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Greetings and welcome to the Aris Water Solutions Third Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Tuerff, Senior Vice President, Finance and Investor Relations. Thank you, sir. You may begin.

Good morning and welcome to the Aris Water Solutions third 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 everyone for joining us this morning. Before we begin, I’d like to mention that October marked the 1-year anniversary of our IPO. Looking back on the past year, I’m extremely proud of this team and what has been accomplished. Aris team continues to execute on its plans, growing our reliable, high-quality asset base and volumes being recognized as trusted water technology partner in keeping our balance sheet in great shape. Now to the third quarter, we had a strong quarter driven by a 14% increase in volumes over the previous quarter and a 47% increase over the third quarter of 2021. Our growth continues to be primarily driven by our expanding customer base as well as our expansive infrastructure, which overlays some of the premier acreage in the country where the industry has demonstrated its commitment to invest in further growth. Alongside the steady growth, we are continuing to focus on opportunities to enhance the value of our asset base by further optimizing our cost structure, offsetting recent inflationary headwinds and efficiently adding technology improvements. As we head into the end of the year, operators are balancing production targets, budgetary pressure from inflation and shareholder returns. We anticipate seeing the benefits of recent completions activity, leading to increases in our produced water volumes in the fourth quarter, but are monitoring our Water Solutions business for potential year-end slowdowns. So in conclusion for the quarter, our strong results are representative of the resilience of our business, underscored by the value of our long-term contracts, differentiated infrastructure, close customer relations and demonstrated reliability. We look forward to the rest of this year and continued success in 2023 and beyond. With that, I will turn it over to Amanda.

Thank you, Bill. Aris had a strong third quarter. We increased our total water volumes to over 1.4 million barrels per day, up 47% versus the third quarter of last year, and up 14% sequentially over the second quarter of this year. We saw significant volume growth in both produced water handling volumes, which were up 8% sequentially over the second quarter and Water Solutions volumes, which were up 27% sequentially over the second quarter. Our adjusted operating margin per barrel was $0.36 per barrel in the third quarter of 2022, down from $0.41 a barrel last quarter. While adjusted EBITDA continues to grow significantly, both sequentially and year-over-year, it is important to discuss margin dynamics. First, we have grown our water recycling business rapidly over the past couple of quarters. In addition to the 16 facilities already commissioned, we brought on 6 new permanent facilities in the third quarter. We experienced increased cost during mobilization commissioning of these new facilities, which related primarily to temporary rental equipment and third-party contract personnel. With these facilities now fully online, we do not expect onetime start-up costs to reoccur. Second, we sold a higher proportion of ground water volumes this quarter versus prior quarters. Some of the locations we provided source water to this quarter was further from our core system, which limited our ability to use as much of our own treated, produced water as we had previously. For the quarter, we sold approximately double the amount of groundwater on a daily basis than we did in the first half of the year. Sales of groundwater generally have lower margins since we do not have the benefit of down-hole operating cost savings from reusing our own produced water. Longer term, operators are demanding more recycled produced water for completions. And as we expand our system with additional permanent reuse facilities, we expect to provide a higher proportion of recycled water versus groundwater. In addition, we believe that we are still on track to meet our sustainability performance target for 2022 associated with our sustainability-linked bond. Finally, as we indicated last quarter, we are managing through this extraordinary inflationary environment, particularly as it relates to field labor costs and commodity-linked consumables such as chemicals and diesel fuel. Since the beginning of the year, chemical costs overall have increased between 10% and 20%. Contract labor rates are up about 25% per hour and diesel fuel is up more than 30% per gallon. While we believe the impact of inflation on our cost has begun to slow, the team has continued to aggressively analyze all our activities to identify where we can safely reduce costs and increase efficiencies. We have made progress on several fronts and are beginning to see the benefits of the steps we have taken to manage costs, and we expect to see more positive impact to our margins in subsequent quarters. We will also see the benefit of our CPI-linked revenue escalation clauses in our contracts as they hit annual reset dates in the first half of next year. Again, our adjusted EBITDA continues to grow both year-over-year and sequentially and as we continue to implement opportunities to increase our efficiencies to offset inflationary impacts, we do expect our margins to improve. We are also pleased to announce our strategic agreement with Chevron and ConocoPhillips to jointly focus on advancing opportunities for beneficial reuse. Together, we will identify, develop and pilot proprietary and differentiated technologies for potential applications in non-consumptive agriculture, low-emission hydrogen production and direct air capture of atmospheric CO2. Aris will lead this initiative while also leveraging the technical expertises of Chevron and ConocoPhillips. As concerns around long-term water scarcity grow, we believe that the use of treated produced water offers not only a compelling alternative to the use of groundwater and oil and gas industry, but also a new source of water for other sectors. This strategic agreement strengthens our relationships with ConocoPhillips and Chevron while recognizing the capabilities of our team as water treatment specialists and demonstrating our leadership in this field. Working alongside Chevron and ConocoPhillips brings us tremendous scale and capability to continue to advance water sustainability, both today and well into the future. We also recently announced the acquisition of proprietary treatment technologies related assets from Water Standards. The acquired assets include proven technologies that exceed EPA and other regulatory requirements for safe surface discharge of treated produced water that we believe can be replicated and scaled for use in the Permian Basin. The strategic agreement with Chevron and ConocoPhillips, the acquisition of Water Standard surface discharge technologies and the continued build-out of our technical team with the appointment of Lisa Henthorne as our new Chief Scientist, all enhance our capabilities to ensure that we’re at the forefront of helping the industry develop opportunities and technology for beneficial reuse. As we continue to look at future opportunities in water treatment, we remain primarily focused on growing our core business. Finally, I want to formally introduce everyone to Stephan Tompsett, our new CFO, who joined us in the third quarter. Steve has over 20 years of experience in the energy industry in both industry and banking roles. He has already made a big impact in the few weeks he’s been here, and we are eager for you all to get to know him. We also want to thank Brenda Schroer, who played a pivotal role in getting us through our successful IPO. Brenda will be with us an advisory capacity to support the transition to speed through year end. With that, I will turn it over to Steve to discuss the financial results for the quarter.

Thank you, Amanda. We recorded adjusted EBITDA for the third quarter of $39.3 million, up 28% from the third quarter of 2021 and up 6% sequentially from the second quarter of 2022, driven by the increase in volumes across our system. Looking forward to the fourth quarter, we currently expect adjusted EBITDA to be between $39 million and $41 million, which is within the lower end of the range of our previously provided full year guidance. As Amanda highlighted, our outlook for the fourth quarter has been impacted by inflation as well as timing impacts from our customers’ latest forecast, which indicate pushing some completions on our dedicated acreage into the first quarter of next year. There was also a recent fire at one of our large customers’ facilities, which will negatively impact volumes for the next couple of quarters. We have begun to receive forecast for 2023 activity from our customers, now in the process of incorporating those into our own outlook. We expect our customers to continue to make steady investments in our contracted acreage and believe our growth will continue into next year. Recent industry reports and initial production targets from some of our large customers indicate 15% to 25% year-over-year oil production increases in the areas in which we operate for 2023. We expect to grow alongside this increasing production and look forward to providing an update to our 2023 outlook when we provide our fourth quarter ‘22 results. Turning to capital allocation, our framework remains intact, and our balance sheet and liquidity remained strong. We invested approximately $49 million in capital expenditures for the third quarter and approximately $97 million year-to-date. We expect fourth quarter capital expenditures to total between $45 million and $53 million, consistent with our previously provided full year outlook of $140 million to $150 million. We also recently announced our fifth consecutive dividend of $0.09 a share payable on November 30. We ended the quarter with leverage at 2.4x net debt to EBITDA as compared to our target range of 2.5x to 3.5x and have no debt maturities until 2025. Liquidity remained strong with $165 million currently available under our revolving credit facility. We are utilizing our credit facility to fund a portion of our capital program in the fourth quarter, including the build-out for Chevron, as we bridge short-term working capital needs until those projects go in service early next year. Now stepping back and in the context of the rapid growth Aris has experienced, we are accelerating several initiatives to drive operational efficiencies and further system optimization and controls. For example, we are currently assessing and implementing systems to meet full SOX Compliance requirements in 2023 including auditor assurance. We are also working to improve data flow and real-time visibility into operating expenses, which can then be used to drive cost productivity and working capital improvements. Given our top line growth, we believe these efforts will benefit us significantly in 2023 and beyond to further maximize the value of our infrastructure. Finally, in connection with the 1-year anniversary of our IPO, we will be filing a primary and secondary Form S-3 shelf registration statement as a procedural matter. However, we have no plans to issue any primary securities at this time. With that, I will turn it over to Amanda to wrap up.

Thanks, Steve. Overall, we have had a strong quarter and are proud of our team’s performance. We have delivered consistent growth through market cycles, macroeconomic headwinds and certain politics and inflationary pressures. We continue to remain diligent on enhancing our operating efficiencies in tandem with our revenue growth and expect to continue to make progress on our operating costs. Like Bill, I also want to mention the first-year anniversary of our successful IPO. It has been a dynamic year for the industry, yet we are proud to say we have continued to grow quarter-over-quarter and most importantly, our team continues to deliver and is excited about the future. With that, we will take questions.

[Operator Instructions] Our first question comes from the line of Don Crist with Johnson Rice. Please proceed with your question.

Good morning everybody. How are you all this morning?

Great Don.

Amanda, I wanted to talk about the inflationary impacts of fuel and chemicals that you have been talking about for a couple of quarters now and it seems to have less of an impact this quarter. Can you remind us when the contract openers are again? If I remember correctly, they were around first of the year.

Yes. So, you are talking about the inflation CPI in our contract, the first half of the year, we will see a number of those roll over. Chevron, for example, resets in March and the majority of the other contracts throughout sort of Q1, early Q2.

Okay. And with – obviously, you are spending a lot of money this back half of this year for Chevron build-out. As we model 2023, should it be kind of a steady ramp up, or is there volumes right now that are kind of being held up for water infrastructure and we are going to see kind of like a step change next year, or is it pretty smooth next year? Can you give us any color around that?

Yes. When we did the Chevron transaction and we indicated that we were going to be spending approximately $50 million to $60 million, we also indicated that there was a lag of about six months to nine months until we would see the benefit of those volumes. So, you will see more volumes coming into the system from Chevron next year as we complete all of the hookups and the infrastructure needed.

But it should be kind of a smooth ramp-up, or is there going to be like a step change in the second quarter or something like that?

No, it’s a pretty smooth ramp-up.

Yes. There is nothing being held back due to water takeaway right now. It’s just their completion schedules through next – the first half, three quarters next year.

Okay. And just one final one for me. Obviously, you are making a big push into water reuse and the recycling bit through the hiring of a Chief Scientist and the transactions that you have done. Can you just expand on that just a little bit and tell us what’s the end goal here? And what’s the monetization potential. If we look out 3 years or 4 years, is there a monetization potential for all the things that are going on right now?

We do believe so, Don. I mean we are moving a tremendous amount of water. And as you think about sustainability in this industry, we need to find ways to use that water, and in fact, use that water not only for reuse in the industry, but to use it for purposes outside the industry. We have been pretty clear that while we are focusing on our core business, we are also looking to see what else we can use as four to four and have undertaken projects with universities. This alliance with Chevron and Conoco allows us to test technology and basically lead in examining how we can find robust, cost-effective technology to treat produced water for uses outside of the industries. ‘23 will be a year of really technology focused, identifying technologies that can in fact enable this. And we also believe that we will find technologies that we can use outside of the oil and gas industry and other verticals. So, monetization, yes, we are doing this to find those opportunities, full monetization in the categories we spoke about, non-consumptive ag, potentially hydrogen, looking at direct air capture to carbon sequestration, other things like that. But we see that having more visibility end of ‘23 when a lot of this work that we are going to be sharing with Conoco, Chevron, universities and others that we will be leading. It becomes more apparent as to what we can in fact do with this water.

I appreciate all the color. I will turn it back. Thank you.

Our next question comes from the line of Samantha Hoh with Evercore ISI. Please proceed with your question.

Hey guys. Thanks for taking my question. So, I apologize for my voice. I lost my voice in recent days. But I wanted to say on the topic of the beneficial reuse initiative. And I was just wondering if is this agreement that you are collaborating with Chevron and Conoco, is this an exclusive agreement, or I mean how do you imagine once the technology is in place, that you will be able to roll out this technology and what type of model that you will have in terms of sharing this technology that you guys are going to build?

Good morning Samantha. I am sorry, it sounds like you have got the crowd that everyone has got. So, on your question, we will be developing IP know-how throughout this process. And so if in fact, which we know we will be able to do hopefully, we are able to develop something that works and works effectively. We will be able to roll it out not only for our own activities, but also for third-parties. In terms of this being exclusive yes, we are working with them exclusively, but there are other majors and other companies who are looking to potentially participate in this JIP with the three of us. But again, we will lead the efforts and we will have the ability to take any proprietary IP know-how for use beyond just our own operations.

Okay. That’s really great. I guess the other question that I had really had to do with sort of like the jump in revenue per barrel on the water solutions side. I am kind of just surprised by how much it went up this past quarter. Could you maybe speak a little bit about that? Just the variations in like growth between the Producer Water Handling segment and water solutions, it seems like just you are seeing a lot more sequential growth on the water solutions side. And just wondering if you could talk a little bit more about that.

Yes. Samantha, good morning, this is Steve. It’s really just a function of more groundwater and pricing-related to that. So, it’s mostly just a function of mix rather than anything else.

Okay. So, that’s where that mix is coming through. How do you see pricing progressing? I mean so should – I guess assuming there is going to be less groundwater in the fourth quarter, maybe we will see that mix be – that maybe we will see the average price go down on the water solutions side for fourth quarter? Just trying to figure out the right revenue mix for the fourth quarter.

We would expect it to normalize as groundwater percentage comes back down.

Okay. Maybe I will get more help on the modeling offsite later, Steve. Thanks guys, great quarter.

Thank you.

Thanks. Hope you feel better.

Our next question comes from the line of Selman Akyol with Stifel. Please proceed with your question.

Thank you. Good morning. So, I guess just following up on water solutions, and I am thinking about the recycled water. Your volumes were up 15% sequentially, 70% overall for water solutions and you talked about adding six new facilities. So, maybe could you talk about the growth that we should expect coming in recycled volumes?

Yes. We did add six new facilities this year, and we talked a lot about the impact of those facilities, particularly in terms of the startup costs on our margins. And we will continue to see growth in our recycled water. But as we have said before, it tends to be a little bit lumpy. So, if you think about just the size of these fracs now with simultaneous fracs and multi-well pads, we see sort of that quarter-to-quarter lumpiness as things may be pushed from one quarter to another, but we will continue to see growth in our reuse activities. But we expect it to actually moderate in Q4 and then again continue to grow in Q1 into next year.

And I think the nature of the recycling assets versus the produced water takeaway assets is we don’t expect them to be built and be full 100% of the time for their life. The payoffs are very, very quickly on that capital, which means that we are going to see up and down over the lifetime of a particular reuse facility even if it’s permanent as opposed to a pipe that we are trying to get 100% utilization on all the time. So, it will be – they will move around. It’s about location and it’s about ultimate savings and return on that capital, which is very, very high, but it’s not as consistent as the produced water side.

Understood. Thank you. You also, in your opening comments, talked about monitoring for any year-end slowdowns. And I am just kind of curious if you could expand on that. Are you seeing any of that yet, or are you being told that it’s coming?

We have had – we have got visibility into our customers’ base. There is, I would say, coin tosses at this point on who is going to slow down for the holidays. If not, I think it’s going to be a function of pricing and dynamics going into both Thanksgiving and then the extended Christmas, New Year’s holiday on whether we see fracs continue or whether we get a bit of holiday. And I think it’s just too early to tell. So, we are cautiously waiting to see what happens and would rather anticipate a slowdown. If we think there is a 50% or 60% chance we see it, then not anticipate it at this point.

Got it. And then also, is there any update just on your acquisition from last quarter, how it goes? Maybe did it contribute any volumes this quarter? Are you expecting any volume contribution going into 4Q? I know the real impact is going to be felt next year, but I am just curious as to how that’s going?

The integration is going extremely well. And as we indicated, when we closed that transaction, we were really seeing the impact in 2023, very sort of limited impact now as we take these wells offline as we sort of improve them and we upgrade the capacity in some of these wells. So, it remains a great deal, but limited impact this year in terms of volumes.

Yes. And they are being – we are constructing pipe to connect them into our system as well right now currently. And so as that activity goes on, that allows them to be used much more going into next year.

Alright. Thanks very much.

[Operator Instructions] Our next question comes from the line of John Mackay with Goldman Sachs. Please proceed with your question.

Hi everyone. Good morning. Thanks for the time. I wanted to go back to margins. I mean I know we have talked through a couple of moving pieces here. I was just wondering, I mean if we are looking at the kind of transitory start-up costs versus mix shift impact versus the inflationary impact. Are you guys able to just maybe quantify for us what some of those moving pieces are, particularly some of those that might be rolling off as we look into fourth quarter and beyond?

If we look at the costs that are rolling off, let’s focus for a second on what we refer to as those start-up costs, which were very real. We brought on six facilities in reuse. And we underestimated what that was going to take as we sort of scramble to meet custom demand. And remember, we just had a great third quarter. And if you look at those volumes in terms of our reuse volumes being up, 27% or source volumes being up 27% from Q2. So, those sort of one-time start-up costs related to third-party contractors, we couldn’t hire fast enough, rentals, to get ready. And we also had certain issues such as a pond that had hailed damage and we had to realign it. So, all of those came together with sort of power, etcetera, to just to say between $0.02 and $0.04 impact. So, we expect in large part for those sort of one-time costs to go away and we are working very rapidly to ensure that all rentals are given up and that we move forward. We also have some water purchases to make sure we work and that was the mix to make sure we were able to provide for our customers. So, those sort of go away sort of going forward in terms of inflation, this is where we are very focused when we talk about these efficiencies to ensure that if some of this inflation is going to be sort of a systematic change and sort of here to stay, that we focus on automation and chemical dosing. Labor, we have done a lot with labor, produced water side. We really haven’t increased labor because of automation. And then if we also look at what we have done, so not only are we reducing our commodity linked sort of items like chemicals, but we are also hedged on power in Texas. And what’s happened there is we have brought on 11 facilities. Those facilities are in Texas. So, we are seeing and we will see in Q4, the benefit of the mix of shallow wells in Texas, which will bring down even further our power costs and we expect to sort of see that benefit of between 10% and 20% on power in our operating costs on the well side. So, some of this is one-time. Some of this has continued to just chip away at inflation and clearly identify what we need to be doing to just be more efficient in all of our operations. I said a lot, John, so I hope at least some of this has answered your question.

That was great. That was very helpful. Thank you for that. Maybe just as a follow-up, I mean if we are looking at third quarter, where the water sales volumes are really strong, we look at kind of how you guys have trended over the last year. Congrats on the 1-year anniversary, by the way. If we look at just kind of how those two have trended, the completion side has grown a lot more than the produced water side. Can we – are these the same customers that you guys are serving on both sides, and we would maybe start to see a pickup on the produced side from some of this completion activity maybe more broadly, just how those two volume lines should trend versus each other maybe through ‘23 and going forward?

Yes. On the completion side, we are largely working with our existing customers, although we obviously work with some where we don’t have dedications or take away on the produced water side. And as you see these completions – moving through those completions, you will see the produced water side be impacted as more volumes sort of come online. As Bill said, the produced water side is sort of more predictable, more visibility, more steady on the completion side. We do see a little more lumpiness Q3, Q4 and going into Q1.

But to your – getting to your specific question, I think we will – most of that has been going to our customers, so we will get that water back on the produced water side.

Correct.

Alright. That’s great. Appreciate the time today.

Thanks John.

We have reached the end of the question-and-answer session. Mrs. Brock, I would now like to turn the floor back over to you for closing comments.

Thank you. At this time, we just want to thank everybody on the call for calling in and listening. We want to thank our customers, all of our employees for all of the work they did this quarter and before. And we just look forward to coming back in Q4 and talking to you all again. Thank you.