Select Water Solutions: Infrastructure Investments Fuel Margin Expansion and Cash Flow Growth

Select Water Solutions has emerged as a critical player in the energy water management sector, leveraging strategic infrastructure investments to drive margin expansion and cash flow resilience. Despite near-term headwinds in certain segments, the company's long-term focus on high-margin, capital-efficient projects—particularly in the Permian Basin—positions it to capitalize on a structural shift toward water recycling and disposal in the oil and gas industry.

The company's first-quarter 2025 results underscore its progress: revenue rose 7% sequentially to $374.4 million, while adjusted EBITDA surged 14% to $64.0 million. Gross margins in the Water Infrastructure segment remained robust at 53.7%, even as revenue dipped slightly due to declines in legacy freshwater pipeline projects. This decline, however, appears intentional: Select Water is shifting focus to higher-value recycling and disposal operations, which now account for a growing share of its activity.

Margin Expansion as a Strategic Priority
Select Water's margin discipline is its strongest asset. In the Water Infrastructure segment, the company's emphasis on long-term, fixed-fee contracts—such as its 11-year agreement in the Northern Delaware Basin—ensures stable cash flows while shielding it from commodity price volatility. This project alone involves $100–$125 million in capital expenditures, including 100 miles of new pipelines, two recycling facilities, and 6.25 million barrels of storage. By mid-2026, these assets could contribute to gross margins exceeding 50%, as the company scales operations and benefits from economies of scale.

Meanwhile, the Water Services segment, which provides trucking and disposal services, faces short-term headwinds. Revenue rose 7.8% in Q1 but could dip 5–10% in Q2 due to operational consolidation and variable customer demand. However, Select Water is using this transition to reduce costs and improve margins, targeting a 20–22% gross margin range for the segment.

The Infrastructure Flywheel
Select Water's success hinges on its ability to deploy capital into projects that generate outsized returns. The Central Basin Platform project, which adds 11 miles of pipelines and 6.25 million barrels of storage, is slated to begin operations in Q3 2025. Similarly, its Midland Basin disposal facility—adding 35,000 barrels per day of capacity—will bolster its position in a region where water management is critical to oil production efficiency.

The company's $225–$250 million 2025 capital expenditure plan is underpinned by a new $550 million credit facility, which includes sustainability-linked terms. This financing underscores investor confidence in Select Water's ability to execute its strategy while maintaining a balanced balance sheet.

Investment Considerations
Select Water's valuation reflects both its near-term challenges and long-term potential. While short-term revenue dips in certain segments may pressure short-term earnings, the company's focus on high-margin infrastructure projects and long-term contracts creates a durable moat in an industry where water management costs are rising. The Permian Basin, in particular, remains a growth engine: its output is projected to grow steadily through 2026, and Select Water's recycling and disposal facilities are positioned to capture a larger share of this demand.

Investors should monitor two key metrics: 1) the execution pace of its Northern Delaware Basin project, which is critical to margin expansion, and 2) the conversion of capital expenditures into free cash flow. While Select Water's current free cash flow conversion (5–15% of EBITDA) is modest, the company's focus on asset-light models and fee-based contracts should improve this over time.

The Bottom Line
Select Water Solutions is a play on the energy sector's water management evolution—a $10 billion opportunity in the Permian Basin alone. While near-term volatility is inevitable, the company's strategic focus on infrastructure that drives margin expansion and cash flow resilience makes it a compelling long-term investment. For investors with a multi-year horizon, the stock offers a blend of defensive characteristics and growth potential, particularly as it scales its recycling and disposal operations. Hold for now, but keep an eye on execution in the second half of 2025.