Greetings and welcome to the Select Water Solutions Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. The 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, Chris George, Executive Vice President & Chief Financial Officer. Thank you, Chris. You may begin.

Thank you, operator. And good morning, everyone. We appreciate you joining us for Select Water Solutions conference call and webcast to review our financial and operational results for the second quarter of 2024. With me today are John Schmitz, our Founder, Chairman, President and Chief Executive Officer, and Michael Skarke, Executive Vice President & Chief Operating Officer. Before I turn the call over to John, 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 selectwater.com. There will also be a recorded telephonic replay available until August 14, 2024. 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, July 31st, 2024, 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 by management. Listeners are 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. Please refer to our earnings announcement released yesterday for reconciliations of non-GAAP financial measures. Now I'd like to turn the call over to John.

Thanks, Chris. Good morning, and thank you for joining us. I'm pleased to be discussing Select Water Solutions again with you today. During the second quarter, we continued to make progress on our key objectives such as improving our consolidated operating margins, generating strong free cash flow and executing on our water infrastructure strategy. On a consolidated basis, we were able to improve gross margins by 2 percentage points sequentially. In addition to these operational gains, we reduced SG&A by 11% during the second quarter, allowing us to grow net income by $11 million and adjusted EBITDA by $10 million on a flat consolidated revenue relative to the first quarter. At a segment level, we grew water infrastructure revenues by 8% and gross profit before D&A by 17% sequentially. I'm very pleased with the continued progress we have made toward the execution of our water infrastructure growth and margin improvement strategy, resulting in another quarter of record-high revenue and gross profit for the segment. Our accretive acquisitions and recent organic recycling and disposal infrastructure projects have delivered steady performance and we continue to increase the utilization of legacy assets as well. In addition to the revenue gains, more importantly, we have made tremendous progress in improving the profitability of the segment, increasing gross margins before D&A for water infrastructure to 51% during the second quarter. In doing so, we have been able to achieve the 50% margin target we set for this segment much earlier than we planned. Looking at the water services and chemical segments, while the activity outlook has become more challenging in recent months, I'm confident we can continue to find ways to reduce our maintenance capital, gain market share and improve our operational efficiency. These efforts support continued consolidated margin improvements across the business and steady…

Thank you, John. During the second quarter, we saw solid growth in our overall profitability, generated strong free cash flow and continued to execute on strategic acquisitions to support our water infrastructure growth strategy. Accordingly, our water infrastructure segment continued its steady growth trajectory, once again achieving record high quarterly revenue and gross profit results during the second quarter. While oil prices have generally held steady at levels that provide an attractive economic return for our customers, natural gas prices have been more challenging, pressuring overall activity levels in the first half of the year. Our water services and chemical technology segments have seen the impact of these activity levels, particularly on the completion side. However, with the support of our latest strategic initiatives and continued growth in water infrastructure, we generally remain on track towards achieving our key 2024 objectives. Furthermore, Select's ongoing transition to a more infrastructure-based, production-levered, full-lifecycle water company continues to align our future profitability and cash flow generation with critical secular growth drivers unique to our business, particularly as we continue to add more long-term contracts into the portfolio, such as the large 15-year acreage dedication agreement we entered into in the northern Delaware Basin during Q2, which significantly expanded our partnership with a core customer in the region. The industry continues to seek creative solutions for the challenges created by growing produced water volumes, including increasing induced seismicity. We believe Select is well positioned to be a leading driver of our industry's ability to solve these challenges through increasing produced water recycling, expanded infrastructure networks and strategic commercial water balancing. Additionally, as our EMP customers continue to extract value through industry consolidation, we believe there will be growing demand for high-quality partners with the size, scope and networks to serve the largest operators and…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first questions come from the line of Luke Lemoine with Piper Sandler. Please proceed with your question.

Hi, good morning. You all detailed the two new projects in Delaware and the growth CapEx associated with that. You all have a variety of projects here that you've been investing in over-time and it looks like next year you could as well. How do you balance this and how should we think about the returns? A lot of other North America Service companies and they don't have the growth lag that you do. So, I just kind a thinking about incremental CapEx, incremental projects, can you just help frame the returns and how we should think about this?

Sure, Luke. This is Michael Skarke. A couple of thoughts there. I think part of the growth profile is really the core focus we've got around infrastructure and probably more specifically recycling as it relates to the Northern Delaware. There's a bit of a secular tailwind there as we're looking at competing with traditional freshwater sourcing and disposal and the challenges that exist in that area. So, we're seeing a lot of traction there. The returns are really consistent with what we've said in the past. We're trying to get a three-year return on our capital under the underwritten contract with the ability to connect it beyond that with other operators to improve upon that return. Most of the projects we've announced, unfortunately, there's a long lead time as I know we've discussed in the past. And So, we're looking to try to get those on by the end of the year. But we are expecting a meaningful contribution from the capital we'll spend this year for next year. And then, as we build out that system and that network, we're finding projects, really, we get more projects. More opportunities, more extensions, more connections, more optionality with operators, all of that is what's really driving our backlog and really the enthusiasm we have around water infrastructure as we look forward to 2025.

Luke, maybe a couple of points I'll add on to that, to your question specifically around the allocation of capital, the returns and particularly how that compares to maybe the competitive landscape. And I think one of the unique things about Select as a platform, we are a rapidly growing growth platform around infrastructure, but we are able to self-fund a lot of that capital outlay through the strength of our leading platform around water services and chemicals. The diversified platform we have all across the U.S. as well gives us quite a bit of flexibility and optionality to look at different basins and different components of the infrastructure supply chain as well to really find the best opportunities. But to Michael's point, I mean, clearly the expertise we have around recycling and our ability to integrate that with the logistical application of services is definitely providing us some clear differentiated project wins and success there. But I think the underwriting support, whether it's infrastructure around disposal, recycling facilities or pipelines, we generally take a similar approach towards our underwriting economics, kind of across the board in that segment. And we're seeing that on the solid side as well with some of our more recent entry into that part of the business. So, it's definitely a rapidly growing capital allocation point for us in terms of making some of those decisions. But our ability to self-fund a lot of that out of the base business and utilize the liquidity we have in the facilities has been quite effective for us here recently, although the pace of that is obviously picking up here in the back-up of the year, but for the right reasons.

Okay. And then the water infrastructure margins. I mean, it's hopped over the 50% mark, which is pretty important. And it happened a lot sooner than we expected. I'm not sure about if you guys expected it this soon as well. But could you just talk about kind of what drove the acceleration there and allow that to happen quicker than expected?

Sure. So certainly, was very pleased to see us get to that 50% point here in the first half of the year. We were striving to get there potentially in 24, but certainly targeting, getting there by 25. So, pleased with the pace of our ability to get there in the second quarter. It was contributed, a couple of things contributed to that, when you think about the incremental utilization of existing capacity within the base infrastructure business, every incremental barrel of throughput through a piece of fixed pipe or a facility provides a pretty attractive incremental margin. And we were able to drive revenue growth in the first half of the year through both, organic business development as well as bringing on a creative acquisition that contributed to the segment on a margin basis that's the tire of where we've been. We've been able to take costs out of some of the recent acquisitions faster than anticipated. So, there's still a little bit of work to get them integrated into the networks, particularly out in East Texas. But generally speaking, the assets that we've been able to bring into the system, we've been able to utilize quickly and get some costs out sooner than we anticipated. So, all of that's really contributing. But I think first and foremost, it's just the continued ability to drive volumetric throughput through the assets at a higher rate. And we expect to see a material continued pace of that. And into Q3 here that I think should stabilize those margins above 50% and give us clear visibility into continuing to take those further over the next year or so.

Okay. Got it. I'll turn it back. Thanks.

Excellent.

Thank you. Our next questions come from the line of Jim Rollyson with Raymond James. Please proceed with your questions.

Hey, good morning, guys. Just maybe circling back on water infrastructure. Chris, you talked about just this quarter didn't quite get to the sequential growth you originally hoped for. And you talked about Thompson Pipeline as it relates to third-quarter guidance. But if I recall correctly, kind of start of the year you were thinking water infrastructure revenues were probably going to be up somewhere between 30% and 40%. I'm curious if you still think that given the kind of delay in the Thompson Pipeline, because obviously that implies a pretty big step up in 4Q if and when that hits.

Yes, that's a good question, Jim. I'd say that the Thompson pushing into the fourth quarter is certainly going to impact the top-line contribution expectations for the year. So probably coming in towards the bottom end of that guide. But I think importantly, the profitability has improved at such a pace that we're likely tracking towards something that at the top end or potentially exceeding the top end of the growth on the profit side, which was expected to be 40% to 50% year-over-year growth. So, I think we're in a position we might be able to push above the top end of that range on the profitability side. So, on a gross dollar basis, still on track or potentially ahead of where we expected to be at this point, even if the top line is going to be a little lower than we might have liked. But obviously, that's really just a timing question of getting some of those assets up and running. And certainly, once they come online in Q4 and the new projects in Q1, we should see a pretty heady pace of growth in the next six to nine months from those new projects. And those should continue to be additive to the margin profile as well.

Absolutely. Yes, appreciate that. I just want to make sure we get the timing right. And then on that, you're kind of leaning into growth CapEx as opportunities are there for contracted high return projects. I realize this is probably an ongoing moving target. But if you kind of add up all of the projects you have contracted for now, plus the recent M&A, when all this is on, let's say it's 1Q or ramping up into second half of next year, what kind of revenue run rate do you already have visibility on for water infrastructure? Just trying to understand how this unpacks as we go in through 2025 based on what you already have kind of in hand today.

Yes, it's a good question, Jim. Obviously, with the dollars we're spending in the back half of this year, there's not going to be a ton of contribution from a revenue standpoint from those projects until we get into 2025. And there'll be a continued pace of that spend in the first half of next year. I think that from an overall growth capital standpoint, I think we have a pretty high level of confidence towards seeing a comparable level of growth spend next year that we see this year with additional contract wins. In terms of thinking about how that starts to pull through the top line and translates into a growth rate, I think you can generally think about the growth capital we're actively deploying now based on the announced projects, as well as kind of the four-year guide. Take that three-year cash-on-cash approach from our organic capital deployment and 50-plus percent gross margin and that's going to be a pretty good way to think about the timing of that capital contributing to the overall growth.

Yes, got it. Appreciate that. I'll turn it back. Thank you.

Thank you. Our next question has come from the line of Jeff Robertson with Water Tower Research. Please proceed with your question.

Thanks. Chris, just to follow-up on the margins, if you're ahead on margins in water infrastructure, should we think that you'll accelerate your goal of getting to the plus 50% on gross profitability before year-end 2025?

I think it certainly gives us an opportunity, Jeff, to get there faster and obviously with the activity environment, providing a little more of a governor on the completion’s parts of the business around services and chemicals, it provides an additional layer of profit-weighting out of infrastructure in the relative near-term. I'd say that based on the backlog of projects we see and the timeline of when we expect to get those projects underwritten and deployed, I think that's still an appropriate way to kind of frame our expectations here. But certainly, as we look into 2025, I think there's an opportunity for us to pull that timing forward potentially, Jeff, but it would certainly require some additional contracts getting under our belt here in the back half of this year.

And as you think about the business over the next several years, with an increasing share of revenue and cash flow being underwritten by long-term infrastructure projects, does that impact the way you think about capital budgeting and cash return to shareholders plan and just the ability to compound that growth into continuing to expand the water infrastructure segment?

Yes. No, it's a great question. We certainly think that we've got an ability to deploy the growth capital we have in front of us this year out of free cash flow. We've been able to grow the dividend over the last year. We were quite active from a repurchase standpoint last year. A little bit more constrained from a buyback standpoint this year, as we've been picking up the pace of the organic capital deployment. Looking out 12 months from now, I think that getting more underwritten contracts in the books is definitely going to give us more optionality and flexibility into how we underwrite the business, both in terms of taking a look at the capital structure on the balance sheet, as well as the stability and opportunity for shareholder return growth. So, I think for now, we've certainly shifted focus from an M&A standpoint in the first half of the year towards an organic capital deployment standpoint in the back half of this year. We remain with a $21 million authorization on the share repurchase that we'll continue to have for tactical deployment. But I think the pace of opportunity in front of us from an organic project standpoint is picking up at a rate that that's the best opportunity for us to put good capital to work here if we can continue to add long-term, 10-year, 15-year underwritten contracts for new growth in water infrastructure.

And I think that's a really important point. I mean, our strategy is working. We've been really more successful at growing water infrastructure revenue and profitability than we anticipated so far. And we really are focused on and going to continue to execute that strategy. And it's fueled by driving more volume through existing systems and networks as Chris mentioned. And also, as I mentioned earlier, the fact that as we expand our system networks, we're seeing more and more deals that are just expansions of those existing systems. So, we're really excited about kind of the opportunity to drive further growth despite what is a softer uncertain macro environment.

And maybe to your specific question around contracts, Jeff, probably around half of the infrastructure segment today is supported by long-term contract and looking forward into next year. That should, with the new projects coming online, make up a substantial majority of that segment's revenue and profitability by the time we get to the end of 2025. So, having that visibility into a growing segment with a large base of underwritten contracts is definitely going to give us that optionality to make different decisions. But ultimately, it's going to give us the opportunity to make good decisions.

Thank you.

Thank you. Our next questions come from the line of Tom Curran with Seaport Research Partners. Please proceed with your questions.

Good morning.

Hi, Tom.

Chris, by my calculations, the water infrastructure division is average annual revenue per recycled barrel. So, this is excluding chemical technologies on the flat revenue. Just for that water infrastructure division, my calculations say that annual average revenue per recycled barrel doubled in 2022 and then rose roughly another 50% in 2023. Assuming my math is accurate enough, could you break down those steps up in revenue intensity by key driver contribution? And then do you expect that uptrend to continue into 2025?

Yes, it's certainly an interesting way to look at it, Tom. We have seen a very rapid pace of growth from a top line standpoint and a volumetric standpoint across both the recycling and the disposal side of the business. From a disposal standpoint, we've obviously been adding to that part of the business through acquisition this year, whereas on the recycling side has been adding more through organic project development. So, we're adding from kind of both parts of the strategic channels there. From an actual recycling rate of growth, we saw a substantial growth up to in excess of 250 million barrels recycled in 2023. And we think that that's going to continue to pick up a rapid pace of growth, similar to some of the things you were talking about, Tom. I think that looking forward, the contracts that we just announced are really recycling-based facilities bill out. So, we should see the pace of growth in recycling be the majority of the driver into 25. Whereas this year that split last year was more recycling weighted. This year is probably going to be more disposal weighted with the acquisitions and the continued utilization of those assets as we network them into the system. So, I think you're probably going to have an inversion of that growth this year, reverting back to being a recycling heavy weighted growth next year.

Maybe Tom, just to put a finer point on it, what Chris said, from a disposal capacity, the acquisitions we've made have given us about a 30% uplift in our available capacity. And on the recycling, the announcements we just had in the script and earnings, that's going to expand our fixed facilities, which I think is what you referenced, capacity by 20%. So, from today to really first quarter, kind of mid-late first quarter next year, we should have a 20% uplift in our fixed facility capacity for recycling.

And that's obviously on a capacity basis, but we've got obviously an ability to pull through increased utilization of the existing asset base that provides us quite a bit of opportunity to grow at a rate comparable or higher.

And that's really where the interconnections come into play in the system expansions. That's the importance of those two.

Yes.

Got it. Yes, I was more trying to dig into sort of disaggregating by anchor tenant ramp, then scaling up the facility further by tying in additional customers and then maybe pushing pricing as you proved yourself and your market reputation's expanded, but I could dig into that more with you in a follow-up call. Just, Michael, regarding the Water Infrastructure Division's organic opportunity set, for the premium projects that you're most optimistic about winning, can you give us an idea what the rough split is between the Midland and Northern Delaware and then what percentage of those high-probability awards? Again, the ones you're most confident about getting across the finish line here over the second half, how many of those include fixed recycling capacity, whether it's a brownfield expansion or new-build construction?

Sure. So, we've got a diverse footprint, Tom, as you know and are really excited about that. I think John mentioned that the operational and geographic diversity is one of our strengths and differentiators, and he's exactly right. I mean, we got, we've executed business development opportunities in five basins. We've had strategic M&A in six, so we're really focused everywhere, but the Northern Delaware is where we're primarily focused. It's where we announce these two deals. It's where the majority of our high confidence business development opportunities set lies. Most of that is around the water recycling and that's just where the market is trending and where the market leader in water recycling. We have kind of first mover advantage but frankly it's become a core competency of ours. And so, it's a real strength and it's something that we're looking to advance and capitalize on and that's why you're seeing the increase in CapEx, that's why you're seeing the increase in contracts and that's where I suspect we will continue to execute over the back half of this year.

Hi, Tom, this is John. One thing to add about the Upper Delaware to Michael's point, I mean, two counties in Mexico, it's really developing as it relates to coming off freshwater and getting on produced recycled water. It's really developing in water exchange. It's heavily weighted to needing the solutions that Select has. So, it demands really the capital and the solutions for this acreage to be developed and developed correctly. So, we feel really strong about our position in the Northern Delaware.

Got it. And the last one for me and I would love to hear all three of you weigh in on this but on the solid’s management front, how would you describe Select's strategy at this point and the full scope of what you seek to do commercially in advancing wastewater treatment and cleanup toward or ever closer to economically viable, beneficial reuse specifically for solids management? Do you plan to stick with just separation and disposal for now or do you already intend to expand into extracting and monetizing valuable mineral deposits like lithium, cadmium and bromine?

Tom, this is Michael. I'll take a shot. I think that was probably a three- or four-part question so you'll have to bear with me as I wade through it. So, starting with solids management, I mean, from an operational and financial perspective it really fits nicely with water infrastructure. The financial profile, the returns, the operations, the employee intensity all matches very well. It allows us to manage the total waste stream and we're excited to be able to provide that total solution for our customer. It leverages in the existing water infrastructure footprint so we're really pleased with what we've acquired so far and I think we would look to kind of strategically expand that if the right opportunity were to arise. Beneficial reuse we really think of is separate from solids management. There's certainly a component of it. We have a very strong team focused on it. We're partnered with a very large operator and a joint development agreement. We had a successful field trial earlier this year and are gearing up for another one, another trial, the back half of this year. So, it's something we've invested real time and money in the last couple of years and are continuing to do so. Our primary focus on that is really taking cost out of the system. The challenge there is not the technical feasibility but more the economic effectiveness and so we're focused on reducing both CapEx and OpEx in that system. Obviously while still developing reliable and adaptable system to the changing water qualities. So that's not something that we've talked a lot about but it is something we're going to continue to work on and we do think the market is heading that direction and we're going to be ready for it. The last part, at least the one that I recall, was around mineral extraction. That's again something that we're paying attention to. We know that there are several different elements that exist in produced water that do have economic viability. We've measured it across our extensive footprint and are working and engaged with companies to see what that would look like in terms of extracting it, who would do what, what the economics would be. But -- that's still similar to beneficial reuse in the earlier stages of becoming a true economic solution. But it's something that we're obviously aware of, we're evaluating and seeing what role we would play.

Maybe a couple of things I'd add to it, Tom. To Michael's point around the cost management side of beneficial reuse and your point around solids, one of the things that you ultimately have come to bear when you're treating water to a beneficial reuse level of quality is you generally have a freshwater quality on one side and a heavy concentrated brine on the other side, as well as solids that have to be managed. It provides a more vertically integrated cost management approach if we have that solids piece as an integrated part of a solution. That concentrated brine that you get on the backside also provides more optionality around looking at that mineral extraction as a part of that system that's already necessary for that water treatment to get to a beneficial treatment quality. So, it does provide a full opportunity set as you go across the different applications of how you might approach this. We're certainly looking at that on an integrated basis as well as analyzing the various technologies and the various geographic discrepancies between what those water qualities look like and the demand for both the waste stream management as well as the extraction.

Got it. Thank you for all the very thoughtful answers.

Thank you. Our next question has come from the line of Bobby Brooks with Northland Capital Markets. Please proceed with your question.

Hi, good morning, guys. Thank you for taking my question. First one that I've got is just, could you help quantify how much of a revenue headwind were the divestments and consolidations of non-core assets within water services? The segment was up slightly sequentially above the low single-digit decline guide that you guys had given. Just looking for a little bit more color on what drove the strength and are those factors causing the strength in the second quarter expected to dissipate in the third quarter given the mid to high single-digit decline or maybe that decline is more a factor of divestment that you are looking to execute? Just looking for color on that.

Yes, good question, Bobby. So, if you think about the -- obviously we, I think, outperformed what we thought we'd be able to do in the second quarter and that was largely on the back of the pull forward of some water sourcing opportunities that we were able to get with our kind of key infrastructure contracts and customers. So, we were able to do that in both the Delaware side of things as well as up in North Dakota with the customer off that Thompson system to kind of meet their completions demand in the near term as we get those projects continued to build out over the next couple of quarters. So that was the substantial driver of what got us to growth, to counteract what continues to be some active consolidation efforts as we've kind of mentioned primarily around the more commoditized application of fluids hauling. Everything that we can do to get a piece of water onto pipe is obviously a high-margin benefit to the company. And so, there's definitely an application of approach towards continuing to focus on getting volumes off of truck and onto pipe over time. And you'll continue to see that as we build out the systems. But year to date, if you look at the last six months, really the kind of entire majority of the volume or the revenue dollars we've seen come off the segment from a water services standpoint year to date, relative to Q4 are out of that fluids hauling segment. So, we've seen quite a bit of stability in other parts of services, particularly around our water transfer and logistics business, that's pretty core to supporting the overall efforts around infrastructure. And so, we'll continue to focus on what that might look like over the back half of the year here. But overall, the decisions we're making should ultimately be margin accretive to the segment over time. And I think that they're beneficial to the overall strategic efforts of getting that volume put on pipe over time and into our infrastructure network.

Got it. Appreciate that call out. Then switching to water infrastructure, obviously a nice 8% sequential revenue growth there. You guys have talked about, you mentioned increased utilization, but in terms of the driving factor there, but you guys also had a couple of acquisitions, right, that would have contributed there. So, I was just looking to get a sense on how much of that growth was through organic development or increased utilization of legacy assets versus inorganic acquisitions growth there?

Yes, for the second quarter, the gross profit gains in infrastructure was about a 50-50 split contribution from additional acquisitions and contribution from organic growth and enhanced utilization of the existing asset base. On a year-to-date basis, you've taken the first quarter into account, it's certainly going to have a higher weighting towards acquisition, probably more of a 75-25 split on a year-to-date basis. But I would say that even though the back half of the year will continue to be focused around the organic project build-out, there's still quite a bit of utilization enhancement we can get out of the acquired assets. There's a little bit of effort and undertaking to get those networked into the system. And as we get those networked, it's going to give us quite a bit of opportunity to enhance the utilization of those acquired assets. That's really the strategic reason for a number of these deals. And so, I think looking forward, we'll be able to drive utilization improvement across the business, but that'll be both on the existing assets as well as the recently acquired assets beyond what we've been able to see on a kind of day one or quarter forward basis from the recent deals.

Got it. And when you're saying the split, you're comparatively -- comparative on the year-to-date, are you comparing that to first half '23 comparatively, right?

Good question. I was comparing that sequentially coming off of Q4. So, picking up the first acquisitions in the early part of January in 2024. And that relative split was on a sequential basis looking at Q4 of '23 forward into Q1 and the first half of year on a consolidated basis.

Got it. Thanks for that clarification. And just last question for me is on the PR, you mentioned how the Northern Delaware System expansion will effectively triple the capacity of your current system there. So, my question is, is all of that added capacity already dedicated to certain long-term production agreements? And essentially, when that's up and running in the first quarter of 2025, its utilization is going to already be at 100%. And if that is so, all that is all the added capacity that will be you -- I'm sorry. And if that's so, where all the added capacity is going to be utilized once it's up and running? Does the tripling in capacity essentially translate to a tripling in terms of financial impact?

Bobby, this is Michael. To talk about the operational side of it, so all of that capacity is not dedicated to a single operator. So, when we underwrite these projects, we underwrite somewhere between a third and really probably closer to a half of the capacity by the cornerstone customer. And they're going to have the right of first refusal on the asset. But then we work to commercialize it, the remaining portion. And so, we do expect the anchor tenant to come online in Q1 and really ramp up in Q2 as we work through some of the early inefficiencies of building a system. But we do expect to have additional excess capacity and meaningful excess capacity on the system that we would commercialize with offset operators in the area.

And Bobby, one of the clear strategic benefits and value adds to the customer of getting these recycling facilities up and running is it provides effectively a disposal off ramp for the produced water that they need to manage and get rid of. But it also provides an opportunity to match and manage water in the marketplace to the completion demand across multiple operators. So, it really is a water-balancing effort to bring in multiple operators into those assets so that you have steady pace of production coming into the system from multiple operators. And then that provides optionality to redeploy that treated barrel back towards new development across multiple operators as well. And the more you can add that flexibility with additional operators, it creates a more effective balanced network overall.

Got it. That's a very virtuous cycle. I appreciate the time. Congrats on the good quarter and I'll return back to the queue.

Thanks, Bobby.

Thank you, Bobby.

Thank you. [Operator Instructions]. Our next questions come from the line of John Daniel with Daniel Energy Partners. Please proceed with your question.

Hi, guys. Thank you for keeping this call going. And I'm going to apologize in advance for my water 101 questions. But when you look at the expansion you've got in the Northern Delaware to the dedication of 81,000 acres and then the right of first refusal for 162,000 extra, do you have at this point visibility into the customer's activity levels for '25? And if you do, are they simply moving assets, rigs and so forth from one area to the other? Or is it incremental gains if you were to exercise that 162?

So, when we enter an agreement like this, John, we partner with the operator. We need to understand their long-term development plan as well as their near-term needs to make sure that we're sizing the system correctly. We're building it out to where they need it built out first. And so, we're really partnered with the operator. So, we do get regular schedules, drilling schedules. Obviously, they change. And we're working to accommodate those changes. But this is a long-term planning with our customer. And so, we know what they're doing in 2025 and beyond.

Yes, it's a material change to the relationship and a partnership approach there, John. And as it relates to the active acreage dedicated as well as the opportunity and the look towards the Delaware for acreage, those are active ongoing dialogues that are underway. So, it's really around how do we meet the needs of their current schedules and what they have visibility into over the visible period of 12 months, 24 months and then how do we think about what that translates into around the larger acreage footprint as they also potentially add acreage from their own acquisition opportunities in the future as well.

And we see the Delaware is important because it really once you have the system just expanding it a little bit here or there is a natural solution for both us and the operator. Again, speaking to the importance of balancing long and short within the operator but for other operators as well as Chris mentioned. And so, we're really looking to see how that our customers’ needs expanding grow within the dedicated interest but within the larger Delaware period as well so that we can expand our system to take care of those customers and offset operators as well.

And John mentioned it earlier as well but I mean frankly these solutions are becoming critical to the customer's ability to even develop the acreage they have in some of these areas particularly in Northern New Mexico. So, I think that it's changed the way that they approach water it's changed the way that we partner with them around water and it changes the way they evaluate opportunities to grow further on their own side. So, we definitely are focused on how we match those solutions to their needs and what they see as their opportunity.

When I think about it you know when we say dedicated we got to know where they're going to drill, how many they're going to drill, what time they're going to do that and we are full contact and what kind conversations planning with them as we get that dedicated position as we invest that money that we wrap around that three-year cash on cash or 50 plus gross margin but that Delaware for stuff that is really holding hands to make sure that we can plan the system out in the future to bring that value to them and to make sure that we can move that water properly and we don't duplicate the asset base that's already been put in place because of poor planning.

Okay. And then just a few more and if you want to hang up on me that's cool but the -- when you talk about constructing the multiple recycling facilities and the upgrades is that for the 81,000 acres or is that for the 81 plus to 162?

That would just be for the 81, John. So, the Delaware acreage would be incremental and well beyond that so that's additional long-term development potential for us.

Got it. Okay. Turn into the acquisitions I recognize not all SWD facilities are created equally but when you look at the compare sort of the northeast where you get one active well and one uncompleted one and you essentially buy that for $9 million and you compare that to say the Trinity deal where you got 22 SWDs and a lot of other stuff. Is there -- I assume there's differences in volumes the capacity for well or is this perhaps suggestive that just the Northeast market is structurally better than the Permian?

I wouldn't say that it's better than the Permian, John it's just different. The disposal wells in the Northeast are considerably smaller than the ones in the Permian. So, you can have a 15, 20, 25,000 barrel a day disposal well in the Permian you don't have anything like that in the Northeast you're going to have a 3 or 5,000 barrel a day well and that might be a good well. The pricing is materially different in the Northeast in the Permian. I mean those are probably two of the most extreme markets that we participate in. And it gets back to the volume of the well. So, they're just fundamentally different markets. It's -- you can compare disposal wells within a basin of similar depth. It's much more challenging to compare disposal wells in different basins, particularly if they have different depths. What I would say that is consistent though is how we've made the acquisitions. Whether it's the Northeast or East Texas or the Permian, we're pretty consistent in our valuation. We're going to make sure that it is a creative on a historic and go forward basis. And that's really the case, whether it's a $9 million acquisition or a $22 million acquisition.

That's all I want to -- thank you for --

Yes, John.

John, on the -- when you're buying disposal wells, this company is a little bit different in some respect because if you think about it, we got three different ways of looking at it. One, just needed volume in a certain area. They need to be able to dispose water that they're creating as they complete these wells in certain areas. But then we have pretty large pipe systems now that gather water and take it to a place that you can dispose of it in higher volumes or at lower cost to bring value to that customer. Get it off a truck, get it on pipe and actually save money disposing of it. But what we've realized and probably this is developed under our nose, is that we also now have these systems that are really water exchange systems. You dispose, you have a capacity of disposal that these wells fit into that are needed sometimes, but not all times because sometimes that piece of water is getting recycled and it's a needed recycled barrel for completion. So, it becomes a water exchange system of water balancing. And these assets fit into those equations in all three ways.

Got it. Okay. Well, congrats. Thanks for letting me get on the call and congrats on the hitting the 50% margin threshold.

Thank you, John.

Thanks, John.

Thank you. This now concludes our question-and-answer session. I would now like to turn the floor back over to John Schmitz for closing remarks.

Thank you to everyone that joined our earning's call today and for your continued support and interest in learning more about Select Water Solutions. I look forward to speaking to you again next quarter.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a wonderful day.