Aris Water Solutions, Inc. [ARIS] Conference call transcript for 2022 q4
2023-03-07 13:39:04
Fiscal: 2022 q4
Operator Greetings, and welcome to the Aris Water Solutions fourth quarter 2022 earnings 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, Finance and Investor Relations for Aris Water Solutions. Thank you. You may begin.David Tuerff Good morning, and welcome to the Aris Water Solutions fourth quarter 2022 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 in 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 in the appendix of today’s companying presentation.I’ll now turn the call over to our Founder and Executive Chairman, Bill Zartler.Bill Zartler Thank you, David, and thanks, everyone, for joining us this morning. 2022 marked another year of tremendous progress for the company. We grew both volume and adjusted EBITDA for the year by more than 20% over 2021. We continue to expand our footprint backed by long-term contracts with premier operators in the core of the Permian Basin. Over the course of last year, the company further established itself as a leader in water infrastructure solutions, as evidenced by our strategic comprehensive water management agreement with Chevron, and our collaborative beneficial reuse efforts alongside ConocoPhillips, ExxonMobil, and Chevron. I'm excited to continue this momentum in 2023 and well beyond. Looking at the market for ’23, we see steady growth from our largest customers, though, as several have communicated publicly, slower growth than forecasted six months ago. As our system expands and covers more ground, we also see additional contracting opportunities with our current and other operators. Capital discipline and shareholder returns remain the core priority for both us and our customers, and no one has been immune to inflationary pressure on operating and capital budgets. For us, that means steady volume growth alongside customers who have extended inventory runway in top tier dedicated acreage, which we are connected to and is reflected in our CapEx for 2023. We also believe that we are at the forefront of solutions for the beneficial reuse of produced water. We began by recycling produced water for the oil and gas industry's own water-intensive operations, and believe we can continue to expand our services into other industrial uses. Amanda will elaborate further on our position and efforts in this sector. We also believe we are positioned to be a natural consolidator of the fragmented, private and operator-owned oil field water infrastructure industry and adjacent opportunities treating complex water for other verticals outside of the oil and gas industry. We have a proven track record, public equity currency, flexible balance sheet, and a platform that can be efficiently scaled through M&A. In 2022, we evaluated several transactions, but none other than our acquisition of Delaware Energy's assets, met our key cash flow and earnings accretion targets. We see future opportunities for consolidation, and remain focused on strategic fit, complementary capabilities, and financial discipline. While we're excited about our ample growth opportunities this year, we remain primarily focused on realizing further operational efficiencies. With our asset footprint, blue chip customers, and unparalleled team, I'm excited for Aris’s growth in 2023 and beyond. With that, I'll turn it over to Amanda.Amanda Brock Thank you, Bill. Our business delivered significant growth in 2022, with full year volumes at 36% and adjusted EBITDA up 24% year-over-year. But as we previously announced, the fourth quarter fell short of our expectations, and we have not yet realized the full earnings potential of our infrastructure. We were impacted more than we anticipated by continued high cost inflation, severe weather, and changes in customer activity, as well as lower skim oil revenue. Some of these factors were beyond our control, but we are taking steps to continue to address what is within our control. We've began to mitigate the impact of inflation on controllable expenses in the fourth quarter, making sequential progress in our adjusted operating margin of one penny a barrel versus the third quarter. However, we did not make progress on costs as quickly as we had wanted. For our core produced water business, we saw downhole disposal operating costs stabilize in the fourth quarter, as we focused on controllable costs. However, we also saw the impact of lower skim oil revenue on operating margins due to lower skim recoveries and lower oil price in the fourth quarter. We have made improvements in how we capture skim oil and have now seen increases in oil recovered. In our water recycling and sorting business, we continue to be challenged by elevated costs, particularly power, equipment rental, and pumping costs in areas where we do not have permanent power and are using diesel generators and renting pumps. We have projects underway to reduce these expenses. To provide some context, we grew our recycled produced water volumes by nearly two and a half times versus 2021, and significantly increased the number of active facilities, and it has taken time to adjust the way we operate and move water for a more complex network. We have three fundamental challenges impacting our sourcing margins. The first is related to industry supply challenges and extended lead times for key components for our newer reuse facilities. We are renting equipment in the interim, leading to higher operating expenses. We expect these components such as rental pumps and tankage to be replaced by permanent capital equipment over the course of 2023, reducing operating costs by approximately $3.2 million on an annualized basis. Second, we are waiting on public utilities to connect our newer reuse facilities to line power. Prior to making these line power connections, we've had to incur rental and diesel fuel costs for temporary generators. We anticipate these connections should be made over the course of 2023, reducing operating costs by approximately $4.4 million on an annualized basis once complete. Finally, we've seen lower inlet quality water in some of our newer operating areas, particularly in Lee County, which has resulted in increased costs related to higher levels of chemical treatment needed to achieve specifications required under our contracts. We are implementing improvements to our chemical dosing systems, working with our customers on the quality of water they're sending us, and how to manage water quality more cost effectively. In addition to focusing on our controlled expenses, we are also implementing projects to become more capital efficient. As we look at our expansion program for disposal wells, we have recently redesigned our facility configurations and expect to save approximately $2.5 million per disposal well on average, and see incremental operating cost savings. As we connect to new customer locations, we are also increasing the size of our trunk lines to provide additional capacity in future years. Turning to our outlook for this year, lower fourth quarter completion activity on our acreage slowed our volume growth in early 2023, but we are already beginning to see produced water volumes ramp in the past several weeks. While we are seeing produced water volumes flat to slightly down in the first quarter of 2023 versus the fourth quarter of 2022, we anticipate growing produced water volumes 15% to 20% overall in 2023. In contrast, while produced water volumes are growing, we anticipate incrementally lower completion schedules from some of our larger customers, consistent with recent provisions to their production forecast for the Permian. This lower level of completion activity is expected to reduce the amount of our produced water which is recycled, which will in turn impact us in three ways. First, we will see low and total margins in our water sourcing due to reduced customer activity. Second, because we are not recycling as much, we will dispose of more volumes downhole, incurring additional operating expenses. Third, with reduced recycling, less disposal capacity has opened up, and we are not able to take as much higher margin interruptible volumes because our available disposal capacity is required for our contracted volumes. Now, turning to Delaware Energy, while we have now connected the primary disposal well to our system, upgrade to the assets we acquired are currently behind schedule due to supply chain issues related to the procurement of tubing. These delays are impacting our performance in the first half of the year, with volumes approximately 35% below where we had anticipated. We expect our upgrade and full integration to be completed by the second quarter, and should see an increased and sustained volume as this work wraps up. We believe annualized EBITDA will still be in line with our original expectation of $11 million to $13 million per year for the second half of the year. While substantial efforts are underway to maximize returns in our core produced water handling and recycling business, we are very encouraged by the progress we are making, leading collaborative industry efforts on beneficial reuse of produced water. We're excited to announce that ExxonMobil has joined our previously announced strategic agreement with Chevron and ConocoPhillips, to pilot and implement technologies to treat produced water for beneficial reuse. We are now in the execution phase, and expect to have the primary pilots associated with this program completed by Q1 2024. In the interim, we are actively looking at opportunities to commercialize the beneficial reuse of treated produced water in verticals outside of oil and gas. Additionally, last month we announced, the US Department of Energy, and the National Alliance for Water Innovation, selected Aris’s pilot as the only known project focused on the treatment of produced water using desalination technologies to receive a federal funding grant. We also recently completed a six-month agricultural study with Texas A&M, which successfully used treated produced water for irrigation of cotton and ryegrass. We are excited to share that this project also quantified and confirmed the significant potential for carbon sequestration in ryegrass, cotton, and their associated roots. We are now beginning to evaluate how we can partner with other stakeholders to develop full-scale projects in this area. In addition, we recognize that raw produced water contains various concentrations of minerals such as lithium and bromine and other inorganic compounds such as ammonia that may have commercial value, and are exploring and assessing the feasibility of various extractive technologies. On the sustainability front, we are also pleased to announce that we successfully exceeded the 2022 sustainability performance target of our sustainability linked notes. Our recycled produced water exceeded 70% of total water volume sold versus our sustainability target of 60%. In conclusion, while the fundamentals of our produced water business remain strong, we recognize we have more work to do in managing our reuse costs. The Aris team remains focused on optimization of our operating costs, capital efficiency, and selectively pursuing additional growth opportunities where we feel we can invest capital at attractive returns. With that, I’ll turn it over to Steve to discuss our financial results and financial outlook for 2023.Stephan Tompsett Thank you, Amanda. We recorded adjusted EBITDA for the fourth quarter of $36.1 million, up 1% from the fourth quarter of 2021, but down 9% sequentially from the third quarter of 2022. The sequential decline was largely due to the volumetric miss and operating cost pressures we previously communicated. We were also negatively impacted by lower skim volumes and lower realized skim pricing by approximately $1.6 million as compared to the third quarter of 2022. For capital, we invested approximately $147 million during the year, in line with expectations and guidance. Looking forward to 2023, for produced water, volumes, as expected, have begun the year slightly down, and should average 925,000 to 935,000 barrels per day for the first quarter, and we expect year-over-year volumes to average 1.01 million to 1.04 million barrels per day. Our forecast assumes higher margin spot volumes, or a lower percentage of our overall volumes relative to 2022. As a result, lower recycled volumes that we will look to capture short-term opportunities that geography and contracted customer activity allows, which could drive this number higher. As we evaluate our results sequentially in the first quarter of 2023 versus the fourth quarter of last year, it's worth bearing in mind that there are two fewer days in the first quarter relative to the fourth, which impacts us by approximately $800,000. For 2023 revenue, produced water rates are expected to increase approximately $0.02 to $0.04 per barrel on average, excluding the impact of skim pricing due to contract mix and CPI escalators in our contracts, which go into effect over the first half of the year. We expect adjusted operating margin for produced water, excluding skim, to be relatively flat year-over-year as these revenue increases will offset approximately $2.5 million of additional well maintenance expense, which is planned to take place throughout the year. We see potential upside for margins to improve above these levels if we are able to increase our rate of recycling relative to our forecast or accelerate some of our cost savings initiatives. For skim oil, we have made some operational adjustments to address the shortfall we experienced in the fourth quarter, and forecast recoveries of approximately 0.09% of produced water volumes for the year, as compared to 0.08% in the fourth quarter. While overall skim oil volumes are expected to increase year-over-year, revenue from skim is forecasted to be down, as we assume an average realized price of approximately $68 per barrel as compared to $86 per barrel in 2022. It is worth noting that relative to our outlook of 0.01% increase in annual skim recoveries, equates to approximately $2 million of EBITDA, and a $1 per barrel change in annual skim pricing impacts EBITDA by approximately $325,000. For the water solutions business, our expectations are for slightly lower completion activity from our customers in 2023, resulting in volumes of 360,000 to 370,000 barrels of water per day for the first quarter, and 375,000 to 395,000 barrels of water per day for the year. We believe revenue for reuse water and groundwater will grow $0.02 to $0.05 per barrel on average in 2023. We should offset some of the increase in operating expenses, which continue from the second half of 2022. We have several initiatives underway to drive improvements, as Amanda mentioned, but our outlook assumes reuse and sourcing total adjusted operating margin will be down approximately 5% to 10% year-over-year. Our outlook also assumes we recycle approximately 20% of all produced water inlet barrels. So, to the extent we increase that rate, we can see additional margin, as a 1% change in our recycle rate equates to approximately $1 million of EBITDA, including downhole OpEx savings. So, taken together, we're forecasting $33 million to $35 million adjusted EBITDA for the first quarter, and $150 million to $170 million of adjusted EBITDA for the full year. This outlook reflects the strength in our core produced water handling volumes, which continue to exhibit consistent growth, offset by the impacts of inflation, lower skim pricing, and lower rates of recycling.Turning to capital, for 2023, we forecast $110 million to $120 million in growth capital, which is weighted towards the first half of the year. This capital is primarily related to existing contracts, and includes required connections to new well pads, expansions of key sections of trunk lines, and six new disposal wells. We also plan to spend $16 million to $18 million for high return non-recurring system optimization investments to drive the operating margin improvements previously mentioned, as well as approximately $3 million to $4 million for one-time capital associated with new accounting software implementation, SOX compliance, and office space. We also have $11 million to $13 million for maintenance capital to ensure asset integrity and system availability. Taken together, capital expenditures are forecasted to be between $140 million and $155 million for the full year, including $45 million to $55 million in the first quarter, excluding the impacts of working capital. Our growth capital spending generally has a six-to-nine-month lag between investment and revenue. So, we have good visibility to growing produced water volumes and realizing the benefit of our capital program in the second half of 2023 and early 2024, as additional wells are connected, and our system optimization investments deliver anticipated operating cost reductions.Looking at our balance sheet and credit profile, we ended the year with a debt to adjusted EBITDA ratio of 3.0 at the midpoint of our target range, and have no debt maturities until 2025. In the fourth quarter, we utilized a portion of our revolver to fund working capital and growth CapEx, and have approximately $150 million available under our credit facility as of today. Finally, we recently announced our sixth consecutive dividend of $0.09 per share, which will be paid on March 29th to shareholders of record as of March 17th. With that, I'll turn it over to Amanda to wrap up.Amanda Brock Thanks, Steve. While the fourth quarter fell short of our expectations, we're proud of the team's performance across 2022. We have continued to grow. We provided safe, reliable service to premier operators. We exceeded our sustainability goals. We led collaborative industry efforts to further beneficial reuse. We managed through our unprecedented inflationary pressures. We are highly focused on operational improvements and continue to work towards improving our operating margins, both through cost reduction initiatives and pricing increases. We expect our adjusted EBITDA to increase significantly in the back half of 2023 as we realize the benefit of our cost optimization efforts, the full impact of the Delaware Energy acquisition, and CPI-linked escalation in our revenue rates. We also see continued growth into 2023 and beyond with existing customers and through additional business development efforts. While Aris has been a growth company since inception, we will remain selective as we evaluate new growth opportunities and work towards becoming free cash flow positive. With that, we will take questions.Question-and-Answer Session Operator [Operator Instructions] Our first question comes from the line of John Mackay with Goldman Sachs. Please proceed with your question.John Mackay Hey, good morning. Thanks for the time. I appreciate all the new detail on some of the specific OpEx savings that you're kind of working through. I'm just trying to think from your perspective now looking at it, we've been talking about some of these margin headwinds for a couple of quarters now. Just wondering if you could spend a little more time talking kind of the milestones we should be watching for to - for you guys to actually start to hit some of these margin improvements that we're waiting for from here and maybe if you could just comment overall kind of how comfortable you are on the guide right now. Thanks.Amanda Brock Thank you, John. Appreciate your question. We'll have Steve take you through the list. We have been committed to sharing more details so you are able to track our progress.Stephan Tompsett All right. Thank you, Amanda, and good morning, John. I think if you look across the year, what you heard Amanda speak to in regards to some of the rental equipment and electrical, we think that's all going to be addressed in the first half of this year. So, we really think that in the second half of the year, you're going to see that improvement in operating margin. In sum, it’s about a penny and a half per barrel across all volumes. So, we should see improvement across the second half of the year relative to the first. Likewise, with Delaware Energy, we should have all that work done by the second quarter. So, we'll see a step up in Delaware Energy volumes and resulting units as well. I think the other piece of this, from a revenue standpoint on CPI, we have different contracts coming in January, April, and July. And so, by July, we'll have the benefit of all the CPI escalators. So, that's really where we're going to see a differentiation between first half and second half.Amanda Brock John, the other thing that we're going to see, and we are tracking is obviously power. When we IPOed, we were working on getting power to all of our SWDs, and we were able to be successful. At this point, we've got over 18 booster pumps out in the field, moving water, both for produced water disposal, as well as related to our reuse. Working with Exxon, a little bit out of our control, but we are now on the schedule. That schedule may slip slightly, but we are able to work throughout the first half to get connected to line power. So, we will be able to report back what we've actually connected. And as we've explained, that impact of just getting that line power connected is approximately $4.4 million. So, it is meaningful, and we are pushing them as hard as we can.John Mackay Okay. Appreciate that. Looking forward to kind of seeing that unfold this year. Maybe just as a follow-up, on the completions outlook, just curious if you could spend a little more time walking through that one as well. How much of that is - is it kind of leaning on one customer slowing down more than others? Is it more of a kind of impact of seeing kind of higher interruptible volumes in ‘22? So, kind of the year-over-year moderation and activity isn't actually as high as it could be. And then maybe last, just lower completions this year, what does that mean for ‘24 potentially?Amanda Brock So, we have guided that we expect our completion outlook to be lower, and you're right, that doesn't turn impact interruptible volumes because when we do recycle, we open up capacity to bring interruptible volumes. I think in terms of leaning on our customers, it's really understanding their forecasts, and we have very large customers, and we are impacted by one large customer in particular that has reduced their forecast and outlook. But again, this is a short cycle business. So, we may see changes as the year progresses, but what we are sharing at this point is our best estimation of where the forecast is right now. It is a function of geography. So, it is a function of where customers are moving their frac crews, and we are continuing to just stay on top of that, but some of this is out of our control.John Mackay All right, understood. Thank you for the time today. Appreciate it.Operator Thank you. Our next question comes from the line of Spiro Dounis with Citi. Please proceed with your question.Spiro Dounis Thanks, operator. Morning, everybody. Amanda, you mentioned in your closing remarks just around being a little bit more selective around growth going forward. And I think the release also pointed to maybe a path towards being free cash flow positive. Curious if you’d just expand on those remarks a little bit, and if that's a sort of a slight shift and maybe being more discerning about growth projects than you have been in the past. And when it does come to the free cash flow outlook and getting to that positive point, you guys talked about this in a lot of different ways on the call so far, but it sounds like ‘23 exit rates should be much stronger than current levels. Also sounds like we could see a sort of meaningful drop off in CapEx after some of these one-off items occur sort of later in ‘23. So, is it sort of crazy to think that ‘24 could be that inflection point on cash flow, or is it still a little bit further out than that?Amanda Brock Great question. Something we talk about an awful lot. So, you're right. We do see the exit rate at the end of this year. I mean, Q4 to Q4, we see 26% increase in produced water volume. So, our core business and our volume story, continues to be just very strong. We sort of see exiting again in accordance with our current forecast of sort of over $180 million in EBITDA. Selective growth, I mean, this is really a function as a midstream company where you've got fixed rates and where you have some CPI, and you know in our case, some of our CPI escalated the caps. We are going to become more discerning. Nobody anticipated inflation, but we have now seen the impact inflation can have on margin degradation. So, the projects we want to be looking at are going to have to really achieve a certain return threshold and really be additive to our system. So, we are going to be a little more selective, as you said. In terms of free cash flow, again, we understand the importance of this. We do see CapEx coming down. Growth CapEx came down this year by about $25 million. We do see some of the projects that we are doing this year impact EBITDA in ‘24. There's always that delay. We believe that CapEx will be down next year. And in terms of free cash flow, on the basis of our current outlook, current forecast, looking at the operating margin improvements and efficiencies that we expect to achieve, we do at this point see that early 2024 should be that infection point.Spiro Dounis Wow, great. Okay. That's great color. Thanks for that, Amanda. Second question, just wanted to touch on M&A as well. Came up in in some of those prepared remarks. You mentioned that you've all been sort of evaluating several targets last year, but none quite hit that hurdle rate. Curious how you'd characterize the M&A market now. Has it softened a bit where maybe you can get more alignment on price? Just curious how you're thinking about that today.Amanda Brock So, again, very disciplined. We talked about that last year. We would've liked to have done a deal last year, but it wasn't for the lack of opportunity. It was for the product and the price did not sort of achieve what we wanted. But I'm going to have Bill address that in terms of this year because it is a strong pipeline.Bill Zartler Well, I mean, I think that the integration and consolidation of the upstream industry has led the efforts across, whether it's midstream or services, and the realization between private and public markets in terms of what these assets and businesses are worth, I think is beginning to get more apparent. And I think that to the extent opportunities reveal themselves, the recognition of where valuations ought to be now where everyone may have expected these things to be over the last several years, but where the market says they're worth today, and hopefully there's some consolidation opportunities and having a public currency which allows sellers to continue to achieve upside in the public stocks as the market valuations rebound over time, is more than likely what we see happening in the midstream space.Spiro Dounis Got it. That’s great color. Thank you, everyone.Operator Thank you. Our next question comes from the line of Samantha Hoh with Evercore ISI. please proceed with your question.Samantha Hoh Hey, guys. Thanks for taking my question. I was wondering, maybe we can just stay on the M&A topics for just a little bit. Are you guys still going to focus on like midstream targets? Or not midstream, I'm sorry, Permian targets. Any sort of information you can share in terms of how you're thinking about like maybe by geography or customer mix in terms of how you're targeting potential M&A opportunities and how you might fund that transaction?Amanda Brock Sure, Samantha, and good to hear from you. So, we've been, again, pretty consistent that if you are in this space, the Permian is a great place to be. We certainly have looked and will continue to look at other basins where fundamentals may support the type of growth and returns we want to see. So, it is - geography is very important in our analysis, but we're not only looking sort of at the midstream space. As we sort of explained before, we will look at sort of some of the adjacencies in sort of water treatment, which may not be geography-specific, but as it relates to our core business, we look for things that are accretive, that strategically makes sense with our system where we can potentially use underutilized capacity of the targets, and where we can potentially bring in more reuse opportunity and more effectively utilize the volumes across the systems.Samantha Hoh Okay. And then a segue to the beneficial reuse initiative. I was just wondering if the pilot, the field pilot that you guys are planning on rolling out in the first quarter of next year, and can you maybe talk about it in terms of the size of that pilot? Is that going to be sort of like a small scale field trial, and then you have to go back into the engineering room and really try to scale that up over time?Amanda Brock Great question, Samantha. It actually is a series of pilots. We have set it aside at our (Spanos) SWD. And working with Chevron, with Exxon, with Conoco, is just an amazing lineup of talent and capabilities and sharing all of those costs with them. We will be piloting a series of different technologies at scale. So, all of these technologies have either been tested out in the field before, or with some of the more promising ones, it's coming off some bench testing, but we will be looking at different technologies throughout this entire year and early next year for the ability to scale up robust lower costs, and then taking into consideration the geography we're in to make sure that they are energy efficient, et cetera. So, series of pilots, and after these pilots, we will then determine which technologies we wish to use for pre-treatment, for treatment, for polishing post-treatment, because remember, what we are trying to do is lower cost of recycling and treating produced water for different applications. So, if you're doing it for hydrogen, you've got to get very clean water. What we've proven with this agricultural program is, you don't have to have as clean as you'd have to do for hydrogen. So, complex, happy to talk about it in more detail because you know I can talk about it forever, and very, very encouraged by what we are seeing, and working at the same time this year with ag, with industry, to find ways to commercialize this, because we've got this huge feedstock of water that once we know how to cost effectively treat it, this feedstock can be used by multiple industries for different applications.Samantha Hoh Just to piggyback on that, is that being expense out of G&A right now, or is there some component of growth CapEx going into this initiative?Stephan Tompsett Yes, that's a good question. What we've done in our financial statements is, we've broken this out into R&D. so, it's a separate line item. So, you have that visibility into it. So, it doesn't flow through CapEx, and you'll see through these partnerships we've established, the capital burden on the company is fairly low.Amanda Brock And Sam, I would challenge just anybody to achieve what we've achieved on the budget we've achieved it, and we'll continue to work this year. And we have now the benefit of significant cost-sharing by these strong partners who are also funding independent grants. But now, we grant that we receive - we’ll not only be funded by the DOE, but Exxon is also funding a portion of that grant, and that grant's going to really sort of focus on diesel, we've got others where we'll be focusing on brine and looking at extractive technologies to see whether or not they're commercially viable.Samantha Hoh That's great. Best of luck to you, guys.Operator Thank you. [Operator instructions]. Our next question comes from the line of Praneeth Satish with Wells Fargo. Please proceed with your question.Praneeth Satish Thanks. Good morning. I just wanted to go back to the guidance for produced water volumes. I think you're projecting 17% growth at the midpoint. I guess I'm trying to determine how much of this growth is tied to existing customers and their drilling plans versus potentially adding new customers and gaining market share. Is there any way to kind of break that out?Stephan Tompsett Yes. I would say the overall majority of this is for existing customers and existing contracts. So, we have pretty good confidence in the forecast based on the information we have from our producers today. So, it's not predicated upon new business development opportunities.Praneeth Satish Okay, great.Amanda Brock Praneeth, in terms of additional markets, share and gaining market share, you know that we have a very robust business development effort. So, we are constantly expanding, working with customers, with tuck-in. So, that will continue, but that is not what is really reflected in these growth numbers. And I think in the earnings presentation, we really talk about the fact that 87 - well, in ‘22, 87% of our produced water handling volumes were under these long-term fee-based contracts, and we expect to see that trend this year.Praneeth Satish Okay, got it. And then I was wondering if you could just maybe give us an update on your capital return philosophy. I think originally there was an intent to kind of grow the dividend in step with cash flow growth, and I'm just wondering if that's still the case.Stephan Tompsett Yes. I think as we look forward, from a project return standpoint, we continue to achieve attractive returns on the project level. Certainly, has been impacted by capital and operating inflation costs, but we think the volume ramp and the free cashflow that Amanda alluded to earlier, is going to put us in a position next year that we'll be able to recommend to the board dividend increases - well, once we achieve the free flow positive status. So, I think that's something that's certainly on our radar, something we'd like to deliver shareholders, and then we intend to.Praneeth Satish Got it. Thank you.Operator Thank you. Our next question comes from line of Selman Akyol with Stifel. Please proceed with your question.Selman Akyol Thank you. Good morning. Just a couple quick ones. Just going back to Delaware Energy Services, you talked pretty confidently about achieving integration, I guess, in the second quarter. Maybe you could elaborate on that a little bit, exactly why you're so confident in that. Have you got everything that you needed in order to do it now? Is it just a function of hooking up? Any additional color there would be helpful. And I guess then the second question for me is just in terms of interruptible volumes, could you just remind us, I guess, maybe the profitability difference between interruptible, and then as well as maybe what's assumed for - or what's embedded in guidance for that?Amanda Brock Sure. I'll start with on Delaware, and then I'll have Steve take the interruptible. So, on Delaware Energy, we are confident that this will be a second half of the year. It really relates to supply chain issues. We have connected to most of the SWDs that we are going to connect to. This is a function of ordering tubing and getting the tubing in and the coatings on the tubing, most likely more information than you need, but we have line on site of timing. Once we have it in hand, we can go back in on the upgrades and get those completed. So, we have a schedule and we anticipate second half of the year on an annualized basis, we will deliver that $11 million to $13 million in EBITDA that we expected.Stephan Tompsett Yes. In terms of interruptible, we're about $0.10 a barrel more profitable with those. It's purely incremental, relative to what we have in the forecast, we're able to grow it. I think in terms of last year, and we have this on Slide 13 of the presentation, we were about 13% of spot volumes last year. Our current forecast has that down about 9% this year. So, to the extent we're able to grow that, that would give us the additional margin.Bill Zartler Yes. So, I think it is a doubling effect on that. So, there is a point at which we fill up excess capacity, but it also can replace water that we're recycling, and we use that to fill in when recycling and use the capacity we're being paid for twice. So, interruptible does deliver outsized margins.Selman Akyol All right. Thank you very much.Operator Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Ms. Brock for any final comments.Amanda Brock Thank you. Want to thank everybody for joining the call today. We also want to sort of thank all our employees for their hard work in ‘22, the hard work that is still ahead of us. We are very focused on delivering results. We also want to thank our customers for their trust, for working with us every day, our suppliers, and hoping they're going to speed up now that we seem to be moderating on CPI, our shareholders. We look forward to updating you all in Q2. Have a great day.Operator Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
