Aris Water Solutions Inc. Q1 2023 Earnings Call
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Greetings and welcome to the Airbus Water solutions first quarter 2020 earnings conference call.
At this time all participants are in a listen only mode a.
A brief question and answer session will follow the formal presentation, if anyone should be quiet operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host even turf senior Vice President Finance and Investor Relations. Thank you you may begin.
Good morning, and welcome to the Aerospace solutions first quarter 2023 earnings Conference call I'm joined today by our President and CEO , Amanda Brock, our founder and executive Chairman Bill <unk> and our CFO Stephen Thompson.
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 in it.
<unk> 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 filings made from time to time with the Securities and Exchange Commission.
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 financial measures 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 I'll turn the call over to our founder and executive Chairman Bill DARR.
Thank you David and thanks, everyone for joining us this morning Aric.
<unk> is off to a strong start in 2023 from a market perspective, we have seen activity levels consistent with our expectations of steady volumetric bureaus. So far this year and as we look forward. Some of our customers have indicated publicly that they are forecasting additional production to be online in the back half of 2023 and in early 2024.
Sure well commodity prices continue to fluctuate we have not seen any material impact to our customer's activity levels or our water volumes. We believe this is reflective of the strength of our primary large contracted operators, who have made long term commitments to the Permian basin and continue to invest as planned through the commodity price cycles.
The industry's need for high capacity water handling with the flexibility to deliver high rates of recycled produced water continues to expand.
We were fortunate that our primary areas of operation are located in some of the best acreage in the Permian Basin, which has supported the consistent growth of our produced water volumes since inception, including our 23% volume growth in 2022, while we will continue to grow alongside current and new customers by investing in our infrastructure to support their growth.
With capital efficiency and shareholder returns remain core priorities as we evaluate opportunities.
Coming out of a challenging second half of 'twenty 'twenty. Two we are focused on improving internal business processes, driving operational efficiencies and cost reduction initiatives. While there is still more progress to be made we are beginning to see tangible impacts to the bottom line and are pleased with our performance going into the second quarter we.
We are also encouraged that our proprietary treatment processes have potential applications outside of the oil and gas industry.
I'm proud of our team's execution, thus far in 2023, and our prospects for the rest of the year with that I'll turn it over to Amanda <unk>.
Hey, Bill.
We are pleased with our improved operating results and positive progress in the first quarter. Our continued focus on driving operational efficiencies and improving internal business processes has already delivered substantial improvements, particularly in skim oil recovery in working capital.
The cost savings initiatives, we referenced not first quarter earnings call, including electrification that field infrastructure and reducing rentals are proceeding as planned and are expected to live a meaningful incremental margins in the second half of it yeah.
For the quarter, we grew our total water volumes by 5% and adjusted EBITDA by 6%.
And I'll put you on a business as customer volumes came in higher than forecasted we saw volume exit growth of 3% as compared to the fourth quarter of 2022, averaging 971000 barrels per day.
We also saw the benefit of significantly higher skim oil recoveries in the quarter, which was the result of operational changes, we made which drove incremental skim oil capture and as a result, but Kevin volumes that we believe were not captured in the fourth quarter 2022.
Going forward. However, we believe we can consistently increase skim oil yields by at least 10% as compared to 2022.
Water recycling and sourcing business grew sequentially by 11% in the first quarter as we sold 405000 barrels per day. This growth was benefited by some pull forward of demand as a portion of water is scheduled to be sold in the second quarter was sold in the first quarter did you opt.
The changes in contracted completion schedules.
The Permian basin like other areas continues to be impacted by the effects of unprecedented inflation in 2022.
While the rate of inflation has tempered in 2023, we have not yet seen prices materially decrease.
As a result, we continue to be extremely focused on our cost reduction initiatives and identifying additional opportunities to reduce costs over the remaining course of the yeah.
Our project to convert this depends from diesel dependent how it is tracking well with nine locations scheduled to be completed by the end of the second quarter and another 10 scheduled to be completed in the second half of the yeah.
As we mentioned last quarter, we are working closely with our regulators top provider in new Mexico to try and maintain the timelines they provided that to connect a new we used facilities to line pipe.
These conversion to permanent power should deliver annual savings.
Normally $4 4 million once complete.
Similarly, a project to replace rental pumps at numerous locations with company owned assets is progressing well with one location complete equipment deliveries for three more sites scheduled in may and the remaining four locations expected to be off rental equipment in the second half of the yeah, we still.
In fact, the annual cost savings, but this project to be approximately $3 2 million.
From an organic growth perspective, we continue to work closely with our contracted customers to expand our system and capacity to accommodate their development plans. We also continue to focus on incremental growth and are evaluating numerous opportunities.
However, we will be selective as it relates to executing new contracts as we focus on capital efficiency and underwriting new transactions to ensure accretive growth.
Yeah.
We are pleased with the progress we've made on our beneficial reuse pilot project with Chevron Conoco Phillips and Exxonmobil.
As we previously indicated the purpose of this pivotal pilot and to identify evaluate and develop proprietary treatment processes to support cost effective beneficial reuse of treating produced water outside of the oil and gas industry and support water sustainability in the Permian basin.
Following a detailed evaluation process. The pilot team has selected thermal and membrane desalination technologies for field testing with a full pilot phase expected to be completed in the first half of 2024.
Contemporaneously with our pilot studies, we are also actively evaluating and identifying potential avenues to collaborate and partner with various companies in the chemical agricultural fertilizer hydrogen empower affected.
Potentially utilize treating produced water all minerals and trained and the brine stream.
We are also pleased to announce that after a detailed review arris has been selected as one of the only full finalist in the water reuse project to the yeah at the global water Intelligence 2023 Global Water Awards in Berlin in May.
This recognizes heiresses accomplishments to date and water conservation as a result of our water reuse efforts in the energy industry.
In conclusion, we finished the quarter with positive momentum carrying into the second quarter.
I'm very pleased with the team's execution and performance in the first quarter against the plan we laid out.
And with that I'll turn it over to Steve to discuss our financial results for the quarter.
Thank you Amanda.
We recorded adjusted EBITDA for the first quarter of $38 $1 million up 6% from both the first quarter of 2022 and sequentially from the fourth quarter of 2022.
The sequential increase was largely due to our produced water and water solutions volume growth as well as approximately $2 million of skim oil revenue above expectations.
We also realized 675000 of lower G&A expense relative to our plan as some spending was reduced or delayed until later in the year.
For capital expenditures, we incurred approximately $48 million for the quarter in line with our expectations and guidance.
Looking ahead to the second quarter, we expect produced water volumes to average approximately 1 million barrels per day, reflecting continued growth consistent with our outlook for the year.
We're also forecasting skim oil recoveries of 0.10% of produced water inlet volumes at an average realized price of $68 per barrel.
For the water solutions business, we expect volumes of 365 to 375000 barrels of water per day for the quarter and I expect to recycle approximately 25% of enlist produced water volumes.
On the cost side, well maintenance expense is forecasted to be approximately one and a half million dollars higher relative to the first quarter, which is part of the annual increase we highlighted on our last earnings call.
We also expect G&A expense to be approximately $500000 higher than the first quarter, largely due to ongoing or Tony your improvements and increased head count.
Taken together, we are forecasting adjusted EBITDA of $35 million to $37 million for the second quarter as compared to first quarter guidance of $33 million to $35 million, which would imply a 6% increase at the midpoint, excluding onetime benefits we saw in the first quarter.
We also forecast capital expenditures to total between 55 and $65 million consistent with our full year capital plan of $140 million to $155 million, which as we noted last quarter. It was weighted towards the first half of the year.
Turning to our balance sheet, we ended the quarter with a debt to adjusted EBITDA ratio of two seven times and approximately $159 million available under our credit facility.
We have increased our focus on improving working capital and have made meaningful progress in reducing our accounts receivable balance of $27 million or 21% from year end 2022 or growing revenue 11% sequentially.
Finally, we recently announced our seventh consecutive dividend of nine cents per share, which will be paid June 29 to shareholders of record as of June 16th.
Now looking forward, we recognize the importance of free cash flow and return of capital to shareholders. We continue to grow our business volumes and see additional opportunities for expansion.
Well it is still too early to provide a formal outlook for 2024 based on our current outlook. We are focused on achieving a free cash flow inflection point in 2024, and providing an update to our shareholder return framework to supplement our high return organic growth opportunities.
With that I'll turn it over to Amanda to wrap up thanks, Dave we are proud of the arris. His team's performance in the first quarter, we're optimistic for the rest of the yeah.
But notwithstanding the first quarter's improvement we still have left to do and we're going to remain focused on reducing our operating costs enhancing capital efficiency and selectively pursuing additional growth opportunities, where we feel we can invest capital at attractive returns.
We are also going to continue to work towards improving our operating margins and where possible increase pricing in our short term revenue cycle businesses.
But it's premature to make changes to our full year guidance. Our successful start to the yeah gives us further confidence in meeting our financial targets.
With that we'll take questions.
Thank you we will now conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star Keith one moment, while we poll for our first question.
Our first question comes from Spiro <unk> with Citi. Please proceed.
Thanks, operator, good morning team.
Good morning morning.
Good morning morning.
You had mentioned trying to find some new initiatives to reduce costs beyond what you've laid out so far I just want to can you maybe provide some examples of where you're evaluating there and if you think he's going to be this next tranche of cost savings could be as large as what youre doing this year.
We see the next tranche I'm sorry, good morning, everyone and thanks for your question launching right into the answer we see the next sort of tranche of cost savings.
More incremental as we've indicated the electrification and process and the cost savings associated with that initiative and with reducing rentals gives us a much larger impact to margins. We are still looking at chemicals, we are still looking at a and <unk>.
Personnel costs, we are still looking at the construction all of our facilities and how we change some of the materials that we use to lower costs and all of those are going to be incremental and will continue over time to just bring in incremental savings.
Got it that's a it's great secondly, just around Capex you know I think as we look for the remainder of the year. It implies a pretty sizable step down in the second half of 'twenty, three and I guess I'm. Just curious is that a good run rate as we think about 'twenty 'twenty four you know it sounds like you're obviously still evaluating growth initiatives here. So I'm just trying to get a good sense for what's in there.
Normalized sort of growth capex level.
What we've said before on Capex is that throughout the year, you know high yield Capex and Pentagon quoted the culture is very lumpy. It is this year, we've been very clear that as a front end loaded.
And which will result in revenue and 24, obviously it is too early we are looking at 24.
Our hope is that that Capex, obviously continues to come down and we are evaluating additional growth opportunities. We are growing with our customers, but last year. It was backend loaded. This year is front end loaded David would you like to add anything to that.
You're right Amanda.
But we're gonna grow alongside the industry. So while we see sustained levels of completion activity from our customers, we're going to see a couple of program play out the way. It has this year. It is too early to say, where we're going to land next year.
But we do see the the deceleration going into second half of the year are playing out based on the current outlook.
Got it it makes sense, it's all I had today guys. Thanks. Thank you. Thank you.
Once again, ladies and gentlemen to ask a question. Please press star one on your telephone keypad.
Our next question comes from Samantha Hoh with Evercore. Please proceed.
Hey, guys. Thanks for taking my question and congrats on a really nice quarter and I guess to maybe spend all their time on this oh wait that you've won and or that you're a finalist for in Berlin.
I really like that that would be an opportunity in terms of you know the water we use them in Europe , especially because youre looking at work here is using produced water, but I was just wondering if there's an opportunity there that to apply the processes or technologies that you're developing them in the Permian you maybe applications and end.
Yep.
Yeah.
Good morning, Matt and thanks for the question and the global water or was it pretty much the Premier Awards.
In the world and they have that there are many actually tonight when they choose between before we were very surprised that we were chosen exactly because this is P. J supporter in the energy industry and this was an award that is in Europe . We believe it gives us a lot of exposure to people who may have technologies that.
We wanted to see whether or not we can apply them 40 cost effective treatment.
Treatment of produced water for beneficial reuse.
But in terms of.
Do we have technologies that we can apply international yes, we believe we do but that is not anything that we are looking at at this time. We are very focused domestically. We've got a lot of work to do here, but it's a great complement.
When we I shouldn't say, we don't expect to win but when you're up against a wildlife Park in Singapore and a massive project in Australia. We are just happy out of hundreds as you know applicants to be on that list.
Yeah, no congratulations I'm, it's really nice to see water you have more of a global.
<unk> solutions are being applied here I guess my other question has to do with.
Just just how youre able to keep growing at such a low.
People in country.
You know I think we spoke offline about just how you are just not as intensive.
In terms of like head count weighted basis and is there a level at which you will need to scale up more on the people side or how do you think about you know having like training for appeal hands and just sort of like what your needs are here based on like what your outlook for both medicine, and how youre manner.
The whole labor shortage.
Inflationary or you know like all those are very strong macro fundamentals that are going.
Going on in the U S. Here.
That's a good question answered as Steve said in his comments you will see in Q2 that we will have some additional head count we are looking at this all the time, we run very lean we have also talked in past quarters about our automation efforts and those assets are.
To reduce labor across a large geographic area with lots of driving and with the set of teams that are not necessarily colocate. It. So we continue to look at the allocation of labor. We are very focused on training and but we do understand the cost associated with that but we are going to operate efficiently.
So as we increase the number of facilities as you know we continue to add volumes you will see us add labor, but it will be a very managed process.
Yeah, we've spent a lot of capital on automation and remember this is a big infrastructure business. So it's it's you know, we're putting capital in rather than adding head count and a lot of places in that that we will see the benefits of some of that as we grow spreading those.
Those fixed cost and labor out over greater volumes.
Excellent and that does it for me thanks, guys.
Thank you.
Thank you. Our next question comes from weight Soupy with capital one. Please proceed.
Good morning, everyone and thank you for taking my question.
I wanted to see if you all might be able to give us a little bit more color on working capital you had a nice a nice relief there are accounts receivable declined quarter to quarter.
Really more in the context setting.
Second half.
This outlook.
And really in the context of free cash I mean could we see free cash inflection points, maybe a little earlier than expected. Thank you.
Thanks, Wade and Steven very happy you asked that question, so I'm going to just Barents Sea.
Hi, good morning.
As you just heard Bill talk about the automation and the investments that we've made on the operation side.
What we have on the back office side is ripe for automation and so that's some of the expense that you see this year and evaluating our accounting systems and we have added some oh, some resources to to drive a greater focus on efficiency of working capital. So.
So we're very pleased with what we saw this quarter or we expect to see incremental improvements over the course of the year and then we are looking to replace our accounting ERP package over the next six to 12 months, we're just going to drive further automation. So I don't expect a step change similar to what we saw in Q1 to repeat itself, but we will.
To see further incremental improvements quarter over quarter.
Wonderful, Thank you and just switching gears a little bit.
Spent some time last quarter talking about the M&A market I'm wondering if you could maybe give us give us an update on what you're seeing out here right now that's all I've got thank you all.
We did obviously, we see a lot of opportunities out.
Out there, but as we previously indicated we were always going to be disciplined and we're not going to put the balance sheet at risk. If we see something that we like it's got to be accretive. It's also got it makes sense to us strategically and geographically, where we think we bring you know synergies to a particular opportunity.
T.
And so that being said, if we see something that fits all of those criteria, we'll take a hard look but I'll, let bill add to that because he is in a pretty strong opinions on this and as you've seen our track record. We haven't you know we have been very disciplined.
I think I mean, we we continue to believe that our growth accretive growth makes sense and we will do it opportunistically, where we find the fit and Amanda hit really our key criteria, which as you know we are going to protect our balance sheet, we need to see a really strong strategic fit to the business with some synergies going forward and it needs to be accretive in and obviously our <unk>.
<unk> hasn't performed as well as we'd like and the relative evaluations are the private sellers are struggling a little bit with what are what they think their businesses are worth and our you know hopefully there's a a meeting of the minds over the course of the next year and we find opportunities that make sense for us to take advantage of it if not we're happy and we can continue to grow organically.
At the same time.
Wonderful thanks again.
Quarter Chris.
Thank you.
Our next question comes from Selman <unk> with Stifel. Please proceed.
Thank you good morning, I guess following up on that last question is there any update on the integration of Delaware Energy services, and then I have one more after that as well. Thank you.
Good morning, Selman were on track with the Delaware upgrades and as we indicated last quarter Workovers and repairing some of those assets all of those initiatives are on track. So we expect to be able to achieve on top of the incremental run rate EBITDA.
In the second half of 'twenty three.
Got it and then also you talked several times about you know you are accretive growth looking at new contracts I'm wondering maybe could you just talk a little bit about the activity you're seeing in and around your assets as well as what the pricing is out there right now what the pricing environment is that done.
It for me thanks.
Certainly and yes, we did grant that's obviously, a very very important particularly in this environment and we are seeing steady activity as bill said in his opening comments notwithstanding sort of price fluctuation and what we are seeing is steady growth from our primary customer as a prime.
Cosman being Chevron Musa and Conoco oxy, everybody with more of a long term view and you know we've been looking at the forecast and really looking at off all costs and we are just seeing growth that is consistent with what we laid out for 'twenty fall Mewbourne has had some accelerated growth there obviously I got a lot of.
Rigs out there. So we are seeing consistent growth from our customers in and around our assets. We are also seeing an activity and new areas that are proving to be very promising for operators adjacent to our asset. So I think he will just continue to see this growth.
In 'twenty three and beyond.
Yeah.
Thank you.
Thank you at this time there are no further questions in queue I would like to turn the call back over to management for closing comments.
Thank you. So thank you very much for joining us today, we've had a strong quarter. We look forward to look forward to coming back and talking again at the end of second quarter. We also want to thank all of our shareholders and stakeholders, including our customers and most importantly, a set of <unk>.
Dedicated employees, who have been working very hard to continue to make the improvements that we talked about today. So thank you very much and talk to you at the end of second quarter.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
Yeah.
Uh huh.
Hum.
Hum.
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