Q2 2023 Aris Water Solutions Inc Earnings Call
Greetings and welcome to Abby waters, Felicia second quarter 2023 Oh, you conference call at.
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It is now my pleasure to introduce your host David Sir.
Deep finance and Investor Relations.
Please go ahead.
Good morning, and welcome to the <unk> water solutions second quarter 2023 earnings Conference call I'm joined today by our President and CEO , Amanda Brock, our founder and executive Chairman bills artwork, 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 <unk>.
Hence 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 other cautionary statements included in our filings made from time to time with the Securities and Exchange Commission.
I'd 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 a 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 turn the call over to our founder and executive Chairman Bill as Arthur.
Thank you David and thanks, everyone for joining us this morning.
Chris has delivered another strong quarter with steadily increasing volumes and solid earnings growth as reflected by our results over the quarter. Our contracted customers remained active in our core area of the northern Delaware Basin and have indicated that they will continue to do so despite fluctuation in commodity prices and the overall reduction in U S.
Australia and completion levels, our capture area in the northern Delaware continues to offer operators, a compelling combination of inventory deck, and well economics, which are driving additional well completions and outsized production growth relative to the rest of the U S onshore production.
The need for comprehensive proven large scale water management solutions for produced water handling and supply for completions is of increasing importance to our customers and arris is expanding infrastructure network is well positioned to capture additional volumes.
This steady production growth has supported errors throughout its development of high quality acreage under contract with decades of remaining inventory will be developed consistently under a wide range of commodity price environment.
Chris as water volumes have more than tripled since 2019, we're making demonstrated progress in recapturing margins to continue to grow cash flow alongside our water volumes.
There is still more progress to be made we were pleased to be executing on our business plan ahead of schedule and have seen tangible impacts to the bottom line from our cost reduction and asset optimization efforts. Our team has performed well through the first half of the year and I'm excited for the rest of 2023 and beyond with that I'll turn it over to Amanda.
Thank you Bill.
We're very encouraged by our results over the first half of the yeah.
Quarter over quarter, we grew our total water volumes by 9% and adjusted EBITDA by 12% as production increases and alcohol operating area in the northern Delaware.
Customers have additional demand for our reliable critical water management infrastructure.
Our customers, we continue to expand our infrastructure network and capture additional volumes, which will further solidify our leadership position in the basin.
And our produced water business, we had volumetric growth of 8% as compared to the first quarter of 2023, we averaged just over 1 million barrels per day exceeding our forecast.
Get them, all recoveries of 0.1%, but in the barrel of produced water were in line with our expectations as operational changes implemented earlier this year are delivering consistent results.
Water recycling and sourcing business sold 452000 barrels of water a day in the second quarter growing sequentially by 12% driven by a systems capability to aggregation deliver large quantities of recycled water throughout the basin.
We also made tangible progress in reducing rental equipment expenses during the second quarter as our installed permanent infrastructure is now catching up to support our rapid pace of growth.
To date, we are ahead of schedule to reduce our rental equipment cost by approximately $3 2 million on an annualized basis versus the end of second quarter last year, which highlights the early success of our cost reduction initiatives.
Completion schedules may fluctuate quarter to quarter, we continue to benefit from the broad trends and increased capital allocation to the northern Delaware customer's preference for recycled water and the physical reach of our network.
We are managing through the continued impact of inflation and working with our vendors on our controllable cost reduction initiatives.
Our project to convert booster pumps from diesel to permanent power is tracking well with nine locations completed to date and 12 more scheduled to be completed in the second half of 2023.
As we've mentioned previously we are working closely with our regulated power provided in new Mexico to maintain the timelines they provided us to connect time U S facilities to line power.
We expect our CPI escalation clauses electrification projects and rental expense reductions will deliver meaningful incremental margin improvement in the second half of the year.
As trusted infrastructure providers, we are working closely with our longtime customers who have driven our consistent volumetric growth.
Certain large customers have indicated they are increasing their production in our core acreage and others have swapped a contracted acreage with smaller producers who plan to accelerate development.
As running plants and volume forecast in a contracted acreage increase we will expand our infrastructure network in areas with compelling upstream economics and decades of inventory.
Accordingly, we are modestly increasing our growth capital outlook for the second half of this year positioning us to capture these incremental volumes support our existing customers and execute on new opportunities.
And beneficial reuse, we continue working alongside Chevron Conoco Phillips and Exxonmobil and are now in active testing of promising treatment technology and proprietary processes in the field.
The goal of this testing is to develop cost effective robust methods of treatment to support commercial opportunities to use treated produced water outside of the oil and gas industry.
We also continue to collaborate with regulators to develop appropriate oversight framework for the use of this treated produced water.
We look forward to seeing programs over the next several quarters.
So I don't we're not beneficial reuse initiatives. We are pleased to announce that talk to Eric who will be joining us. This month as an adviser to focus specifically on the commercialization of high value materials, and minerals and not Brian stream Doctor Hook, a professor of engineering at UCLA and the faculty scientist at Lawrence Berkeley National.
<unk> is a globally recognized leader in developing water technologies and has successfully commercialized numerous technologies over the years.
We are also pleased to announce that we were the recipient of Hot Energy 2023 E. S. T Award for public midstream companies this past quarter, recognizing all contributions towards sustainability in the Permian basin.
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 second quarter of $42 $6 million up 14% from the second quarter of 2022 and up 12% sequentially from the first quarter of 2023, well exceeding our expectations for the quarter.
The sequential increase was largely due to our produced water and water solutions volume growth as well as approximately $1 $6 million in maintenance costs, which were delayed into the third quarter due to supply chain issues.
The quarter also benefited from an estimated $1 $7 million of one time items, including higher margins a minimum volume contract deficiencies.
G&A expense and lower property taxes.
Excluding these one time items, our core volumetric growth and operational performance exceeded the high end of our guidance range for the quarter by approximately 6%.
For capital expenditures, we incurred $49 million below our guidance for the quarter due to slightly delayed timing of a couple of project spending.
Looking ahead to the third quarter, we expect produced water volumes to average just over 1 million barrels per day slightly below volumes for the second quarter before growing again in the fourth quarter.
We're forecasting skim oil recoveries to remain approximately 1% of produced water inlet volumes at an average WTO price of approximately $74 per barrel.
As a reminder, every $1 change in oil price relative to our expectations would correspond to a change of an estimated $100000 in EBITDA per quarter.
On the cost side, well maintenance expense is forecasted to be $2 $1 million higher relative to the second quarter inclusive of $1 6 million of maintenance cost delayed from the second quarter.
We also expect third quarter G&A expense to be $1 $2 million higher than the second quarter due to office relocation accounting system projects and increased headcount.
For the third quarter, we're forecasting adjusted EBITDA of $39 million to $42 million as operating cost improvements and CPI linked revenue escalation are expected to offset slightly lower volumes for.
For the full year, we are increasing adjusted EBITDA guidance to the top half of our previous range of $150 million to $170 million to $160 million to $170 million.
As Amanda mentioned, we are increasing 2023 gross capital expenditures by approximately $10 million and maintenance capital by approximately $5 million, which brings our capital guidance for the year to $160 million to $170 million.
Turning to our balance sheet, we ended the quarter with a debt to adjusted EBITDA ratio below the midpoint of our long term leverage target and $171 million of available liquidity.
We continued to improve working capital during the second quarter and have now reduced our accounts receivables by 53 days sales outstanding were 37% since the end of last year.
Finally, we recently announced our eighth consecutive dividend of nine cents per share, which will be paid on September 28 to shareholders of record as of September 14th.
At this time, we were primarily focused on executing on the rest of 2023 early 2024.
Longer term, we look to balance the production growth targets of our operators. The return profiles of capital investments under our long term agreements and our shareholder return framework for long term value maximization.
We continued to receive forecasts from our contracted customers for 2024 and look forward to providing an update to our organic growth business development and shareholder return frameworks as those schedules become better defined.
With that I'll turn it over to Amanda to wrap up thanks.
Thanks, Steve.
We've made significant progress in the first half of the yeah, and I want to congratulate our team.
As we've said before we still have work to do and remain focused on execution margin expansion and ensuring we fully realize the cost efficiencies we identified at the beginning of 2023 we.
We are growing consistently.
Reinvesting in our footprint, which is underpinned by the best in class operators in the core of the Northern Delaware Basin.
With further margin improvement efforts underway and increased volume forecast from key customers I'm confident in our outlook for the rest of this year and excited for our long term future with that we will take questions.
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Perfect.
The nice thing is people or equipment. It may be in nature. So I would you pick up your headset.
And our first question comes from Chinese Bryant with Citi. Please go ahead.
I think you're seeing accelerated activity in some of your producers I know, it's a little early for specifics.
Talk about what you're seeing behind you right.
And Chas. Thank you for your question. Unfortunately, you were a little bit garbled in the beginning but I think you're asking a question about how we are seeing volumes grow.
And from 23 beyond.
That's correct.
Yeah.
Alright, yes, that's true.
Thank you and thanks for that question.
Obviously, we have continued to track and exceed expectations on volumes in our area. We see strong volumes continuing to grow in our area of focus we've got great inventory, we're in great rock and we are seeing.
We've also had some of our customers publicly state that they are allocating additional capital and expand expect to grow in new Mexico. So all of those trends very positively.
Okay got it.
Thanks for that that's helpful and just a follow up question could you maybe talk about the M&A landscape and how you're seeing it around your footprint and how you see that fitting into your growth strategy in the future.
Charles the.
The market is there that we continue to see opportunities to put capital to work in organic with with better returns I'm. There's a few things that may begin to pop on the market over time, but our focus is really executing on the organic growth. We have right now and we continue to evaluate opportunities as they come up and.
And have.
Made outgoing indications to folks about stuff, but I think at this point.
You know things are not tracking for any any really consolidation at this point.
Okay understood. That's helpful. Thanks for the time today.
Thank you.
Our next.
<unk> comes from Don Crist with Johnson Rice. Please go ahead.
Good morning, everybody.
Oh not.
Amanda I just wanted to touch on the third quarter guide a little bit obviously, the second quarter was super strong.
And the third quarters pulling back a little bit I just wanted to make sure that that was just timing related maybe a pad slipped into the second quarter versus the third quarter and you know we've seen some of your other peers kind of indicate that that activity is slowing just want to make sure that that's not the case here at arris.
Thank you Don and good morning Gregg.
Great question, we obviously outperformed our expectations in Q2, and we did guide down water solutions, particularly in Q3.
As we've always said water supply is lumpy really short cycle, but I'll have Steve go ahead and give you some more detail about how we view Q3, and obviously, how we see additional strength and production in Q4 yeah.
And as soon as the.
So the business on a water solutions side. It is lumpy when you look at our produced water forecast. So we're still forecasting 17, 18% year over year growth.
We brought up the lower end of our EBITDA guidance for the year. So we're not seeing any impact on financial performance. We're confident in our full year outlook. So the volume is going to be there, although it may vary quarter to quarter.
Still good about about where the business is going.
And we do point out that if you saw us coming into Q2, and we outperformed supply we indicated that some of Q2 had moved into Q1, yeah. We all said completely you know exceeded our own expectations. So it is difficult to forecast, even though we have long term contracts and it's just the nature.
I appreciate that color and if I could just touch one on the on the removal of rental equipment and reduction of costs. There where are you in that process. I don't know if you could put a percentage on it or not but I'll be 30 or 40% through that process now I mean, the cost came down pretty significantly in the second quarter.
Should we expect.
Further reductions in the in the back half of the year on the removal.
The removal of rental equipment.
Q3, and Q4 again, Steve why don't you explain with more granularity how we see this breakdown you were worried about halfway through almost halfway through on the rental side you. The other major project. We have conducted a permanent line power and as we stated were about just.
Just under halfway there we have nine of our about 20 locations converted over so that probably distracting and again were there on the regulated utility schedule, but tracking nicely. So we expect some incremental margin improvement from those two projects over the course of the second half of the year as well as some additional margin expansion from our CPI escalators.
So should see some additional expansion over the course of the second half of the year.
I appreciate all the color I'll turn it back thanks good quarter.
Thank you. Thank you.
Okay.
There are no further questions at this time I would like to turn the floor back over to Amanda Brock for closing comments.
Please go ahead.
Thank you very much and thank you for all who connected in today and we.
Had a strong second quarter, we are executing well and making significant progress on the plan. We laid out for 2023, we feel very optimistic about the rest of the year and beyond and in that vein, we want to thank our customers.
And also want to particularly call out our employees. Our team has worked and continues to work extremely hard and we are very grateful for their efforts.
We look forward to talking to you all again next quarter.
Very much.
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Okay.
This concludes today's conference call you may disconnect. Your lines that just fine. Thank you for your participation and have a great day.
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