Select Water Solutions Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2025

Key Takeaways

  • Positive Sentiment: Selective Water Solutions delivered a strong Q2 with net income up 22%, adjusted EBITDA up 13%, and Water Infrastructure revenues rising 12% alongside a 55% gross margin.
  • Positive Sentiment: The company closed a strategic asset swap with Omni, acquiring Bakken-region landfills, treatment and disposal plants, and oil reclamation assets while divesting non-core trucking operations to enhance margins and focus.
  • Positive Sentiment: Select initiated a formal carve-out of Peak Rentals, appointing Scott McNeil as CEO to pursue a standalone capital structure and accelerate growth in distributed power generation with natural gas generators and proprietary battery systems.
  • Negative Sentiment: Water Services and Chemical Technologies faced sequential revenue declines of approximately 4% and 11%, respectively, with additional rationalization and activity headwinds expected to pressure Q3 results.
  • Positive Sentiment: The company forecasts 20% year-over-year growth in Water Infrastructure for 2026, supported by a robust backlog of long-term contracts and sequential Q4 ’25 revenue and gross profit gains.
AI Generated. May Contain Errors.
Earnings Conference Call
Select Water Solutions Q2 2025
00:00 / 00:00

There are 12 speakers on the call.

Operator

You, and welcome to the Select Water Solutions Second Quarter twenty twenty five Earnings Conference Call. Please note this conference is being recorded. I would now like to turn the conference over to Garrett Williams. Please go ahead, sir.

Speaker 1

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 2025. With me today are John Smith, our Founder, chairman, president, and chief executive officer Chris George, executive vice president and chief financial officer Michael Skarkey, executive vice president and chief operating 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 via webcast and accessible from our website at selectwater.com.

Speaker 1

There will also be a recorded telephonic replay available until 08/20/2025. 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, 08/06/2025, 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 law. These forward looking statements reflect the current views of Select's management.

Speaker 1

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 ks, our quarterly reports on Form eight ks 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. Now I'd like

Speaker 2

to turn the call over to John.

Speaker 3

Thanks, Garrett. Good morning, and thank you for joining us. I am pleased to be discussing Select Water Solutions again with you today. During Select's 2025, we improved our profitability and cash flow while continuing to advance our strategic objectives around growing water infrastructure, scale and margin. I'd like to start with some of the key second quarter highlights, an overview of several large contracts and transactions we recently closed and other strategic and market updates.

Speaker 3

Then Chris will walk through the second quarter results and forward outlook in more detail. In the second quarter, we increased net income by 22% and adjusted EBITDA by 13%. Importantly, we improved operating margins across each segment, leading to a consolidated gross margin gains of nearly two percentage points. Supported by our growth in both our recycling and disposal volumes, we achieved strong top line and bottom line growth in our Water Infrastructure segment while growing gross margins before D and A to 55%. Since the start of the second quarter, we have signed several new long term agreements for large gathering, recycling, distribution and disposal projects.

Speaker 3

These agreements continue to add scale to our contracted and dedicated acreage position in New Mexico and provide meaningful long term revenue potential. We also have recently executed on or now underway with multiple strategic opportunities to rationalize our water services segment in support of our rapidly growing water infrastructure platform. As we've previously indicated, we have been very focused on assessing our water service portfolio to allow us to focus our time and capital on the areas that deliver high gross margins, continued growth, and full life cycle water solutions. During July 2025, we closed on a creative transaction with Omni Environmental Solutions that allowed us to achieve multiple strategic goals at once. In this one transaction, we were able to strategically grow our infrastructure business while monetizing and rationalizing certain noncore parts of our water service segment.

Speaker 3

As part of the deal, we acquired a special waste landfill, a processing and treatment plant, disposal facilities, and an oil reclamation asset in the Bakken Region. Now with four active landfills in the region and an expanded integration into solids liquid separation and enhanced oil reclamation, we have established a clear market leading solids management footprint in the Bakken to pair with our sizable traditional wastewater disposal portfolio. We will spend the back half of the year getting the assets in the facility upgraded and expanded, but we are excited to add additional high gross margin growth potential for the infrastructure business in 2026 through this deal. In exchange for these assets, Omni acquired Select's trucking operation in the Northeast, Mid Con and Bakken regions. We expect this deal will have improved our consolidated margins over time, reduced our operational risk profile, and streamlined our business in multiple basins.

Speaker 3

While the Omni transaction is a strong step towards rationalization in the water service portfolio, we believe more opportunities remain to capitalize on certain strategic assets within our water services segment. Accordingly, we are now formally exploring financing and capital structure options to unlock value in Peak Rentals, our equipment rentals business within the water services segment. As part of this effort, I'm excited to partner with Scott McNeil, a highly respected and proven executive in the energy and power sector. Scott has been instrumental in the formation, leadership, and monetization of multiple successful energy companies and brings deep experience in both operations and capital formation. Scott joins us as the CEO of Peak and will be leading the strategic development and transaction planning for the business.

Speaker 3

Pat Anderle continues his role as president of Peak, maintaining the operational leadership, execution discipline, and customer focus that has long driven Peak's success. The Peak platform includes well site equipment, pressure and flow control systems, and notably, an emerging distributed power generation business. For more than fifteen years, has been a leader in deploying traditional diesel distributed power solutions into the energy markets. And more recently, PEEK has capitalized on the rapidly growing demand for its natural gas generators and proprietary battery power systems. Demand for mobile off grid power is surging as oil field electrification accelerates.

Speaker 3

As the power grid build out lags, these solutions ensure critical energy infrastructure stays online with resilient and reliable backup. We see the impact of this every day as we utilize Peak's distributed power solutions to support the rapid build out of our own water infrastructure platform in remote regions of West Texas and New Mexico. Peak is scaling into the distributed power sector with meaningful advantages, an established rental platform, a large base of operations, and strong customer relationships across top tier operators. Furthermore, Teak has secured a long term exclusivity agreement with a critical supplier of proprietary battery storage solution, and we believe Peak is the first company to integrate battery power systems alongside generators in the field for both upstream and midstream application. In order to support Peak's momentum in the distributed power generation business and ensure the business has access to dedicated growth capital that does not compete with our water infrastructure growth needs, we are in the process of evaluating transactions that would establish a stand alone capital structure.

Speaker 3

We completed the formal carve out of PEEK as a stand alone operating company earlier this year, and we are well prepared for various potential outcomes. While the ultimate outcome is still to be determined, we expect to preserve continued economic exposure to Peak's future growth and value creation in its distributed power space while maintaining long term strategic alignment to support our core water infrastructure growth strategy. Ultimately, each of the Omni and Peak initiatives are aimed at focusing Select's near term priorities around our core strategy of building and promoting ratable, repeatable water infrastructure growth and more directly, the continued build out of our large scale Northern Delaware Basin infrastructure network in New Mexico. Now shifting back to our infrastructure build Mexico. I am pleased to have executed multiple new long term contracts in the Northern Delaware during the second quarter to expand on our current network in both Eddy and Lea Counties, adding approximately 60,000 acres of additional leasehold dedication and 385,000 acres under right of first refusal agreements.

Speaker 3

These new contracts encompass the full water life cycle, including gathering, recycling, disposal, and treated water distribution. And they underwrite the addition of multiple new recycling facilities and nearly 30 miles of additional dual line large diameter pipeline. But what I'm even more excited about is that in each of these deals, our E and P operator partners have agreed to directly convey the ownership or operations of their existing recycling and disposal infrastructure to Select. Select will continue to contractually support each of these customers' core operations, but will have the opportunity to utilize the assets for a broader systems water balancing and commercialization as well. This is a very strong testament to the economic and operational value that Select provides in the marketplace with our full life cycle water balancing capabilities.

Speaker 3

We greatly appreciate the trust that our partners have in Select's reliability as a large water network operator and believe we are well positioned for more long term contracts ahead. We also continue to grow our disposal capacity and takeaway in conjunction with this large network build out, with plans to continue to grow this capacity over time to support long term network optimization and efficiency. Upon the completion of these recently awarded projects in the Northern Delaware Basin alone, we will have approximately 1,800,000 barrels per day of recycling through throughput capacity and more than 1,000,000 acres of combined leasehold and ROFR dedicated acres. On a pro form a basis, New Mexico will have gone from contributing zero to now more than 60% of our total fixed recycling capacity across the Permian in about a two years' time. To further reflect on this point, across the last five quarters, we have added on an average more than 77,000 dedicated leasehold acres and more than 140,000 ROFR acres per quarter, a tremendous pace of contract growth in a short period of time.

Speaker 3

In effect, we continue to add a significant backlog of contracted future revenues and cash flows underwritten by some of the best geology and lowest breakeven well inventory in the industry. I am confident we'll continue to add more contracts into the portfolio over time, and I am excited about the growth potential this will provide over the coming years. Ultimately, we maintain a high level of confidence around our water infrastructure growth potential and believe the segment is poised to see strong 20% year over year growth in 2026, building on the double digit growth we expect in 2025. While the macro activity environment may present challenges in the second half for more of the completions oriented parts of our water services and chemical businesses, we maintain market leading positions in each of these segments and expect them to continue to generate strong free cash flow while we focus on growing our water infrastructure segment. At this point, I'll hand it over to Chris to speak about our financial results and the outlook in a bit more detail.

Speaker 3

Chris?

Speaker 2

Thank you, John, and good morning, everyone. In the second quarter, Select had a strong performance in light of varying activity levels and made great progress in advancing strategic objectives during the quarter. During the second quarter, we achieved 22% sequential growth in net income, 13% sequential growth in adjusted EBITDA, higher gross margins before D and A across each segment, growth in both our recycling and disposal volumes, and continued water infrastructure long term contract wins. Looking at our second quarter in more detail, water infrastructure produced a strong quarter with revenues increasing 12% and gross profit before D and A growing 15%, well ahead of our expectations. The segment also generated a strong 55% gross margin for D and A during the period, up 1.5 percentage points from the prior quarter and more than four percentage points compared to the prior year.

Speaker 2

Looking ahead for our Water Infrastructure segment, we expect overall activity in Q3 to be relatively steady with our anchor tenant customers with some modest variability in interruptible activity, resulting in revenues that are relatively steady to potentially slightly down low single digit percentage points in the third quarter relative to what was a very strong Q2. We should also maintain gross margins before D and A above 50%. However, based on our current customer schedules and new projects coming online, we anticipate a strong Q4 for infrastructure, with revenue and gross profit expected to increase double digit percentages sequentially, resulting in a twenty twenty five exit rate that remains in line with our prior guidance. Importantly, with our latest contract awards, we are adding new capital projects that should continue to provide growth for this segment into 2026 and beyond, a testament to our water infrastructure strategy overall and the strength of its future earnings potential. While we will continue to closely monitor market conditions in partnership with our key customers with a strong 2025 exit rate and new projects expected to come online throughout 2026, we believe we are on track to deliver 20% growth in water infrastructure in 2026 compared to full year 2025.

Speaker 2

We also remain on target to well exceed our previous goal of achieving 50% or more of our consolidated gross profit coming from water infrastructure on an exit rate basis in 2025, particularly in light of the omni transaction. While we've achieved much in the past two years, we anticipate this contribution trend to continue into 2026 and beyond. Switching to the water services segment. In the second quarter, we saw revenues decrease by approximately 4% sequentially, driven primarily by weakening activity levels in the latter part of the quarter. This decrease, however, was below the low end of our prior revenue guide of an expected 5% to 10% decline, and our gross margins before D and A and services held relatively flat at around 20% during Q2.

Speaker 2

I believe the Water Services segment performed favorably compared to the market activity overall in the 2025. However, we should experience further reductions in the second half of the year attributable to both activity and the larger rationalization efforts mentioned earlier. Immediately after quarter end, Select closed on the aforementioned Omni asset swap transaction that resulted in the divestiture of certain trucking and related operations in the Northeast, Mid Con, and Bakken regions, along with modest cash and stock consideration. Additionally, and separate to the omni transaction, Select also exited the remainder of its trucking operations in the Mid Con and Haynesville regions for cash consideration. These combined actions significantly reduce our remaining trucking footprint to just the Permian, Rockies, and Eagle Ford regions.

Speaker 2

To put that into context, for the trailing twelve month period ended 06/30/2025, the divested trucking operations represented more than a third of the revenue and more than a fifth of the gross profit before D and A of Select's trucking business unit and approximately 105% of the total revenue and gross profit for water services as a segment as a whole. Additionally, as previously noted, and as part of our broader efforts to focus Select around our core infrastructure and full life cycle water solutions thesis, we recently stood up the Peak Rentals business within the water services segment of Select to be a stand alone operating company and have begun evaluating strategic alternatives for this business. As part of the structured carve out, we have incurred certain incremental costs at both the cost of sales and SG and A levels in order to ensure that Peak is well positioned to operate independently, leading into any potential strategic opportunities. While we expect some impact from weakening activity levels, these rationalization efforts represent a sizable portion of the approximately 25% revenue decline we anticipate in the third quarter for Water Services. However, even with the meaningful expected revenue reduction, we expect margins to remain relatively flat to Q1 and Q2 levels of approximately 19% to 20% in the 2025.

Speaker 2

Moving on to the Chemical Technologies business. This segment saw sequential revenue decline of approximately 11% during the second quarter, in excess of our guided expectations, driven primarily by pullbacks in activity levels associated with some of our pressure pumping customers. However, gross margins before D and A of 17.5% in the second quarter exceeded our guided range of 14% to 16%, resulting in modestly higher gross profit before D and A in the 2025 as compared to the first quarter. During the third quarter, we expect revenue to decrease low to mid single digit percentages, outperforming the overall activity environment on the heels of continued success with new product development initiatives while holding relatively steady 15% to 17% gross margins. Looking back on a consolidated basis, in the second quarter, SG and A increased to $39,000,000 or just under 11% of revenue, partially impacted by incremental SG and A costs incurred as part of our peak carve out.

Speaker 2

We expect SG and A to hold relatively steady on a gross dollar basis during the second half of the year. Though over time, we will continue to look for opportunities to rationalize the cost structure of the business in conjunction with the ongoing rationalization efforts in Water Services. Altogether, we saw solid consolidated adjusted EBITDA of $73,000,000 during the 2025, above the high end of our previous guided range, largely resulting from the stronger than expected margin performance out of our Water Infrastructure segment. For the 2025, we expect consolidated adjusted EBITDA of 55,000,000 to $60,000,000 as softening activity in The US Lower 48 impacts the more completions oriented water services and chemical technology segments, along with the immediate impact of the Omni transaction. While activity declines will impact the short term outlook of our water services and chemical technologies businesses, we are confident in the continued long term growth prospects for our water infrastructure segment and the additional resilience that our growing contract portfolio will bring over time.

Speaker 2

And as we've outlined, with new projects coming online through the back part of the year and into 2026, the Water Infrastructure segment is poised for continued sequential growth with 10% quarter over quarter growth in 2025 and twenty percent year over year growth during 2026. I'll now hit on a few below the line items and cash flow details before we wrap up. Looking at our other costs for the first quarter, D and A increased approximately $3,000,000 in Q2 to approximately $43,000,000 With additional growth CapEx, we expect D and A to see a similar increase in Q3 to approximately $45,000,000 Interest expense should remain relatively steady, and our effective book tax rate applied to pretax operating income should stay in the low 20% range, with cash taxes on the year remaining low at around $10,000,000 or less. While we need to conduct further analysis, given recent federal legislation, we would expect our cash tax obligations to remain relatively muted across the next couple of years as well. On the cash flow side, we generated more than $10,000,000 of free cash flow during Q2, even with the significant ramp to $79,000,000 of CapEx during the quarter, primarily in support of contracted infrastructure projects.

Speaker 2

During the second quarter, we also deployed $3,000,000 to acquire bolt on infrastructure assets in the Permian to strategically support our existing recycling and disposal networks. As demonstrated by our latest project awards, we are seeing our large backlog materializing into actionable contracts. Following the recent project wins, we still expect $225,000,000 to $250,000,000 of net CapEx in 2025 with a bias towards the higher end of the range, though we have now added to our growth CapEx backlog into 2026. We maintain our expectation of 50,000,000 to $60,000,000 of this CapEx going towards ongoing maintenance and margin improvement initiatives in the near term. Absent the ongoing sizable growth capital outlays, our business maintains a very maintenance light capital model.

Speaker 2

Our operating assets have significant free cash flow generating capabilities and flexibility to manage maintenance spend in accordance with market conditions without impacting our operational performance. While near term cash flow will be impacted by reduced activity levels, we continue to generate very solid 70 plus percent free cash flow capture out of our base water services and chemicals profitability and are very well positioned to fund our water infrastructure growth projects while maintaining a healthy balance sheet overall in a challenging market. In summary, we advanced our strategic initiatives in q two and remain confident in our overall strategic outlook. We are proud to have positioned the company with strong liquidity, resilient earnings streams, and growing contract coverage, and we look forward to continuing to deliver strategy. With that, I'll hand it over to the operator for any questions.

Speaker 2

Operator?

Operator

Thank you. We will now be conducting a question and answer session. Thank you. And our first question comes from Jim Rollison with Raymond James.

Speaker 4

Hey, good morning guys. Nice quarter. And John, you talked a bit about this, but you guys continue to sign new contracts with duration, with acreage dedication, and you even have customers giving you their assets now for you to run. Curious, you know, as you look at the market and the opportunity set, what inning do you think we're in from an opportunity perspective as far as that goes? And is the macro on the oil side having any impact on kind of the pace of desire to do that?

Speaker 4

Is just the magnitude of the water challenge really superseding that?

Speaker 3

Yeah. Thanks, Jim. Good morning. You know, as far as where we are in the the inning of the of the build out, I think, you know, our team has really put some major contracts in place and some dedication. And as far as the big projects, the two that we just announced and and and a few we still have in the that we haven't announced yet.

Speaker 3

I would tell you that we're pretty far into the the build out now. We have to, you know, physically put the plants and the pipe, in place. But, you know, the the major wins, I think we we've got that done. What what isn't done and what is starting to happen now is as you, you know, put this network together, you cross either that role for acreage or you cross undedicated position. And and what we're having happen to us now is, you know, we're receiving the calls of of of the add ons, you know, people that wanna come into the network that it, you know, could service their acreage and be an economic value in a meaningful way.

Speaker 3

And that that's just starting to happen, Jim, right now. So big projects, we're pretty far on our way. We gotta build them out. Picking up the pieces as we go through the acreage, it's just starting, Jim.

Speaker 4

Yeah. And and maybe to follow go ahead, Michael.

Speaker 5

No. I I was just gonna maybe address part of your question on the backlog. I I would say that the backlog is is strong, and it's it's flat despite converting these projects from opportunities to signed contracts, and that removes it from the backlog. But we're continuing to backfill for them so that it's relatively flat. And I don't see the near term macro headwinds changing that.

Speaker 5

I think we will be able to continue to deliver projects and have as we have on a quarterly basis going forward.

Speaker 4

Got it. Thanks for that, Michael. And and and as you guys kinda look at that acreage that isn't locked up that crosses paths, maybe just relative size of what you have locked up versus because, obviously, your roofer acreage currently is a bigger number than your your dedicated acreage. But but when you add that in plus the guys that aren't even involved yet, I'm just curious how much opportunity that still provides.

Speaker 5

Yeah. I might take a shot at that and kinda let John clean me up. I mean, the first thing I'd point out is that the road per acre is just twice what we have under dedication, and so there's a meaningful growth impact there that that hasn't been fully developed, but we certainly think we're well positioned to capture it. In terms of new acreage out there, I'd really look to kind of the expansion that we have in Eddy County, which the deals that we announced largely allow us to continue our expansion in Eddy County backed by long term contract. And we're reversing a lot of acreage that is not tied into our system and and and much of which, frankly, isn't committed, which John alluded to.

Speaker 5

So I think there's a real opportunity there for us to connect it and and tie it into the system. And I I mean, that's what makes me so excited is we're really building a a system of size and scale in New Mexico, and it uniquely positions us to solve the localized imbalance of produced water and completion water. And that's gonna allow for continued growth as you've seen over the last few quarters, but also stability across the system.

Speaker 4

Gotcha. And then as a as a follow-up, John, quite interesting development on the the peak side of things. Would love to get and and, obviously, know Scott McNeil pretty well, but would love to get your view on just maybe framing the market opportunity as you guys see it for that business because, know, it's it's gonna be a unique strategy with trying to carve that out and and still keep economic benefits. But I'll, you know, just love to see maybe just put put some brackets around where you think that that economic opportunity is.

Speaker 3

Yeah. You know what? I think Peak, because of where it's been since really the the beginning of what is Select, has a very unique position, but it always you know, Peak always participated on the drilling and completion side of the business. So when you think about temporary housing, potable water, wastewater, communications, and power generation, we were really around drilling rigs and completion frac crews. But, you know, the 350 plus MSAs we got are with companies that are in the production business as well.

Speaker 3

So the lack of electrical, you know, grid generation and and the way that continues to grow in length of time before it gets, you know, put in place, Jim, allows Pete to really have an opportunity of which it's now taking advantage of of of taking those as MSAs and going into the production side of the business in a meaningful way. So, I think it's got a really good position. What really advanced that position is, you know, Select and these contracts that, Michael and and the team has put together are in that same area, in that same electric generation problem is real. And we, you know, had to start supporting ourselves, in the midstream side of the business to to, you know, power generate these recycling or or transfer or disposal wells in areas there's not electricity. The other thing I would tell you is that we we were very early in establishing a relationship with a a battery company, and we, you know, did our own investigation, if you will, of of of applying that battery technology along with our diesel power generation in the same application that we've been doing for many years now and the same kind of load.

Speaker 3

And what we found is that, you know, you could, apply that battery, and that generator will run roughly 20% of the time, versus generator direct, and it'll burn about 20% of the fuel. And you can size the battery for the peak demand position, and you don't have to size the generator for the peak demand. You just have to size the generator for the job. And it it it's really an economic value. It really cleans up the electricity currency going into the job.

Speaker 3

It really allows a more quieter workplace, and it allows automation application around that electricity that is harder to do with, you know, full, you know, diesel power generation twenty four hours. So we're we're excited about it.

Speaker 4

Got it. Appreciate the all the color. Thank you, guys. Thank you, Jim.

Operator

And our next question comes from Derek Podhaser with Piper Sandler.

Speaker 2

Hey, good morning. Just to

Speaker 6

follow on Jim's question with Peak Rentals. Maybe if you could just help us provide just some further details around the kit, maybe how much capacity TCAS right now from a megawatt perspective, what's owned, maybe what's deployed on an active megawatt perspective. Types of units, are these the smaller sub one gigawatt units, or are these more like the RECIPs in that two to three megawatt range? Just maybe some more color on the actual fleet size and type of kits.

Speaker 3

Yeah. So the this is John. So the, current fleet size and the, you know, the space we have participated in since we started peak back in o seven is the smaller portable diesel power generations. So definitely, the smaller units. But even the units that we're deploying today, both in the midstream and the production side of what we're doing are still, the smaller, recip units.

Speaker 3

They're they're bigger than what we've done in the past, so they're 400 k w type stuff, in on electric submersible pumps or midstream application of water movement, but they they definitely are still smaller portable recip units.

Speaker 2

But on the the growth side of it, Derek, the focus around the natural gas units, those are definitely growing to to larger scale units and and focus more on that production side and the infrastructure application to build out. But but regardless of the the unit type, they, you know, they fit within our existing, you know, production and refurbishment capabilities from the the business to date. And so we've got a, you know, a large legacy of of being able to manage, you know, all all different types of units and and, you know, we're gonna continue to look at scaling up appropriately, particularly on the natural gas side.

Speaker 6

Got it. That makes sense. And and maybe just, like, total size of the fleet, megawatt, and, like, today, and where you think it can go next year?

Speaker 2

We haven't put anything out specifically on the total fleet size, and we're investing in it, I would say, you know, robustly this year. The the ultimate, you know, I would say, scale of the fleet over the next, you know, twelve to twenty four months will probably be somewhat dependent upon the ultimate outcome of what what we're able to accomplish here because there's, you know, clearly growth in demand. There's clearly opportunities to to deploy units. We're focused on what the scale of that backlog can look like and and what our order book can can grow into.

Speaker 6

Got it. That's helpful. And then just a follow-up switching back over to infrastructure. Obviously, lot of exciting growth opportunities as we think about 2026. You you gave a 20% year over year growth number there.

Speaker 6

Maybe just an early look into 2026 CapEx budget. Maybe you could just put some, you know, guardrails around it, how we should think about it, what CapEx will be required to support that 20% growth. I'm just thinking through more of the all the moving pieces as far as seeing a cash flow inflection in infrastructure. But maybe just we'll start with the CapEx and what you think you'll need to spend in order to support that 20% growth number.

Speaker 2

Yeah. It's a good question, Derek. You know, one thing to to be clear on is that, you know, current outlook of, you know, 20% or so is based on the projects we have underwritten via contract today. So, obviously, we've got a, you know, a backlog of capital being deployed in in the '25, and we've now backlogged some additional projects into the first half of next year. Between, you know, the '25 and and the '26, we probably got about 200 and, you know, 25,000,000 of of capital deployment, probably about 75 to, you know, to potentially a 100 of which is in the first half of next year.

Speaker 2

So that 20% is is, you know, underwritten by, you know, those current contracts and those current projects now under construction. Now that said, we certainly continue to feel optimistic about our ability to add new contracts into the portfolio over the back half of '25 and certainly across the full year of '26. And so, you know, our expectation would be that we continue to add new projects under contract and and that, you know, capital, you know, deployment over, you know, the course of 2026 has opportunity to look more like the capital deployment of 2025. So we think that there's certainly upside to add to the backlog there with new contracts. And to the extent we're able to successfully do that, you know, that add to the portfolio, and that would add growth opportunity beyond the 20% we're, looking at under already underwritten today.

Speaker 5

But from an operational standpoint, the the current construction time line extends into

Speaker 3

the third quarter of next year.

Speaker 6

Got it. Okay. That makes sense. Thanks, guys. I'll turn it back.

Speaker 7

Thank you.

Operator

Moving on to Bobby Brooks with Northland Capital Markets.

Speaker 8

Hey. Good morning, guys. Thank you for taking my question. So the twelve year contract within Eddy County announced on today's release, it was specifically mentioned that it will connect to the ongoing Eddy County network expansion that was announced on the 1Q call. This would lead me to believe that this new contract announced would materially accelerate the payback on this capital project that is currently underway without much additional CapEx.

Speaker 8

Is my logic here fair, or is there something maybe I'm missing?

Speaker 2

I certainly appreciate the context of the question, Bobby. We are going to see additional capital deployed with the the new projects recently announced, you know, give or take around $40,000,000. You know, that said, you know, anytime you're adding on to kind of an anchor, you know, build out asset, you know, the economics do have the the ability to improve, you know, off of that kind of base build out. So both the the capital economics around the interconnection between Eddy and Lee County, as well as the expansion now, you know, into the, you know, the the second big contract off that system does give us the opportunity to further commercialize that, further reach additional acreage into, you know, Michael and John's points earlier. Now we've got access to significantly more uncontracted and or commercial volumes that that we feel like we can add on to that system and improve the overall economics.

Speaker 5

Yeah. We're we're really excited that the two systems match up together because it again, it we think creating one large network is very important. As I mentioned, it it able it helps us balance out longs and shorts and create stability. But but the two acreage positions are they're adjacent. They're not they're not overlapping.

Speaker 5

And so it will be kind of expanding into new territory, which we just think creates more optionality and flexibility.

Speaker 2

But, you know, one thing to add, obviously, as we mentioned, you know, having having our customers, you know, willing to convey some of their existing infrastructure to us as part of the, you know, network build out is is obviously a much more efficient, you know, capital deployment opportunity. You're not duplicating, you know, capital in the ground. You're not duplicating or or conflicting, you know, assets with our customers or others in in the basin. And and we've seen, you know, obviously, a willingness there from our customers to to convey that operatorship and ownership over to us, which is a good outcome for both us and them.

Speaker 5

And maybe just one final point beyond the the capital efficiency. I think it really just speaks to the value of the system and the network we've we've connected. I mean, our customer realizes it's better off in our hands than in theirs. It will help us serve them better than if they owned it. And I I think that's a very strong statement.

Speaker 8

Really helpful color. And just to maybe follow-up on that customer's conveying assets to you, I get the rationale of them realizing you got Select can better operate them themselves. But is there any economic benefit for them doing that? Do you guys maybe give them a little bit of better pricing on these contracts? Or is it just, hey.

Speaker 8

We have this asset. We know you can do we know you can utilize it better?

Speaker 5

I mean, from a from a deal making standpoint, it's clearly part of the discussion and negotiation when we think about, you know, terms and pricing and all of that. But the real the real value here is around the network effect that it creates. It's it's less about the the the the assigned value of that asset and more about what putting it into our system system allows us to do and how it allows us to serve them better than if they owned it.

Speaker 8

Very helpful context there. And then I really found it helpful commentary on how you expect water infrastructure revenues to scale over the next eighteen months. When I take your comments for 4Q 'twenty five, revenues up 10% to about $85,000,000 combine that with the comments on the expectation for 20% year over year growth in 2026. That implies water infrastructure revenues on a quarterly basis exiting 2026 are above 100,000,000 So is it right for me to think that as you see it now, water infrastructure on a run rate revenue basis yearly is going to be $400,000,000 plus exiting '26?

Speaker 2

Yeah. Certainly, from a trajectory standpoint, Bobby, you're you're thinking about it correctly based on the current, you know, the current projects and and the schedules that we have in hand and and the backlog opportunity. You know, there will be a trajectory over the course of '26 with, you know, as Michael mentioned, projects, you know, building out through the first half of the year and and and partly into q three as well. And so that should drive a continued trajectory with an exit rate in '26, you know, materially above, you know, obviously, where we're gonna be in the first half of the year like you outlined there.

Speaker 5

The only thing, Chris, I'd add to that is is the statement I made previously, which is we we have been successful over the last four or five quarters at announcing kinda new long term commitments that will have additional volumes on the system, and and I would expect that to continue in the near future. So we're we're building for for the back half of '26. But my hope is, Bobby, that when we talk again in in three or six months that we're building for, know, the front half of '27.

Speaker 3

I think it's important and I but Michael and Chris both really touched on it, Bobby. But, you know, as Michael said, you know, we we these assets allowed us to put a network together. These contracts allowed us to put a network together. The interconnect of this system travels through basically three pieces, the dedication piece, which is what we're talking about here in the volumes. It travels through the roper piece that, as Michael said, is twice the dedication, and then it travels through the undedicated or not ropered piece, but still is logistically correct to bring value to us and our customers.

Speaker 3

And that is upside, and and the network brings real value to that upside. And we expect that we will continue to get the calls on the upside.

Speaker 8

Super helpful color. Congrats on nice quarter. I'll return to the queue.

Speaker 4

Thank you, Bobby.

Operator

And our next question comes from Don Crist with Johnson Rice.

Speaker 9

I appreciate the asset rationalization and and selling us some trucking assets. But as you kinda progress through, are there other assets in the portfolio besides Peak that you're currently looking at? I mean, would you sell the rest of the trucking assets? Would you kinda cut deeper and go towards chemicals or anything of that nature? Or is there anything else that we don't know about in the portfolio today that that could be a divestiture candidate as we kinda move forward to offset some of the capital you're spending on the construction side?

Speaker 2

Yeah. Good question, Don. And I'll I'll maybe start and let John add on. You know, as we look at the services, you know, segment, you know, here forward, obviously, with the omni transaction, you know, completing here in in July, you know, we've significantly rationalized that trucking footprint. You know, we have three basins of the trucking operations left.

Speaker 2

You know, I would say those areas have more strategic interaction with our existing infrastructure portfolio and and support, you know, I would say, a steady state of produced water delivery to those assets. So we view that as as having a, you know, a good strategic relationship and a and a production base, you know, stability to it with a a better margin profile than the assets that we've divested out to date. Peak, obviously, with a, you know, an ongoing process here represents a a good opportunity to continue to rationalize the portfolio with about 20 peak represents about 20% of the services segment, you know, p and l and about 10% of the consolidated p and l. So, you know, while obviously a good sized business, you know, represents an opportunity for us to recapitalize it with growth capital, you know, opportunities and and continue to help, you know, support the overall strategy. Either way, you know, we have a a very strong balance sheet.

Speaker 2

And so we have, you know, strong cash flow generative capabilities out of both the current services footprint even on a rationalized basis as well as the chemicals business that helps support that growth trajectory within water infrastructure. And we feel like we've got the opportunity to continue to invest in that growth trajectory, you know, with the, you know, the current liquidity we have at hand. We'll obviously maintain a a disciplined balance sheet overall. But once you get beyond that, what you have left with, in the services business really fits what we have in infrastructure and what we're trying to accomplish on a full life cycle basis well. You've got large scale market leading temporary water logistics capabilities.

Speaker 2

You've got large above ground and temporary storage solutions. You've got capabilities of supporting your contracted underwritings with the the infrastructure build out, and we've actually seen some of some of the more recent contracts successfully integrate that last mile logistics piece as well. So we feel like we've got a good, you know, a good portfolio approach with the business based on the decisions we've made today. And, you know, we look forward to figuring out what the ultimate outcome is on on the peak opportunity here. But, you know, we continue to see new product development wins in the chemicals business driven by some of the ongoing secular transitions around, you know, longer laterals, produce water reuse, the trends that generally support the water side of the business and the infrastructure demand as well.

Speaker 2

So, you know, we'll we'll continue to assess over time, Don. I think what we'll be focused on more near term is how to rationalize the the, you know, the cost structure and the operational processing side of the business in, you know, in conjunction with the decisions we've already made. But, John, anything to add on top of that?

Speaker 3

Right. Don, I think what we think about all the time in in rationalization, you know, with peak, logically, there is a a large opportunity in the power generation piece of peak and the expansion into, you know, the production side and the midstream side. It's just, you know, it is a need of capital for a very attractive opportunity, and it really is not the full life water cycle thought process. The other one we think about all the time is we want to make sure that we can bring value to our infrastructure customers. And if we have pieces of our business that integrate in a manner that allows us to bring that value both in utilization to us and and and revenue dollars and profits, but also in economic value to our customer.

Speaker 3

We we are really focused on what fits with that infrastructure piece to do that, Don.

Speaker 9

I appreciate all that color. And, again, I applaud you for for rationalizing some of the assets. Just one further one for me, and you didn't talk about Colorado at all in this press release. I'm I'm guessing that it's still kinda quiet, and you're adding assets there, and we should expect big news out of there more in the kind of late twenty six. Is that still the right kind of time frame?

Speaker 3

Yep. I can hear what throw it over to Mike.

Speaker 10

Yeah. We we continue to see great progress. I mean, our our mission ultimately is to develop a very reliable, efficient water network and banking system that'll support all of the stakeholders in the region. So we're, you know, really committed to delivering that lasting value and, you know, really serve all the community stakeholders there. We have made material progress even in since in the last quarter.

Speaker 10

We've completed a landmark engineering study. I think that further indicates and provides justification of how unique our system already is and how how unique it will become. So I think that will allow us to demonstrate how ratably and reliably across many years, across drought years that we that this system will be. And I think we're extremely excited about the demand we continue to see in the market.

Speaker 2

It's a

Speaker 10

you know, it's an area where Select can bring its cutting edge automation, its operational capabilities to really bring this system to life. So, you know, that is something that's you know, the activities right now are working with local irrigators, developing the partnership into truly a unique large scale lease fallow and water banking program. All of that makes this system very unique, and we continue to see great demand. And, yeah, we're pushing all the stakeholder engagement and pushing the commercial side as well, all actively every quarter.

Speaker 9

I appreciate the color. I'll turn it back. Thanks.

Speaker 2

Thank you, Don.

Operator

And moving on to Jeff Robertson with Water Tower Research.

Speaker 11

Thank you. Just, John, a question on Peak, which you've discussed a lot. Would separating that out with its own structure and capital capital sources, would that allow allow the water infrastructure business to do anything different with respect to the types of projects that it could take on or the kind of capital commitments that it could make?

Speaker 3

I don't think we have any limitations that right now, we you know, we're we're harvesting and closing the opportunities that exist to create that water infrastructure business that we continue to expand. And as Michael said, the backlog is strong. So I wouldn't say that it allows us to do anything different than what we're gonna do. The one thing that it does allow and and and and support is, again, you know, the the support of the electrification of that midstream water business that we put together in Eddy and Lee County and other areas, it needs electrical solution. And I believe that having the backbone of Peak to be able to do that is is is important in our in our execution there.

Speaker 3

So I I do believe that's an interaction that allows it to make sure, you know, there's a a a strong ability on the electrification side of the business. Michael, you got any No.

Speaker 5

I I think that's exactly right.

Speaker 8

I I'd

Speaker 5

characterize anything we do with Peak as offensive rather than defensive, Jeff. I mean, we we feel like we're on our front foot on infrastructure, and we can continue to be whether we do something with peak or not. Peak is just there's a tremendous opportunity there, and we'd like to capitalize on it.

Speaker 11

If I could ask one quick question in the Bakken. John, with the with the expanded solids bit footprint that you have, is there is there growing demand for the services you provided? And are you working on continuing to tie that into a network maybe to replicate what you're doing in the in the Permian Basin?

Speaker 3

Yeah. I've I'll I'll say a few things, on the infrastructure side, and and I believe that solids, liquids management business is very, very similar in that you can bring a network capability of logistics value to the operators very similar to to what we're doing in the infrastructure recycling and disposal space. But, you know, if you really look at infrastructure, the management of of recycled water, you know, solids, liquid separation, landfills, and disposal, oil reclamation is a really big piece of all for those. And we think that that really fits us well as we think about supporting the interaction between our infrastructure recycling, water business, and then the solids liquids build out that we're doing, which includes the the landfills. That oil reclamation piece is a very important part of that.

Speaker 3

Michael, would you

Speaker 8

Thank you. Yeah.

Speaker 5

No. I I certainly agree, John. The only thing I'd say is just from the transaction standpoint, we had some trucking operations that we had deemed noncore that were poor to the counterparty, and they had a landfill in an area where we were the largest provider of of, you know, sales management. So it was a logical swap, and we were strengthening our position and, and and giving up assets that weren't central to kind of the, ongoing infrastructure service thesis that we have.

Speaker 7

Thanks, Michael.

Operator

Our next question comes from Josh Jain with Daniel Energy Partners.

Speaker 7

Thanks. Maybe just one quick one on the chemical technologies business. You talked about it falling a bit more than anticipated in Q2 and revenues down low to mid single digits in Q3. Could you just offer your thoughts on this business moving forward sort of early indications into 2026? And do you think you can hold margins at the current levels at where they are today?

Speaker 2

Yeah. Certainly, good question. On on chemicals, you know, we we saw a pretty strong q one. And and while, you know, q two saw a a little bit more revenue decline than we anticipated, I think q three is actually proving to be quite resilient in the current activity environment. We've been, I think, quite, you know, positively pleased with some of the outcomes we've had in in recent product development.

Speaker 2

Some of the ongoing and recent, trials we've executed on with customers have been quite successful. And so I think we feel pretty good about the opportunity to continue to grow market share in that in that business. That, you know, in basin manufacturing capability we have in the Permian is, you know, is really a kind of a a unique opportunity both from a logistical standpoint as well as a, you know, product development turnaround, you know, testing lab capability standpoint as well. And we've been adding some more vertical integration into the raw material side of of the supply chain at that plant as well. So I think we feel good about the the ability to, you know, hold and protect and, you know, see those margins, you know, sustain and and maybe grow over time given some of that, you know, operational efficiency we've gotten.

Speaker 2

And then the new product development are focused on the the highest efficiency, you know, highest, you know, margin products we've got, supporting the most complex and advanced, you know, completions out there on the longer laterals and and larger simultaneous for x solutions. So I think it's been been a good, you know, trajectory for the business overall over the last twelve months. And I think the continued demand on the operator side will help, you know, compensate for some of the the challenges on the pressure pumping customer side more recently.

Speaker 3

The the the one thing I'd add to Josh that's becoming very apparent now in the relationship of our chemistry business, to our infrastructure business and our our temporary, last mile water transfer that's in services is has these fracks moved to more complex, volume, more equipment running in a twenty four hour period? Our chemistry in in the way they can support movement of water, through pipe in in and around its friction reducers or we we call it DRA or a drag reducers is is becoming very important. And that that product is a is a good high gross margins product for us, but it also brings a a considerable amount of value to our customers.

Speaker 2

If the if those product offerings and that efficiency can help the customer reduce the the time it takes to drill and complete wells and and do so more efficiently. It's a it's a great win for us and a great win for the customer.

Speaker 7

Great. Thanks for taking the question. Appreciate it.

Speaker 3

Thank you.

Operator

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

Speaker 3

Thanks to everybody for joining the call. We appreciate your continued support and interest in learning more about Select Water Solutions, and I look forward to speaking to you again next quarter. Thank you.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.

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