Select Water Solutions, Inc. (WTTR) Q3 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the Select Energy Services third quarter earnings conference call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris George, Senior Director of Finance and Investor Relations. Thank you. Mr. George, you may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Select Energy Services conference call and webcast to review our third quarter 2017 results. With me today are John Schmitz, our Executive Chairman; Holli Ladhani, our President and Chief Executive Officer; and Gary Gillette, our Chief Financial Officer. Before I turn over the call, 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 selectenergyservices.com. There will also be a recorded replay available until November 16, 2017, and the access information is included in yesterday's earnings release. Please note that the information reported on this call speaks only as of today, November 9, 2017, and therefore time sensitive information may no longer be accurate as of the time of the replay 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 Energy'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 final IPO prospectus, our information statement filed on Schedule 14C, quarterly reports on Form 10-Q, and current reports on Form 8-K to understand those risks, uncertainties and contingencies. Also, please refer to our third quarter earnings announcement released yesterday for reconciliations of non-GAAP financial measures. And now, I would like to turn the call over to our founder and Executive Chairman, Mr. John Schmitz.

Thank you, Chris, and welcome everyone to Select Energy third quarter conference call. As most of you know, we issued a press release last week announcing that our merger with Rockwater Energy Solutions has been completed. We are very pleased and excited to be 1 combined company and our integration plans are well underway. Today, we will cover Select's third quarter stand-alone results in more detail, but additionally, Holli Ladhani, now Select's CEO will discuss the combined company and some of the financial highlights in the third quarter. Gary Gillette will cover Select's stand-alone financial performance in full detail, but first let me highlight just a few items of our third quarter. Our revenue in the quarter was $153.9 million, up 14.5% from the second quarter. Adjusted EBITDA was $32.4 million, up 18.8% from the second quarter, with an EBITDA margin of 21%. The ramp in drilling activity slowed somewhat in the third quarter compared to the growth we experienced between quarter 1 and quarter 2. The land-based U.S. rig count grew by 6% sequentially in the third quarter, while the number of completions grew by 12%, according to Baker Hughes and the EIA reporting, respectively. Even with the 12% growth in completions in the quarter, the DUC population, drilled uncompleted wells, increase by 610 wells during the quarter to a level of 7,270 wells, which represents a very attractive future revenue opportunity for Select. Within our 3 reporting segments, I would highlight our water solutions segment, which represents 81% of our revenue in the quarter. Water solutions revenue grew by 16% sequentially to $125.1 million. Gross margins before depreciation and amortization in the water solutions were up 200 basis points sequentially to 30%, with incremental gross margins of 42%, which is very much in line with our expectations. During the quarter, we completed a small acquisition. Resource Water Transfer, a Permian and East Texas water transfer company that fits comfortably within our footprint. We will continue to be opportunistic on tuck-in opportunities that are highly accretive, but our main focus over the near term will be the integration of Rockwater. We continue to be pleased with the performance of our GRR acquisition in northern Delaware and New Mexico. We noted on the recent third quarter Exxon conference call, Exxon announced its intention to go from 20 rigs to 30 rigs in the Permian during 2018, which we believe is indicative that this area will remain very attractive for operators and, as a result, we are actively pursuing additional water sources opportunities in this area. In the Bakken, we have begun work on our Thomson intake on the North Shore of Lake Sakakawea, which will be our third intake point off of the lake. We are in discussions with several operators regarding long-term water supply agreements. The completion of the Thomson intake assures us of maintaining our 100 million barrels of annual water allocation off of the lake from the Army Corps of Engineers. We continue to invest in all 3 of our business segments, with CapEx in the quarter of $24.3 million, with the majority of this going toward our core pre-frac business. Year-to-date, through the third quarter, we have spent approximately $66 million in CapEx versus our full year 2017 plan of $79 million, and that spend is split roughly equal in parts between maintenance, growth and catch-up maintenance from a significant underspend during 2015 and 2016 downturn. In spite of the modest decline in rig count over the last month of the quarter, we continue to see a very high level of activity on the completions side. As we have indicated, well completions were up 12% sequentially in the third quarter and our water business -- water solutions segment revenue was up 16%. We exited the quarter with good momentum and expect to continue in the fourth quarter with standard caveat that we would expect a modest slowdown late in the fourth quarter as we get further into winter weather conditions and the holiday season. We are also beginning to see a general -- generally more receptive environment for price increases, as both labor and equipment are in very tight supply in the completions space, and we will certainly attempt to get price increases where we can. With that, I will turn it over to Gary to go through the financial details

Thank you, John, and good morning, everyone. As John mentioned, we reported total revenues of $153.9 million for the third quarter of 2017, up 14% sequentially from the second quarter of 2017. Adjusted EBITDA was $32.4 million, up 19% from the second quarter. Net income for the third quarter was $2.6 million as compared to a net loss of $10.5 million in the second quarter of 2017, successfully marking our first quarter with positive net income since the fourth quarter of 2014. Turning to our segment results, our water solutions segment generated revenues of $125.1 million in the third quarter of 2017 compared to $107.8 million in the second quarter, an increase of 16%. Segment gross profit before depreciation and amortization grew 24% to $37 million as compared to $29.8 million in the second quarter, representing incremental margins of 42%. Peak, our accommodations and rental business unit, generated revenues of $15.6 million in the third quarter of 2017 compared to $13.3 million in the second quarter, an increase of 17% against the rig count increase in the quarter of only 6%. Gross profit, again, before depreciation and amortization, was $3.6 million at a gross margin of 23% compared to $2.5 million and 19% in the second quarter, representing incremental margins of 49%. Shifting over to our wellsite completion and construction services business unit, Affirm generated revenues of $13.2 million in the third quarter of 2017 compared to $13.3 million in the second quarter, essentially flat with the prior quarter. This was largely related to storm-related weather issues in South Texas, from which we have since recovered. Gross profit and gross margin before depreciation and amortization were $2.3 million and 17% compared to $2.5 million and 18% in the second quarter. Affirm continues to maintain positive segment free cash flow and has provided positive segment net income during the 9 months year-to-date. Now turning to the balance sheet and cash flow in the quarter. Significant uses of cash during the quarter included net CapEx of $23.4 million, an increase in our working capital of $7.4 million and, finally, $6.7 million, representing the cash portion of the small acquisition completed during the quarter. We ended the quarter with no debt and cash on the balance sheet of $42.4 million. In conjunction with the close of the Rockwater acquisition, we entered into a $300 million asset-based lending facility, with a group of banks led by Wells Fargo. To close the acquisition, we funded the repayment of Rockwater's outstanding debt of $77 million through a combination of cash on our balance sheet and borrowings under the new ABL facility. Immediately following the close, we had approximately $50 million of net debt on the balance sheet. This leaves us with immediate liquidity of approximately $175 million based on our preliminary borrowing base on the ABL facility at close. Now that our merger has been completed, we wanted to give you an overall summary of our capitalization breakdown. Post-merger, we have approximately 56.7 million Class A shares outstanding, 6.7 million Class A2 shares outstanding and 42.8 million Class B shares outstanding, for a grand total share count of approximately 106.3 million. As required by the 144A Registration Rights Agreement that Rockwater entered into, we intend to file a registration statement pertaining to the A2 shares with the SEC as soon as practicable but not later than March 31, 2018. Our 3 largest shareholders following the close of the merger are Crestview Partners, SCF Partners and our founder, John Schmitz, together representing roughly 41% of shares outstanding. With that, I'd like to turn it over to Holli to discuss some of the combined company highlights. Holli?

Thanks, Gary. Let me start by saying that I'm pleased and honored to be able to speak to you today for the first time as the CEO of the combined Select and Rockwater companies. This is a combination that creates a very clear leader in the water solutions segment of the oilfield services market and we couldn't be more excited about the opportunities ahead of us. As John mentioned, the merger was official on November 1. Since our announcement of the merger in late July, the teams have been focused on developing a detailed plan to integrate these 2 companies. Because of the early preparation, we immediately moved into executing the integration plan upon the close of the merger. From an operations integration standpoint, our primary focus will be on the integration of the water-related businesses, while the rest of the business, including our chemicals and Canadian business as well as the Peak and Affirm businesses, remain largely as is. On the water solutions integration, we found the operations of each company to be highly complementary, both from a geographic standpoint as well as a service line context, which aids greatly in making the integration decisions more logical and straightforward. Another focus of the integration process will relate to the corporate overhead functions, which will make up a significant component of the overall consolidation savings. We had indicated previously that we expected the combination to yield consolidation savings of $15 million to $20 million and at this juncture, we're confident we will be at the top end of that range. Gary covered the Select third quarter performance, so let me give you some financial highlights of Rockwater's third quarter and then a summary of what the combined company performance in Q3 would look like. Excluding divested operations, Rockwater had third quarter revenue of $201 million, up 21% sequentially with adjusted EBITDA of $26.4 million. Within the Rockwater business units, the water-related business grew by 17% in the quarter to $115 million. Our chemicals business saw a 29% increase to $64 million, and our remaining business, which includes our Canadian operations as well as our sand hauling business, grew by 22% to $22 million, excluding certain divested operations. We're particularly pleased with our chemical unit performance as we've continued to penetrate the friction reducer market. We expect that to continue and we've begun expanding our production facilities in the Permian Basin to better support our customers. Now if you simply take the stand-alone operations of Select and Rockwater in the third quarter and add them together, excluding the contribution from certain Rockwater divested assets, that exercise will produce combined third quarter revenue of $355 million with adjusted EBITDA of just short of $60 million. We're still finalizing our analysis to confirm the segment reporting units we will use going forward. Having said that, in the combined financials, the water-related revenue makes up roughly 70% of the combined revenue, chemicals comprises 15% and other services, which would include Peak, Affirm, our Canadian operations and sand hauling, make up the remaining 15%. As a public company, we've been looking at a number of external market measurements that could provide a context by which to analyze and forecast Select's revenue. One that we've been tracking internally is the combined company's revenue in water solutions in comparison to total quarterly completions as published monthly by the EIA. Since the low point of the market in the second quarter of 2016, we've seen our quarterly revenue, relative to total completions ratio, grow by over 50%. Additionally, our current revenue to total completions is approximately 25% greater than it was in the fourth quarter of 2014, in spite of a roughly 30% decline in our price book since that time. This increase in revenue per completion comes from a combination of increasing well intensity, including longer laterals as well as higher sand concentrations, which requires more water, market share gains and a modest level of price realization. We believe this is a fair indicator of the relative performance of our water solutions business against our direct available revenue opportunity, while excluding the impact of DUCs or changes in the rig count, and it may drive wells drilled but not necessarily wells completed. As to near-term priorities, as John mentioned, integration of the 2 water businesses is front and center. Now, as a much larger company with a very strong balance sheet, we also have an opportunity to look at larger oilfield water projects and continue to pursue discussions with our customers about opportunities for outsourcing their water infrastructure needs so they can focus their capital dollars on drilling and completing wells. With crude oil inventory levels coming down and oil prices firming, we remain positive about 2018, particularly for companies like Select, whose focus is on the completion side of the equation. With that, I'd like to thank you for joining our third quarter earnings conference call. And now, we'll open up the call to questions. Operator?

[Operator Instructions] Our first question comes from the line of Jim Wicklund with Crédit Suisse.

This is Jake on for Jim. I guess, to start off, I was wondering if you could just talk about the competitive landscape, specifically in the Permian. We had Tetra announce this morning it's increasing its investment of lay-flat hose in the water management business given sort of the macro trends that you were talking about and it sounds like the market is starting to get short capacity. I was wondering if you are seeing any other players come in or people adding more capacity there?

Yes, I can take a shot at that, Jake. I'll talk about it a little more broadly and then maybe we can talk a bit more about the Permian. But when you think about the -- where we sit utilization-wise, we're very highly utilized in our water transfer business as well as our flowback and well testing business. And I think one thing that's going to be interesting is that, given our size now and our balance sheet, we're going to be in a very good position and, frankly, in a better position than most of our competitors to be able to continue to add the equipment that's going to be necessary to support these larger jobs. When you break down the competitive landscape and we think about, say, water transfer, given, on a combined basis, we'll be over 1,400 miles of hose. I think the next largest competitor is probably under 400 miles of hose. So we're going to be 4x to 5x larger than our next competitor. And then, once you get past that next level, most players are 100 miles, 125 miles of hose, so it's still a pretty fragmented business. When you think about things like ASTs, we have the largest fleet in North America. Flowback sets are a little harder to measure because people define those differently, but again, I think that there's maybe a handful of us that have some scale and then it falls off materially after that. But I do think one of the things that is going to be helpful for all of us is there is absolutely a tightening on the equipment and that's helping put some pressure on pricing, which is going to be necessary as we feel like we'll need to invest in some growth capital next year to support the needs of our customers and we're going to make sure that the pricing is at a level that allows us to earn a reasonable return on those additional investments. Specifically to the Permian, I think one thing to think about there that in the announcement call, I believe, we disclosed that the Permian is about 1/3, maybe 30% of our combined business, and that's still going to be generally the case today. We haven't looked at it based on third quarter, but don't expect that to have reduced. And it's probably a region that will continue to gain size when you just look at where the activity levels are. So a meaningful part of our investment will likely be going into the Permian to support those activity levels.

Got it. And then as a follow-up, you kind of hit on pricing there. I was wondering if you could help us thinking about sort of the price versus volume levers for revenue growth in the water business in the third quarter. And then going forward, I guess, what sort of magnitude of price increases might you be able to expect to push out over the next several quarters?

It's always a hard answer, and I'm sure you get that from everyone, just because it's customer dependent and it depends on which region you're in and what service line and specific circumstances. But if you just step back and look at it, what we've probably realized is single-digit type margin improvement, and that's probably what we should expect as we continue to move forward. So it's not a big step changes, but there is still room there for pricing improvements. And I think on the other side of the equation, though, is that we're going to continue to drive cost out of our system so that we aren't relying just on pricing to be able to improve our margins.

Our next question comes from the line of Thomas Curran with the B. Riley FBR.

Would you be able to tell us on either a pro forma basis for the merged entity or for Select and Rockwater respectively, what was the average lay-flat hose utilization for the quarter?

I don't know that -- that's a tough one at this stage because I don't know that the 2 companies track or define utilization the same way, Tom, so I'm hesitant to put numbers out there. That is something that we are very focused on and when we have our call following the year end, I think we'll be in a better place to try to give you something specific that we would intend on continuing that sort of disclosure going forward. But for now, I would say, we are utilized, both companies, to a point that we'll be buying more hose to be able to satisfy the needs of our customers.

And then turning to the permanent pipeline side, I know in the past, you have given us some indication of where the Bakken network is at in terms of utilization. Could you share an update there with us, either what it did in the quarter or perhaps where it exited the quarter in terms of utilization?

Tom, this is John Schmitz. We -- as I said in the entry information, we're developing the Thomson permit now off the north side of the lake which hasn't been installed or active to date. So that's happening right now. We're in conversations with the customer base for potential use of that water and contracts for that water. But if you look at our active system, which is primarily the Charleston system that we've described in the past, our third quarter volumes were up 28% off of the Charleston system and revenues were up about 29%. So the position we have off Lake Sakakawea and our infrastructure is performing well up there.

Our next question comes from Sean Meakim with JPMorgan.

It's going to be for Holli or for John, one of the key rationales for the deal was to scale up the business to better compete for larger type of projects, investing alongside your customers. It's obviously early days here, but just wanted to get your latest thoughts on timing and scope of some of these potential capital investments for some of these infrastructure-type of projects.

I can start and John can add some additional color, Sean. Clearly, our focus right now is on integration so that's going to be something that's taking a lot of our time and energy. But at the same time, we do have a, I'll call it, a queue of projects or a pipeline of projects on the infrastructure side that the team is going to continue to work on. But as you can imagine, those are -- they're lumpy and they take time to develop. You have to start, obviously, with making sure you have the right water source and then there are right of ways and then there's adding the customers on the other end. But we do have a few of those that we're working on now that could come to fruition or we're certainly hopeful it will come to fruition in 2018.

Sure, this is John, Sean. So as I mentioned, on the Bakken system, we're developing the north side of the lake, so that gets us into a new position off of Lake Sakakawea in some real core Bakken acreage. But we have about a half a dozen potential water sources and systems that we're working both to develop and understand the source as well as the ability to put infrastructure in and, most importantly, working with our customer base on the use of that water once we develop the source and put that infrastructure in. So the pipeline is still there, we're working on it and continuing to move forward with our efforts there.

Okay, great. And just thinking about the plans for additional growth capital in '18, could you maybe give us a little bit a sense of lead times for new lay-flat hose? Any bottlenecks in the supply chain or pricing pressure for new hose? Anything else just to highlight there?

I think that on the hose side, it's nothing material from a delay perspective, and it depends on sort of the vendors that we've been using and we're a large buyer, and therefore I think we tend to get priority in that process. So we haven't seen issues there. I would say on other aspects, pumps are challenging these days, getting your hands on those and when you look at the flowback part of our business, the larger vessels have fairly long lead times, 4 to 5 months in many cases. So actually one of the things that we've done is we've already initiated the process and executed, even just recently in the last week, on lining up some of that sort of equipment such that it can be a revenue generating asset for us early in '18.

Our next question comes from Ian MacPherson with Simmons and Company.

The margins in the business have really been ascendant over the past few quarters and I just wanted to frame your comments. John, you made your comments around needing price increases to offset incipient labor and equipment inflation. What does that translate into with regard to your leading edge incrementals for the next quarter or 2, from Q3 into Q4 and Q1? Are margins pressured at this point and need pricing to stabilize? Or are margins still ascendant for the near term?

Yes, so we haven't changed our view. We think incrementals to our revenue growth is somewhere around 35% in -- without price, and if we get price, it can move up in the 50%, as you've seen in this earnings release. We are seeing shortness of labor and equipment, especially in our 2 biggest revenue-generating areas, which is the water transfer business and the well testing business. That equipment continues to be a CapEx program we're currently investing in. Labor is tight in certain areas and primarily in the active areas. So we expect our incrementals to continue to do what you've seen in the third quarter and the prior quarter to that.

All right, good. You now -- your new company covers really the entire value chain for water services for the industry. Can you identify the top 1 or 2 areas of growth or tightness across your product and service offering now that you would expect to see best growth or most need of incremental capital in the year ahead, whether it's flowback or lay-flat hose or somewhere else in the front or back end of the spectrum?

I think you probably hit it, Ian, that it will be in areas like lay-flat to continue to be able to support these longer hauls, needing the right sized hose. There's been a transition from the 8-inch to more of the 10- and 12-inch, so we're making investments there. Also on the flowback, as I mentioned earlier, given the amount of sand that's coming back out of these wells, the type of equipment you need, so the size of the vessels, the size of the iron as well. So I think that -- those will be priorities for us. Another area though that's not as obvious is around our chemicals business where we see opportunities there to expand our in-basin manufacturing capabilities, and that allows us to service our customers better. It allows us to drive some costs out on transportation. So that will be an area that gets capital. And then as we were talking earlier, we do have a -- have several projects in the queue around permanent infrastructure that would get part of our capital allocation for the following year as well. So capital allocation is obviously mission-critical to us. This is a business that's a very capable of generating strong cash flow and strong return on assets, so we have to make sure we get those investments right. But again, given our size, given our balance sheet, we think we're probably better positioned than most anybody out there to be able to take advantage of it.

Holli, forgive me for squeezing in a quick third question. You said Rockwater stand-alone EBITDA in the third quarter was $26.4 million. That has to bias higher the $45 million to $47 million range that was cited in the merger document for the second half expectation. Is that a safe assumption?

I think that's fair. It's one where -- one of the things that we always get a little concerned about is around the holidays, and so while we've had a good October and November is shaping up well, we need to see what happens there. But I think when we you think about the range that we gave for the legacy Rockwater or Rockwater stand-alone for the back half of the year, we would expect to be at the high end of that range.

Our next question is a follow-up from Thomas Curran with B. Riley FBR.

John or Holli, when it comes to the nature of the opportunities you're considering for the Point Thomson intake and what would eventually become the northern leg of the Bakken pipeline network, would you still plan to take the same approach you did to the Charleston and Iversen lines looking to start with an anchor tenant via an AMI? Or, given where we're at in the up cycle, would you instead prefer to go 100% spot market initially? Maybe just share some color on how strategically you're approaching lining up those initial customers for the eventual northern branch?

Yes, Tom, this is John. So we are approaching it the same way we did the Charleston and the eastern extension off the Charleston. We would like to get an anchor tenant. We expect that relationship to be an area of mutual interest or an acreage dedication and it would be a portion of the volumes on the pipe that are out of the permit, out of the take point. It would not before the total ability. So some of the water, if we're successful and execute a contract with a base customer, the rest of the water would probably be spot water that we would try to sell into the market off this system.

Okay, and then turning to the M&A front. I'm sorry, if I missed this in the beginning, I was delayed in joining the call. Did you end up closing on the third pending bolt-on you had? And if so, could you share some color on that? And then when it comes to the nature of the Permian infrastructure investments you're considering next year, do any of those include potentially taking over infrastructure that's currently owned and in-house at your customers?

Sure. So we did close on the acquisition. So it was an $8.5 million total value. There was about 24 miles lay-flat in it. They had a very good position with 2 customers. They had multiple customers but very good 2 positions, 1 in East Texas and 1 in the upper Delaware and we closed this September 15, so a minimal contribution for the current quarter but a good acquisition. On the acquisition front, we always do have conversations that are active in potentially buying infrastructure or positions that are already in place. But currently, I would say the ones that are most active are organic water sources that we have developed. We're proving up, we're going through the process of planning, designing and, potentially, execution of the infrastructure piece of it, which leads us through the strategic conversations with the customer base. That's the majority of our current efforts, Tom.

Our next question is a follow-up from Jim Wicklund with Crédit Suisse.

[indiscernible] you talked a great deal about the ability now, as a larger company, to do major infrastructure projects. And I know you talked a little bit this morning about some of the projects you're doing. Are those the projects that you were alluding to back several months ago when you were talking about major infrastructure projects? Or is that something that's still on the horizon and, if so, can you kind of give us a little hint as to what that might be?

Jim, no, we are describing it in the same manner today, and the active sources in infrastructure that I talked about today are some of the same projects that we talked about when we described the merger and the strengths of the company and the size of the company. So there is some large volume source potential as well as large infrastructure possibilities that we have been working on and continue to work on, primarily in the Permian basin, Jim.

And these are projects that would allow you to take advantage of the scale that you've created with both Select and Rockwater and the acquisitions? Because I'm assuming that having that kind of scale in a basin makes a significant difference on a competitive basis?

That's correct, Jim. So when we think about it, both companies had strengths that would apply if you brought a very strategic piece of water and infrastructure in place and you capture the service work off of that position as you develop it. So there's strengths that come out of Rockwater, strengths that come out of Select in various areas, both -- just the play area being the Permian or other areas but also the areas within the play, upper Delaware, lower Delaware. The positions on these service -- these companies, we got these assets, these people and how they interact when you develop sources and infrastructure is very positive when you have scale like this, Jim.

Okay. And if I could sneak in one more since we're already into repeat questions. The biggest pushback I get from investors is they tell me that the E&P companies source their own water, and they don't need a Select, they can do it themselves. And I can think of a couple reasons why that wouldn't really work and you give them an alternative, but can you address that for me?

Yes. First of all, the majority of the revenue inside this company is movement of water, storage of water, delivery of water. It's a service component, it's not just sourcing water. We look at sourcing water strategically so we can bring value of reduced transportation costs to our customer base, that's the approach we take. Yes, some of our customers do source their own water and we still are a very big service provider and they're some of the larger customers we have. But I also would point out that even the customers that source water, whether it's produced water out of the formation or source water from other sources, we also source water for those customers as well. It's just an added benefit, it's very useful to them, but most importantly, we capture the service work. We provide the movement, the containment and the delivery of that water to the blender. So yes, some of our customers do, do that, Jim, but it's a positive to this company, not a negative.

Our next question is a follow-up from Ian McPherson with Simmons.

I also would like to give you an opportunity to disabuse the pushback on the story. Another one that we hear -- we get anecdotes, and it's hard to convert anecdotes into a trend, but this notion of E&P's, [ which ] I think especially in the Permian, moving towards recycling water as opposed to sourcing fresh water from companies like you. Can you speak to the evolution of that and also what your capabilities and your business opportunity is on the recycle side and E&P's trying to address pre-frac water from that direction?

Yes, I'll take that one, Ian. As you said, operators have been blending, essentially, the produced water with fresh water where it makes sense, for some time now. And I say where it makes sense, it has to make economic sense. And that produced water has to meet the same sort of threshold questions that fresh water does. What does it cost to move it to where it's needed? What does it cost to store it until it's needed? And if that is cheaper than sourcing fresh water, then the operators are using it and you're seeing a pretty reasonable amount of that in the Permian because of where the drilling programs are working. I would say, for us, that's actually an opportunity because, as John just described, we are a logistics company. We make more money off of moving and storing and treating water than we do selling water. And on the treatment site, specifically, we have capabilities for not only the pretreatment of the frac water. But on this produced water, it's fairly limited amounts of treatment that are required because they are blending it down with fresh water. But that is yet another opportunity for us as we work that way. And the Permian, does seem to be the largest user of the produced water right now, but we are -- we've seen it for some time in the Northeast and we help our customers up there. The other thing I would add is that as these operators are moving produced water around and as companies are doing that for them, they're very focused on the potential HSE-type impacts. Having a spill of produced water is different than having a spill of fresh water from a remediation perspective. And so operators are looking for reliable and high-quality service providers, which obviously Select falls into that camp. But then also we found that they've focused in on our capabilities as it relates to our automated pumps because they have the ability to shut themselves down when there's a pressure release in a line. Therefore what you've done is you're limiting the amount of any potential spill and there's really not anyone else that has that capability at the same level we do these days, so again, I think that's just another opportunity for us and why we would be a supplier of choice for operators as they begin to move more and more of the produced water around.

This does conclude our question-and-answer session. I would now like to turn the call back to Ms. Ladhani for any closing remarks.

Thanks. And thanks, everyone for your questions this morning and taking time to join us. And look forward to talking with you again after the year end.

Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines and have a wonderful day.