Select Water Solutions, Inc. (WTTR) Earnings Call Transcript & Summary

Greetings, and welcome to the Select Water Solutions conference call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the call over to your host, Garrett Williams, Vice President, Corporate Finance and Investor Relations. Please go ahead, sir.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Select Water Solutions conference call to discuss our announced acquisition of Pilot Water Solutions. With me today are John Schmitz, our Founder, Chairman, President and Chief Executive Officer; Chris George, Executive Vice President and Chief Financial Officer; Michael Skarke, Executive Vice President and Chief Commercial Officer; and Mike Lyons, Executive Vice President and Chief Strategy and Technology 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 until October 9, 2026. The access information for this replay was also included in the acquisition press release. Please note that the information reported on this call speaks only as of today, September 25, 2026, 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 Select's 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, our current reports on Form 8-K, our quarterly reports on Form 10-Q in our other filings with the SEC to understand those risks, uncertainties and contingencies as well as to review additional disclosures associated with the pending acquisition. In addition, comments made by management during this conference call may contain discussions of certain non-GAAP financial metrics. For the definitions of such metrics, please refer to our SEC reports and their related disclaimers set forth therein. These non-GAAP measures should be considered in conjunction with the information contained in our financial statements prepared in accordance with GAAP. The pending transaction of Pilot Water Solutions, which is currently expected to close in the fourth quarter of 2026, and as subject to customary closing conditions and receipt of required regulatory approvals, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Act. Now I'd like to turn the call over to John.

Thanks, Garrett. Good morning, and thank you for joining us. Today, we announced our agreement to acquire Pilot Water Solutions, a leading private water midstream company with a sizable produced water infrastructure footprint, most notably across the Permian Delaware Basin. With Pilot Water, Select will add highly contracted production-related earnings stream at an accretive valuation in the heart of the Delaware Basin. The Pilot Water acquisition strengthens Select's position as a diversified market-leading water midstream platform. While Select will continue to lead with its recycle first strategy, with the integration of Pilot Water, we will have a well-balanced overall infrastructure network, managing both scaled recycling and disposal across a market-leading presence in the broader Delaware Basin. Pilot Water's infrastructure platform consists of approximately 2.7 million barrels per day of active permitted disposal capacity. Nearly 900,000 barrels per day of incremental undeveloped permitted disposal capacity and more than 700 miles of pipeline infrastructure. In the first half of 2026 Pilot Water has handled about 850,000 barrels per day of produced water with more than 80% of these volumes coming from the Delaware Basin across both Texas and New Mexico. Additionally, a new 175,000 barrels per day MVC-based contract in the Delaware Basin is expected to increase Pilot Water's daily produced water volumes handled to 1 million barrels per day during 2027. Importantly, Pilot Waters revenue are supported by an attractive contract portfolio with more than 80% of its annual revenue supported by long-term contracts with an average tender of more than 7 years. These contracts include 480,000 barrels per day of minimum volume commitments and 306,000 dedicated acres. Select has successfully built a scaled acreage dedication contract portfolio in recent years. And I am very excited to strengthen Select pro forma contract book with Pilot's sizable MVC contract base in addition to the incremental dedications, adding greater predictability and durability to Select's future cash flows. Pilot water strategic disposal portfolio provides select with immediately available capacity which will allow for near-term utilization enhancements and long-term system optimization and water balancing capabilities across Select' broader recycling and disposal network. When tied in to Select's existing Delaware Basin network, we will be well positioned to efficiently capture the full life cycle economics of produced and treated produced water across a broader pro forma footprint. Additionally, Pilot Water is approximately 900,000 barrels of undeveloped permitted disposal capacity largely in the Delaware Basin across both Texas and New Mexico, ensures Select is well positioned to capture a growing percentage of the industry's produced water volumes in the region, which are expected to grow by more than 10% per year over the next decade. This capacity I outlined is before taking into account the broader leased and owned surface we will acquire in this transaction that provides access to additional high-value poor space offering incremental optionality for long-term out-of-basin disposal or beneficial reuse solutions efficiently located related to Select's broader New Mexico network. We will continue to prioritize local recycling as the most cost advantaged solution for every barrel. However, Pilot Water's available disposal capacity and permitted undeveloped poor space availability gives select the flexibility to optimize volumes across an integrated system and the opportunity to capture the full growth potential of our contracted produced water in the future. Select has been on a steady growth-oriented strategic path over the last 5 years to build out our water infrastructure segment and transform our business into a production-weighted midstream business supported by long-term contracts and durable and predictable cash flows. I believe we have been very successful at executing our strategy in recent years with our Water Infrastructure segment growing at an average annual growth rate of more than 50% over the last 5 years. The Pilot Water acquisition is expected to immediately deliver another 60% plus leg of growth for the Water Infrastructure segment in 2027. We have near-term visibility to growing our combined daily volumes to more than 2.5 million barrels per day during the first half of next year, supported by additional contracted MVC volumes. And with multiple previously announced projects set to be completed by the end of 2027, we are well positioned for additional contracted growth in the years ahead. To put that in perspective, in 2027, water infrastructure is now expected to comprise approximately 70% of Select's pro forma consolidated gross profit before depreciation and amortization with the majority of this earnings stream under long-term MVCs or acreage dedication commitments. To conclude, I am very excited for what's to come for the integrated business, and I look forward to welcoming the new Pilot Water employees into the Select family soon. At this point, I'll hand it over to Chris to provide additional highlights around this accretive acquisition. Chris?

Thank you, John, and good morning, everyone. We are pleased to announce the acquisition of Pilot Water for aggregate closing consideration of $700 million, including $600 million of cash and $100 million of shares of Select's Class A common stock. The sellers also have a right to an additional $15 million contingent cash payment payable upon the satisfaction of certain operational milestones expected in early 2027. Additionally, the sellers retain a right to a cash true-up payment at the 30-day volume weighted average share price as of the 6-month anniversary of the closing date is lower than a 30-day volume-weighted average price at the closing date. For the full year of 2026, Pilot Water is expected to generate $100 million to $110 million of 2026 adjusted EBITDA, which is expected to grow to $120 million to $130 million in 2027 primarily driven by the new 175,000 barrel per day MVC-based contract that John mentioned earlier. Longer term, we are targeting an additional $10 million to $15 million of annual cost synergies that are incremental to the 2027 forecast and are expected to be achieved during the next 12 to 18 months. These metrics equate to a highly accretive acquisition represented by valuation multiples of 6.8x, 5.7x and 5.2x based on the total transaction value, including earn-out consideration relative to the EBITDA guidance midpoint for 2026, 2027 and an implied 2027 run rate with fully realized synergies, respectively. We believe the combined systems, especially in the Delaware Basin also offer significant revenue synergy potential in the coming years with excess capacity availability, enhanced commercialization opportunities and broader system balancing capabilities. Additionally, there are incremental opportunities to develop capital-efficient out-of-basin disposal solutions, significantly scale mineral extraction royalties, and efficiently integrate long-term beneficial reuse solutions. We look forward to harvesting incremental value as the combined network positions us to deliver our customers with increased optionality, scaled produced water flow assurance and ultimately attractive economic savings. Select's combined network will have significant scale with 3.8 million barrels per day of recycling capacity, 4.8 million barrels per day of combined active and undeveloped permitted disposal capacity over 1,600 miles of pipelines and approximately 57 million barrels of treated and produced water storage capacity. Looking forward, we expect the acquired assets to require approximately $20 million to $25 million of additional recurring annual maintenance CapEx, while we separately plan to invest approximately $50 million of onetime additional integration and network enhancement CapEx for each of the next 2 years to enhance tie-in and integrate Pilot Water's infrastructure into Select's existing networks. As we have continued to grow and mature our Water Infrastructure segment, and its contractually secured earnings streams with a diversified blue-chip customer base, the long-term cash flow visibility and through-cycle stability in the business has been significantly enhanced. On a pro forma basis, Select maintains a highly diversified customer base with no single customer representing more than 7% of consolidated revenues. As John mentioned, Select's future earnings will be supported by a strong contract portfolio, which on a pro forma basis includes over 600,000 barrels per day of MVC commitments, about 90% of which are with investment-grade counterparties as well as approximately 3.6 million acres under dedication or ROFR dedication with a weighted average remaining contract term of approximately 9 years. The combined company's robust contract position supports improved visibility through cycle durability and steady growth in produced water volumes across a diversified footprint operating across all major U.S. basins with an especially strong position in the core of the core in the Delaware Basin within the Permian. Additionally, this contract stability provides us with incremental flexibility as we look at the long-term capital structure of the business. As noted in the transaction release, in connection with the acquisition, Select has entered into debt commitment letters with JPMorgan and Bank of America to provide a committed financing sufficient to fund the acquisition subject to customary conditions. Select expects to fund the cash portion of the consideration with cash on hand, borrowings under our committed debt financings or depending on market conditions, other debt financing. That said, we fully intend to maintain a prudent balance sheet and capital allocation framework, preserving strategic flexibility as we continue to invest in and grow the business in the years ahead. Accordingly, pro forma for the anticipated debt financing required to fund the acquisition of Pilot Water, we anticipate net leverage at closing to remain less than 2.0x, demonstrating our ongoing commitment to maintaining a more conservative leverage profile as compared to most other competitors in the marketplace. While we expect a near-term uplift in CapEx with the addition of Pilot Water's assets, the combined company's cash flow-generating capabilities are strong and growing, and we expect the transaction to be immediately accretive on a cash flow per share basis. Overall, we believe we are well positioned to continue investing in the business while still returning cash to shareholders and maintaining a very attractive balance sheet. While the transaction remains subject to the satisfactory completion of customary closing conditions and regulatory approvals, the transaction is expected to close during the fourth quarter of 2026. Ultimately, I am very excited about the opportunities ahead for the pro forma business. And with that, I'll hand it over to the operator for any questions. Operator?

[Operator Instructions] Our first question comes from the line of Jim Rollyson with Raymond James.

Congrats on the deal and certainly pretty favorable relative multiples here. I don't know if this is for John or Chris, but you guys have been clearly leaders in Permian recycling and this really seems to round out your capabilities on the disposal side. I guess I would love to hear your thoughts and any maybe brackets around potential. But what does this combination do for your growth opportunity? Because as I think about this, you guys have been capturing a lot of value locking things up, particularly led by recycling and maybe you were getting to later innings in how much potential you had to capture from here. Curious what you think this does for that kind of back-end opportunity set?

Yes, it's a great question, Jim. It obviously expands the opportunity set for us and gives us more choices. But maybe I'll give Michael a chance to weigh in on this one.

Yes. Thank you, Jim. I mean, obviously, we think the systems are highly complementary. We still love our recycling first position, but the optionality and the flexibility that we create by providing the disposal back up from the pilot assets is significant. And I would say that really, our goal is to tie the systems together and then to utilize that disposal back up to fully monetize the investment we made in the large diameter dual pipeline system across New Mexico and further monetize the contracts that both Select and Pilot have as we look kind of out into 2029, 2030 and beyond. So we're really excited about this transaction. And we think there is significant kind of revenue and operational synergies that will come in future years.

I presume the revenue opportunities on synergies are meaningfully higher than the $10 million to $15 million just in cost synergies. But Chris, on the second -- just a follow-up question here on kind of cash flows, CapEx, things like that. You laid out maintenance CapEx of $20 million to $25 million [indiscernible] adds and then the kind of couple of years of $50 million a year to integrate all this stuff together. I presume they've been on a similar growth trajectory somewhat to you guys. But maybe once you get past that integration CapEx, just how to think about ongoing CapEx growth opportunities and kind of how this ultimately builds the free cash flow on a combined basis for you guys?

Yes. It certainly is going to scale the long-term free cash flow generating capabilities of the business, Jim. As we outlined and you referenced, we do have near-term visibility into the capital needs to put the system together effectively. The NBC that we mentioned that's coming online in 2027 and has been an ongoing capital project for a Pilot over the course of the bulk of 2026 here, and that will largely be completed and ready to come online in the early part of 2027. So there'll be a little bit of capital associated with the completion and build out of that project and then the other needs of putting the 2 systems together. But the maintenance needs of that system at that point, as I referenced, on top of what we've historically outlined for our needs. I mean that we think is an expectation we can maintain go forward. So as we look out 2 years from now, we'll have a meaningful acceleration in the free cash flow potential of the business. And at that point, we'll have a great set of capital allocation choices to continue to invest in growth or to continue to look at other opportunities to return or deploy capital.

Our next question comes from the line of Derrick Whitfield with Texas Capital Securities.

Congrats on the acquisition as well. As you think about the synergies associated with pilot customers, could you speak to what that could mean for diversification and growth with that client base for you guys?

Sure. So I mean the Delaware Basin is a relatively small customer base. So there's obviously a lot of overlap, but there's clearly customers where Select has a stronger relationship and one is where Pilot has a stronger relationship. And it's largely centered around the fact that Pilot's a disposal solution and selected recycling first. So really, our job is to combine the 2, integrate the system and then strengthen both those relationships by bringing our industry-leading recycling solutions to those that are primarily disposal and then by providing, as I mentioned earlier, by providing the disposal backstop to our current recycling solution for our primary customers.

Great. Makes sense. And clearly, looking at Slide 11, it's a hand-in-glove situation from a debt perspective. But as you guys think about future projects that could drive further synergy it would seem that bringing down your Eddiconnector pipeline into Culberson or res could be very synergistic for both businesses. How do you think about that opportunity?

That's a good question, Derek. What I would say is that there's you're exactly right. The complementary nature of the system from a geographic perspective is really attractive. And then again, from a purpose perspective, one being recycling and one being disposal. I would say that -- this acquisition does present us with several kind of other solutions. One would be it's an avenue to an out-of-basin solution or other distant disposal solutions like the one that you mentioned on Eddy County. Obviously, I don't know it's obvious, but Pilot wasn't involved in mineral extraction or beneficial reuse solutions. And so we would have kind of technology and partnerships to bring to this relationship through the work we've done over the last 12 to 18 months on those fronts. So there's a number of different opportunities that this will allow us to embark on that really would be harder to have achieved as a stand-alone company.

Next question from the line of Scott Gruber with Citigroup.

Yes. And I'll reiterate the congrats on the deal. I'm just thinking about the timing around those commercial synergies Slide 6 suggests this could be sizable and kind of several times the size of the cost synergies. You talked about 2 years of investment to integrate the systems. How should we think about the timing around capturing the commercial synergies kind of post integration?

Yes. I'll maybe start and then Michael will add to, Scott. Obviously, first and foremost, we're focused on getting the transaction to an efficient and timely close and we'll be in a position to have more open industry discussions with our customers and with the appropriate counterparties at that point in time. So we think that there's certainly a lot of opportunity here to pull those existing contracts together and find the right opportunities to get the appropriate integrated outcome. The time line to integrate the system could accelerate to the extent there was an appropriate reason to do so. As we outlined on the cost synergy side, we're targeting a 12- to 18-month time line here. So we want to make sure that we make the right choices and the appropriate time lines to get the best outcomes. But I think that, that 24-month period here is going to be a very important period for us. Michael, anything on.

Yes. I mean we agree with you. We think the revenue synergies are really attractive. There's a number that we've identified, and there's a number more that we just think that when we get in there and work with our collective customer base and really show them the full offering that there's going to be more that we haven't identified today in terms of timing and the first step is getting the system fully integrated and connected. And that's a process that we've already begun evaluating but there's going to be a phased-in approach. So I would expect some of the synergies to come kind of within that initial 2 years as we get the system built, and then there's going to be a number of them that are going to be outside of that time frame. So it's not going to be a light switch where they all just show up once we connect the system. It's going to be -- we'll have some, hopefully, next year certainly the year after and then continue to build from there.

I appreciate that. And then just looking at the complexion of the systems, obviously, different being more recycling led in New Mexico and disposal led in Texas. So does the $100 million of CapEx in total to integrate the system, does that contemplate recycling build-out in Texas? Would that come after? Is there interest in that from your customers? Just a little bit of color on the kind of how you see the recycling side building out in Texas, if there's interest.

Yes. It's a good question, Scott. Right now, the focus of that capital is on integrating the system, continuing to complete the build-out of existing projects underway. There are existing permits and capacity for recycling across both portfolios. So we will have flexibility of choice, obviously, with the scale of what we've built out on the select side with recycling. We think that gives us a meaningful avenue to utilize that footprint to treat and distribute barrels efficiently throughout New Mexico. And as we look down into Texas, as we previously mentioned, and you'll see we've got existing projects we've added into the Texas side here in recent periods as well with contracted framework. So we do think there's going to be optionality to look at more of an integrated recycling and disposal approach long term across the whole of the footprint. But we think we can do that pretty efficiently on a cycle barrel basis with the integrated system with adding that pipeline connectivity between the 2 systems.

Our next question comes from the line of Bobby Brooks with Northland Capital Markets.

Just wanted to touch on like the time line of this coming to fruition. Also just a nice multiple you paid on this. Is it fair to think the pilot teams saw upside in joining Select, having a bigger network, rate, more network effects? And then also, obviously, they took a portion of the acquisition is given the equity in Select. So they also -- they continue to have upside exposure to this. Just wanted to hear on those 2 pieces.

Yes. Thanks. This is John. I would say that both parties come out really well from this transaction. They have a core business that they want to focus on. And at the same time, they wanted some value out of their asset base that had some upside. And we, on the other side, completely are very excited about the integration opportunity with these 2 assets. We also are getting both operational and regulatory and permitting and things of that nature out of the team that's staying with us that really enhances our abilities with this system and other things when we think about regulatory application of beneficial reuse or mineral extraction or things of that nature. So I think both parties got really good value out of it. It allowed the sellers to concentrate on a core that they were very focused on, and it allowed us to actually add to our core in a meaningful way and there's a lot of synergies between these two systems.