Earnings Call Transcript - WTTR Q3 2025

Operator, Operator

Greetings, and welcome to the Select Water Solutions 2025 Third Quarter Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Garrett Williams, VP of Corporate Finance and Investor Relations. Thank you. You may begin.

Garrett Williams, VP, Corporate Finance and IR

Thank you, operator, and good morning, everyone. We appreciate you joining us for Select Water Solutions conference call and webcast to review our financial and operational results for the third quarter of 2025. With me today are John Schmitz, our Founder, Chairman, President and Chief Executive Officer; Chris George, Executive Vice President, Chief Financial Officer; Michael Skarke, Executive Vice President and Chief Operating Officer; and Mike Lyons, Executive Vice President and Chief Strategy and Technology 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 selectwater.com. There will also be a recorded telephonic replay available until November 19, 2025. 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 5, 2025, 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 law. These forward-looking statements reflect the current views of Select's 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. 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 John.

John Schmitz, CEO

Thanks, Garrett. Good morning, and thank you for joining us. I am pleased to be discussing Select Water Solutions again with you today. During the third quarter of 2025, we advanced key strategic objectives across each of our segments. In Water Infrastructure, we secured incremental contracts to enhance long-term water infrastructure scale and cash flow generation. In Water Services, we continued our consolidation and divestment efforts to drive a focus on long-term margin enhancement and efficiencies. And finally, in Chemical Technologies, we increased our market share gains, driving strong sequential revenue and margin improvement. I'd like to start with some of the key third quarter highlights, then provide an overview of several additional long-term contracts before addressing the forward outlook in more detail. In the third quarter, we maintained steady consolidated margins despite a weaker activity environment, driven by another strong margin quarter for the Water Infrastructure segment and improved Chemical Technologies margins. While general industry activity levels have been down, the produced water challenges our customers face continue to grow, creating the necessity for durable solutions from commercial water midstream players. Pore space availability and seismicity-based curtailments remain a concern for traditional disposal solutions, which are driving tailwinds behind the continued demand for Select's recycle-first solutions. Accordingly, we continue to advance our end-to-end water midstream offering with new contracts, organic expansion and bolt-on acquisitions. The Permian Basin remains the most active basin in the industry, but it still lacks the necessary infrastructure and solution to support future operator plans and expected produced water volumes over the coming years without additional development. We continue to scale our infrastructure operations to meet this demand and are proud to be recycling nearly 1 million barrels of water per day in the Permian Basin with the vast majority flowing through our fixed facilities. Every day, these recycling solutions create significant operational efficiencies and economic value for our customers by providing synthetic disposal capacity that alleviates the need for significant produced water volumes to be injected into subsurface reservoirs. We expect to exceed our produced water recycling targets again this year with an active backlog of projects currently under construction; we expect strong growth into 2026 as well. Supporting this future growth, in the third quarter, we signed several new midstream contracts in the Permian Basin to add over 65,000 additional acres under long-term dedication across both Texas and New Mexico. We now have added nearly 800,000 additional acres under dedication during 2025 alone and are highly confident that we will continue to add incremental dedications to this inventory backlog before the end of the year. Something else that I'm very excited about, during the third quarter, we signed a new long-term contract for water transfer; our last mile temporary pipeline and logistics services in the Permian Basin. The existing water infrastructure contracts we signed in the Delaware Basin in the second and third quarter of 2025 paved the way for this expansive water transfer agreement with a key customer. This contract enhances more than 300,000 acres under existing dedication with newly contracted water transfer services alongside existing water recycling, gathering and disposal dedications. I believe this shows the strengths of Select's unique integrated value proposition and our customers' trust in our automated water transfer and logistics services. While produced water gathering, recycling and distribution remains the primary growth driver, we also continue to responsibly grow our Permian disposal capacity to complement this recycling footprint. With ever-growing produced water volumes, the Permian Basin demands comprehensive and flexible water midstream solutions going forward. Our produced water systems incorporate large diameter dual gathering and distribution pipelines that are connected to both centralized recycling and disposal facilities, providing optionality on how we manage produced water for our customers. Disposal is and will continue to be a cornerstone of produced water management, and we will continue to add disposal capacity as needed to balance our overall system. Our growing disposal network operates in unison with our recycling capabilities to provide comprehensive long-term solutions that bring stability and enhanced takeaway assurance for the long-term contracted water inventory volumes of our customers. As our network continues to scale, this optionality will further expand over time and will play a critical role in our long-term beneficial reuse solutions as well. Treated produced water offers a unique and cost-effective starting point for both desalination and mineral extraction and provides enhanced flexibility and capacity as an alternative disposal outlet. We remain at the forefront of developing these new technologies and scalable solutions and are actively partnering with key customers, regulators, universities and other stakeholders on advancing the framework necessary for these beneficial reuse solutions. Elsewhere on the technology side, we continue to advance our mineral extraction efforts that are very synergistic with our existing water midstream footprint and future beneficial reuse solutions. This includes the recently announced groundbreaking of Texas' first commercial produced water lithium extraction facility in the Haynesville Shale in East Texas. This facility will be funded, designed, constructed and operated by our partner, Mariana Minerals, a leader in domestic critical mineral resource development. This project will leverage Select's extensive produced water gathering pipeline and disposal infrastructure in the Haynesville to source, transport and manage produced water streams critical to the extraction process. For this, Select will receive recurring royalty payments. Based on the near-term goal to deliver up to 70,000 barrels per day and expected fixed price contracts, we expect royalty payments of about $2.5 million per year beginning in early 2027, ramping up to $5 million per year once the refinery is producing at full efficiency and capacity. With nearly 1.3 million barrels per day of produced water moving through our infrastructure on average during 2025, there remains tremendous mineral extraction potential across Select's portfolio, and we expect to grow this royalty-based cash flow over the coming years. To update on some of our other ongoing strategic initiatives, our municipal and industrial project in Colorado is steadily progressing as expected. Additionally, on the peak rental side, demand for our distributed power solution continues to grow, and stakeholder engagement remains constructive. We are aiming to establish a distinct path forward for Peak before the end of the year. While two very different initiatives, the underlying strategy and message is consistent. We are focused on delivering to our shareholders a streamlined water infrastructure-focused company with more predictable and stable long-term earnings. Ultimately, we have high confidence in what we are building. And even in a lower commodity price environment, our Water Infrastructure segment is demonstrating growth and resilience. We expect Water Infrastructure to grow by 10% in the fourth quarter and more than 20% during 2026. We believe that in a lower commodity price environment, more than ever, our customers will look to us to unlock incremental economics and efficiencies. Large-scale water balancing and recycling is a prime example of the combination of good stewardship and good economics as it mitigates potential reservoir pressure impacts from produced water injection while also serving as a cost advantage alternative to legacy disposal. In addition to reducing lease operating expenses for our customers, recycling also provides a cheaper source barrel for our operators' completion needs as compared to traditional freshwater supply, thereby also reducing their capital expenditures for new well development. While the current activity environment may present some challenges for more of our completions-oriented offerings in water services and chemical technologies, we believe our market-leading positions in these segments will allow us to outperform the market and continue to generate solid free cash flow to fund our overall growth. In summary, I am pleased with the ongoing advancement of our strategy and the way our organization responds to the challenging environment. One of the key statements and tenets we tell ourselves at Select is that we have to do more with less and with better results. The current market environment and our customers effectively demand this from us. But most importantly, we demand it of ourselves every day, and we are committed to delivering that for our stakeholders. Looking ahead, I think the fourth quarter will be a good demonstration of these efforts, and I appreciate the continued dedication of our employees and the ongoing trust and support of our long-term shareholders. With that, I'll hand it over to Chris to speak to our financial results and outlook in a bit more detail.

Chris George, CFO

Thank you, John, and good morning, everyone. In the third quarter, Select exhibited resilience in light of declining activity levels and made steady progress in advancing its strategic objectives. During the third quarter, we achieved another quarter of strong water infrastructure margins, sizable increases in Chemical Technologies revenue and gross profit before D&A of 13% and 29%, respectively, and cash flow from operating activities of $72 million, outpacing our adjusted EBITDA. Looking at our third quarter in more detail, Water Infrastructure revenue decreased 2.5% with margins of 53%, modestly below prior quarter levels, but in line with our expectations. The modest reductions were primarily driven by reduced skim oil sales and lower realized oil prices, as both disposal and recycling volumes held fairly steady during the quarter. Looking ahead for our Water Infrastructure segment, we anticipate revenue and gross profit growth of approximately 10% in the fourth quarter compared to the third quarter. Furthermore, with our sizable backlog of ongoing construction projects and our latest contract wins, we expect continued growth well into next year, driving more than 20% annual growth in 2026 compared to 2025. We expect to maintain gross margins before D&A consistently above 50% in both Q4 and throughout 2026 as well. In the Water Services segment, in the third quarter, we saw revenues decrease by approximately 23% sequentially. This decrease was heavily impacted by the divestment of legacy trucking operations associated with the Omni transaction, which closed in early July. This divestment accounted for more than a third of the overall decline, with the remainder driven by lower customer activity levels during the quarter. While sizable, this decrease was better than our prior revenue guidance of an expected 25% decline, though our gross margins before D&A and services of 18% came in slightly below our expectations during the third quarter. We expect the impacts from ongoing lower activity levels and typical fourth quarter seasonality to result in sequential revenue declines of low to mid-single digits in Water Services, with margins before D&A improving to 19% to 20% in the fourth quarter of 2025. Moving on to Chemical Technologies. This segment achieved a sequential revenue increase of 13% during the third quarter, significantly above our guided expectations as ongoing successes with new product development initiatives drove market share gains. Importantly, gross margins before D&A also materially exceeded our expectations, coming in at 19.9% in the third quarter, resulting in gross profit before D&A of $15.2 million, a 29% sequential increase. During the fourth quarter of 2025, we expect steady revenue with gross margins of 18% to 20% as continued market share gains and product mix contribute to notable outperformance versus the expected activity levels in the key markets and regions we serve. On a consolidated basis, SG&A increased to $42 million during the third quarter, driven primarily by severance and deal costs, including from the Omni transaction and ongoing peak efforts. We expect SG&A to return to approximately $40 million in the fourth quarter, and we will continue to look for opportunities to reassess the cost structure of the business in conjunction with the ongoing rationalization efforts in Water Services. Altogether, adjusted EBITDA came in at just under $60 million during the third quarter of 2025, at the high end of our previous guidance. For the fourth quarter of 2025, we expect consolidated adjusted EBITDA to grow to $60 million to $64 million, as strong sequential growth in the Water Infrastructure segment is expected to more than offset typical fourth quarter seasonality. I'll now hit on a few below-the-line items and cash flow details before we wrap up. Looking at our other costs for the third quarter, D&A increased approximately $2 million in Q3 to approximately $45 million. With the continued build-out of our growth capital projects, we expect D&A to increase in Q4 to approximately $46 million to $48 million. Interest expense should remain relatively steady, and our book tax rate applied to pretax operating income should stay in the low 20% range, with cash taxes on the year remaining consistent with prior guidance of $10 million or less. Given recent federal legislation, we would expect our cash tax obligations to remain relatively muted across the next couple of years as well. On the cash flow side, cash flow from operations of $72 million meaningfully exceeded our adjusted EBITDA for a second consecutive quarter as we continue to improve our working capital profile. Growth CapEx increased to $95 million during Q3, primarily in support of contracted infrastructure growth projects, resulting in negative free cash flow of $19 million in the third quarter. We also incurred $35 million of cash outflows for acquisitions in the quarter related primarily to the Omni transaction as well as the acquisition of other disposal assets in the Permian and Northeast regions to strategically support our market-leading recycling and disposal networks in those basins. For several quarters in a row, we have seen our large backlog of water infrastructure opportunities materialize into actionable contracts. Following the recent project wins and continued pace of development, we are modestly increasing our 2025 net CapEx guidance range to $250 million to $275 million, up $25 million since the prior update. While near-term cash flow is expected to be impacted by elevated growth CapEx spend associated with our new contracted infrastructure growth projects, we maintain a very healthy balance sheet overall. We are well underway in executing our strategic commitment to streamline our overall business and deliver to our shareholders an industry-leading water infrastructure and midstream growth platform comprised of strong free cash flowing assets while upholding our commitment to a low leverage balance sheet. We maintain our expectation of $50 million to $60 million of annual CapEx going towards ongoing maintenance and margin improvement initiatives in the near term, although this could come down over time with additional services rationalization. Absent the ongoing sizable growth capital outlays, we have a very maintenance-light capital model. Our operating assets have significant free cash flow generating capabilities and flexibility to manage maintenance spend in accordance with market conditions without impacting our overall operational performance. In summary, we advanced our strategic initiatives in the third quarter and remain confident in our overall strategic outlook. We are proud to have positioned the company with strong liquidity, resilient earnings and growing contract coverage, and we look forward to continuing to deliver on our strategy. With that, I'll hand it over to the operator for any questions.

Operator, Operator

We advanced our strategic initiatives in the third quarter and remain confident in our overall strategic outlook. We are proud to have positioned the company with strong liquidity, resilient earnings, and growing contract coverage, and we look forward to continuing to deliver on our strategy. Now, I'll turn it over for any questions.

Unknown Analyst, Analyst

Congratulations on a strong performance and for making progress in contracting water infrastructure. John, I believe we all have a good understanding of your strategy regarding the infrastructure aspect, including your efforts in recycling, expanding networks, and managing water resources. You and Chris both mentioned plans to increase disposal capacity this quarter and in the future to support your initiatives. I’m interested in your perspective on your position in this area, especially considering the significant amount of water volume coming out of the Permian that you cannot recycle. Could you elaborate on your thoughts about disposal?

John Schmitz, CEO

The first thing to mention is that we always aim to prioritize recycling as our first option. We believe it offers the best economic benefits to our customers and provides a strong profitability profile for us. However, we need to support that network with sufficient disposal capacity. I'm referring to the disposal solution you asked about. We continue to identify opportunities to acquire what I would describe as stranded assets. As we develop these networks, we create connections between different pieces of infrastructure, such as pipes and storage, which allows us to utilize the stranded disposals effectively. This disposal capability integrates into our overall water balancing strategy and has shown promise. We anticipate it will remain a significant opportunity as we expand this network.

Unknown Analyst, Analyst

Appreciate that, John. And the other kind of exciting thing, I think, or at least really interesting is the mineral extraction, and you kind of mentioned beneficial reuse and you guys are working on that. Maybe just talk about kind of what inning you're in, in the beneficial reuse and maybe what is the opportunity set of beneficial reuse and mineral extraction over the next five years, just kind of thinking about how this compounds the growth in water infrastructure.

John Schmitz, CEO

Sure. I'll let Mike Lyons and Michael Skarke share their thoughts. We are extremely excited about the recent developments in East Texas and look forward to applying that across more volumes within our control in our networks. Additionally, we are eager to collaborate with regulators, universities, and major upstream players on repurposing a portion of that water. Mike, I'll hand it over to you.

Michael Lyons, CRO

Thank you. I believe the key achievement for us is that we've invested significant time over the past couple of years in understanding our portfolio, and it's rewarding to see those efforts yield results. We're operating a commercial-scale facility, and while we're just beginning to generate revenue, we have made significant progress from a technical standpoint to ensure these projects are commercially viable. We've actively sought out partners who are experienced operators, financially strong, possess a competitive edge, and are committed to progressing beyond pilot projects, since profitability is crucial for us. Our water infrastructure networks, especially in recycling, are particularly appealing to these partners and will drive value. We also have solid plans to monetize the remainder of our portfolio, which we will share as they develop. We prefer to discuss actual developments rather than just future intentions. We are confident in how this specific project will evolve, and you can expect to see more progress. Michael, if you'd like to add something about the desalination aspect, recycling there serves as an excellent foundation as well.

Michael Skarke, COO

No, sure. I appreciate it. So Jim, on that point, we are looking to monetize the expansive network we have in New Mexico by providing traditional disposal in that way. We can be a recycling first provider, but still really monetize our position and make sure we solve the total water problem with traditional disposal. As we look forward, there's issues with in-basin disposal, there's distant disposal, and there's beneficial reuse, and we think it's going to be all of the above. So there's not going to be one answer to the proverbial water that's going to come in the Delaware Basin and the Permian more broadly. So we continue to work with strategic partners, like John mentioned, operator partners, universities, and others on beneficial reuse solutions. We think this is coming. We've had some success at different levels and hope to have an announcement at some point in the future when we're further along in the process.

Operator, Operator

The next question is from Bobby Brooks from Northland Capital Markets.

Robert Brooks, Analyst

Chemical Technologies performed well, with sales increasing by 13% compared to the previous quarter and achieving a 20% margin, which was an improvement over the expected mid-single-digit decline and the anticipated margins of 15% to 17%. Chris, you mentioned that gaining market share through new products contributed to this strong performance. I would like to know more about whether the new products were the sole reason for the market share gains and if you believe you can sustain those gains moving forward. Additionally, could you elaborate on why the new products experienced such high levels of adoption?

Chris George, CFO

I appreciate the question, Bobby. We're very excited about the performance of the Chemical products segment, particularly in R&D, during the quarter. Our technology team is strong, and a key factor behind our success is the ongoing improvements in efficiency that John pointed out from our customers. This comes in several forms, such as extending lateral wellbore lengths and reducing the number of days on pad while enhancing overall efficiency. Ultimately, these factors lead to new technical requirements for chemical products. The chemistry needed for achieving optimal results in a 4-mile wellbore lateral and for effectively managing different fracturing styles all points to the necessity for advanced technical solutions, especially when combined with produced water and recycled produced water. This aligns well with our extensive recycling capabilities and the expertise we have in managing water resources. These are some of the primary drivers of our success. Looking ahead, we believe that our recent achievements will continue, and we are proud of our team's ability to develop products that meet market demand for enhanced efficiency.

Robert Brooks, Analyst

Got it. That makes sense. And if we think about the kind of soft guide you've given of greater than 20% growth for water infrastructure next year, which is up from the 20% growth on the 2Q call you mentioned. Could you just break down maybe how much of that is going to be coming from the dozen or dozen plus new infrastructure projects you've announced this year versus how much of it is higher utilization on existing assets?

Chris George, CFO

That's a very good question. It's definitely a combination of both. As we've mentioned before, we typically aim to underwrite these projects with a primary anchor tenant customer and begin commercialization as new contracts and interruptible volumes come online to effectively balance the system. Considering the rate at which new projects are launching in the fourth quarter and into the first three quarters of next year, we anticipate a consistent flow of new projects and the commercialization of our investments made in 2025. Therefore, it will be a mix of both. I expect there will be steady growth throughout next year. Additionally, with the new projects initiated this quarter, we are building a capital backlog that will extend well into the third quarter of next year.

Robert Brooks, Analyst

Got it. And then just on the lithium extraction news from the inter-quarter press release put out. Obviously, really exciting. But I was just curious to maybe get a sense of how many more opportunities you feel like you have across your portfolio? It seems like you've kind of been in some deeper discussions. Just was hoping to get any additional color on how to think about the opportunity set there.

Chris George, CFO

Yeah. As we mentioned, obviously, we've got well north of 1 million barrels of water moving through our infrastructure every day, and that's going to continue to grow as we look forward into next year, like we talked about. We've spent a good bit of time looking at the content and the quality of the water and the minerals across the full portfolio. We've got leading positions in many basins here. But Mike, maybe hit on some of the more specific opportunities that are prioritized.

Michael Lyons, CRO

I believe that as we move forward, next year will reveal more significant advancements in our recycling facilities. If we set a target for 2030, I anticipate that our overall business could contribute margins ranging from $10 million to $15 million. What makes this situation noteworthy is that our partners fulfill a distinctive role for the offtakers, acting as a natural hedge with domestic lithium or iodine, which enhances their market value. Many of the contracts we are currently negotiating are likely to be fixed price and fixed volume agreements, ensuring stable royalty streams that carry a 100% margin. This creates a unique, low-risk, and predictable cash flow for our business. Our infrastructure networks and high water concentrations uniquely position us to provide this type of service and value to our partners. I hope this adequately addresses your question, Bobby.

Operator, Operator

The next question is from Don Crist from Johnson Rice.

Donald Crist, Analyst

I wanted to start out by just asking a kind of more detailed question about how you're building out the Northern Delaware infrastructure. And as I appreciate it, your infrastructure is kind of built out to where with the flip of a valve, you can move between recycling and disposal. And the genesis of my question is, how does that kind of play out when you're talking to potential customers on acreage dedication and whatnot? And how does that factor into contracts going forward? Does that give you a leg up over some of your competitors?

John Schmitz, CEO

Yeah. Thank you for the question, Don. And you're exactly right. So we started our infrastructure in Lea County really in 2025. We've been expanding it into Eddy County. And in '26, we're going to be connecting our expansive systems in Lea County and Eddy County. They're all dual pipeline kind of large diameter systems, so we can move water in both directions in large quantities at high rate to really maximize optionality and expansion opportunities. And this is in an area where completion water is scarce and where production water has a hard time finding disposal because the state of New Mexico is not permitting more disposal. You're undercapacity; you have all the seismicity and pore space issues that are becoming more and more talked about. So the fact that we have large diameter dual pipes and significant storage in place is really critical in solving the solution. And where I think it gives us a leg up is we're able to take the water from the operator. They have a need to get rid of that water, and we can take it. And we're recycling first. We said that first to everyone, and that's well known. And the reason we're recycling first is we think it's a better economic model for us and for our customers. And so we do better when they do better. So it really is kind of a true win-win. But to the extent that we can't recycle it across a very vast system spanning most of Lea and Eddy County, then we'll flip it to disposal. That way, there's the surety that we can continue to take their water and be that commercial backstop and fully monetize the contract and the assets we put in the ground.

Donald Crist, Analyst

I do appreciate that color, and it seems like you do have a leg up over some that are just disposing of water, not recycling. Kind of along those lines on the disposal side, are you only disposing of water in New Mexico or do you have kind of pore space outside of New Mexico into Texas where you can move water if and when that becomes necessary?

John Schmitz, CEO

We have disposal operations and pore space in both New Mexico and Texas. So we do have that optionality that you're alluding to, Don.

Donald Crist, Analyst

Okay. And one final question for me. On the Haynesville, what kind of discussions are you having as we kind of move into kind of the back half of '26? I mean, all of us energy analysts believe that there's going to be a whole lot more gas drilling, particularly in the Haynesville? And kind of what are you hearing on the customer front in that regard?

Chris George, CFO

Yeah, that's a great question, Don. I think certainly, in the current market environment, there's definitely a strong optimism around the bull case on the gas side of the market. The LNG demand that's going to continue to ramp is very well suited for first volumes out to come out of the Haynesville. As we've mentioned before, we're the largest commercial disposal provider in both the Haynesville and in the Northeast in the Marcellus Utica. And so we're very well-positioned to capitalize on any advancing activity growth in either of those basins. But I think in particular, in the Haynesville, you're going to see that first initial ramp to support that outlook. And I think we're well-suited to satisfy that demand. More importantly, many of our customers are already looking forward in terms of how they're going to meet not only their activity development cadence that they're planning for, but some of their obligations that are in place for that LNG offtake.

John Schmitz, CEO

And we're in the middle of those discussions with kind of the market-leading position of disposal in the Haynesville. We're a part of those, and we've seen some strengthening in the Haynesville this year where other basins have seen some softness. And most of the research analysts or like yourself are getting more bullish on gas, and we're seeing that through the lens of our customers when we look into 2026.

Operator, Operator

The next question is from Scott Gruber from Citigroup.

Scott Gruber, Analyst

I want to touch on the review that you're undertaking on the opportunity set in distributed power for your Peak business. What type of end markets are you contemplating? What type of assets could be required? Just some color on the potential growth avenues for Peak that you're contemplating, that would be great.

Chris George, CFO

Yeah. Good question, Scott. So obviously, as we mentioned, that process is underway, and we'll certainly update you guys as we get further along here, but certainly looking to have a path forward by the end of the year. But we continue to see demand growth for those solutions, both on the nat gas generation side as well as the battery storage side. We've continued to add to the backlog of the capital program there. And effectively, every unit we get delivered goes out, many of which under contract. We've seen that both in support of Select infrastructure build-out in New Mexico as well as commercial counterparties on a number of different outlets. But John, do you want to speak to it?

John Schmitz, CEO

Sure. Yeah. So on the market and what we are targeting, first of all, Select has been in this business a long time. It was on distributed power. It was diesel generated, and it was primarily in fairly large scale into the drilling and completion support. That's where that mechanism is. So the footprint that we have to support that is already in place. What we have now took advantage of and started to develop is applying battery storage along with that distributed power and what you can do with peak powers and the clean application of electricity into certain pieces of equipment because of that battery system. That's going really well. And then we also want to bridge with the same MSAs that we have in place for long periods of time that customer that we were doing business with on the drilling and completion side, we now are doing business with them on the production side. A lot of that is the distributing natural gas generations that we're putting in place for production facilities, which is a way longer-term application for that piece of equipment. We also believe that even though it's a larger power consumption, that battery solution will fit into that application on the production side as well. So that's the targeted position that we are executing on today.

Scott Gruber, Analyst

All right. Interesting opportunity. As you think about deploying capital into the business? Obviously, there's some competition for capital within the portfolio given the growth opportunities on the produced water side and into recycling assets. Just how would you frame up that competition for capital within the portfolio across all these growth opportunities?

John Schmitz, CEO

Yeah. So I mean, we are very focused on water infrastructures and contracted and our position in these networks and water balancing, real value-add long-term contractual, high gross margin, very good profile returns. We believe that thesis fits into the franchise of Peak with their distributed, electrical and battery storage. But it is a different thesis than what's inside of Select, and we are very focused on making sure that both of it is answered. That is the process that Chris talked about earlier when we first started to answer your question.

Chris George, CFO

To kind of put a bow on that, Scott, I mean, at the end of the day, we think it's a great growth opportunity set within Peak and the distributed power side, but we don't want it to limit or compete for capital on the water infrastructure side where our primary growth opportunity set lies, and that's the reason we're undertaking the process to ensure that it has the ability to capitalize on its own market opportunity in the correct way within the portfolio.

John Schmitz, CEO

One important point to mention is that many companies entering the distributed power business with strong growth capital profiles are transitioning from a different operational model compared to our water infrastructure sector. Our Water Infrastructure business provides a stable capital return, high gross profit, and long-term contracts in an area where we add value and focus on recycling. We are dedicated to protecting this segment and managing it effectively. However, we also acknowledge that the distributed power and battery business shares a similar thesis regarding returns and long-term relationships with production facilities, compression facilities, or water transfer facilities, which are valuable for both customers and us in utilizing natural gas or peak power battery applications.

Operator, Operator

The next question is from Derek Podhaizer from Piper Sandler.

Derek Podhaizer, Analyst

Just wanted to ask a question about the water transfer and logistics service contract that you announced. You talked about water infrastructure paved the way to secure this new contract. So maybe just talk to us about the strength of this integrated approach that you have between infrastructure and services and how it's a differentiating factor for you versus your peers?

Michael Skarke, COO

Sure. No, thanks for the question, Derek. So I mean, Water Transfer is part of our Water Services business, and it's traditionally a call-out service. So the fact that we can get a multiyear contract for all of the water transfer services is new and unique and something that, as John mentioned, we're particularly excited about. It was enabled by our water infrastructure contracts and the success we've had executing with that operator. I mean, without that, the contract would not have been available. And just because of that execution, the operator was happy to expand the scope of our relationship into that full custody and water delivered to location, which I think is reflective of the position we have on water transfer. So we're the largest water transfer provider. We have automation capabilities and an asset base that is second to none. And with produced water jobs becoming more complex, longer, more highly engineered and the environmental sensitivities around that, I think we were a logical choice for this operator to really expand the scope of our relationship. As we kind of look specifically to New Mexico, but more broadly, across our asset base, I think other operators will see it similarly in that you have a best-in-class water transfer provider who can provide care and custody of that barrel all the way to location at a fair market rate and reduce the liability and any uncertainties. And so we're hopeful we can continue to leverage that strength and that synergistic relationship.

John Schmitz, CEO

Yeah. I think it's a great question, but it really does completely fit within the value add to both our company and our customers from water infrastructure, large containment to delivery to job site. We put together a Control Center that I want Mike Lyons to talk about a little bit because it really tells you why these things could work. It works together and brings a lot of value throughout the system. So Mike, you might walk through our efforts with the automation.

Michael Lyons, CRO

We refer to it as the Remote Operating Center. It operates around the clock and oversees all our assets across the Lower 48, including every disposal well, treatment facility, and active water transfer job. The center is staffed with individuals who have extensive field experience and serve as board operators, enabling two-way communication and monitoring of every job. This setup helps us detect and address leaks often before they occur, preventing issues. As we are actively deploying layflat hoses and managing numerous water transfer jobs simultaneously, this capability is crucial to our operations. With our increasing focus on infrastructure, including the installation of hundreds of miles of piping, monitoring every inch of that network is essential. Ensuring the safety and containment of water is a top priority for our operating partners. Furthermore, optimizing our network provides significant value, as we can create efficiencies that others cannot due to our vigilant monitoring of every barrel at all times.

Derek Podhaizer, Analyst

Got it. That's all very helpful color. And then maybe just on the Water Services, maybe the margin profile here. So I'm just trying to think about how we should think about these margins moving into 2026. So obviously, they came down quite a bit. Maybe talk to us about that. I'm not sure if that was related to the recent divestiture within the segment. Top line is coming down in the fourth quarter, margins are improving. So if I think about 2026, do you expect to get back above that 20% level, same levels that we saw in the first three quarters of 2024?

Chris George, CFO

It's a great question, Derek. With the rationalization efforts we've undertaken in Water Services, a fundamental part of that initiative is improving margins over time. We have continued to enhance our consolidated gross margins due to growth in Water Infrastructure and a strong performance in chemicals. While we have not yet achieved this in services, it remains the top priority for that segment. We hold a leading market position across our activities in that area, providing significant opportunities to increase our margin profile over time as we divest from lower-margin operations. The integrated water services contract with Water Infrastructure exemplifies how we can add efficiencies that benefit both our customers and ourselves. Integrating our logistics with our infrastructure should help save money for customers and enhance our operations' margin profile in Water Services. In summary, we strongly believe that segment needs to return to the mid-20s in the near to medium term to generate an appropriate return on capital. It is already producing a solid free cash flow profile, and any initiatives to improve that margin over the next year or two will continue to support this cash flow.

Operator, Operator

The next question is from Derrick Whitfield from Texas Capital.

Derrick Whitfield, Analyst

I wanted to start with the M&A environment. In the release, you guys are highlighting the success you're having with strategic infrastructure acquisitions during the quarter. As I think about the upstream sector, less M&A tends to occur in the $60 per barrel or lower price environment. Having said that and understanding that E&P-owned assets could transact in a lower price environment, how would you guys characterize the A&D environment for water infrastructure at present?

John Schmitz, CEO

Sure, Derrick. This is John. I would say that as we assemble networks and identify suitable assets, the earnings potential of these standalone assets is significantly lower than when they are integrated into a larger network. This integration allows us to enhance water management and adjust to current market demands. We are consistently discovering stranded assets or those that can add value as we expand our networks by dedicating more acreage, increasing pipeline capacity, and enhancing storage solutions. The integration of these assets into our networks proves valuable, as evidenced by some of the commercial agreements we've secured. Some operators are even contributing their assets to our network as part of these negotiations. We anticipate this trend will continue, with opportunities emerging both from individual assets and from larger interconnected networks. Additionally, we see potential in customers' underutilized assets that were originally intended for a single purpose. These underused resources, including unused pipelines, can be integrated into our operations. We believe there is significant value in this market as we proceed with our expansion.

Michael Skarke, COO

What I would say, Derrick, is we're looking at smaller accretive acquisitions off of our expansive network. That's very different than kind of new projects or large organic step-outs. What John is highlighting is whether it's replacement CapEx or an acquisition, if we can tie it into a larger system, it becomes very attractive to us. You've seen us do a fair bit of that this year. I think that we will continue to look for those opportunities going into next year.

Operator, Operator

The next question is from Jeff Robertson from Water Tower Research.

Jeffrey Robertson, Analyst

If I could go back to the beneficial reuse concepts. John or Michael, if you think about commercializing beneficial reuse, is that an arrangement between Select and the upstream customer who's putting water into your system, or is it an arrangement between Select and a downstream customer, excuse me, who's taking water for beneficial reuse?

Michael Skarke, COO

I think it's a market that hasn't fully formed, so we're going to have to see how it plays out. I suspect over time it will be both. However, I believe that initially, it will be a direct relationship between Select or someone like Select and an operator partner.

Chris George, CFO

I would add that ultimately, the first stage of that, that Michael is referencing, that's really alternative disposal. So finding a way to treat that barrel to a usable quality to discharge back into the environment as a form of alternative synthetic disposal or alternative disposal outside of typical injection. That's going to be the first one. Longer term, those barrels do have a recognizable value in the marketplace that could go into other non-oil and gas markets. I think that's where you're going with it, Jeff. Obviously, to the extent we get there, that's obviously alternative or additional revenue potential. It also provides the ability to solve water challenges in other markets as well. So the industry could be a net added contributor to the water supply chain versus a consumer. That's ultimately where we think it goes long-term. But obviously, it's going to probably have a staged trajectory over the next couple of years.

John Schmitz, CEO

I'll let Mike talk a little bit about it. But actually, it's very interesting. We're actually finding our customers that could be on both sides of your question. They have produced water as a waste stream. It actually is an area that they need water for other operations, and we can put beneficial reuse application to work to convert a portion of that waste stream and replace freshwater sources they're using in their other operations. But Mike, you?

Michael Lyons, CRO

I think John is talking about some current opportunities we're pursuing. We've worked closely with our operator partners to identify the best places to implement these solutions. Typically, the ideal locations are those where there is available waste heat and options for disposing or recycling concentrated brine, along with a natural use for the clean water. This clean water could serve various purposes, such as in a chemical process or for cooling needs. All these systems need water, which is becoming increasingly scarce, especially at the quality required for industrial and chemical uses. Additionally, from a regulatory perspective, using this water for industrial or chemical customers is more straightforward. These are the immediate opportunities we are focusing on, and we will provide more details as they develop into commercial agreements. We are actively engaging with customers such as chemical plants, data centers, and gas plants. Furthermore, when considering land application for irrigation or direct release onto land, these efforts represent longer-term strategies but are essential for the industry's evolution. We are actively involved in ensuring water quality specifications are clear and in compliance with regulatory standards. This represents a significant shift for the industry, but it's a high priority, and achieving scale is our long-term objective, aligning perfectly with our company goals and networks. We are uniquely positioned to make an impact in this sector.

John Schmitz, CEO

If you consider the Haynesville, Chris, you and Michael have discussed it, and you have mentioned increasing utilization of your existing assets there in the past. At what point are you starting to see opportunities for new growth projects in that region, perhaps around 2026 or 2027?

Chris George, CFO

Yes, Jeff, we experienced growth opportunities when gas prices were higher a couple of years ago, but it has cooled off in the past two years. Now, those conversations are starting up again, aligned with the outlook we discussed earlier. We have a pipeline gathering and distribution system that is unique, which gives us a market-leading position in that basin. Thus, we are typically the first point of contact when operators are considering expanding their platform, including drilling completion schedules and water management. We are discussing network expansion, and it is a favorable time to be the market leader in the Haynesville.

John Schmitz, CEO

Yes.

Operator, Operator

This now concludes our question-and-answer session. I would like to turn the floor back over to John Schmitz for closing comments.

John Schmitz, CEO

Yes. Thanks, everyone, for joining the call. We appreciate your continued support and interest in learning more about Select Water Solutions. We look forward to speaking to you again next quarter. Thank you.

Operator, Operator

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