Thank you everyone. Moving on to the next presenter, we have Select Water Solutions, WTR on the NYSE. With us today, we have two members of management. We have the CFO, Chris George, and VP, Garrett Williams from Select Water Solutions. Just as a brief overview, Select Water Solutions is a leading provider of sustainable full lifecycle water solutions to the energy industry and emerging water infrastructure solutions provider to municipal industrial markets. I'll turn it over to you, Chris, if you want to give a more detailed overview than that two-liner.
Sure. Select is a diversified water and chemistry solutions provider, primarily serving the traditional energy industry. We operate across three primary segments: Water Infrastructure, Water Services, and Chemical Technologies. We are the only fully integrated water solutions platform with full manufacturing capabilities around our own proprietary chemistry solutions. The primary growth engine for the company more recently is our Water Infrastructure segment. This is building the permanent infrastructure needs, supporting energy development with an especial focus on the recycling first solutions in the Permian Basin. How do we take the wastewater generated out of oil and gas development and turn that into an alternative resource, both for reuse within oil and gas development, but also looking at other opportunities to extract things like rare earth minerals, lithium, iodine, out of that waste stream.
Other, as Shawn said, municipal, industrial, or alternative solutions for that volume flow as well over time. That's primarily where our growth capital's going more recently and where we're focusing the bulk of our strategic time. That's a high-level overview. We do operate in every major U.S. basin in the United States, across the full platform of what we offer as well.
Just one follow-up on the Permian and the recycle first. What's that value proposition? I mean, let's get to the business of it and why it's done and why it's a value proposition for your customers.
It's a great question. First and foremost, recycling for us, we view as the perfect intersection of good stewardship and good economics. When we can recycle a barrel of produced water that's already having to be managed every day out of oil and gas development, we can treat that locally, we can redeploy that back into localized development. That, at the end of the day, can offer a 30%-40% cost savings to the customer. That cost savings is to the customer, whether it's for their lease operating expenses versus traditional disposal means, so their OpEx over the life of the well's development, or their capital expenditures for new well development versus alternative sources for those well completions, such as traditional freshwater, brackish water sourcing. What we've been focused on is very much a recycling first strategy in the Permian. Why the Permian?
It's really because that's where the scale of the challenge is most prolific. The Permian is the largest area from an activity standpoint in the U.S. It's about half of the activity in the country. We produce more water naturally occurring out of the reservoir in the Permian than anywhere else in the U.S. You can generate anywhere from two to six barrels of water for every barrel of oil we produce naturally out of the reservoir. You've got scale of challenges from a disposal standpoint in terms of permitting new capacity. You've had issues around induced seismicity in some of these geographies, where you've got regulatory oversight and constraint limiting the ability to permit new disposal wells. Recycling really is the best solution in our mind to solve all of those challenges, both from a strategic standpoint, a regulatory standpoint, and an economic standpoint.
For investors who are new to this, what would normally happen to the produced water versus what you guys do, just to set some perspective for people new to it?
Historically, in the energy industry, that produced water was transported to disposal, going back 10, 15, 20 years ago, on trucks. Over the last decade, more and more onto pipe. We've been very focused on building out that pipe infrastructure as a needed solution in areas for traditional disposal. For recycling, it requires a different type of infrastructure. You need dual-lined infrastructure, so you need to both gather and be able to redeploy those barrels efficiently. The alternative for that barrel is traditional disposal. Whether that's going on a truck or via pipe, it goes to a disposal facility to inject that wastewater downhole into a wastewater injection well that could be a standalone point of geography solely for disposing of the wastewater. It could be a vacated point of geology from legacy conventional producing wells.
At the end of the day, that water is coming naturally out of the reservoir every day with the oil, and it has to be managed. If you don't have a home for that wastewater, that's putting your production at risk from getting shut in if you're a customer. It's a critical aspect of resource development and resource management. If you run into limitations around what you can do with that barrel, then it can limit the customer's ability to generate their revenue.
This becomes an ROI for your customers, essentially, right? I mean, this is an economic sale to them.
Yeah, absolutely. If you think about what a customer spends their money on from an OpEx standpoint, water is generally speaking gonna be one of the, if not the highest, one of the top three highest costs from a lease operating expense standpoint of developing their resources and producing that oil every day.
We talked a little bit about the Permian, but what's happened in the Delaware?
The Delaware. It's very interesting. The Permian, as I mentioned, is where the biggest scale of challenge is. The Delaware is really kind of the Permian on steroids because the Delaware has the most undrilled inventory locations left in the U.S. You've probably got more undrilled wells in each of Eddy and Lea County on probably a two to two and a half times basis versus most traditional counties in Texas, in the Midland Basin side.
You've got a different regulatory environment in New Mexico than you do in Texas. It's harder to permit new disposal capacity. Naturally, from the geology, you produce a much higher water cut. You're generally producing anywhere from 4 bbl to 8 bbl of water per day, in the Delaware versus other areas of the Midland Basin or certainly compared to other areas like the Bakken or the Eagle Ford.
It really is the aggregation of all of the biggest challenges that we face as an industry. If you think about the core of the core of tier one inventory left in the U.S., where new growth is coming from. We had a federal lease sale in New Mexico here just a couple of weeks ago, and it set new all-time records for highest price paid per acre in the industry's history. It really reinforces the fact that it's the best geology from an oil production standpoint available in the U.S., but it does come with a lot of challenges from a water management standpoint.
Within the Water Infrastructure business, other things than water, obviously we've spent time talking about that so far. What else should investors be aware of?
Near term, we're obviously hyper-focused on completing the build-out of our New Mexico infrastructure platform. Over the next call it two quarters, we'll be finishing out the first wave of the greenfield build-out of that New Mexico position. We think there's some backlog opportunities to come behind that, but at that point, you'll have nearly 2 million barrels per day of water recycling capacity in New Mexico, over 400 mi of pipeline infrastructure for this recycling strategy.
We're also thinking about what's next. As that position gets more mature and starts to generate good, solid, growing free cash flow for us, what do we do from there? There's a couple of areas of opportunity that we're very focused on. How do we maximize the value potential out of that resource that we now have contracted and flowing into our infrastructure every day?
Things like mineral extraction out of the waste stream is something we're very focused on. Things like lithium, iodine that are naturally occurring in that barrel that provide extraction potential. How do you take that recycling potentially a step further? Right now for oil and gas, we are not treating it to a freshwater equivalent spec. That's higher cost. It's not needed for well completion activities. How can you treat that barrel to a freshwater equivalent quality that can be either discharged back into the environment in a safe and an environmentally conscious way or how do you redeploy that back into other industrial, municipal, agricultural opportunities that can create a net addition to the water supply versus a net consumption of the water supply from an industry perspective?
That would seem to be very important in the Delaware, too, in areas of overall water shortage, right? Having that opportunity would be very valuable.
Yeah, absolutely. If you think about an area like West Texas or New Mexico, this is not a a water rich region. Competing with local municipal and agricultural resource demand for freshwater is obviously something that we're very focused on not doing. If the industry can become a net addition to the water supply, you think about growth opportunities in the U.S. like data center development. Well, what are data centers focused on? They're focused on close proximity to energy and high surface availability from a construction standpoint. The oil and gas basins that we operate in are very good targets for those projects. They're also not areas that are rich in freshwater resources. How do we solve the problem of the resource need for those projects without providing constraints on some of the other needs?
We think that that waste stream coming out of oil and gas can be an alternative source for some of these projects, and provide an opportunity to have a stewardship-oriented cadence of development alongside some of these hyperscalers that are building large capital projects.
West Texas is not short on space or energy. I think there's plenty of two things it has plenty of. I'm going to go back to the brine extraction. Really interesting. Just expand on that a bit, the value proposition from it. Is it really an economic opportunity for you over the next couple of years?
Yeah, it's a great question. One of the things that's unique about Select's platform is given what we are already doing from a recycling first strategy for oil and gas development, we're effectively already taking about half of the OpEx out of the system that would be required to take it a step further for that mineral extraction or for beneficial reuse. When we think about how to maximize the potential out of a barrel of water, there's naturally occurring minerals in that water that comes out of the formation when it's produced. The concentrations are different. We've done testing across all 13 states we operate in. Some are better disposed towards extraction potential than others. Thus far, we have signed partnerships with specialists in this area for lithium extraction in East Texas, in Haynesville.
We've added two additional partners more recently in the Permian, both in the Midland Basin side and the Delaware Basin side. We think that that's a great opportunity to add royalty-based revenue income for Select rather than viewing it as another capital project. We already have barrels moving through our infrastructure every day, we've partnered with folks that are better specialized in the extraction potential around lithium, looking to go to iodine potentially next. They're investing their own capital in these facilities. We will effectively be a resource owner and extract a royalty out of that. We will get high margin, royalty-based revenues out of the barrels we are already managing every day. After that mineral extraction occurs, those barrels will be delivered back to us for either reuse or for disposal.
It's a great opportunity to add on just incremental cash flow to the capital investments we've already made and improve the margin profile over time. If you think about beneficial reuse, similarly, we've already invested in this infrastructure, the operating expenditure is required to take that barrel to a freshwater equivalent spec for beneficial reuse. Similarly, we've already covered around half of the OpEx required to do that. I think compared to others that might pursue it from an industry perspective, we're probably cost-advantaged given the investments we've already made and the recycling first strategy we've already built.
The brine could go through, a third party would extract the minerals out of it, right? I assume the economics there work for them. It's not necessarily a technology challenge at that part. The water after what goes through there could be put into potable water again. Is that the process?
It could be treated all the way to a freshwater spec if required or demanded, or it could be treated to an oil field spec and redeployed back in a new well development, or it could be disposed of. It depends on the application of need and region and infrastructure. It's effectively something that can be daisy chained with our existing facilities or existing solutions.
I wanted to talk a moment about Colorado and municipalities and industrial applications. An interesting angle. Can you expand on that a little bit?
Sure. What Shawn's speaking to here is we've aggregated a large resource position from a freshwater resource position standpoint in Colorado, with a focus on leasing those water rights long term into municipal and industrial development on a non-oil and gas basis. From a historical standpoint, Select really built the company on managing the service application of delivering water to the well site for oil and gas development. That's what we built the company on before we transitioned more towards permanent infrastructure growth. In doing that, we developed a long-term expertise in managing, sourcing, procuring, storing, permitting freshwater resources.
As we thought about what we could do for additional diversification growth long term, as we're no longer needing to use those freshwater resources in oil and gas development, now that we're recycling barrels more efficiently, what can we do differently with those resources that we've contracted or own? This was an opportunity for us to take that expertise, aggregate a large resource position, and look to lease that to municipal off-takers. You think about areas like Texas, Colorado, you've got large municipal growth, large industrial growth needs around water resources. Similar to what we were talking about around beneficial reuse, how do we solve for some of those growth needs and demand on freshwater resources?
This is another area where we had a large aggregated resource position that could be redeployed through state programs from traditional permitted means into other industrial or municipal needs, supporting municipalities that are more and more balance sheet constrained than they've ever been. It's becoming more challenging to go out and raise big bonds for buying water resource positions.
Data centers are obviously a bit of a controversial topic in terms of consuming freshwater resources. What we've done is aggregate the resource position, and we're focused on adding contracts over the next 24 months to establish the build-out of the infrastructure and development of those water rights, but do so on a long-term lease basis that would be supplemented by infrastructure as well.
Just to clarify, when you say infrastructure, can you just define what that means in your business context?
Yeah. For this type of project, what we're heavily talking about is storage. These are very senior water rights off the Arkansas River Valley basin system, legacy canal ditch rights and river rights. Making sure you've got sufficient storage to capture annual flow in peak times, but having that storage in place, and potentially pipe infrastructure in place to help move those barrels as needed.
The Water Infrastructure business itself, the growth impact that's having on earnings visibility for you, it's a little different business model and earnings profile. Can you address?
Yeah. There's a lot of reasons we've focused on the Water Infrastructure growth strategy over the last few years. Certainly, one of them is the contracted nature of Water Infrastructure development. When we're deploying capital into these Water Infrastructure projects, we're generally deploying that capital under a long-term contract. That can take a number of forms, heavily weighted towards large acreage dedications. We're partnering with our customers to underwrite these capital projects through these large acreage dedications that underwrite their own future development plans, both from a need for barrels for their development, but also the water that's produced out of the wells in that acreage over time as well.
Generally, that anchor tenant helps anchor the project, then we'll further commercialize the remaining capacity of that asset, that facility, that piece of pipe over time with additional third parties to help provide that economic efficiency to all parties over time. We also like the fact that it manages the production life of well resource, we're adding stability and longevity to the business. Rather than where we came from, which was heavily weighted to being a call-out Water Services business supporting the completions life cycle of development, we're still very much the largest solutions provider or service provider in those needs. Water Infrastructure's now the largest contributor to the gross profit of the business. About half the gross profit of the business is now generated out of Water Infrastructure that's coming from those long-term contracts.
If you look forward into where the growth is coming from, we've indicated 25%-30% growth in that Water Infrastructure segment this year, that should layer onto further growth into 2027. That's underwritten by these contracts. Not only are we adding visibility and stability to the business through cycle, we think we're also improving the quality of the earnings over time. We generate a 55%, give or take, 50%-60% gross margin profile out of that Water Infrastructure segment. That's meaningfully accretive to where the business had historically been in the low to mid-20s for the legacy Water Services and Chemical Technologies offerings.
Investors certainly tend to value recurring revenue predictability and cash flows at higher levels, right? Removing big chunks of the cyclicality from the business, is that fair to say?
Yeah. It's certainly fair to say. Obviously, we're still predisposed to oil and gas activity. We're not trying to get away from that. As we layer on contracted revenues, as we layer on incremental high margin cash flow streams, like the royalty opportunities around minerals or even longer-term contracts around things like municipal and industrial development, we think that's going to continue to improve the quality of the earnings over time. Right now, we're heavily reinvesting in the business. Last year, this year, we're going to be largely redeploying our operating cash flow back into the business. One of the things that we love about the diversity of the platform is we've been able to build an infrastructure platform that's grown at a meaningful double-digit CAGR over the last six years. We still have a balance sheet that's less than a turn of net leverage.
How have we been able to do that? It's largely because of the free cash flow we generate out of the traditional services and chemical offerings that allow us to reinvest in the business, keep a very clean balance sheet along the way.
Yeah, I'm sure this isn't by accident when you look at the valuation in the market and what's going to be valued. Let's take it back to a bigger strategic board level. Obviously, the infrastructure business, you tend to get a better valuation for those dollars. Is that what was behind this as a strategic initiative as well, and how should we think about the valuation implications of that?
Yeah. It's certainly not lost on us that parts of the business trade at a premium value in the marketplace. I think, clearly anything we can do to improve the growth profile of the business as well as the earnings quality of the business, we think will get rewarded over time in an equity value re-rate. We've already seen a good recognition of that over the last year or two. Part of it is also meeting the secular demands of what the industry requires. We've historically focused on that recycling first approach because we thought that was always where the industry was going to go, and whether we were lucky or smart, it turned out correct.
I think by meeting the industry and where it's going, we've been able to establish a good footprint, and I think establish an opportunity for growth along with the stability. It's often hard to find growth in our industry. Water is an area where you've been able to find good, solid growth opportunities, particularly in the Permian, from a competitive landscape position. We're certainly the largest traditional disposal provider in the gas-oriented basins, the Haynesville and the Marcellus Utica. We've got good, strong market-leading positions supporting the basins that are going to be the leading providers of gas offtake for these LNG terminals that are obviously supporting global development there. We feel like we're really well-positioned.
I think as we continue to grow, continue to invest, continue to add contracted stability, it'll give us more flexibility around the balance sheet over time and more flexibility around shareholder returns over time. We think there's other things we can continue to do to add to that equity valuation over time.
Just one last question I have to ask. You still leverage the CapEx cycles in the industry. What's your view on what all of this that's been going on and oil prices and, again, just an opinion side from where do you think things are going to go?
Yeah. It's obviously something we get asked a lot. I think it's fair to say that the market, the world now clearly understands that oil and gas is here to stay for a long time. You think about things that are driving economic development and growth, like data center development, AI. Well, at the end of the day, they're some of the largest energy consumers we have ever seen in history. You're going to need all of the solutions around energy. From a macro perspective, we're not in the business of prognosticating oil and gas prices, but I do think it's fair to say that the market risk premium in the commodity was probably understated the last couple of years, and that's probably been reset even if we get stability back into the market here in relatively short order.
I think the concerns around oil in the low 60s or pushing into the 50s has kind of gone away for the foreseeable future. Where it stabilizes on the back end of this, whether that's in the 70s, 80s, 90s, is still to be seen. I think what you can say is that solving physical inventory problems is much harder than solving paper trading problems. I think it will take longer than most folks realize to stabilize here. You've probably taken 1 billion barrels of production out of the global supply over the last 90 days. To recoup that, you're probably adding 1 million barrels a day to demand over the next three to five years. Versus coming into the year where we thought we might be 500,000 bpd oversupplied. It's a big swing from a macro dynamics perspective.
We'll see how it all stabilizes. For an activity standpoint, we're not seeing, I would say, major changes from the customer base. We probably are seeing more stability to activity schedules. We're probably seeing folks pull activity forward to accelerate getting production to market. We're not seeing folks look to meaningfully add capacity at scale yet.
Okay.
I think if we see the commodity long tail 12, 18 month forward strip move north of $80, $85, maybe that changes. For now, we'll probably see the private operators be more responsive, we'll go from there.
Something like $75 WTI helps the industry incrementally, keeps activity up, but you're not going to see a huge surge in exploration.
No. It will help stabilize things through cycle, but it's not going to create a big, I would say rapid CapEx cycle.
Great. Well, thank you, gentlemen. Appreciate it, Chris and Garrett. Any questions? We have time for one, maybe. No, we're out of time. Oh, they said no. All right. Thanks, guys.
No, thanks for having us.
Thank you.
Appreciate it.