Select Water Solutions: Making Waves In Sustainable Solutions

Thesis:

Select Water Solutions (NYSE:WTTR) is a leading provider of comprehensive water management and chemical solutions to the oil and gas industry in the United States. With a strong focus on sustainability and advanced technology, the company's broad range of services, extensive geographic coverage, and expertise in oilfield chemicals position it as a standout player in the market. Its impressive financial performance and competitive strengths make Select Water Solutions a compelling investment opportunity for those seeking growth in the sector.

What does Select Water Solutions do?

Select Water Solutions is a prominent company that specializes in providing comprehensive water management and chemical solutions to the oil and gas sector in the United States. As stated in their most recent annual report, Select Water Solutions operates through three primary divisions: Water Services, Water Infrastructure, and Oilfield Chemicals.

The Water Services division plays a significant role in generating revenue for Select Water Solutions. It offers a wide range of complex services to support the entire lifespan of a well, from initial completion to ongoing production. These services include tasks like transferring water, conducting flow back and well testing, containing water, hauling fluids, monitoring water quality, automating water networks, and providing on-site rental equipment and accommodations. Select Water Solutions employs advanced technologies such as their patented WaterONE™ automation services and the proprietary AquaView® software platform. These technologies enable continuous monitoring and visibility into water-related operations for customers. They provide capabilities such as hydrographic mapping, monitoring water volume and quality, remote monitoring of pits and tanks, leak detection, asset and fuel tracking, and automated equipment services. By leveraging these technologies, Select Water Solutions aims to help customers reduce operating costs, enhance well productivity, improve safety, minimize the risk of spills, and mitigate environmental impacts.

The Water Infrastructure division is another crucial aspect of Select Water Solutions' business. This division focuses on developing, constructing, and managing semi-permanent and permanent infrastructure solutions to support new oil and gas well development and ongoing production activities. It involves activities such as sourcing water, recycling and disposing of flow back and produced water, and managing associated logistics. To achieve this, the Water Infrastructure division utilizes a network of water sources, pipelines (both permanent and semi-permanent), treatment and recycling facilities, earthen pits, and saltwater disposal wells. The division's primary objective is to reduce the need for water transportation by trucks, promote recycling practices, and minimize the industry's reliance on fresh water.

The Oilfield Chemicals division is responsible for developing, manufacturing, managing logistics, and supplying a comprehensive range of chemicals used in various oilfield processes, including hydraulic fracturing, stimulation, cementing, pipeline operations, and well completions. These chemicals are crucial for improving the transportation and placement of proppant materials in targeted zones within geological formations that produce oil and gas. Additionally, the Oilfield Chemicals division offers customized water treatment and flow assurance solutions throughout the completion and production phases. Through their FluidMatch™ solutions, the division conducts tests and analysis of customers' specific conditions and requirements to optimize the design of well-completion fluid systems.

In summary, Select Water Solutions plays a vital role in providing innovative and sustainable water solutions for the oil and gas industry. Their responsibilities encompass managing water resources, developing infrastructure, employing advanced technologies, and offering chemical solutions. All these efforts contribute to efficient and environmentally responsible water management throughout the lifecycle of oil and gas wells.

Market

The future of Select Water Solutions is closely tied to the specific market dynamics and trends in the water solutions industry for the oil and gas sector. Here are some factors that may influence the future of Select Water Solutions:

The demand for water solutions in the oil and gas industry continues to rise due to the growing complexity and volume of water required for various operations. Select Water Solutions specializes in services such as water transfer, flow back and well testing, water containment, and fluids hauling, which are essential for drilling and completion activities. This demand is expected to remain significant in the foreseeable future.

Stringent environmental regulations regarding water management and conservation are anticipated, driving the need for safe and environmentally responsible water solutions. Select Water Solutions' focus on recycling, treating, and repurposing produced water aligns well with sustainability goals and can help minimize the environmental impact of oil and gas operations.

Continued technological advancements and innovation will play a crucial role in the future of Select Water Solutions. By utilizing automation, data analytics, and remote monitoring, operational efficiency can be enhanced, and water resources can be effectively monitored and managed. Select Water Solutions' proprietary technologies, such as their WaterONE™ automation services and AquaView® software platform, give them a competitive advantage in providing comprehensive technology solutions to their customers.

The water solutions market for the oil and gas industry is highly competitive, with a trend toward consolidation in recent years. As larger companies acquire smaller players or form strategic partnerships, competition may intensify. However, Select Water Solutions' comprehensive water-management solutions, established customer base, and industry expertise position them favorably in this competitive landscape.

While Select Water Solutions primarily serves the oil and gas industry, there is potential for diversification and expansion into other sectors that require water solutions. Industries such as mining or power generation, which have water-intensive operations, could benefit from Select Water Solutions' expertise in water management and recycling. Exploring new markets beyond oil and gas could provide additional avenues for growth.

Environmental, social, and governance (ESG) considerations are gaining prominence across industries, including water solutions. Select Water Solutions' commitment to responsible water management and focus on sustainability align well with ESG principles. This can enhance their market reputation, attract environmentally conscious customers, and meet the expectations of investors and stakeholders.

Overall, the future of Select Water Solutions is promising, given the ongoing demand for water solutions in the oil and gas industry, the increasing focus on environmental sustainability, and the potential for technological advancements. By adapting to market changes, embracing innovation, and expanding into new sectors, Select Water Solutions can position itself as a leading provider of comprehensive and sustainable water management solutions.

Competition:

The market in which Select Water Solutions operates, providing water management and chemical solutions to the oil and gas industry, is highly competitive. Here are some key factors that contribute to the competitive nature of the market:

Market Fragmentation: The water solutions industry in the oil and gas sector is characterized by fragmentation. There are numerous smaller and often private service providers that offer water management and logistical services across specific geographic areas or with a narrow focus. This fragmentation leads to intense competition as these players vie for contracts and market share.

Competitive Bidding Process: Contracts in the industry are typically awarded through a competitive bidding process. Companies like Select Water Solutions need to demonstrate their capabilities, including operational track record, pricing competitiveness, safety standards, technology solutions, and environmental performance, to differentiate themselves from competitors and secure contracts. This competitive bidding process puts pressure on companies to constantly improve and showcase their strengths.

Core Competitors: Select Water Solutions faces competition from both larger oilfield services companies that offer some water-oriented and environmental services as well as smaller specialized service providers focused solely on water solutions. While larger companies may have the advantage of offering a broader range of services, specialized providers often focus on specific regions or niche service offerings. Both types of competitors present challenges for Select Water Solutions in terms of market share and customer acquisition.

Technological Advancements: The industry is evolving rapidly, with advancements in technology playing a significant role. Companies that can offer innovative technological solutions, such as automation systems, data analytics, and remote monitoring, gain a competitive advantage. These technologies help improve operational efficiency, reduce costs, and enhance environmental sustainability. To stay competitive, Select Water Solutions needs to stay abreast of technological developments and integrate them into their services.

Some Competitors include:

1. Halliburton Company (HAL): Halliburton is a multinational oilfield services company that provides a wide range of services, including water management solutions, to the oil and gas industry. They offer services such as water treatment, recycling, and disposal, as well as chemical solutions for hydraulic fracturing and other oilfield operations.

2. Schlumberger Limited (SLB): Schlumberger is another leading oilfield services company that offers various water management solutions to the industry. They provide services such as water sourcing, recycling, and disposal, as well as chemical solutions for well-stimulation and completion.

3. Baker Hughes Company (BKR): Baker Hughes is an international energy technology company that offers a comprehensive range of services to the oil and gas industry. They provide water management solutions, including water sourcing, treatment, recycling, and disposal, as well as chemical solutions for well-stimulation and production.

4. Ecolab Inc. (ECL): Although primarily known for its expertise in water, hygiene, and energy technologies, Ecolab also offers solutions for the oil and gas industry. They provide water treatment and chemical solutions tailored to the specific needs of oilfield operations, including hydraulic fracturing.

Performance

Source: Seeking Alpha

The performance of Select Water Solutions has been tremendous, as can be seen above.

I dug deeper into what contributed to the performance.

The successful integration of recently acquired businesses made a significant contribution to Select Water Solutions' overall revenue growth, showcasing a solid quarter. These acquisitions likely expanded the company's customer base and market presence, leading to increased sales.

In addition to the positive impact of acquisitions, Select Water Solutions experienced organic revenue growth across every segment during the first quarter. This indicates that the company's existing operations and services were able to generate increased sales without relying solely on acquisitions. Factors such as improved market demand, effective marketing strategies, and customer retention efforts may have contributed to this growth.

The Water Infrastructure segment, in particular, saw substantial revenue growth of 32% in the first quarter, according to its latest quarterly report. This growth can be attributed to the increased utilization of existing assets, showcasing Select Water Solutions' ability to optimize its infrastructure and extract more value from its resources. Operational improvements, better asset management, or increased customer demand for water infrastructure services may have contributed to this success.

In its latest quarterly report, it is stated that revenue growth in the Water Infrastructure segment was also driven by contributions from new Greenfield and brownfield organic projects. These projects likely involved the development or expansion of infrastructure in response to customer demands, indicating that Select Water Solutions actively pursued growth opportunities and capitalized on market demands to drive sales.

Select Water Solutions reported improved gross margins across all segments, with each segment experiencing a significant increase of at least 200 basis points compared to the previous quarter and nearly 500 basis points compared to the first quarter of the previous year. This improvement suggests that the company successfully managed costs, optimized operations, and potentially implemented pricing strategies that resulted in higher margins on its products and services, leading to improved profitability.

The company's ability to provide integrated water and chemical solutions, alongside contracted infrastructure, differentiated Select Water Solutions from its competitors. This unique offering likely appealed to customers and contributed to increased sales. Additionally, Select Water Solutions' focus on sustainable water solutions and efforts to reduce the environmental impact of the energy industry positioned them as a leader in the market, further enhancing their value proposition.

Based on these points, in my opinion, the management team knows to set themselves apart from competitors and invest in the parts of the business, explaining the positive growth results.

Competitive position

Will the growth continue? I believe so for the following reasons.

Select Water Solutions offers a comprehensive suite of sustainable water and chemical solutions, catering to the diverse needs of its customers throughout the water lifecycle. Their range of services includes temporary and customized solutions and long-term investments in sustainable infrastructure. This broad offering gives the company a competitive advantage in addressing the complex requirements of its clients.

With well-established field operations across key shale plays, basins, and regions in the United States, including the Permian, Bakken, Eagle Ford, Haynesville, Marcellus, Utica, Rockies, and Mid-Continent regions, Select Water Solutions boasts an extensive geographic footprint. This enables them to serve a significant portion of the current domestic unconventional drilling and completion activity, positioning them as a leading provider in the industry.

Select Water Solutions has made substantial investments in advanced technology and automation, including patented hardware and software applications such as WaterONE™ and AquaView®. These technologies enable real-time data analysis, remote control, and automation, resulting in improved operational control, efficiency, and safety. The company's expertise in automation gives them a competitive edge by delivering reliable, efficient, and environmentally responsible solutions.

A key focus for Select Water Solutions is water infrastructure development, including establishing water sources, recycling infrastructure, and semi-permanent and permanent pipeline infrastructure. By investing in infrastructure such as commercialized recycling facilities or disposal wells, the company reduces production costs for its customers while minimizing environmental impact. The development of water pipeline infrastructure networks and access to significant water volumes further enhances Select Water Solutions' ability to meet customer demands and reduce freshwater consumption.

With expertise in oilfield chemicals, Select Water Solutions develops, manufactures, and delivers a full suite of completion chemical products used in hydraulic fracturing and related well-completion processes. Their chemical solutions are customized to meet customers' technical, economic, and environmental needs. With proprietary products and advanced laboratory technologies, Select Water Solutions is well-positioned to support customers as completion chemistry evolves.

Select Water Solutions is committed to sustainability and actively invests in water treatment and reuse services, commercialized recycling facilities, and the use of non-potable water sources. By collaborating with stakeholders and prioritizing conservation and responsible development, the company aligns the industry's needs with sustainability goals, providing them with a competitive advantage in the market.

Overall, Select Water Solutions' competitive strength lies in its ability to provide integrated, sustainable water and chemical solutions, advanced technology and automation, extensive geographic coverage, and expertise in oilfield chemicals. These strengths position the company as a leader in the industry and enable them to meet the evolving needs of its customers while addressing environmental concerns.

Risk analysis

Select Water Solutions, as a provider of comprehensive water management and chemical solutions to the oil and gas industry, operates in a dynamic and challenging market environment. While the company has exhibited strong growth and competitive strengths, there are several key risks that should be considered.

The first risk stems from the inherent volatility of the oil and gas industry. Select Water Solutions' financial performance is closely tied to the drilling and completion activities of oil and gas companies. Fluctuations in oil and gas prices can significantly impact the demand for the company's services. During periods of low prices, oil and gas companies may reduce their drilling activities, leading to decreased demand for water-management and chemical solutions.

Regulatory changes pose another risk to Select Water Solutions. The oil and gas industry is subject to various regulations related to environmental protection, water management, and health and safety. Changes in regulations, such as stricter water disposal and treatment requirements, can increase compliance costs for the company. Failure to comply with regulations can result in penalties, fines, or legal liabilities, impacting the company's financial performance and reputation.

Technological advancements play a crucial role in the water solutions industry. Select Water Solutions needs to stay ahead of these advancements to remain competitive. Failure to adopt or integrate new technologies into its operations may result in a loss of market share to competitors who can offer more advanced and efficient solutions. Therefore, it is essential for the company to continually invest in research and development, evaluating and integrating innovative technologies to enhance its service offerings.

Competition is another risk factor. Select Water Solutions operates in a competitive market, facing larger oilfield services companies and smaller specialized providers. Larger companies have the advantage of offering a broader range of services, while specialized providers may have niche expertise or regional advantages. To maintain and expand its market share, Select Water Solutions needs to differentiate itself through its comprehensive suite of services, advanced technologies, extensive geographic coverage, strong customer relationships, and the ability to provide tailored solutions that address customers' specific needs.

Economic factors also pose risks to Select Water Solutions. The demand for oil and gas services, including water solutions, is influenced by overall economic conditions. During economic downturns, oil and gas companies may reduce their capital spending and drilling activities, leading to a decline in demand for Select Water Solutions' services. Additionally, factors such as interest rates, inflation, and geopolitical events can impact oil and gas prices, which in turn can affect the profitability and growth prospects of the company.

Finally, the dependency on the oil and gas industry itself presents a risk. Select Water Solutions' business is closely tied to the overall health and performance of the oil and gas sector. Any significant decline in oil and gas exploration and production activities can have a negative impact on the company's revenue and profitability. Fluctuations in oil and gas prices, changes in drilling activity, or shifts in energy policies and consumption patterns can pose risks to Select Water Solutions' business operations and financial performance.

In summary, while Select Water Solutions has shown impressive growth and possesses competitive strengths, it faces risks related to the volatility of the oil and gas industry, regulatory changes, technological advancements, competition, economic factors, and its dependency on the oil and gas sector. It is crucial for the company to navigate these risks effectively through strategic planning, adaptation to market changes, and a focus on innovation to ensure its continued success in the dynamic water solutions market.

Valuation and Performance Comparison

Source: Seeking Alpha

Compared to its peers, Select Water Solutions has had great growth numbers, especially in the last 12 months. Its PE ratio seems reasonable and the P/S is actually much cheaper than its peers.

Overall Conclusion

Select Water Solutions has been performing greatly, especially in the last year or so. My analysis shows the revenue and profit increase can be attributed to smart investment and management decisions. Its overall competitive strengths make it an attractive market and make me believe that the company can continue its momentum. At current valuation levels, I believe Select Water Solutions is a buying opportunity.