Select Water Solutions, Inc.

Greetings, and welcome to the Select Energy Services Third Quarter 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 is now my pleasure to introduce your host, Chris George. Thank you, Chris. You may begin.

Thank you, Operator, and good morning, everyone. We appreciate you joining us for the Select Energy conference call and webcast to review our financial and operational results for the third quarter of 2021. With me today are John Schmitz, our founder, chairman, president, and CEO, Nick Zweika, senior vice president and chief financial officer, and Michael Skarkey, executive vice president and chief operating officer. Before I turn the call over, 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 selectenergy.com. There will also be a recorded telephonic replay available until November 17, 2021. 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, November 3, 2021, and 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 SELEX management. However, 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 for the year ended December 31, 2020, our current reports on Form 8K, as well as our quarterly reports on Form 10Q to understand those risks, uncertainties, and contingencies. Also, please refer to our earnings announcement released yesterday for reconciliations of non-GAAP financial measures. And now I'd like to turn the call over to our founder, chairman, president, and CEO, John Schmitz.

Thanks, Chris. Good morning, and thank you for joining us. I'm excited to be discussing Select Energy again with you today. As I've outlined on each of our recent calls, we continue to focus on three primary strategic areas, which are, first, improving and bolstering the base business, second, advancing our technology, ESG initiatives, and diversification efforts, and third, executing on strategic M&A. I am very pleased with the progress we have made across each of these areas during the third quarter. We continue to see the benefits of a strong commodity price backdrop, which has supported steady activity growth and productive pricing conversations with our customers. This has driven revenue and earnings higher during the third quarter. On technology and sustainability front, we continue to add new recycling facility, advance our emissions reduction efforts, and have expanded our leadership team with the addition of a chief technology officer to further advance our technology strategy. And lastly, we continue to execute our M&A strategy, having closed on the acquisitions of both complete energy services and old recovery during the third quarter and Aqua Libra midstream at the beginning of the fourth quarter. Looking at our operational and financial performance during the third quarter in more detail, we generated strong overall revenue growth of 27%. Additionally, we saw adjusted EBITDA double, supported by both our base business and the complete acquisition. Setting aside the growth contributions of our recent M&A activity, we still saw the base business grow revenues sequentially by 9%, generating incremental margins of more than 30%. This continued growth was driven by a combination of modest activity and market share increases, and more importantly, continued pricing improvements. Additionally, we saw good momentum throughout the quarter, with September representing our strongest month of the year to date. I'll let Nick speak to our fourth quarter financial outlook in more detail But looking a bit further, I feel very good about our continuing ability to grow the business, meaningfully improve our pricing, and capture market share heading into 2022. With oil above $80 and natural gas above $5, we expect to see capital budgets for our customers increasing next year by 20% or more. That said, we still expect to serve a disciplined marketplace with much of the E&P CapEx growth directed at increased service pricing. Even with the service pricing growth, our customers are still very well positioned to generate meaningful cash flows, improve their balance sheet, and return capital to shareholders. All of these point to select maintaining a positive momentum over the coming quarters. Looking beyond the macro-driven tailwinds and thinking about additional ways we can support our business improvements, we continue to make investments to support our technology, ESG, and diversification efforts. I believe Select is already a technology leader in the water solutions marketplace. But continued investments in our automation, data analytics, emission reduction, and fluid match solutions will be critical to provide our customers with lower cost and improved performance. To that end, I am pleased to announce the addition of Susie Colbert to our leadership team as Select's first Chief Technology Officer. Susie brings over 20 years of experience in a number of technology and financial operation leadership positions at Marathon, BP, Noble Drilling, and Anadarko. Susie will oversee the integration and development of our R&D, operational technology, and IT efforts across the organization to ensure that we continue to advance and grow our position as a technology leader in the sector. Additionally, while the E and ESG is often top of mind in our business, we believe the other areas are equally as important. Accordingly, SUSE will be focused on reviewing, accessing, and enhancing our cyber strategy and data protection. This is especially important given the critical investments we are making in technology, machine learning, real-time data collection, and cloud-based analytics. Shifting back to our environmental efforts, we continue to execute our emissions reduction, recycling, and infrastructure strategies. On the emissions reduction side, since signing our exclusive distribution partnership with EmissionsRx during the second quarter, we recently received our first delivered methane combustor unit during the third quarter. We quickly deployed this to our first customer, and we have five additional units on order that we expect to receive and deploy during the fourth quarter. To remind everyone, these EmissionRx solutions are designed to help control, reduce, and ultimately eliminate methane and other waste gas emissions during the flowback and production phase of a well. This removes the need for open flaring on location and at the production facilities. We believe there is a significant demand for this new technology and we are excited about the prospect of partnering with more customers in the coming months to further their emissions reduction strategies. On the water sustainability side, during the third quarter we completed the expansion of our largest recycling facility located in Martin County. We also completed our three newest Permian Basin facilities late in September. This brings our total combined fixed and mobile water recycling capacity in the Permian Basin to approximately 525,000 barrels per day. What's also exciting to me is that we've seen recent success in advancing our recycling efforts outside the Permian Basin as well. We were recently awarded a three-year take or pay contract to build, own, and operate a produced water recycling facility for a major integrated oil and gas company in the Rockies region. We commenced construction on this produced water recycling facility late in the third quarter of 2021 and expect it to be fully operational in the first quarter of 2022. This facility will support the recycling of up to 15,000 barrels of water per day with the ability to expand up to 30,000 barrels of water per day. This facility will be connected by pipeline to an existing saltwater disposal well owned and operated by Select. We believe this connection to our existing disposal infrastructure provides meaningful optionality and flexibility for our customer. In general, these fixed infrastructure recycling facilities streamline our customers' water logistics, reduce their costs, and improve their results. In addition to meeting our customers' business needs, these facilities will also be critical in advancing our ESG goals and those of our customers through decreasing both freshwater usage and waste disposal. Now switching to M&A. We continue to be active in the marketplace with the recent acquisition of Complete Energy, Aqua Libre Midstream, and Old Recovery. We saw the benefit of this activity during the third quarter, with more benefits still to come in the fourth quarter and beyond. Looking at the two larger transactions in more detail, the acquisitions of Complete Energy closed on July 9th, thereby contributing for a majority of the third quarter. However, the acquisition of Aqua Libra from BASIC closed on October 1st, and therefore did not contribute to the third quarter. I spoke to the benefits of complete acquisition in detail on our last call, and I believe the acquisition of Aqua Libre provides similar financial, strategic, and operational advantages. Overall, with Aqua Libre, we believe we've added $70 to $80 million of annualized current run rate revenue and $6 to $8 million of annualized current run rate adjusted EBITDA with meaningful room for operational improvements, cost synergies, and high ROA growth. While we anticipate cost synergies resulting from each of these transactions over the course of the coming quarters, we expect these to largely take hold in 2022 as we consolidate operation locations, remove excess capacity, and sell underutilized assets. Operationally, with Aqua Libre, we are getting a solid production service presence in Texas, New Mexico, Oklahoma, and North Dakota, as well as more than 550,000 barrels per day of permitted disposal capacity, approximately half of which is in the Permian Basin. Additionally, more than half of Aqua Libre's current produced water volumes are delivered by pipelines, supported by a number of long-term contracts. Ultimately, we believe these assets are very well positioned for subsequent development opportunities, such as recycling solutions. We view this captive supply of produced water as an alternative, sustainable water source and we will continue to invest in technology and infrastructure needed to provide these solutions to our customers. As you've seen in our recent take-or-pay agreements in the Rockies, we believe that we have a very unique opportunity to build sustainable, full lifecycle recycling solutions around our existing and recently acquired infrastructure footprint. and more importantly, have the ability to do it through long-term contractual commitments around these assets. In addition, with nearly 100% of Aqua Libra's revenue coming from production-related services and infrastructure, we've added further revenue stability to our core completions-oriented base business. Combined, these two deals have increased our production-related revenue from about 10% of our total revenue during the first half of 2021 to about 25% on a pro forma basis. As we look forward, I believe that continuing to grow our less technical production and industrial related revenues and adding contracted revenues through our recycling and pipeline infrastructure will further stabilize and enhance our cash flow generation capabilities and further separate Select from its competitors. Ultimately, I believe the continuing execution of this strategy will position us to reassess a more formal long-term shareholders return program over the course of 2022. Again, I am very excited about our recent M&A execution, our technology strategy, our recycling projects, and our other ESG-focused investments. I firmly believe the market needs additional consolidation and we are well positioned to execute on additional opportunities ahead. With growing activity, strong commodity prices, and improved operational and financial performance in the third quarter and into next year, the future is exciting. With that, I'll hand it over to Nick to discuss the financial performance and outlook in more detail.