 2024.

Sentiment

Score: 6

Explanation: The document presents a mixed picture with strong growth in the Water Infrastructure segment and strategic acquisitions, but also a decline in overall revenue and net income. The future outlook is positive, but there are risks and challenges to consider.

Positives

• The Water Infrastructure segment showed strong revenue growth and margin improvement.
• Strategic acquisitions are expanding the company's service capabilities and geographic reach.
• New long-term contracts for infrastructure projects are expected to drive future growth.
• The company anticipates improved margins in Water Services and Chemical Technologies segments in the second quarter.
• Select expects to maintain strong Water Infrastructure gross margins.
• The company is on track to achieve its target of generating more than 50% of consolidated profitability from Water Infrastructure and Chemical Technologies during 2024.
• Free cash flow generation is expected to grow over the remainder of the year.

Negatives

• Consolidated revenue decreased to $366.5 million from $374.9 million in the previous quarter and $416.6 million in the first quarter of 2023.
• Net income decreased to $3.9 million from $27.6 million in the previous quarter and $13.7 million in the first quarter of 2023.
• The Water Services segment experienced a 5.6% sequential revenue decrease.
• Cash flow from operations was impacted by an $18.6 million use of cash to fund working capital needs.
• Total liquidity decreased to $168.6 million as of March 31, 2024, from $307.4 million as of December 31, 2023.

Risks

• The company faces risks related to integrating acquired businesses and realizing anticipated synergies.
• Global macroeconomic uncertainty, including the Russia-Ukraine war and conflicts in the Middle East, could impact operations.
• Actions by OPEC+ and the Biden Administration could affect oil and gas production and demand for the company's services.
• Changes in well-completion technologies could reduce demand for the company's services.
• Regulatory actions to reduce fossil fuel use could impact long-term demand for the company's services.
• The company is exposed to fluctuations in oil and gas prices and capital spending by oil and gas companies.

Future Outlook

The company expects modest consolidated revenue growth and an increase in Adjusted EBITDA to $64-$68 million in the second quarter of 2024. They also anticipate free cash flow generation to grow over the remainder of the year and expect to pull through more than 40% of Adjusted EBITDA into free cash flow during 2024. Select aims to generate more than 50% of its consolidated profitability from Water Infrastructure and Chemical Technologies during 2024.

Management Comments

• The first quarter represented a very solid start to the year.
• The first quarter represented another strong step forward in the execution of our Water Infrastructure growth strategy.
• These acquisitions supported continued revenue growth in our Water Infrastructure segment during the first quarter and have set the stage for even stronger growth during the second quarter.
• Driven by enhanced disposal utilization and the contributions of our accretive acquisitions, we expect to maintain our strong Water Infrastructure gross margins, while also seeing meaningful margin gains in our Water Services and Chemical Technologies segments during the second quarter.
• I believe with our continued M&A execution and our organic infrastructure investments, we are well positioned to capitalize on additional opportunities ahead as one of the fastest growing infrastructure platforms in the industry.
• Select remains distinctively positioned in the energy landscape to advance a unique integration of water and chemical technology solutions with high-margin, long-term contracted infrastructure.

Industry Context

This announcement reflects a continued trend of consolidation and strategic acquisitions within the energy water and waste management sector. Select Water Solutions is positioning itself to capitalize on the growing demand for water infrastructure and waste disposal services in key oil and gas producing regions. The focus on long-term contracts and infrastructure development aligns with industry trends towards sustainable and reliable solutions.

Comparison to Industry Standards

• Select's Water Infrastructure segment's gross margin before D&A of 46.9% is strong compared to peers in the midstream water sector, such as Nuverra Environmental Solutions which has reported gross margins in the 30-40% range.
• The company's focus on acquisitions to expand its disposal capacity is similar to strategies employed by companies like Waste Connections and Republic Services in the broader waste management industry.
• Select's emphasis on long-term contracts mirrors the approach of pipeline companies like Plains All American Pipeline, which rely on stable, contracted revenue streams.
• The company's free cash flow of $3.5 million is relatively low compared to larger, more established players in the sector, but is expected to improve throughout the year.
• The sequential revenue decline in the Water Services segment is a concern, but the company's focus on higher-margin infrastructure and chemical technologies is a positive sign.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and overall revenue, but encouraged by the growth in the Water Infrastructure segment and future outlook.
• Employees may be impacted by the integration of acquired businesses and the consolidation of certain non-core operations.
• Customers will benefit from the expanded service capabilities and geographic reach of the company.
• Suppliers may see increased demand for their products and services as the company expands its operations.
• Creditors may be impacted by the company's increased debt levels and changes in liquidity.

Next Steps

• The company will continue to integrate recent acquisitions.
• The company will focus on bringing new infrastructure projects online before year-end.
• The company will work to improve margins in the Water Services and Chemical Technologies segments.
• The company will continue to execute its Water Infrastructure growth strategy.

Key Dates

Keywords

Water Infrastructure, Water Services, Chemical Technologies, Acquisition, Disposal, Recycling, Pipeline, Permian Basin, Haynesville, Bakken, EBITDA, Gross Margin, Waste Management, Environmental Services