Select Energy Services, Inc. (NYSE:WTTR) Q1 2023 Earnings Call Transcript

Select Energy Services, Inc. (NYSE:WTTR) Q1 2023 Earnings Call Transcript May 3, 2023

Operator: Greetings, and welcome to the Select Energy Services First Quarter Earnings Conference Call. At this time all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. And as a reminder, this conference is being recorded. It is now my pleasure to introduce to you Chris George, Senior Vice President of Corporate Development, Investor Relations and Sustainability. Thank you, Chris. You may begin.

Chris George: Thank you, operator. Good morning, everyone. We appreciate you joining us for Select conference call and webcast review our financial and operational results for the first quarter of 2023. With me today are John Schmitz, our Founder, Chairman President and CEO; Nick Swyka, Senior Vice President and Chief Financial Officer and Michael Skarke, Executive Vice President and Chief Operating Officer. Before I turn the call over to John, I have a few housekeeping items to cover. A replay of today’s call will be available by webcast and accessible from our website at selectenergy.com. There will also be a recorded telephonic replay available until May 17, 2023. 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, May 3, 2023. And therefore, time sensitive information may no longer be accurate as of the time of the replay listening or transcript reading. In addition to comments made by management during this conference call may contain forward-looking statement within the meaning of the United States Federal Securities laws. These forward-looking statement reflect the current views of select management. However, various risks uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in the statements made by management today. The listener is encouraged to read our annual report on Form 10-K, our current reports on Form 8-K, as well as our quarterly reports on Form 10-Q to understand those risks, uncertainties and contingencies.

Also, please refer to our earnings announcement yesterday for reconciliations of non-GAAP financial measures. Now, I’d like to turn the call over to our Founder, Chairman, President, CEO, John Schmitz.

John Schmitz : Thanks, Chris. Good morning, and thank you for joining us. I am excited to be discussing Select again with you today. The first quarter saw a strong recovery from a challenging fourth quarter with revenues growing 9% and adjusted EBITDA growing 29% sequentially during the quarter. We benefited from a solid quarter contribution from our recent acquisitions, and also saw organic revenue growth during the quarter across every segment. This successful combination of factors led to a company record quarterly revenue of $417 million for the first quarter. Additionally, we nearly doubled net income to $14 million, while adjusted EBITDA increased to $67 million. Across our individual segments, we once again achieved record revenues in both our Water Infrastructure and Chemical segments, while our Water Service segment continued to improve margin to operational efficiency improvements and technology initiatives.

Water Infrastructure was especially strong, seeing revenue growth of 32% for the first quarter. This segment benefited meaningfully from a mix of factors including, our recent acquisitions, the increased utilization of existing assets, and new Greenfield and brownfield organic project contributions. Water Services also saw a solid 5% revenue growth in a flat activity environment and continues to find efficient ways to improve its operations and grow market share. As importantly, we increased gross margins across the board, with each segment seeing at least a 200 basis point increase in margins relative to the fourth quarter and nearly 500 basis points of improvement in each segment related to the first quarter of the prior year. Looking forward while natural gas has seen some challenges, we continue to believe that the current commodity price outlook remains supportive of a productive activity environment for our customers with mobile service assets leading technology and strategic infrastructure across every basin, we expect to see modest revenue growth across the business and a lot of opportunity to generate incremental operating efficiencies, driving margin improvements across the board in coming quarters.

We continue to have great success at further developing the broad infrastructure asset base, we built and acquired over the last couple of years. This quarter was no different. And we’ve advanced a number of highly accretive projects in recent months. During the first quarter alone, we’ve added through acquisitions about $10 million of additional infrastructure that integrate seamlessly into our core Midland Basin asset. We also contracted or commenced more than $34 million of Greenfield and expansion projects across the Midland and Delaware basins and the Midcon, Haynesville and Rockies regions. These projects are each backed by long-term contracts supported by minimum volume commitments and acreage and wellbore dedications. We continue to see strong interest from our customer base around contracting new additional infrastructure projects, particularly around full lifecycle recycling and reuse solutions.

And we see a number of opportunities for additional growth this year. Our unique ability to provide integrated water and chemical solutions in tandem with contracted infrastructure continues to bring value to our customer and differentiates our value proposition from our competitors. Our recent development successes and deep project backlog should provide for continued growth not only in the second half of ’23, but well into ’24. The additional stability provided by these initiatives, acquisitions, projects and contracts gives us a great optionality in our capital allocation strategy. Accordingly, I am pleased the board of directors has reactivated our share repurchase program with an additional $50 million authorization. This gives us a total authorization of $58.5 million when taking into account the remaining $8.5 million left on the prior authorization.

I believe this targeted repurchase program provides an attractive incremental return opportunity for our shareholders and great supplement to our existing base dividend program. We will continue to build and enhance our solid track record of returning capital to our shareholders as a component of our overall capital allocation framework. Our revenue and profitability continue to improve during the first quarter. And I’m very excited about the growth capital projects and shareholder return opportunities. Another extremely large opportunity for the company at this point, and one that we are extremely focused on addressing, is the excess net working capital that has resulted from the pace of our recent opportunistic M&A activity. We have dedicated significant internal and external resources to our ongoing systems integration efforts and our ERP project input implementation.

I’ll let Nick speak to this and in a bit more detail, but we are firmly focused on these initiatives and others to unlock a meaningful amount of cash during the second half of ’23 that has otherwise been backlogged on the balance sheet in recent quarters. Converting this excess working capital from accrued revenue assets into cash is capable of fully repaying our recent ABL borrowings and funding our new projects and shareholders returns. Our business is clearly capable of producing significant free cash flow. And we remain committed and I believe that we should harvest two thirds of our adjusted EBITDA and the free cash flow. On the rebranding front, we continue to make progress in our efforts and anticipate fully doing business under the new brand at summer.

As a reminder, during the first half of ’23 Select intends to change his name to Select Water Solutions, Inc. We will remain traded on the New York Stock Exchange under the stock ticker WTTR embracing our heritage as water first company. For now, our Corporate and Financial segment reporting structures are not changing. But we will continue to evaluate how we best simplify our communications with our customer and our external reporting with our investors to ensure that we are conveying our message efficiently and receiving maximum value and brand recognition for our capabilities and technologies across the entire platform of our operations. This exercise will also support our concentrated working capital improvement efforts by significantly streamlining our brand architecture, and improving our customer billing process and capabilities.

Importantly, this initiative also prepare Select for the years ahead as we continue to advance our strategy to become the leader in sustainable water solutions within traditional energy while also supporting the new energy transition, and accessing diversification opportunities and water sustainability and full water waste stream management down the road. Select is uniquely positioned to provide the critical solution that advance water sustainability efforts for our customers, and the energy industry as a whole. We are well suited to drive emissions reduction and reduce the environmental impact of the industry through further pipeline infrastructure development, which reduces truck-base fluid transportation. However, more critically, Select is focused every day on solving the highly localized and tangible problems of cleanwater access and waste stream management in our local communities in which we operate through our water recycling capabilities.

Last year, we recycled more than 7 billion gallons of water and are with our recent and ongoing investments in new recycling facilities. We anticipate these recycled produce water volumes to meaningfully increase again during ’23. Importantly, these recycling activities meaningfully reduce the waste disposal needs required and increase the freshwater availability to our local communities that needed. How can we continue to progress these key initiatives I encourage listeners to be on the lookout in the coming weeks for Select’s 2022 Sustainability Report for additional details on Select’s commitment to sustainability and support of all our stakeholders. And thanks to our recent acquisitions, Advanced Chemical Technologies, organic infrastructure growth opportunities and our other strategic investments, I expect to see continued revenue EBITDA and net income growth in 2023 and beyond.

I’m very excited about what the future holds for Select and look forward to further executing on this vision through additional profitability growth, shareholders return and strategic execution in the coming quarters. Now I’d like to turn it over to Nick to provide more details on our first quarter financial performance, our second quarter and 2023 outlook and other ongoing initiatives. Nick?

Nick Swyka : Thank you, John. And good morning, everyone. Select had a great start to 2023 as we push forward with new all-time high quarterly revenue performance. Margins also advanced notably across the board with oilfield chemicals reaching a record gross margins resulting from our continued market share gains and customer demand for our higher margin proprietary manufactured products supporting our fluid matched initiatives. Our net income nearly doubled, and we posted the highest quarterly adjusted EBITDA performance since 2018. While the macro environment settled from the high growth base of 2022, Select clearly still has positive company specific trends and secular growth drivers in our core business model of providing full lifecycle water solutions to a more complex and sustainable energy industry.

Our business benefited from enhanced customer opportunities resulting from our recent acquisitions, and more efficient operations across the board, as well as a number of recently executed development opportunities across multiple basins. These combined to produce positive monthly progression throughout the quarter. 9% revenue increase was bolstered by having an additional month of breakwater operations relative to fourth quarter, but the bulk of the increase was driven by higher utilization and recent investments across our Water Infrastructure segment. As John discussed, we have contracts in place supporting attractive incremental investments into both new infrastructure and enhancements to existing assets that we expect will yield additional revenue and margin expansion through the year.

Recent stock market dislocation related to non-energy sectors provided us with an attractive opportunity to authorize and initiate a $50 million share buyback program in addition to the remaining $8.5 million authorization we previously had in place, to fully executed the two buyback programs, in combination with the quarterly dividend at its current level would distribute over $80 million to shareholders this year. With our expectation of ample free cash flow over the back half of this year, we believe over the course of 2023 we will meaningfully reduce the current draw on our sustainability linked credit facility from its March 31 balance after fully funding both our 2023 CapEx program and the potential fulfillment of our share buyback authority.

As I noted on our February call, our primary focus entering 2023 after two years of rapid organic growth coupled with a dozen acquisitions was to meaningfully boost our operating margins. As cost inflation gradually moderates, our continued integration and internal efficiency efforts allow us to carry a larger part of every earned revenue dollar through to the bottom line. Though, some elements are consistent, the primary means by which we accomplish this varies somewhat by segment. In Water Services our primary focus is on internal efficiency and taking costs out of the system, whether it’s on new procurement initiatives, in-sourcing third party labor after stretching to accommodate rapid growth, or harmonizing operations across the diverse acquisition footprint.

Water Infrastructure, we’re developing highly accretive greenfield projects, as well as boosting the utilization and margins on existing infrastructure through networking investments and expansion opportunities. Additionally, throughout 2022 and into 2023, our Chemicals group has continued to grow market share in our higher margin proprietary product offerings. We continue to shift manufacturing capacity towards these customized products, while limiting our production of more commoditized products and lower margin blending operations. With the growing interconnectedness of our operations, delivering the industry’s only true full lifecycle water and chemistry solution, we’re excited to soon become Select Water Solutions. Our fixed infrastructure, mobile logistics and customized chemistries, combined to provide an exceptional opportunity for our customers to improve their cost efficiency and well productivity while reducing their environmental footprint.

First quarter revenue of $417 million, grew by $35 million sequentially. Net income increased from $7.6 million to $13.7 million sequentially, even after accounting for the $11.6 million impact of a non-cash charge for trademark abandonment related to our ongoing rebranding efforts. Additionally, adjusted EBITDA increased to $67.2 million from $52.2 million in the fourth quarter. Looking forward, we expect to build off this strong first quarter financial performance. While, we do anticipate recent relative weakness and natural gas prices to lead to a modest decline in rig counts and gas basins, which represent about 17% of our revenues year-to-date. We do not perceive material impacts to revenues from this or much impact to activity in the oil basins which represent more than 80% of our revenues.

Accordingly, we expect to prioritize margin enhancement efforts and organic growth projects in the relative near term. In fact, even in the Haynesville shale, where we expect some of the more notable impacts from natural gas pricing weakness, we’ve executed multiple recent long-term contracts for new infrastructure projects, as produced water management remains a core priority for many of our customers. Now walking through the individual segments. The Water Services segment increased revenue by 10 million or a little less than 5%, with modest market share gains offsetting some weather related challenges from January. Our 2023 investments for this segment are primarily maintenance CapEx and we believe the second quarter will deliver similar revenue with a 100 to 200-basis point improvement to gross margins before G&A resulting from ongoing efficiency initiatives.

Next, to Water Infrastructure, which was clearly the star performer of the first quarter. The recycling facilities and other infrastructure assets we recently acquired are delivering the volumes and economics we counted on. And while we continue to grow our Permian footprint through additional investment and acquisitions during the first quarter, the five non-Permian projects outlined in our earnings release, demonstrate our ability to drive new contracted high margin project opportunities across multiple other unconventional basins as well. Although this segment has the most upside potential in 2023 and into 2024, as our new projects continue to come online, the strength of the segments material outperformance in the first quarter leads us to a moderated growth outlook for the second quarter.

Accordingly, we expect stable revenues in the second quarter relative to the first. So we expect to see continued margin improvement of 200 to 300 basis points, bringing gross margins before G&A back above 30%. The Chemical segment which continues to set new all-time highs for revenue and gross profit, increased its margins two percentage points nearly 20%. Water Treatment for recycling purposes is a secular tailwind for this group, much like it is for water infrastructure. And we expect revenues increased by low to mid-single-digit percentages, while gross margin percentage should hold relatively steady in the second quarter SG&A of $35.8 million was impacted by $2.9 million of transaction and rebranding costs in the first quarter. While the direct transaction costs in connection with recent acquisitions to decrease in the absence of further M&A, we see the next few quarters delivering similar transaction costs overall, given the ongoing rebranding efforts.

In the back half of the year, we expect stable to modestly increased SG&A given the moderating but still elevated rate of labor inflation. That said, we anticipate SG&A reducing on a percentage of revenue basis back towards the 8% mark due to the anticipated top-line growth in the coming quarters. First quarter net CapEx of $21.2 million benefited from $6.7 million of assets sales. Since beginning our recent M&A activities and mid-2021, we have sold more than $45 million of non-core assets out of the dozen or so acquisitions in the last two years. This has helped us materially de risk, we’re already very attractive deep value deals, and also help fund our most recent acquisitions. That said we do expect this asset sale pipeline will normalize over the rest of 2023 after a handful of remaining real estate and asset sale opportunities.

Overall, we reiterate our 2023 net CapEx guidance of between $90 million to $130 million, after giving effect to roughly $20 million and expected full year asset sales. We expect depreciation and amortization expense to be in a low-$30 million range per quarter and tax expense to remain minimal through 2023. Overall cash flows were impacted by a little over $10 million of asset acquisitions during the quarter, as well as about $11 million of combined open market and tax withholding related share repurchases during the quarter. However, the bulk of the impact of cash flows during Q1 related to working capital. Free cash flow was impacted by a $79 million use of cash for working capital build, as we materially grew revenues while continuing to work through our systems integration and implementation efforts.

Unlocking this working capital balance is a core focus and towards that goal, we are targeting a reduction of at least $75 million from our accounts receivable balance between the first quarter and the end of 2023, through these investments and improvements, with further reductions to be identified for 2024. Our primary integration challenges remain focused around our back-office processes associated with multiple electronic ticketing and invoice production systems, which have resulted in delayed timelines on delivering uniform and complete invoices to our customers. The rebranding effort, ticketing systems integrations and ERP integration and upgrade initiatives will greatly streamline our invoicing and cash collections in the back half of the year.

In the interim, we expect second quarter cash collections from accounts receivable to notably improve over the first quarter following recent integration efforts. While we work through our ERP project implementation in the coming months, we will continue to find opportunities to improve upon our internal order cash processes. And I look forward to reclaiming a significant amount of deferred cash out of working capital and back onto the balance sheet with that $75 million goal clearly in mind this year. I’m confident we can further build upon that goal with additional DSO reductions beyond 2023. But hitting that initial goal this year is priority number one. We finished the quarter with $75 million drawn on our sustainability-linked credit facility and have $165 million of total liquidity.

However, we expect to see these borrowings reduced and liquidity position meaningfully enhanced by year-end. Recent working capital challenges notwithstanding we continue to see a very robust cash flow profile ahead of us for the full year. With that, I’ll hand it back to John for some final remarks, John?

John Schmitz : Thanks, Nick. Before we jump into the question and answers, I’d like to take a moment to once again thank our now over 4,000 employees, including our newest team members that have joined us in 2023. I firmly believe we have the best watering chemistry experts in the industry who are truly dedicated to solving the critical problems that our customers face every day. Thank you. And with that, we’ll open it up to questions. Operator?

Q&A Session

Operator: Thank you, sir. We will now be conducting a question-and-answer session. And our first question comes from the line of Jim Rollyson with Raymond James. Please proceed with your question.

Jim Rollyson: Good morning, guys. Nice, solid turnaround from last quarter.

John Schmitz : Thank you, Jim. Good morning.

Jim Rollyson: Good morning. One quick question on revenue guide. Obviously, you kind of flattish for Water Services and Water Infrastructure and up mid-single-digits for oilfield chemicals. But margins are improving kind of across the two flat revenue businesses. And I think Nick, you did a good job of explaining some of what’s driving that expansion. Just maybe how we think about or how you guys are thinking about margin expansion over the balance of the year, because obviously, I think you’re expecting as some of these projects come on, as your utilization improves, et cetera, that revenues are actually going to grow in the back half of the year relative to first quarter. And I presume some of that will be carrying additional margin improvement with it. So I’m just trying to think about how maybe where exit rate margins might be for your business segments as we go through this year.

Nick Swyka : Sure, Jim. Thanks for the question. On Water Services, we mentioned the efficiency improvements there. The good thing about a flatter environment versus a high growth environment is you can really focus your energies on getting those costs out of the system on addressing areas where you have opportunity to standardize across your operations, rebuilding things like centralized procurement that can help lower costs throughout your operations. And so we’re focused on that front. And so, we have a very large revenue base in Water Services, and applying few more points of margin through the year really has a good opportunity there to push more dollars through to the bottom line. So we’ll continue working on that. We didn’t — don’t have explicit guidance for the back half of the year.

But I think certainly building upon the 100 to 200 basis points that we expect in the second quarter, getting closer to the mid-20s in the back half of the year, certainly achievable. Water Infrastructure, so we’ve had the $34 million of new projects announced between this call and last. Those are all highly accretive. We continue to engage in a large number of active discussions with our customers. I’m sure in our next call, we’ll have some new projects to announce that are also accretive and put substantial dollars to work. So that will continue to drive that segment higher beyond the 30% that we are targeting for the second quarter here. Finally, in Chemicals. So that’s been a very strong performer for a number of quarters now both in revenue and margin.Given the nature of the business, its manufacturing, capital life doesn’t require a lot of CapEx. We do have existing roof line existing facilities there that can continue to be expanded at relatively low cost.

So I think we do have the potential there to drive some continued margin improvement. Of course, we have the revenue growth in second quarter that we’re anticipating. And I think we can get into the low-20s there as we move through the year with a stable, constructive commodity environment like we have today.

Jim Rollyson: That’s very helpful. Thanks, Nick. On the new projects, you’ve said, I think both of you guys have said this multiple times, so they’re highly accretive. So clearly margin performance there is pretty strong. They’re backed by contracts, obviously drive some of the longer term growth and enhance the utilization of your existing infrastructure. I’m curious when you think about — you have a CapEx budget for this year, but as we kind of go forward, it seems like there’s quite a bit of opportunity beyond even just the additional projects you announced this quarter. Maybe, how do you balance that desire by your customers with the capital needs and your kind of budget et cetera?

Michael Skarke : Hey, Jim. This is Michael Skarke. I’ll take a shot at it. So just to start off, we still expect maintenance CapEx of $50 million to $60 million on the year. And then we’ve gotten into something that’s roughly equal to that from a growth CapEx standpoint. But we’ve acknowledged that the growth CapEx will be largely determined by our Water Infrastructure projects. So the more successful we are at bringing those in, the more likely we’re going to hit it kind of the high-end of the initial range. And then to the extent that we were less successful be on the low end of the range. But given the fact that we’ve already announced I think, close to $35 million in CapEx this year, with the intent of continuing to develop in the Permian Basin and beyond our full lifecycle water solutions. We’re hopeful that we can continue to expand that contracted revenue and grow the business that way.

Jim Rollyson: Right. And then the last one for me just kind of related to that, on the your most of your growth CapEx for organic brownfield greenfield projects, to date have been kind of Permian-focused, but obviously, the announcements this quarter are pretty much all outside of the Permian. Curious where you see, just is the margin and return opportunities outside the Permian, similarly strong to what you’ve been experiencing in the Permian.

Michael Skarke : Sure, so most of our focus has been the Permian and most of our focus going forward will continue to be the Permian just because of the amount of water and activity there. But we’re still very focused on full lifecycle Water Solutions outside of the Permian. We’ve announced in the Haynesville, we’ve announced in the DJ, we’ve announced in Midcon and we’re not solely or exclusively focused on those basins. So we’re really going to pursue opportunities across our entire footprint that we’ve put together over the last two years. From a return standpoint, the returns are competitive with the Permian. And they’re competitive with other uses of capital. All of these investments are high margin, employee-light, high ROI investments. And we think it’s cool. We’re in central to kind of our theme and thesis and what we’re trying to achieve

Jim Rollyson: Fantastic, thanks for color.

Operator: The next question comes from the line of Don Crist with Johnson Rice. Please proceed with your question.

Don Crist: Good morning, gentlemen. I wanted to ask about speciality chemicals. I know it’s early days in creating specific formulas for different formations in the Permian. But how is that business progressing? Are you getting traction amongst customers that wants specialty chemicals more than that in the past? And? And are the results from those wells starting to bear out that, that you’re actually sweeping more oil out of the formation?

Michael Skarke : Sure, Don. This is Michael and thank you for the question. I think we’ve seen a step change in our revenue margin in our Chemical Group. And it’s primarily because of our investment in technology with the secular tailwinds of transitioning from produced water efficiently from freshwater produced water driven by the Permian. And it all central it’s all central to fluid match, we’ve really pivoted from what was a lower margin kind of more distributed — distribution-oriented business, to one that is very technology-focused and custom chemistry. And that’s what’s driving the revenue. That’s what’s driving the margin improvement over the last few quarters. It’s been largely focused on fresh introducer and new well completions.

But we are bringing that technology into some of other solutions like cement additives and surfactants. We think it’s been — it’s not exclusive to the Permian either. I mean, that’s where we’ve seen most of the transition of produced water, but with our kind of our technology solutions in the fluid match is applicable beyond the Permian. In terms of specific reserves, we are working and had been trialing products that are really trying to match the chemistry to the rock. So we started with matching the chemistry of the water. And we’re trying to work on matching it to the actual reservoir to improve hydrocarbon recovery. It’s early days, but we’re very excited about the results and are involved in meaningful conversations with multiple operators, some of the biggest and some of the smaller ones.

Because obviously improving recoverable reserves, everyone’s interested in that.

Don Crist: I appreciate the color there. And just one final one for me. John, are there any kind of bite size acquisitions out there that would greatly enhance any of your operations or you kind of set where you want to be right now from an M&A perspective? I know you’ve done a lot over the past couple quarters. I didn’t know if that’s kind of slowing down, are there still opportunities out there?

John Schmitz : We always keep our eyes open, but we have put together a very unique position with assets across multiple basins. And it’s very tightly with what Michael just described. So our focus is on our asset base, what we can do for our customers and value add across those asset base now, while we can do with the integration efforts that Nick talked to whether it’s, in the large piece of money on the Water Services side, or very important to management of our working capital, when streamlining our processes, and now we put these assets together and these companies together. I wouldn’t say there’s nothing and we will keep our eyes open. But right now, we have really got a unique position. And we’re going to focus on that position.

Don Crist: I appreciate all the color guys. Good work on the quarter. And I’ll get back in queue.

John Schmitz : Thank you, Don.

Operator: And the next question comes from the line of Luke Lemoine from Piper Sandler. Please proceed with your question.

Luke Lemoine: Hey, good morning. You talked about some of the full life water recycling projects and your CapEx budget and how these are highly accretive. Just want to see if you could talk about how you think about paybacks or returns when you’re targeting some of these new investments.

Nick Swyka : Sure, thanks, Luke. So we’re aware that every project is different, different geology, different types of contracts, customers opportunities to develop the on that anchor tenant. So obviously, we want to maximize all of that upside and minimize the risk in any project, we look at. However our capital allocation priorities, we have about $80 million allocated towards full potential shareholder returns. That’s critical to us. And I think that’s a strong yield based on our current market cap. As we’ve discussed here, and we’re actively signing new contracts for long-term contracted mixed production related revenue as well with customers at very high returns. Certainly, we apply internal hurdles that are think very attractive and accretive from a margin basis, total returns basis paybacks within — versus our weighted cost of capital here.

So overall, we’re applying great type standards to it. We have some projects that don’t make it to the finish line, whether that’s customer related or returns driven. But Michael, you can discuss a little more on the individual project criteria here.

Michael Skarke : Sure. So just thinking about full lifecycle Water Infrastructure projects, the ones we’ve announced and the ones we’re working on. There’s a couple of key ingredients, whether it’s a brownfield or greenfield investment. And first, it’s got to have the contractual support. So we’re really looking for an anchor tenant or several anchor customers to underpin the contract, or underpinning the investment. Second, it’s got to be strategic, it’s got to be cool and central to what we do and an area where we can do it well and better than anyone else. And then we’re really focusing largely around gathering through pipelines, the recycling, the redistribution and disposal. And then from strict return standpoint, we’re underwriting them inside of a three-year payback, with as Nick said, room to commercialize that was all set operators that would improve the returns.

And then the only other thing I’d add is we’re always looking to the geology as well. We want to understand the reservoir to the extent that we can to make sure that we know the number of economical targets and the volume of water that’s coming back so that we can manage that makes sure that we size that story appropriately. So that’s kind of a little more specifics about how we think about the underwriting of the projects we’ve announced and the ones we’re working on.

Luke Lemoine: Okay, got it. Thanks, Mike. Thanks, Nick.

Operator: And the next question comes from the line of Tom Curran with Seaport Research Partners. Please proceed with your question.

Tom Curran : Good morning, guys. Starting with Water Infrastructure, when it comes to your existing asset base, everything that’s already been constructed as online and/or acquired. Where would you say you’re at as a percentage of realizing the total estimated earnings power of that existing Water Infrastructure asset base? And, when it comes to capturing the remaining upside, what are the key levers you’ll be focusing on over 2023? Is it — how much of it is just getting to full effective utilization on the existing recycling facilities? How much of it is capturing opportunities to tie in proximate customer infrastructure, or perhaps add additional customers to existing facilities. Just to expand upon if you’re able to fully achieve that estimated remaining upside over 2023 pre-existing asset base? What would you expect the mix of contributing factors to look like?

Michael Skarke : So Tom, this is Michael. If we just step back now over the last few years, we’ve contracted and commercialized and underwritten five fixed facility infrastructure recycling centers, we’ve acquired another four. And we’ve been aggressively expanding the ones that we initially — the ones we acquired as well as the ones we’ve developed. And so that capacity, that throughput, the storage is always changing, which makes it hard to kind of define and look at from a utilization standpoint. So I mean, today, we’re almost 3 million barrels of throughput capacity. If you include the project in the northern Delaware, we announced last quarter with 14 million barrels of produced water storage. We still have room to expand the recycling facilities or excuse me — we’re room to utilize the recycling facilities within the existing current framework of storage and throughput.

And we still have the ability to add capacity, throughput capacity and storage at that market continues to grow. And they become more interconnected. The disposal sides a little different, because it’s not as easy to expand an existing disposal well. But again, over the last few years, we’ve acquired 1.3 million barrels of permitted capacity per day across all of our — all the basins in our entire footprint. And it was pretty underutilized when we acquired it, which provides obviously meaningful upside. So I think we’ve increased from Q1 of last year at Q1 of this year, our disposal utilization by 50%, which gives you some extent of what we’ve been able to do in a relatively short period of time. And we’re still making investments, we’re still upgrading wells, increasing connectivity to make sure that we continue to expand.

As we look going forward, I mean, the first thing is, you mentioned connectivity, the more operators you connect with, the broader your geographic reach, whether you’re gathering water, recycling water, redistributing water, so that’s a primary focus for us. Reliability and redundancy in terms of interconnecting facilities to make sure that you have that backup and that you are a foolproof solution for your customer. And then obviously, new facilities, whether that’s a step out to expand existing reach with the offset from an existing facility, or a new geography. In terms of the breakdown, I think we will be more heavily weighted to utilizing and expanding our existing facilities, then drilling out new greenfield projects. I’m probably uncomfortable providing an exact number or percentage at this point.

But we’re very focused on expanding what we’ve built and acquired because there’s plenty of room to run.

Tom Curran : Got it? That additional detail is helpful. Thanks, Michael. And then on the Water Services side, you’ve talked a lot about the inward focus for that division and improving its operational efficiency, some of the streamlining and cost out initiatives underway. But in John’s opening remarks, he also emphasized what you’re pursuing on the technology front. Could you update us on what the technology initiatives are for the division this year? And how far along are which of them specifically you accomplished in the first quarter?

Michael Skarke : So, Tom, this is Michael, again. The revenue guide is relatively flat, but we’re excited about expanding margin in Water Services, even with the pressures that exist on the gassy side. And it’s largely because of the technology investments we’re making. There’s also some operational efficiencies that Nick alluded to on the call. In terms of specifics, we’re rolling out kind of expansion and upgrade of our automated water transfer. It’s really the leading solution in the market today. We just rolled out to new kinds of best in class sand management solutions for our well testing program, an automated standard scale, some new sand capture solutions for draw the completion work that we’ve run up against kind of the market leaders in ours it performed as well or better than anything else.

And then we’ve, over the last quarter or two have been rolling out our new waste management solution for our accommodations business. And so we’re looking at all of these as a way to really start to expand our market share in Water Services and what’s going to be flat the choppy market, but also to expand margin. And I think that’ll be the bigger part of the contribution to the bottom line.

John Schmitz : I guess I’d add, there’s kind of one ancillary benefit to that, and that would be on the environmental side. With the technology, we’re seeing reduced emissions, reduced miles driven, less likelihood to spill water, which is obviously important as we move to produce water. So there are some ESG benefits with the technology and reduction in labor, other efficiencies. But ultimately — generally speaking, technology solutions that we’re providing allow us to capture a higher margin and provide a better, safer, or cheaper solution to our customer.

Tom Curran : Right. Got it. Thanks for taking my questions. I’ll turn it back.

Operator: This now concludes our question-and-answer segment. And I’d like to turn the floor back over to John for any closing comments.

John Schmitz : Yeah, thank you for joining today. I look forward to speaking with you again next quarter officially under the new banner name of Select Water Solutions.

Operator: Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you and have a wonderful day.