Select Energy Services Lifts Outlook on Record Quarter

Select Energy Services ((WTTR)) has held its Q1 earnings call. Read on for the main highlights of the call.

Select Energy Services’ latest earnings call struck an upbeat tone, with management emphasizing record performance in its Water Infrastructure segment and broad-based margin expansion. Executives acknowledged near-term headwinds, including higher receivables, rising capital needs and macro uncertainty, but argued that strong EBITDA, raised guidance and a growing asset footprint position the company for durable growth.

Record Water Infrastructure Performance

Water Infrastructure remained the star performer, delivering record quarterly revenue of about $97 million and handling roughly 1.4 million barrels of water per day. Revenue climbed 19% sequentially and more than 33% year over year, while gross margins before depreciation and amortization reached an impressive 56%, underscoring the segment’s operating leverage.

Consolidated Financial Improvement

At the consolidated level, Select showed clear momentum, with revenue rising $19.5 million sequentially and adjusted EBITDA up $13.5 million versus the prior quarter. Net income increased by $11.5 million, adjusted EBITDA reached $77.6 million, and companywide gross margins before D&A topped 30% for the first time, aided by SG&A falling more than 6% to $40.6 million, or about 11% of revenue.

Raised Full-Year Guidance for Infrastructure

Confidence in the infrastructure franchise led management to lift full‑year growth guidance for the segment to 25%–30% year on year, up from a prior 20%–25% band. The upgrade reflects strong early execution, a healthy backlog and visibility into projects already underway, signaling that management sees the current level of demand as sustainable rather than fleeting.

Commercial Wins and Network Expansion

Select expanded its commercial footprint with a series of new agreements and acquisitions across key basins. The company secured multiple minimum volume commitments, acreage dedications, rights of first refusal and interruptible contracts, while recent deals in Northern Delaware added thousands of acres, meaningful disposal capacity, significant water rights and large storage volumes, deepening its network advantage.

Improved Liquidity and Balance Sheet Actions

The balance sheet also strengthened, as proceeds from an equity offering were used to repay the revolver, leaving net debt at $196 million. Total available liquidity exceeded $300 million, and lower borrowing needs helped reduce net interest expense, which is now expected to fall in the range of $4 million to $6 million per quarter in the near term.

Positive Momentum in Water Services and Chemical Technologies

Beyond infrastructure, Water Services revenue increased about 7% sequentially, with gross margins before D&A improving to 21.8% from 19.6%, showing disciplined execution. Chemical Technologies posted roughly $78 million of revenue and a 19% gross margin in line with expectations and is targeting a 10%–15% revenue increase in the next quarter, alongside margin gains into the low‑20s.

Operational Investment Supporting Growth

Capital spending reached $78 million in the quarter, largely directed toward infrastructure projects that underpin future cash generation. The company now expects 2026 net capital expenditures of $200 million to $250 million, up from earlier plans, along with $50 million to $60 million of maintenance CapEx, as it accelerates near‑term project completions to support long‑term free cash flow.

Short-Term Operating Cash Flow Drag

Despite earnings strength, operating cash flow faced a notable short‑term drag due to higher accounts receivable built up in the first quarter. Management framed this as a timing issue rather than structural, indicating that most of these receivables should convert back to cash over the course of the year as customers pay down outstanding balances.

Increased Capital Intensity in 2026

The higher capital budget for 2026 underscores Select’s decision to lean into growth via infrastructure build‑out, even at the expense of near‑term free cash flow. While this increased capital intensity may pressure cash yields in the short run, management believes the projects will mature into attractive, contracted cash flows that enhance returns over time.

Commodity and Geopolitical Uncertainty

Executives cautioned that commodity volatility and geopolitical tensions could influence activity levels, pricing and supply chain costs, particularly in sensitive regions. While near‑term skim oil pricing may provide a modest uplift, the company remains mindful that a weaker macro backdrop or higher input costs could temper utilization and margin expansion.

Expected Water Services Revenue Dip in Q2

Looking to the second quarter, Water Services revenue is expected to decline modestly in the low single‑digit percentage range, largely because sizable one‑off spot water sales in the first quarter will not repeat. Even so, management anticipates maintaining healthy segment profitability, with margins projected around 20% to 22%, highlighting resilience in the core services business.

Cost and Depreciation Pressure Ahead

The company flagged that depreciation and amortization will remain a meaningful expense as new assets come online, with Q2 D&A projected at about $47 million to $50 million and rising into the low $50 million range later in the year. Management also warned that higher commodity prices and potential supply chain disruptions could push up costs, partly offsetting efficiency gains.

Macro-Dependence for Further Upside

Further upside in pricing, utilization and EBITDA will depend on a supportive macro environment, particularly stable commodity prices and continued activity levels in key basins. Management highlighted uncertainties around natural gas takeaway capacity and broader market dynamics, suggesting that while the base case is positive, the company is approaching incremental growth assumptions with caution.

Guidance and Outlook

Guidance underscored management’s optimism, with Water Infrastructure expected to grow 25%–30% year over year and consolidated second‑quarter adjusted EBITDA projected between $77 million and $80 million. Chemical Technologies is targeting double‑digit revenue growth with margin expansion, while a strong liquidity position, controlled interest costs and rising capital deployment support expectations for stronger growth in the back half of the year and improving free cash flow into 2027.

Select Energy’s earnings call painted a picture of a company leaning into its strengths, particularly in Water Infrastructure, while staying realistic about near‑term risks and cash demands. For investors, the key takeaways are robust margin performance, upgraded growth guidance and an expanded asset base, balanced against higher capital intensity and sensitivity to commodity markets and macro conditions.