ARIS - NYSE

Greetings, and welcome to the Aris Water Solutions First 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 of Finance and Investor Relations. Please go ahead.

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

Thank you, David, and thanks to everybody for joining us this morning. Aris Water had a strong first quarter, growing our total water volumes to approximately 1.2 million barrels per day and adjusted EBITDA to approximately $36 million, up 45% and 54% versus the first quarter of 2021, respectively. Activity levels in the New Mexico Delaware Basin continue to increase, and we saw significant growth in the use of recycled produced water by our customers, increasing recycling volumes nearly 4x versus the first quarter of last year. Basin activity and recycled water demand are supporting the continued growth of our full-cycle water management business. As mentioned in our press release yesterday, we’re excited to announce the signing of a new comprehensive full-cycle water management agreement with Chevron, which significantly expands our existing relationship. Under this long-term agreement, Aris will provide Chevron with extensive produced water handling and recycling services across a large portion of Chevron’s core acreage in the Delaware Basin, including acreage in Eddy and Lea counties in New Mexico and Culberson and Reeves counties in Texas. The agreement will also facilitate Chevron’s increased use of recycled water in their operations and will reduce their use of groundwater, improving their water sustainability footprint. The new agreement also increases our scale and further strengthens and expands our dedicated acreage position. We want to highlight that this new agreement results from our demonstrated track record of performance with Chevron and represents a meaningful endorsement of our capabilities and our team. Brenda will talk in more detail about the financial impact of this agreement. Additionally, earlier in the first quarter, we announced our expanded alliance with Texas Pacific Land Corporation. Importantly, Aris now has expanded access across Texas Pacific’s Northern Delaware surface acreage in Texas to provide a full suite of produced water services including incremental water recycling for 2 large leading customers. We also received key additional shallow interval water handling locations as well as the option to permit additional locations that will allow us to expand our system efficiently, and as needed over time alongside the growth of our customers. I would also like to provide a brief update on seismicity issues in the Permian Basin. Again, this quarter, we’ve had no material volumetric or revenue curtailment associated with seismic response area restrictions. We continue to monitor seismic impacts on the industry, and are working closely alongside regulators, academic institutions and our customers to research, pilot, adapt applicable technologies and implement long-term solutions for the beneficial reuse of produced water which, along with other solutions, may have a mitigating impact on seismicity over time. With that, I’ll turn it over to Brenda to discuss our financial results for the quarter.

Thank you, Amanda. Alongside our substantial volume growth Amanda referenced, we recorded adjusted EBITDA for the first quarter of 2022 of $35.9 million, up 54% from the first quarter of 2021, and up approximately 1% sequentially from the fourth quarter of 2021. Our adjusted operating margin was $0.42 per barrel in the first quarter of 2022, up almost 8% compared to the first quarter of last year. We continue to focus on operating efficiencies and have been able to maintain margins in an inflationary environment. We are also benefiting from higher-than-anticipated realized prices for skim oil sales given the current commodity prices. Our capital expenditures were approximately $9.8 million for the first quarter of 2022. Our capital expenditures were lower than anticipated for the quarter due to the timing of cash outflows, but we expect this to normalize in subsequent quarters through working capital associated with our planned capital expenditures. Based on our recently announced Chevron agreement and increased activity levels on our dedicated acreage, we are updating our 2022 financial outlook. We are increasing our estimate of adjusted EBITDA for 2022 to between $165 million and $175 million, and for the second quarter of 2022 to between $38 million and $40 million. We are also updating our expected capital expenditures for the year of 2022 to between $140 million and $150 million. Our increased capital spending reflects opportunities underpinned by visible growth under existing and new long-term customer contracts. Our capital spending generally results in earnings increases 6 to 9 months later, so we will see much of the benefit of our additional 2022 capital investments in 2023 and beyond. We anticipate the returns on our incremental capital to be in line with what we achieved historically. Our new Chevron agreement and increased customer activity levels provides us greater visibility into long-term earnings growth as we continue to establish ourselves as the full-cycle water infrastructure partner of choice to premier operators. We are growing rapidly while maintaining a conservative balance sheet at the low end of our long-term leverage target with ample liquidity. We ended the first quarter with approximately $68 million in cash and an undrawn and available $200 million revolving credit facility, for a total available liquidity of approximately $268 million. Our strong liquidity and specifically, our cash on hand, allows us to make strategic investments in growth opportunities like we are making with Chevron. Additionally, last Friday, we announced our second quarter 2022 dividend of $0.09 per share, continuing our commitment to returning cash to shareholders while maintaining peer-leading growth. With that, I’ll turn it over to Bill to wrap up.

Thanks, Brenda. Our team had an excellent quarter both operationally and commercially. The commodity price backdrop has provided incentives for our customers to increase their activity levels in core areas, while also maintaining their commitments to return capital to shareholders. We’re seeing accelerating activity throughout the Permian Basin and even more robust growth specifically, in our core areas of New Mexico. The Aris business and offering remains in growth mode and continues to provide both significant operating cash flow and opportunities to reinvest this cash for attractive returns under existing and new long-term contracts. Our agreement with Chevron is a great indication of that strategy. We secured a long-term full cycle agreement with a premier operator that underwrites an attractive return on incremental capital that expands our network. We will continue to invest and grow alongside existing and new customers at compelling returns, while working closely with regulators, customers and other key stakeholders to encourage reuse and pioneer beneficial reuse solutions. We will evaluate technologies and capabilities that can accelerate our efforts around water treatment and we’ll make targeted, efficient investments that could help move the industry forward. We are optimistic as we continue to hit record volumes, help the industry achieve its sustainability goals and prudently invest for additional long-term growth alongside our premier contracted operators. We are tremendously proud of our strategic alignment with Texas Pacific Land Corporation and Chevron, both of which are significant milestones and endorsements of our capabilities. This momentum reflects our demonstrated track record built for purpose infrastructure and dedicated team. With that, we will take questions.

[Operator Instructions] Our first question comes from John Mackay with Goldman Sachs.

Maybe I’ll start on the Chevron agreement. Maybe if you can just talk a little bit more about how this kind of came together? How much growth it is off your existing relationship with them? And was any of this at all assumed in the initial forecast you were laying out for us kind of late last year?

Thanks, John. We’ve been working on this contract for quite a while. This expands existing contracts that we had with them in certain areas in the Northern Delaware, which were of shorter duration. So this constitutes a significant expansion of not only the dedicated area, but our activities with Chevron because it now includes our comprehensive solution, which is both handling and reuse. So we’re extremely pleased with how this came about. And in terms of whether or not it was included in the initial forecast, the original smaller contracts were included in that forecast, but the forecast does not include the growth we expect to see coming out of these contracts in ‘23.

Maybe just on the capital side, I know we’re not going to get exact numbers, but maybe just if we look at the increase, about how much of that is kind of Chevron versus pickup in underlying activity? And is any of that just from kind of underlying cost inflation you’re seeing or not much?

It’s an interesting mix, and back to Amanda’s comment, we don’t expect to see a whole lot of incremental growth from the Chevron contract this year, so the capital is being spent in anticipation of next year. It’s the majority of the capital. We’re seeing some small cost increases, 10% to 15% across the way. So all the EBITDA increase for 2022 is really based on our existing customers, our existing business. And there’s a little bit of capital associated with that growth, but not a ton of it. Most of it really is focused on Chevron for ‘23.

John, in terms of your inflation question, a lot of that was already baked in. As we’ve indicated before, we’ve been tracking that. We have CPI in our contracts and we have been conservative in the way in which we have anticipated an inflationary pressure.

Our next question is from Praneeth Satish with Wells Fargo.

I guess, to start, can you maybe just give us a sense broadly in terms of drilling activity and appetite from producers across your footprint? I guess, mainly I’m just asking, is there any more appetite from public E&Ps to ratchet up drilling? Or is it mostly the private majors that are driving the growth?

Well, you’ll have to ask them. But for the most part, I mean, I think incrementally, we are seeing -- if the tendency was to finish earlier to wrap up, you’re going to keep that rig working a little while longer right now. So I think that is, I think Chevron has indicated a slow ramp up, and the rig count currently today doesn’t really reflect that. So I think that we’re rolling into a set of economics that are pretty compelling for operators. I don’t think that the dam is going to break loose and you’re going to see people go up 4 or 5 times, but I do see incremental increases in activity levels among some of the larger contracts, larger players on top of, clearly, the smaller players, more rapid increases.

Got it. And then as we look to 2023 CapEx, I mean, it sounds like activity could edge higher or at least more likely to go up than down. So when we look at CapEx in ‘23, do you think it will be comparable to ‘22 levels? I mean I know you have the Chevron agreement in ‘22, but as you kind of put it together just directionally, do you think it will be about the same or could it go down in ‘23?

Based on our latest forecast, I don’t think we’ll see capital go up in ‘23, more than likely it will be lower than it was in ‘22. The addition of the Chevron contract and the connection of the core infrastructure to them is more of a onetime event based on the way that contract works. So I think we’ll -- we expect to see capital begin to moderate in ‘23.

Our next question is from Don Crist with Johnson Rice.

When you’re deploying capital, are you normally looking for a 3- or 4-year payback on that capital? Or is it -- I know the assets that you’re building are very long-lived and could generate revenue for a long time, but I’m just curious as to what your business decision is on return on capital when you deploy those dollars.

I think those are general guidelines to what we target, Don. I think we’re sort of in the 2.5- to 4-year range depending on the type of capital it is and the pipeline where we’re connecting up infrastructure, maybe a little longer pay back to that particular smaller capital to [batteries]. So it’s a mixture, but I think you’ve got the right range. David, do you have anything to add to that?

No. I think that’s exactly correct.

Okay. And recycled water as a percentage of sold water for new fracs bumped up quite significantly in the first quarter compared to the fourth quarter. Was there something going on there or is it just more adoption to using recycled water versus frac?

It’s a combination -- go ahead, Amanda.

It really is a function of our customers are increasingly comfortable with: one, using recycled water; and two, that our system and the way in which we are collecting and aggregating volumes and are able to move volumes to achieve the quantity they need for these fracs. We’ve now proven we can do that. So the adoption curve had just rapidly increased, which is why you’re seeing us supply more recycled water at this time than groundwater.

Okay. And do you see that increasing materially from here? Or do you think that the mix of fresh water will always stay in that kind of 15% to 20%?

The answer is, it depends. And that’s really a function of geography and where these fracs and completions are happening. We anticipate and believe our customers are going to continue to want more recycled water if we are able to provide it. But there will always be a function of groundwater that is used for blending or if just geography means that we need a higher blend of groundwater because we cannot get the recycled water to them.

Thank you. Ladies and gentlemen, this concludes the question-and-answer session. I would like to turn the call back to Bill

Thanks, Joe. I’d like to conclude today by thanking all of our employees, customers and stakeholders for helping Aris deliver a strong start to 2022. Our valuable people, infrastructure and technology continue to both deepen our relationships with long-standing customers and drive new alliances. We’re proud of our team and our results and look forward to sharing updates on our continued growth as the year unfolds. Thank you, all, and stay safe. Have a great day.