Select Energy Services at Midwest Ideas Conference: Strategic Shift to Infrastructure

On Tuesday, 26 August 2025, Select Energy Services (NYSE:WTTR) presented at the 16th Annual Midwest Ideas Conference, revealing a strategic shift towards water infrastructure with an emphasis on sustainable practices. While the company aims for higher margins and long-term contracts, it faces challenges in regulatory landscapes and market competition.

Key Takeaways

• Select Energy Services is expanding its water infrastructure, particularly in the Permian Basin, focusing on recycling and disposal facilities.
• The company plans to increase shareholder returns through dividends and share buybacks, maintaining a conservative balance sheet.
• Infrastructure gross margins reached 55.6% last quarter, with a future target of 60-70%.
• A significant investment in the Lower Arkansas River project aims to secure long-term municipal water leasing contracts.
• The company is exploring beneficial reuse of water, which is becoming economically competitive.

Financial Results

• Infrastructure gross margin was 55.6% in the last quarter.
• Free cash flow conversion for services and chemicals was 80% in 2023, slightly higher than the previous year’s 75%.
• The company aims for the infrastructure segment to contribute 60-70% to gross profit dollars.
• Water Services gross margins range between 22% and 25%, while the Chemical business stands at approximately 17%.

Operational Updates

• Recycling capacity has increased to 3 million barrels per day, with over 100 disposal wells and 1,000 miles of pipeline.
• The company holds 41 million barrels of storage capacity and over 2.5 million acres of dedicated acreage with rights of first refusal.
• A $160 million investment is planned for pipeline construction in Eddy and Lea Counties.
• Select Energy Services operates 15 recycling facilities in the Permian Basin and is adding about 80,000 dedicated or ROFR acres annually.

Future Outlook

• The company anticipates continued growth in its infrastructure business, with municipal projects expected to yield over 80% gross margins.
• Plans to secure the first municipal water leasing contract within the next 24 months are underway.
• Focus remains on increasing regular dividends and leveraging infrastructure build-out for a dividend-driven model.
• Growth is expected through a recycle-first approach and addressing water transformation needs in expanding areas.

Q&A Highlights

• No immediate plans to expand beyond the Lower 48 US.
• Contract structures ensure payment regardless of whether water is recycled or disposed of.
• Infrastructure margins are consistent across disposal, recycling, and gathering.
• The regulatory environment in Texas and New Mexico is active, with ongoing collaboration with local commissions to establish water reuse standards.
• Beneficial reuse of water is becoming a viable alternative to traditional disposal methods.

For more detailed insights, please refer to the full transcript below.

Full transcript - 16th Annual Midwest Ideas Conference:

John Schmitz, Chairman and CEO: Thanks for having me. And I’m John Schmitz. I’m the chairman and CEO. I founded the company in o seven.

I took the company public in April ’17. Go through some slides here and I’ll I’ll talk to the individual slides. We are a public traded company on the New York Stock Exchange. This is the disclaimer statement. Won’t read it, couldn’t if I wanted to.

The company highlights what the thesis is today and what we’re investing in and what we’re doing with the company. In the oil and gas water space, we’re the fastest growing infrastructure platform that’s out there right now. We took what was a disruptive application of recycled fixed facilities, and we dropped them into the gathering and disposal networks. So our introduction was about five years ago. We put the first fixed recycling facility in Midland in the Permian Basin.

They’re long term contracts. They’re very disruptive. They’re the best economic value management of lifetime water, full life cycle water in the space. It’s growing extremely fast. As I said, we put the first one in place, about 21 on it.

There the company, its history has in water services and chemicals is a real low capital maintenance business. So, free cash flow conversion is a profile within the company, but we actually think this infrastructure as we get out of the growth cycle and to the more matured cycle of the fixed contracts that we have in place in the facilities, it’s going be a very low capital maintenance position that we put together. It is contracted. You’ll see as we go through it, are long life nature contracted positions. It’s dedicated acreage, and these contracts are actually to the land itself.

So, if the asset base was sold, our contract follows the position of the land to the next owner. We contract dedication. What that means is we take dedicated acreage and positions, that’s what we run, write the economics on. Those economics are three four year cash on cash, 50% plus gross margins. It takes up about 50% of the capacity of that facility.

So, we go out and try to commercialize the other 50%. And then, we get about a two to one ROFR acreage to every dedicated acreage. So, if that dedicated company that we contracted with expands their footprint, all their acreage that they bring in, we have the last right of refusal because we got the plan in place, so it’d just be a pipeline expansion for us. We are now taking our skill sets, which we’ve been in the water business since 02/2007, and we’re starting to take that into industrial and municipal positions now. So sourcing water, owning water, developing storage and leasing water into municipalities on long term commitments.

We are committed to shareholder returns. We got a regular dividend, and then we bought back shares in a meaningful way in the last, you know, five years or so. The company is very protective of its balance sheet. It didn’t have much debt. Since we’ve been building out this infrastructure, we have put some debt in place, but it’s still less than one year turn of EBITDA to debt.

It’s within the AR balance, so it’s a very conservative balance sheet. As I said, it’s a leading water provider, sustainable through the life of the well. So the water that comes out with the oil and gas, we’re contracted around that water. Our average life is going to be ten years, but some of these contracts are up to eighteen years, and it is around the water, and the water is the water that comes out with the oil and gas, so full life cycle in how we do that. And then we’re also bridging into the municipal and industrial markets.

The segment it’s reported in three segments. You can see why we’re doing it. The water infrastructure is contracted. It’s on the production side of the well, so it’s not just drilling complete. It’s not cyclical to just the commodity price or the spend rate, and it’s a high gross margins position.

The next piece is where we came from when we started the company, a water service company. It’s more of a 22% to 25% gross margins business. It’s more around the completion activity of the well. So, if they’re drilling and completing wells, that activity will move around with commodity price or capital dollar spend to develop oil and gas instead of produce oil and gas. And the chemical technology piece of it, it’s the lowest margins business we have.

That chemistry is used to make a piece of water usable to frac the well with or the water that actually I mean, the chemical that actually goes into the water to frac the well. This is the evolution that we identified and we executed. So if you go back to 2018, it was a call out service business. 80% of our revenue was in that 22% to 25% gross margin. It was, you know, job by job.

It was around completion spend, completing new wells. That was about a little less than 6,000 employees on it. As you start moving toward to the right there, we started bringing into this infrastructure thesis contractual high gross margin production life of oil. We did that in 2021. So in 2023, that service business went from 80% to 59%.

You look at the second half of this year, that infrastructure business is now 50% of the gross profit dollars. The call out service business is down to mid-30s now, and the chemistry business is still there. If you look at the contracts that we have in place today that we’re actually building the facilities, putting the plants and the pipes and the construction in place as well as the municipal thesis that’s not in the number, we believe that we will fully get the infrastructure, the contract at the high gross margin of more than 50% into the 60% to 70% of the gross dollars into the future on it. And that does not really include the municipality we’ve invested money in now in the Lower Arkansas or South Of Denver, Colorado. And that’s a sizable investment, totally different because municipality project, our thesis, and we’d actually own the water and lease it long term, and it’d even be higher gross margins.

So the conversion continues to happen. The platform itself has gotten big. So, if you look at the right side of the page there, this is our oilfield infrastructure asset base that we’ve now placed and put in place in the last five years or so. The recycling capacity of the company is up to 3,000,000 barrels per day of capacity. The disposal locations that we have, we have over 100 disposal wells.

So, we look at it and say we recycle first. We think that’s the best economic value to us and to our customers, but we realize that there is water that will need to be disposed of. So, we have disposal facilities along with the recycling in the networks. We have 1,000 miles of pipe now, about 41,000,000 barrels of capacity of storage. Very important because you’re balancing water, large quantities of water.

So, some companies are very long water, some companies are very short water, and you’ve sat there in the middle of it with that storage and that optionality in a network. And our dedicated acreage with ROFR is now up to over 2,500,000 acres. The box below it, y’all, is important because this is the piece of that infrastructure I just described that’s in Eddy And Lee County, New Mexico. We were the first to bring recycled fixed facilities there. As I said, we started it in Midland in the Permian, but we’ve now put it into the Delaware and it grew really fast.

So, of that 3,000,000 barrels of capacity and recycle, 1.8 will be in the Upper Delaware, the best rock in The United States as far as economics to oil and gas, 300 little over of, you know, large diameter in ground fixed piping systems, the networks. A million two of the acres that are dedicated or in ROFR is in Edinley County, New Mexico. The storage out of that, you know, 41, 29 of that is in those two counties. We go East West, we go North South, we’re in some of the best drilling location inventory in The United States. This is how fast we grew it.

As I said, we kind of get it put into place in ’twenty one, We really started right North of Midland, Texas is where the first one was. We’ve expanded that one three times now. That one we’ve announced was with Oxy, and we’ve now got 15 of these across the Permian Basin, and we have the first one ever in the DJ Basin in the Rockies today. We, you know, we continue to add to this very quickly. It came very fast.

It was adopted. It was transformational, as I said, but the most important piece is the contracts and the acre dedication. That really means inventory. So it’s undrilled inventory or it’s inventory of water that is produced with the well over the life of the well twenty or thirty years on it, and we’re adding to that very quickly. So, we’re adding roughly about 80,000 either dedicated or roofer acres per year with it.

And as I said, the average, if you look at the last two years, we put these contracts in place and they got an average life of about ten plus years on it. The The acreage dedication and the ROFR, it really is backlog because it’s either wells that haven’t been drilled or wells that are being drilled or wells that are now producing and whether we’re managed to produce water or going to supply the water to actually complete the well that’s backlogged to us on it. This is one of the biggest development assets. This is at Enley County, as I talked about the right side of this map where the pipes are, that is Lea County. That’s where we first started putting the networks together.

And if you look to the left, you see the blocked in lighter blue, that’s where the pipe is getting built right now. So that’s contracts that are won. We’ve announced them. It’s sizable investments, about $160,000,000 of capital that will go across those blocks. But basically, the right side where all the lines are and the connectivity, it will go west and connect Eddie and Lee County together Eddie and and Lee County together, and you’ll go north south across the two counties in East West.

Very big network of balancing water and taking it into areas that the water doesn’t exist, and the expansion of the completions are happening today. This is the development, how quick it happened. So on July 24, we had one system. It was a freshwater system. It split Eddy and Lee County.

It’s the map on the left. We converted that to a produced water system. So, taking produced water that comes out with the oil and gas and repurposing it to use it for fracking purposes instead of freshwater, that’s where we started building the network in Lea County. And then, of course, I just showed you the map on the right, which is the expansion contracted we won. We were building a system today.

We do have a footprint that goes from New York to Mexico, you all, so over all the major basins. You know, the biggest capital commitment that we have today on new builds is in Per Delaware. But as I said, we had the first recycling in the DJ, but we go through the Bakken, we go through the Marcellus, we go through the Utica, we come all the way to the Eagle Ford and through the Haynesville. The company has a very good exposure to both gas and oil in our oil fill packages. So, if you’ve got a commodity price differential or there’s an LNG support mechanism that shows up in the Haynesville and rigs get added, this company has a very good footprint across The United States, and the footprint is assets, hard assets and contracts.

As I said, our services and chemicals is a real high free cash flow provider. We’re using that cash. You can see it on the left, 80% conversion in 2023 and seventy five percent there. The next year, we use that to fund this infrastructure build out that’s contracted in 50% plus gross margin. The gross margin in infrastructure last quarter was 55.6%.

So a very healthy profile, and we think will be a very healthy free cash flow conversion to match or be better than what’s in services and chemicals. This kind of, you know, tells you where we were in the past. We’ve seen in the diagram where we was 80%. Where we are currently, that’s the 50% of the gross margin dollars are coming out of infrastructure. But important is, you know, where we’re going to the right.

We believe all our capital that we’ve already won the contracts on is getting built today. The backlog of conversations that we haven’t converted to a contract, we do not put capital into the ground until we have a contract on it. And then the municipality infrastructure conversion of taking our skill sets and our assets and knowledge and putting them into a, you know, some kind of business relation that’s contracted into municipality or industrial. A really important slide because it really shows you so that dark blue bars, you all, is the water service business. That’s about a 22%, 25% gross margins business.

The chemical business in the green, you can see that was about a 17 gross margins business today. But the light blue and the checkered blue is where we’ve been investing all the dollars, either coming out of the profitability of the two segments or, you know, through our credit facilities. We have expanded that water infrastructure dynamically over five years. And if you go all the way to the far right, that introduces not only the contracts that we’ve won and we’re building the plants and the pipe today, but also the, you know, the potential of the municipality that we have now bought the asset, we’re putting it in place to harvest the contract long term with it. So, very excited about the one on the right that’s definitely moving the company into a 50% to 60% gross margins business that’s contracted.

That’s more life of cycle than a call out service business. This is the Colorado municipal industrial potential. So, this is on the Arkansas River, South Of Denver, Colorado. What we did is used our capital and our knowledge to be able to put together nine or 10 transactions that consolidated large quantities of water, 16,300 acre feet of water. We also bought land up against the river that you can put storage on to be able to capture and store the water and balance to make sure that you can fulfill your contractual relationship with whoever your third party is.

What we believe and what we’re trying to accomplish is there’s a very good leasing model where we will continue to own the water, and we will lease it long term to municipal or industrial users. And that contract could be thirty or forty, fifty years in length of really high gross margins because you’re just leasing your owned asset. So 80 plus percent gross margins out of this asset and with escalators and potentially could be to a public utility municipality that would be your end user, your contracted party with this. This is the first one. We believe we’re going to prove it up with the contract.

We think we’ll get it in the next twenty four months. We’ll build out the facility, prove up the business model, and we believe there’s a considerable amount of opportunity like this because of the expansion and the lack of water in both Colorado, Texas, different areas where there’s high growth. The infrastructure side of it, we’re getting a lot of both in the oil and gas industry with our water that we have been in business with for many years. So industrial data centers, direct air carbon capture, you know, actually repurposing the water or a portion of the water that you could introduce it back into the environment on it. We call it beneficial reuse.

Same thing, we think there’s an opportunity to be able to repurpose a portion of the water instead of disposing it, so turn it into a usable stream instead of a waste stream, and actually contract it into areas that are in much need of water and really areas that the water exists today, but it’s a waste stream as it is. This is one of the beneficial reuse pilot programs. So this is up against that first recycle facility we did North Of Midland, Texas Shelf. This we’ve expanded this three times since it was put in place in ’twenty one. It continues to recycle water back into the oil field to use as completion water for new wells.

But we put this beneficial reuse pilot program up against that facility, and this is where we’re taking a portion of the stream, treating the water to a quality that’s environmentally acceptable, and we’re actually growing crops with it on it. As I said earlier, you know, we do have a regular way dividend. We have raised it every year since we put it in place. We do had done share buybacks. Right now, we have the opportunity to this growth investment phase infrastructure, but we do believe in shareholders’ return.

We do fully agree with keeping the regular way dividend growing. And we believe we’re actually building an investment model that is going to have high free cash flow conversion after the growth rate, and it would be very good model to be able to drive a dividend type relationship. To summary, the as I said to begin with, this is the fastest growing oilfield water infrastructure that’s out there today. We grew up very quickly. Our contract backlog is strong on the contracts we’ve already converted.

Our contract potential backlog of the conversations that haven’t been converted is still strong. That’s all inventory, inventory in some of the best rock across The United States. We believe that the actual infrastructure is going to be a better free cash flow model than the one we had, and the one we had was very good on it. The 2,000,000 dedicated acreage is just inventory. It’s just backlog.

It’s just opportunity. It is a commodity driven position except for the life of the well. So production wise, if you’re going to produce the oil and gas, you’re going to get the water. The water has to be dealt with. Our contracts are around the water.

We are emerging into this municipal industrial. We think we have the right skill sets to do that, and we are committed to shareholders’ return. Protect the balance sheet. Don’t want to go broke. But, yeah, with that, I’ll take some questions if you got any.

Yes, sir. So that 14% that’s in the ’5? Yes, that’s in that 40%. It’s still there. Our current plans is to stay on land Lower 48 US.

We believe our backlog is very strong. The thesis of using recycle first is thesis that’s getting accepted in different basins, and we believe that we can, you know, harvest that opportunity. And then we also believe there is a real water transformation need of the growth that’s happening in certain areas. So getting into municipality and industrial is a big opportunity as well, either through beneficial reuse or just contracting water and owning water. Yes, sir?

So, yeah, answer is yes. So, you could get an effect if you had a slowdown in completion activity and you didn’t need as much frac water. You know, a couple of things. Our contract is around the water. So if you’re not using it or repurposing to frac with, that means you’re going to be disposing of it.

And we get paid for whatever we do, whether it’s gathering, storing, recycling or disposing. Your volumes would get affected though if, you know, the frac horsepower, you know, the job activity was going down in that one piece of the infrastructure, but you would potentially pick it up in another piece of the infrastructure. The infrastructure, the 55.6% that was in the last quarter, y’all, it’s about very similar between disposal, recycling, gathering. First of all, they’re all about the same kind of gross margins, and they also are pretty equal in size if you look at recycling and disposal. They kind of fit together very well.

Yes, sir? Recycled chemicals used for fluid customers? It’s all the chemical company sells into primarily upstream oil and gas companies. So the ExxonMobil, Oxy, Conoco, Chevron, people like that or companies like that. This chemistry is used primarily for two things.

It’s either to make a piece of water usable to frac with or actually the chemical that goes in the water to frac the well. It’s the only in basin reactive chemical plant in Midland, Texas. So it’s got a very unique position, and manufacturing plant is right in the heart of where it’s going to be used. So, transportation value is real inside the company. And then if you can think of it when you went from freshwater to frac wells to using produced water, the way you did that is you used the chemistry to match to the produced water to make it a quality that you could use to frac the well.

So, specialized chemistry out of that plant has become very important because of the amount of produced water we’re using now to frac the wells in the Permian Basin. Yes, sir? Yeah. There continues to be movement both on Texas and New Mexico side and the Permian, whether it’s movement because of seismic activity or movement because of pore space and how disposal wells are affecting the pore space, whether it’s productive potential pore space or whether it’s just continuing to utilize and use up the pore space that’s available. But, yeah, it’s pretty active in the effects, regulatory, as well as just pure law of how we’re disposing of the water in Texas and New Mexico in the Permian Basin.

Yes, sir? It’s a very good question. We’re working with this is in Texas, so this is North Of Midland. We’re working with the Texas Railroad Commission and Environmental Water Commission as well as a university and then an upstream customer. This is on a customer site.

And the research and development that’s happening in this pilot, and this is a permitted pilot that we put in place, the testing and the research and development is actually being used to write the standard, the quality of the water that they’ll put large permits around, and that’s what this project’s about. The economics of converting, does that translate? Actually, very good. So, if you look at the way the produced water is managed today across the basin, you recycle for refracking what we introduced to the space, that’s the most economical. That’s the easiest way to get frac water and actually dispose of your water because it’s like a synthetic disposal.

You sending it to a recycling facility instead of injecting it downhole and through a disposal well. That’s the most economic. The second one is the disposal well itself, the old conventional gather it and dispose of it. The next one is beneficial reuse, this page right here. This is the next most expensive, but it’s getting very close to actual injection cost today.

So you potentially could get beneficial reuse as a competitive economic nature to just disposing of a well in a disposal well. And the last one is what you call out of basin. That’s when you’re moving the water long distances through pipe and taking it to a different area and disposing of it in that area because you’re lacking pore space or volume or, you know, ability, that’s the most expensive.

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