Q3 2023 Aris Water Solutions Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to the Everest water solutions third quarter wont be twenty-three earnings conference call. Our hosts for todays call is David Turf Senior Vice President of Finance and Investor Relations. At this time, all participants are in a listen only mode.
Later, we will conduct a question and answer session.
I would now like to turn the call over to your host Mr. Turf the floor is yours.
Good morning, and welcome to the Arris water solutions third quarter 2023 earnings Conference call I am joined today by our President and CEO, Amanda Brock, our founder and executive Chairman and.
And our CFO Stephen Thompson.
I'd like to remind you that during 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>.
<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 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.
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 will now turn the call over to our founder and executive Chairman Goldberg. Thank you David.
Thanks, everyone for joining us. This morning, Erez continued its positive momentum with excellent third quarter, our contracted customers continue allocating capital to activity on our dedicated acreage in the northern Delaware basin, resulting in sustained water volume growth over the past several years, our customers substantial inventory depth and attractive economics and our.
Area of operations to support critical multi decade need for comprehensive water management services, we are continuing our growth alongside our customers expanding our infrastructure to meet their needs. While also providing the industry with sustainable solutions.
Arris as water volumes are up nearly 60% over the last two years and in the third quarter of this year, we made significant progress in recapturing margins, increasing profitability, while supporting the consistent pace of development on our acreage we.
We continue to drive greater efficiency and return on capital of our business and we are proud of our execution. Thus far in 2023 with respect to inorganic growth. We remain disciplined in our approach with a continued focus on strategic fit accretion in both the short and long term and maintaining a conservative balance sheet with that I'll turn it over to Amanda.
Bill I, probably initiative for 2023, which improve our profitability and recapture margin, while continuing to expand our infrastructure footprint to support our customers' growing volumes in the coal.
Basically let me extremely pleased to report significant progress in the third quarter and believe this positive momentum will continue into next quarter, finishing the year at the high end of EBITDA guidance I'll focus on electrification of infrastructure efficiency in the field and business process improvement helped them.
The eight two cents per barrel a sequential improvement in adjusted operating margin per barrel and our adjusted operating margin was 30 cents per barrel was in line with margins, we recognized prior to inflationary pressures, which began to impact us in early 2022.
Supporting our enhanced profitability was our eighth consecutive quarter of produced water volume growth and better than anticipated water installation ball games, enabling us to grow adjusted EBITDA to nearly 45 million for the coal tax.
5% sequentially and up 14% year over year.
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These forward a business, we averaged 1.060 million barrels per day for the third quarter ahead of our expectations and continuing our sequential growth.
Good morning recoveries, a 0.11% in the pound.
Found that produced water was also ahead of expectations and operational changes implemented earlier this year to improve skim oil yields are delivering consistent results.
Sales also benefited from rising commodity prices in the quarter.
We also saw higher water solutions volumes than we anticipated as completion activity was pulled forward from the fourth quarter into the third quarter and we won additional stock business, while much of our water solutions business is under long term agreements. We also often win shortest cycle spot volumes over the course of the quarter.
As operators water needs shift.
Water recycling and sourcing business, so at 460000 barrels of water per day.
The 42 million barrels in the third quarter growing sequentially by 2% supported by our expansive infrastructure network that allows errors to aggregate significant volumes of water on its system for recycling and re delivery to other areas across the basin.
As we've seen while completion schedules may move up or push out in a given quarter. We are outpacing our expectations for water solutions volumes for the year.
We also made significant progress in reducing reuse rental equipment and diesel fuel expenses by continuing to convert facilities to permanent electrified infrastructure.
Compared to the third quarter, a year ago, we've reduced our rental equipment and diesel fuel costs by approximately $5 4 million on an annualized basis delivering on our commitment to improve margin to mitigate inflationary pressures, we experienced in 'twenty to 'twenty two.
In terms of revenue the largest by CPI Escalations took effect at the beginning of the third quarter and combined with the success of our electrification projects and rental expense reductions. We are proud to have delivered meaningful incremental margin improvement in the third quarter. While there is still work to do we have driven material margin improvements while I can.
Our consistent volumetric growth and the results are reflected in our profitability looking ahead to 2020 full we are working closely with our customers on the water infrastructure needs as they finalize their plans for next quarter and we will have further updates to our 2024 outlook alongside <unk>.
Quarter reporting a volumes earnings profiles and infrastructure expansion for Nexgen will depend unexpected rate of growth of our customers.
We will moderate our capital spending proportionate to that volumetric outlook.
On the basis of the forecast we've received thus far from our currently contracted customers. We expect 2020 full capital expenditures to be lower sequentially. That's a 2023 we will also selectively pursue additional organic growth opportunities provided they meet our return thresholds importantly.
However, with the business and system improvements we have made throughout 2023, we believe we can sustain increased operating margins and improve the rate of return on our capital investments, improving our operational flexibility and better optimizing our capital spending and assets now turning toward our bench.
Special reuse assets, we remain focused on working alongside our customers to solve long term water management challenges and pursue opportunities to use produced water and applications outside of the oil and gas industry, a beneficial reuse pilot project with Conocophillips, Chevron and Exxonmobil well underway.
In the third quarter and we are testing several promising technologies through the first half of next year. In addition, as we mentioned last quarter. While we are piloting numerous technologies. We are also in the early stages of identifying potentially valuable constituents and our long term produced water Brian stream and.
We are encouraged by the data we've seen so far.
We are engaging in preliminary conversations with third parties to determine where the mineral constituents and our water can be commercialized 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 third quarter of $44 $9 million up 14% from the third quarter of 2022 fives.
And 5% sequentially from the second quarter of 2023, again exceeding our expectations for the quarter.
<unk> increase was largely due to a pull forward of contracted water solutions volumes into the third quarter and additional spot water solutions volume sold higher than anticipated skim oil recoveries and realized pricing as well as improved adjusted operating margins driven by the expense reductions I mentioned earlier.
Capital expenditures, we incurred $40 million in the quarter in line with our full year expectations of $160 million to $170 million.
During the third quarter. We also closed on the sale of certain noncore assets in Martin County, Texas for cash consideration of $20 $1 million. This accretive transaction allows us to redeploy capital into higher returning projects in our core Northern Delaware Basin system. So it did reduce our produced water volumes beginning in the third quarter.
The assets, which were sold handled approximately 50000 barrels per day of produced water margins lower than our system average.
Looking ahead to the fourth quarter, we expect produced water volumes to be up approximately 2% to 3% relative to the third quarter adjusting for the impact of our recent asset sale for forecasting skim oil recoveries, a 0.1% of produced water inlet volumes at an average W. Ti price of approximately $87 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 for the water solutions business on the basis of our current forecast. We expect volumes of 405 to 420000 barrels of water per day for the quarter declining moderately sequentially due to the pull forward.
Volumes originally scheduled for the first quarter and the potential for seasonal slowdowns and as always given the shorter cycle opportunities that arise in water solutions. Our commercial team continues to pursue opportunities to add spot volumes to the corner with the changes we've made to our operations. We believe we will be able to maintain the operating margin improvements realized in the third quarter and are projecting.
Adjusted operating margins of 39 to 41 cents per barrel for the fourth quarter, we're forecasting adjusted EBITDA of $41 million to $45 million further increasing our guidance range for the year of 2023 to the upper end of our expectations of $166 million to $170 million.
Our capital expenditures remain on track to meet our full year guidance of $160 million to $170 million turning to our balance sheet. We ended the quarter with a debt to adjusted EBITDA ratio of 2.53 times at the low end of our long term leverage target and $190 million of available liquidity in October we announced we had opportunistically refinanced our credit.
Facility, extending maturity through 2027, and increasing the facility to $350 million, which is proportionate to the company's growth since the prior facility was put in place while the prior facility was not due to go current until April 'twenty 'twenty four we felt it prudent to refinance early when we have a supportive market given the recent volatility in the banking sector.
Finally, we recently announced our ninth consecutive dividend of <unk> per share, which will be paid December 20, <unk> to shareholders of record as of December so with that I'll turn it over to Amanda to wrap up.
Steve.
I'm very proud of our team's execution. Thus far in 2023, we began the year with a focus on profitability and cost reduction initiatives and quarter over quarter, we've made meaningful progress and we know we're not done we remain committed to maintaining these efficiencies while identifying further opportunities to enhance profitability.
Our business in the prolific northern Delaware Basin is supported by large operators, making sizable investments through commodity cycles in areas with multi decade inventory and compelling upstream economics.
Looking to the future we are optimistic about our ability to continue to meet our customers' long term water infrastructure needs, while pursuing opportunities to utilize produced water outside of the oil and gas industry with that we will take questions.
At this time, we will conduct the question and answer session.
If you would like to ask a question. Please press Star then the number one on your telephone keypad now and you will be placed in the queue in the order received once again to ask a question. Please press Star then the number one on your telephone keypad now we are ready to begin.
Your first question comes from John Mckay of Goldman Sachs. Your line is open.
Hey, good morning, everyone. Thanks for the time and congrats on the quarter, maybe if we could just break down a little bit more some of the moving pieces on the margin recovery.
You mentioned electrification and bringing down the rental expense just curious if you can share a little bit on again on the moving pieces. There. How confident you are in the kind of trajectory going forward and you know maybe if we can be greedy kind of where you think these margins could get to over time.
Thanks, John.
We do think that that's a margin recovery is sustainable and we continue to look for other opportunities to actually increase that over time.
Do you take you through the actual specifics on the electrification rentals, but rest assured we're looking at all aspects of our business to continue to see where we can increase efficiency.
Yeah, John Good morning.
On the electrification of rentals that we've talked about when you look at our <unk> facilities.
Three of the eight are already done and we are starting to realize the savings from that two of the facilities have been done and we're waiting for a break in schedule. So we can implement those so we'll see incremental savings as we go into next year.
We have three facilities that are still in the queue for XL that we expect to be completed. This this quarter. So we're going to see continued margin improvement from those and then on the the rentals are we continue to have a cost savings forecasted into this quarter and next year.
Produced water side right now we have 13 of the 20th booster pumps that we talked about earlier in the year converted and we've got an additional two that are going to be put in place. This year. We did have some several slipped in excel schedule into next year. So we're going to have four or five that are going to push into Q1 and again that's out of our control we are ready.
Waiting for them. So we continue to see some incremental margin improvement on those projects.
Alright, I appreciate all that maybe.
Just thinking about the asset sale could come in a little more on and maybe I don't know if you want to say EBITDA or multiple sold.
Thank you have a little left in the Midland as well should we think about that as being in the noncore bucket and if there's anything else kind of across the footprint more broadly that that can be caught up.
And I think we've been pretty specific about where our primary focus has been in the northern Delaware. When we sold this asset with more opportunistic in that there was a buyer coming in who wants to enter the basin. This was an accretive deal. It was non core to us with lower margins. So we're very happy with the outcome of this deal you want to add any.
To that David Steve, Yes, we haven't disclosed the multiple of the transaction, but as Amanda indicated it was accretive to us.
It was a standalone asset so we didn't have the ability to recycle reuse in the in the area.
So we're able to redeploy into high return projects volumetric leaves 50000.
Barrels per day, so when you look period to period, you're going to see that change come out. So the growth may look muted relative to that.
We're very happy with the transaction.
Alright, that's great appreciate the time today.
Thank you.
Your next question comes from Spiro <unk> with Citi. Your line is open.
Hi, This is Chad on for Spiro I'm, starting off we're hearing more about produced water constraints in the Permian do you see a scenario where water takeaway actually becomes a bottleneck and what's the solution to prevent that.
There is a lot more conversation about produced water constraints and concern.
And that they will be enough takeaway. This is actually a tailwind for us.
And so we are looking at a lot of different options as to how we can ensure that you know this wave of wounds that continues to come in the northern Delaware can be dealt with beneficial reuse.
Pipelines potentially out of the basin and continuing to look at ways in which we can be more efficient without disposal volumes, but there is a lot of attention on it and that is positive for us.
Okay. That's helpful. And then just following up you know I know execution has been a focus this year just curious how the M&A landscape is shaping up in the current environment and how that could play into your growth outlook going forward beyond this year.
Thanks, Chad.
We've been very very disciplined leap, we've said this every quarter.
For M&A for us its got to be accretive it's got to make sense strategically and valuations have to make sense. Both now short term as well as long term and while they've been things, we'd like to look at and we'd like to have done if they don't meet our thresholds, we're not going to transact.
Got it okay understood.
Oh, sorry.
I think bill if he had no essentially that's exactly right.
We're currently on it okay.
Okay understood. Thanks for the time today.
Thank you Chad.
Yeah.
Your next question comes from Wade Suki with capital one your line is open.
Good morning, everyone I'm.
Not to harp on the on the prior couple of questions on the M&A.
On the M&A front.
But it.
It sounds like we don't have to read into this this asset so don't read into anything.
With that but we've talked about this before would you all mind they'd be walking us through what some of the consolidation in the basin might do for opportunities. We've got a big player out here, who is a maybe.
Maybe a little bit more strategic minded how do you think about the opportunities longer term given given that backdrop.
But are you talking about the consolidation opportunities that are going on between the E&P guys.
Exactly exactly exactly one one big customer in particular sort of what I'm referring to.
Well, you know trust us we watch it very closely.
It's interesting in that our customers tend to be the consolidator.
Our customers tend to be sort of conoco and chevron and the larger companies who are dedicated to the Permian basin, a dedication to take the northern Delaware and allocating a lot of capital to continued growth of that so the.
The recent deals.
Deals that we've seen the pioneer Exxon deal does not really impact us being in the Midland Basin, and our contracts run with the land.
So that means that there is any consolidation we are not concerned with any contractual impact and we do believe that being on that's great rock with these great customers that this is a tailwind for US you will see increased efficiencies people on making acquisitions to grow and this is break rock bill you've looked at this a lot with.
Consolidation is actually good for US we are focused on the larger customers in longer transactions and so as as the rollout there has been several levels of consolidation, obviously theres the big Mega deals and then theres been a lot of.
Smaller consolidation among the formerly private equity backed companies that have gone public and put themselves together informed some great great spend type companies.
Do I think they look more strategic.
We ended up rolling acres with them.
And there are activities that sort of swings more than the activity of the majors and so that's why we've been really steadily growing is because we've had a proportionate share of the majors versus those that are minimal.
Similar transactions.
Great. Thank you just just switching gears, a little bit to the kind of the reuse RMB going on right now, but what kind of milestones or maybe guidepost should we be looking for over the next few months.
Hi data really yeah, we expect sources and in Q1 to begin to talk to you guys about what we are seeing in the brine.
And the work that we're doing in understanding the valuable constituents that may be entrained in all produced water that we can also begin to see if there's additional revenue stream there.
And so far as the actual pilot.
We are underway with right now we will keep everybody informed as to how the technology results coming through as we work with Exxon and Chevron and Conocophillips. So I think he won't hear a lot more in 'twenty for about what we are doing and what we see as potential.
Upside.
Next year.
Perfect. Thank you so much appreciate it have a great day.
Your next question comes from Jeffrey Campbell with Seaport Research Partners. Your line is open.
Hi, good morning.
Uh huh.
Exxonmobil does not appear to have much acreage and arris as core Stateline area, even accounting for the recent pioneer acquisition I was just wondering how this affects their participation in the official water reuse effort.
Jeffrey I focus on.
With the beneficial reuse is really sort of agnostic as to where the acreage is and they are very committed to that consortium.
Because finding what we can do it beneficial reuse is actually not just a Permian issue, it's just everywhere, but in terms of their acreage they have significant acreage with poker Lake.
And the other acreage positions in Lea and Eddy So in fact and they are a.
Great customer for us and will continue to be a great customer as we grow our position with them, yes, I think the fundamental nature of the business. The beneficial reuse may be along the stateline, but our pipeline network, that's moving water around and extends far up into Eddy and Lea County and.
It actually does surround Exxon as poker Lake.
I can't answer it.
Great. Thank you for that color.
Mean technology commercialization and regulatory approval.
Talking about the reuse beneficial reuse.
Do you regard as more challenge.
And I think at this point, we are very focused on the regulatory approvals that will be needed, particularly in new Mexico. We've seen a lot of progress made with the railroad Commission and other regulations in Texas the issue with technology as technology is there to treat this water. What we are trying to do is to make sure.
And it is robust and that it is cost effective so a lot of our focus is on bringing down the cost of treating this high Tds water to the lowest cost we can accommodate with what we have to achieve in terms of dealing with the constituents.
Okay, great and if I could just one last one.
Regarding the effort to commercialize high value materials minerals and your brine stream.
Will this require a significantly different technical approach than the beneficial use effort and Tim given water volumes.
Exposed to both efforts are they're going to have to be discreet to one effort.
No. It is it is a process.
The beneficial reuse pilot is focused on treating water to make that more to let me just use very simple 10 to clean it to a certain standard. So it can be used for a certain purpose.
<unk> discharge or whatever you're going to use it fall when we're focused on the brine. We are more focused not on treating it to make it clean, but how can we treat to extract from that water the highest concentrate on whatever mineral all valuable material, you're trying to extract that slightly.
Different but it is a process. It is just more of a different approach when it comes to the extractive side, yes.
And if you think about the beneficial reuse youre, removing as much good water as possible and are concentrating their constituents in the heavier Brian that heavier Brian and the concentrated Brian allows you to more cost effectively potentially extract those other minerals quite way to explain it.
Your next question comes from Selman <unk> with Stifel. Your line is open.
Thank you good morning, Al I'm, just sort of following up on <unk>.
John's question earlier in terms of you guys talked about sort of the electrification and the additional pumps that can be removed et cetera.
I'm just curious can you.
Put some dollar figures on what's left to go in terms of you know you characterize it as sort of $5 4 million on an annual basis with what you see coming up can you talk about maybe the <unk>.
Savings you're trying to capture in terms of dollars on a go forward basis.
Yeah, no happy to on those two projects.
Specifically, we talked about seven and a half.
$8 million in total when it's all done so we've made substantial progress towards that goal.
So we're confident we're going to achieve those figures and beyond that we are looking across the business for other ways to optimize our vendors contracts operations et cetera. So this is a mindset of continuous improvement.
But in terms of those two projects, we are tracking well towards our $75 million plus or minus target.
So the $5 four is out of that 70, and a half plus or minus.
That's right okay.
Okay, Great understood and then the winner.
In terms of just sort of the brine stream opportunity or exploration that you're doing and I know, we're going to get more of it in 'twenty four.
But should we be thinking of this as still.
Several years out for.
Revenue generation or are you seeing something potentially maybe sooner.
I think we.
On the brine side, we believe that may be sooner, but this is still several years out. So we wanted to explain to everybody that we are very focused on it. We are very encouraged by what we are seeing but we are not at a point, where we are going to come out and sort of talk about what the revenue expectation is.
Understood. Thank you very much.
Thank God.
Yes.
Your next question comes from Puneet <unk> Satish with Wells Fargo. Your line is open.
Thanks, Good morning, maybe just I guess following up on the Brian questions here and I know, you'll give more clarity next year, but I'm just wondering conceptually.
If you kind of.
Perfect. The pilot or are you looking to apply this across all of your water volumes or is it just kind of certain regions that are more concentrated in more economically viable I guess how.
Homogeneous as this opportunity.
I'm pretty good.
Good to hear from you.
So we are very focused and we've always said that we are focused on ways to asset always to value. So we are constantly looking at all produced water to see what we can do with that other than just dispose of it and what is there that you know got value. So we have reuse and recycle as much as we can and we continue to.
To be very focused on reuse.
In addition men at this pilot for beneficial reuse is to provide technology that can be used for.
Water across the basin.
So it is not that it's just specific for certain areas of the basin is going to have flexibility that can be used with different influent water across the basin.
Got it that's helpful.
And then switching gears I know, it's a little early but.
As you look out to 2024 do you envision being free cash flow positive after dividends and then if so would you consider raising the dividend at that point.
Our increase in capital return.
Yes, I think you know we are very focused on free cash flow I mean that was very important.
Steve Why don't you go ahead and explain how we're looking at this pretty set at this point.
We don't have full year outlooks from our customers for the back half of the year, we have some indications for the first quarter and into the second quarter, but as Amanda mentioned in her prepared comments, we do expect capex to come down relative to this year and we expect EBITDA to be up so at this point, we're gonna have to defer a more fulsome answer until.
Our full year.
Call in a couple of months, but.
Again as I said, we're very focused on it we know the importance of it to our investors and we'll have more to communicate here before too long.
Thank you.
At this time. It appears there are no further questions I'd like to turn the call back over to management for any closing remarks.
Thank you all for participating today, and we want to thank everybody on the team for a great quarter.
We have more work to do but we are very excited about what's to come. We also want to thank our customers for their continued support and we look forward to talking to you on again on the fourth quarter earnings call have a great day, and because you won't be told to you before then have a great Thanksgiving.
This.
<unk> today's arris water solutions third quarter 2023 earnings conference call.
For attending and have a wonderful rest of your day.
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