Select Water Solutions(US:WTTR)2019-11-08 00:41Financial Data and Key Metrics Changes - The company generated total revenue of $329 million in Q3 2019, an increase of $5 million quarter-over-quarter or $12 million considering the impact of last quarter's divestitures [28] - Adjusted EBITDA was $49 million, down $3 million from the second quarter, leading to a net income of $7 million [29] - Free cash flow reached $42 million in Q3, bringing the year-to-date total to $65 million, with expectations to exceed the high-end of the previously targeted 2019 free cash flow range of $65 million to $80 million [26][27] Business Line Data and Key Metrics Changes - Water services segment revenues declined 3% sequentially to $197 million in Q3 from $202 million in Q2, with gross profit before depreciation and amortization at $43 million [30] - Water infrastructure segment revenues increased by 24% from $52 million in Q2 to $64 million in Q3, with gross profit before D&A rising from $13 million to $17 million [33] - Oilfield chemical segment revenues increased by $5 million to $68 million in Q3, with gross margin before D&A improving from 14% to nearly 16% [34] Market Data and Key Metrics Changes - The company observed an 8% reduction in the number of active frac fleets during the quarter, alongside a 7% decline in the Baker Hughes horizontal rig count [14] - General completions activity is expected to decline by 15% to 20% from Q3 levels in Q4 due to typical winter slowdown and early budget exhaustion [21] Company Strategy and Development Direction - The company aims to strengthen its market position in Integrated Water and Chemical Solutions while delivering meaningful free cash flow [8] - Strategic initiatives include acquiring businesses that enhance capabilities, investing in technology, and focusing on organic growth opportunities [9] - The recent acquisition of Baker Hughes' water chemical services business is expected to complement existing water treatment capabilities and enhance customer relationships [17][20] Management's Comments on Operating Environment and Future Outlook - Management noted that while the third quarter faced macro challenges, operational performance was strong relative to the market [13] - The company anticipates a challenging Q4 but expects to rebound in 2020, focusing on cost management and capital allocation [42][99] - Management emphasized the importance of maintaining a debt-free balance sheet and generating substantial free cash flow [38][40] Other Important Information - The company has zero bank debt and a net cash position of $43 million as of September 30, with expectations for substantial additional free cash flow in Q4 [38] - The company plans to lower its previous 2019 CapEx target from $120 million to $140 million down to $100 million to $110 million [23] Q&A Session Summary Question: How does the focus on capital discipline by E&Ps impact water infrastructure investment opportunities? - Management sees operators looking at post-frack systems and smaller organic investment opportunities rather than large systems due to valuation challenges [46][49] Question: Can you elaborate on the WCS acquisition and its impact on the Chemicals business? - The acquisition is expected to enhance the integration of services and chemical capabilities, allowing for more effective customer solutions [56][57] Question: What are the dynamics of the water pipeline business heading into 2020? - Management remains optimistic about the pipeline's positioning and expects to commercialize it effectively, leveraging high-rate water sources [64][66] Question: What is the expected annualized revenue contribution from the WCS acquisition? - Management indicated that the margins from WCS would be similar to improved Chemicals margins seen in Q3, and it is expected to be accretive [67] Question: What is the outlook for capital allocation and potential share repurchases? - Management plans to maintain a focus on generating free cash flow, with a portion allocated to business investments and returning capital to shareholders [82][84]