Select Water Solutions - Q2 2023

Transcript

Operator (participant)

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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Chris George. Please, you may begin.

Chris George (SVP of Corporate Development and Investor Relations)

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 second quarter of 2023. With me today are John Schmitz, our Founder, Chairman, President, and Chief Executive Officer, Nick Swyka, Senior Vice President and Chief Financial Officer, and Michael Skarke, 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. There will also be a recorded telephonic replay available until August 17th, 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. 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. 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-K, our current reports on Form 8-K, 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. 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 Services 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 investors.selectwater.com. Please refer to the company's current report on Form 8-K, 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.

John Schmitz (Founder, Chairman, President, and CEO)

Thanks, Chris. Good morning, thank you for joining us. I'm pleased to be discussing Select Water Solutions again with you today. The second quarter saw strong margin improvements, meaningful free cash flow generation, and higher net income and Adjusted EBITDA. Our continued focus on operation integration and 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&A. 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 million, and increase Adjusted EBITDA to $70 million, a 4% increase relative to the first quarter of 2023.

On the cash flow side of things, I am pleased with the progress we made during the second quarter. Nick can touch on the components in a bit more detail, but our focused effort to reduce our working capital are paying off and helped deliver $102 million of cash flow from operations during the second quarter. Adjusting for the $36 million of net CapEx spent during the quarter, we were able to pull through about $66 million 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. I expect to see more progress on reducing working capital over the back half of the year, providing a significant opportunity for generating outside size free cash flow.

Strong free cash flow provides us with many attractive options for capital allocation. During the second quarter, we returned about $44 million to shareholders through dividends and buybacks, funded $36 million of net CapEx, heavily weighted toward our contracted recycling and pipeline infrastructure projects, and closed on a small bolt-on, $4 million water containment asset acquisition. Ultimately, we were still able to re-reduce our outstanding borrowings by $10.5 million. We already have repaid a meaningful portion of our remaining outstanding borrowings during the third quarter 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.

During the second quarter alone, we were able to repurchase 5% of the outstanding A shares, in addition to paying our third quarterly dividend. We will continue to weigh capital returns against other growth projects and M&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 will further enhance that vision. Operationally, 2023 is a very important year for us. Having closed on more than a dozen acquisitions over the last two years, combined with the rapid pace of market activity growth coming out of the pandemic, we needed to prioritize, first 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. 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 will 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 that we are able to provide around the infrastructure base. While there is still more to accomplish, we have seen these efforts pay off across the company and our customer base, with gross margins improving by 160 basis points on a consolidated basis during the second quarter, 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 second quarter, 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. 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 produced water disposal facilities.

Importantly, these solutions are nearly all under long-term contracts or are 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 million of contracted projects underwritten so far this year. The project backlog remains very strong, and we expect to close on multiple additional projects in the back half of 2023. With our recent projects expected to come online during the late third quarter and fourth quarter, I'm excited about the growth prospects of the segment looking into 2024.

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. Long term, having care, custody, and control over an increased portfolio of produced water barrels, regardless of the ultimate use, will 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 in 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 opportunities to create additional value across an integrated water and chemistry business. 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 aligned as strategic partners with our customers. When we think about our growth priorities, Water Infrastructure will certainly remain front and center. 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 2023, 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&A, Water Infrastructure has grown from about 7% of the total company gross profit in 2018, to about 25% expected for the third quarter 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 the company will be earned from sustainable recycling solutions, contracted pipelines, 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.

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 second 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 2023 and beyond. Nick?

Nick Swyka (SVP and CFO)

Thank you, John, and good morning, everyone. Our focus on cash generation and operational efficiency paid off in the second quarter with a strong free cash flow yield and higher gross margins for the company. Net income and Adjusted EBITDA both advanced quarter-over-quarter, even as the surrounding macro environment 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 it 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. 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 cash collections during the quarter, reflected in the $102 million operating cash flow benefit to the company.

This is the result of the dedicated teamwork across multiple 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 million during the quarter, and our previous target of reducing AR by $75 million between first quarter and year-end has now been raised to $100 million. With this target, we expect to repay the remaining credit facility borrowings prior to year-end and have ample liquidity to act on a range of potential strategic opportunities. 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 million of open market share repurchases on top of our regular quarterly dividend, leaving around $10 million of remaining authorization.

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 that level of buyback activity during the third quarter. November marks the one-year anniversary of the initiation of our regular $0.05 per share quarterly dividend, and we plan to reevaluate that level following our upcoming August payout. With our expectation of 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. Looking at the income statement, Select Water Solutions' second quarter revenue declined sequentially by 3% to $405 million.

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 $13.7 million to $22.6 million sequentially, and Adjusted EBITDA increased to nearly $70 million from $67 million in the first quarter. While declines in completions activity, along with rig count through the second 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 customers generally remain highly profitable and well-capitalized. We have seen pricing remain steady, and we do not anticipate any material pricing movement based on activity levels.

Additionally, some of the projects we announced last quarter will begin to make an impact in the third and fourth 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 footprint, we have a number of potential incremental infrastructure projects in various phases of development that we expect to announce in coming quarters. Now walking through the updated segments, Water Services revenue declined by $10 million sequentially or a little less than 4%. We prioritized higher profitability over top-line growth, targeting a limited rationalization of underperforming locations in 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 can be more efficiently deployed elsewhere. With this strategy in mind, to maximize return on investment, we expect a low-to-mid single-digit % revenue decline, but higher profitability with an improvement to gross margins before D&A of up to 100 basis points. Our recalibrated Water Infrastructure segment delivered steady performance from the base of a very strong first quarter. We believe the third quarter should see gains in both revenue by mid-single-digit %, as well as gross margins before D&A of 200-400 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 third quarter, 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 third quarter as market share gains offset lower industry activity relative to the second quarter. Consolidated SG&A decreased sequentially to $34.3 million from $35.8 million, due primarily to a $1 million decrease in transaction and rebranding costs.

I expect the back half of the year will deliver around $35 million per quarter of SG&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 we announced on our last call. Second quarter net CapEx of $36.3 million increased from the $21.2 million of the first quarter. Our 2023 net CapEx forecast remains within its previous range, with a tightening of that range to $100 million-$130 million, after giving effect to roughly $20 million in expected full-year asset sales.

I'm pleased that with our heightened cash flows, we were able to pay down our Sustainability-Linked Credit Facility by a little over $10 million, while executing these critical organic growth investments, as well as the $44 million of shareholder returns during the quarter. We expect depreciation and amortization expense to continue at around $35 million per quarter and tax expense to remain minimal through 2023. We added $27 million of liquidity during the quarter to finish with $193 million of total liquidity. 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. With that, we'll open it up to questions. Operator?

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the questioning queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your headset before pressing the star keys. Our first question comes from Jim Rollyson, Raymond James.

Jim Rollyson (Director and Equity Research Analyst)

Good morning, guys.

Nick Swyka (SVP and CFO)

Morning, Jim.

Jim Rollyson (Director and Equity Research Analyst)

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. Circling back to something you said a minute ago, Nick, on when we think about margins for Water Infrastructure, as they're, 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. So we're north of 40% margins, kind of guiding, obviously, pretty stout growth sequentially, but up to 200-400 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% margin go to?

I mean, is that something that as these projects hit, I know you've said margin accreted, but is that something that's in the mid-40s, in the high 40s? Just maybe some sense of how that looks and any color you might provide just on how y'all are thinking about incremental revenue opportunity for that business, just based on what you have already underway.

Nick Swyka (SVP and CFO)

Sure, Jim. Thank you. 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 million of infrastructure projects in our last call. As you know, we like to underwrite contracted projects with a three-year payback window with additional upside potential from third parties or expansions. You do a little bit of math there, and that gives you a pretty healthy EBITDA, $10 million-$12+ million, just from those projects alone.

We do expect to come back and detail some additional projects over the next quarter and, and into the back half of the year here that'll add to that, and add to it at accretive margins of 50% or better. 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 net networks, as we continue to bring recycling, not just in the Permian, but, but in other basins, and develop many of the assets that we've acquired over the past couple of years.

Michael Skarke (EVP and COO)

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

Jim Rollyson (Director and Equity Research Analyst)

... kind of steady, so, you know, absent new projects, that kind of like, sounds like steady ramp as, as we go through the next few quarters. You obviously highlighted there's still opportunity out there in Permian and elsewhere. Are we talking kind of similar size projects to what you guys have been underwriting over the last 18 months or so? Are there any larger, more material projects on top of this? You've kind of been, you know, hitting singles, doubles, and, and, and obviously great margins on top of that. Just curious if as you have rebranded and people are starting to see what you guys are capable of, if there's actually any larger sized opportunities as well.

Michael Skarke (EVP and COO)

As John mentioned, you know, 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, you know, whether it's through the rebrand or just, just executing for our customers. We're getting a lot of interest on projects really in, in all basins across our footprint. They range from, you know, small deals to, to quite large deals, bigger than anything that 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 million-$10 million build out. 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.

Jim Rollyson (Director and Equity Research Analyst)

Fantastic. Just one, one last question. John, on the, on the M&A front, you know, you guys were extremely busy consolidating a bunch of things at, 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, for M&A as you kind of get past the, 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 forever, given your, your market cap today. Just curious, kind of on the opportunity set here over the next couple of years?

John Schmitz (Founder, Chairman, President, and CEO)

Yeah, no, great, great question. We were busy, and we did put a lot of transactions together, a lot of companies. Most importantly, what we put together is a footprint with this asset base, really across the lower 48, but in some areas, it's really number one position. The opportunity around that asset base that we've put together, Jim, is the opportunity we're really, really focused on. If you ask me if there's M&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, a very good opportunity for capital, both for our customers and us, we're all for it.

Right now, we are very focused on this infrastructure asset base that we put together because it's very unique. To Michael's point, there is a lot of conversation. There's a lot of opportunity outside of the ones we've announced already, and they are, you know, some of them are large in size, but a lot of them are small. The small, either, you know, pipelines to bring water to the asset base that we have in place or hook up the asset base to each other to become, you know, 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.

I, I would also add, too, yes, the rebranding is very important because it tells us, tells our customer base, our investors, some on ourselves, who we are and what we are. 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, long-term contracts over this concentrated water position we put together now.

Jim Rollyson (Director and Equity Research Analyst)

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

John Schmitz (Founder, Chairman, President, and CEO)

Thanks, Jim.

Operator (participant)

Our next question comes from Luke Lemoine with Piper.

Luke Lemoine (Managing Director)

Hey, good morning.

John Schmitz (Founder, Chairman, President, and CEO)

Hi, Luke.

Luke Lemoine (Managing Director)

Morning. Jim, tackled the Water Infrastructure margin question. I guess, in Water Services, you had nice margin improvement there, even with reps ticking down, and 3Q has the same outlook with reps down 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? It, it sounded like some of this might have been closing down unprofitable locations and continue to kind of rationalize the asset base, but any commentary you could provide on that would be helpful.

Michael Skarke (EVP and COO)

Sure. Just directly to, to hit the margins, you know, our, our near-term goal for Water Services is the mid-20s%, with longer term in the high 20s%. Really, the drivers in that is, is further integration. Part of that further integration is the consolidation and potentially elimination of some of the yards that are, one, not strategic to our integrated water and chemical thesis, and two, unprofitable or mildly profitable. As we, as we look to consolidate or rationalize that, you know, it could have some downward pressure on, on revenue, but we're expecting margins to be flat or even improved by that activity. That was the other piece beyond the, the integration is really just operational efficiency. I mean, we're, we're, we're removed from COVID now, far enough.

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

I, 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 further technology, which will drive profit to the bottom line. Those are really what we're focused on in services, Luke.

Luke Lemoine (Managing Director)

Great. Got it. perfect. Thanks a bunch.

Operator (participant)

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

Tom Curran (Senior Equity Analyst)

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

Michael Skarke (EVP and COO)

On the sites, it, it really comes down to individual points in time, and we, we can have some sites that are-- that are, you know, full out at for a period of time, but that's, 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. I, I would say somewhere in the 50%-60% range in terms of utilization, and those are a lot of the projects that, that we're working on, is looking to tie in more customers so that we can leverage that capacity. 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.

We'll continue to expand it to meet the needs of our customers in the market.

John Schmitz (Founder, Chairman, President, and CEO)

Yeah, Tom, one thing I'd add.

Tom Curran (Senior Equity Analyst)

Hi.

John Schmitz (Founder, Chairman, President, and CEO)

Yeah, this is John. 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. That system has a major effect on capacity increase as you think about moving water to needed places or removing water from, you know, produced places and across recycling or disposal assets. The actual, you know, putting them together, allows for capacity to increase meaningfully.

Michael Skarke (EVP and COO)

You're not limited by the single system utilization, so that you're able to, to work through kind of the highs and lows and, and peak shape somewhat.

John Schmitz (Founder, Chairman, President, and CEO)

Tom, one, 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. We think there's great opportunities, whether it's a margin expansion or added services or, you know, bringing specialized chemistry into the mix.

Tom Curran (Senior Equity Analyst)

That all makes sense. Then, you know, in the line of inquiry here on Water Infrastructure's opportunity set. 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? Then of the current total number that you're chasing, how many of those entail full lifecycle recycling facilities?

Michael Skarke (EVP and COO)

The, the number is obviously fluid. Deals can, can come and go, and you, you never really know if it's gonna cross the finish line until you get two signatures on the piece of paper. Generally speaking, the opportunity set, you know, some have fallen out, but the opportunity set is, is increased from where it was last time. We would be above that today, and at least half, or, or better, would be kind of full lifecycle water projects. We're, 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. Really what we're getting a lot of interest in is that full lifecycle solution.

Again, it's, it's, 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.

Tom Curran (Senior Equity Analyst)

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

John Schmitz (Founder, Chairman, President, and CEO)

Thank you, Tom.

Operator (participant)

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

John Daniel (Founder and President)

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?

Nick Swyka (SVP and CFO)

Yeah, John, certainly, we, we hope to get better handle on that heading into next year's kind of budget for you. If they were all realized, it would be a number that's much larger than today.

John Daniel (Founder and President)

Yeah.

Nick Swyka (SVP and CFO)

Much larger than 2023, certainly. We do have opportunities that are larger, as Michael mentioned, and, and ones that are similar to the ones we've announced most recently. What's important to us, it will be within cash flow.

John Daniel (Founder and President)

Sure.

Nick Swyka (SVP and CFO)

We, we pursue high-return projects. We pursue it with knowing that Select, we, 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. Ultimately, we hope to be able to use that water in beneficial reuse. That's really what all these projects are.

John Daniel (Founder and President)

Right

Nick Swyka (SVP and CFO)

are furthering, is, is that goal, that system, and the ability to drive greater economics through better connectivity. We, 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.

John Daniel (Founder and President)

Yeah.

Nick Swyka (SVP and CFO)

we're gonna be very thoughtful and judicious about that, of course, but, a lot of exciting things on the horizon that, hope to get into more in future calls.

John Daniel (Founder and President)

Got it. I really was driving the question, trying to get a sense for whether you think the, the demand for all of your services is actually accelerating, relative to growth you might have experienced in, you know, the last year or so, so.

Nick Swyka (SVP and CFO)

Yeah, as Michael mentioned, we have, yeah, certainly more, more projects under discussion-

John Daniel (Founder and President)

Yeah

Nick Swyka (SVP and CFO)

... than we did 6 months ago, and, you know, that's a long-term contracted projects, when we, we talk about those.

John Daniel (Founder and President)

Sure.

John Schmitz (Founder, Chairman, President, and CEO)

Hey, John. 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 in the Water Infrastructure, it adds to the ability for us to do more services. That more services could be around that actual facility, as well as the interaction between the facility and the job.

John Daniel (Founder and President)

Mm-hmm.

John Schmitz (Founder, Chairman, President, and CEO)

It, it is driving something different than what we had before as we develop it, John.

Michael Skarke (EVP and COO)

The same thing would be true for the chemistry component. You know, really around the recycling piece. As you put in more recycling facilities, and you're managing that produced water and making it into a usable frac water again, applying Select chemistry to that, which really focuses and specialize on matching, you know, complex water with, with, with the right chemistry, there's an augmentation effect there as well.

John Daniel (Founder and President)

Okay.

Michael Skarke (EVP and COO)

It's services and the chemistry piece.

John Daniel (Founder and President)

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

Michael Skarke (EVP and COO)

Short answer is yes.

John Daniel (Founder and President)

Okay.

Michael Skarke (EVP and COO)

I mean, the, the distribution is, is still, you know, largely focused on the Permian because that's where so much of, of the activity and the produced water is.

John Daniel (Founder and President)

Sure.

Michael Skarke (EVP and COO)

You know, we're, we're seeing in areas where we've been in the past, like, like the DJ, as well as in new areas where we haven't, where we don't have projects or haven't announced them. I, I, I think you're, you're seeing other basins continue to wrestle with some of the, 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. We get really excited about it, one, because it presents an infrastructure opportunity for us. You know, really, oftentimes a, a brownfield around our existing asset base, the newly acquired asset base.

John Daniel (Founder and President)

Yeah.

Michael Skarke (EVP and COO)

Also on the chemistry side, as you, as you start to embrace more of the, the reuse, there's more complex chemistry that's associated with that, and that's kind of our bread and butter.

John Daniel (Founder and President)

Okay.

Nick Swyka (SVP and CFO)

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.

John Daniel (Founder and President)

Yeah.

Nick Swyka (SVP and CFO)

We're not, we're not looking at, going to Alaska or offshore or anything here.

Michael Skarke (EVP and COO)

Yeah, I should have specified within our existing footprint.

John Daniel (Founder and President)

Okay. Yeah.

John Schmitz (Founder, Chairman, President, and CEO)

Hey, John, before, before we get off that subject, because it's, again, I, I believe it, it adds to your, your question or, or, or, you know, has a point of effect to your question. You take our position in the Haynesville Shale with what we got out of the Nuverra transaction.

John Daniel (Founder and President)

Uh-huh.

John Schmitz (Founder, Chairman, President, and CEO)

That, 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 Skarke's talking about. They're really projects to continue to hook it together or add disposal or, or lay a pipe to more, you know, more produced water that's being hauled, and, and it's a, it's a good backlog.

John Daniel (Founder and President)

Yeah.

John Schmitz (Founder, Chairman, President, and CEO)

The interesting thing is, you know, the Haynesville contracted, but we actually are adding two in that Haynesville right now. If the Haynesville got active and it become an opportunity for recycle, we have a large quantity of water that's centralized with a network that you can deliver back out to second to none.

John Daniel (Founder and President)

Okay. Okay, interesting. 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, you know, 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 four-five years ago? Then, on that fleet, what's the opportunity set to maybe, you know, have CNG-powered tractors or electric? That's it for me.

John Schmitz (Founder, Chairman, President, and CEO)

John and I are looking at each other on this one. John, I told you I was gonna. No, it's a great question. I haven't thought about it in a while. I mean, I.

John Daniel (Founder and President)

Yeah

John Schmitz (Founder, Chairman, President, and CEO)

I probably need to follow up with you to get you something that you can really sink your teeth in. When I think about it, all of the frac water was being delivered by truck back in the day.

John Daniel (Founder and President)

Yeah.

John Schmitz (Founder, Chairman, President, and CEO)

Now, granted, the frac sizes are smaller, but that is a lot of trucks. The pipeline infrastructure for the produced water and flowback was limited or nonexistent as well. You've taken, all of the frac water today is being delivered by, you know, hose or pipe.

John Daniel (Founder and President)

Uh-huh.

John Schmitz (Founder, Chairman, President, and CEO)

A sign-- the majority, at least in, in most basins, if not all, is except for the Northeast, is gonna be the, the flowback and produce is gonna come through pipe. The amount of trucks that we've eliminated as an industry is, is substantial. Now, there's still a lot of trucks out there, and there's always gonna be a need for them in, in, in certain aspects, but the reduction is, is pretty dramatic. You know, in terms of CNG, we've looked at, at CNG and LNG, you know, over the years. You know, part of the challenge, as you're well aware of, there's the economic piece, but there's also just the logistics.

John Daniel (Founder and President)

Sure.

John Schmitz (Founder, Chairman, President, and CEO)

So you really have to kind of put that infrastructure in yourself at your yard to make it work, and, and just make sure that you're really disciplined and thoughtful about your route planning. Hey, John. Yes, sir. Before we get off that subject, I think it, it's really important to, 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. They are a service component, and they haul produced water in a meaningful way that's not hooked to pipe today.

John Daniel (Founder and President)

Right.

John Schmitz (Founder, Chairman, President, and CEO)

The other answer, it would not be compressed natural gas to answer directly to you. 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 gonna be advanced to.

John Daniel (Founder and President)

Okay.

John Schmitz (Founder, Chairman, President, and CEO)

That will bring a different type of truck application as we go forward.

John Daniel (Founder and President)

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

John Schmitz (Founder, Chairman, President, and CEO)

Thank you.

Operator (participant)

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

Jeff Robertson (Managing Director of Natural Resources)

Thank you. Good morning. Just a question, as operators continue to push where they can for longer laterals and larger completion jobs, does that present an opportunity, like, and 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?

John Schmitz (Founder, Chairman, President, and CEO)

Yeah, this is John. I'll take it and try to answer it. It longer laterals and activities around completion, whether it's simul-frac, or longer laterals or more complicated water opportunities to the wellsite, multiple sources, 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. That because of use of water, you know, the, the, the utilization or the efficiency that is demanded by our customer in a 24-hour period and the complexity of that. It, it's a plus for us, but yes, it complicates things.

Jeff Robertson (Managing Director of Natural Resources)

Does that play into your hand or your strength, just with what Select can deliver to the customers for site management?

John Schmitz (Founder, Chairman, President, and CEO)

Yeah, I, it plays into Select's thesis, but it also plays into Select's history, because if you look back across the, the last 10 years of, as slickwater 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. AquaView, automation, pump technology, eight sources for a big job that needs to be brought into the solution of delivery. It's, it's really what our, you know, our backbone is about.

Jeff Robertson (Managing Director of Natural Resources)

Thank you for taking my questions.

Operator (participant)

This concludes-

John Schmitz (Founder, Chairman, President, and CEO)

Yep

Operator (participant)

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

John Schmitz (Founder, Chairman, President, and CEO)

Thank you, operator. Thanks for everybody for joining the call today and giving us the interest in learning more about Select Water Solutions, and we definitely look forward to speaking to you again next quarter.