Select Water Solutions 2026 Third Quarter Earnings Conference Call - SELECT WATER SOLUTIONS INC

Financial Performance:

• Consolidated Q3 2026 revenue reached $412 million; Adjusted EBITDA was $93 million (up from Q2), with YTD Adjusted EBITDA of $264 million, surpassing the full-year 2025 record.
• Net income for Q3 was $23 million; consolidated adjusted EBITDA margin stood at approximately 22.6%.
• Water Infrastructure segment revenue grew 40% YoY to a record $110 million with 57% gross margins before DNA; water services revenue grew 7% sequentially to an estimated $150–160 million run rate; Chemical Technology revenue was $90 million, meeting the high end of guidance.
• Produced water volumes increased 30% YoY to 1.7 million barrels per day.
• Post-quarter financing: Closed $900 million in senior unsecured notes (7.58% yield, 8-year term) and a new $500 million 5-year revolving credit facility, raising total available liquidity to nearly double the prior facility; pro forma net debt-to-Adjusted EBITDA leverage is approximately 2.0x.
• Net CapEx for Q3 was $88 million; 2026 guidance for total Net CapEx updated to $300–310 million to accommodate Pilot Water integration and growth.
• Operating cash flow was $84 million; SG&A expenses were $54 million (13% of revenue) due to transaction costs, expected to normalize to 10–11% in 2027.

Guidance and Future Outlook:

• Full-year 2026 Consolidated Adjusted EBITDA guidance raised to above the high end of the previous 25–30% YoY growth range (excluding Pilot Water benefits).
• Q4 2026 Adjusted EBITDA guided at $95–100 million; Water Infrastructure revenue expected to range $150–160 million (35–45% growth) with gross margins of 52–56%; Water Services revenue $150–160 million with margins 21–24%; Chemical Technology revenue $75–80 million with margins 17–18%.
• Full-year 2026 Pilot Water performance expected to be within prior guidance ($250–270M revenue, $100–110M Adjusted EBITDA); 2027 outlook for Pilot remains $120–130M Adjusted EBITDA.
• Management projects 2027 as a year of accelerated commercialization with full-year Pilot consolidation, expecting significant organic growth from new contracts and integration synergies.
• Net CapEx for 2027 is expected to remain similar to 2026 levels as a starting point, with maintenance CapEx increasing modestly to $80–90 million, potentially yielding higher free cash flow as earnings grow.

Business Segments and Product Lines:

• Water Infrastructure: Drove record performance via 1.7M bpd volumes; closed strategic acquisition of Pilot Water Solutions, integrating "recycling-first" capabilities with "disposal-first" fixed infrastructure to solve capacity constraints.
• Water Services: Completed divestment of 55% majority stake in Peak Rentals for $77 million consideration ($42M cash, $35M seller note), retaining 45% minority interest; deconsolidated Peak from balance sheet, reducing future segment revenue contribution by ~21% but maintaining equity upside.
• Chemical Technology: Revenue of $90 million driven by surfactant suite growth (now >10% of portfolio); new product trials progressing with expected acceleration in 2027 adoption.
• Strategic Partnerships: Continued collaboration with LibertyStream Infrastructure on lithium and iodine extraction facilities; two active projects under construction with two more in pipeline.

Market and Competitive Landscape:

• Secured a major Northern Delaware Basin contract expansion with an investment-grade customer, adding >250,000 acres and extending terms by 12 years.
• Win rates are increasing due to improved network balance, reliability, and the ability to offer firm disposal capacity (a previously lost opportunity) now resolved via Pilot acquisition.
• Regulatory tightening in Texas is viewed as creating value for permitted capacity; company benefits from "change-in-law" provisions allowing cost pass-through to customers.
• Market interest in advanced chemicals (surfactants) is accelerating, with large operators likely to influence broader industry adoption in 2027.

Risks and Challenges:

• Integration costs and seasonal expenses in Q4 2026 may compress Water Infrastructure margins to the 52–56% range.
• Deconsolidation of Peak Rentals will reduce Water Services revenue and EBITDA contribution for Q4 2026.
• Pilot Water permits have shelf lives requiring monitoring and renewal, though currently not a restriction.
• Macro and geopolitical uncertainties remain, though management expresses high confidence in the company's contracted earnings profile.
• Upfront integration costs and preliminary purchase price accounting may temporarily impact Q4 financials.

Management Commentary and Tone:

• Tone was highly confident and optimistic, emphasizing record performance and successful strategic execution.
• Management highlighted the "complementary nature" of the Pilot acquisition, noting that customer inquiries have surged post-closing as they recognize the ability to solve the "firm capacity" gap.
• Emphasis placed on the "end-to-end" water management value proposition, combining recycling economics with firm disposal capacity to maximize value per barrel.
• CEO John Schmitz and executives expressed strong conviction that 2027 will be an active year for commercialization and organic growth.

Analyst Questions and Answers:

• Jim Rollison (Raymond James): Q3 to Q4 EBITDA transition explained as a net result of losing Peak's full-quarter contribution (~$7–10M EBITDA impact) offset by Pilot's partial quarter contribution and strong base growth; CapEx expected to be similar in 2027 to 2026, driving improved free cash flow.
• Robert Brooks (Northlink Capital Markets): Competition questions addressed; win rates improved due to unique recycling/disposal mix; previously lost bids were due to lack of firm disposal capacity, now solved by Pilot. Partnership with LibertyStream remains robust.
• Scott Gruber (Citigroup): Regulatory risks in Texas viewed as manageable due to contract provisions; Peak Rentals strategy allows the new owner capital flexibility while Select retains equity upside.
• Derek Whitfield (Texas Capital): Customer feedback on Pilot is "surprising and very encouraging," with demand for larger volumes; Chemical Technology adoption expected to accelerate in 2027 as well-test results mature (12–18 month lag).
• Eli Joseph (JP Morgan): Future focus on long-distance disposal pipelines; revenue synergies expected to be accelerated beyond initial expectations; margin profiles for new projects consistent with current 50–60% targets.
• Jeff Robertson (Water Tower Research): Goal to interconnect Northern and Southern Delaware systems over 12–18 months; Permit renewals are standard procedure; margin profiles expected to remain consistent or improve through integration efficiencies.
• Sean Mitchell (Daniel Energy Partners): Surfactant adoption timeline relies on well-test results (12–18 months); 2027 anticipated as the acceleration year for industry-wide adoption.

Other Key Points:

• Management confirmed the closing of the Pilot Water acquisition earlier in November, with integration planning already underway.
• The company has a "large-time or dual-pipeline network" that enhances flexibility in barrel deployment (recycling vs. local vs. distant disposal).
• SG&A expenses are projected to normalize to 10–11% in 2027 after the 2026 transaction-related spike.
• Net interest expense is expected to rise to $15–17 million in Q4 2026 due to the new senior notes offering.