Executive Summary / Key Takeaways

• Strategic Transformation Underway: Select Water Solutions is executing a profound strategic shift, divesting non-core, completions-oriented assets while aggressively investing in high-margin, long-term contracted water infrastructure, particularly in the Permian Basin and diversifying into municipal/industrial water.
• Infrastructure-Led Growth Accelerating: The Water Infrastructure segment is the primary growth engine, achieving 12% sequential revenue growth and 55% gross margins in Q2 2025. It is projected for 20% year-over-year growth in 2026, underpinned by a robust backlog of dedicated acreage and new projects.
• Technological Edge & Operational Efficiency: Proprietary automation, digital twin systems for water balancing, and innovative battery-hybrid power solutions for Peak Rentals, alongside in-basin chemical manufacturing, provide significant competitive advantages, driving efficiency and cost savings for customers.
• Financial Discipline & Shareholder Returns: Despite substantial growth capital outlays, the company maintains a strong balance sheet with a new $550 million sustainability-linked credit facility. It expects 70%+ free cash flow conversion from its base businesses and recently increased its quarterly dividend by 17%.
• Diversification into New Markets: The $72 million investment in AV Farms, LP, targeting Colorado's agricultural, municipal, and industrial water markets, represents a foundational step towards ultra-long-term, low-risk revenue streams, offering a unique exposure to perpetual water resource ownership.

The Foundation: A Strategic Pivot Towards Sustainable Water Leadership

Select Water Solutions, Inc. (NYSE:WTTR) has undergone a significant transformation, evolving from its roots as Select Energy Services to a specialized leader in sustainable water management and chemical solutions for the energy industry. This strategic pivot, formalized with its name change in May 2023, underscores a deliberate focus on building a resilient, infrastructure-heavy business model. The company's core investment thesis centers on its ability to provide comprehensive, environmentally responsible water solutions, leveraging technological differentiation and long-term contracts to generate predictable, high-margin revenue streams.

In the competitive landscape, WTTR carves a distinct niche. While larger, diversified oilfield service giants like Halliburton (HAL), Baker Hughes (BKR), and Schlumberger (SLB) offer broad service portfolios, WTTR's specialized focus on lifecycle water management provides a competitive edge in operational efficiency within specific, water-intensive environments. Compared to these larger players, WTTR's strategy emphasizes tailored infrastructure development and automation in water networks, contrasting with the broader, integrated approaches of its global rivals. Against specialized chemical players like ChampionX (CHX), WTTR's integrated infrastructure and chemical solutions offer a more holistic approach to water management.

WTTR's technological prowess forms a critical component of its competitive moat. The company employs cutting-edge automation and digital twin systems that enable precise forecasting of water needs 6 to 12 months out, facilitating efficient water balancing across vast networks. This capability allows WTTR to optimize water movement, maximize recycling, and minimize disposal, delivering significant cost savings and operational certainty to its E&P customers. For instance, in one of its Delaware Basin recycling facilities, 75% of produced water inflow comes from an anchor tenant, while 60% of the treated water outflow is redeployed to other third parties, illustrating the power of its water balancing network.

Further technological differentiation is evident in its Peak Rentals segment, which is scaling into the distributed power sector. Peak has secured a long-term exclusivity agreement with a critical supplier of proprietary battery storage solutions, positioning WTTR as a pioneer in integrating battery power systems alongside generators for upstream and midstream applications. This hybrid technology allows generators to run approximately 20% of the time and consume about 20% of the fuel compared to direct generator use. This innovation provides tangible benefits including economic value, cleaner electricity, a quieter workplace, and enhanced automation capabilities, crucial for the surging demand for mobile off-grid power driven by oilfield electrification.

In its Chemical Technologies segment, WTTR operates the only in-basin reactive chemistry plant in the Permian, offering logistical advantages and rapid product development capabilities. This allows for tailored water treatment solutions, especially vital for produced water reuse in increasingly complex, longer lateral well completions. The company's chemistry expertise, particularly in friction reducers, is becoming essential for efficient water movement through pipelines in high-volume, 24-hour frac operations, bringing considerable value to customers by reducing well completion times and costs.

Operational Momentum and Financial Strength

The year 2024 marked a period of accelerated growth and operational excellence for Select Water Solutions, laying a robust foundation for its current performance. The company achieved record water volumes transported, recycled, and disposed of, driving a 26% annual revenue growth and a substantial 62% increase in annual gross profit from its Water Infrastructure segment. This segment's gross profit contribution is on track to exceed 50% of consolidated gross profit by the end of 2025, a testament to its strategic importance. Produced water disposal volumes alone surged by 43% year-over-year in 2024, demonstrating a clear shift towards production-weighted revenue streams.

The momentum continued into the second quarter of 2025, with WTTR reporting strong financial results that underscore its strategic execution. Consolidated net income increased by 22% sequentially, reaching $11.7 million, while adjusted EBITDA grew by 13% to $72.6 million. This performance was largely propelled by the Water Infrastructure segment, which saw its revenue climb 12% sequentially to $80.9 million and gross profit before depreciation, amortization, and accretion (D&A) grow 15%, achieving an impressive 55% gross margin. This margin performance represents a 1.5 percentage point sequential improvement and over 4 percentage points year-over-year, significantly outpacing the company's prior goal of 50% margins.

Conversely, the Water Services segment experienced a 4% sequential revenue decline to $215.7 million in Q2 2025, primarily due to weakening activity levels and a strategic shift away from legacy freshwater sourcing. The Chemical Technologies segment also saw an 11% sequential revenue decrease to $67.7 million, impacted by pullbacks from pressure pumping customers. However, the gross margin for Chemical Technologies remained robust at 17.5%, exceeding the guided range of 14-16%. These shifts reflect WTTR's deliberate rationalization efforts, focusing capital and resources on higher-margin, more predictable infrastructure assets.

The company's liquidity remains strong, supported by a new $550 million sustainability-linked senior secured credit facility secured in January 2025. As of June 30, 2025, WTTR held $51.2 million in cash and cash equivalents, with $228.1 million in available borrowing capacity. Net cash provided by operating activities for the first six months of 2025 was $77.5 million, though this was impacted by a $62 million increase in working capital from the successful ERP system implementation in Q1 2025, which is expected to normalize and release cash in subsequent quarters. Free cash flow for the first half of 2025 stood at $40.7 million. This financial flexibility enables WTTR to fund its ambitious growth initiatives while maintaining a disciplined balance sheet, with a net debt to EBITDA leverage ratio substantially below one times at the closing of the new credit facility.

Strategic Expansion and Future Outlook

WTTR's strategic narrative is deeply rooted in its aggressive expansion of water infrastructure, particularly in the Northern Delaware Basin of New Mexico. In Q2 2025, the company secured multiple new long-term contracts, adding approximately 60,000 acres of dedicated leasehold and 385,000 acres under right-of-first-refusal (ROFR) agreements. These agreements encompass the full water life cycle and underwrite the addition of new recycling facilities and nearly 30 miles of dual-line large-diameter pipeline. A significant competitive advantage emerged as E&P partners agreed to directly convey ownership and operations of their existing recycling and disposal infrastructure to Select, a testament to the value WTTR provides in system-wide water balancing. Upon completion of these projects, the Northern Delaware Basin alone will boast approximately 1.8 million barrels per day of recycling throughput capacity and over 1 million acres of combined dedicated and ROFR acreage. New Mexico is projected to contribute over 60% of WTTR's total fixed recycling capacity across the Permian within two years.

The company's rationalization of its Water Services segment is a key strategic move to enhance overall profitability and focus. In July 2025, WTTR executed an asset swap with Omni Environmental Solutions, acquiring a solids waste landfill, a processing and treatment plant, disposal facilities, and an oil reclamation asset in the Bakken region. This bolsters WTTR's market-leading solids management footprint in the Bakken, integrating it with its wastewater disposal portfolio. Concurrently, WTTR divested its non-core trucking operations in the Northeast, Mid-Con, and Bakken, and exited remaining trucking operations in Mid-Con and Haynesville. These divested operations represented over one-third of the trucking business unit's revenue and over one-fifth of its gross profit, and are expected to improve consolidated margins and reduce operational risk.

Further strategic refinement involves Peak Rentals, WTTR's equipment rentals and power solutions business. The company is formally exploring financing and capital structure options to unlock value in Peak, which has been carved out as a stand-alone operating company. This initiative aims to provide Peak with dedicated growth capital, particularly for its distributed power generation business, which is capitalizing on surging demand for natural gas generators and proprietary battery power systems amid oilfield electrification. WTTR expects to preserve economic exposure to Peak's future growth while maintaining strategic alignment with its core water infrastructure strategy.

Looking ahead, WTTR's management provides concrete guidance, anticipating a strong Q4 2025 for Water Infrastructure with double-digit sequential increases in revenue and gross profit, leading to a 2025 exit rate in line with prior guidance. The segment is poised for robust 20% year-over-year growth in 2026, a figure already underwritten by current contracts and projects. For Q3 2025, consolidated adjusted EBITDA is projected to be $55 million to $60 million, reflecting softening activity in completions-oriented segments and the immediate impact of the OMNI transaction. Depreciation, amortization, and accretion (D&A) is expected to rise to approximately $45 million in Q3 2025, with cash taxes remaining low at $10 million or less for the year, potentially muted for the next couple of years due to the One Big Beautiful Bill Act (OBBBA). Net CapEx for 2025 is guided at $225 million to $250 million, with a bias towards the higher end, primarily for infrastructure growth.

A significant long-term strategic move is WTTR's $72 million investment in AV Farms, LP, a partnership to consolidate senior water rights and storage portfolios in Colorado for agricultural, municipal, and industrial markets. This initiative, a natural extension of WTTR's water expertise, provides rights to 16,300 acre-feet of source water annually (equivalent to ~125 million barrels/year). WTTR expects to transition to a majority ownership position over time, eventually operating these assets. This venture is projected to generate $20 million to $30 million in consolidated annual net income from initial anchor contracts, with potential for more than double that upon full commercialization. These ultra-long-term contracts (up to 50 years) offer low-risk, predictable cash flows, enhancing the stability and diversification of WTTR's revenue base.

Risks and Competitive Dynamics

Despite its compelling growth trajectory, WTTR operates within an inherently dynamic and often volatile industry. Global geopolitical conflicts, such as the Russia-Ukraine war and Middle East instability, alongside changing trade policies and high interest rates, can suppress demand for oil and natural gas, impacting commodity prices and, consequently, customer activity. The average WTI crude oil spot price decreased in Q2 2025 to $64.57 from $81.81 in Q1 2025, reflecting these macroeconomic pressures. While the company's infrastructure model offers resilience, its Water Services and Chemical Technologies segments remain more exposed to these short-term activity fluctuations.

Customer consolidation, particularly in the Permian Basin, presents both opportunities and risks. While it can lead to larger, more integrated projects that favor WTTR's full life cycle solutions, it can also cause near-term disruptions and reduced drilling activity. Regulatory changes, including environmental policies and tax laws like the OBBBA, also pose risks, though the OBBBA's provisions for expanded federal leasing could be beneficial. Operational risks include the successful integration of its new ERP system, which caused a temporary $62 million increase in working capital in Q1 2025, and potential disputes with co-investors in the AV Farms partnership, where WTTR currently lacks sole decision-making authority.

WTTR's competitive positioning is strengthened by its specialized focus and technological advantages. Its Water Infrastructure segment, with its oversized pipelines and digital twin systems, allows for superior water balancing and efficiency compared to competitors. The company's in-basin chemical manufacturing and proprietary battery-hybrid power solutions further differentiate its offerings, providing cost savings and operational benefits that larger, more generalized oilfield service firms may struggle to replicate in niche applications. While WTTR's overall scale is smaller than global giants like SLB and HAL, its deep expertise and integrated solutions in water management create a strong competitive moat, particularly in the critical Permian Basin and emerging municipal/industrial water markets.

Conclusion

Select Water Solutions is executing a strategic transformation, methodically shifting its business mix towards a more resilient, infrastructure-led model. By leveraging its technological differentiators in water balancing, chemical solutions, and distributed power, and by securing long-term, acreage-dedicated contracts, WTTR is building a formidable competitive moat in the essential domain of energy water management. The aggressive expansion of its Northern Delaware Basin network and the strategic diversification into Colorado's municipal and industrial water markets underscore a clear vision for sustainable, predictable growth.

Despite short-term headwinds in completions-oriented segments and broader macroeconomic uncertainties, WTTR's strong balance sheet, disciplined capital allocation, and commitment to shareholder returns position it favorably. The company's ability to generate significant free cash flow from its base businesses, coupled with the highly accretive nature of its infrastructure investments, provides a compelling investment thesis. Investors should recognize WTTR as a company strategically positioned to capitalize on the increasing demand for integrated, sustainable water solutions, driving long-term value through operational excellence and technological leadership.