Q2 2022 Aris Water Solutions Inc Earnings Call

C.

readetings and welcome to the erris water solutions second quarter 2022 earnings conference callat. This time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. If anyone to require operator assistance areuring the conference, please press star zero on your telephone Q pad as a reminder this conference is being recorded. I would now like to turn the conference over to your host, David Turf. Senior Vice President, finance and Investor Relations.

Good morning and welcome to the ARRIS water solutions second quarter 2022 earnings conference call. I am joined today by our President and CEO , Amanda Brock, are Founder and Executive Chairman, bills artler, and our CFO , brren. assubefore we begin, I'd like to remind you that in this call, in 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 and the other cautionary statements included in our most recent quarterly report on Form 10 -q and annual report on Form 10-K filed with the Securities and Exchange commiss. 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. These supplemental measures should not be considered in isolation or as a substitute for financialmeasures prepared in accordance with U's GAAP reconciliations 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 AR.

Thank you David, and thanks to everyone for joining us this morning. In the second quarter, we continued our momentum and growth in a supportive commodity price environment, but were impacted by headwind and supply chain constraints leading to a higher than anticipated cost. Inflation and unexpected delays from our contracted customers led in the quarter with the newer completion design of multiwell long Lal pads and large water supply needs, delays can have a significant impact on us across the end of the quarter. As a result, our adjusted EBITDA for the second quarter fell slightly below our expected range of 38 to $4 million.

Our long-term contracts, demonstrated reliability and leading recycling capabilities however, continue to drive our growth alongside our premier customer base. As delayed Wells are completed, we expect to both delivered recycleed water for those Wells and receive the associated produce wire volumes back. Similarly, our CPI linked revenue inflation causes in our contracts are triggered at discrete, generally annual times, thus resulting in short-term mismatches. Fundamentally, we continue to grow substantially year-over-year and are confident in this continued growth.

Yesterday we also announced the acquisition of the Delaware energy services assets in exchange for equity consideration and a small volume metric based earnout. I'll want amand to expand on the strategic benefits of the transaction, but we are pleased to add Delaware energy's complementary assets and customers to our core system in Eddie and Lee counties. With that, I'll turn it over to Amanda.

Thank you Bill. In the second quarter we increased our total water volume to approximately one point two million barrels per day, up 34% versus the second quarter of last year and up 6% sequentially over the first quarter of this year.

As stillill referenced llater, in the second quarter a few of our large contracted customers experienced delays in their provided schedules and completions on our dedicated acreage, which had turned delayed anticipated water solution volumes and related revenue.

Our adjusted operating margin per barrel with 41 cents a barrel in the second quarter of 2022, down as teny a barrel compared to the second quarter of last year. We have seen cost pressures continue to increase, particularly related to labor and commodity linked csts, such as chemical treatment expenses.

We continue to be focused on identifying and implementing operating efficiencies, such as enhancing automation to better manage costs and margins during this inflationary environment.

iccontractual revenue increases with CBI linked escalators at annual reset dates, which will help offset pressure on our margins over time.

We continue to look for attractive opportunities to add capabilities and scale to our infrastructure network and today we are very pleased to announce the closing of the acquisitions of Delaware energy services assetsthe Delaware energy assets add seven water handling facilities and associated gathering lines in our core areas of edd and Lee counties in new mexicothis is a great opportunity to add assets to our network for several reasons. First, the Delaware energy assets are located adjacent to our core infrastructure and can be efficiently integrated into our network with minimal construction risk.

Second by adding additional handling capacity in new Mexico, we can recycle in more locations for a greater number of customers. And third, we're supplementing our operational capabilities close to existing a new customers which we expect to generate additional commercial opportunities.

We expect the Delaware energy assets to add incremental 11 to 13 million in adjusted EBITDA in 2023, once fully integrated, and to all the defray from additional future capital expenditure in our core operating areas.

On beneficial reuse, we continue to make progress, piloting and identifying relevant technologies for the treatment of produced water for nonconsumpted agriculture and industrial uses and potential supplemental water. We are completing several beneficial reuse pilot projects and working alongside regulators, development partners and other industry participants to evaluate and scale promising technologieswe will have additional progress to share on these initiatives and partnership shortly, as we focus on driving innovation in sustainable water management and maximizing opportunities for the use of produced waterand with that I'll turn it over to brenda to discuss the financial results for the qu.

Thanks Amanda. We recorded adjusted EBITDA for the second quarter of 37.2 million of 21% from the second quarter of two thousand and 21 and up 3% sequentially from the first quarter of 2020 -two.

As Bill and Amanda reference, due to volume delays in inflationary pressure, our adjusted EBITDA was slightly below our previously provided guidance range of 38 ion to four million for the quarter.

Based on customer provided updated schedules, we have reforecast our third and fourth quarter 2022 volume expectations. Given these updated volumes, along with inflationary pressures that will impact operating margins in the short termwe, anticipate third quarter adjusted EBITDA will be between 38 and 41 million at this time. We believe the fourth quarter 2022 adjusted EBITDA will grow five to 10% sequentially from our third quarter estimated EBITDA.

Our capital expenditures were approximately 39 million for the second quarter of 2022 and approximately 48 million year-to-date.

We're investing in the second half of 2022 to support further growth in 2023 and beyond for cheron and other contracted customers.

We expect capital expenditures to be back half weighted in 2022 as we construct additional infrastructure consistent with our previously provided full year outlook of 140 to one hundred and fifty million.

We continue to see attractive returns in growing our infrastructure and our capabilities, while maintaining a conservative balance sheet at the low end of our long-term leverage target, with ample liquidity.

We ended the second quarter with approximately 35 million in cash in an undrawn and available two million revolving credit facility, for a total available liquidity of approximately two hundred and 35 million.

As vill and Amanda has mentioned, we closed on the acquisition of Delaware energy's assets on Monday, August first, with an issuance of approximately three pointthree, seven million shares. That will be reflected in our third quarter financial statements.

We will continue to evaluate acquisitions for strategic infrastructure to support incremental growth. Additionally, yesterday we announced our third quarter 2022 dividends of nine cents per share, continuing our commitments to returning cash to shareholders while maintaining flexibility to fund additional growth opportunities. With that, I'll turn it back to Amanda to rapa. Thanks brenda, as we think about the company's performance more broadly, with are delivering sequential volume growth of over 6% in the second quarter and anticipate growing adjusted EBITDA by property: 30% as year versus of 2021.

Our customers are clearly committed to developing their deep inventory of assets on our long-term contracted acreage, which is dedicated to us on average for the next nine years, in the core of the Northern Delaware basin.

Executing on opportunities such as Delaware energy this quarter and a significantly expanded long-term shareon agreement last quarter is indicative of our focus on delivering efficient growth.

Our core operations and business development opportunities remain strong and we believe we will continue our rapid growth well into the future. With that, we will take questions.

Thank you.

Ladies and gentlemen, we will now begin no a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad and a confirmation tele will indicate your lines in the queue. You may press star two if you would like to remove your question from the queue.

For participants using speaker equipment and may be necessary to pick up your handset before pressing the starkeys.

one moment. Please fully me pull for questions.

Our first question comes from samata. Ho with evercorre ISI, Please proceed.

Hey guys, thingss for taking my question. I have a question, I guess, just on the margin front. Do you think that you'll be able to recoup some of the the decline that you selling one que for this, the the higher you know cost that you incurred? It's kind of carious us some of those cost esscillators kick in so that because you you know a flat margin, or is it going to be?

The potentially.

meth, thanks for that question. Yes, we do see us recoupiting some of that margin. As you know, we've got CPI in our contracts and those usually reset in January , March and also in June - June , particularly one of our large contracts.

So with inflation being where it is, we have sort of our stress, the ability of our CP, the recovery in our contract, to really keep up. But as we focus on efficiency and as time momove forward and as sort that we see inflation lowering, we do see those margins and being recouped.

Okay excellent, and is just kind of wondering as we sit here at start of August , are you guys anticipating any sort of slowdown for the end of the summer or maybe at the end of the year for the holidays?

We spent a lot of time Sam talking to our large contracted customers about their plans, working with them on their forecast. At this time we do not anticipate and slowdown sort of a year end. Everybody is still moving forward. Clearly, because of the slowdown and delays we saw here at the end of June in these frac schedule which have have had the impact on our here in Q2, it is difficult with tightness in the market for them to sort of catch up. So we will sort of see the delay we experience now through the year. We expect to sort of fully catch up next year that we've got capacity to utilize. That we see ourselves with BD finding opportunities to utilize the capacity we've got. So as a consequence from that question about slowdown, we think there's an opportunities result of BD, as a result of catching out to get to sort of the low end of our guidance range. But as a consequence of lack of visibility at this time what we are really doing is lowering our forecast to a range of 15.16 thousand twenty two with opportunity to actually improve if we're able to bring additional B opportunities to that. But we do not see additional new delays at this time that we have been told about.

Okay great. And then just one last word back can squeeze. one in is just: you know the, the beneficial we use UH, the.

Produce water. I'm curious which projects you are most excited about. You know, I mean, there's a lot of really interesting opportunities and it definitely makes a lot of sense from the environmental angle. So I was just kind of curious: you know which projects you know do you think is well most likely to who move forward to fast, and then which one gets you the most excited?

We're pretty excited to about a number of the project that we've got going on. We have completed our first project, protect as saynm, as it relates to growing cartton and switch grassh, which was very successful. We arehave sort of looking at phase to on thati guess the projects that we're most excited about is working on a full-scale piloot with two of our large operators, which we'll sort of talk about later, where we will be piloting that we're able to cast, identify technologies to really treat water. We're not only consumptiveof agriculture but also for industrial users and for environmental users for discharge the environment, as they do potentially in other states. So a lot of project that we're working on right now. I think we're further along on the non consumptiveof agriculture.

And we look forward to hearing all about all these projects. Thank you.

Thank you.

Our next question comes from the line of Don Christ with Johnson rice. Please proceed.

Morning everybody. How are we all this morning very and thank you.

I wanted to talk about the Delaware energy acquisition you know in. In looking at their website and the Slide seven of the new presentation, it looks like number one they were trucking a lot of water and number two that you have a lot of right of ways close to their disposal Wells. I wanted to ask kind of a two part question. Number 1: what would the the CapEx be to kind of fully integrate the seven disposal Wells to your system? And the number 2, how much of an impact will that be on on next year's CapEx is is is it significant impact to next year's CapEx like a reduction and CapEx for next year versus what your original plans were?

So we do see dely CapEx reduction next year the consequence of this acquisition: we have right of way and a connected ready to some of these Wells And so we do not see significant additional cost that's needed to connect our system to the Wells that we are going to integrate to. There are certain Wells we acquired that we do not anticipate bring into the larger system at this time that a connected to existing and potential of new customers. So from a CapEx perspective, this is a positive story. We're very excited about this acquisition. It gives a great optionality and it gives us an opportunity this year to sort of accelerate some of the initiatives that we're looking at with our customers and, as we indicate in our debt, once integrated we expect this acquisition to generate incremental annual adjustedity ebitddo 11 to 13 million. But there is great a capacity to utilize asse depending on our this developed opportunities that could be higher and so I you got to look at the next year in two different ways. one is there's the the. Our forecasting doesn't utilize all the capacity. We're using that capacity to fray additional capital that we have plan on spending next year. If you were to fill P those assets, you're talking ebitddo ARS between know 19 to $2 million range all in. So you can look at it a couple ofdifferent buckets, but we're just focused on the eitherbit dollars incrementally added by what we know was on that system today and what brings in, and then the capital to framement of approximately you know 25, 20 y, $5 million next year.

It looks like a very, very attractive acquisition to me and I wanted to pivot to to the delays from your customers. Have those delays been alleviated now? So basically you just got, you got pushed one quarter to the right from those volumes coming in and and is that kind of done? It was it kind of a one off thing. Like you know, a frac crew had a issue and kind of missed a month or something like that. Any color could provide de to go. So the specific delays that we saw in late June , already those jobs were working today. So it is a pushback now that you don't really catch up for a while because you're still very tight frac capacity. It, in order to C up, you either need to go lot faster then you plan or you need to add a frac crew, and so we're not seeing incremental additions today out there, but we are seeing that volume catch up. So it's a bit a push to the right, more than anything else, into next year where we hope at that point you freed up a little additionalfrac capacity to catch up.

ok So you know that the issues are alleviated. So it's it's very push, but big numbers. I just a just a put perspective. A four well pad today withten thousand of of laterals is going to take two million barrels of water, and two million barrels of water at 40 cent margin ends up being a hundred thousand dollars pushed. A pure gross profit push across the courcourse. So it the numbers add up very quickly. You get a couple of those happen by the quarter. It's a significant impact to. But we see them all catching up today and we see know the sand challenges going away. We see the basic frac challenges slowly woodland their way out. Is the market gets, gets caught up and more efficient.

And these delays that occurred, that impact of this quarter occurred in the last weeks of June . The build ERS explained: if you have one 4, well pad basically that two get pushed out, it have a real impact that you catch up. But it's very, very lumpy then quarter over-quarter and we didn't have a lot of advanced notice on this as it happened in the field as a consequences, you properly said, of crude performance and just managing supply chain: sand, et cetera.

I appreciate that color and just one more if I could squeeze it in on the cost side. I don't know if it was labor that necessarily hit you or other supply chain butit.

Has that kind of stabilized now, or do you think that you're going to see more impacts going forward into the back half of the year?

Think we better understand the impacts we're dealing with. We certainly saw some impact in labor, which we've taken steps to try alleviate. We also saw a big impact in chemicals and the cost of chemicals. So, focusing on both supply chain with chemicals but also chemical utilization and increasing automation, we are reacting to costs and we are looking at ways to increase efficiency, bring an additional automation to manage those costs better.

Thanks Don.

And our next question comes from John mckay with Goldman sa.chs, Please proceed.

Hey everyone, good morning. Thanks for the time. I wanted to follow up again on the OpEx side, can you know? We talked a little bit about this last year, but maybe you can go into a little more detail. And another: we're focus on costs, just the difference in margin between being able to recycle a barrel versus needing to send a barrel downhole. these- talk about you again- recycling be a lot higher margin. Does that still hold given the changes with chemical prices et cetera? Maybe you can talk a little bit later. Play therethank.

There is a little more chemical use than we have going down hole the recycle. So there's some of that. But you're vogoing the downho loyalty which offsets a little bit of that. The chemical cost really was on a perbarrel basis. It went up the actual cost of the chemical which we see offsetting. There are some age two's challenges and in that in Lee County and that additionally drives into our chemical cost up and we're working with our customers to alleviate that ahead of our systems.

Also generhally we recycle in obviously, as we don't go downhall and you know the power components where're going downhall and we have seen, particularly in new Mexico, which countsfer about 50% of our power load, we have seen rate pace go up and so there are some increased power cards. But generally what we've explained before about the savings when we recycle and don't go downhall are still correct.

That's right it thinks So that may take another one with higher level. If we bake in everything's the acquisition you guys announced today, we think with the big chevron contract from a couple of months ago.

youjust talk a little bit high level on how you're thinking about overall kind of EBITDA wide gouse kind of next year over this year and maybe even looking to 24 not necessarily talking specifics but just how we can think about again. You guys versus a overall basis basin perspective. Let's say.

So if we know- look at, you know, 23. obviously we're not ready to give guidance on that, but you know we remain very optimistic by growth into 23. we see that rampant growth with rig townts and with a new chevron contract you reference, and also with BD and the activity levels of our customer. So you know we see the sequential year over over year growth. If we, you know, look at 22- we still got EBIT D growth in 22, as we explained, you know, almost 30% with opportunity to do better. So we do continue to see that sequential growth. I mean we've been very optimistic about the core business and remain very focused, you know, on executing and continue to achieve that growth. Still we want to add to anything that.

okct. That's great. Appreciate the time today. Thank you, Thank you.

Thank you, Ladies and gentlemen. This concludes our question-and-answer session, and I'd like to turn the call back to Amanda Brock for any closing remarks.

Thank you, and thank you everybody for your questions. So, despite the headwinds and the delays that we've talked about, we remain very confident in our core business and this continued growth. We're optimistic about the opportunities. We remain very focused on executing and managing costs.

And we look forward to coming back with improvements. So thank you to our customers, to our employees, to all of our stakeholders, and have a great day everybody.

Thank you. This concludes today's conference. Thank you for your participation, and you may now disconnect.