Greetings, and welcome to the Select Energy Services fourth 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, sir. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Select Energy Services conference call and webcast to review our fourth quarter and full year 2017 financial results. With me today are John Schmitz, our Executive Chairman; Holli Ladhani, our President and Chief Executive Officer; and Gary Gillette, Senior Vice President and 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 March 15, 2018, 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, March 8, 2018, 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 law. 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 fourth 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 the Select Energy 2017 Fourth Quarter Conference Call. With the culmination of our November 1 merger with Rockwater, we are now well into the integration of the 2 companies, and Holli will speak to that in some detail. I would also mention at the onset that the given timing of the merger, which closed on November 1, the fourth quarter financial results included in our press release only include 2 months of legacy Rockwater operations. We also have provided a summary of standalone Rockwater results for the month of October to provide a meaningful and relevant basis for comparison on a full combined company basis. We are very encouraged with how the 2 companies have come together combining the inherent and complementary strengths within the Water Solutions segment, which accounts for nearly 70% of our consolidated combined revenue. Operator activity in the fourth quarter was generally in line with our expectations with the exceptions of a bit more severe cold weather than normal in the northern half of the country, which we did have an impact on our operations in December. The significant upward move in oil prices is clearly favorable to our customers and their spending plans, but for Select, it is just as important that pressure pumping prices have moved up significantly and is justifying new builds and refurbs, which are currently needed in the market. The frac fleet count was up modestly in the fourth quarter but began to flatten midway through the quarter, which, we think, was indicative of a lack of equipment. Even as new frac spreads hit the market, the current labor market is tight and will remain challenging. As this is the first time in recollection that the oil industry -- oil service industry had to…

Thanks, John, and welcome to our fourth quarter earnings call. Let me first turn to our progress on integration activities. We've successfully combined the field organization in our legacy Rockwater and legacy Select Water Solutions business segment, and are now going to market exclusively under the Select brand-name for our water-related service lines. The integration is going well, and we continue to believe our business will benefit from the combining -- from combining these 2 strong operational teams in every region of our water transfer and flowback product lines. We're also making good progress on yard consolidations that will allow us to maximize our asset utilization and optimize our market coverage, which is particularly important, given the tight markets we're operating in. In the back office SG&A area, as of January 1, all of Rockwater's water operations are now on the Select ERP system. We now have a single IT platform in our core water business segment, which will allow more timely and efficient financial reporting and operational response, and we're almost complete in the task of combining the SG&A functions and eliminating redundancies. We believe we'll come in towards the upper end of our $15 million to $20 million estimate of consolidation savings, and all of that should be in our run rate by the end of the third quarter. As John indicated, the actual fourth quarter financials only include 2 months of Rockwater operations, given the November 1 closing date of the merger. We provided summary information in the press release about Rockwater's performance in October. By adding those numbers together with our published Q4 financials, you have a snapshot of fourth quarter on a combined basis. Gary will provide a detailed overview of reported results next, but I'll speak to these combined numbers to provide a quarterly…

Thank you, Holli, and good morning, everyone. As Holli mentioned, our fourth quarter results include 2 months of contribution from Rockwater following the closing of the merger. We reported total revenues of $304 million for the fourth quarter of 2017, up 98% sequentially from the third quarter of 2017. Adjusted EBITDA was $43.9 million, up 35% from the third quarter. Net loss for the fourth quarter was $14.9 million as compared to net income of $2.6 million in the third quarter. Turning to our segment results. Our Water Solutions segment generated revenues of $217 million in the fourth quarter of 2017 compared to $125 million in the third quarter, an increase of 73.6%. Segment gross profit before depreciation and amortization was $47.9 million compared to $37 million in the third quarter. Our Oilfield Chemicals segment represents a new reporting segment and includes the Completions, Specialty and Production Chemical services that were acquired through the Rockwater merger. This segment generated revenues of $41.6 million and gross profit before depreciation and amortization of $4.6 million during the 2 months included in Select's fourth quarter 2017 operating results. Our third segment, Wellsite Services, includes the legacy Peak and Affirm businesses and also includes 2 months of the Canadian and sand hauling operations that were acquired in the Rockwater merger. This segment generated revenues of $45.6 million in the fourth quarter of 2017 compared to $28.8 million in the third quarter. Gross profit, again, before depreciation and amortization, was $8.3 million compared to $5.9 million in the third quarter. Now turning to the balance sheet and cash flow in the quarter. Significant uses of cash during the quarter included net CapEx of $32.7 million, $8.8 million related to DLCs and merger-related severance and finally, $4.9 million representing the cash portion of the small well…

Thanks, Gary. Before we wrap up, I wanted to take a brief moment to announce that Eric Mattson will be formally retiring from Select at the end of March. I wanted to acknowledge his long dedicated service to Select and express a sincere thank you to Eric. Eric has had a very distinguished career in the oilfield service industry and has been a true partner of mine since we began Select over a decade ago. He has provided tremendous support to the organization, originally as an investor, then as a CFO, and most recently as a guiding hand through our 144(a) IPO and merger process. I look forward to having him as an advisor in the future endeavors and thank him for everything he has done for Select. With that, we'd like to thank you for joining our fourth quarter earnings conference call. And now we'll open up the call for questions. Operator?

[Operator Instructions] Our first question comes from James Wicklund of Crédit Suisse.

Eric, congratulations on another retirement. Guys, the gross margin was a little bit of a disappointment in the quarter. It was below what The Street had expected in Water Solutions, overall, Oilfield Chemicals was a little bit light. Can you talk about margins going forward? And is this a matter of price competition, lower utilization, costs? What should we expect to see with gross margins over the course of the next couple of quarters?

Sure, Jim. We -- obviously, in our prepared remarks, we talked about some of the things that hit us specifically on the Water Solutions side. And certainly when you're doing work for a customer that includes a large portion of pass-through, that's going to have an impact on your margin. So we were, obviously, profitable on that incremental work to get the water transfer work, but we did have to pass through some water sources and some heating revenues. So that was a big part of what impacted us up in the Bakken. But I'd say, stepping back in more of a general response to, is it competitive pricing, is it cost? What is it? Activity levels? What we're seeing is there continues to be high demand for our assets and for our people, but we are, at the same time, trying to get pricing improvement, and that comes on a customer by customer basis and depending on which service lines, and which regions you're in, you'll have more success in some than others. And at the same time, though, we're fighting off our own price inflation. And so the key is just to try to stay a step ahead of that. But we -- obviously, we did see some deterioration in the fourth quarter, but believe that a meaningful amount of that was, I'll call it, short-term seasonality and some specific customer mix-driven items. But we do continue to believe that there are going to be opportunities to improve those margins. Over the longer term, it will be through things like adding technology that provide automation, but in the near term, it's hiring people such that we're not paying contractors, we're not paying as much overtime, that will help our cost structure. But also just taking best practices from both of these 2 companies that we brought together when you start to look at that down on a yard by yard level, we do think that there are opportunities there. And while we look at Q1, it's going to have some of its own challenges, but we actually do believe that where we're going to exit Q1 is going to be where we would've expected.

Okay. I appreciate that. And what kind of were your expectations? I'm looking at this, and if I'm getting it wrong, I apologize, but your Water Solutions margins came in at about 22%. I think The Street was looking for something close to 27%. I just didn't know if you could kind of help us quantify the impact of the fourth quarter issues you have in the Bakken. Or however, you want to do it, I guess, Holli, really is, is a 27% gross margin on Water Solutions realistic for the first half of this year?

I think it'll have some challenges, but we think that it's possible.

Okay, okay. That's helpful. I know too much granularity, we can't do at this point. There seems to be great deal of interest in water, obviously, with the lead story in the JPT in January, and we're seeing a great deal of activity percolate up. Are you seeing increased competition? I know some companies are getting large enough that they too are thinking about coming public, we're going to carve out a water solutions subsegment that Spears, I guess, will have to report one day. Can you talk a little bit about the competition you see out there? And is it local or is it regional or is it a specific to one of the businesses that you have in your integrated solution?

When you think about the competitive landscape, first, I would say I don't think we had seen material changes in new competitors coming in. You're starting to see a little bit of consolidation of the competitive base. But for us, there's really one notable competitor that has a national footprint, but it only overlaps in a couple of areas, like our water transfer and our flowback and well testing. We don't have somebody else that has the same sort of access to water sources that we have, to the permanent infrastructure that we have or certainly, our chemicals business when you look at things on a consolidated basis. But after you go past that one competitor, it really becomes regional competition that we're up against. And as I said, I don't feel like that's changed significantly. I don't think the space is attracting new entrants, not like we saw back in 2011 and '12 time frame, certainly don't see that happening.

Our next question comes from Thomas Curran of FBR.

Eric, I want to echo Jim's sentiment. It's been a pleasure working with you over the past 18 months, and I do hope to have the chance again in whichever future role will result in your next retirement. I'll pick up his line of questioning as well. In looking from mid-2018 through year-end, are you comfortable with the current consensus trajectory for revenue and EBITDA? So specifically as you hit where you would expect to be exiting 1Q for 2Q through 4Q, does current consensus also seem achievable to you, Holli?

I think maybe the best way for me to answer that one, Tom, is that maybe let's focus first on first quarter. January did get off to a slower start with the weather, and we saw jobs getting pushed because of logistical challenges on sand. But once we got into February, the revenue per day was up over January, and we're seeing that in March. And so again, my comment earlier of we expect to exit the quarter where we would have expected. And maybe the best way is to say, we still believe that the incremental margins, 30%, 35% in the near term are achievable, likely higher than that sort of when you look longer term over the back half of the year, just because, again, we're going to be fighting the cost inflation, and it's just staying in front of that will be -- I think that's going to create more challenges in the front half of the year than it will the back half of the year.

And that makes sense, Holli. Maybe another way to approach it is, in looking to the back half of the year, would you expect to be achieving pricing gains at that point that are resulting in sufficient net pricing increases to push that incremental margin north of that 30% to 35% range that's more activity-driven?

I think that's the right way to look at it, Tom, because in the early parts of the year that getting the net gains is going to be more challenging. But I do feel like we have that opportunity in the back half of the year as things continue to tighten.

Great. So first half more about just keeping up with overall cost inflation, second half is when you start getting into net gains that really start to move incremental margins. That makes sense. And then, John, on the M&A front, you said that in addition to Rockwater, you executed on 5 bolt-ons. Exiting the 3Q call, I was at GRR plus 3 smaller deals for a total of 4. Could you share some color on this fifth and then just provide an update on the overall deal environment?

Yes. So we closed on some flowback assets on a transaction, which would have been the fifth, past GRR, 2 water transfer companies, the technology company, and now we bought a well testing asset base up in the Northeast.

Okay. And then turning to the Bakken pipeline network. John, you've previously shared with us where volume was at, I think, on an annualized basis. Could you tell us where it averaged in 4Q? And then with the Charleston anchor customer, once they get back up to where you expect them to be in February, where volume would be at that point?

Sure. So it wasn't the Charleston, it was that dedicated contract and they kind of run out of their capital completions program middle of November, Tom, is when it happened. So our December volumes were more than in half. They put that frac horsepower back to work end of January going into February, and now put the second frac horsepower spread back to work. So our volumes actually off of it today are back to where they were, and going into March, we feel real good they'll stay there throughout the year to the levels that we had back in the third quarter.

And at this point, John, does it look as if they would climb higher than over the second half from -- after returning that 3Q level? Or would you expect them at this point, based on their indications, to just hold steady?

Good question. You really have to look at the volume in total off of the lake, and we're developing the north side now in the Thomson TEG Point. And once we get that development, we're completely focused on trying to find an anchor tenant like we did on the Charleston to take water off the lake. So that volume could be incremental to what we're doing off the Charleston today. The Charleston, as it relates today, looks to be steady to what we experienced in high flow rates during 2017.

Okay. Since you bought it up, I'll squeeze in one more on Point Thomson. Have you completed construction of the intake that was key to increasing your permanent capacity from 60 million barrels the 100 million barrels annually?

We have not finished all the construction on the TEG point, but we have established the TEG point off the lake. So as far as the permit is concerned, we have established a TEG point to the permit. We are not finished on the service construction yet, Tom.

Our next question comes from Jud Bailey of Wells Fargo.

Question on CapEx. I think, Holli, you mentioned that the CapEx guidance does not include any potential infrastructure or contemplate any infrastructure projects. Could you maybe give us your thoughts on what are the odds of you, perhaps, executing on one of those? Or kind of would you give us a little more color on what the environment may be like for opportunities you see this year and maybe in what region?

Sure. We absolutely do believe that there are going to be opportunities to identify water sources that we can then put into the sweet spot of the basins. The Permian is probably our largest focus today, and we have a handful of projects that we're working through. As you might imagine, they take time, you have to identify a source, you have to negotiate the right price of that source. You then have to negotiate right-of-ways to get you to where you need to actually use the water, and then you have to have a customer base ready to make some commitments around that. So as I said, we do have several in the pipeline. Would not expect all of those to hit, but we're optimistic that we will achieve some success on that front this year, and feel good about our ability to, obviously, finance and pay for that kind of project, above and beyond the capital program that we have laid out now, just because the $150 million to $160 million that we laid out, about half of that's maintenance and half is growth. Even with that and some of the small working capital builds, we expect to be able to generate meaningful free cash flow. Because of the timing of the capital spend, that free cash flow will be more heavily weighted to the back end of the year, but we do like the liquidity and the outlook on that front to be able to support these types of infrastructure projects.

My follow-up would be, can you give us a sense of what a range is fine? What the size of some of these types of projects would be? And how do you think -- do you think about it on a -- like a year's payback or return or how do you think about those projects? And maybe just a little color on the potential size.

Sure. I mean, there are some we do that are millions of dollars because it's really more of water depot where you're developing a system of pits to be able to stage the water. But I think the more traditional infrastructure projects that you're thinking about, it could be anywhere from $20 million to $50 million. There are some, I'm sure, that could exceed that, but most of those that we look at kind of fit into that range. And the way we do look at it on a payback, and we want to have enough certainty with contracted customer on the other end that will take some portion of the capacity, if it's 1/4, if it's 1/3, something along those lines, that we do get dedicated, not likely a take-or-pay but some sort of dedicated acreage. If the economics around that will give us something inside, say, a 4-year payback, that gives us a lot of confidence that then we would be able to add customers in that area based on, obviously, our review of the acreage and of the rock to get that -- we can even get that into a 2-year payback, which is similar to our other investment opportunities. And then what we also have to remember when you get those sort of infrastructure projects in place, that's just the trunk line. And we then make very nice margins for that last mile component that come off of that, and the Bakken is a great example of that strategy. And when you pull all that together, surprisingly you can get infrastructure that gives you similar payback as some of our other organic growth opportunities.

Okay. Great. Well I appreciate that color. And then the last one for me is I appreciate the kind of the slow start to the year and some of the seasonal issues and how that's going to impact margins. One thing if you could help us, but how do we think about revenue sequentially from 4Q to 1Q? Do you still think revenue can grow with some of the problems you saw in January? Or is it slightly up or slightly down? Can you help us think about how we should think about revenue with some of the challenges to start the quarter?

I don't know that we should expect something very different from Q4. Obviously, there's still -- we have all of March to get through, but to your point, we did start off a little slow. But yes, I think just -- we absolutely, though, when we -- again, where we're exiting, where we're very comfortable with and we feel like that's where the growth is going to come out of that. And the way we look at our business is probably similar to the way you look at the business, in that we're going to be highly correlated to the frac fleets. And as you see, those continuing to increase our margins and our activity levels will move with that. And then the other thing that John and I talk about is, what's going into the blender, and that's the water and it's the chemicals. So we're -- obviously, remain optimistic about 2018.

Our next question comes from Sean Meakim of JP Morgan.

I appreciate all the feedback around capital needs and free cash flow. That was certainly very helpful. I wanted just to continue on the conversation around the large-scale infrastructure projects. Many of the E&Ps that we talk to express a desire to control their water management process as part of their value add or their secret sauce. And so I thought maybe it could be helpful if you could just expand a bit on the value add from Select's perspective that makes you the right partner for some of these opportunities.

Sure. I think one thing that's always useful is to break down, when an operator talks about managing their water, there's the pre-frac side, which is the water sourcing for the actual frac and then the post-frac side, and we do see operators more often wanting to control that post-frac. The gathering of the produced water and disposal of it, just because it has such a material implication on their ability to produce from the well. On the pre-frac side, what we've seen more of is for some of the larger -- and actually, I shouldn't just say larger because it's different sized customers, that to mitigate risk, they want to make sure that they have the water source identified and committed. And so there are times that they'll do that themselves, but there are times they look to companies like us to be able to source that for them still. And then there's that next step, which is the forward deployment into the basin where it's needed. And then there's the actual logistics of it, that last mile, to ultimately get it to the pits, get it to the blenders. And what you do see, as you referred, some operators will source their water, a few have actually built that for deployment. But what we haven't seen is where operators are interested in doing the logistics, really that last mile logistics, and the handling of the water at that stage. And clearly, that's the sweet spot of our business is handling all the logistics. John, anything you would add?

One thing that I would say, Sean, is the forward deployment of water is getting more and more complicated because of the size of the water and the area that you're covering. So yes, there is certain E&P companies that want to make sure they have a source, make sure they can feed that frac horsepower, develop those reserves, even to the point that they'll invest in fixed infrastructure, and this is on the pre-frac side is where we're so focused. But the reality is movement of water is becoming a lot more complicated, pit to pit, concentrated from source to source and then deliver high volume into that frac horsepower that now seems running 24/7 and not shutting down between stages. It is more complicated and, of course, that's logistics, and that's what we pride ourselves on, that's what we have the team for, that's what we have the equipment for, and we believe that's a positive for us.

We've noticed that most of the upside surprise in E&P budgets for 2018 has -- that upside has been geared around infrastructure rather than incremental D&C activity. And as you all maybe take a look at some of the budgets from your customers, could you give us a sense of -- I think, a lot of The Street is focused on takeaway capacity and particularly in the Permian, but presumably, some of that is going to be water infrastructure-related, both on the front end and the back end. Maybe could you elaborate a little bit, I guess, kind of what your take has been? What you heard from your customer budget plans for '18?

We talk to them more around their completions programs, obviously, than we do the infrastructure buildout, Sean. But -- and probably, it isn't that atypical that it always takes several weeks to a month or so to kind of get things kicked off. But what we have seen is, generally, there seems to be some appetite for, I'll call it, capital discipline, at least for a particular segment of our customer base that there certainly have expectations to be busy, and that we get some visibility into how many rigs they're going to run over the course of the year and how many wells they're going to complete. And that's, obviously, what gives us the optimism of looking out over the course of the year and seeing the tightness that we expect because we do see that activity ramping up, but it's not something that we think is beyond what the market can handle.

Fair enough. And just last piece of this, would you -- is it fair to say that the Permian is taking a large portion of your focus with respect to some of these large incremental projects? Or just maybe -- a sense of geographically, how your opportunity set looks would be helpful.

Yes, I think the Permian is where the majority of the opportunities are going to lie for us right now. As you can imagine, the Bakken, we already have a stronghold. We have kind of the best position you could have there. So not a lot to do incrementally. And then as you go region by region where you can get to that concentration of activity levels and to where you're going to have challenges on supplying water or challenges disposing of water, it just -- the Permian becomes the sweet spot where you can check all those boxes. So that is where we spend our time on thinking about infrastructure.

Our next question comes from Ian MacPherson of Simmons & Company.

Slim pickings left here, but I had a couple of questions left. Holli, you had mentioned the manufacture and build out for chemicals in basin, which will help your logistics cost advantage. The gross margins for chemicals were about half of your enterprise average for the fourth quarter. How much of an improvement do you think we could expect to come from that particular lever and other levers, in general, with regard to chemicals margins?

Sure. To back up, yes, we are -- thanks for noticing that. We're very excited about having that in-basin manufacturing. And that in and of itself will help us on a cost structure for one of our largest moving products, which is friction reducers. So we'll -- that will be up and running here by the end of the quarter is the expectation such that we can have some commercial batches out starting in Q2. So you won't necessarily see that benefit in Q1, but it'll be there in Q2. What we're fighting right now on our cost structure side on the chemicals is largely transportation. There's a shortage of drivers, and so as you think about deploying all of our products out to the field, where we're laser focused on how we can continue to drive that cost down. But this is a business, too, that, as you can imagine, you have some sort of fixed cost infrastructure. And as we see our volumes increasing, we get that operating leverage. So as we see that over the course of the year, that will also add to our margins. And then we had a few somewhat transitory things. As we're -- we were -- we're working on a new product that you have some trial and error around things like that, you end up having some waste and things that add additional cost that it's really an investment in a new product line, and we did experience some of that in Q4 that we'll reap the benefits of when that product starts moving here in 2018. So absolutely do expect improved margins in that business. It's not the kind of business that will provide the same sort of returns as our Water Solutions business, but it also doesn't require the same level of capital in it. So you still return a nice -- you get a nice return on your assets.

That's very helpful, thanks. Only other one for me, I think John successfully teased out the first quarter revenue expectation and, I guess, I would follow that up with do you expect any major variability with regard to margins from Q4 to Q1? Or should that also look fairly static for the total basis?

I think it's fair to think about it being pretty well the same.

Our next question is a follow-up from Thomas Curran of FBR.

I got a few smaller questions here. Have you decided yet on whether you're going to go with EnviroEdge or the existing AquaLogic and AquaView platform? Are you going to combine them? What sort of solution are you leaning towards at this point?

We're absolutely taking the best of both because there were parts of each that were superior to the other, and that's actually something I think our customers have already seen. And so it's really not a choice of one or the other. I think we are going -- from a branding perspective, we're going to have to zig or zag, and I think we'll probably go -- stay with AquaLogic and AquaView, but that will take on some of the benefits of EnviroEdge.

Okay. And then in returning to the large infrastructure projects opportunity, I just wanted to be clear, when it comes to those projects, you're going to remain primarily, if not exclusively, focused on the pre-frac side? Is that correct? And then when it comes to opportunities to potentially acquire or take over, let's say, on a sale leaseback basis, infrastructure that is owned by your customers, would you potentially be interested in any pre-frac or post-frac opportunities with those divestments?

Yes, this is John. We are very focused on pre-frac. We look for strategic sources and then how we can forward deploy that in a manner that's value add to our customer base in a manner that we can capture the service component of that last mile that Holli described. We're not focused on post-frac today. We're open for any kind of opportunity as we think about M&A, but very focused on pre-frac right now.

And the only thing I would add, Tom, is that our logic behind that is we feel like we can add more value on the pre-frac side because it's easier to develop a multi-user system. And so you lay a larger line and you get more people -- multiple people pulling off of that and that seems to make more sense versus the produced water lines largely today seems to be single user and so that makes it harder for us to add value. But not -- as John said, we'll be continuing to explore and get more educated and make sure we understand the opportunities on the post-frac, but pre-frac will be our focus. I would -- and the one blend to that is, at some point the produced water, which is a post-frac, becomes a pre-frac water source. So where we do see opportunities there on reuse that might require some sort of infrastructure, I'm not sure which bucket you put that in because it really is just another source of water, but it might be tying in some produced water.

Thank you.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the floor back over to management for closing comments.

I think that's it. Everyone, thanks for joining our fourth quarter and full year 2017 conference call. Have a good day.

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