Aris Water Solutions Inc (ARIS) 2025 Q1 法說會逐字稿

Greetings, and welcome to the Aris Water Solutions first-quarter 2025 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

It is now my pleasure to introduce David Tuerff, Senior Vice President, Finance and Investor Relations. Please go ahead.

Good morning, and welcome to the Aris Water Solutions first-quarter 2025 earnings conference call. I am joined today by our President and CEO Amanda Brock; our Founder and Executive Chairman, Bill Zartler; and our CFO, Stephan Tompsett.

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.

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 US 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. Aris began 2025 with a strong first quarter, continuing its momentum from last year. We saw record volumes in both produced water handling and water supply, driven by higher-than-anticipated completion activity and sustained produced water takeaway demand.

Early in the second quarter, we're seeing those volumes continue, giving us a strong outlook for the first half of the year. As we look forward to the second half of 2025, we are actively monitoring commodity price impacts to our customers' activity levels and tariff uncertainty around our costs.

Currently, we've not seen material schedule changes from our customers on our dedicated acreage, but we remain in constant contact with them as their outlooks are further refined. We believe we are well positioned for potential uncertainty given our long-term contracts in the core of the Northern Delaware Basin, featuring multiple decades of highly economic inventory with well-capitalized customers.

We are focused on managing our capital investment to match that of our customers and can moderate our capital investment alongside a slowdown in activity if one were to occur. We have a dynamic team that has weathered COVID and commodity price volatility in the past, and we will manage the business prudently while taking advantage of our pristine balance sheet and strong contractual underpinning to capture opportunities that may arise.

With that, I'll turn it over to Amanda.

Thank you, Bill. We continued our success in the first quarter of 2025 with record volumes driven by higher-than-anticipated customer activity levels, strong sustained produced water volumes, and increased spot volume demand on our infrastructure network. As a result, we grew both produced water volumes and water solution volumes 7% sequentially versus the fourth quarter of last year.

We achieved adjusted operating margin of $0.44 a barrel in the quarter with record volumes and sustained margins driving adjusted EBITDA of $56.5 million, another all-time high for Aris. The first quarter represented our first full quarter integrating the McNeil Ranch into our operations, and we're evaluating several encouraging inbound opportunities to bring additional revenue streams to the ranch, including active discussions for large-scale solar and other surface royalty development.

As we said last quarter, we remain excited about the optionality the ranch provides and its attractive subsurface characteristics for additional port space and disposal, which have been validated by our customers. We have an opportunity to accelerate growth as land becomes increasingly valuable adjacent to the fastest-growing areas of production in New Mexico and remain in active conversations with current and potential new customers to bring incremental water volumes to the ranch in the future under long-term agreements.

While delivering consistently outstanding results in our core gathering and recycling business, we've accelerated our beneficial reuse efforts in partnership with leading operators. We continue to progress through the permitting process to desalinate produced water at large scale for potential reservoir replenishment, industrial, non-consumptive agricultural use. Our team is leading broad industry efforts to reduce desalination costs as we expand our existing partnerships to accelerate commercialization.

We also continue to make progress in our strategic efforts in industrial water treatment, further integrating the new team that joined us in the first quarter of this year. On mineral extraction, we have finalized site selection on the first iodine facility, and this plant should be online in early 2026, providing another source of margin uplift.

As Bill referenced, there's significant uncertainty around commodity prices and tariffs. However, we're off to a strong start this year and are seeing that strength continue into the second quarter. We have continual dialogue with our customers about the potential impact commodity prices could have on their businesses and activity levels. And at this time, we are not seeing any immediate impact to our outlook.

We are working closely with our customers as they evaluate their plans for the second half of 2025, and we'll provide further updates if our outlook changes accordingly. Our customers are large blue-chip operators under long-term dedication agreements and highly economic acreage. In past commodity down cycles, our customers have a track record of sustained production strength. And importantly, we are positioned to moderate our capital investments alongside our customers if and as needed.

With that, I'll turn it over to Steve to discuss financial results for the quarter and details on our outlook for the second quarter of 2025.

Thank you, Amanda. We recorded adjusted EBITDA for the first quarter of $56.5 million, up 4% sequentially and 6% year over year, driven by record volumes in both produced water handling and water solutions. We generated adjusted operating margins of $0.44 per barrel, reflecting the durability of our operating improvements over the last 24 months. In the quarter, we also had approximately $2 million of planned well maintenance costs deferred until the second quarter, benefiting margins by approximately $0.01 per barrel.

Turning to CapEx, we invested $21 million in the quarter, down 44% versus the first quarter of last year. For the second quarter, we expect produced water volumes to be between 1.2 million and 1.25 million barrels per day and water solutions volumes to be between 475,000 and 525,000 barrels per day. We expect adjusted operating margin to be between $0.41 and $0.43 per barrel for the quarter, down slightly versus the first quarter due to timing of well maintenance expenses and lower skim oil price realizations.

Relative to our initial outlook for the year, the current WTI price strip represents a $6 million to $8 million headwind to our business. However, we do have offsetting benefits from our strong first-half volumes, stronger skim oil volume recoveries, CPI-linked revenue escalation clauses, and outperformance on first-quarter earnings.

With regard to tariffs, we have evaluated our operating and capital expenses and do not believe we currently have any meaningful direct exposure to potential tariff increases within our existing cost structure. We are in close contact with our suppliers as they assess any potential impacts to their supply chains, and we will continue to work with them to monitor and mitigate any potentially broad inflationary pressures that might arise.

Turning to our balance sheet, during the first quarter, we successfully refinanced our senior notes, which were set to mature in 2026, and due to significant investor demand, upsized our offering to $500 million alongside a credit upgrade by Moody's from B1 to B2. Net of the offering, we ended the quarter with net debt of $480 million and a 2.2 times debt-to-adjusted EBITDA ratio with $372 million of liquidity.

Finally, we declared our second-quarter dividend of $0.14 per share to be paid June 18 to shareholders of record on June 5. Needless to say, this will be a very dynamic year, but we are confident in our team's ability to effectively manage through this period of volatility and uncertainty. We remain committed to maintaining our strong balance sheet, delivering free cash flow and creating further long-term value for our shareholders.

With that, I'll turn it back to Amanda.

Thanks, Steve. To close, I want to thank our team, our suppliers, and our customers for an exceptional start to the year. We continue to outperform in our core business, showing robust volume growth, cost efficiencies, disciplined capital investment, and safe operations.

We understand there is market uncertainty and believe with our continued strong performance, supported by our long-term contracts and large dedicated customers in the core of the Permian, we are in a strong position to weather potential disruptions and to take advantage of the opportunities that often arise during periods of volatility. We want to reiterate that should our customers reduce their activity levels in a sustained low oil price environment, we will be able to moderate our own capital investment accordingly and produce resilient free cash flow.

With that, we are happy to take questions.

(Operator Instructions) Wade Suki, Capital One.

Thanks for taking my question. I recognize the uncertainties out here, but I am kind of curious what your expectations for things like water cuts, volumes, et cetera, over the near to intermediate term if your producers were to move more into maintenance mode?

Good morning, Wade. Thank you for the question. We've had an excellent Q1 as you know, and we've also got great visibility into Q2, and we've had a strong start in Q2. So we believe that we're on track for a very strong first half. When we look at the second half of the year, we understand that there's a lot of volatility, there's a lot of uncertainty, and it's going to be very dynamic.

At this time, our customers have not communicated material changes in their forecasts. But of course, what we have done is run scenarios to try and anticipate if changes were to occur and if volumes were to decrease, what will we do?

And as we've always said, we grow alongside our customers, so if our customers start to reduce volumes, we in turn will react depending on timing, depending on geography, and we'll be able to reduce CapEx. And we think that CapEx reduction will be significant enough in the 25% to 30% range. So we don't know where volumes are going to go. But we do know that we can react. We also, in terms of the water cut, to that question, the water cut will remain the same. It just is going to be a volume impact.

Great. Thank you so much. Appreciate that. Just in terms of M&A, maybe can you give us an update on what you're seeing out there? Has any of this volatility or uncertainty impacted seller motivations, bid-ask spreads, et cetera?

I think it is early days, Wade. Certainly, in any time of volatility, there are people out there who must be feeling very uncomfortable, particularly if they might expect things to change in their particular area of focus. I mean, Bill, would you want to respond to that? I mean, we're not --

Yeah. It's a relative value game, and we've obviously traded down stock price, some size, and so that changes expectations on both sides. So I think that the bid-ask spread has been there. It was probably closer than ever as our valuations were up and expectations were high, but it's -- there's still -- there's a few things transacting, but very little of the large water combinations are really happening at this point in time.

But we do think we are well positioned with our balance sheet, which is extremely strong, to sort of take advantage of some things that might arise during a time of volatility like this.

Understood, thank you so much. Appreciate it.

Thanks, Wade.

Jackie Koletas, Goldman Sachs.

Hi. Thank you so much for taking my question. First, I just wanted to start on the volume front. They were significantly stronger than expected in the first quarter. I believe you mentioned potential spot volumes. Were there any one-time impacts or activity that occurred? And therefore, how should we think about volume growth cadence from here?

I'll start, and then I'll let Steve sort of elaborate. But yes, volumes were extremely strong. Some of the wells came on better than expected. That always is a nice thing to see. We also saw more interruptible, and obviously that results in more skim.

No, that's right, Amanda. Jackie, when we're doing large-scale recycling, it opens up capacity on our system. And it's sometimes difficult to forecast when exactly we're going to receive or be able to take interruptible volumes because it is location-specific. But our commercial team goes out and tries to procure whatever additional revenue they can as that activity moves around the system.

So we do see it quarter to quarter. It does vary, but it's hard to forecast months in advance. So we're always charging them with going out and achieving more. And in this case, they were able to exceed expectations.

Got it. That's clear. Thank you. And then just one follow-up. In a downside environment, how would you be thinking about capital allocation specifically continued dividend growth versus further debt reduction? Just a little bit more color there.

Yeah, absolutely. So I guess at this point in time, there's no change to our capital allocation framework. We continue to focus on balance sheet strength and the financial health of the business. As Amanda mentioned, we do have the ability to flex down capital. If there is a downturn in volumes, it's going to depend on geography and timing of any customer slowdown. But we do feel confident we could reduce 2025 capital in the 20% to 30% range.

We talked about in the past, from a sustaining and maintenance standpoint, we'd be looking at under $50 million of spending to maintain flat volumes, so we really have a lot of optionality as it relates to sustaining our free cash flow and protecting the balance sheet. I think it's premature to think about any changes to our long-term shareholder return framework right now. We're still consistent in wanting to deliver annual dividend growth, and we'll look to do that for the long term.

Great. Thank you so much. Appreciate it.

Spiro Dounis, Citi.

Maybe I just want to start with McNeil Ranch, if we could. Amanda, you gave us an update in the prepared remarks, but would love to get a little more color on commercializing that land. Maybe what inning you think you're in in terms of filling that out. I know at one point, you talked about maybe options to monetize that in some way. And then just timing from here and how to think about next updates.

Certainly. Good morning, Spiro. McNeil is exceeding our expectations. We knew it was in a great location, but we've had a lot of -- we've had more inbounds than we expected as it relates to the surface. With its location with hubs, with that gas transmission line going through at the railway line, with the power transmission. We've had a lot of inbounds, whether it's been solar, battery.

So we're evaluating all of those in addition to just your more traditional surface royalty-type activities. So that's great. In addition, from a milestone perspective, we've already been granted on the Texas side, 11 permits. So at this point, and this is quick, we are sitting on 330,000 barrels of permitted disposal capacity.

So do we have an opportunity to monetize? Yes. There are inbounds all the time, but we think this property just gets more valuable over time, but we will always be listening. We are in early innings. We continue to talk to our core customers about the subsurface characteristics, about the routes, right of way. But overall, we are very, very happy with this acquisition.

Got it. That's great to hear. Second question, maybe going back to Wade's question a little bit here and thinking about the outlook. But mainly I want to focus on areas where there is maybe a lot of durability in your cash flow stream and maybe some variability too, but I guess maybe confirm my thinking.

On the produced water side, one, I suspect if there were cuts announced tomorrow, we wouldn't really see that impact on the produced water until maybe next year. And as far as I know about the water cut, I think you said it stays the same, but I guess my view is that it sort of increases as the well ages. And so curious, is there a similar dynamic with natural gas where if crude is kind of flat, gas tends to increase? Is there a similar dynamic with water?

So let's talk about the water cut. We get asked this question a lot. But the water cut, as a reservoir and a well ages, does increase slightly, but it's not something that we are really running through the model at this time. I think on the produce water side, what you would see for example, if completions slowed down, is you would actually see volumes -- produced water volumes increase. But David, you've been looking at this, so do you want to be more specific?

Sure. Hey, Spiro. Yeah, as we think about the volume stream and the company overall, the vast majority, about 70% of the business, is produced water driven. And that's largely going to follow oil production as opposed to completion activity. So -- especially given our customers, their inventory, and the quality of the rock that's dedicated to us, we think that production stream of oil and associated water will be very resilient, and again, allow us to achieve the free cash flow targets we set out at the beginning of the year.

So while you can see some variability in water cut over time, we really think the best corollary to our water volumes is oil production. And given the resilience of that in the Northern Delaware, we see that as very steady.

Yeah, a little nuance to that will be that when there's a significant amount of water recycled not just by us, but others that do it themselves, that volume -- if completions slow down, that volume tends to flow in our system as interruptible, and we'll try to take every bit of that we can. Ee saw that same dynamic early in COVID when completions activity came to a rapid halt and produced water volumes that needed to go to disposal increased pretty dramatically over that short period of time before they trailed back off.

Got it. Okay, appreciate the color. I'll leave it there. Thanks, team.

Thanks, Spiro.

Jeremy Tonet, JPMorgan.

Just want to start off with a question on the competitive landscape as you see it here. We've seen some other mid-streamers with water operations I think more recently redouble their efforts in the water field. And just wondering how you feel about your competitive standing versus maybe some of these other larger mid-streamers looking maybe a bit more at water?

Sure, Jeremy. I think you may be referring to the announcements on the long-haul pipelines, Westin announcing Pathfinder and some others announcing an open season. We are seeing all of that activity. As it relates to Westin, that is south of us. It does not impact us competitively in any way. I think when we look at how we are positioned geographically and the pipeline that we anticipate we'll be building in '26 toward the McNeil Ranch, we think we are still well positioned competitively.

Got it. That's helpful. Thanks for that. And then maybe turning to beneficial reuse of industrial water, any incremental kind of updated thoughts on expanding the applications here? I believe there's been discussion about potential data center applications in the past. Just wondering any updated thoughts you might be able to share here.

There's always a lot of talk right now about data centers. If the question is can we use this water and can we treat it for datacenters, the answer is yes. But we think it's early innings on data centers, and we are watching that market. You do get the inbounds, but we are not relying on that market in any way.

What we are doing -- and we've had great success and have really made some positive improvements through the piloting -- is we've been able to reduce the price and OpEx and even CapEx of desalinating this water for surface discharge, for reservoir replenishment, and we're making a lot of progress in the permitting, talking to customers, as well as I think we indicated in the script and in the press release that we have now got the site for the first iodine facility. So all in all, we are seeing great progress.

Got it. That's helpful. Thank you.

Praneeth Satish, Wells Fargo.

Maybe just going back to Jeremy's question here on competition, so recognizing the Western pipeline is south of your footprint, but I guess WaterBridge has an open season. That pipeline seems closer to your McNeil Ranch. So just trying to understand how does this project have any impact on your development timeline, your prospects of building your own water pipeline, I think, you said in 2026? Just trying to understand the implications and if it has any bearing on your development plans.

Praneeth, thanks for the question. I think people need to focus on the fact that we have entered into long-term contracts. And these contracts with our customers and they get extended. And so it really -- we've got a large footprint, large acreage dedication. We're engaged in discussions to expand that over time. So it really does not impact us. Bill, do you want to sort of comment on that?

Well, I think ultimately, moving the water out of the particular well site locations is a complicated environment. This isn't like gas and oil that you're going from producing region to consuming region. This water goes into disposal zones. It goes into recycling networks where we have built extensive pond infrastructure where we can wheel water around for various customers as treated water for completions and move that then into zones. And so it's a complicated equation.

But we believe, and I think it's proving out, that controlling the water at its source and locking up the long-term consumption under long-term agreements for our customers' completion activity for the use of treated produced water in their completions activity provides the baseload for a very dynamic system and allows us to flex capital around the system in a way that's very unique.

Got it. That's very helpful. And then I just wanted to understand on the Q2 guidance, so you mentioned first, there was a lot of interruptible volumes in Q1. And I think, Bill, you mentioned there's the potential for at least a temporary surge of interruptible volumes if drilling activity slows.

Just looking at the Q2 guidance, how much of that do you assume is interruptibles versus contractually committed volumes? Just trying to get a sense of the underlying assumptions behind the guide.

Praneeth, very little. We really don't -- we view interruptible as a bonus in large part, so there is very little modeled. David?

Yeah, that's right, Praneeth. We model primarily around what our contracts are slated to deliver, and we're in constant contact with those customers as those plans are defined. And then as Bill referenced earlier, as we have opportunities to add additional volumes into the system, we try to go capture those on a spot basis. But really, we try to plan around what our contracted customers are doing.

Makes sense. Thank you.

Thank you.

Selman Akyol, Stifel.

So two quick questions. You referenced being able to flex down your capital spend by 25% to 30%. Should we think about -- is it more than just well connects that you can address there with capital?

Yeah, I think -- again, I want to stress it's very dependent upon who slows down and when and where. Because the system is dynamic, and it takes into account recycling, which opens up capacity on the system. So it's all of the above in terms of capital and where we might be able to reduce it. It's capital for new pipeline, capital for well connects, capital for ponds, surface facilities. It's all of the above. And again, if we look at that under $50 million for sustaining capital, at that point, you're probably not drilling many wells, but again, it's going to be location specific.

Got it. Thank you for that. And then you also mentioned, and I'm sure it's very small as you look out into 2026, the iodine. But is there any way you can put some metrics or economics around what you're expecting out of that?

So as we've said before, we are going to do it on a royalty basis, and that royalty really is dependent on the amount of iodine that is produced. And at this time, the company that we are talking to is evaluating whether or not they upsize their facility. So we'll come back and give you more information next quarter once we have more visibility of their construction plans and the size of the plant.

All right, thank you very much.

Jeffrey Campbell, Seaport Research Partners.

Good morning. Amanda, congratulations on the strong quarter. My first question is now that the first projects are coming into view and based on some remarks you made earlier today, it sounds like surface disposal could increasingly compete with traditional disposal on costs. So I wanted to first ask, am I understanding that correctly?

And then second, will it be restricted to very specific reservoir types? Or could this eventually even take place on McNeil Ranch at some point?

Jeffrey, extensive question there. Let me try and break it up. Yes, we did have a great first quarter, so thanks for recognizing that. I think everybody is so focused on the uncertainty going forward, we do want to emphasize the fact that we have been operating very efficiently. The team has executed. We've got a great first quarter and it looks good in second quarter.

Surface disposal. In terms of what reservoirs, that is too early. That is a function of working with the regulators. At this time, it is looking at surface and reservoir discharge. As it relates to McNeil, one of the things we said when we bought McNeil is that we could use McNeil for surface discharge for nonconsumptive agriculture because we would be aggregating volumes at that location. And as it relates to price, it is becoming more competitive. So it is not on a par with disposal, but it is no longer as expensive as people thought it would be when we began the piloting.

That's very helpful. I want to ask an M&A question in a little bit different way. And I'm not trying to be pejorate about this, I'm just curious. Every quarter, you get asked about M&A. I'm wondering, with your expanding use of treated water, the good things you just told us there, your entry into industrial water treatment and obvious enthusiasm for it, I'm curious if an acquisition in the core business is still a preference for Aris.

Great question, actually. And I think we are still very focused on an acquisition in our core. And we would have loved to have made an acquisition at this time. We don't want to buy anybody else's problem, and we've been very disciplined as it comes to value.

We are looking outside of our core at smaller bolt-ons. You saw us add a team with some great IP which we are bringing into the system and expanding. But overall, we are still focused on our core. Bill?

Yeah, I mean, it's a pretty simple analysis. We have a very good business, great contracts, great customers, great acreage. We're very confident and knowledgeable about what that is and finding a complementary fit at the right value with the right relative contribution of contracts and assets and potentially people is really paramount. As we continue to evaluate those, nothing has fit that bill just yet, and we're looking hard at this small incremental organic growth around nonenergy oil that we think has some very interesting attributes, but it's very early days and small.

Okay, great. Thank you. Appreciate it.

Derrick Whitfield, Texas Capital.

Regarding the desal opportunity, you've noted a few times that cost has come down quite a bit relative to initial expectations. In your view, could this be done with the cost recovery included for less than $1 per barrel?

We've always talked about, as have others who have been focused on this, on trying to break through that $1 a barrel from an OpEx, yes. And it depends on size from a CapEx and sort of balance of plant cost, but certainly, OpEx can be below $1 a barrel.

Great. And then maybe leaning in further on the beneficial reuse side, it appears you guys are making progress beyond iodine and are evaluating technologies and identifying partners for commercialization of other minerals. What appears the most promising at this time beyond iodine?

I'm going to use lithium cautiously because there is technology today and that technology is improving. So there are a lot of inbounds on lithium from names that are familiar to people, but there's a lot of price volatility on lithium. I think magnesium is something that is very attractive, ammonia. And so I think there are a lot of these trace metals and minerals that we are looking at. But I think you will see us focus on the iodine and then you'll see us begin to talk most likely a little bit more about magnesium.

Great, I'll turn it back to the operator.

Sean Mitchell, Daniel Energy Partners.

Good morning, guys. Thanks for taking my question. Amanda, I know the range of outcomes has widened dramatically with tariffs and OPEC bringing barrels back to the market. Given the size of your customer base and who you work for, any guess at what price these guys might start to -- I mean, what oil prices potentially will these guys actually start to adjust activity?

Good morning, Sean, and I wish we knew. We saw Enterprise come out and make a couple of statements about that. I think what I want to focus on is who our customers are. If you look at 75% of our customer base is Chevron, they are out saying they're going to grow and continue to grow. You've got Conoco. You've got Oxy. Then of course, we've got Newburn. And Newburn may be private, but Newburn is a great large customer running a lot of rigs, and we are in some of their core rock.

So focused on who our customers are I think is very important because I think they will be more resilient and they will not be as reactive to movements in oil price. But that is the million-dollar question that everybody is asking. Again, we think we are going to be resilient because our customers are going to be resilient and because of how they behaved during COVID. They did not react like the smaller private equity-backed operators.

Yeah, no, that's helpful color. Thank you. And then maybe just to follow up on skim oil, what price are you guys assuming for Q2?

We assume the strip, we don't provide, or we don't come up with our own internal forecast. We just take --

Yeah, fair enough. All right, thank you. Appreciate the color.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Amanda Brock for any closing comments.

Thank you. We understand that there is a lot of uncertainty, but we want to reiterate that we are well positioned, we have produced great results, the team is very focused, and we think that we will be very resilient and effectively manage through this period of volatility uncertainty. We want to thank our customers, our team, our suppliers for a great Q1 and for a great start to the year. Q2 looks good, and we look forward to talking to you next quarter. Thank you very much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.