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

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 operating results for the third quarter of 2022. 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 November 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, November 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. With that, 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 third quarter's results combined with our recent acquisitions display our continued ability to execute on our core strategies of improving and bolstering our base business, advancing our technology, sustainability and diversification efforts and executing on strategic M&A. The third quarter saw strong sequential revenue growth, increasing 12% quarter-over-quarter with all segments showing solid improvements during the quarter. Our Water Service segment saw quarterly revenues approach pre-pandemic peak levels with gross margins increasing to 23%. Meanwhile, our Infrastructure segment achieved record quarterly revenues and our Chemical segment achieved record high margins. Reinforced by steady activity levels, a challenging labor market, and a tight equipment supply environment, we continue to capture market share and see pricing improvements across each of our segments. Combined, these factors led to a strong 70% growth in net income and 32% growth in adjusted EBITDA. On the back of these strong financial improvements, I'm also pleased to have announced the acquisitions of Breakwater Energy Partners and the strategic infrastructure assets from Cypress Environmental Services, both of which closed this week. Select has a long and successful track record in M&A, and I continue to believe that consolidation remains an important way to drive efficiencies and further create value within our industry and more importantly, for the Select shareholders. Both of these acquisitions fit us extremely well and provide strategic growth opportunities at very attractive entry points. With these acquisitions, we are also bringing on skilled and experienced leadership and their strong operating teams who we are excited to partner with going forward. With Breakwater, we are acquiring one of the market leaders in advanced water recycling infrastructure, disposal, and logistics solutions. Breakwater has broad capabilities across the entire Permian Basin with complementary water logistics operations in the Eagle Ford, with a core footprint of strategic commercial recycling facilities serving the heart of the Midland Basin. Breakwater currently operates about 600,000 barrels per day of active recycling capacity at its four primary fixed facilities with an additional 1.4 million barrels per day of permitted capacity available for development. Breakwater also operates nine active modular recycling facilities with 1.5 million barrels per day of throughput capacity. Breakwater's facilities are supported by 46 miles of gathering and distribution pipelines, 70,000 barrels per day of disposal capacity, and 4.7 million barrels of storage capacity with an additional 3.7 million barrels of permitted storage capacity available for development. This footprint expands Select's recycling capabilities to nearly 3 million barrels of total daily capacity across fixed and mobile capabilities while adding a number of new strategic customer relationships and strengthening existing relationships with new recycling opportunities. Through the Cypress acquisition, we added a portfolio of strategic wastewater disposal facilities in North Dakota at an attractive value. Further consolidating the Bakken region following our recent acquisition of Aqua Libre Midstream and Nuverra, we believe there is meaningful opportunity to expand and network these assets with our existing infrastructure footprint. In addition to the strategic benefits, both transactions provide clear and immediate financial benefits as well. On a full year 2022 combined basis, the acquired operations from Breakwater and Cypress are expected to generate approximately $110 million to $115 million of revenue and more than $30 million of adjusted EBITDA. The businesses have seen a strong trajectory through the year, and there remains meaningful opportunity for growth and network expansion in 2023. Importantly, both of these acquisitions further complement Select's rapidly growing portfolio of contracted and production-related revenues, adding incremental stability to our revenue base. Breakwater's recycling facilities and infrastructure operations are supported by a number of long-term customer contracts, while more than 60% of Cypress volumes are currently delivered by pipeline with long-term contracts. Supported by our strengthening revenue and earnings profile and recent acquisitions, we are also pleased that our Board has initiated a regular quarterly dividend program during the third quarter. With the first dividend payment set to be made this month, initiating a regular quarterly dividend program reflects our confidence in Select's operating performance and strong balance sheet as well as our commitment to generate multiple avenues of shareholder returns over time. These factors, along with our capital-light business model and growing portfolio of contracted infrastructure and production-related revenue streams, enable us to return capital to our shareholders while maintaining a disciplined capital structure to support the growth of our business and continued expansion of our water recycling and infrastructure initiatives. We strongly believe in the long-term earnings and free cash flow generating capabilities of our business and are excited to share the benefits of this cash generation with our shareholders. While the third quarter saw the U.S. onshore rig count increase by about 7%, completions activity continued to modestly lag during the quarter with low single-digit percent growth. Even with this disparity, we continue to accelerate our revenue wallet share on a per completion basis as we saw strong demand from our customers for the integration of our comprehensive water and chemistry solutions. While we anticipate some modest seasonality during the fourth quarter, customer activity remained steady overall, underpinned by a solid commodity price environment. These two recent acquisitions and Breakwater especially add additional scale and experience, further advancing Select's ability to offer innovative, integrated water and chemistry solutions. I believe we will continue to build on our recent success with more integrated offerings along with additional longer-term contracts and infrastructure development opportunities in 2023. We anticipate continued operational efficiency gains and growth opportunities from our acquisitions and we expect to see further improvements to our financial performance, including meaningful free cash flow generation next year. 2023 is shaping up to be a very strong year for Select. With that, I'll hand it over to Nick to discuss the financial performance and outlook in more detail.

Thank you, John, and good morning, everyone. The third quarter exceeded our expectations from both a revenue and margin perspective. And with the acquisition of Breakwater along with the Cypress infrastructure assets, we're poised to continue this momentum. Revenue of $375 million grew by 12%, or $39 million, and 59% of this revenue increase fell through to higher gross profits. All three of our segments increased their gross margins from second to third quarter, resulting in our highest quarterly net income and adjusted EBITDA since the third quarter of 2018. Net income increased by 70% to $24.7 million and adjusted EBITDA by 32% to $62.8 million. Despite volatility in commodity markets and in the daily headlines, our customers are in the strongest financial position they've been in years, and demand for secure and dependable oil and gas production from the United States continues to grow. As we partner with our customers to produce natural resources in a safe, cost-efficient, and environmentally friendly manner. We've also demonstrated the value of our unique ability to connect chemistry with full lifecycle water management and share in the value this partnership creates. Produced water recycling is a prime example of this value creation, and the Breakwater acquisition brings a substantial growth opportunity with a large footprint of new fixed recycling infrastructure in the Midland Basin. Along with consolidating certain Texas and New Mexico Water Logistics Services, this infrastructure network furthers our goal to increase contracted and production-levered revenue streams and enhances our established commitment to growing our recycled produced water volumes. While we were already well on pace this year to exceed our 2022 target of 31 million barrels of recycled produced water through our six facilities, the Breakwater acquisition with its current 600,000 barrel per day recycling capacity provides strong additional momentum in this area and puts us well on our way to meeting our 50 million barrel future annual commitment. With the addition of the Breakwater leadership team and over 300 skilled employees and the combined revenue and adjusted EBITDA run rate John mentioned earlier, we expect the Breakwater acquisition to generate considerable value for our shareholders in the months and years to come. The initiation of a regular quarterly dividend also marks a milestone in our corporate maturity and commitment to shareholder returns. Our phenomenal recovery and growth over the past two years, expansion of contracted and production-levered revenue streams, all executed while maintaining a net cash position opens up new opportunities to create and return value. We will continue to make targeted investments to advance our infrastructure network while benefiting from the expansion of this more stable cash flow stream. Turning to the individual segments. The Water Services segment grew its revenue sequentially by 13% to $221 million, while advancing gross margins over 3 percentage points to 22.8%. This segment benefited from continuing pricing improvements, driving incremental gains of nearly 50% to gross margin before D&A. Our Water Services segment will be both benefited and impacted by the Breakwater acquisition and integration in Q4, which makes forecasting the fourth quarter a little more difficult. We'll, of course, have a more fulsome forward view on our next earnings call in parallel with 2023 budget development. But for now, we see Water Services as generally steady in the fourth quarter, balancing out the integration and usual seasonality with continued momentum in recent outsized gains relative to general industry activity. Water Infrastructure saw the most significant revenue gains in the third quarter, growing by 23% sequentially to $74 million in the third quarter. The recent investments we've been making around both acquired infrastructure assets and Greenfield recycling facility development are now generating meaningful revenue and profitability for the company, and we expect both of our latest acquisitions to continue this trend. With this revenue growth, gross margin before D&A increased to 27.2% in Q3, and we anticipate margins in the high-20s percentage range with low double-digit revenue growth in Q4, driven primarily by the acquisitions. While the Chemicals segment had seen tremendous organic revenue expansion over the last few quarters, the third quarter marked a consolidation of that higher revenue at remarkable margin expansion. Quarterly gross margin before D&A increased sequentially from 14.6% to 18.8% as we reallocated manufacturing production and resources away from certain lower-margin commoditized products into our more specialized proprietary chemistry. This segment will not be directly impacted by the acquisitions announced yesterday, but even with typical seasonality, we expect to be able to grow revenues by mid-single digits in the fourth quarter while maintaining margins around the Q3 level. Our SG&A as a percentage of revenue remained below 8% while increasing in dollar terms from $26.7 million to $29.8 million. This figure includes $700,000 of transaction costs in Q3, which we expect will increase in the fourth quarter due to the size and impact of the Breakwater acquisition. Looking forward, we expect to maintain SG&A as a percentage of revenue at a consistent level prior to considering one-off transaction costs. Given that Breakwater has historically been run as a lean private company with limited overhead and the Cypress assets do not come with any material corporate costs, we are not prioritizing cost synergies in these transactions, particularly given the tight labor market for the specialized skill sets our combined teams possess. While the latest acquisitions will require some additional near-term integration efforts for certain back office functions, generating positive free cash flow through improved working capital management is a core priority, driven primarily by our continued meaningful revenue growth. Net working capital increased by $54 million during the third quarter, resulting in free cash flow of negative $10.7 million in Q3. However, we expect to advance into positive ground over the fourth quarter of 2022 and to generate considerable free cash flow during 2023. Gross CapEx of $19.8 million for the third quarter translated to net CapEx of $16.1 million after asset sales. $29 million of net CapEx year-to-date, we expect to finish the year between $45 million to $50 million, reducing the top end of our previous guidance. Looking forward, we believe our low capital intensity business model provides further support for our ability to produce substantial free cash flow in 2023. We finished the quarter with a net cash position of $13.2 million and no bank debt and have nearly $245 million of total liquidity when considering our sustainability-linked asset-backed lending facility, up from $221 million as of last quarter. The Breakwater acquisition includes the repayment or settlement of approximately $13 million of net debt and other obligations in conjunction with closing. Before opening the call for questions, we wanted to welcome our new team members to the Select family. We are eager to harness their talents and capabilities to continue to fulfill our vision to be the recognized leader and trusted partner in sustainable water management solutions. Select's expanded footprint of water recycling and disposal infrastructure in both the Midland Basin and the Bakken, along with our other steadily improving base operations, provides us with a greater opportunity set both with individual customers and in managing multiple customers' needs across highly productive acreage. The growing momentum seen in the third quarter's results, combined with these valuable new partnerships, will bring exciting new ambitions for Select in 2023. Thank you. And with that, we'll open it up to questions.

Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of John Daniel with Daniel Energy Partners. Please proceed with your questions.

Hey, guys. Congrats on the two deals. Probably it might be a silly question, but when you look at Breakwater with the 600,000 barrels a day of capacity today, and you note the permits for another 1.4 million. Can you just walk me through the process to develop that capacity, the time required to develop it and the cost? Just incremental color would be helpful.

Sure, John. This is Michael Skarke. Breakwater has been very diligent with the permitting process for commercial recycling facilities. When there’s a good track record, the permitting can be completed in as little as three or four months. In the past, permits could take six months or longer. The construction timeline depends on the size and type of treatment, but if everything goes smoothly, it could take four to five months, while on the longer end, it might take up to nine months. A major challenge is the commercialization process, as it usually requires significant capital for a project that isn’t underwritten and partially commercialized. This additional lead time can be a factor. Breakwater has effectively permitted and established recycling facilities and storage, but capital has been an issue. This has also been the case with other transactions we've completed in the last 18 months, where the assets were underutilized and lacking growth capital. We look forward to collaborating with them, understanding their pipeline, and aligning it with our backlog and customer relationships to fully develop and commercialize these systems.

Okay. All right. Got it. And then just the transactions here, largely Permian, Bakken, can we talk about what some of the other M&A opportunities might be in other basins? Are you actively looking today or is this keeping you pretty busy with these two deals?

Yeah, John. This is John Schmitz. I would tell you that we know the market. I mean, we're actively in the market at all times. We try to stay tuned to the market as we can. As you've seen in the past, we remain open to business in this type of transaction. We believe there is still more opportunity across the United States in these unconventionals to do water and chemical solutions where we're adding asset bases that really fit with our asset base, assets that need capital to really commercialize. We're in a position to put contracts and long-term relationships around them, efficiencies and value for the customer. So we're active, still, John, and we believe there's more.

Fair enough. Okay. And then the last one, just a housekeeping. Nick, I think you said the net CapEx for '22 is $45 million to $50 million.

That's correct.

I heard that correctly. I mean just a framework for next year, just given your growth through acquisition, what that might look like potentially?

Yes. Obviously, we'll have more detail on our next call with the whole budget, but I think we can go into some of the factors here. As we acquire more assets as activity increases, that's going to naturally take your maintenance CapEx up a little bit. Right now, we're seeing $40 million to $50 million as a ballpark range for next year. We'll be adding to that some targeted growth opportunities not only around the previously announced acquisitions, but as we get our hands around the Breakwater and Cypress yields and understand the great opportunities there. You will have fewer asset sales than we had in the year-to-date period so far. But as far as the growth investment, really, our third quarter infrastructure performance reflected putting money to work on our previous acquisitions. I think the infrastructure group has a healthy trajectory in front of it, not just from those, but on an ongoing targeted capital-light basis here.

Okay. That's a good starting point. Thank you very much for letting me ask questions.

Thank you, John.

Thank you. Our next questions come from the line of Tom Curran with Seaport Research Partners. Please proceed with your questions.

Good morning. Nick, I think this quarter's big working capital build that consumed $54 million as CFO and then the related step down in cash on the balance sheet to just $13 million has spurred some consternation following on the heels of your regular dividend introduction. Obviously, as usual, at this point in an OFS up-cycle, Select's need to build working capital is a very high-quality positive challenge. But could you expound on how exactly you expect to reverse working capital flow in 4Q? What specific levers are you planning to pull for it to become a source of cash flow from operations in 4Q? And then how do you expect to constrain it as you move through 2023?

Sure, Tom. These are high-quality customers. We work for the biggest majors, large independents, and very high-quality, smaller independent and private equity-backed customers as well. So, as you're well aware, we've had several integrations recently. I'm going to try not to get too deep into the weeds here, but we're also upgrading various ERP systems into one consistent ERP across the whole company. Right now, we have three. So each of those, you're operating separate groups, billing customers from different historical accounts, which just provides a bit of confusion and a need to integrate teams and processes going forward. We're disappointed by the working capital build in the third quarter, but we do see a great opportunity not just in the fourth quarter to turn that around, but in 2023 to deliver substantial positive free cash flow. We've been focused on these recent acquisitions to a large extent recently. We will have some working capital needs as it relates to the revenue that we're bringing on. However, we think for the entire company, we have a large opportunity here going forward to unlock that. You saw in our liquidity number that was up $25 million that we are very well capitalized. We are still net cash positive with no bank debt. All these things provide us with a lot of opportunities.

And as your team has had the chance to dig into the receivables that you've inherited via the acquisitions, are there any that have seen an increase in the risk profile where you've seen an increase in the possibility of not being able to collect to the extent you thought or potentially having to create a reserve?

No, Tom, no surprises. Our reserve is very conservative, or it is appropriate for our ongoing business and our ongoing revenue. There are no surprises in any of these acquisitions. It's just getting everything connected on the same wire and pulling those in.

Got it. And then exiting 2Q of your seven existing recycling facilities, I believe six were still at utilization levels of less than 50%, could you update us on how those six progressed over 3Q and where their utilization rates stand now?

Sure. So, Tom, this is Michael. When we look at the fixed facility recycling facilities we have, all of them, this was the first quarter where we had all of them contributing for a full quarter. So we're certainly trending in the right direction from that standpoint. As I look at Q4, I think we're going to continue to commercialize, particularly the newer facilities and see utilization continue. In terms of your more specific question, I'd say about a third of the utilization for Q3 was higher across the board than it was for Q2, but half of our facilities are still new and emerging and underutilized. We have the ability to continue to commercialize really all of them, but at least half, I would consider only utilized today.

Thanks for that, Michael. I have one last question. Could you clarify whether you began negotiations with the Cypress creditors while it was still in Chapter 11 restructuring? Also, did it emerge from that process? I would appreciate it if you could provide some insight into how you pursued and took advantage of that opportunity.

Yeah, Tom. This is John Schmitz. We did have conversations prior to the transaction that did happen, which I believe was an out-of-court restructuring, but we actually did the transaction with the group that bought the whole Cypress. They were wanting the pipe inspection business out of it, and we were wanting the disposal assets that we ended up getting. So we actually bought it from a party that participated in restructuring the company.

Got it. Thanks for that additional color, John. I’ll turn it back.

You bet. Thanks, everybody, for discussing Select today, and we look forward to the next quarter. And again, welcome to all the employees of the transaction as team members. Thank you.

Thank you. This does conclude today's conference call. You may disconnect your lines at this time. Thank you for your participation and have a great day.