Northern Delaware Basin Water Recycling Will Drive Future Resilience

Key Takeaways

• Expansion of dedicated water infrastructure contracts and advanced recycling capabilities is driving predictable revenue growth, premium pricing, and stronger customer relationships.
  
• Business streamlining and adoption of automation and proprietary technologies are improving margins, operational efficiency, and unlocking new cross-selling opportunities.
  
• Heavy reliance on oil and gas, concentrated revenue streams, operational cost pressures, and industry shifts pose significant risks to long-term growth and earnings stability.

Catalysts

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

• The company has secured a substantial and growing backlog of long-term, acreage-dedicated water infrastructure contracts in the Northern Delaware Basin, providing high predictability on revenue and cash flows over multiple years, with further upside as undedicated and ROFR acreage is converted-positioning Select to achieve significant Water Infrastructure revenue growth above $400 million annual exit run rate in 2026. This is likely to support sustainable top-line growth and improved earnings visibility.
  
• Major E&P operators are conveying water recycling and disposal assets to Select for network integration, allowing the company to optimize and commercialize these systems at higher utilization and margin, with minimal incremental capital-directly enhancing operating leverage and driving consolidated net margin expansion as volumes scale.
  
• Regulatory and industry pressures to recycle and reuse water are accelerating, favoring Select's advanced recycling capabilities and full life-cycle water solutions platform; this trend is increasing customer reliance on Select for ESG-compliant offerings, supporting premium pricing, durable customer relationships, and higher net margins.
  
• Ongoing rationalization and divestiture of lower-margin, non-core assets (e.g., trucking operations) and the carve-out of Peak Rentals for dedicated growth capital is streamlining the business to focus on core infrastructure, reducing operational risk and SG&A, thereby improving overall business margins and future free cash flow.
  
• The broader adoption of automation, digitalization, and proprietary chemical technologies-both within Select's operations (e.g., integrated water networks and in-house chemical manufacturing) and in customer field activities-is driving efficiency, product differentiation, and cross-selling opportunities, bolstering both revenue growth and margin expansion opportunities across the company's platform.

Select Water Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Select Water Solutions's revenue will decrease by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.3% today to 4.7% in 3 years time.
• Analysts expect earnings to reach $65.5 million (and earnings per share of $0.62) by about September 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 analysts price target, the company would need to trade at a PE ratio of 34.7x on those 2028 earnings, up from 26.5x today. This future PE is greater than the current PE for the US Energy Services industry at 15.0x.
• Analysts expect the number of shares outstanding to grow by 1.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.12%, as per the Simply Wall St company report.

Select Water Solutions Future Earnings Per Share Growth

Risks

• The company remains heavily exposed to the oil & gas sector, which faces long-term secular headwinds from the accelerating transition to renewable energy and decarbonization efforts-these trends may structurally reduce Select's addressable market, impacting long-term revenue growth.
  
• Significant capital expenditures, with $225–$250 million expected in 2025 and a similar pace in 2026, could constrain free cash flow as project growth slows, especially if new contract signings don't keep up-potentially leading to earnings and margin pressure if infrastructure buildout outpaces demand.
  
• The divestment and rationalization of noncore assets, such as trucking and Peak Rentals, make the company more focused, but they also increasingly concentrate revenue on infrastructure contracts with a relatively small group of large E&P customers, raising the risk of revenue instability and downward pricing pressure if customers consolidate or reduce activity.
  
• The company's Water Services and Chemical Technologies segments are showing sequential revenue declines, and continued weakness in these segments-even with margin stability-could lead to reduced overall earnings diversification and increased reliance on long-term infrastructure contracts.
  
• Industry-wide advances in water management technology (automation, closed-loop, chemical-free, or more efficient fracking processes) and regulatory risks-such as stricter water recycling, disposal, or emissions requirements-could lower overall water service volumes and increase compliance/operational costs, squeezing long-term net margins and growth prospects.

Valuation

• The analysts have a consensus price target of $14.5 for Select Water Solutions based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be $1.4 billion, earnings will come to $65.5 million, and it would be trading on a PE ratio of 34.7x, assuming you use a discount rate of 8.1%.
• Given the current share price of $8.41, the analyst price target of $14.5 is 42.0% 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.