ARIS - NYSE

Good morning, and welcome to the Aris Water Solutions First Quarter 2024 Earnings Conference Call. I am joined today by our President and CEO, Amanda Brock, our Founder and Executive Chairman, Bill

[Operator Instructions] The first question comes from the line of John Mackay with Goldman Sachs.

Maybe we'll start on the margin side, if you don't mind. You guys have made a lot of progress and kind of working through some of those OpEx issues. Maybe just can you break down for us, if you're backing out the $4 million of incremental gains this quarter? Just what underlying margin strength looked like? And then how we should think about that moving from here?

Thanks, John. Yes, happy to do that. As we've sort of discussed before and as we've talked about, we saw a high point of margins this quarter at the $0.46. We also have indicated that we saw a pull forward of about $4 million. So when you normalize that, we think this quarter was still an all-time high at about $0.43, which is what we've also guided to in Q2. But Steve, why don't you go ahead and break that down in terms of what we saw with increased flow backs and how we account for that $4 million pull forward.

We had some maintenance items push into Q2.

Yes, it's true. We had about $2 million of R&M expense related to wealth and maintenance that's going to go into Q2.

And that was just more of a timing issue. So as we look forward, we're very pleased with the progress that we've made. We guide $0.43. That is a high. And so overall, we think is sustainable, and we continue to look at our operations, how we are running our operations to find additional efficiencies which we still see opportunities, but they won't be sort of some of the big strides forward that we were able to take in '23 in this quarter.

Great question. Steve, why don't you go ahead and sort of talk about the deliberations on this one?

And John, to your question on how we're going to grow the business, considering how we look at the dividend in the future, it's organic and inorganic. We have great organic opportunities. We continue to pursue opportunities in our area. We've got great infrastructure, great customers. It's core of the Permian Basin. I think on the inorganic side, Bill, would you like to...

Next question comes from the line of Spiro Dounis with Citi.

Spiro, certainly, on M&A, we've talked about it consistently that this is something we would like to do under the right circumstances, if it's accretive I mean it strategically helps us expand our footprint and we can do more with the assets. But why don't you sort of talk about the landscape right now.

And on the commercial side Spiro, we continue to have great relationships with our customers, getting repeat business from them as they expand their footprint. So we do see continued growth in the basin. And of course, the basin that we're in, the Northern Delaware is, in many respects, the growth engine of the Permian. So in terms of future market share, we are very deliberate. We are seeing high return projects. We have an exceptional BD commercial team, and I expect us to continue to grow our market share.

Great. Second question, Amanda, maybe just want to touch on some of these reuse initiatives. You all seem to be leaning in more here with this latest print. One, you mentioned the sort of mineral extraction and then also this hydrogen pilot. It sounds early stages in both cases. But curious, can you just give us a sense of what these projects look like over time and maybe some milestones we should be able to look out for?

Next question comes from the line of Wade Suki, with Capital One.

I think most of them have been answered at this point, but just taking a step back, I'm wondering how do you think about the durability, sustainability or maybe as you put it, the visibility into the longer term kind of revenue, cash flow of the business, kind of given the profile contracting customers, geography, all that kind of stuff that underpin the business today. How do you think about that on a longer-term basis?

Fantastic. And if I could just dovetail on a couple of the questions before, thinking about capital allocation, free cash flow, et cetera. I just want to make sure I'm kind of reading the few inch right here or at least analyzing things within the ballpark. Free cash, obviously, excellent performance in the first quarter. If I'm looking at the second half of the year, could I think about kind of a similar cadence per quarter before dividends, after dividends? Is that reasonable to think about?

Well, when you look at the free cash flow quarter-to-quarter, of course, we are looking at this on more of a long-term basis. So you're always going to have some noise from working capital and timing of capital projects. So we sort of look through cycles as we think about cash flow and shareholder return growth. So it's not going to be necessarily quarterly dividend increases. We'll look on more of an annual basis. And there will be timing considerations just from a free cash flow standpoint.

Next question comes from the line of Jeremy Tonet with JPMorgan Chase & Co.

This is Noah Katz on for Jeremy. First, I wanted to touch on your line of sight into your customer needs and performance. I think you've previously said you receive a 6-month notice from customers. So if you could touch on any upside to volumes you're seeing in the second half of 2024 and what gives you guys confidence in providing your 2Q guidance?

Thanks, Noah. Yes, we do under our contracts have to get a 6-month notice. But we are talking to our customers constantly. And while that is a contractual provision, we do have visibility into more than 6 months longer dated. We know where they are. We run our own forecast. We talk to them every day. The commercial team is very embedded. It's a very sticky relationship. So we do have great visibility. And we do see total volumes trending into a ramp by the end of the year. So it does give us confidence. And I think we signaled that by the dividend increase. But we do see volumes ramping at the end of the year. But it's pretty steady.

That's great. And as a follow-up, I know you guys reduced leverage again this quarter to the 2.15x mark from 2.4x in previously. With the reduced leverage and the dividend raise this quarter, can you speak to how repurchases stack up with your capital allocation priorities?

Go ahead.

Next question comes from the line of Praneeth Satish with Wells Fargo.

Got it. No, that's helpful. And then when I look at the guidance for Q2, it seems like it implies a sequential decline here in produced water volumes between Q1 and Q2. Can you help explain what's driving that? I mean I know you mentioned that you pulled forward some produced water volumes from Q2 into Q1. But I would imagine that, that would continue into Q2. So I'm just trying to understand that decline there.

Some of that Praneeth, is the pull forward with 20 well pads flowbacks and that flowback is sort of your highest volume of water. So that decline is actually sharper as you -- as time goes on. So that does have an impact, which is why we're sort of guiding lower in Q2. Obviously, we're going to do everything we can as we always do to reverse that. But a lot of this is just a function of what our customers are doing and what we're seeing in terms of either steady-state production or flow backs.

Next question comes from the line of Sean Mitchell with Daniel Energy Partners.

Amanda, congrats on the quarter. Quickly, just skim oil recoveries were up significantly. I'm kind of not very smart on this, but what drove that? And like it looks like you have that coming back down in Q2? And how impactful is that from a profitability standpoint, in terms of your outperformance for the quarter?

So Sean, good to hear from you, NGS, skim oil was a surprise in Q1 in the early part of that quarter. There were some flowbacks in a particular area, and there was some outside production of skim oil. The operator then made some changes and that skim oil declined. So how much should we get is always just a function of what our customers are doing. So we do guide over the year, but we do have some lumpiness depending on activity area, whether it's recycled and whether it's sort of flow back.

Got it. Okay. And then maybe remind us and any color you can provide around your inflation escalators on your long-term contracts. Obviously, that's very impressive. Can you give us any color around the inflation escalator?

Happy to do that, David, why don't you go ahead and explain how they come in at different times during the year?

Sure. They usually reset annually depending on the signature date of the contract. Some of our larger ones occur in the middle of the year, and then we have a couple at the beginning of the year, as Steve referenced earlier.

Ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to Amanda Brock for closing comments.

Thank you. As you saw and have heard, we had a great first quarter. We're continuing to work very hard. And with that, I want to again emphasize that last year and this quarter would not be possible without an amazing dedicated team and customers who've supported us and have confidence in our ability to perform. So thank you all. We look forward to updating you next quarter, and thank you for participating this morning.