Aris Water Solutions Inc (ARIS) 2022 Q2 法說會逐字稿

Greetings, and welcome to the Aris Water Solutions Second Quarter 2022 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, David Tuerff. Senior Vice President, Finance and Investor Relations .

Good morning, and welcome to the Aris Water Solutions Second Quarter 2022 Earnings Conference Call. I am joined today by our President and CEO, Amanda Brock, our Founder and Executive Chairman, Bill Zartler; and our CFO, Brenda Schroer.

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 the other cautionary statements included in our most recent quarterly report on Form 10-Q and annual report on Form 10-K filed with the Securities and Exchange Commission.

I would also like to point out that our investor presentation and today's conference call will contain discussion of non-GAAP financial measures, which we believe are useful in evaluating our performance. These supplemental measures should not be considered in isolation, or as a substitute for, financial measures prepared in accordance with U.S. GAAP. Reconciliations to the most directly comparable GAAP measures are included in our earnings release and the appendix of today's accompanying presentation. I'll now turn the call over to our Founder and Executive Chairman, Bill Zartler.

Thank you, David, and thanks to everyone for joining us this morning. In the second quarter, we continued our momentum and growth in a supportive commodity price environment that were impacted by headwinds in supply chain constraints leading to higher-than-anticipated cost inflation and unexpected delays from our contracted customers late in the quarter. With the newer completion design of multi-well long lateral pads and large water supply needs, delays can have a significant impact on us across the end of the quarter. As a result, our adjusted EBITDA for the second quarter fell slightly below our expected range of $38 million to $40 million.

Our long-term contracts demonstrated reliability, and leading recycling capabilities, however, continue to drive our growth alongside our premier customer base. As delayed wells are completed, we expect to both deliver recycled water for those wells and receive the associated produced water volumes back. Similarly, our CPI-linked revenue inflation costs in our contracts are triggered at discrete generally annual times, thus resulting in short-term mismatches. Fundamentally, we continue to grow substantially year-over-year and are confident in this continued growth.

Yesterday, we also announced the acquisition of the Delaware Energy Services assets in exchange for equity consideration and a small volumetric-based earn-out. I'll let Amanda expand on the strategic benefits of the transaction, but we are pleased to add Delaware Energy's complementary assets and customers to our core system in Eddy and Lea Counties. With that, I'll turn it over to Amanda.

Thank you, Bill. In the second quarter, we increased our total water volume to approximately 1.2 million barrels per day up 34% versus the second quarter of last year and up 6% sequentially over the first quarter of this year. As Bill referenced, late in the second quarter, a few of our large contracted customers experienced delays in their provided schedules and completions on our dedicated acreage, which in turn delayed anticipated water solution volumes and related revenue.

Our adjusted operating margin per barrel was $0.41 a barrel in the second quarter of 2022 down $0.01 a barrel compared to the second quarter of last year. We have seen cost pressures continue to increase, particularly related to labor and commodity-linked costs such as chemical treatment expenses. We continue to be focused on identifying and implementing operating efficiencies, such as enhancing automation to better manage costs and margins during this inflationary environment. Our contractual revenue increases with CPI-linked escalators at annual reset dates, which will help offset pressure on our margins over time.

We continue to look for attractive opportunities to add capabilities and scale to our infrastructure network. And today, we are very pleased to announce the closing of the acquisition of Delaware Energy Services assets. The Delaware Energy assets add 7 water handling facilities and associated gathering lines in our core areas of Eddy and Lea Counties in New Mexico.

This is a great opportunity to add assets to our network for several reasons. First, the Delaware Energy assets are located adjacent to our core infrastructure and can be efficiently integrated into our network with minimal construction risk. Second, by adding additional handling capacity in New Mexico, we can recycle in more locations for a greater number of customers. And third, we're supplementing our operational capabilities close to existing and new customers, which we expect to generate additional commercial opportunities. We expect the Delaware Energy assets to add an incremental $11 million to $13 million in adjusted EBITDA in 2023 once fully integrated and to also defray some additional future capital expenditures in our core operating areas.

On beneficial reuse, we continue to make progress piloting and identifying relevant technologies for the treatment of produced water for nonconsumptive agriculture, industrial uses and potential supplemental water. We are completing several beneficial reuse pilot projects and working alongside regulators, development partners and other industry participants to evaluate and scale promising technologies. We will have additional progress to share on these initiatives and partnerships shortly as we focus on driving innovation in sustainable water management and maximizing opportunities for the use of produced water.

And with that, I'll turn it over to Brenda to discuss the financial results for the quarter.

Thanks, Amanda. We reported adjusted EBITDA for the second quarter of $37.2 million up 21% from the second quarter of 2021 and up 3% sequentially from the first quarter of 2022. As Bill and Amanda referenced, due to volume delays in inflationary pressure, our adjusted EBITDA was slightly below our previously provided guidance range of $38 million to $40 million for the quarter.

Based on customer provided updated schedules, we have reforecast our third and fourth quarter 2022 volume expectations. Given these updated volumes, along with inflationary pressures that will impact operating margins in the short term, we anticipate third quarter adjusted EBITDA will be between $38 million and $41 million. At this time, we believe the fourth quarter 2022 adjusted EBITDA will grow 5% to 10% sequentially from our third quarter estimated EBITDA.

Our capital expenditures were approximately $39 million for the second quarter of 2022 and approximately $48 million year-to-date. We're investing in the second half of 2022 to support further growth in 2023 and beyond for Chevron and other contracted customers. We expect capital expenditures to be back half weighted in 2022 as we construct additional infrastructure consistent with our previously provided full year outlook of $140 million to $150 million.

We continue to see attractive returns in growing our infrastructure and our capabilities while maintaining a conservative balance sheet at the low end of our long-term leverage target with ample liquidity. We ended the second quarter with approximately $35 million in cash and an undrawn and available $200 million revolving credit facility for a total available liquidity of approximately $235 million.

As Bill and Amanda have mentioned, we closed on the acquisition of Delaware Energy's assets on Monday, August 1, with an issuance of approximately 3.37 million shares that will be reflected in our third quarter financial statements. We will continue to evaluate acquisitions for strategic infrastructure to support incremental growth.

Additionally, yesterday, we announced our third quarter 2022 dividend of $0.09 per share, continuing our commitment to returning cash to shareholders while maintaining flexibility to fund additional growth opportunities. With that, I'll turn it back to Amanda to wrap up.

Thanks, Brenda. As we think about the company's performance more broadly, we are delivering sequential volume growth of over 6% in the second quarter and anticipate growing adjusted EBITDA by approximately 30% this year versus 2021. Our customers are clearly committed to developing their deep inventory of assets on our long-term contracted acreage, which is dedicated to us on average for the next 9 years in the core of the Northern Delaware Basin.

Executing on opportunities such as Delaware Energy this quarter and a significantly expanded long-term Chevron agreement last quarter is indicative of our focus on delivering efficient growth. Our core operations and business development opportunities remain strong, and we believe we will continue our rapid growth well into the future. With that, we will take questions.

(Operator Instructions) Our first question comes from Samantha Hoh with Evercore ISI.

I have a question, I guess, just on the margin front. Do you think that you'll be able to recoup some of the decline that you saw in 1Q or just the higher cost that you incurred? Just kind of curious if some of those cost escalators kick in so that we could see a flat margin. Or is it going to be down potentially?

Samantha, thanks for that question. Yes, we do see us recouping some of that margin. As you know, we've got CPI in our contracts, and those usually reset in January, March and also in June, June, particularly with one of our large contracts. So with inflation being where it is, we have sort of outstripped the ability of our CPI, the recovery in our contracts to really keep up. But as we focus on efficiencies and as time moves forward and as sort of we see inflation lowering, we do see those margins being recouped.

Okay. Excellent. And I'm just kind of wondering, as we sit here at the start of August, are you guys anticipating any sort of slowdown for the end of the summer or maybe at the end of the year for the holidays?

We've spent a lot of time, Sam, talking to our large contracted customers about their plans, working with them on their forecast. At this time, we do not anticipate a slowdown sort of at year-end. Everybody is still moving forward. Clearly, because of the slowdown in delays, we thought here at the end of June in these frac schedules, which have had the impact on us here in Q2, it is difficult with tightness in the market for them to sort of catch up.

So we will sort of see the delay we experienced now through the year. We expect to sort of fully catch up next year, but we've got capacity to utilize. So we see ourselves with BD finding opportunities to utilize the capacity we've got.

And so as a consequence, asking that question about slowdown, we think there's an opportunity as a result of BD, as a result of catching up, to get to sort of the low end of our guidance range. But as a consequence of lack of visibility at this time, what we are really doing is lowering our forecast to a range of [1 50] to [1 60] for '22 with opportunity to actually improve if we're able to bring additional BD opportunities to bear, but we do not see additional new delays at this time that we have been told about.

Okay. Great. And then just one last one, if I can squeeze one in. It's just the beneficial reuse of produced water. I'm curious which projects you're most excited about. I mean there's a lot of really interesting opportunities, and it definitely makes a lot of sense from the environmental angle. So I was just kind of curious which projects do you think is more -- most likely to move forward the fastest and then which one gets you the most excited.

We're pretty excited, Sam, about a number of the projects that we've got going on. We have completed our first project with Texas A&M as it relates to growing cotton and switch [grass], which was very successful. We are sort of looking at Phase 2 on that.

I guess the project that we're most excited about is working on a full-scale pilot with 2 of our large operators, which we'll sort of talk about later, where we will be piloting that we were able to cost identify technologies to really treat water for not only consumptive agriculture but also for industrial uses and for environmental uses for discharge the environment as they do potentially and in other states. So a lot of projects that we are working on right now, but I think we're further along on the nonconsumptive agriculture.

Our next question comes from the line of Don Crist with Johnson Rice.

I wanted to talk about the Delaware Energy acquisition. In looking at their website and the Slide 7 of the new presentation, it looks like, number one, they were trucking a lot of water; and number two, that you have a lot of right of ways close to their disposal wells.

I wanted to ask kind of a 2-part question. Number one, what would the CapEx be to kind of fully integrate the 7 disposal wells to your system? And then number two, how much of an impact will that be on next year's CapEx? Is it significant impact to next year's CapEx like a reduction in CapEx for next year versus what your original plans were?

So Don, we do see definitely CapEx reduction next year as a consequence of this acquisition. And we have right of way and are connected already to some of these wells. And so we do not see significant additional cost that's needed to connect our system to the wells that we are going to integrate to. There are certain wells we acquired that we do not anticipate bringing into the larger system at this time that are connected to existing and potential new customers. So -- and from a CapEx perspective, this is a positive story.

We're very excited about this acquisition. It gives us great optionality, and it gives us an opportunity this year to sort of accelerate some of the initiatives that we're looking at with our customers. And as we indicated in our deck, once integrated, we expect this acquisition to generate incremental annual adjusted EBITDA of $11 million to $13 million, but there is greater capacity to utilize these assets, and so depending on our business development opportunities, that could be higher.

And so I think you got to look at the next year in 2 different ways. One is there's -- the EBITDA we're forecasting doesn't utilize all the capacity. We're using that capacity to defray additional capital that we have planned on spending next year. If you were to fill up those assets, you're talking EBITDA between $19 million to $20 million range, all in. So you can look at it in a couple of different buckets, but we're just focused on the EBITDA that's incrementally added by what we know is on that system today and what brings in and then the capital defrayment of approximately $25 million -- $20 million, $25 million next year.

Yes, it looks like a very, very attractive acquisition to me. And I wanted to pivot to the delays from your customers. Have those delays been alleviated now? So basically, you just got -- you got pushed one quarter to the right from those volumes coming in? And is that kind of done? Was it kind of a one-off thing, like a frac crew had an issue and kind of missed a month or something like that? Any color you could provide there would be helpful.

So the specific delays that we saw in late June have already -- those jobs are working today. So it is a pushback. Now you don't really catch up for a while because you're still very tight frac capacity. And so in order to catch up, you either need to go off faster than you planned or you need to add a frac crew. And so we're not seeing incremental additions today out there, but we are seeing that volume catch up. So it's a bit of a push to the right more than anything else into next year, where we hope, at that point, you've freed up a little additional frac capacity to catch up.

Okay. So the issues are alleviated. So it's just a push to the right (inaudible)

They're alleviated over time. They're alleviated over time, John.

They're In big numbers. Just to put it in perspective, a 4-well pad today with 10,000-foot laterals is going to take 2 million barrels of water. And 2 million barrels of water at a $0.40 margin ends up being $800,000 pushed -- of pure gross profit pushed across the quarter. So the numbers add up very quickly, and you get a couple of those happen right in the quarter. It's a significant impact, but we see them all catching up today, and we see the sand challenges going away. We see the basic frac challenges slowly willing their way out as the market gets caught up and more efficient.

And these delays that occurred that impacted this quarter occurred in the last weeks of June. So as Bill just explained, if you have 1 4-well pad, basically the 2 get pushed out. It has a real impact. So you catch up, but it's very, very lumpy then quarter-over-quarter, and we didn't have a lot of advanced notice on this as it happened in the field as a consequence, as you appropriately said, the crude performance and just managing supply chain, sand, et cetera..

And just one more, if I could squeeze it in. On the cost side, I don't know if it was labor that necessarily hit you or other supply chain. But has that kind of stabilized now? Or do you think that you're going to see more impacts going forward into the back half of the year?

I think we better understand the impacts we're dealing with. We certainly saw some impacts in labor, which we've taken steps to try and alleviate. We also saw a big impact in chemicals and the cost of chemicals. So focusing on both supply chain with chemicals but also chemical utilization and increasing automation, we are reacting to costs, and we are looking at ways to increase efficiency, bring in additional automation to manage those costs better.

And our next question comes from John Mackay with Goldman Sachs.

I wanted to follow up again on the OpEx side. Could you -- we talked a little bit about this last year, but maybe you can just go into a little more detail now that we're focused on costs. Just the difference in margin between being able to recycle a barrel versus needing to send a barrel downhole, we used to talk about, again, recycling be a lot higher margin, does that still hold given the changes with chemical prices, et cetera? Maybe you can just talk a little about the interplay there.

There is a little more chemical use than we have going down holding to recycle. So there's some of that, but you avoid the downhole royalty, which offsets a little bit of that. The chemical cost really was on a per-barrel basis. It went up, the actual cost of the chemical, which we see offsetting. There are some H2S challenges in Lea County, and that additionally drives some of our chemical costs up, and we're working with our customers to alleviate that ahead of our systems.

Also, John, when we recycle, and obviously, as we don't go downhole and you know the power components with going downhole, and we have seen -- particularly in New Mexico, which accounts for about 50% power load, we have seen rate pace go up. And so there are some increased power costs. But generally, what we've explained before about the savings when we recycle and don't go downhole are still correct.

Okay. That's great. Maybe I'll take another one just higher level. If we bake in everything at the acquisition you guys announced today, we think about the big Chevron contract from a couple of months ago, could you just talk a little bit high level on how you're thinking about overall kind of EBITDA-wide growth kind of next year over this year and maybe even looking to '24, not necessarily talking specifics, but just how we can think about, again, you guys versus an overall basin perspective, let's say?

So if we look at '23, obviously, we're not ready to give guidance on that, but we remain very optimistic about growth into '23. We see that ramp in growth with rig counts and with the new Chevron contract you referenced and also with BD and the activity levels of our customers. So we see the sequential year-over-year growth.

If we look at '22, we still got EBITDA growth in '22, as we explained, of almost 30% with opportunity to do better. So we do continue to see that sequential growth. I mean, we are feeling very optimistic about the core business and remain very focused on executing and continue to achieve that growth. Bill, do you want to add to anything to that?

I think that's it. Yes. I think that's it.

Ladies and gentlemen, this concludes our question-and-answer session. And I'd like to turn the call back to Amanda Brock for any closing remarks.

Thank you, and thank you, everybody, for your questions. So despite the headwinds and the delays that we've talked about, we remain very confident in our core business and this continued growth. We're optimistic about the opportunities. We remain very focused on executing and managing costs. And we look forward to coming back with improvement. So thank you to our customers, to our employees, to all of our stakeholders, and have a great day, everybody.

Thank you. This concludes today's conference. Thank you for your participation, and you may now disconnect.