Q1 2023 Select Energy Services Inc Earnings Call
Participants
Christopher K. George; Senior VP of Corporate Development, IR, & Sustainability; Select Energy Services, Inc.
John D. Schmitz; President, CEO & Chairman; Select Energy Services, Inc.
Michael C. Skarke; Executive VP & COO; Select Energy Services, Inc.
Nicholas L. Swyka; CFO & Senior VP; Select Energy Services, Inc.
Donald Peter Crist; Research Analyst; Johnson Rice & Company, L.L.C., Research Division
James Michael Rollyson; Director of Oilfield Services; Raymond James & Associates, Inc., Research Division
Luke Michael Lemoine; MD & Senior Research Analyst; Piper Sandler & Co., Research Division
Thomas Patrick Curran; Senior Analyst; Seaport Research Partners
Presentation
Operator
Greetings, and welcome to the Select Energy Services First Quarter Earnings Conference Call. (Operator Instructions) A brief question-and-answer session will follow the formal presentation. And as a reminder, this conference is being recorded. It is now my pleasure to introduce to you, Chris George, Senior Vice President of Corporate Development, Investor Relations and Sustainability.
Christopher K. George
 Thank you, operator, and good morning, everyone. We appreciate you joining us for Select conference call and webcast to review our financial and operational results for the first quarter of 2023. 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 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 selectenergy.com. There will also be a recorded telephonic replay available until May 17, 2023. 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, May 3, 2023, 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 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 today. 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 yesterday for reconciliations of non-GAAP financial measures. Now I'd like to turn the call over to our Founder, Chairman, President and CEO, John Schmitz.
John D. Schmitz
Thanks, Chris. Good morning, and thank you for joining us. I am excited to be discussing Select again with you today. The first quarter saw a strong recovery from a challenging fourth quarter with revenues growing 9% and adjusted EBITDA growing 29% sequentially during the quarter. We benefited from a solid quarter contribution from our recent acquisitions and also saw organic revenue growth during the quarter across every segment. This successful combination of factors led to a company record quarterly revenue of $417 million for the first quarter. Additionally, we nearly doubled net income to $14 million, while adjusted EBITDA increased to $67 million. Across our individual segments, we once again achieved record revenues in both our Water Infrastructure and Chemicals segments while our Water Services segment continued to improve margin through operational efficiency improvements and technology initiatives.
Water Infrastructure was especially strong, seeing revenue growth of 32% for the first quarter. This segment benefited meaningfully from a mix of factors, including our recent acquisitions, the increased utilization of existing assets and new greenfield and brownfield organic project contributions. Water Services also saw a solid 5% revenue growth and a flat activity environment and continues to find efficient ways to improve its operations and grow market share. As importantly, we increased gross margins across the board with each segment seeing at least a 200 basis point increase in margins relative to the fourth quarter and nearly 500 basis points of improvement in each segment related to the first quarter of the prior year.
Looking forward, while natural gas has seen some challenges, we continue to believe that the current commodity price outlook remains supportive of a productive activity environment for our customers with mobile service assets, leading technology and strategic infrastructure across every basin, we expect to see modest revenue growth across the business and a lot of opportunity to generate incremental operating agencies, driving margin improvements across the board in coming quarters. We continue to have great success at further developing the broad infrastructure asset base we've built and acquired over the last couple of years. This quarter was no different, and we've advanced a number of highly accretive projects in recent months. During the first quarter alone, we've added through acquisitions about $10 million of additional infrastructure that integrates seamlessly into our core Midland Basin assets. We also contracted or commenced more than $34 million of greenfield and expansion projects across the Midland and Delaware Basins and the Mid-Con, Haynesville and Rockies regions. These projects are each backed by long-term contracts supported by minimum volume commitments and acreage and wellbore dedications. We continue to see strong interest from our customer base around contracting new additional infrastructure projects, particularly around full life cycle recycling and reuse solutions, and we see a number of opportunities for additional growth this year.
Our unique ability to provide integrated water and chemical solutions in tandem with contracted infrastructure continues to bring value to our customers and differentiates our value proposition from our competitors. Our recent development successes and deep project backlog should provide for continued growth, not only in the second half of '23, but well into '24. The additional stability provided by these initiatives, acquisitions, projects and contracts gives us a great optionality in our capital allocation strategy. Accordingly, I am pleased the Board of Directors has reactivated our share repurchase program with an additional $50 million authorization. This gives us a total authorization of $58.5 million when taking into account the remaining $8.5 million left on the prior authorization. I believe this targeted repurchase program provides an attractive incremental return opportunity for our shareholders and great supplement to our existing base dividend program.
We will continue to build and enhance our solid track record of returning capital to our shareholders as a component of our overall capital allocation framework. Our revenue and profitability continued to improve during the first quarter, and I'm very excited about the growth capital projects and shareholder return opportunities. Another extremely large opportunity for the company at this point and one that we are extremely focused on addressing is the excess net working capital that has resulted from the pace of our recent opportunistic M&A activity. We have internal resources to our ongoing systems integration efforts and our ERP project implementation. I'll let Nick speak to this in a bit more detail, but we are firmly focused on these initiatives and others to unlock a meaningful amount of cash during the second half of '23 that has otherwise been backlogged on the balance sheet in recent quarters. Converting this excess working capital from accrued revenue assets into cash is capable of fully repaying our recent ABL borrowings and funding our new projects and shareholders' returns.
Our business is clearly capable of producing significant free cash flow, and we remain committed in our belief that we should harvest 2/3 of our adjusted EBITDA into free cash flow. On the rebranding front, we continue to make progress in our efforts and anticipate fully doing business under the new brand this summer. As a reminder, during the first half of '23, Select intends to change its name to Select Water Solutions, Inc. We will remain traded on the New York Stock Exchange under the stock picker WTT, embracing our Heritage's WaterFist company. For now, our corporate and financial segment reporting structures are not changing, but we will continue to evaluate how we best simplify our communications with our customer and our external reporting with our investors to ensure that we are conveying our message efficiently and receiving maximum value and brand recognition for our capabilities and technologies across the entire platform of our operations.
This exercise will also support our concentrated working capital improvement efforts by significantly streamlining our brand architecture and improving our customer billing process and capabilities. Importantly, this initiative also prepares Select for the years ahead as we continue to advance our strategy to become the leader in sustainable water solutions within traditional energy while also supporting the new energy transition and accessing diversification opportunities and water sustainability and full water was stream management down the road. Select is uniquely positioned to provide the critical solution that advanced water sustainability efforts for our customers and the energy industry as a whole. We are well suited to drive emissions reduction and reduce the environmental impact of the industry through further pipeline infrastructure development, which reduces truck-based fluid transportation. However, more critically, Select is focused every day on solving the highly localized intangible problems of clean water access and waste stream management in our local communities in which we operate through our water recycling capabilities.
Last year, we recycled more than 7 billion gallons of water and our -- with our recent and ongoing investments in new recycling facilities, we anticipate these recycled produced water volumes to meaningfully increase again during '23. Importantly, these recycling activities meaningfully reduce the waste disposal needs required and increase the fresh water availability to our local communities that need it. As we continue to progress these key initiatives, I encourage listeners to be on the lookout in the coming weeks for Select 2022 sustainability report for additional details on Select's commitment to sustainability and support of all our stakeholders. And thanks to our recent acquisitions, Advanced Chemical Technologies organic infrastructure growth opportunities and our other strategic investments, I expect to see continued revenue, EBITDA and net income growth in 2023 and beyond. I'm very excited about what the future holds for Select and look forward to further executing on this vision through additional profitability growth, shareholders' return and strategic execution in the coming quarters. Now I'd like to turn it over to Nick to provide more details on our first quarter financial performance, our second quarter and 2023 outlook and other ongoing initiatives. Nick?
Nicholas L. Swyka
Thank you, John, and good morning, everyone. Select had a great start to 2023 as we push forward with an all new all-time high quarterly revenue performance. Margins also advanced notably across the board with Oilfield Chemicals reaching a record gross margin resulting from our continued market share gains and customer demand for our higher-margin proprietary manufactured products supporting our fluid match initiatives. Our net income nearly doubled, and we posted the highest quarterly adjusted EBITDA performance since 2018. While the macro environment settled from the high growth pace of 2022, Select clearly, it still has positive company-specific trends and secular growth drivers in our core business model of providing full lifecycle water solutions to a more complex and sustainable energy industry. Our business benefited from enhanced customer opportunities resulting from our recent acquisitions and more efficient operations across the board as well as a number of recently executed development opportunities across multiple basins. These combined produced positive monthly progression throughout the quarter. The 9% revenue increase was bolstered by having an additional month of breakwater operations relative to fourth quarter, but the bulk of the increase was driven by higher utilization and recent investments across our Water Infrastructure segment. As John discussed, we have contracts in place supporting attractive incremental investments into both new infrastructure and enhancements to existing assets that we expect will yield additional revenue and margin expansion through the year.
Recent stock market dislocation related to nonenergy sectors provided us with an attractive opportunity to authorize and initiate a $50 million share buyback program. In addition to the remaining $8.5 million authorization we previously had in place. It's fully executed the 2 buyback programs in combination with the quarterly dividend at its current level, would distribute over $80 million to shareholders this year. With our expectation of ample free cash, we believe, over the course of 2023, we will meaningfully reduce the current draw on our sustainability-linked credit facility from its March 31 balance after fully funding both our 2023 CapEx program and the potential fulfillment of our share buyback authority. As I noted on our February call, our primary focus entering 2023 after 2 years of rapid organic growth, coupled with the dozen acquisitions was to meaningfully boost our operating margins. As cost inflation gradually moderates, our continued integration and internal efficiency efforts allow us to carry a larger part of every earned revenue dollar through to the bottom line. Though some elements are consistent, the primary means by which we accomplished this varies somewhat by segment.
In Water Services, our primary focus is on internal efficiency and taking cost out of the system, whether it's on new procurement initiatives, in-sourcing third-party labor after stretching to accommodate rapid growth or harmonizing operations across the diverse acquisition footprint. For water infrastructure, we are developing highly accretive greenfield projects as well as boosting the utilization and margins on existing infrastructure through networking investments and expansion opportunities. Additionally, throughout 2022 and into 2023, our Chemicals Group has continued to grow market share in our higher-margin proprietary product offerings. We continue to shift manufacturing capacity towards these customized products while limiting our production of more commoditized products and lower-margin blending operations. With the growing interconnectedness of our operations, delivering the industry's only true full lifecycle water and chemistry solution, we're excited to soon become Select Water Solutions. Our fixed infrastructure, mobile logistics and customized chemistries, combined to provide an exceptional opportunity for our customers to improve their cost efficiency and well productivity while reducing their environmental footprint.
First quarter revenue of $417 million grew by $35 million sequentially. Net income increased from $7.6 million to $13.7 million sequentially, even after accounting for the $11.6 million impact of a noncash charge for trademark abandonment related to our ongoing rebranding efforts. Additionally, adjusted EBITDA increased to $67.2 million from $52.2 million in the fourth quarter. Looking forward, we expect to build up this strong first quarter financial performance. While we do anticipate recent relative weakness in natural gas prices to lead to a modest decline in rig counts and gas basins, which represent about 17% of our revenues year-to-date, we do not foresee material impacts to revenues from this or much impact to activity in the oil basins, which represent more than 80% of our revenues. Accordingly, we expect to prioritize margin enhancement efforts and organic growth projects in the relative near term. In fact, even in the Haynesville Shale, where we expect some of the more notable impacts from natural gas pricing weakness, we have executed multiple recent long-term contracts for new infrastructure projects as produced water management remains a core priority for many of our customers.
Now walking through the individual segments. The Water Services segment increased revenue by $10 million or a little less than 5% with modest market share gains offsetting some weather-related challenges from January. Our 2023 investments for this segment are primarily maintenance CapEx, and we believe the second quarter will deliver similar revenue with a 100 to 200 basis point improvement to gross margins before D&A resulting from ongoing efficiency initiatives. Next to Water Infrastructure, which was clearly the star performer of the first quarter. The recycling facilities and other infrastructure assets we recently acquired are delivering the volumes and economics we counted on. And while we continue to grow our Permian footprint through additional investment and acquisitions during the first quarter, the 5 non-Permian projects outlined in our earnings release, demonstrate our ability to drive new contracted high-margin project opportunities across multiple other unconventional basins as well. Although this segment has the most upside potential in 2023 and into 2024 as our new projects continue to come online, the strength of the segment's material outperformance in the first quarter leads us to a moderated growth outlook for the second quarter.
Accordingly, we expect stable revenues in the second quarter relative to the first, though we expect to see continued margin improvement of 200 to 300 basis points, bringing gross margins before D&A back above 30%. The Chemicals segment, which continues to set new all-time highs for revenue and gross profit, increased its margins 2 percentage points to nearly 20%. Water treatment for recycling purposes is a secular tailwind for this group, much like it is for water infrastructure, and we expect revenues to increase by low to mid-single-digit percentages while gross margin percentage should hold relatively steady in the second quarter. SG&A of $35.8 million was impacted by $2.9 million of transaction and rebranding costs in the first quarter. While the direct transaction costs in connection with recent acquisitions should decrease in the absence of further M&A, we see the next few quarters delivering similar transaction costs overall given the ongoing rebranding efforts. In the back half of the year, we expect stable to modestly increased SG&A given the moderating but still elevated rate of labor inflation. That said, we anticipate SG&A reducing on a percentage of revenue basis back towards the 8% mark due to the anticipated top line growth in the coming quarters.
First quarter net CapEx of $21.2 million benefited from $6.7 million of asset sales. Since beginning our recent M&A activities in mid-2021, we have sold more than $45 million of noncore assets out of the dozen or so acquisitions in the last 2 years. This has helped us materially de-risk what were already very attractive deep value deals and also help fund our most recent acquisitions. That said, we do expect this asset sale pipeline will normalize over the rest of 2023 after a handful of remaining real estate and asset sale opportunities. Overall, we reiterate our 2023 net CapEx guidance of between $90 million to $130 million after giving effect to roughly $20 million in expected full year asset sales. We expect depreciation and amortization expense to be in the low $30 million range per quarter and tax expense to remain minimal through 2023. Overall, cash flows were impacted by a little over $10 million of asset acquisitions during the quarter as well as about $11 million of combined open market and tax withholding-related share repurchases during the quarter. However, the bulk of the impact to cash flows during Q1 related to working capital.
Free cash flow was impacted by a $79 million use of cash for working capital build as we materially grew revenues while continuing to work through our systems integration and implementation efforts. Unlocking this working capital balance is a core focus. And towards that goal, we are targeting a reduction of at least $75 million from our accounts receivable balance between the first quarter and the end of 2023 through these investments and improvements with further reductions to be identified for 2024. Our primary integration challenges remain focused around our back office processes associated with multiple electronic ticketing and invoice production systems, which have resulted in delayed timelines on delivering uniform and complete invoices to our customers. The rebranding effort, ticketing systems integrations and ERP integration and upgrade initiatives will greatly streamline our invoicing and cash collections in the back half of the year.
In the interim, we expect second quarter cash collections from accounts receivable to notably improve over the first quarter following recent integration efforts. While we work through our ERP project implementation in the coming months, we will continue to find opportunities to improve upon our internal order cash processes and I look forward to reclaiming a significant amount of deferred cash out of working capital and back on to the balance sheet with that $75 million goal clearly in mind this year. I'm confident we can further build upon that goal with additional DSO reductions beyond 2023, but hitting that initial goal this year is priority #1. We finished the quarter with $75 million drawn on our sustainability-linked credit facility and have $165 million of total liquidity. However, we expect to see these borrowings reduced and liquidity position meaningfully enhanced by year-end. Recent working capital challenges notwithstanding, we continue to see a very robust cash flow profile ahead of us for the full year. With that, I'll hand it back to John for some final remarks. John?
John D. Schmitz
 Thanks, Nick. Before we jump into the question and answers, I'd like to take a moment to once again thank our now over 4,000 employees, including our newest team members that have joined us in 2023. I firmly believe we have the best watering chemistry experts in the industry who are truly dedicated to solving the critical problems of our customers face every day. Thank you. And with that, we'll open it up to questions. Operator?
Question and Answer Session
Operator
 We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Jim Rollyson with Raymond James.
James Michael Rollyson
Nice solid turnaround from last quarter. One quick question on revenue guide. Obviously, you're kind of flattish for water services and water infrastructure and up mid-single digits Royal Field chemicals, but margins are improving kind of across the 2 flat revenue businesses. And I think Nick, you did a good job of explaining some of what's driving that expansion. Just maybe how we think about or how you guys are thinking about margin expansion over the balance of the year? Because obviously, I think you're expecting as some of these projects come on as your utilization improves, et cetera, that revenues are actually going to grow in the back half of the year relative to first quarter. And I presume some of that will be carrying additional margin improvement with it. So I'm just trying to think about how maybe where exit rate margins might be for your business segments as we go through this year.
Nicholas L. Swyka
Sure, Jim. Thanks for the question. So the Water Services, we mentioned the efficiency improvements there. The good thing about a flatter environment versus a high-growth environment as you can really focus your energies on getting those costs out of the system on addressing areas where you have opportunity to standardize across your operations, rebuilding things like centralized procurement that can help lower costs throughout your operations. And so we're focused on that front and center. We have a very large revenue base in water services and applying a few more points of margin through the year really has a good opportunity there to push more dollars through to the bottom line. So we'll continue working that. We didn't -- don't have explicit guidance for the back half of the year. But I think certainly building upon the 100 to 200 basis points that we expect in the second quarter, getting closer to the mid-20s in the back half of the year is certainly achievable. Water Infrastructure, so we've had the $34 million of new projects announced between this call and last. Those are all highly accretive. We continue to engage in a large number of active discussions with our customers. I'm sure in our next call, we'll have some new projects to announce that are also accretive and put substantial dollars to work. So that will continue to drive that segment higher beyond the 30% that we are targeting for the second quarter here.
Finally in chemicals. So that's been a very strong performer for a number of quarters now, both in revenue and margin. Given the nature of the business, it's manufacturing, it's capital-light. It doesn't require a lot of CapEx. We do have existing roof line, existing facilities there that can continue to be expanded at relatively low cost. So I think we do have the potential there to drive some continued margin improvement. Of course, we have revenue growth in the second quarter that we're anticipating, but I think we can get into the low 20s there as we move through the year with a stable constructive commodity environment like we have today.
James Michael Rollyson
That's very helpful. On the new projects, you've said -- I think both of you guys have said multiple times that they're highly accretive. So clearly, margin performance there is pretty strong. They're backed by contracts obviously, drive some of the longer-term growth and enhance the utilization of your existing infrastructure. I'm curious when you think about -- you have a CapEx budget for this year but as we kind of go forward, it seems like there's quite a bit of opportunity beyond even just the additional projects you announced this quarter. Maybe how do you balance that desire by your customers with the capital needs and your kind of budget, et cetera?
Michael C. Skarke
Jim, this is Michael Skarke I'll take a shot at it. So just to start off, we still expect maintenance CapEx of $50 million to $60 million on the year, and then we've guided to something that's roughly equal to that from a growth CapEx standpoint. But we've acknowledged that the growth CapEx will be largely determined by our water infrastructure projects. So the more successful we are at bringing those in, the more likely we're going to hit at kind of the high end of the initial range. And then to the extent that we are less successful will be on the low end of the range. But given the fact that we've already announced, I think, close to $35 million in CapEx this year with the intent of continuing to develop in the Permian Basin and beyond our full life cycle water solutions. We're hopeful that we can continue to expand that contracted revenue and grow the business that way.
James Michael Rollyson
Great. And then last one for me, just kind of related to that. On the -- most of your growth CapEx for organic brownfield greenfield projects to date have been kind of Permian-focused, but obviously, the announcements this quarter are pretty much all outside of the Permian. Curious where you see -- just is the margin and return opportunities outside the Permian similarly strong to what you've been experiencing in the Permian?
Michael C. Skarke
Sure. So most of our focus has been the Permian and most of our focus going forward will continue to be the Permian just because of the amount of water and activity there. But we're still very focused on full life cycle water solutions outside of Permian. We've announced in the Haynesville, we've announced in the DJ. We've announced in the Mid-Con and we're not solely or exclusively focused on those basins. So we're really going to pursue opportunities across our entire footprint that we've put together over the last 2 years. From a return standpoint, the returns are competitive with the Permian and they're competitive with other uses of capital. All of these investments are high-margin, employee like high ROI investments. And we think it's core and central to kind of our theme and thesis on what we're trying to achieve.
Operator
(Operator Instructions) The next question comes from the line of Don Crist with Johnson Rice.
Donald Peter Crist
I wanted to ask about Specialty Chemicals. I know it's early days in creating specific formulas for different formations in the Permian. But how is that business progressing? Are you getting traction amongst customers that want specialty chemicals more than in the past? And are the results from those wells starting to bear out that you're actually sweeping more oil out of the formation?
Michael C. Skarke
Sure, Don. This is Michael, and thank you for the question. I think we've seen a step change in our revenue margin in our chemical group and it's primarily because of our investment in technology with the secular tailwinds of transitioning from produced water -- [inaudible]Â from freshwater produced water driven by the Permian. And it's all central to fluid match. We've really pivoted from what was a lower margin kind of more distribution-oriented business to one that is very technology-focused and custom chemistry. And that's what's driving the revenue. That's what's driving the margin improvement over the last few quarters. It's been largely focused on friction introducer and new well completions, but we are bringing that technology into some of our other solutions like cement additives and surfactants. We think it's been -- it's not exclusive to the Permian either. I mean that's where we've seen most of the transition to produced water. But with kind of our technology solutions, the fluid match is applicable beyond the Permian.
In terms of specific reserves, we are working and have been trialing products that are really trying to match the chemistry to the rock. So we started with matching the chemistry of the water, and we're trying to work on matching it to the actual reservoir to improve hydrocarbon recovery. It's early days, but we're very excited about the results and are involved in meaningful conversations with multiple operators, some of the biggest and some of the smaller ones because obviously, improving republic reserve, everyone is interested in that.
Donald Peter Crist
 I appreciate the color there. And just one final one for me. John, are there any kind of bite-size acquisitions out there that would greatly enhance any of your operations? Or are you kind of set where you want to be right now from an M&A perspective? I know you've done a lot over the past couple of quarters. I didn't know if that's kind of slowing down? Or are there still opportunities out there?
John D. Schmitz
We always keep our eyes open, but we have put together a very unique position with assets across multiple basins and it's very tightly with what Michael just described. So our focus is on our asset base. What we can do for our customers and value add across those asset base now. What we can do with the integration efforts that Nick talked to, whether it's in the large piece of money on the water services side or very important to management of our working capital and streamlining our processes. And now we put these assets together and these companies together. I wouldn't say there's nothing, and we will keep our eyes open. But right now, we have really got a unique position and we're going to focus on that position.
Donald Peter Crist
I appreciate all the color, guys. Good work on the quarter, and I'll keep back in queue.
Operator
Thank you, Don. And the next question comes from the line of Luke Lemoine from Piper Sandler.
Luke Michael Lemoine
You talked about some of the full-life water recycling projects and your CapEx budget and how these are highly accretive. I just wanted to see if you could talk about how you think about paybacks or returns when you're targeting some of these new investments.
Nicholas L. Swyka
Sure. Thanks, Luke. So we're aware that the project is different. You have different geology, different types of contracts, customers, opportunities to develop beyond that anchor tenant. So obviously, we want to maximize all of that upside and minimize the risk in any project we look at. Our overall capital allocation priorities, we have about $80 million allocated towards full potential shareholder returns. That's critical to us. And I think that's a strong yield based on our current market cap. As we've discussed here, we're actively signing new contracts for long-term contracted mix of production-related revenue as well with customers at very high returns. Certainly, we apply internal hurdles of that, that are, I think, very attractive and accretive from a margin basis, total returns basis paybacks within versus our weighted cost of capital here. So overall, we're applying very tight standards to it. We have some projects that don't make it to the finish line, whether that's customer-related or returns driven. But Michael, you can discuss a little more on the individual project criteria here.
Michael C. Skarke
Sure. So just thinking about full life cycle water infrastructure projects, the ones we've announced the ones we're working on. There's a couple of key ingredients, whether it's a brownfield or a greenfield investment. And first, it's got to have the contractual support. So we're really looking for an anchor tenant or several anchor customers to underpin the contract or underpin the investment. Second, it's got to be strategic. It's got to be core and central to what we do in an area where we can do it well and better than anyone else. And then we're really focusing largely around the gathering through pipelines, the recycling, the redistribution and disposal. And then from a strict return standpoint, we're underwriting them inside of a 3-year payback, with, as Nick said, room to commercialize that with offset operators that would improve the returns. And then the only other thing I'd add is we're always looking to the geology as well. We want to understand the reservoir to the extent that we can to make sure that we know the number of economical targets and the volume of water that's coming back so that we can manage that and make sure that we size it facility appropriately. So that's kind of a little more specifics about how we think about the underwriting of the projects we've announced and the ones we're working on.
Operator
And the next question comes from the line of Tom Curran with Seaport Research Partners.
Thomas Patrick Curran
Starting with water infrastructure. When it comes to your existing asset base, everything that's already been constructed is online and/or acquired, where would you say you're at as a percentage of realizing the total estimated earnings power of that existing water infrastructure asset base? And when it comes to capturing the remaining upside, what are the key leaders you'll be focusing on over 2023? Is it how much of it is just getting to full effective utilization on the existing recycling facilities? How much of it is capturing opportunities to tie in proximate customer infrastructure or perhaps add additional customers to existing facilities? Just could you expand upon if you're able to fully achieve that estimated remaining upside over 2023 for the existing asset base, what would you expect the mix of contributing factors to look like?
Michael C. Skarke
Sure. So Tom, this is Michael. If we just step back over the last 2 years, we've contracted and commercialized an underwritten 5 fixed facility infrastructure cycling centers. We've acquired another 4, and we've been aggressively expanding the ones that we initially -- the ones we acquired as well as the ones we've developed. And so that capacity, that throughput, the storage is always changing, which makes it hard to kind of define and look at it from a utilization standpoint. So I mean, today, we're almost 3 million barrels of throughput capacity if you include the project in the Northern Delaware, we announced last quarter with 14 million barrels of tree-produced water storage. We're -- we still have room to expand the recycling facilities -- or excuse still to utilize our cycling facilities within the existing current framework of storage and throughput and we still have the ability to add capacity -- throughput capacity and storage as that market continues to grow and they become more interconnected.
The disposal side is a little different because it's not as easy to expand an existing disposal well. But again, over the last 2 years, we've acquired 1.3 million barrels of permitted capacity per day across all of our -- all the basins in our entire footprint. And it was pretty underutilized when we acquired it, which provides obviously meaningful upside. So I think we've increased from Q1 of last year, Q1 of this year, our disposal utilization by 50%. And which gives you some extent of what we've been able to do in a relatively short period of time. And we're still making investments. We're still upgrading wells, increasing connectivity to make sure that we continue to expand. As we look going forward, I mean, the first thing is, as you mentioned, connectivity, the more operators you connect with the broader your geographic reach, whether you're gathering water or recycling water redistributing water. So that's a primary focus for us, reliability and redundancy in terms of interconnecting facilities to make sure that you have that backup and that you are a full-proof solution for your customer. And then obviously, new facilities, whether that's a step out to expand the existing reach with the offset from an existing facility or a new geography. In terms of the breakdown, I think we will be more heavily weighted to utilizing and expanding our existing facilities, then drilling out new greenfield projects, but I'm probably uncomfortable providing an exact number of percentage at this point. But we're very focused on expanding what we've built and acquired because there's plenty of room to run.
Thomas Patrick Curran
Got it. That additional detail is helpful. And then on the Water Services side, you talked a lot about the inward focus for that division in improving its operational efficiency, some of the streamlining and cost-out initiatives underway. But in John's opening remarks, you also emphasized what you're pursuing on the technology front. Could you update us on what the technology initiatives are for the division this year? And how far along or which of them specifically you accomplished in the first quarter?
Michael C. Skarke
Sure, Tom. This is Michael again. The revenue guide is relatively flat, but we're excited about expanding margin in Water Services even with the pressures that exist on the gassy side and it's largely because of the technology investments we're making. There's also some operational efficiencies that Nick alluded to on the call. In terms of specifics, we're rolling out kind of expansion and upgrade of our automated water transfer. It's really the leading solution in the market today. We had just rolled out some new kind of best-in-class sand management solutions for our well testing flowback an automated sand scale, some new and capture solutions for drill out and completion work that we've run up against kind of the market leaders and ours have performed as well or better than anything else. And then we've, over the last quarter or 2, have been rolling out our new waste management solution for our combination business. And so we're looking at all of these as a way to really start to expand our market share in water services and what's going to be a flat to choppy market, but also to expand margin. And I think that will be the bigger part of the contribution to the bottom line. I guess I'd add, there's kind of one ancillary benefit to that, and that would be on the environmental side. With the technology, we're seeing reduced emissions, reduced miles driven, a less likelihood of still water, which is obviously important as we move to produced water. So there are some ESG benefits with the technology and reduction in labor, other efficiencies. But ultimately, generally speaking, technology solutions that we're providing allow us to capture a higher margin and provide a better, safer or cheaper solution to our customer.Â
Operator
This now concludes our question-and-answer segment. I'd now like to turn the floor back over to John for any closing comments.
John D. Schmitz
Yes. Thank you for joining today. I look forward to speaking with you again next quarter officially under the new banner name of Select Water Solutions.
Operator
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you, and have a wonderful day.
