Advanced Water Recycling Will Meet Rising Energy And ESG Demands

Key Takeaways

• Rapid contract wins and expanding infrastructure are set to drive sustained growth and margin outperformance, positioning Select as a dominant, diversified water solutions provider.
  
• Surging demand for recycling, regulatory pressure, and LNG export growth enable Select's unique platform to capture premium pricing and recurring, high-margin revenue.
  
• The company faces strategic risks from market shifts to renewables, geographic concentration, heavy capital needs, and potential technological changes impacting long-term demand and earnings stability.

Catalysts

Provides water management and chemical solutions to the energy industry in the United States.

• While analyst consensus expects Water Infrastructure revenue to grow by 15 to 25 percent through 2026, the scope and speed of new contract wins, large-scale acreage dedications, and accelerated project backlogs suggest that double-digit sequential growth could continue well into 2027 and beyond, likely driving both topline revenue and gross margins far above current expectations.
  
• Analysts broadly agree that contracted, long-term municipal and agricultural water projects will generate high-margin, stable revenue streams, but underappreciate how outsized demand and rapid contract finalization in Colorado and similar regions could enable Select to become a dominant non-energy water supplier, fundamentally diversifying and accelerating multiyear net income growth.
  
• Select's massive integrated pipeline and recycling network now underpins a growing share of water logistics for unconventional oil and gas development, positioning the company as the essential utility-like backbone for E&Ps as they intensify outsourcing and long-term partnerships, enabling sustained margin expansion and durable, recurring cash flows.
  
• Intensifying regulation, ESG mandates, and severe regional water scarcity are catalyzing exponential customer demand for water recycling and reuse, and Select's unmatched recycling capacity, proprietary technology, and digital operational platform position it to capture premium pricing and increased market share, driving outperformance in net margins.
  
• The imminent surge in US LNG and natural gas exports-notably in the Haynesville and Marcellus-will ramp drilling and water handling needs, and Select's uniquely scalable gathering-disposal-recycling infrastructure in those basins provides a platform for high-return brownfield expansions, boosting asset utilization rates and accelerating both revenue and EBITDA beyond consensus models.

Select Water Solutions Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Select Water Solutions compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Select Water Solutions's revenue will grow by 4.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.4% today to 9.0% in 3 years time.
• The bullish analysts expect earnings to reach $148.5 million (and earnings per share of $1.41) by about July 2028, up from $35.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 19.7x on those 2028 earnings, down from 28.4x today. This future PE is greater than the current PE for the US Energy Services industry at 11.9x.
• Analysts expect the number of shares outstanding to grow by 1.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.45%, as per the Simply Wall St company report.

Select Water Solutions Future Earnings Per Share Growth

Risks

• The accelerating transition towards renewable energy threatens long-term oil and gas demand, which could shrink Select's core addressable market and over time put sustained pressure on future revenues.
  
• Heavy customer concentration, especially within U.S. shale basins, exposes Select to the risk of pricing pressure, margin erosion and contract renegotiations during industry downturns, potentially resulting in lower topline revenue and declining net margins.
  
• The company's capital-intensive infrastructure expansion, such as large investments in the Northern Delaware Basin and AV Farms, raises ongoing CapEx needs; this could erode free cash flow and strain net margins, particularly if growth capital opportunities diminish or if utilization rates fall short of expectations.
  
• The expansion strategy remains highly concentrated geographically and dependent on U.S. unconventional basins, leaving Select vulnerable to regional drilling slowdown, resource depletion, or sudden changes in local environmental regulations, all of which could cause volatility in earnings and revenue.
  
• Potential technology advances in waterless or closed-loop fracking, as well as increased adoption of in-house water recycling by oil and gas operators, may reduce long-term demand for outsourced water solutions and impact recurring earnings streams.

Valuation

• The assumed bullish price target for Select Water Solutions is $19.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Select Water Solutions's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $19.0, and the most bearish reporting a price target of just $11.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $1.6 billion, earnings will come to $148.5 million, and it would be trading on a PE ratio of 19.7x, assuming you use a discount rate of 7.5%.
• Given the current share price of $9.63, the bullish analyst price target of $19.0 is 49.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.