Greetings, and welcome to the Select Energy Services Fourth Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. Chris George, Vice President of Investor Relations and Treasurer. Thank you, Mr. Chris George. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Select Energy conference call and webcast to review our financial and operational results for the fourth quarter of 2021. With me today are John Schmitz, our Founder, Chairman, President and CEO; Nick Swyka, Senior Vice President and Chief Financial Officer; and Michael Skarke, Executive Vice President and Chief Operating Officer. Before I turn the call over, 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 selectenergy.com. There will also be a recorded telephonic replay available until March 9, 2022. 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, February 23, 2022. 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 Laws. 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. Also, please refer to our earnings announcement released yesterday for reconciliations of non-GAAP financial measures. And now I'd like to turn the call over to our Founder, Chairman, President and CEO, John Schmitz.

Thanks, Chris. Good morning and thank you for joining us. I'm excited to be discussing Select Energy again with you today. Overall, 2021 was very exciting for Select. Having been back in the CEO seat for a little over a year now, I'm pleased with the progress we've made on executing our strategy of improving and bolstering our base business, advancing our technology, ESG and diversification efforts, and executing on our strategic M&A. I'd like to start by highlighting some of our 2021 achievements. We finished the year with total revenues of $765 million and adjusted EBITDA of $50 million, while seeing revenue, margins and adjusted EBITDA grow every quarter throughout the year. On the technology and sustainability front, we continue to advance our water recycling efforts. We've invested in six facilities during 2021 backed by long-term contracts. This sets the stage for a significant growth in our recycled volumes for 2022. We are also having constructive conversations with our customers every day. And I believe we will continue to build on our recent success with more long-term contract development opportunities in 2022. We are also very active on the M&A front during 2021. As I've stated many times, I believe consolidation is very important for this industry. Through a combination of cash and stock consideration we closed on the acquisitions of Complete Energy Services, Agua Libre Midstream, HB Rentals and UltRecovery during 2021. Additionally, we are set to close on the acquisition of Nuverra Environmental Solutions. In doing so, we've added nearly $300 million of run rate revenues to an already growing base business and acquired strategic portfolio of infrastructure assets, including gathering and distribution pipelines, disposal facilities, and landfill operations. Importantly, we have also welcome more than 1,200 new skilled employees to the Select family. In a challenging…

Thank you, John, and good morning, everyone. We continue to gain steam on our strong financial recovery, adding 25% quarterly revenue growth, while expanding margins and reporting positive net income. Our $255 million of fourth quarter revenue increased $50 million from the third quarter and $94 million from the second. More importantly, we're bringing more of this revenue through to the bottom line with adjusted EBITDA growth of over 70% to $26.4 million from $15.1 million in the third quarter and fourth quarter net income of $11.1 million from a $14.2 million net loss in the third quarter. To accomplish this, we're successfully leveraging all three elements of our strategy as John outlined. We are driving recovery through our base businesses, gaining market share and strengthening margins. Our base businesses pre-acquisitions grew revenue 14% quarter-over-quarter, while the EIA and other third-party sources estimate industry completions grew low-single-digits. Clearest example of this core business improvement came from our Chemicals segment, which grew revenues by 22% quarter-over-quarter, while improving margins by two percentage points, even though none of our recent acquisitions directly benefited the Chemicals segment. In regards to advancing our technology, ESG initiatives, and diversification efforts, our latest three recycling projects that came online during the fourth quarter contributed to growth in both revenue and margins through the Water Infrastructure segment, and will contribute further during 2022. Overall in 2021, we recycled 25 million barrels that produced water through our fixed facilities, and we expect to continue driving these volumes higher. This recycling alleviates demand for freshwater sources in water stress regions, while also limiting waste disposal which is particularly important in areas of seismicity concerns. Finally, I'll touch on our strategic M&A. We believe we executed each of these transactions at extremely attractive valuations and they have begun to contribute…

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Ian MacPherson with Piper Sandler. Please proceed with your question.

Just a lot of moving pieces in recent months and quarters with acquisitions and congratulations on those. It makes it a little bit foggy or from our -- from the cheap seats here with respect to comping your business on a sequential basis. But obviously the Chemicals business outperforming the broader market and the margins was encouraging in Q4. And I wonder if you could just speak generally for Chemicals and Water Services. How your pricing negotiations are going on across the platform in this inflationary environment and how you see your pricing power in 2022. And in terms of being able to expand margins organically going forward? Or if you think it's maybe more of a realistic ambition to maintain rather than expand margins organically?

Ian, this is John. Before we get to your question here and thanks for your question. As you may have seen, we just released our announcement that we closed Nuverra Environmental Solutions this morning. So just want to put that out there before we get started here. With that, we'll answer your question. So Ian we are having success, pushing pricing both on the Chemical side and with our Water Solutions, various business units. One thing we're mindful of is we're still in an inflationary environment here. So with that success, we are still seeing cost pressures on labor side on oil links polymers, and other raw materials here. So we have been successful. Obviously, our customers are posting good results in this environment with WTI where it is, and we expect to continue to grow that margin. But we are addressing cost pressures as well.

And Ian this is Michael Skarke speaking specifically about chemicals. In relation to the fourth quarter, we saw just an adoption of our specialty FRs. Those performed really well entreated, produced and produced water. Hence we're seeing the market move more and more that direction and we've seen a bigger demand for our products. And a complementary to that is we're making good strides on specialty FRs. We've been able to pull-through some of our other products, kind of specifically scale and biocide, which helps us increase the revenue on a per well basis.

Super. Thank you guys. John, also, just wonder if we could dig into your M&A pipeline. You've been awfully busy recently, closing on Nuverra this morning, congratulations. If you were to scale the opportunity set for the year ahead relative to so much that you've already done recently. How would you compare that opportunity set and in your attitude towards continuing to use the balance sheet to grow the business?

Yes. Yes, Ian, we continue to be always eyes open when it comes to M&A opportunities. We feel like we really add a strategic asset and geographic footprint, as we think around water and chemistry, recycling in fixed pipeline systems. And we feel like we did it at a really deep value. But we're going to judge M&A that way on a go-forward. It's got to fit the mold of where we want to be and what we want to do. And we want to make sure that the return is proper, because we have a lot of opportunity in-house. Now if you think about all these assets, we put together the different things that we can do around those assets. And then, as Michael said, matching chemistry to what the industry is doing now with produced water and recycling. So M&A is on our mind, we watch it, but it's got to be devalue. We got to get strategic assets where we want them. And we've got a lot of opportunities that we're discussing with customers today in-house.

I think it would stand to reason that your sweet spot of bid ask spreads may be in the rearview mirror now, but would you disagree with that?

It really, if you think about it, Ian, maybe the bid ask as far as just M&A in general. But when you put the strategic of match, matching our abilities or our asset base that we already have in and around more assets that could be on the market, or potential M&A. When you look at that, in total, that's where we really find devalue things, buying these assets, like we bought them and we're going to continue to watch really close and find more things of that nature, Ian.

And our next question comes from the line of J.B. Lowe with Citi. Please proceed with your question.

Hey, good morning guys. Quick question. I don't know if you went through this on your prepared remarks. But in terms of water infrastructure, and the visibility you guys have into the Bakken over the next couple quarters. I'm just wondering what do you expect that business mine could do kind of in Q2, Q3.

Historically, Q2 is the breakup season in the Bakken. Typically we do see some retreat there. However, with Nuverra coming into the fold here, we have picked up some great assets in the Bakken that can work with our systems and infrastructure there. We expect longer-term beyond Q2. But we'll have some real opportunities to build out a broader network there, but as you've noted Q2 historically with Bakken is not the peak of the year.

Fair enough. Other question was just on -- and it's kind of maybe a kind of a tough one given all the moving parts. But what do you think your base business? And I guess it also depends on what you define as your base business, but kind of ex the integration costs that you guys expect over the next few quarters, what do you think incrementals could do maybe on a segment by segment basis, or just on a corporate basis, you guys have any insight into that kind of ex the transaction charges?

Yes, so historically, we've seen 30% incrementals. I think that's a reasonable estimate to use going forward. We mentioned that we feel from customer discussions and what our customers put out there that we will see North America CapEx of 25% to 35%, we have seen and are continuing to see additional pricing gains here. That factors into the 25% to 35%. So I'd say the pricing environment is stronger than usual when it comes to that 30% incremental, but at the same time, the cost inflation environment is also stronger than usual, too. So I think 30% is a reasonable assumption to use across but we do have those benefits of finding cost synergies when we're putting these businesses together. So over the next six months, we do have more cost synergies to reach here with not just Nuverra but also with Agua Libre acquisition and HB Rentals to an extent as well.

Our next question comes from the line of Tom Curran with Seaport Research Partners. Please proceed with your question.

Good morning. For Water Infrastructure on the base business side, you highlighted the contribution to sequential growth of the Northern Delaware pipelines. By that I assume you specifically mean the two big pre-frac systems, the Legacy GRR network and then the pipeline you built for that super major anchor tenant. For those two pre-frac pipelines, could you tell us how utilization rose from 3Q to 4Q and what you're expecting for 2022? What sort of volume mix do you expect between the anchor tenant and spot sales over the course of this year?

So the Q4, we had really good volume for our anchor tenant, which displays some of the spots fill activity we had kind of during the quarter, as we look out to the rest of the year, we're going to see the anchor tenant come down off of an annualized number from the Q4. But we do expect spot sales to pick up and have already had some of those awarded. The one other thing I would note is that New Mexico like many other markets are moving to more recycling. And that's an area that we are participating in and working on providing more recycled water solutions in that basement as well. So while that could have some ability to bring down the pipeline volumes, we see it as an opportunity to increase overall revenue and margins.

Got it, and then turning to your existing opportunity set of produced water gathering and recycling facility, investment opportunities is and here, I'm specifically speaking to, what's in your existing growth CapEx budget that could determine where you come out in that net CapEx range between $50 million and $70 million. So just that existing opportunity set does it mainly consist of projects that are similar in size and nature to the six, we just seen you execute call it that $2 million to $5 million of CapEx size range and does it include any opportunities to simply purchase acquire an existing facility that's currently owned by a customer?

So this is Michael, I'll speak to kind of the opportunity set. So, we're involved in multiple discussions with multiple customers, largely in the Permian, but really across the infrastructure base that we've added around recycling. And I expect that we're going to be able to deliver some of those solutions to the market, which is why we've provided that forecast. In terms of the CapEx, you're exactly right. What we're looking at would be kind of within the range that you mentioned, in terms of acquisitions of other customer systems or competitor systems that would be outside the CapEx range we provided.

Got it. And then, Michael, I guess my last one will be for you as well. It's a two-parter, sort of a wish list heading into 2022. First, for recycling what technology, what area are you focused on investing in whether it's via bolt-on acquisitions, or would you already have an in-house that you're just going to develop further via R&D? Where are you focused, that you want to expand your capabilities in for recycling? And then turning to the Industrial Solutions Group, what targets or strategy does Walt have for 2022?

Sure, so on the recycling, our primary focus is around building out around our existing infrastructure footprint. So we've acquired a considerable amount of assets from Agua Libre and now Nuverra and we see opportunity around those assets to service their existing customers, and nearby customers with those assets. There's also an opportunity for us to build standalone systems like we've done in the past in the Midland Basin. From a geography, half the rigs in the Midland Basin or assuming the Permian Basin and that's where the recycling is probably most prevalent on a volume standpoint. So we're focused there. But we're clearly looking beyond that. We've got solutions and are involved in discussions outside of West Texas, to Mexico and outside of Texas in general. As it relates to Industrial Solutions, Walt has finished his market assessment. He's come up with his business plan. And we're in the early stages of building a team and staffing a group that is capable of executing that strategy. And we're expecting to start make progress and have first revenue and really beginning -- gaining momentum in the back half of this year.

And this concludes the questions-and-answers portion of the call. I would now like to hand the call back over to John Schmitz for any final comments.

Thanks everybody for participating with us and allowing us to discuss Select and the opportunities that we got in front of us for 2022 and look forward to talking to you next quarter.

And ladies and gentlemen thank you for your participation. This does concludes today's teleconference. You may disconnect your lines and have a wonderful day.