Aris Water Solutions Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2024

There are 7 speakers on the call.

Operator

Greetings. Welcome to ARRIS Water Solutions Second Quarter 20 24 Earnings Conference Please note this conference is being recorded. I will now turn the conference over to David Turf, Senior Vice President, Finance and Investor Relations. Thank you. You may begin.

Speaker 1

Good morning, and welcome to the ARRIS Water Solutions Second Quarter 2024 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 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 and events contemplated by such forward looking statements. You are cautioned not to place undue reliance on forward looking statements. Please refer to the risk factors and other cautionary statements included in our filings made from time to time with the Securities and Exchange Commission.

Speaker 1

I would also like to point out that our investor presentation in 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.

Speaker 1

I'll now turn the call over to our Founder and Executive Chairman, Bill Zartler.

Speaker 2

Thank you, David. ARRIS continued its strong momentum in 2024 driven by resilient volumes from our long term contracting customers and continued operational execution. We've substantially completed our first half weighted capital expenditure program and continue to more effectively leverage our asset footprint. Consistent revenue growth, structurally improved margins and efficient capital investment has allowed us to generate excess cash and further enhance our ability to increase returns to shareholders. Our steadily growing water volumes are a function of our contracted customers' oil production volumes in top tier acreage in the Northern Delaware Basin.

Speaker 2

As our customers continue their efficiency gains, they are driving greater oil recoveries from fewer rigs, pads and well completions. These productivity gains benefit us as we are more efficient alongside them by leveraging our existing extensive infrastructure, which has over 770 miles of large diameter pipe and 625,000 dedicated acres under contract. We're off to a great start this year and encouraged by our outlook well into the future. With that, I'll turn it over to Amanda.

Speaker 3

Thank you, Bill. ARRIS had a strong first half of the year. Following a great Q1, we grew our produced water volume 5% year over year and achieved adjusted EBITDA of $50,000,000 in the 2nd quarter, up 17% year over year. As anticipated, we saw a sequentially softer quarter volumetrically due to natural declines from significant reduced water flowback volumes that were pulled forward from the Q2 into the Q1 of the year. In the Water Solutions business, we sold 362,000 barrels of water per day, approximately flat with the Q1.

Speaker 3

While our customers deferred a few scheduled completions until later in the year, we still expect water solution volumes to increase throughout the 3rd and 4th quarter. For the 2nd straight quarter, we achieved operating margins of $0.46 per barrel. Our operations team continues to demonstrate the stability of our margin improvements driven in large part by electrification efforts, reduced chemical costs, automation and improved processes for solid waste handling. Given our strong start to the year and outlook for the second half, we are increasing our adjusted EBITDA guidance range for the full year of 2024. We've maintained our focus on efficient capital deployment and remain on track for the cash flow generation we forecasted at the beginning of the year.

Speaker 3

We have significant balance sheet capacity and flexibility providing us opportunities to invest in high return organic growth projects and strategic inorganic acquisitions while returning excess free cash flow to shareholders. We continue to lead the industry in delivering sustainable water management solutions, while evaluating additional opportunities to extract value from our produced water waste stream. In the Q2, Aerie signed electric intent with an established iodine production and marketing company who will construct the 1st iodine extraction facility in the Permian Basin at 1 of ARRIS' produced water management facilities. Our development partner operates numerous similar iodine extraction facilities in other basins, and this facility will be designed to confirm the commercial viability of extraction of iodine from ARRIS' produced water. We will provide additional information around the potential economic benefits of this project once those are finalized.

Speaker 3

As it relates to our beneficial reuse efforts, we continue working with regulators to accelerate the approval process for the use of produced water outside of oil and gas. The ARRIS led joint industry project with ConocoPhillips, Chevron and ExxonMobil has successfully completed its second of 3 desalination pilots and is scheduled to complete testing of the 3rd pilot by year end. This will conclude Phase 1 of the project verifying that produced water can be cost effectively and safely treated for multiple purposes. We are also pleased to announce that Contera Energy recently joined the partnership, adding their considerable expertise to the evaluation and piloting process. With that, I'll turn it over to Steve to discuss our financial results the quarter and details on our outlook for the rest of the year.

Speaker 4

Thank you, Amanda. We recorded adjusted EBITDA for the 2nd quarter of $50,000,000 up 17% from the Q2 of 2023 and down 6% sequentially from the Q1 of 2024 due in large part to natural declines and large flowback volumes delivered earlier in the Q1. We achieved adjusted operating margin of $0.46 per barrel for the 2nd straight quarter, which reflects a $0.01 per barrel benefit from water sourcing business mix as we sold more recycled water and less lower margin groundwater than skim recovery than anticipated, providing additional margin of $0.015 per barrel. Notwithstanding the benefits from increased SKIM in the water supply business mix, the improvements made over the past 24 months are durable and we expect our core operating margins will be sustained at these levels throughout the rest of the year and beyond. And as we've noted in the past, we expect our groundwater sales will continue to decline over time as we deliver increased sustainable profitable recycled produced water volumes.

Speaker 4

Turning to CapEx, we indicated early in the year that our 2024 capital program would be front end weighted in the 1st 6 months unfolded as expected. We invested $37,000,000 in the 2nd quarter, which brings first half CapEx to $75,000,000 as compared to our expected full year range of $85,000,000 to $105,000,000 which is consistent with our prior guidance. Looking ahead to the 3rd quarter, we expect produced water volumes to be between 1.061.09000000 barrels per day and we're forecasting skim recoveries of approximately 1300 barrels of oil per day. In the Water Solutions business, we expect 3rd quarter volumes to average 410,000 to 440,000 barrels per day, consistent with our expectation for an uptick in well completions on our dedicated acreage in the second half of the year. Driven by our strong performance in the first half of the year and increased confidence in both the volume and margin outlook for the rest of 2024, we are increasing our full year adjusted EBITDA range to $195,000,000 to $205,000,000 With regard to our balance sheet, we ended the quarter with net debt of $438,000,000 and a 2.2 times debt to adjusted EBITDA ratio well below our leverage target range of 2.5 times to 3.5 times and $299,000,000 of available liquidity, which provides us with significant financial flexibility.

Speaker 4

Finally, I'm pleased to report that our accounting ERP software upgrade we announced last year successfully went live July 1. This implementation will help drive additional back office efficiency and provide the necessary corporate infrastructure to support future growth. I'm proud of all that our team has accomplished in delivering this project on time and on budget. With that, I'll turn it over to Amanda to wrap up.

Speaker 3

Thanks, Steve. In closing, I again want to thank our dedicated team. We are operating extremely well and are consistently delivering on our goals. We've paired our long term underlying revenue growth from our contracted customers with margins that we've demonstrated have structurally and sustainably recovered. We've become more efficient, better leveraging our asset footprint and driving a significant decrease in capital spending, while still supporting our customers' growth.

Speaker 3

The result is increased cash generation, which paired with our strong balance sheet gives us significant optionality for future high return organic growth and strategic inorganic opportunities while continuing to increase our returns to shareholders. With that, we will take questions.

Operator

Thank Our first question is from John McKay with Goldman Sachs. Please proceed.

Speaker 5

Hey, good morning. Thanks all for the time. I wanted to start on the Permian and maybe just your view on kind of growth into the back half and as we get into 'twenty five. We've heard a couple of different narratives this earnings season on Delaware pace versus Midland pace, improving producer efficiencies, etcetera. Would just be curious to your view and then maybe how that compares to what you're looking at the beginning of the year?

Speaker 5

Thanks.

Speaker 3

Thanks, John. The Permian continues to produce particularly in the Northern Delaware as we predicted and forecast earlier this year. If you look at who our customers are and how they articulate to the Street what they're going to do, we have just seen steady performance and we continue to see steady performance through year end. David, would you like to take that further?

Speaker 1

Yes, sure. I think, John, we're seeing relatively flat rig count consistent with expectations coming into the year with improved operator efficiencies driving production growth sort of over and above that. And that tracks with what we're seeing volumetrically on our side of the business, right, with production growth on the produced water side in the mid single digit range, consistent with what we expected and consistent with what our producers are doing in the basin. And the sourcing volume is relatively flat corresponding to the rig count. So I would say looking on out into 2025, we see that theme largely continuing, and we see sort of mid single digit production growth consistent with what our customers have said about the next year.

Speaker 3

We are seeing, John, some narrative among customers about whether or not they increase the rig count in the Delaware. You do see some softening of rig count in the Midland Basin versus the Delaware, but that has not yet been determined. We watch that carefully like everybody else.

Speaker 5

I appreciate that. Thanks. And maybe shifting gears a little bit, there's also been a broader focus recently on disposal capacity, overall availability of pore space.

Speaker 1

Can you just talk

Speaker 5

a little bit about what your strategy is here and what that means for

Speaker 3

your cost structure? Thanks. Certainly. As we previously discussed, particularly when we did the alliance with TPL, we've always been focused on being proactive on making sure that we have access to sufficient pore space where we can drill, grant us permits when our customer supply is decayed. So at this point, we have about 90 permits in place across a large geographic diversified region.

Speaker 3

We have relationships with landowners like Texas Pacific and that was a very important alliance that we announced a couple of years ago where we have the ability to go ahead and permit on TPL land and then drill as needed. So we continue to identify areas of growth where our customers are moving and staying ahead of that by aggressively and carefully actually finding force base, applying for permits and being ahead of any concerns.

Speaker 1

All right. That's clear. Thank you very much.

Operator

Our next question is from Spiro Dounis with Citi. Please proceed.

Speaker 1

Hi, this is Chad on for Spiro. They started off leverage is below target levels and you seem to have some dry powder. Can you refresh us on the uses of capital here and provide an update on the M and A landscape given some recent deal activity?

Speaker 3

Good. I'll have Steve start with our capital program and then we'll address the M and A landscape.

Speaker 4

Yes. Good morning. In terms of capital allocation, there's really no change in the framework that we approach to that. Our balance sheet is in great shape and we're going to continue to focus on that. We never want to put ourselves in a position where leverage is a concern.

Speaker 4

Beyond that, we are focused on deploying capital into attractive organic growth projects and inorganic opportunities where they present themselves. And as you saw last quarter with our dividend raise, we expect to increase shareholder returns sustainably and consistently over the long term. So we remain focused in that framework and look to deliver on that consistently quarter over quarter.

Speaker 3

As it relates to the M and A landscape, what we have seen is some recent interest in the sector. You've seen 2 recent transactions and Waste Connections buying the Lane Midstream business and then I think yesterday the announcement of Gelix buying H2O Midstream in the Midland Basin. In the case of the latter, transaction in process for a number of years. Our H2O was in a sales process for over 2 years. It had come to market.

Speaker 3

We had looked at those assets. For many reasons, we had determined that from a value perspective, we did not feel comfortable with the evaluations the sponsor was expecting. So again, Delek had reasons for doing that transaction, but we do remain very interested in the M and A market. And we do see opportunities with companies that may be private equity backed and there may be some fatigue where at the right price we'd be interested in moving forward. Bill Johnson is on the phone.

Speaker 3

So Bill, if you want to add to that given the landscape we're working on right now?

Speaker 2

No, I think you covered it. I mean our focus is making sure that we're we have our business and we know what it's trading for. We've got the buildup of how we've structured our contracts and our partners throughout the business and we're going to be carefully looking for the right opportunities and I think they will be out there over the course of the next year or so. If they're not, we'll continue to build our business and we see no shortage of fairly attractive organic projects to do within our core at the same time.

Speaker 1

Thanks. Yes, that's really helpful. And then the second question, you've reached another milestone on mineral extraction. Can you talk about next steps from here and ultimately what you hope the strategy achieves?

Speaker 3

Certainly, and thank you for that question. We previously indicated that beneficial reuse obviously is a long term play as we try and find other uses for our produced water other than just disposal. When we spent over a year looking at what was in our water, We told everybody that we'd identified certain high value minerals that we thought were attractive. And in the last quarter, we said we would come back with milestones and we were talking to potential channel partners who could evaluate whether or not what was in our water could be extracted in a commercial way. So we are now announcing that we've entered into an LOI as it relates to 1 mineral, which is iodine or iodine.

Speaker 3

I'm never going to get that right. And as it relates to that mineral, this company has a lot of experience, has other facilities in other areas where they have been brine mining for this mineral. And it is not a large facility. They will be putting up the CapEx. It will be all of our produced water on one of our facilities.

Speaker 3

And we right now think we will structure it as kind of a royalty, a tolling, where they pay us a royalty per barrel. But we are very optimistic that we're going to be able to see how this can be done. And at the same time, we continue to have conversations as it relates to other minerals that are in our water. So it is a milestone. What we indicated is when we have something like this happen, we will communicate, as we make progress and this is progress.

Speaker 1

Got it. That's very helpful. Thanks for the time today.

Speaker 3

Thank you.

Speaker 2

Thanks.

Operator

Our next question is from Jeffrey Campbell with Seaport Research Partners. Please proceed.

Speaker 1

Good morning. Congratulations on the strong quarter. My first question, I just wondered, did you expect iodine to emerge as the first commercial target for mineral recovery? And what's your view as to why that became the first one to emerge?

Speaker 3

I'm not a scientist, and thanks, Jeffrey, for the question. I think we did expect it to emerge more quickly than the others. It's a function of technology that's available. The references that were out there in a different basin, So we did expect it to emerge 1st. And what it means to the others is we are on the route of talking to people as it relates to magnesium, ammonia and different processes, but certainly removing iodine from the water does not then prevent you from moving other minerals from the water.

Speaker 3

But this was not expected, not unexpected rather.

Speaker 1

Okay, great. And my other question, I noted with interest the MOU with Texas Tech University regarding agricultural applications of the JIP water. Can you contrast your impending work with Texas Tech with that that you've already done at Texas A&M and other academic institutions?

Speaker 3

Texas Tech is where the Texas consortium is, where multiple parties belong to this consortium, looking at ways to use produced water beneficially outside of the oil and gas environment. We were a pioneer and very early working with Texas A and M picking up on a program that had actually existed years ago and that was treating produced water for use in cotton and we were very successful. We now also have a DOE grant, which we have mentioned before. This deal grant is in the process of being executed, and that will take us a step further with our partners and actually growing more cotton in the ground rather than in greenhouse to further verify that this can be done cost effectively with carbon sequestration associated with the roof structure and, soil.

Speaker 1

Great. Thanks very much.

Speaker 3

Thank you.

Operator

Our next question is from Jeremy Tonet with JPMorgan Chase. Please proceed.

Speaker 6

Hey, everyone. This is Eli on for Jeremy. Maybe to start on some of the sustained margin strength through the first half of the year. It seems like these cost optimization efforts have really worked. So how should we think about these stronger margins?

Speaker 6

And are they likely to persist monitor around the business to sustain this type of performance?

Operator

Thanks, D.

Speaker 3

I, and thanks for recognizing that they are sustainable. I'll have Steve go ahead and take you through where we've been successful with the low hanging fruit and where we think there's been some structural changes and then where we always guide on SKIM and

Speaker 4

progress in our margin improvement. A lot of that is the efforts over the last 12 to 18 months around electrification, getting off of rental equipment on the permanent equipment and then some efforts around chemicals and other items. Those are sustainable, we believe in the long term and we've guided to $0.43 per barrel, which we think is a long term number that will of course creep up with the CPI escalators that we have in our contracts on the revenue side. The outperformance the last two quarters, we do believe were one time items. We provide guidance based around where we have high confidence and to the extent we're able to outperform on SKIM that would be a benefit above it.

Speaker 4

But what we've done is sustainable and durable over the long term.

Speaker 6

Awesome. That's good to hear. And maybe just as a follow-up, I know the decision to keep CapEx flat alongside the EBITDA raise, it might be some timing of investment opportunities. But just thinking about the strong balance sheet, how does the team think about the timing of potential dividend hikes? Did you guys consider another one this year?

Speaker 6

And then what do you see as the cadence for dividend growth for the business going forward?

Speaker 4

Yes. We discussed it internally and as well as our Board on a quarterly basis, not just for the short term, but for our long term strategy. And as I said earlier, we do intend to increase shareholder returns in a sustainable manner over the long term. I don't think you should anticipate quarterly dividend increases, but we certainly anticipate and intend to have long term consistent dividend growth. We evaluate share buybacks as well.

Speaker 4

That's just more of a nuanced topic given the low float that we have. But you should expect long term shareholder returns to increase over time.

Speaker 3

Bill, would you like to add to that, just given how clean everything is and the balance sheet optionality?

Speaker 2

Yes. I mean, I think that Steven's got it. We're evaluating it as we continue to go. And there's nothing wrong with having a super great balance sheet. And if we don't find the opportunity, we'll pay the debt down and watch for the next opportunity.

Speaker 2

So I think it's we're in this for the long haul and it's steady, right opportunities for inorganic, organic as well as continued distributions to our shareholders. That will continue over a period of time and we're not looking at this at a quarter by quarter basis. We're looking at it over the long haul.

Speaker 3

Thank you.

Operator

And with no further questions at this time, I would like to turn the conference back over to Amanda Brack

Speaker 3

Hearing a lot of feedback. Hopefully everybody is hearing it better than we are. We had a great quarter. We are all remain very focused on the efficiencies and operational excellence. We are very pleased, but we are not done yet.

Speaker 3

There is more to go. We are very optimistic the future. As Bill said, we're in this for the long haul. We are seeing some opportunities out there. We are working extremely hard.

Speaker 3

So thank you to all of our employees and for contributing to where we are today. Thank you to our customers and our shareholders, and we look forward to talking to you next quarter, if not before. Have a great day.

Operator

Thank you. This will conclude today's conference. You may

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Earnings Conference Call
Aris Water Solutions Q2 2024
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