Citi Sees 40% Upside for Select Water, Targets $13

Key Takeaway

• Citi upgrades Select Water Solutions to buy, raising the target price to $13 for a 40% upside, citing strategic pivot towards water infrastructure.
• The company's shift and M&A activities position it well against peers, trading at over four times projected EBITDA, undervalued compared to Aris Water Solutions' 6.5 multiple.
• Analyst consensus leans positive with an uptick in stock price to $9.46, reflecting market optimism towards Select Water's strategic redirection and growth potential.

Strategic Pivot Fuels Optimism

Select Water Solutions, a provider of sustainable water services for the oil and gas industry, has initiated a strategic shift towards its water infrastructure business, focusing on the management and recycling of produced water. This move is seen as a positive response to the volatile and cyclical nature of completions activity in the water services sector, which constitutes the company's largest business line. Citi analyst Scott Gruber views this pivot as a strategic alignment with energy industry trends, anticipating it will lead to higher and more stable margins for the company.

Analyst Upgrade and Price Target Lift

Scott Gruber, an analyst at Citi, has upgraded Select Water Solutions' stock to buy from neutral, significantly raising the price target to $13 from $9. This adjustment suggests a potential 40% upside from the stock's closing price on Wednesday. Gruber's optimism is rooted in the company's recent mergers and acquisitions (M&A) and organic growth, which he believes positions Select Water well to capitalize on its strategic redirection. The company's efforts to expand its infrastructure segment through M&A are expected to accelerate growth and enhance stock value.

Valuation and Market Position

According to Gruber's analysis, Select Water Solutions is currently undervalued compared to its peers, trading at just over four times its projected earnings before interest, taxes, depreciation, and amortization (EBITDA) over the next 12 months. In contrast, Aris Water Solutions, a competitor, trades at a 6.5 multiple. Gruber suggests that, given Select Water's focus on infrastructure growth and strategic acquisitions, a more appropriate blended multiple for 2025 would be approximately 4.7x, which is higher than the current valuation of around 4.1x. He also notes that the risk of decreased demand for frac water, a concern in the past, has diminished with rising oil prices, further supporting the stock's upside potential.

Analyst Consensus and Market Reaction

The analyst consensus on Select Water Solutions Inc (WTTR) includes six ratings, with one strong buy, three buys, and two holds, indicating a generally positive outlook among market analysts. The company's stock price has recently seen an uptick, trading at $9.46, which is a 2.10% increase, reflecting the market's initial response to the strategic changes and the upgraded analyst expectations. The highest price target set for the stock is $13.00, with an average target of $11.25, suggesting an 18.92% upside potential, while the lowest target is at $9.00.

Street Views

• Scott Gruber, Citi (Bullish on Select Water Solutions):

  "Through a mixture of recent M&A and organic growth, we believe WTTR is well positioned to execute on their strategic shift and see upside ahead for the stock... With WTTR’s Infrastructure growth being accelerated by M&A, the proper blended multiple on 2025E appears to be ~4.7x, above the stock’s current ~4.1x. Further, the downside risk to slowing demand for frac water appears to have passed with higher oil prices."