Rising Global Water Scarcity And ESG Will Unlock Efficient Recycling

Key Takeaways

• Select is positioned for substantial recurring revenue and margin expansion due to superior infrastructure growth, unique business models, and operational leverage across geographies.
  
• Regulatory pressures, water scarcity, and electrification trends will drive premium pricing, new revenue streams, and strong long-term cash flow opportunities.
  
• Heavy dependence on oil and gas, regulatory and customer risks, and required tech investment threaten future growth, margins, and cash flow stability.

Catalysts

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

• Analyst consensus expects 15 to 25 percent water infrastructure revenue growth, but current contract wins, rapidly compounding dedicated and ROFR acreage, and the ongoing shift of customer-owned infrastructure to Select could drive segment growth well above 25 percent annually for multiple years, leading to sharply higher recurring revenue and gross margin gains as infrastructure utilization accelerates.
  
• Analysts broadly agree that recent investments in Colorado will bring stable, high-margin growth, but this segment appears poised to deliver even greater earnings upside; Select's early-mover advantage and unique water banking model position it to dominate western US municipal, agricultural, and industrial water management, tapping into a multi-decade, inflation-protected, contracted revenue stream with outsized cash flow conversion.
  
• The pace of water scarcity and ESG-driven regulations is intensifying faster than expected, creating a supply-demand imbalance that will enable Select to command premium pricing for advanced recycling and full-cycle solutions, translating directly into margin expansion and pricing power well ahead of current projections.
  
• Select's newly fortified market-leading platform in solids management and oil reclamation in the Bakken, paired with its integrated water and waste infrastructure footprint, creates operational leverage and a new, high-margin revenue stream that could materially increase consolidated EBITDA and reduce cyclicality.
  
• The soon-to-be standalone Peak Rentals distributed power business, with exclusive battery storage partnerships and deep customer integration, is positioned for hyper-growth as US oilfield electrification accelerates, potentially yielding a significant windfall from recapitalization or IPO while preserving Select's economic upside and supporting higher EPS growth.

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 2.3% today to 5.6% in 3 years time.
• The bullish analysts expect earnings to reach $92.6 million (and earnings per share of $0.88) by about August 2028, up from $33.0 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 30.6x on those 2028 earnings, up from 25.9x today. This future PE is greater than the current PE for the US Energy Services industry at 13.2x.
• Analysts expect the number of shares outstanding to grow by 1.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.01%, as per the Simply Wall St company report.

Select Water Solutions Future Earnings Per Share Growth

Risks

• The accelerating transition to renewable energy and the possibility of long-term fossil fuel demand decline threaten Select Water Solutions' entire business model, which is heavily tied to oil and gas production, risking long-term erosion of revenues and future growth opportunities.
  
• Increasing regulatory pressure and stricter environmental legislation around water usage, disposal, and fracking could significantly raise Select's compliance and operating costs, negatively impacting net margins and future earnings.
  
• Persistent customer concentration among a small set of large E&P clients exposes the company to substantial contract renegotiation and revenue volatility risk, especially during periods of low drilling activity, which could sharply impact topline and cash flow stability.
  
• High ongoing capital intensity for infrastructure projects means that if future growth contracts or asset utilization slow due to market trends or operator adoption of water reuse/recycling, Select may face a strain on free cash flow and greater balance sheet risk, putting long-term earnings under pressure.
  
• Secular shifts in the industry, such as customers increasingly adopting closed-loop systems, water recycling, automation, and digital oilfield solutions, may commoditize Select's legacy services and force heavy investment in new technology, impacting net margins and dampening long-term competitive advantage.

Valuation

• The assumed bullish price target for Select Water Solutions is $18.0, 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 $18.0, and the most bearish reporting a price target of just $10.0.
• 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 $92.6 million, and it would be trading on a PE ratio of 30.6x, assuming you use a discount rate of 8.0%.
• Given the current share price of $8.21, the bullish analyst price target of $18.0 is 54.4% 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.