Aris Water Solutions Inc (ARIS) 2021 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Aris Water Solutions Inc. third-quarter 2021 earnings call and webcast. (Operator instructions)

At this time, it is my pleasure to turn the floor over to your host: David Tuerff, Senior Vice President Finance and Investor relations. Sir, the floor is yours.

Good morning and welcome to the Aris Water Solutions third-quarter 2021 earnings conference call. I am joined today by our Founder and Executive Chairman Bill Zartler; our President and CEO Amanda Brock; 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 included in our prospectus filed with the Securities and Exchange Commission in connection with our IPO.

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 will now turn the call over to our Founder and Executive Chairman, Bill Zartler.

Thank you, David. I'd like to welcome everyone to Aris Water Solutions' first conference call as a public company. We thank everyone for their investment and belief in our Company and are excited to begin our next chapter as a public company.

As a reminder, we own and operating a leading environmental water infrastructure and recycling business in the Northern Delaware and Midland Basins. Our built-for-purpose high-capacity produced water handling and recycling systems provide our customers with proven produced water takeaway assurance and access to significant recycled produced water volumes for sustainable water supply.

Our broad water recycling capabilities and infrastructure help our customers meet their water-related sustainability targets and mitigate their impact on local groundwater sources. We operate over 660 miles of high-capacity water pipeline, have 48 active water handling facilities, and 10 high-capacity produced water recycling facilities.

Aris Water had a strong third quarter as we continue to recognize the benefits of our large-scale infrastructure and increased demand for recycling produced water. In the third quarter, we executed four new long-term acreages dedication with a weighted average life of 10 years, increasing our dedicated acreage by 20,000 acres. Two of these contracts with leading operators include long-term full-cycle water handling and recycling solutions. We also set records for total volumes handled and produced water volumes recycled. We continue to see steady increases in completions activity in the Northern Delaware and Midland Basins and anticipate continued further volume growth going forward.

We have a demonstrated and differentiated ESG track record that is core to our operations and mission. Amanda will now expand further on our operating performance.

Thank you, Bill. As Bill indicated, in the third quarter, we saw record volumes of water handled and sold on our integrated water handling and reuse infrastructure network. We handled 961,000 barrels per day of total water volume in the third quarter 2021, which is an increase of 42% versus the third quarter of 2020 and an increase of approximately 4% on the second quarter of 2021. These record volumes were driven by the increased activity of our long-term contracted blue-chip customer base and continued demand for our recycling solutions.

We continue to differentiate our capabilities through our ability to aggregate and deliver to multiple operators recycled water in the quantity, quality, and timeframe they need for their completions. Recycled produced water made up more than 60% of sourced volume supply for the quarter, exceeding our sustainability performance target that was established for our 2022 fiscal year under our sustainability linked notes.

The sustainability performance target was to have recycled water constitute 60% of total sourced volumes sold by December 2022. Since July 2019, Aris has recycled more than 2.1 billion gallons of treated produced water, directly displacing the use of groundwater. We continue to work closely with our customers on reuse and evaluating opportunities to increase water sustainability and are making demonstrable progress toward helping the industry maximize water recycling.

Our infrastructure also provides us the capability to work with customers to pilot technologies that promote beneficial reuse of treated produced water outside of the oil and gas industry. And we continue to make progress as we evaluate and pursue these opportunities.

Our adjusted operating margin per barrel was $0.41 in the third quarter of 2021 compared to $0.38 per barrel in the third quarter of 2020. We have also made significant progress in reducing structural costs through automation and increased recycling activities. While we have seen some recent impacts from cost inflation, particularly around chemicals for treatment, we continue to be focused on operating efficiencies and opportunities to add incremental margin going forward. We also have inflation escalation clauses in our contracts that help mitigate inflationary cost pressures.

And with that, I will turn it over to Brenda to discuss our third-quarter financial results.

Thanks, Amanda. Our adjusted EBITDA for the third quarter of 2021 was $30.8 million compared to $19.7 million for the third quarter of 2020. Adjusted EBITDA includes adjustments for temporary power costs, abandoned exploration projects, noncash charges including an asset abandonment of $27.4 million as previously disclosed, and other nonrecurring items. We transitioned all major handling facilities to permanent power at the end of the second quarter and thus are no longer adjusting for temporary power costs.

Our capital expenditures were $20.4 million for the third quarter. We expanded our pipeline network by approximately 25 miles and increased our produced water recycling capacity by approximately 50,000 barrels per day. We continue to deploy incremental capital at attractive returns to capture growth opportunities alongside our long-term contracted customers.

We are growing rapidly while maintaining a conservative balance sheet at the low end of our long-term leverage target and ample liquidity. We ended the third quarter with approximately $36.4 million in cash prior to the receipt of approximately $32.8 million of incremental IPO proceeds and an undrawn and available $200 million revolving credit facility. We also generated $6.1 million of free cash flow in the third quarter.

With our industry-leading balance sheet and liquidity position, we have significant optionality to allocate capital to the highest return opportunities for our shareholders. As we think about capital deployment, we will prioritize incremental capital projects with both existing and new customers that allow us to leverage our existing infrastructure and add volumes to the system.

We are evaluating opportunities to return cash to shareholders with our new Board and expect to provide more clarity in December. We have a track record of disciplined M&A that prioritizes financial returns, strategic fit, customer quality, and contractual underpinning. And we will continue to prioritize those qualities in any potential acquisition.

With that, I will turn it over to Bill to wrap up.

Thanks, Brenda. Aris Water had an excellent quarter and this is an exciting time for us to take the next step as a company. We're extremely optimistic and continue to hit record volumes, help the industry achieve its sustainability goals through the operational and financial benefits of our operating infrastructure, and deploy new capital at attractive incremental returns. We are managing our balance sheet prudently and running the business with a focus on free cash flow generation.

We have a premier asset footprint built specifically to accommodate our customers' substantial full-cycle water management needs. Our infrastructure is located in the core of premium acreage with multi-decade inventory life and best-in-class well economics. Finally, as evidenced by our performance over the past year, our dedicated team has the experience and expertise to continue to grow this business into the future.

With that, we will take questions.

(Operator instructions) John Mackay, Goldman Sachs.

Hey, everyone. Good morning. Thanks for the time. I wanted to do one micro one and then I will follow up with something on the macro side. Some of the new contracts you guys announced include both the produced water handling and also the recycling side. Can you just talk a little bit more about your ability to kind of pull in these full-service contracts going forward? And is that what the mix starts to look like over time?

Thank you, John. Yes, the new contract that we've been signing increasingly with term include both disposal and handling and reuse. We are seeing our customers and new customers increasingly want that bundled service. They want the proven takeaway capabilities. And then at this point, we have proven that we can deliver back to them the amount of water they need for the increasing quantity of water they need for completion. So I think as we go forward, you will see contracts on the same dedicated acreage that are for both reuse and recycling as well as handling.

That's helpful. Thank you. Maybe just on the macro side then, you guys have a pretty good insight into what's going on at the majors. Just curious if you can share if you are seeing any sort of pickup in activity more recently? Or is it still what we've been seeing mostly through 2021 where it's the private companies kind of leading and the public companies holding back a little bit?

We're seeing the mix shift a little bit. Some of the larger ones have been discussing growth plans starting sort of in the end of the fourth quarter through next year. So we are seeing a mix. They obviously are not accelerating as fast as some of the privates are at this point in time and you can refer to all their details across the board.

But we're still seeing ready steady climb up of the production rates. Now, if your rig count may not go up, you are seeing increased efficiencies on the completion side. So we're actually seeing more water per rig produced if you think about it that way even with potential flattish rig activity. But we still see it growing.

John, this is a time that our customers are all evaluating their plans for 2022, so we are seeing increased inbounds asking us about capability permits and availability and utilization of our system. So we are, as Bill said, continuing to see sort of steady inquiries, steady growth, and optimistic about what this means.

All right. That's great. Thank you.

(Operator instructions) Kyle May, Capital One Securities.

Hi, good morning, everyone. Just one quick one for me. You mentioned the new acreage dedications. Just curious if you can talk about the competitive landscape for new business and then maybe how big is the opportunity set in your area?

They are in a lot of the large acreage blocks have been dedicated to us and others. There's still a decent amount of incremental opportunities, a surprising amount, that continue to pop up. Like I said, we added 20,000 acres last quarter and we're in dialogue right now for more.

So most of our activity clearly is predicated on current acreage growth on it, but we do see that there's new business development and there's a landscape for it to grow. I think the notion of the reliability of the system and the full-cycle water management offering is one that's allowed us to attract these customers without a lot of price competition, if you will.

Got it. That's all for me. Thanks this morning.

Thanks, Kyle.

Thank you.

(Operator instructions) There appear to be no further questions at this time. I would now like to turn the floor back over to Amanda Brock for any closing remarks. Thank you.

Thank you, Cat. Thank you all for participating in our call today. We want to thank all of our employees, our customers, our new shareholders, our old and existing stakeholders for another strong quarter and most importantly for the successful IPO.

We are really proud of all of the efforts that have gone into the continued growth of our system, our leading market position in the core of the Permian, and our ESG leadership. And we look forward to participating in these calls in the future, in reaching out to all of you, and most importantly to providing further positive updates. So thank you to all of you who have been listening and have a great day.

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time and have a wonderful day.