Q3 2021 Aris Water Solutions Inc Earnings Call

Good day, ladies and gentlemen, and welcome to the Arris border solutions incorporated third quarter 2021 earnings call and webcast all lines have been placed in a listen only mode and the floor will be opened for questions and comments following the presentation.

If you should require assistance throughout the conference. Please press star zero on your telephone keypad to reach a live operator at this time. It is my pleasure to transfer over to your host David <unk> Senior Vice President Finance, and then faster relations Sir the floor is yours.

Good morning, and welcome to the Arris water solutions third quarter 2021 earnings Conference call I'm joined today by our founder and Executive Chairman Bill <unk>, our president and CEO, Amanda Brock and our CFO Brenda Schwark.

Before we begin I'd like to remind you that in this call and the related presentation. We will make forward looking statements regarding our current beliefs plans and expectations, which are not guarantees of future performance and are subject to a number of known and unknown risks and uncertainties and other factors that could cause actual results to differ materially from results.

And events contemplated by such forward looking statements.

You are cautioned not to place undue reliance on forward looking statements. Please refer to the risk factors included in our prospectus filed with the Securities and Exchange Commission in connection with our IPO.

I would also like to point out that our investor presentation, and today's conference call will contain discussion of non-GAAP financial measures, which we believe are useful in evaluating our performance. The supplemental measures should not be considered in isolation or as a substitute for financial measures prepared in accordance with U S. GAAP reckon.

A reconciliation to the most directly comparable GAAP measures are included in our earnings release and the appendix of today's accompanying presentation.

I'll now turn the call over to our founder and executive Chairman Bill DARPA.

Thank you David I'd like to welcome everyone to Arris water solutions first conference call as a public company. We thank everyone for their investment and belief in our company are excited to begin our next chapter as a public company.

As a reminder, we own and operate a leading environmental water infrastructure and recycling business in the northern Delaware and Midland basins are built for purpose high capacity produced water handling and recycling systems provide our customers with proven produced water takeaway assurance and access to significant recycled produced water volumes were sustainable.

Supply.

Our growing water recycling capabilities and infrastructure to help our customers meet their water related sustainability targets and mitigate their impact on local groundwater sources.

We operate over 660 miles of high capacity water pipelines had 48 active water handling facilities and 10 high capacity produced water recycling facilities.

Erez water had a strong third quarter as we continue to recognize the benefits of our large scale infrastructure increased demand for recycling produced water in the third quarter, we executed four new long term acreage dedications with a weighted average life of 10 years, increasing our dedicated acreage of about 20000 acres to a.

These contracts were waiting operators include long term full cycle water handling and recycling solutions. We also set records for total volumes handled and produced water volumes recycled we continue to see steady increases in completions activity in the northern Delaware and Midland basins, and anticipate continued further volume growth going forward.

We haven't demonstrated and differentiated ESG track record that is core to our operations and mission Amanda will now expand further on our operating performance. Thank you Bill.

The case in the third quarter at least the record volumes the board handled installed integrated water handling and reuse infrastructure network.

We had a 961000 barrels per day total water volume in the third quarter of 2021, which is an increase of 42% versus the third quarter of 2020, and an increase of approximately 4% in the second quarter of 2021.

These record volumes were driven by the increased activity of our long term contracted blue chip customer base and continued demand for our recycling solution.

We continue to differentiate our capabilities throughout her ability to aggregate and 11 to multiple operators recycled water in the quantity quality and timeframe they need predicting patients.

Recycled produced water made up more than 50% of solid volume supply for the quarter.

Feeding our sustainability performance target that was established for our 2022 fiscal year under a sustainability linked notes.

The sustainability of bonus target was to have recycled water constitute 60% of total salt volumes, so 5% about 2022.

Since July 2019, Arris is recycled more than $2 1 billion gallons of treated produced water directly displacing the use of ground water. We continue to work closely with our customers on reuse and evaluating opportunities to increase water sustainability and amazing demand.

Covid programs toward helping the industry maximize water recycling.

Our infrastructure also provides us the capability to work with customers to pilot technologies that promote beneficial reuse of treated produced water outside of the oil and gas industry and we continue to make progress as we evaluate and pursue these opportunities.

Our adjusted operating margin per barrel was 41 cents in the third quarter of 2021 compared to 38 cents per barrel in the third quarter of 2020.

We have also made significant progress in reducing structural costs through automation and increase recycling activity.

While we have seen some recent impact from cost inflation, particularly around chemicals for treatment. We continue to be focused on operating efficiencies and opportunities to add incremental margin going forward.

We also had inflation escalation clauses in our contracts that help mitigate inflationary cost pressures.

And with that I'll turn it over to Brenda to discuss our third quarter financial results.

Thanks Amanda.

And EBITDA for the third quarter of 2021 was $30 8 million compared to $19 7 million for the third quarter of 2020. Adjusted EBITDA includes adjustments for temporary power costs abandon exploration project noncash charges, including an after the abandonment of $27 4 million as previously disclosed and other nonrecurring items.

We transitioned all major handling facilities to permanent power at the end of the second quarter and thus are no longer adjusting for temporary power cost our capital expenditures were $20 4 million for the third quarter, we expanded our pipeline network by approximately 25 miles and increase our produced water recycling capacity by approximately 50000 barrels per day.

We continue to deploy incremental capital at attractive return to capture growth opportunities alongside our long term contracted customers. We are growing rapidly while maintaining a conservative balance sheet at the low end of our long term leverage target and ample liquidity. We ended the third quarter with approximately $36.

$4 million in cash prior to the receipt of approximately $32 8 million of incremental IPO proceeds and an undrawn and available $200 million revolving credit facility.

Also generated $6 1 million of free cash flow in the third quarter with our industry, leading balance sheet and liquidity position, we have significant optionality to allocate capital to the highest return opportunities for our shareholders. As we think about capital deployment, we will prioritize incremental capital projects with both existing and new customers that allow.

As to leverage our existing infrastructure and add volumes to the system.

We are evaluating opportunities to return cash to shareholders with our new board and expect to provide more clarity in December.

We have a track record and disciplined M&A that prioritizes financial returns strategic fit customer quality and contractual underpinning and we will continue to prioritize those qualities and any potential acquisition.

With that I'll turn it over to bill to wrap up.

Thanks, Brenda Arris water had an excellent quarter and this is an exciting time for us to take the next step as a company, we're extremely optimistic and continue to hit record volumes of the industry and achieve the sustainability goals through the operational and financial benefits of our operating infrastructure and deploying new capital at attractive incremental returns, while managing our balance.

Sheet prudently in running the business with a focus on free cash flow generation, we are a premier asset footprint built specifically to accommodate our customers substantial full cycle water management needs. Our infrastructure is located in the core.

Average was multi decade inventory life and best in class well economics, finally, as evidenced by our performance over the past year. Our dedicated team has the experience and expertise to continue to grow this business into the future with that we will take questions.

Thank you the floor is now open for questions. If you do have a question you May press star one on your telephone keypad at this time. If your question has been answered you could remove yourself from the queue by pressing one okay, and ladies and gentlemen at star one and.

Our first question comes from John Mackay from Goldman Sachs. John Go ahead.

Hey, everyone. Good morning, Thanks for the time.

We want to do one micro one and then I'll follow up with something on the macro side.

Some of the new contracts you guys announced include both the produced water handling and also the recycling side can you just talk a little bit more about your ability to kind of pulling these.

Full service contracts going forward and does that put the mix starts to look like over time.

Okay.

Thank you John and yes, the new contracts that we've been signing increasingly with time includes both disposal and handling and reuse and we are seeing our customers and new customers increasing want that bundled service. They want the on proven takeaway capability and then at this point.

We have proven that we can deliver back to them the amount of water they need for the increasing.

Quantity of water they need for completion, so I think as we go forward you will see contracts on the same dedicated acreage that if a boat reuse and recycling as well as handling.

Okay. That's helpful. Thank you maybe just on the macro side than you guys have a pretty good insight into what's going on at the majors I'm just curious if you can.

Sure if youre seeing any sort of pickup in activity more recently or is it still or have you been seeing mostly through 'twenty, one where its the private companies kind of leading in the public companies holding back a little bit.

Well, we're seeing a mix shift a little bit some of the larger ones.

And I had been discussing our growth plans.

Starting sort of in the end of the fourth quarter or into next year. So we're seeing a mix thing. They obviously are not.

Accelerating as fast as some of the privates are at this point in time.

Refer to all their details across the board, but we're still seeing pretty steady climb out of.

Production rates does the rig count may not go up Youre seeing increased efficiencies on the completion side. So we're actually saying you know more water per rig produced if you think about it that way, even with potential flattish rig activity, but we still see it growing.

John This is a time that our customers are all evaluating their plans for 2022. So we are seeing increased inbounds asking us about capability permits.

And availability and utilization of our system. So we are as bill said continuing to see sort of steady inquiry steady growth.

And you know optimistic about what this means.

All right that's great. Thank you.

Thanks, John.

Again, ladies and gentlemen, its star one to ask a question on the phone.

Please hold while we poll for questions.

And our next question comes from Kyle May from capital One Securities go ahead Kyle.

Hi, Good morning, everyone. Just one quick one for me.

You mentioned, the new acreage dedications I'm just curious if you can talk about the competitive landscape for new business and then maybe how big is the opportunity set in your area.

There are a lot of the large acreage blocks have been dedicated to us and others. There is still.

Decent amount of incremental opportunities a surprising amount that continue to pop up but so we added 20000 acres of last quarter and were in.

Dialog right now for more so.

Most of our activity clearly is predicated on current acreage growth on it but we do see that there is new business development and there's a landscape of where to grow I think that the notion of the reliability of the system and the full cycle of water management offering.

One that's allowed us to attract these customers without.

Without a lot of price competition, if you will.

Got it that's all for me thanks, good morning.

Thank you.

Okay, ladies and gentlemen, Thats star one to ask a question. Please hold while we poll for questions.

Yeah.

Yeah.

And there appear to be no further questions at this time.

I would now like to turn the floor back over to Amanda Brock for any closing remarks. Thank you.

Thank you Kat.

You all for participating in our call today, we want to thank all of our employees our customers and new shareholders are all an existing stake hold it for another strong quarter and most importantly for the successful IPO.

We are really proud of all of the assets that have gone into the continued growth of our system, a leading market position in the core of the Permian and our ESG leadership, and we look forward to participating.

In these calls in the future in reaching out to all of you and most importantly to providing further positive update.

And thank you to all of you who've been listening and have a great day.

Thank you. This does conclude today's conference. We thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.

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