Greetings and welcome to Select Energy 2022 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Chris George, Senior Vice President. Please go ahead, sir.

Thank you, operator, and good morning everyone. We appreciate you joining us for the Select Energy conference call and webcast to review our financial and operational results for the second quarter of 2022. With me today are John Schmitz, our Founder, Chairman, President and Chief Executive Officer; 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, 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 August 17, 2022. 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, August 3, 2022. And therefore, time-sensitive information may no longer be accurate as of the time of the replay listening or transcript reading. In addition, the comments made by management during this conference call may contain forward-looking statements within the meaning of the United States Federal Securities Laws. These forward-looking statements reflect the current views of Select management. However, various risks, uncertainties and contingencies, could cause our actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener is encouraged to read our Annual Report on Form 10-K, our current reports on Form 8-K, as well as our quarterly reports on Form 10-Q to understand those risks, uncertainties and contingencies. Also, please refer to our earnings announcement released yesterday for reconciliations of non-GAAP financial measures. Now, I'd like to turn the call over to our Founder, Chairman, President and CEO, John Schmitz.

Thanks, Chris. Good morning and thank you for joining us. I'm excited to be discussing Select Energy again with you today. The second quarter's results represent a meaningful step forward and the continued execution of our strategy of improving and bolstering our base business, advancing our technology, sustainability and diversification efforts and executing on our strategic M&A. The second quarter saw strong sequential revenue growth, increasing 14% quarter-over-quarter with our chemical segment producing all-time record revenues during the quarter. Our Water Services segment saw quarterly revenues grow 20% during quarter two, getting back to levels not seen since quarter one of 2019, well before the pandemic began. Meanwhile, our infrastructure segments achieved quarterly revenues higher than the quarterly average of either 2018 or 2019 and within striking distance of all-time highs. Combined these revenue levels with our significant investments in technology, continued operational efficiencies and consolidation benefits and we generated strong 83% growth in net income and 48% growth in adjusted EBITDA. Paired altogether, and I believe we are demonstrating that the industry activity and pricing does not need to fully recover to pre-COVID levels for Select to get back or exceed pre-downturn levels of financial performance. Even so, it has become clear that US unconventional resources will be the primary growth driver to supply global energy needs over the next few years. As the market continues to tighten we are well positioned to help meet that need through our advanced technology solutions, strong balance sheet and the flexibility provided by our recent acquisitions. Our asset light business model does not require large amounts of reactivation or maintenance CapEx, and we believe will generate substantial free cash flow through the cycle. As we advance our market leadership, we continue to make progress on the integration efforts of our recent acquisitions.…

Thank you, John and good morning everyone. As John outlined, our financial performance continued its strong momentum during the second quarter, with large gains across revenue, adjusted EBITDA and net income. All three of our segments increased both the revenue and margins and the trajectory both through the quarter and upon exit remains positive. Our revenue grew by 14% from $295 million to $336 million. While a full quarter of revenue from legacy Nuverra assets boosted this total, the majority of the increase was derived from pricing and activity improvements. While cost inflation remains a challenge, pricing recovery has accelerated in recent months. Even with recent commodity price pullbacks our customers are generally highly profitable in this commodity environment and recognize the value our advanced technology brings, especially around integrated water and chemistry solutions, such as water treatment, reuse and recycling. These solutions leverage the combined firepower of our three business segments and have helped drive the chemicals segment in particular to its highest quarterly revenue and gross profits we have reported as a public company. Gross margin for the company improved from 8.4% to 10.6% in the second quarter and adjusted EBITDA increased 48% from $32.2 million to $47.7 million. Net income of $14.6 million grew 83% from $8 million in the first quarter. Despite working capital headwinds free cash flow returned to positive territory at $1.1 million on $11.1 million of cash flow from operations as the company continued its targeted recycling and infrastructure development program, while cycling out unneeded equipment and real estate related to our recent acquisitions at a favorable time in the market. Investments in new recycling facilities and gathering pipelines among other core business assets led to gross CapEx of $15.5 million or net CapEx of $9.9 million after asset sales. The $18 million…

Thank you very much. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Don Crist with Johnson Rice. Please go ahead.

Good morning, gentlemen. How are you all today?

Good morning. Doing well.

I wanted to touch on pricing, I mean, obviously, there's been a lot of pricing uplift in -- with demand over the last couple of quarters, but where do you see pricing as we move into the back half of ‘22 and ’23? Do you see things stabilizing or do you think that there is significant uplift potential as we kind of move into ’23?

Sure, John. This is Michael Skarke. I'll take the first part of that. So pricing thus far this year has largely been to cover our costs, we've seen a pretty significant increase in fuel and labor, and in the raw materials on the chemical side. I think we've certainly kept up with pricing so far this year. For the back half of the year, there's kind of two factors, one is, how do we expect those inflationary pressures to continue? And then what do we see with supply-demand imbalance? In terms of our cost, we think fuel is going to be relatively flat for Q3, raw materials were forecasting relatively flat for Q3. On the labor side, we think we're going to continue to see inflationary pressures there. So that's something that we're targeting to make sure that we're able to pass through to our customers. And then looking at the market to see where there is a supply demand imbalance and who were able to work for at a fair price. So I would expect us to continue to get price in Q3 and that's going to be in part, because of the reasons I mentioned, but also what John covered in his remarks about increased completion activity, which is one of our primary drivers.

Don, if you look at our customers results. They're doing very well. This is a great commodity price environment for them. So you're seeing in the first quarter reports and the second quarter, very high profitability, as well as some upward CapEx movements and acknowledgment of further pricing increases. So that also supports our view there.

And as it kind of goes to pricing on the other side of the fence, as you recycling picks up, can you give us -- I don't know if you have the number in front of you, just a percentage of fresh water sourcing that you're displacing from your recycling efforts. Because I know you probably charge to take away water, and then charge back when you give that freshwater back to -- recycled water back to them. Just trying to get a sense of what the potential uplift is and how much you're displacing today from a fresh water sourcing perspective?

Right. So our recycling and in-sourcing of produced water relative to fresh and blackish water is going to continue to shift over the last year or two. Really I'm seeing an increase in the treated produced and produced water on a quarter-over-quarter basis. I don't have the exact figure in front of me, but for the current quarter we're going to be moving about 35 million to 40 million barrels of produced water that would be directly replacing fresh water.

It's definitely picking up for sure. And just one final one for me. I mean, everybody knows about the demand in the Permian Basin and how that moves into ‘23, but can you talk about your other areas, maybe mid-continent in the Rockies and what the demand picture looks like there for further growth.

Are you talking about recycling or just the general demand?

Just general demand, because I know a majority of the rig count is in the Permian today, I just didn't know what the infrastructure needs would be in those other areas that you operate.

Sure. So you're absolutely correct. The majority of the revenue -- the rig count is in the Permian. And that's an area that we're very active and spending a lot of time and a primary focus, but everywhere right now is pretty active into next points, the economics, whether it's oil or gas is attractive really across our footprint. So we're seeing increased demand for all of our services, for services, for chemistry and for infrastructure. We obviously announced that we went live on recycling project in Colorado, which was a step out for us from the Permian. And we're evaluating other infrastructure projects really across our footprint today.

I appreciate the color. I'll turn it back and get back in queue.

Thank you. Our next question comes from the line of Tom Curran with Seaport Research Partners. Please go ahead.

Good morning.

Good morning, Tom.

Nick, when it comes to the realization of synergies and cost savings across the acquisition. It seems as if you're on track to exit the quarter with about 5% left to do a complete ALM, mainly consisting of streamlining some final yards and locations. And then a significant amount left to execute Nuverra with around 10% remaining on targeted staff reductions and then several operational and back office tasks left. Could you just update us on where each stands now and what you think has the most bang for the buck to be delivered of what remains?

Tom, I think the way you outlined the acquisitions there as far as the specific companies is largely accurate. We think about overall synergy realization in three phases and they are parallel to each other. The first one, which is the shortest is that, back office rationalization. So putting the companies together and integrating the processes. There is a lag there on cash flow, but as far as the SG&A costs we're in the late innings on that. Certainly a lot of progress there and we've been very aggressive. The next one in the field, the operational efficiencies, understanding the best footprint we have in the field and where to serve customers out and what operations we can sell off in terms of real estate and equipment. That we've made a lot of progress on as well. You've seen our asset sales in the first half of the year of about $18 million there. And so, we're getting more and more efficient, but probably have some more opportunity there ahead of us versus an SG&A. And finally, I think the third most important one here is the revenue synergies. We're making those investments, John talked about a tie-in project there, but there's a lot of networking opportunity among the assets we acquired. There's a lot of opportunity to generate operating leverage with minimal new investment around the current utilization profile. So that's the one where it's the biggest dollar opportunity long term, but also probably where we're earliest in realizing that.

Helpful. That was a comprehensive update I was looking for. And then, for Water Services, where is utilization of your lay flat hose inventory today versus where it peaked in 2018? And then at the industry level, what's your sense of utilization levels from loosest the tightest for the major water services assets. I'm thinking lay flat hose, containment assets and then flowback and well testing systems.

So, Tom, I don't have the exact utilization compared to 2018 on the assets off hand. But what I would say is, really so far this year we've been looking at utilization more as the utilization of labor and less of the utilization of equipment. Labor has been tight, we haven't been able to expand with the market to keep up with the demand. And so, that's been the largest constraint. However, really starting in this last quarter and I expect to continue in Q3 that starting to shift where you are having equipment become a constraining factor for us and for the industry in general. And in part, it's just because we haven't had a ton of investments since 2018 or some cases 2014. And so we are getting tight on equipment really across services, and so that's another one where labor is still tight, but equipment is starting to constrain as well. Thankfully, we do have a little more flexibility on the infrastructure side and on the chemical side, largely to our in-basin chemical manufacturing, we can expand that, we have room to grow and we can expand organically if needed. And then on the infrastructure side, we got some really good people with the acquisitions of complete. I believe [indiscernible] but almost as important, we have an asset base that in our view was underutilized and so we've really been working to Nick's point to expand that. So there is capacity on the infrastructure side today.

Great. And then as my last one. Michael, I have you -- I'll direct this one to you as well. As you're looking at 2023, could you give us a preliminary view of your goals for the Industrial Solutions Group?

Sure. So we're very committed to expanding into industrial solutions and really the revenue diversification. We continue to focus on it organically. Our focus is really around water and midstream and that's where we think we have core competency and a strategic advantage that we're looking to expand that. As you would know, Tom, I mean, it really hasn't come as fast as we initially hoped this year. And I think that's partially due to limitations on people and equipment, but we're still very focused on it, and I expect it will have meaningful movement in industrials in 2023. We're pushing for it this year, but I think 2023 is when we can start to talk about it and to really highlight what we've been able to accomplish.

Sounds good. Thank you for taking my questions.

Thank you, Tom.

Thank you. Our next question comes from John Daniel with Daniel Energy Partners. Please go ahead.

Hey, good morning guys. John, this might sound like a crazy question, but you are very experienced and you live in -- the backyard is the Barnett for you. [indiscernible] back in the glory days lot of trucking and all of that going on there. What do you seeing right now for your business? Is there -- what's the opportunity here?

You're talking about just the Barnett, John? Is that what you're asking?

Yeah. Just that area, yes, sir. Just your -- this is not so much to Select, your views on it first and then to Select.

I mean, the biggest movement, and we all know it is the assets have changed hands into different companies, and they become primary. So there is new activity related to that asset changing hands and there is new -- there is also new people that are executing that activity, John, that you -- that showed up in the basin. There was a lot of wells that really didn't have a lot of attention for four, five year period. And that renewed attention, whether it's a producing well or shut-in well or recompletion or actually a new drill, that activity is way different in the Barnett today than it was [indiscernible].

Right. But do you see there is an -- I mean, is there much of an opportunity over the next one to two years in that market for you and for the industry?

Yeah. We're still very well positioned in that respect. We're seeing actually increased activity in well testing our water transfer opportunities around either refrac or new drills and completions. So it's a good position for us, it's still a smaller market compared to almost any.

And the only thing I would add to that. It is obviously the most mature market and cost have come down and competitors have exited. And so I don't see a lot of competition returning. So if you do have a good position, either with services or infrastructure, when you get that uptick in activity, it becomes a decent little market, like John said, and we shouldn't have to -- it shouldn't be as much competition just because the activity just hasn't been there over the last couple of years.

That’s what I was thinking. Okay. Turning to a market that's a little bit bigger, the Permian. The five tie-in agreement that you all had, how many opportunities exist out there for you to do interconnecting various facilities. Is that a one offers or do you see more opportunity.

It's definitely not a one-off, John. So that was a greenfield project, recycling project for us and the way that those work is, we generally have one or in some cases two customers underwrite the project economics. And then the goal is to expand those to offset operators to really service the area which you haven't underwritten -- the idea is to fully commercialize the system, while giving priority to your cornerstone customer or anchor tenant. And so whether it's a greenfield projects or existing underutilized, if you’re talking to the Permian, for us that would largely be an Agua Libre asset, we [got] (ph) a lot more opportunity to further commercialize tie into other operators or other operator systems and it's something that we're actively focused on daily and it really developed a team focused on the -- team specific to the Permian, focused on those opportunities. [Multiple Speakers]

Yes, sir.

Something that is real and primarily is because we did these transactions. I mean, we now have physicians where we got additional assets and good growth places across the United States where drilling rigs are running, where completions are happening and new orders coming online. And we now have four disposal wells out of four different transactions along with the disposal wells we had. And that footprint is a different footprint and the value of those assets between each other and interconnect or recycling opportunity or just logistics efficiency is way different than it was. I mean, if you think about this company and what it ran at its high back in ‘18, you look at that asset base, you think of what was sold off, what was developed and then you think about these four transactions and look at that asset base today. That asset base is a lot different to a positive and being able to create value in both revenue and profits, as well as value to the customer base in application.

So early days than I suspect. Okay. Two more from me and I'll turn it over. Just a follow-up on this agreement. Can you speak to what type of capital is required to do a project like this? And knowing that it varies based off distance and so forth, but just curious.

Sure. So -- and you're exactly right, it’s absolutely dependent on distance. The capital for this particular project was very minor. We were in close proximity to another operator system, and so it was under $0.5 million.

Very good. Okay. And the final one is moving over to the chemical side. Can you just briefly speak to any challenges getting product on the supply chain and what you're seeing in terms of the inflationary pressures there? And I'll turn it over.

Good question. I tried to address it a little earlier, but the chemical raw material supply chain is been in a real challenge. I mean we've seen limitations on raw materials, we've seen extreme price variability, it's been tough this year but really dates back to kind of a freeze of last year. The market's just been out of whack in some respects. I'd say that our technology team has worked really hard to reformulate around shortages and make sure that we have the availability of our core products and we've been pretty successful at doing that. In terms of pricing, generally speaking, the raw materials are down slightly from their peak, but we're still expecting for our Q3 the raw materials to be flat relative to Q2. Fortunately, as you kind of seen in the margins, we've been able to navigate around raw material shortages or in the revenue rather and then the margin we have been able to pass through much of these raw materials through to our customers.

Thank you for all the color. Thanks. Have a good day, guys.

Thank you, John.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to John Schmitz for closing remarks.

Yeah. Thanks everybody for participating today. As you can tell, we like a lot talking about Select. And we look forward talking to you next quarter around our opportunities and asset base. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.