Select Water Solutions Inc (WTTR) 2018 Q3 法說會逐字稿

Greetings, and welcome to the Select Energy Services Third Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Chris George, Vice President, Investor Relations and Treasurer. Thank you. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Select Energy Services conference call and webcast to review our 2018 third quarter results.

With me today are John Schmitz, our Executive Chairman; Holli Ladhani, our President and Chief Executive Officer; and Nick Swyka, Senior Vice President and Chief Financial Officer.

Before I turn the call over, 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 selectenergyservices.com. There will also be a recorded replay available until November 21, 2018. 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, November 7, 2018, and therefore, time-sensitive information may no longer be accurate as of the time of the replay 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 Energy's 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.

The listener is encouraged to read our annual report on Form 10-K for the year ended December 31, 2017, our subsequent quarterly reports on Form 10-Q and current reports on Form 8-K to understand those risks, uncertainties and contingencies. Also, please refer to our third quarter earnings announcement released yesterday for reconciliations of non-GAAP financial measures.

And now, I'd like to turn the call over to our Founder and Executive Chairman, John Schmitz.

Thank you, Chris, and I would like to welcome everyone to the Select Energy Services 2018 Third Quarter Conference Call. I am very pleased with the team's execution and our third quarter financial results.

During the quarter, we saw record high revenues, margins, adjusted EBITDA, net income and operating cash flow for Select as a public company. While we did see activity begin to soften late in the quarter, overall, our customers remained fairly active for most of the period. We saw flat to modest incremental increases in rigs, frac crews, completions and frac stages on a full quarter average basis. While we are just at the beginning of our formal 2019 budgeting process, we will be watching E&P budgets closely as they emerge in the coming weeks and months. We continue to believe that our position as the largest Water Solution provider with operations at all major unconventional basins, our blue-chip client base and our outstanding balance sheet should position us to take advantage of many coming opportunities into the markets.

With that, let me turn it over to Holli to give you detailed information on the quarter and our outlook before she hands the call over to Nick to cover the financials. Holli?

Thanks, John, and good morning, everyone. To echo John's comments, we're very proud of the team and their performance in Q3. Our revenue growth was more or less in line with completions activity levels, with total revenues up 1%, and Water Solutions revenues up 3%. Additionally, our ongoing emphasis on operational efficiencies resulted in margin improvements across all 3 segments and adjusted EBITDA incremental of over 100%. Overall, these improvements lead to an attractive 25% growth in net income over the second quarter and notable free cash flow.

Having just passed 1 year from the closing of the merger, I'd like to touch on a couple of points relating to that milestone. From a people perspective, our operations team is fully settled into place and there haven't been any real surprises on the customer front post-merger.

However, one area of integration we haven't been satisfied with is the build in our working capital. System and process integration and consolidation of MSAs has resulted in a DSO metric notably higher than either company experienced premerger. The team is very focused on this, and we expect continued improvements over the coming quarters. As the working capital build flattened during the third quarter, cash flow from operations more than doubled from Q2 to just over $60 million, resulting in solid free cash flow generation of $19 million. The post-merger platform that Select has today puts us in a position of strength to defend and grow our market share in multiple regions and service lines. Looking forward, there's some evolving market-based challenges ahead of us. A more pronounced E&P budget exhaustion and Permian takeaway constraints will add additional challenges to Q4 on top of the typical seasonality we've come to expect. These challenges are likely to be felt across all segments and geographies to varying degrees of impact.

While we can't fight the headwinds of fewer wells being completed, we believe our pricing impacts will be more limited than what we're seeing in other areas of the service industry such as frac and sand where oversupply is a more meaningful concern. As a market leader in Water Solutions, our customers value our comprehensive solutions and capabilities, and we believe that long-term pricing opportunities will reflect that.

Given the high rates of overtime, contract labor and rental expense we've seen year-to-date, we'll remain focused in the near term on employee retention and managing our cost base to protect our margins. But again, we expect this market softness to be short-lived and believe we're well positioned to take advantage of any weakness in the market.

Oil prices and customer cash flows remain at healthy levels. Our judicious and balanced capital allocation strategy to date has placed us in a very good position to capitalize on this opportunity, which is really what this next 6 months is, an opportunity. We'll continue to invest in our business in preparation for expected increased activity levels in 2019, which should include attractive margin-enhancing opportunities around automation and rental replacement.

Global macro-fundamentals remain strong, with WTI averaging just shy of $70 during Q3 and the 2019 strip in the mid-$60s. As we look forward, U.S. onshore shale plays will likely be tasked with providing the majority of global oil demand growth next year, with the high decline rate seen in the U.S. shale, incremental completions will be a critical component of the supply equation. With regard to the Permian, we've been encouraged by the recent narrowing of the Midland-Cushing differential, highlighting the operators' ability to get their product to market. We also believe pipelines will be coming online starting in the summer to alleviate some of the takeaway constraints.

We certainly believe that current commodity pricing levels provide attractive rates of return and forward hedging opportunities for our customers as they work through their 2019 budgeting processes. Our current view, based on recent customer conversations and industry analysis, leads us to expect overall North American onshore drilling and completion spending to increase by the mid- to high single digits in 2019, and for completions to capture an outsized share of this, particularly given the recent strong DUC build, most notably in the Permian, but also in other regions. We believe completions activity should accelerate outside the Permian in Q1 and in the Permian by Q2, with first half ramp leading to a market in full swing by the second half of 2019.

Given this macro view, we feel confident about our business and where we sit, and as John said, we're the largest Water Solutions provider with operations in all major unconventional basins with a top tier customer base. Additionally, our balance sheet improved even more this quarter. This positioned Select well to capitalize on the so-called pause in the Permian and continue executing on our long-term strategy. We see many opportunities out there in the market, and we'll continue to add to our business development team to manage the level of activity. There remained a number of ongoing market consolidation opportunities, and we believe we can take advantage of the current market dislocation to make incremental bolt-on acquisitions.

As an example of this, we recently entered into an LOI to acquire a small regional service company, which provides us access to a new geography and customer group for one of our service lines. Additionally, on the infrastructure side, we continued to make good progress on multiple projects in a number of areas. We're starting to see more customer acceptance around entering into long-term contracts, such as AMIs or take-or-pays, but I still feel confident about our ability to execute in the coming months.

We also remained committed to investing in differentiating technology, including the ongoing automation of multiple aspects of our fleet. As a critical component of our strategy, automation of the water supply chain not only improves our operating margin but provides material improvement in the safety and environmental risk management for our customers and significantly expands the scope of our data collection capability.

With that, I'd like to hand it over to Nick, to walk through our financial performance in more detail. Nick?

Thank you, Holli and John, and good morning, everyone.

As Holli mentioned, this quarter marked a large step forward in realizing cash flow generated by the underlying business. The $60 million of operating cash flow easily covered CapEx, while allowing us to lower net debt by approximately $18 million during the quarter. I'm pleased to see the working capital process improvements we are undertaking begin to bear fruit, with accounts receivable declining slightly on higher revenue.

Merging customers and systems, combined with distinct billing processes and resource constraints, resulted in an abnormal build in working capital in recent quarters. This is now a high focus of the team, and we are already seeing early improvements that we expect to continue in the coming quarters. With legacy systems fully integrated and internal transparency amplified, we expect to harvest an incremental $50 million to $75 million through the first half of 2019 from accounts receivable through these improvements on a hypothetical flat revenue basis. I expect continued cash flow growth from the underlying business operations as well, which have previously been obscured by the expansion of working capital. The relatively low capital intensity and differentiated nature of our business should become more evident as these cash flows materialize.

We reported total revenues of $397 million for the third quarter of 2018, up 1% sequentially from the second quarter. From this 1% growth in revenue, we achieved adjusted EBITDA expansion of 8% and net income growth of 25% from the second quarter to $73.7 million and $31.3 million, respectively. As we think about the fourth quarter, the slowing pace of completions for the industry will have an impact on our revenue. While there is no perfect macro indicator for our business, we do look to the completions count as a relevant and readily available metric, even if it is frequently subject to later revision. We would generally expect our fourth quarter revenue to track roughly in line with completions, which we currently expect to be down in the 10% range quarter-on-quarter. But given competitive dynamics and our continued steady investments in automation and rental replacement, we do not expect significant deterioration in our segment margins beyond the typical Q4 compression.

As Holli noted, we are bullish in 2019, given early conversations with our customers, and our improved financial health versus this time last year, and the intensifying growth in the number of DUCs given the steady rig count in the lower 48.

Given this view on 2019, our CapEx forecast for full year 2018 remains in the $140 million to $150 million range.

Turning to our segment results, Water Solutions revenues increased 3% sequentially to $281 million in the third quarter from $274 million in the second quarter. Additionally, our Water Solutions segment generated gross profit before depreciation and amortization of $73 million compared to $70.1 million in the second quarter, an increase of 4%. Gross margin improved 30 basis points to 25.9%, with strength concentrated in our water sourcing business, most notably our GRR operations in the Northern Delaware Basin. Nonrecurring transaction costs of $2.5 million related to merger rebranding efforts negatively impacted this margin. Absent these costs, margins would have been 26.8%. We do not expect any additional rebranding costs going forward. For Q4, we expect Water Solutions revenue to decline roughly in line with the completions count.

In our Oilfield Chemicals segment, we saw relatively flat revenues of $64 million. The segment generated gross profit before depreciation and amortization of $7.5 million during the third quarter, up from $6.3 million in the second quarter. Margins increased by 200 basis points due to the reduction of freight costs from the recent opening of our in-basin Midland friction reducer production line and improved product mix. Bucking the trend in completions count, we anticipate small gains in both revenue and margin in this segment due to strong customer reception of our new proprietary high-viscosity friction reducer and the continued benefit of recently implemented operational efficiencies.

Our Wellsite Services segments saw revenues decline in Q3 to $51.6 million as compared to $54.7 million in Q2. While we saw continued growth in our accommodations and rental service line during Q3, this growth was more than offset by the lost revenue resulting from the closure of 3 underperforming yards within our Canadian operations. Despite the decline in revenue, the segment generated gross profit, again before depreciation and amortization, roughly equal to the second quarter at $10.8 million, and saw margins improve just over 4 percentage points. We don't anticipate much overall change in this business in the fourth quarter.

Turning to our balance sheet, we've continued to build dry powder as we evaluate our capital allocation plans for 2019. We repaid $15 million of borrowings on our ABL during the third quarter, with another $10 million paid back since quarter-end, while still executing on our CapEx plan. Our net CapEx for the quarter totaled $41 million. We ended the quarter with $65 million of borrowings on our revolver, now $55 million with the recent repayment. That left us with immediate liquidity of approximately $218 million given our borrowing base at quarter-end. The strong balance sheet, along with our anticipated increased cash flow generation over the next 2 quarters, provides us with additional optionality as we develop our 2019 budget plans.

With that, I'll hand it back to Holli for some concluding remarks.

Thanks, Nick. In conclusion, we're very proud of our Q3 results, and though we expect a sequential decline in Q4, driven largely by lower levels of completions-related activity, we expect this to be transitory. We're very excited about some of our recent development successes, and as we progress through year-end, we'll continue to remain diligent with our capital, while seeking the best long-term returns for our shareholders. We're pursuing high-return opportunities across certain organic equipment and infrastructure investments as well as through bolt-on acquisitions that expand our geographic reach by service line. Additionally, we'll continue to review our noncore assets. As our cash flow grows, we'll evaluate all of these investments through the lens of a sensible capital allocation framework.

With that, I'll turn it back over to the operator, and we'll take your questions. Operator?

(Operator Instructions) Our first question comes from the line of James Wicklund with Crédit Suisse.

Nice quarter, obviously the market likes it so congratulations. Holli, on the Water Solutions business, the questions are really about pricing. And I understand, automation -- or that's not the same question, but automation and efficiency and execution, all those things, but it just seems difficult that you guys have a difficult time when improving pricing in Water Solutions over the last several quarters. Is there a chance for pricing improvement as we go forward? And where and what kind of what holds that back? That's been one of the surprises, actually, I think since you came public is the lack of pricing power even though the business itself has decent incrementals.

Sure, Jim. And I think one thing that we have to keep in mind and put into context is that our pricing didn't fall as much as other people's pricing. So the opportunity for the uplift isn't of the same magnitude. Just because it does -- when we do have a bit more of a floor under our pricing. When we look forward, Q4 is not going to be the time to go after pricing as you might imagine, but I do feel good about, yes, being able to defend our pricing. And we look forward to 2019, is -- there are going to be spots with certain customers, certain service lines and regions that will continue to get some additional pricing. But at the end of the day, I think, when you look at our margins, we're not in an unhealthy spot, when we look at where we are. And when I think about our pricing -- I think something that differentiates us and this is what, this pause of sorts, will help us prove out is that our pricing is a bit more sticky, and I would put it really the explanation for that in a couple of buckets, and one of those is just the competitive landscape, that if you're doing a small, simple water transfer job, there are going to be several regional suppliers of that kind of service. But when we start to get to these more complicated water networks, that are essentially engineered jobs and requires more scale, that's where we're going to come into play. And also, I'll just say frankly, we have better water sourcing capabilities than others out there. When you combine that with our technology, I think that's what makes it really powerful because we essentially apply that technology to these engineered jobs. And that helps us on our side, manage our cost better and support those margins, as I was talking about, because we can price out jobs more accurately because we really understand what it's going to take. And that technology also gives that visibility to our customer. And essentially, through the reliability and visibility that we provide them, it just creates a stickier relationship, and it creates a stickier pricing environment for us.

Holli, I appreciate that. That's helpful. And my follow-up, if I could, you mentioned the technology that you're bringing to bear, and you talk about automation and we're hearing about automation in rigs and operating systems and everything out there. Could you talk about, in your business, because labor is such a high component, can you talk about in your business some examples of automation? Some examples of the technology that you talk about? We think of water lay flat hose and some containers, and so can you talk about where some distinct examples of automation applied to your business and the technologies that you mentioned that you'd bring to bear?

Sure. And it was interesting because we just had our board meeting in Midland last week and we took our directors out to see some of our equipment in action, and we'll have to do that for more folks. But if you think about what we're trying to achieve is, like I said, visibility and reliability for our customers. And through our systems, AquaView, we provide our customers with not only being able to see the pit levels and tank levels but one of the refill rates. And then we also applied that automated pumps, and we're not talking about remote-controlled pumps, we're talking about truly automated. These are smart pumps that can speak to one another, and so that's going to help ensure that we're getting the right flow of water so that you don't -- obviously, you don't run a job down or you don't run out of water. So having that visibility across that network, we can do that. And then we also have automated manifolds, and we have automated proportioning systems, when you're trying to blend a -- or produce water at a fresh water source, and make sure you have consistency of what's going into the blender. So there are a lot of different ways that -- and I think, from our perspective, it's helpful, because anytime we have that automation and you get your customer buy-in, you can then take a person off of that pump, and that's just an example, and what's that allows us to do is go to grow our business without having to continue to add headcount, which I think is going to be pretty important as things ramp up again in 2019. So it's a whole system that we're looking at, and then I'll say, that's version 1.0. Version 2.0 is capturing all that data and turning it into information that our customers can use to manage their jobs.

Our next question comes from the line of Tom Curran with B. Riley FBR.

Holli, picking up on Jim's questions on pricing. For Water Solutions, coming out of the merger, you had given clear marching orders to the field to revert back to offense and start pushing more competently for pricing gains. At the point in 3Q when that initiative understandably might have been paused, how much was Water Solutions' weighted average pricing up at that point off of where it bottomed? And then as of right now and looking through the remainder of the Permian pause, do you expect your pricing to come under pressure and have to fight to defend those gains? Or simply to stabilize and plateau until we see the Permian pick back up?

Yes. I think that -- what I do feel good about on with going through the pause, sort of referring back to what I was just talking to Jim about, I feel like our pricing is more defensible than most. And it's going to depend on service line, there are some that are more protected than others, for sure, in the sense of just what the competitive landscape is and again, what happened to pricing previously. But I think we've said in the past, our pricing probably got hit by 30%, 35% in the downturn. Do we have all of that back? Probably not. But we've got a meaningful portion of that back. So I feel like it's one of those that it's hard to weigh us against the time line with some of the other guys on sand and pumping, just because it was such different dynamics. But I feel, again, limited opportunity for some pricing improvements here, but that's how we're managing our cost structure to make sure we can still get to that sort of high 20s margin for the Water Solutions business.

Okay, and then turning to the Bakken. Based on preliminary 2019 activity indications you've received from both your anchor tenants and other past and potential customers, what volume trajectory do you expect over the next year coming out of your exit level for 3Q? And have you gotten a sense for -- across those customers, an expectation for WTI in 2019 in terms of the number they would plug into their price deck that could serve as a potential catalyst for another leg-up of activity in the Bakken?

Interestingly, Tom, our revenue, when you look at regions and nobody wants to talk about the Permian, so I appreciate you asking about the Bakken. We had 2 regions that were up meaningfully Q3 over Q2: one was the Bakken, one was South Texas. That probably reflects kind of the capital allocation decisions of the operators, and certainly, one of the benefits of having a national footprint allowed us to move with that work. But what we've seen is that stepping back and thinking about our infrastructure in total, that the Bakken infrastructure has been really consistent quarter-over-quarter. You'll find variability and noise month-to-month, but the third quarter was very consistent with Q1 and Q2. And depending on weather and some things and just the capital depletion, we may see that come down a bit in Q4. But we're still optimistic that the Bakken is a strong region. And no reason to think that we won't continue to have opportunities there, and we're even looking at the expansion opportunity off of the Thomson intake, and we're working to determine whether or not we can get a contract in place that would support building another line similar to the Charlson, so I think the Bakken is something we're pretty optimistic about. And then I'd just also note GRR. I think in our prepared remarks, we hit on that a bit but it was a really good month -- I'm sorry, a really good quarter for that team as well and they've essentially doubled the throughput on that system since the acquisition back in 2017, and given the location there in the Northern Delaware, that's another system we expect to be able to continue to get good strong results out of.

Holli, just one quick follow-up on the third potential branch from Point Thomson, would you look to secure an anchor tenant before undertaking that and if so, would you expect that to be yet another AMI contract?

We would want to have some certainty in the cash flow, Tom, and we are still finding in the regions that we're pursuing infrastructure that our customers are pretty interested in being able to have visibility into their water sourcing. And so getting contracts in place is something that we're seeing an appetite for, and AMIs are a good example of that.

Our next question comes from the line of Kurt Hallead with RBC Capital Markets.

Our next question comes from the line of Ian MacPherson with Simmons.

Nick, you didn't expect the margins in the fourth quarter to do any worse than normal seasonal compression, but I don't quite know what you meant by that. So I wanted to follow up on that and get a better sense as to what the margin guidance should be for Q4?

Sure, Ian. So as you know, typically, you'll have weather-related issues in Q4. You'll have some customers who run out of their budget at some point in Q4. We don't often give a big heads-up on that. Given the 2019 ramp-up that we see as we detailed in our remarks, there's a large fixed cost in terms of yards and headcount that we certainly don't want to go away from. So when we look at kind of the usual margin progression in Q4, I'd say, the decrementals there will be much like our recent incrementals in the Water business, which are kind of mid-30%s, I'd say, 35% to 40%. But beyond that, it's a little bit difficult to predict with the weather and the holidays.

That's helpful. That's all I needed. Holli, you talked about -- obviously, there's a lot of opportunity in your capital deployment pipeline. But you're also very low debt and throwing off a lot of free cash on analyst estimates. And so I wanted to ask about potential return of cash to shareholders, how you think about that and if so what methods, how they rank out according to yours or your board's preference?

Sure. And as you might imagine, Ian, we're in the early stages of preparing our budget and plan for 2019. So it's a little premature, but certainly, capital allocation is central to that whole process and as we've lined out, we think that there are good opportunities at the right pricing, given where the dynamics of the market are today. On the tuck-ins similar to the one that I referenced, it's a service company in the Northern Delaware and we do think there are good opportunities to invest in our services business organically. Infrastructure is out there, so all of that will get weighed against our opportunities of returning value for our shareholders because obviously, we're not happy with our stock price. We don't think it reflects the value of our franchise. So that will all compete -- and it's not mutually exclusive, I guess, I would say, it doesn't all have to go into one bucket or the other. So I think what you'll see from us is a sensible allocation. As we look at things -- and as you've said, our debt levels are such that debt reduction is not an attractive allocation of our capital unless it is just essentially reloading the ABL for future investments that we have on the horizon.

Our next question comes from the line of Jud Bailey with Wells Fargo.

A question, Holli, kind of bigger picture, just addressing margins. When you kind of think about all the moving pieces, obviously, you cited some of the near-term headwinds, which everyone's aware of and then some of the strategic initiatives around automation. How should we think about the longer-term kind of margin profile of the business as you -- ex your on some of the automation efforts. And let's assume pricing is -- it just stays firm, how should we think about the margin progression longer term or just the margin of the business as you see it on a longer-term basis?

Yes, it's a good question, because we've made really good progress on the automation front, and it's something that does make us more sticky with our customers. It allows us to maintain our pricing but we haven't necessarily seen the cost benefits run through our P&L with any real magnitude yet. I think that's yet to come. So you combine that with making the continued investments to balance out our fleet between what we own, what we rent. I think that it's still very appropriate to consider the margins for the Water Solutions business, and that gross margin is in the high-20s which would be up -- we were 26.5% once you took out some of the rebranding overhang that we had from the merger. And that's on our -- I'll say, our product line mix today. If we're successful in adding some more infrastructure projects, that would pull that figure up as well.

Our next question comes from the line of Tommy Moll with Stephens, Inc.

So great quarter with GRR delivering record volumes. Can you give us some more detail there? Was that a full quarter benefit? Or I guess, put differently, was activity level there pretty flat across the quarter? Or did you actually exit at a higher rate? And what can you tell us about the outlook there, Q4, where presumably we might see a bit of a dip but really more into next year based on what you're hearing from your customers as of today?

Sure. We did get variability month-to-month, depending on the particular customers we're following. So there wasn't a notable trend during the quarter necessarily. It was just a solid quarter altogether, Tommy, and when we look forward, you're right. If there's less completion activity in that Northern Delaware in the fourth quarter, then we'll feel that. But when we look at where we think the capital will get deployed in the Permian in 2019, the Northern Delaware, that system is right in the sweet spot, and so we have at least a handful of the biggest customers you would want, and we're working with them to try to solve their longer-term water supply challenges. And so I feel really good about that system and how we're positioned for 2019. And we expect it to be very active.

And then for my follow-up and stepping back to a bit of a higher level topic here. On the post-frac side of the business, which is, one, historically, you haven't emphasized as much, but potentially would increasingly going forward, the landscape there continues evolving pretty quickly. There's certainly a lot of private capital sloshing around it, if not as much public capital, at least for now. But how do you see this playing out over the next year? How big of a priority is it for you all to be involved? And if you were to be involved, would it be more likely done on an organic basis or through M&A or some combination?

Yes. Another good question, just because, obviously, when you look at that, it's very much a growing market when you think about the water cuts in the Permian in particular, which has become pretty obvious to a lot of people, to your point, which makes it very competitive. So what we're spending a lot of time and effort on is understanding what's the real value of the underlying assets and the contracts and certainly, if we can create that opportunity, do an acquisition, that's going to be at a return that's competitive with our other alternatives, then we will absolutely pursue that. And I'm telling you, we're also looking at it on an organic level. As you might imagine, we have deep long-term relationships with landowners, and we enter into surface lease agreements with them that relates to the freshwater sourcing where we're able to leverage those same relationships and have conversations with those individuals about obtaining rights for exclusive disposal and gathering systems on their land. And so we're building a portfolio of options around that, and then we just have to determine, what's the cost of building out a system and the appropriate disposal wells and can we get customers lined up to commit to a cash flow that supports that investment we make? So not very different than on the pre-frac side, when we're -- for deploying water to where it's needed. But it's a long -- I'll say, a long sales cycle of sorts, because there just -- there are several aspects of this that -- it takes time to build this up. But we are attacking it organically and we'll look at acquisitions, but it is a pretty competitive landscape right now.

(Operator Instructions) Our next question comes from the line of J.B. Lowe with Citi.

Well, it sounds like Tommy kind of stole my thunder here on the M&A question, but I was actually also hoping to kind of tread into the realm of the hypothetical here. You guys are fairly under-levered, and you have been paying off debt and all. But I was wondering if you were to do kind of a larger chunkier acquisition on the post-frac side or in one of your other business lines, what's kind of the comfort level of bringing debt up to just from a capital structure perspective?

Yes, that's right. So I think, with our current business, and when you look at the working capital we have on the balance sheet, and we feel very comfortable that a downturn that, of course, well more than covers our debt. So I think you're accurate to say that our debt level, as it stands today, is probably a little under the long-term efficiency. We look at potential acquisitions, to a large extent it depends on what that acquisition is. If it's a fixed pipeline business with long-term contracted cash flow there, then that lends itself to probably a little more debt than if we're talking about an acquisition that's more of a short-cycle service business. But I think long term, as we move more into the infrastructure space, more into the AMIs or take-or-pays, that we could be comfortable with a debt level that's around 1 to 1.5x EBITDA. But obviously, we're not going to be hurrying to get there anytime soon with the current business year.

Okay. That's helpful. And if I could just squeeze 2 quick-fire ones here as my follow-up. Just, a, what's the breakdown of your CapEx kind of going forward? I think those -- the $140 million, $150 million level for the year, but if you can kind of give us an idea for 2019, that would be helpful. And then just in 3Q, what were your revenues out of the Bakken?

Sure. So for 2019, as Holli mentioned, we're still in the budget process here. So we'll probably share a lot more color on that on our next call. But I think, overall, we shouldn't see any huge changes one way or the other in that but we'll certainly cover that in more detail next call. As far as breaking that down into the various components, about 40% of that is maintenance CapEx, and we feel that's a pretty decent run rate to take forward as far as what that component is and where we expect that to go next year. Roughly 40% of that would be growth and 20% more of your automation rental replacement, adding margin to our current operations. If -- your other question about the geography and sorry, was it breaking it down by region or was it just the Bakken?

Just revenues out of the Bakken.

Yes. So roughly, if we're talking our water business, that's -- about 10% of that, give or take, comes out of the Bakken. And Holli mentioned, Bakken, in South Texas, Eagle Ford were our 2 biggest increase regions this quarter. So we're seeing a lot of good signs there. Bakken, historically, is pretty affected by winter seasonality but there's a lot of long-term promise there and I think our infrastructure there is in a great position going forward for future completion work.

Ladies and gentlemen, we have come to the end of our time allowed for questions. I'll turn the floor back over to Ms. Ladhani for any final comments.

Thanks. Just quickly, I mentioned in the prepared remarks that I view the next 6 months as being an opportunity and I wanted to elaborate quickly just to say, I think there is an opportunity here to create value and to continue to differentiate Select. And so the things that we're going to be focused on that we'll be keeping up with you over the next few quarters is some of the things we already talked about, we'll continue to invest in automation of our Water Solution systems. And something we didn't hit on today, was the progress in our Chemicals business and having in-basin manufacturing. And we're going to be now focused on commercializing our high-vis friction reducer.

Nick hit on our working capital initiative so that would be a big focus, where we think we can bring that $50 million to $75 million back. And we think it's pretty exciting when you can combine the cash flow we expect to generate from the business, that return of working capital, that's excess and then the liquidity that we sit on today. And when you combine that with the opportunities to create investments in these accretive bolt-on acquisitions and the longer term infrastructure projects as well as just a quick payback opportunity, our core service business, we're pretty excited about all those opportunities. And as we talked about, so we'll weigh those alongside returning cash to shareholders. We have a lot to think about but these are good problems to have, so we're looking forward to the next few quarters, but appreciate you all’s time today. Thanks.

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