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Edited Transcript of WTTR.N earnings conference call or presentation 7-Nov-19 3:00pm GMT

Q3 2019 Select Energy Services Inc Earnings Call

GAINESVILLE Dec 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Select Energy Services Inc earnings conference call or presentation Thursday, November 7, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris George

Select Energy Services, Inc. - VP of IR & Treasurer

* Holli C. Ladhani

Select Energy Services, Inc. - President, CEO & Director

* Nicholas L. Swyka

Select Energy Services, Inc. - CFO & Senior VP

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Conference Call Participants

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* Kurt Kevin Hallead

RBC Capital Markets, Research Division - Co-Head of Global Energy Research & Analyst

* Sean Christopher Meakim

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

* Thomas Allen Moll

Stephens Inc., Research Division - Research Analyst

* Thomas Patrick Curran

B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the Select Energy Services third quarter earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Chris George, Vice President, Investor Relations and Treasurer. Thank you. Mr. George, you may begin.

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Chris George, Select Energy Services, Inc. - VP of IR & Treasurer [2]

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Thank you, operator, and good morning, everyone. We appreciate you joining us for the Select Energy Services conference call and webcast to review our 2019 third quarter Results. With me today are John Schmitz, our Executive Chairman; Holli Ladhani, our President and Chief Executive Officer; and Nick Swyka, Senior Vice President and Chief Financial 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 selectenergyservices.com. There will also be a recorded telephonic replay available until November 21, 2019. 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, November 7, 2019, 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 for the year-ended December 31, 2018, our subsequent quarterly reports on Form 10-Q and our current reports on Form 8-K to understand those risks, uncertainties and contingencies. Also, please refer to our third quarter earnings announcement released yesterday for reconciliations of non-GAAP financial measures.

And now, I would like to turn the call over to our President and CEO, Holli Ladhani.

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Holli C. Ladhani, Select Energy Services, Inc. - President, CEO & Director [3]

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Thanks, Chris. Good morning, everyone, and thanks for joining us today. Overall, we continue to execute on our strategy to strengthen and differentiate our position as the market leader in integrated water and chemical solutions, while also delivering meaningful free cash flow.

The core tenets of this strategy include developing attractive organic growth opportunities; investing in technologies that differentiate our services, reduce our costs, and expand our market share potential; and finding strategic bolt-on M&A opportunities that enhance our capabilities, broaden our service offerings and strengthen our customer relationships. We plan to achieve this strategy all while fortifying our balance sheet through solid free cash flow generation and returning capital to shareholders when appropriate.

More specifically, during the third quarter, we grew revenues in a challenging market through strong performance on our strategic water infrastructure assets as well as continued market penetration for our proprietary friction reducer product line. We delivered $67 million of operating cash flow which we deployed across several initiatives.

First, we acquired a specialized market-leading business that expands our water treatment capabilities with a proven team that further bridges the complementary solutions of our water services and chemicals offerings. Next, we continued to invest in automation technology that differentiates our services and reduces our costs. Third, we continued the development of our strategic Northern Delaware pipeline project, which is progressing on time and on budget. And finally, we executed a modest share repurchase, returning capital to shareholders. We accomplished all of this while strengthening our debt-free balance sheet, increasing our cash position even after these capital initiatives.

While the third quarter wasn't without its macro challenges, operationally Select also performed well relative to the market. Looking at the industry more broadly, U.S. unconventional activity levels typically remain strong through the third and early fourth quarter. However, as operators refocus on cash flow and capital discipline, we're seeing budget exhaustion occurring or set to occur earlier this year for many of our customers. And looking at specific activity levels for the third quarter, early indications point to modestly decreasing completions activity relative to Q2 with a fairly steep downward trajectory in September.

Our own internal frac fleet tracking data indicates an 8% reduction in the number of active fleets during the quarter, alongside a 7% decline in the Baker Hughes horizontal rig count. Given that macro backdrop, I'm very proud of the team's performance in the context of what was otherwise a tough market.

After adjusting for the previously divested well site services business that contributed during Q2, we delivered overall sequential revenue growth of 4%, driven by strong performance in our water infrastructure and oilfield chemical segments. These 2 segments also delivered increased gross margins and our recent cost improvement efforts mitigated decrementals in our water services segment.

As I mentioned, we also continued to deliver strong free cash flow during the quarter, allowing us to execute on our investment priorities, generate returns to shareholders and continue building cash on the balance sheet. Having a clean balance sheet positions us to think and act strategically. As we've said in the past, we're always looking at good strategic bolt-ons that strengthen our service offerings and prioritize unique technologies.

We believe our recent acquisition of Baker Hughes' well chemical services business, or WCS as we'll refer to it, perfectly exemplifies this strategy is it's very complementary to our existing water treatment capabilities. This business is an industry-leading provider of advanced water treatment chemical solutions, spanning the full water life cycle, and serves all major U.S. basins with its largest area of operations being the Permian Basin.

While we plan to report the financial results of the WCS business within our chemical segment going forward, this business will work closely with the operational leaders of each of our segments to provide comprehensive solutions to our customers. If the water sourcing supply chain continues to become more complex and the opportunities for produced water reuse continue to grow, the interplay of the relationship between water quality and the chemistry behind the frac fluid system continues to garner increased focus from our customers.

We believe the comprehensive nature of our existing customer relationships, service capabilities and technical expertise across both water and chemicals will allow us to more effectively grow this business, further differentiating our market-leading position and advancing the strategy that began with the Rockwater merger a couple of years ago.

I'd also like to add that this acquisition establishes a strong strategic sourcing and product development relationship with one of the preeminent chemical manufacturers in the entire industry, expanding our overall product offerings to our customers and broadening our supply chain.

While we continue to evaluate further growth opportunities in the M&A market, we value our strong balance sheet and the flexibility it provides and will remain diligent and disciplined with our capital deployment.

Looking forward, we anticipate Q4 to be a challenging quarter for the industry. We're planning for general completions activity to decline 15% to 20% from the third quarter level, given the typical winter slowdown and early budget exhaustion, with many operators wrapping up their full year capital programs well ahead of the typical holiday schedule. In response to this seasonal weakness, we're focused on taking proactive measures to protect our earnings and cash flow generation, requiring a critical focus on our cost structure and capital program.

As market conditions have continued to evolve and 2020 budgets remain uncertain, we've reevaluated our CapEx needs for the year, leading us to lower our previous 2019 CapEx target of $120 million to $140 million, down to $100 million to $110 million, which includes just under $40 million related to the New Mexico pipeline. This decision will impact the pace at which we upgrade or look to grow our water services asset base in light of current rate of return expectations, but doesn't require us to defer maintenance CapEx.

We're balancing the near-term need to actively manage our cost structure and to make prudent capital investments with being prepared to support our customers as activity picks back up in the first half of 2020.

With that, I'll turn it over to Nick to walk through our third quarter financial performance in more detail.

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Nicholas L. Swyka, Select Energy Services, Inc. - CFO & Senior VP [4]

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Thank you, Holli, and good morning, everyone. I'm pleased to announce that we reached our full year free cash flow target a quarter early with $42 million of free cash flow in the third quarter, bringing us to $65 million year-to-date.

While roughly 1/3 of our operating cash flow came from working capital improvements, 2/3 can be attributed to continued strong operating results. With this operating cash flow, we funded the WCS acquisition for just over $10 million, returned nearly $12 million to shareholders via buyback, invested $25 million of net CapEx and still increased our cash-on-hand by $19 million. I expect that through the remaining months of the year, we will exceed the high end of our previously targeted 2019 free cash flow range of $65 million to $80 million.

Select generated total revenue of $329 million in the third quarter, an increase of $5 million quarter-over-quarter or $12 million considering the impact of last quarter's divestitures. Our water infrastructure and Oilfield Chemical segments demonstrated impressive resilience in growing both revenues and margins during what was a challenging quarter for the industry. We don't expect to repeat this level of revenue in the fourth quarter, but are encouraged by our customers' continued preference for our people, expertise, technology and solutions.

Adjusted EBITDA was similarly resilient at $49 million, down $3 million from the second quarter, leading to net income of $7 million. As a company, we continue to remain laser focused on adjusting costs in real time with activity and we are executing that effort on all fronts, OpEx, CapEx and SG&A into the fourth quarter.

Diminishing completions activity in September and a full quarter impact of previous pricing pressures led to water services segment's revenues to decline 3% sequentially to $197 million in the third quarter from $202 million in the second. The segment generated gross profit before depreciation and amortization of $43 million in the third quarter compared to $47 million in the second, reflecting a slight decline in segment gross margins from 23% to 22%.

With further revenue declines in the mid to high-teens on a percentage basis expected in the fourth quarter, due to our customers exercising capital discipline and other seasonal impacts, our operational leadership is taking decisive action that when combined with our improved efficiencies from our investments in technology should keep near term decremental margins in line with traditional levels prior to activity picking back up in 2020.

The water infrastructure segment significantly increased revenues by 24% from $52 million in the second quarter to $64 million in the third. Gross profit before D&A increased from $13 million to $17 million quarter-on-quarter as our Bakken infrastructure returned to higher utilization and our existing New Mexico infrastructure saw record volumes. Gross margin before D&A of 27% for the quarter improved modestly from 26% in the second quarter. While this segment is not immune to macro volatility, we expect the water infrastructure segment to outperform in the fourth quarter relative to anticipated industry activity levels, with the high single-digit percentage revenue decline on a similar margin.

The Oilfield Chemical segment continues to improve its profitability with revenues increasing $5 million to $68 million in the third quarter and gross margin before D&A of nearly 16% versus second quarter's 14%. This combination of higher revenue and margins led to gross profit before D&A of nearly $11 million for the quarter, up from $9 million in the second quarter. The continued effectiveness of our proprietary products and favorable logistics with our in-basin manufacturing continue to win new customers and provide higher throughput from our manufacturing facilities.

While seasonal impacts and integration and relocation costs related to the recent WCS acquisition will likely pressure margins temporarily back into the low teens for the fourth quarter on a similar revenue base, we expect this to rebound in 2020. The addition of WCS furthers the integration of our chemicals group into the full water lifecycle value chain and unlocks new customer opportunities across a wider range of solutions. We're very excited about the potential for this business and will provide more guidance for the anticipated contribution of this business as we progress further with our 2020 budget process.

Looking at our other corporate costs, higher tax expense this quarter was driven primarily by the accrual methodology we follow, along with state taxes based more on activity. And we expect the full year tax rate to finish in the mid-teens. We don't expect any material change in depreciation in the fourth quarter, while SG&A should decline by a mid-single-digit percentage through our ongoing cost-cutting efforts.

We continue to have 0 bank debt and enjoy a net cash position of $43 million as of September 30, with an expectation that we'll generate substantial additional free cash flow over the fourth quarter. This fortified balance sheet enables us to compete more effectively in a down market as well as be prepared to exploit organic investment or targeted acquisition opportunities that may emerge. While growing our cash balance and executing on a targeted bolt-on acquisition, our share buybacks during the third quarter brought our total capital returned over the last 12 months to roughly $29 million, while over the same time period eliminating $65 million of debt.

The remarkable cash flow generating potential of our franchise has manifested itself through positive free cash flow every quarter since the Rockwater merger. And we expect that to continue through a challenging stretch in Oilfield services. While remaining opportunistic in our pursuit of high-return investments, we will continue to safeguard the balance sheet and prioritize cash flow and returns on capital above all other financial metrics.

With that, I'll hand it back to Holli for some concluding remarks.

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Holli C. Ladhani, Select Energy Services, Inc. - President, CEO & Director [5]

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Thanks, Nick. To quickly wrap-up, our leading position in the marketplace and debt-free balance sheet uniquely position us to manage through the current market environment and take advantage of opportunities in the coming quarters.

Though the market will present challenges outside of our control in the coming months, we continue to focus on the things we can control: our costs, our customer service and our disciplined capital allocation. We remain focused on our strategy of generating returns and free cash flow for our investors and consistently executing for our customers while keeping our employees safe every day.

With that, I'll turn it back over to the operator and we'll take your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions). Our first question comes from the line of Sean Meakim with JPMorgan.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [2]

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So, Holli, given the outlook that we have here heading into 2020, can you maybe give us a sense of how you're thinking about this, the continued effort on the part of E&Ps to focus on capital discipline? How that impacts what you think about water infrastructure investment opportunities? And both from a sourcing side as well as on the produced side, just kind of where you see those opportunities and has that shifted in the last few months in terms of the opportunities that you see out there?

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Holli C. Ladhani, Select Energy Services, Inc. - President, CEO & Director [3]

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Yes, I mean we definitely see operators looking on the post-frac side. They've built some fairly meaningful systems over many years and the market's valuation of those with some recent deals is pretty robust. And so I think there are a lot of those guys looking at whether or not there's sort of an arbitrage there between what they -- the multiple they could sell those businesses for versus how they're valued. So I think we'll continue to see at least active discussions around larger systems that operators can put together on the post-frac side.

I do think, from our perspective, we're more focused on, I will call it, bespoke solutions to an operator's challenge which means there'll be smaller organic investment opportunities just because I think the valuations and the size and magnitude of some of these large systems is outside of the sweet spot for us. And we're challenged to find opportunities that will generate the kind of returns on the capital that we would need to deploy, just don't see it meeting those hurdles. But we'll continue to be really focused on being able to work through what we call singles and doubles. And when you start to add those up, it can become a nice growth opportunity for us.

And as an example, during the third quarter we were able to negotiate a small produced water line for a customer in the Permian where we spent a few million dollars to connect to their fields to allow them to manage their completion programs and maximize the use of produced water. And we have a contract associated with it, and it has nice return. And I think the smaller investment sizes, and by doing it organically, is going to give us the returns we want. But I think trying to go attack some of those big systems is not going to be the right fit for us.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [4]

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Could we maybe just talk a little bit about the WCS acquisition as well? Maybe just kind of how we see that impacting the chemicals business? What was the genesis? Kind of was it a push or a pull type of transaction? And just maybe I don't think investors necessarily have a good -- a lot of visibility into what that market looks like. And so maybe giving us a better sense of how plentiful are the opportunities for bolt-on acquisitions in that business and how you see M&A versus organic opportunities within chem. So kind of a lot of pieces there, but kind of flushing that out I think would be helpful.

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Holli C. Ladhani, Select Energy Services, Inc. - President, CEO & Director [5]

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Sure. So on this, I think that there are both organic and bolt-on opportunities in chemicals. You certainly saw the growth in our FR volumes based on the proprietary product line we have and the impact that had on our quarter. As we see market acceptance there, we're getting our volumes up, which means that then we get our cost structure in line, we can absorb those additional manufacturing costs. So organically things are playing out really well there.

And particularly with the amount of produced water that's being used in the Permian, the team has been able to develop new products to meet those needs. It's fairly complicated and they've done a good job of being up to the test. And actually our volume, we were touching capacity, full capacity in the third quarter across our 2 plants. So it was enough that we're actually now looking at expansion opportunities there. Not big dollars because that's the good news. We can expand under roofline. But add some further volumes into the system if we see the right demand indication for it.

And then more specifically on WCS, that was one that we've certainly had an interest in that particular business for, I guess, I'd have to go back, say, probably 12, 18 months. And so we stayed around the hoop to understand whether or not that was going to be core. And as it turned out, Baker Hughes, earlier this year we were able to convince them that maybe we can do more with it than they were. And it ended up being a really great solution because we brought over almost 100 employees that really know the treatment business well.

And I think importantly with this particular opportunity is that we referred to it as helping bridge and connect our services business and our chemicals business. But what we mean by that is that historically the treatment decision and the frac fluid decision have been separated. And it's really important and I think there's value to be had the more you connect those 2 things because the water quality going into the blender really then that's so important to the frac fluid system that you choose.

So now we can attack it I think more effectively from both ends and solve for a fairly complicated equation. But when you take our water services capabilities, all the logistics, all the management we can do there, you add more robust treatment capability. And then our proprietary friction reducers that work in multiple water quality, it's a pretty powerful thing. And we do think that the addition of WCS will put us into more conversations with our customers in that regard. So it's relatively small acquisition, but I think strategically the way it positions us, it's pretty important.

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Operator [6]

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Our next question comes from the line of Kurt Hallead with RBC Capital.

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Kurt Kevin Hallead, RBC Capital Markets, Research Division - Co-Head of Global Energy Research & Analyst [7]

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So, Holli, I'm just kind of curious as you kind of look at the water pipeline business and as you get into 2020. You got the major oil company booking you about 40% of that volume in that pipeline, you extended the pipeline because of some other customer interest. Just wanted to kind of gauge what the latest dynamics are there and whether the appetite to fill that pipeline is still robust given some of the dynamics on budget exhaustion we're seeing this year and the prospect for some limited budget growth into 2020?

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Holli C. Ladhani, Select Energy Services, Inc. - President, CEO & Director [8]

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Sure, it's a good question. I'll tell you, we still feel really good about the positioning of that system. When you look at current rig level activities and you look into 2020, that part of the Northern Delaware is still active and we expect it to be active into 2020. So -- and one thing I would expand on there is that we saw enough demand in the third quarter that we put in some temporary solutions to connect our high rate sources to be able to fill the gap on some volumes prior to that permanent line coming on to operations. And so we were able to leverage the right-of-ways that we had, the high rate sources and essentially bridge to the completion of our construction.

And what will happen now is that something -- and that was part of the benefit to our third quarter. But now as we get the system online, which again on budget, on schedule, it'll be up and operating this quarter, a fair amount of those volumes will transition to that pipeline. And that will then help us from an operating cost perspective. So we -- and these are volumes largely that are not associated with the take or pay that we put into play. So we're finding good opportunities for near-term commercialization of those high rate water sources and look forward to getting on moving across the permanent system.

And we are in conversations with our customers now to really start thinking about the more holistic 2020 solution to their water needs. But all in all, I feel really good about the positioning and our ability to commercialize the pipeline.

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Kurt Kevin Hallead, RBC Capital Markets, Research Division - Co-Head of Global Energy Research & Analyst [9]

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Maybe on the follow up on WCS acquisition on an annualized basis, what kind of revenue contribution are you expecting that to make?

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Holli C. Ladhani, Select Energy Services, Inc. - President, CEO & Director [10]

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Yes, we'll roll out a lot more on that as we do our 2020 budget, Kurt. But I would tell you is, it's fair to assume that the margins on that business are going to be fairly similar to the improved Chemicals margins you saw in Q3. And that we certainly expect it to be an accretive transaction relative to where we trade today.

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Operator [11]

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Our next question comes from line of Tommy Moll with Stephens.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [12]

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I wanted to stick on WCS for a second. I think I'm hearing you correctly that this ties into your longer-term strategy for produced water recycling. So if you could articulate that for us, if I'm correct in that assumption, and then also bring us up to speed on what inning are we in there? It's a theme that has come up a lot, but my sense is it's still pretty early days. And so it would be helpful to know where we are in that process.

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Holli C. Ladhani, Select Energy Services, Inc. - President, CEO & Director [13]

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Sure. I'm starting with the latter. This is one of those conversations, there's the Permian and there's every place else. And where we're seeing the big transition is in the Permian, Tommy. And you're right, it's still, I'll call it relatively early days. And the challenge there is you have to be producing enough water in the right location to support the next completion program. So, for example, the example I gave on the doing a relatively short produced water line to connect two of the fields of one of our customers in the Permian. It was so that they could balance out utilizing that produced water and that was the most cost-effective way to do it was to put some permanent infrastructure in.

And so the major operators in particular and those with some cored-up acreage are, I'd say, moving as quickly as they can to being able to use the produced water. It just -- it's making a lot more economic sense. The cost of disposal is in certain areas going to become tight and so that's an avoided cost by not having to dispose of it. And because of the advancements in the chemistry, we can design frac fluid systems to work with a very wide range of water. And there's really not any water in the Permian that we can't deal with.

And what WCS helps us do is, as I said it, we're just at the table with customers. I think we'll have more of an opportunity to do that now to have that conversation of, here's a particular produced water that you're dealing with. Because it changes not only by Midland Basin versus Delaware, but what part of the stack are you dealing with, what part of the formation.

And so what do we need to do to optimize the treatment and then match it up with the right frac chemistry. Because you could spend an awful lot on treatment and then have a fairly low-cost frac fluid system. Or you could limit the amount of treatment, but then you'll need a more robust frac fluid system to really get the best performance of the completion. And so the fact that we have the knowledge of both sides of that equation, I think it will allow us to create more efficient solutions for our customers.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [14]

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And shifting gears to capital allocation. Would you be able to give us a peek at a range of what CapEx might be for 2020? And then offer any comment to the extent there's free cash flow left over as I suspect there will be significant free cash flow to decide how to deploy. What's the appetite for continued share repurchases?

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Nicholas L. Swyka, Select Energy Services, Inc. - CFO & Senior VP [15]

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Sure, Tommy. I'd say, looking at 2020, obviously we'd have a lot more detail on our next call with our budget. But if you look at our CapEx for this year where we've said it would come in around $100 million to $110 million today, if we did not have that New Mexico project, obviously that would reduce that by about $40 million. And so I think that underlying total there is probably a decent range to start from for 2020 barring additional new infrastructure projects. So you correctly point out that that leads you to a pretty robust cash flow number.

Now when we think about that, I think third quarter is a good microcosm of how we approach our cash flow. So first of all, it's a core tenet of our strategy. And we always want to be generating substantial positive free cash flow. How we allocate it, there'll be a portion that goes to investing in the business, not only maintaining it, but doing those singles and doubles that Holli just talked about. We would like to continue our practice of returning capital to shareholders, whether that's through a buyback or other means. That's something we'll continue to think about going forward, but currently it's the buyback.

And then when we find tuck-in acquisitions like WCS, that makes sense and both from a strategic and accretive perspective, then we'll execute on those. So I think putting all that together for 2020 we will have more details, but for -- that's certainly our philosophy in how we operate and think about cash flow today.

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Holli C. Ladhani, Select Energy Services, Inc. - President, CEO & Director [16]

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And Tommy, the only thing I would add on to that as a general rule of thumb because free cash flow is so core to our strategy, we built the business model to support that. And we think about maintenance CapEx typically running 1/3 of our EBITDA. So that does leave us meaningful cash flow to put to other use as Nick described.

But I do think, one of the things that we're comfortable right now doing is building up some dry powder. We don't know what the next 12 months, what sort of opportunities they might hold for us. And so we're not really in a position today to make broad capital allocation commitments. But I do think in this kind of market, creating optionality is really valuable. And so we're going to be focused on doing that. But step one is generate the cash flow. And then step two is to maybe be a little patient and see what opportunities present themselves and then we'll go from there.

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Operator [17]

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

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Thomas Patrick Curran, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [18]

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Nick, would you please tell us how the balance sheet and 3Q total assets break down across the 3 divisions? And if you don't have that for total assets, perhaps just for noncurrent assets, the P&E, goodwill and intangibles, right of use and another assets.

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Nicholas L. Swyka, Select Energy Services, Inc. - CFO & Senior VP [19]

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Yes, Tom, we'll probably follow-up after the call to get on a little more detail there. But it relatively translates to the current revenue. You're going to have fixed manufacturing assets in chemicals. In infrastructure, we obviously have built in a fair amount of PP&E in our New Mexico infrastructure project. It's not currently online, but will be shortly. And then of course in water services, you have a wide array of equipment there, flowback, transfer. So it's spread out. But we can talk more offline and get into the details of how those categories break out.

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Holli C. Ladhani, Select Energy Services, Inc. - President, CEO & Director [20]

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But as you would imagine, because of the limited investment on, say, the chemical side, even though it has lower margins, it can deliver -- still deliver a nice robust return on assets, for example.

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Thomas Patrick Curran, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [21]

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And then, Holli, returning to those bespoke infrastructure projects that do fall into your wheelhouse for organic investment, how has that opportunity set evolved since the last call in terms of number and attractiveness, maturation stage of discussions? And at this point, when is the earliest that you'd expect to get one of those across the finish line?

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Holli C. Ladhani, Select Energy Services, Inc. - President, CEO & Director [22]

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Yes, I would say, it's a fairly robust list. We have a team of folks that literally that's their job every day is to be out and creating solutions for our customers. And again that's where we found -- that we'll find the most success versus always a hammer looking for the nail. Let's go find out what their problem is and then how we might be able to solve for it.

And so I would say it's a very robust set of opportunities. But each of them have their problems and take time to obviously get it over the finish line. But as we said, we did one of those in the third quarter. And we'll keep plugging away at those and interestingly enough about the small opportunity within the third quarter, it could lead to further opportunities. That's -- it's a big customer that's very active and so once you're in the door, that might accelerate future opportunities.

And so it's really hard to predict, Tom, and I wish we could give you better clarity and guidance on that. But we'll keep working them hard, but we absolutely continue to believe that the organic approach is going to give us the returns that we're looking for and that there are sufficient number of those that we'll have an opportunity to deliver on those in 2020. And we'll obviously be really thoughtful about putting our capital to work and if it's not going to meet the return thresholds, then we won't be executing on those projects.

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Operator [23]

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This concludes the question and answer portion of the call. I would like to turn the floor back over to management for any closing remarks.

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Holli C. Ladhani, Select Energy Services, Inc. - President, CEO & Director [24]

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Thanks. And again, thanks for taking the time to join us this morning. And as I guess it has become somewhat customary, the only thing I wanted to leave you with is what are our top 3 priorities and we've hit on most of those already this morning. But we do expect a softer Q4. Obviously that will rebound, at least that's our view, in 2020. But we've got to manage our cost and our capital in the near term.

So we're looking at rightsizing to match our activity levels. We're going to be laser focused on free cash flow. We're very proud of the 7 quarter track record of delivering positive free cash flow and we're going to maintain that. And then the way we do that is just leveraging our folks and our technology and meeting our customers' needs. So just executing in the field every day is that last priority. So thanks to everybody and have a great day.

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Operator [25]

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