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, stronger profitability, and a cleaner balance sheet. While they acknowledged near‑term pressures from higher capital spending, working capital swings, and macro uncertainty, executives argued that rising margins, expanded contracts, and a growing asset base position the company for stronger cash generation over the next few years.

Record Water Infrastructure Performance

Water Infrastructure remained the star performer, delivering record quarterly revenue of about $97 million and managing roughly 1.4 million barrels of produced water per day. The segment posted gross margins before depreciation and amortization of 56%, with revenue up 19% sequentially versus Q4 2025 and more than 33% year over year compared with Q1 2025, underscoring robust demand and operating leverage.

Consolidated Financial Improvement

At the consolidated level, Select reported a clear step‑up in profitability, with revenue rising by $19.5 million, adjusted EBITDA climbing by $13.5 million, and net income increasing by $11.5 million versus Q4 2025. Adjusted EBITDA reached $77.6 million for the quarter as consolidated gross margins before depreciation passed 30% for the first time, while SG&A fell more than 6% to $40.6 million, or about 11% of revenue.

Raised Full‑Year Guidance for Infrastructure

Reflecting confidence in its pipeline and early execution, management lifted full‑year growth guidance for the Water Infrastructure segment to 25%–30% year over year, up from 20%–25% previously. The upgrade is anchored in the record Q1 results and a growing backlog, signaling that infrastructure will remain the primary engine of earnings growth if current trends continue.

Commercial Wins and Network Expansion

The company highlighted a string of commercial successes, securing three minimum volume commitments, two acreage dedications, two right‑of‑first‑refusal dedications, and eight interruptible agreements across the Permian, Northeast, Bakken, and MidCon. It also closed acquisitions in Northern Delaware, adding about 4,000 acres, roughly 30,000 barrels per day of disposal capacity, around 1,800 acre‑feet of water rights, and about 500,000 barrels of storage to its network.

Improved Liquidity and Balance Sheet Actions

Select strengthened its balance sheet by completing an equity offering that allowed it to repay its revolving credit facility in full. The company ended the quarter with $196 million of net debt outstanding and more than $300 million of total available liquidity, while net interest expense has trended lower, with near‑term interest costs expected to run between $4 million and $6 million per quarter.

Positive Momentum in Services and Chemicals

Outside infrastructure, Water Services revenue grew about 7% sequentially, with gross margins before depreciation improving to 21.8% from 19.6%, indicating better pricing and utilization. Chemical Technologies generated roughly $78 million of revenue and a 19% gross margin, matching expectations, and management signaled strong momentum into Q2 with anticipated double‑digit revenue growth and margins advancing into the 20%–21% range.

Operational Investment Supporting Growth

Capital spending reached $78 million in the first quarter, largely directed toward infrastructure projects intended to underpin future earnings and cash generation. Updated 2026 net capital expenditure guidance now stands at $200 million–$250 million, up from $175 million–$225 million, with an expected $50 million–$60 million of maintenance spending as the company builds out projects that should support long‑term free cash flow.

Short‑Term Operating Cash Flow Drag

Despite robust earnings metrics, operating cash flow faced a meaningful short‑term drag in Q1 due to higher accounts receivable tied to the ramp in activity. Management downplayed the issue as largely timing‑related, indicating that these receivables are expected to convert back to cash over the course of the year as customers settle outstanding balances.

Increased Capital Intensity in 2026

The revised capital plan implies higher capital intensity in 2026, with net CapEx guidance of $200 million–$250 million representing a larger near‑term cash outlay than previously expected. While this stepped‑up spending may temporarily pressure free cash flow until projects reach full contribution, management framed the increases as necessary to capture long‑term growth opportunities in produced water handling and infrastructure.

Commodity and Geopolitical Uncertainty

Executives acknowledged that external factors remain a wild card, citing geopolitical tensions and commodity price volatility that could influence both demand and costs. Near‑term upside may come from favorable skim oil pricing, but longer‑term impacts on customer activity levels, service pricing, and supply chain dynamics remain uncertain, prompting a cautious stance on the macro backdrop.

Expected Water Services Revenue Dip in Q2

Looking to the second quarter, Water Services is expected to see a modest low single‑digit percentage revenue decline as some large spot water sales that boosted Q1 do not repeat. However, the segment’s profitability profile remains solid, with management guiding Water Services margins to hold around 20%–22%, suggesting that the dip is more about revenue mix than structural weakness.

Cost and Depreciation Pressure Ahead

Cost trends are likely to remain a focus, as management expects depreciation and amortization to run at about $47 million–$50 million in Q2 and then edge into the low $50 million range later in the year as new capital projects come online. The company also flagged the risk of higher operating costs tied to rising commodity prices and potential supply chain disruptions, which could offset some of the margin gains if not managed carefully.

Macro‑Dependence for Further Upside

Management stressed that further upside in pricing, utilization, and EBITDA expansion will require a supportive macro backdrop, particularly stable commodity prices and sustained drilling and completion activity. They also pointed to uncertainties around natural gas takeaway capacity in certain basins, underscoring that while current results are strong, the trajectory still depends heavily on broader market conditions.

Guidance and Outlook

For the near term, Select guided consolidated adjusted EBITDA of $77 million–$80 million for Q2, essentially holding the Q1 run rate, while reiterating upgraded infrastructure growth of 25%–30% year over year for 2026. Chemical Technologies is expected to post 10%–15% sequential revenue growth with margins near 20%–21%, and the company plans $50 million–$60 million of maintenance CapEx alongside higher project spending, supporting management’s view of stronger back‑half growth and improving free cash flow as it moves toward 2027.

Select Energy’s earnings call painted a picture of a company leaning into growth with record margins, expanding infrastructure, and a fortified balance sheet, even as it navigates higher capital needs and a choppy macro environment. For investors, the key takeaway is that management is trading near‑term cash flow pressure for what they believe will be durable, infrastructure‑driven earnings and free cash flow in the coming years.