Q3 2024 Aris Water Solutions Inc Earnings Call
Good morning and welcome to the Aerospace Water Solutions third quarter 2020.
for earnings conference call. I am joined today by our president and CEO Amanda Brock, our founder and executive chairman Bill Zartler and our CFO Stephen Tompsett.
Before 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 caution not to place underelyance on forward-looking statements. Please refer to the risk factors and other cautionary statements included in our filings made some time to time with the Securities and Exchange Commission.
I would also like to point out that our investor presentation in today's conference call will contain discussion of non-gap financial measures, which we believe are useful in evaluating our performance.
The supplemental measures should not be considered in isolation or as a substitute for financial measures prepared in accordance with US gap. Reconciliation to the most directly comparable gap measures are included in our earnings released in the appendix at today's accompanying presentation.
Speaker Change: and I'll turn the call over to our founder and executive chairman, Bill Darl.
Bill Darl: Thank you, David. Harris continued its strong 2024 with an excellent third quarter. We saw steady growth in produced water volumes and increased completions activity driving further demand for our recycled water.
Speaker Change: Our ongoing operational improvements delivered consistently strong margins, and as forecasted, our third quarter capital expenditures were down significantly following the completion of our first half-weighted capital program.
Speaker Change: As a result of consistent volume growth, strong margins, and efficient capital investment, we are generating excess cash, which allows us greater flexibility to both reinvest in the growth of our business and enhance shareholder returns.
Speaker Change: As anticipated, we're seeing additional inorganic opportunities come to market and continue to evaluate a number of potential targets.
Speaker Change: Our primary focus is on evaluating adjacent assets in our core operating area where we can drive incremental value and enhance our system's capabilities.
Speaker Change: Thus far, we have not yet found an opportunity that offers the right combination of strategic fit, asset and contract quality, and financial accretion that we look for. And we will continue to remain disciplined while evaluating all potential opportunities.
We want to thank our customers, suppliers, and our team for the strong results this quarter and great overall performance thus far in 2024. We're encouraged by our continued progress and remain optimistic for the end of the year and beyond. With that, I'll turn it over to Amanda.
Amanda Brock: Thank you, Bill. When we initially forecasted 2024 for investors, we had three primary commitments.
Amanda Brock: to grow alongside our premier contracted customers, to improve margins by driving operational excellence, and to improve cash generation through greater capital efficiency.
Speaker Change: with a year largely complete.
Amanda Brock: I'm proud to say we have delivered thus far. We had an exceptional third quarter, growing our produced water volumes 2% sequentially and 6% year over year.
Speaker Change: As indicated last quarter in our outlook, we also saw a significant increase in completion activity in the third quarter, with recycled water volumes growing 25% sequentially and 16% versus the third quarter of last year.
Speaker Change: We continue to see consistent activity on our dedicated acreage in the core of the Permian Basin from our large, long-term, dedicated customers.
Speaker Change: CPI-linked revenue escalation clauses in our contracts and structural operating cost improvements completed over the last year supported third quarter operating margins of 45 cents per barrel up 13% versus the third quarter of last year.
Speaker Change: While business mix, flowback timing, and skim oil recoveries can drive small quarterly variations and margins, we've maintained our improvement in margins over the past year, resulting primarily from electrification and enhanced operational efficiencies.
Speaker Change: Accelerating volumetric growth and sustained margin strength resulted in adjusted EBITDA of $54.3 million in the third quarter, up 9% over last quarter and up 21% year-over-year.
Speaker Change: In addition to operational improvements and cost reductions, our margins continue to benefit from increased skim oil recoveries. We have improved our process for recovering skim oil and now believe a significant portion of the increased skim oil recovery is sustainable over time going forward.
Speaker Change: While overall the trend is positive, we've also seen intermittent periods of elevated skim oil recoveries, particularly related to flowback of large pads, and we believe there will continue to be some variability in recoveries quarter to quarter.
Speaker Change: Looking ahead to the rest of the year, we anticipate slightly increased activity levels from our customers, and thus we are increasing our adjusted EBITDA range for 2024 from $208 million to $212 million.
Speaker Change: Consistent with our commitment to capital efficiency, we've outperformed on earnings while maintaining our capital guidance range for the year and are producing the resulting cash flow from our continued growth.
Speaker Change: Looking at the market, despite commodity price volatility, we see steady to moderately increasing activity levels going well into 2025.
Speaker Change: Our growth is driven by operations on the dedicated acreage of our large, long-term contracted customers in the northern Delaware Basin, which features some of the lowest break-evens in the lower 48 and decades of remaining inventory.
Speaker Change: The Permian, and specifically New Mexico, continue to lead oil production within the United States, and based on initial forecasts received for the year, we anticipate sustained, strong investment on and around our asset footprint.
Speaker Change: We will provide our full outlook for 2025 alongside fourth quarter reporting.
Speaker Change: But given the customer forecast received thus far, we anticipate growing produced water volumes next year at a pace consistent with our growth rate this year and consistent with overall oil production forecast for the Delaware Basin.
Speaker Change: Our capital investment next year will depend on the growth rate of our contracted customers, as well as incremental organic growth opportunities. Currently, we anticipate that we will be able to grow alongside our existing customers at a similar level of capital investment to 2024.
Speaker Change: In 2025, continued volume growth, additional margin progress, and efficient capital investments
Speaker Change: will result in increased cash flow and we're actively evaluating opportunities to reinvest in growth projects while also allocating capital to increase our shareholder returns.
Speaker Change: Beyond the cost reduction efforts we've successfully implemented this year, we are reviewing opportunities to further improve margins.
Speaker Change: Looking forward, we have tailwinds from CPI revenue escalation clauses already embedded in our contracts and are pursuing further efficiencies in water handling costs, rental expenses, and labor productivity.
Speaker Change: For example, third-party landowner royalties are our largest variable operating expense, and we are now looking at opportunities to either creatively acquire surface acreage or partner with landowners to reduce these costs and provide us greater operational flexibility.
Speaker Change: Turning to beneficial reuse, we continue to collaborate with our project partners ConocoPhillips, ExxonMobil, Chevron and Katerra, and regulators to accelerate the use of treated produced water outside of the oil and gas industry.
Speaker Change: By year-end, Aerosmith's partners will have finished testing the third of three desalination technologies for the treatment of high-salinity Delaware Basin-produced water.
Speaker Change: The pilot projects thus far have successfully demonstrated the ability over time to lower energy consumption costs.
Speaker Change: and Potential Capital and Operating Costs for the Treatment of Produced Water. In 2025, we will be focused on increasing the scale of these promising technologies and confirming costs as we progress to commercialization.
Speaker Change: We are also evaluating opportunities on mineral extraction and are working on site selection for our first iodine extraction facility with a strategic partner.
Speaker Change: In addition to iodine, we're in discussions with several mineral extraction companies who specialize in magnesium, ammonia, and lithium, and are actively sampling and testing our produced water.
Speaker Change: We expect to have further updates to our mineral extraction efforts in 2025. And with that, I'll turn it over to Steve to discuss our financial results for the quarter and details on our outlook for the fourth quarter.
Steve: Thank you, Amanda.
Steve: We recorded adjusted EBITDA for the third quarter of $54.3 million, up 21% from the third quarter of 2023, and up 9% sequentially from the second quarter of 2024, due to stronger produced water and recycled water volumes, as well as higher skim oil recoveries.
Steve: We achieved adjusted operating margin of $0.45 per barrel, up 13% from last year, but down just under $0.01 per barrel from last quarter due primarily to customer mix.
Steve: While skim oil recovery and business mix can cause fluctuations quarter-to-quarter, we've demonstrated durable margin improvement over the past year due to improved operating efficiency and cost reduction initiatives.
Speaker Change: Turning to CapEx, with our first half-weighted capital program substantially completed, expenditures for the third quarter were $8 million, bringing CapEx for the first nine months to $83 million.
Speaker Change: We are maintaining our full year 2024 capital guidance, with expenditures for the fourth quarter expected to be between $15 and $22 million, which puts us on track for $98 to $105 million for the full year.
Speaker Change: Looking ahead to fourth quarter volumes, we expect produced water volumes to be between 1.08 and 1.11 million barrels per day, and we're forecasting skim recoveries of approximately 1,550 barrels of oil per day.
Speaker Change: As Amanda mentioned, we've sustainably increased our skim oil recoveries, and our fourth quarter outlook reflects an approximately 20% increase in recoveries relative to what we guided in the third quarter.
Speaker Change: In the water solutions business, we expect fourth quarter volumes to average 450 to 490,000 barrels per day, continuing the strong activity levels we saw on our dedicated acreage in the third quarter.
Speaker Change: For the fourth quarter, we anticipate adjusted EBITDA of $51 to $55 million, increasing our full-year guidance to $208 to $212 million.
Speaker Change: This outlook assumes fourth quarter oil prices of approximately $70 per barrel.
Speaker Change: which is down 10% from year-to-date realized prices and 2.5% to 3% above the current 2025 strip which could offset some of the margin benefits we received from increased skim oil recoveries.
Speaker Change: With regard to our balance sheet, we ended the quarter with net debt of $422 million and a 2.0 times debt to adjusted EBITDA ratio, which is well below our leverage target of two and a half to three and a half times.
Speaker Change: and $325 million of available liquidity, which provides us with significant financial flexibility.
Speaker Change: Finally, we declared our fourth quarter dividend of ten and a half cents per share to be paid December 19th to shareholders of record on December 5th.
Speaker Change: Given our ample liquidity, low leverage, growing cash flow, and expectations for 2025, we anticipate revisiting our dividend payout level with our board after the fourth quarter.
Speaker Change: With that, I'll turn it over to Amanda to wrap up.
Amanda Brock: Thanks, Steve.
Amanda Brock: In closing, we again want to thank our customers, suppliers, and team for their support, hard work, and consistent execution. As a result, we are proud to have exceeded our expectations thus far in 2024 and are encouraged by our outlook for the rest of the year in 2025.
Amanda Brock: We remain focused on providing a safe place to work, delivering exceptional service to our customers, prudently growing the business, and generating cash to both reinvest in the growth of our business and return to shareholders.
Amanda Brock: We have built an incredibly strong foundation from which we will continue to grow. We are excited about our future, enhancing water sustainability in the areas in which we operate, and supporting the industry with innovative, long-term water infrastructure solutions. With that, we are happy to take questions.
Amanda Brock: Thank you.
Speaker Change: Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and 1 on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue.
Amanda Brock: You may press star and 2 if you would like to remove your question from the queue.
Amanda Brock: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Amanda Brock: Ladies and gentlemen, we will wait for a moment while we poll for questions.
Amanda Brock: The first question comes from the line of John McKay from Goldman Sachs. Please go ahead.
John McKay: Hey, good morning. Thanks for the time. I wanted to start on just kind of the early look into 25. Pretty supportive commentary. Just wanted to maybe put a finer note on it.
John McKay: Are we looking at something like mid-single-digit volume growth on the produced water side? And what are the puts and takes on kind of translating that to EBITDA? Thanks.
Speaker Change: Thanks, John
Speaker Change: and Ms. Single-Digit Rhoades.
Speaker Change: We've referred you to our customers and looking at what they have said about their growth. We always grow along.
Speaker Change: side our customers, and you've seen Chevron come out about reaching a million barrels next year. You've seen Ponico come out and talk about 7% growth, so we really sort of refer you to our customers and their commentary at this time.
Speaker Change: All right, that's clear. Thanks. And maybe just the comments around the disposal royalties.
Speaker Change: Could you just remind us what your position looks like right now, and if you're thinking about buying some surface acreage to complement that?
Speaker Change: You know what the competitive dynamics are right now. Is it you know is there a large market for surface acreage out there? Just anything you could frame up there
Speaker Change: Please see the complete disclaimer at https://sites.google.com
Speaker Change: From a royalty perspective, I think people are beginning to understand the importance of the arrangement we reached a couple of years ago with TPLT, where we became their preferred disposal partner, and they had the ability to permit on their property.
Speaker Change: and then drill those permits and we needed them, which obviously helped our capital position. We did not have to build ahead of need to maintain a permit.
Speaker Change: Thank you. Bye. Bye.
Speaker Change: and land out there, there are opportunities to own land ourselves and avoid royalties.
Speaker Change: and also to continue to partner with landowners.
Speaker Change: So I think we see both as options. We also have looked ahead. We have a long runway of permits in diverse locations that we can build as we grow our system. So we think we're in a good position, but certainly, we are looking at buying land.
Amanda Brock: other opportunities to reduce our royalties as part of our crop sufficiency and savings looking forward.
Speaker Change: All right, thanks, appreciate the time.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question comes from the line of Jeffrey Campbell from Seaport Research Partners. Please go ahead.
Jeffrey Campbell: Good morning, Amanda, and congratulations on the strong quarter. Thank you, Jeff. I wondered if you could provide us with a regulatory update, in particular, how is disposal of produced water and surface systems progressing in Texas and
Jeffrey Campbell: Is it reasonable to assume that once approved, this would be a less costly disposal method for ARIS as opposed to injecting water in the ground?
Amanda Brock: I think you're referring to beneficial reuse going forward.
Amanda Brock: There will always be disposal in Texas.
Amanda Brock: And as we are looking at beneficial reuse as an alternative to disposal, so are our customers.
Amanda Brock: When you look at the sheer volume of water that we will be handling as an industry going into the future that is generated in the Permian Basin, you will continue to see
Amanda Brock: opportunities to dispose, to continue to develop beneficial reuse alternatives, and to look at any other methods that can help with the handling of this water.
Amanda Brock: I hope that answers your question. I was not quite clear on...
Amanda Brock: or disposing of the ground, but maybe that's incorrect. So, that was what I was trying to cover.
Speaker Change: Thank you for the clarification.
Speaker Change: Certainly, there are opportunities working with the regulators and applying for the appropriate permit for surface discharge into the Pecos River. That is an alternative. We are actively looking at that, as are others, and I think you will see that continue to progress over the next year.
Speaker Change: I think maybe to add a finer point to that, the salinity of the produced water in especially the Delaware Basin is...
Speaker Change: Way too high to direct inject it, so it will be required to process it in a way to clean it up and that will always leave some level of concentrated brine even if you run it through and end up with water that's of the quality that we believe can be discharged into the surface waters.
Speaker Change: Okay, now that was very helpful. Thank you. Another question I wanted to ask was on slide nine. I just wondered if you could expand on
Speaker Change: What ARIS and JIP's financial responsibilities will be relative to the 2025 substantial capacity scale-up?
Speaker Change: and Beneficial Leaves? And I'm asking that question because with the iodine...
Amanda Brock: It's a royalty arrangement and they're paying the capital costs. I'm wondering if it's going to be different.
Amanda Brock: and what you're visualizing for 2025. Thank you.
Amanda Brock: Thank you.
Speaker Change: So as we look at 2025 and continue to work with our JIP partners and adding partners to that consortium, we are looking at identifying a specific technology, and we have an idea now which one it is, that's extremely promising from a capex, opex, and energy usage perspective, and then scaling that up.
Amanda Brock: As it relates to our capital commitment in 2025, it will not be material. We will continue to share costs with our partners, where many of our costs as it relates to allocation of personnel is reimbursed.
Amanda Brock: And as it relates to the IOD project, we have talked before about not spending any capital and about doing that on a royalty basis, where our partner,
Amanda Brock: spent the CAPEX for the infrastructure related to the extraction of the mineral.
Speaker Change: Okay, great. Thanks very much.
Speaker Change: Thank you.
Speaker Change: The next question comes from the line of Wade Suki from Capital One. Please go ahead.
Wade Suki: Good morning, everyone. Appreciate you all taking my questions.
Wade Suki: Clearly, y'all remain pretty busy on the commercial front. Always appreciate the color y'all provide on both organic and inorganic opportunities. You mentioned maybe adding customers.
Amanda Brock: in the base, and presumably that's in the same zip code, but again, any kind of color you could get would be great. Thank you.
Speaker Change: Thank you, Wade.
Speaker Change: Yes, we continue to be very active on the commercial front.
Speaker Change: We have been working with some customers and anticipate signing some contracts in the future, and we will continue to do so. So yes, Wade, we continue to see a pretty robust market out there to grow with our great customers and new customers that are expanding their operations.
Wade Suki: Fantastic. And then just kind of switching to inorganic, anything you can sort of share with us you know on expectations out here, buyer-seller expectations, bid-ask spread, have we seen that narrow at all or has it been pretty sticky since the last update?
Speaker Change: That's a great question. We're always hopeful that we've been very disciplined. Bill, why did you take that? It's hard to say whether they've gotten any narrower on the bid-ask spreads. They certainly haven't met yet.
Amanda Brock: I mean, we continue to look, as we've talked about, Wade, but, you know, we're looking for projects where it's accretive, where they're strategic, where we can do more with the assets and they're great asset and contract quality. So we continue to look and hope that we will be able to find an asset that meets our criteria.
Amanda Brock: We're very comfortable with the current contracts we have, the ones that we're pursuing aggressively and comfortable with.
Amanda Brock: and the state of our assets, how we built them, and how we're maintaining them. And so I think we have set our own standard and have yet to find anything that fits that, as we said in the remarks, both on a financial perspective as well as an asset and contract quality perspective.
Speaker Change: Understood. Thank you so much. Appreciate it.
Speaker Change: Thanks, Wade.
Speaker Change: Thank you. The next question comes from the line of Praneet Satish from Wells Fargo. Please go ahead.
Praneet Satish: Thanks, good morning all. Does the mid-single digit growth outlook for produced water in 2025 that you provided, does that assume the addition of some of the new customers that you just referenced that you're in discussions or talking to, or is that just based on your existing customer base and the growth plans that they provided to you at this point?
Speaker Change: Yeah, pretty interesting point. Thank you for the question. You know, and as Amanda said, we're not providing 2025 guidance at this point. In fact, we don't have a full year forecast for most of our customers in detail. But at this point, this is for existing customers, existing contracts, what we do have visibility on into the first part of the year and expectations.
Speaker Change: Got it. No, that's, that's helpful. And then maybe just touching on the dividend. Sounds like you're going to have discussions with the board later this year in terms of how to
Speaker Change: think about the growth next year, in terms of the framework of how we should think about it, are you kind of considering dividend growth in line with organic EBITDA growth, or might you pursue a more significant step up or step change given the current payout level and low leverage?
Speaker Change: Yeah, it's a great question and we do remain consistent in our approach to capital allocation that we've laid out in the past.
Speaker Change: and what we want to do is...
Speaker Change: Increased shareholder returns in a consistent, sustainable manner over time.
Speaker Change: As we did indicate in the prepared remarks, we do expect some additional color on that in Q1. I expect there will be some dividend growth. I don't expect a step change that's going to...
Speaker Change: put us out of line with the growth of the business. So we're looking at long-term sustainable growth.
Speaker Change: Got it. Thank you.
Speaker Change: Thank you. The next question comes from the line of Jeremy Jonette from JP Morgan. Please go ahead.
Speaker Change: Hey, this is Noah Katz on for Jeremy. First, I wanted to touch on your capital allocation priorities heading into 2025. Now that Eris has lowered leverage below the 2.5 to 3.5 target at two times currently, how would you guys stack rank creative M&A opportunities or the potential dividend raise you're speaking of and repurchases going forward? Thanks.
Speaker Change: Thank you for the question.
Speaker Change: Consistent in the capital allocation framework that we've laid out, when we've touched on M&A, we would like to look at attractive and creative opportunities where they meet our criteria, but we haven't found those as of this time.
Speaker Change: We have considered shared purchase program, but given the limited flow that we have, we've decided to pass on that at this time. But it's something that we'll continue to evaluate. And as we also indicated, there are some additional growth projects that we're looking at for new customers. But I think you should expect us to be consistent more than what we've delivered.
Speaker Change: Sounds good. Thanks for that. And then as a quick follow-up, can you guys speak to the potential you see for the desalination and mineral extraction projects? Should we expect any other projects coming up the pipeline like these? Thanks.
Speaker Change: Thanks, Noah.
Speaker Change: What we have consistently emphasized is that we are very focused on our core business and that is important for everybody to to have comfort in that fact. We are continuing to look at the future for beneficial reuse
Speaker Change: We think that we will finish off the project next year. We will begin to scale up and I think it is very promising and But we are we are not planning on at this time on additional projects I'm coming in that are other than the projects we've been discussing
Speaker Change: We are looking at industrial water.
Speaker Change: We have developed...
Speaker Change: tremendous capability and expertise and a thousand patents in and the treatment of complex water. So we are exploring opportunities in the industrial sector, but again most of our attention is our core business and making sure that we perform.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question is from the line of Charles Bryant from Citi. Please go ahead.
Charles Bryant: Hi, just one for me. There was some news headlines around a new setback rule in New Mexico that could come into play. I know this can pop up from time to time and it sounds like maybe not much to do around it, at least for now, but curious how you think about the potential impact there if something like that does come into play.
Speaker Change: New Mexico did raise the idea of legislating setbacks.
Speaker Change: have actually gone out and permitted and have adjusted some drill and rig schedules in making sure that if there were going to be impacts that they were appropriately positioned. So we do not see an impact on our business and it will be interesting to see how that legislation moves forward this next session.
Speaker Change: Okay, understood. That's all I had. Thanks for the time.
Speaker Change: Thank you. Thank you. The next question comes from the line of Sean Mitchell from Daniel Energy Partners. Please go ahead.
Sean Mitchell: Good morning, and thanks for taking my question. Happy Election Day. You guys talked in the opening comments about improving skim oil recoveries. Amanda, can you provide more color around what you've done to improve that process? It seems like a pretty nice increase, and it looks like that's going to be included in your guidance going forward.
Speaker Change: Certainly.
Speaker Change: What we have done is
Amanda Brock: Allocate a team that is dedicated to doing nothing else in the field, but give more recovery.
Amanda Brock: So it really has been a function of focus
Amanda Brock: and going out into the field, we have operational changes, but I think it's really the allocation of people. But in addition, we have seen some increase in skin that is coming through in the water. So I think it's a combination.
Speaker Change: Okay, thanks for that. And if you're coming out for the barbecue, bring your coat. It's 42 degrees.
Speaker Change: As long as it's not raining.
Amanda Brock: Thank you for watching!
Speaker Change: You're missing the rain in Houston this morning, Sean. Thanks, Sean.
Amanda Brock: Yep.
Amanda Brock: See you guys tomorrow probably
Amanda Brock: Thank you very much.
Amanda Brock: Thank you.
Speaker Change: As there are no further questions, I would now hand the conference over to Amanda Brock for her closing comments. Amanda?
Amanda Brock: Thank you.
Amanda Brock: So I want to again thank our customers, suppliers, and very importantly our team that continues to execute extremely well.
Amanda Brock: We're growing, we've improved our margins, we've improved cash generation, our balance sheet is in great shape. We feel good through year end, it's setting us up well for 2025 and beyond. So thank you all and we look forward to talking to you shortly.
Speaker Change: Thank you. The conference of Aries Water Solutions has now concluded. Thank you for your participation. You may now disconnect your lines.
Speaker Change: William Zartler, John Mackay, John Mackay, John Mackay, John Mackay, John Mackay, John Mackay