Aris Water Solutions, Inc. [ARIS] Conference call transcript for 2023 q1
2023-05-12 09:35:07
Fiscal: 2023 q1
Operator: Greetings, and welcome to the Aris Water Solutions First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [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. You may begin.
David Tuerff: Good morning, and welcome to the Aris Water Solutions first quarter 2023 earnings conference call. I am joined today by our President and CEO, Amanda Brock, our Founder and Executive Chairman, Bill Zartler; and our CFO, Stephen Thompsett. 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 the 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 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 U.S. GAAP. A reconciliations to the most directly comparable GAAP measures are included in our earnings release and the appendix of today's accompanying presentation. I'll now turn the call over to our Founder and Executive Chairman, Bill Zartler.
William Zartler: Thank you, David, and thanks, everyone, for joining us this morning. Aris is off to a strong start in 2023. From a market perspective, we have seen activity levels consistent with our expectations of steady volumetric growth so far this year. And as we look forward, some of our customers have indicated publicly that they are forecasting additional production to be online in the back half of 2023 and early 2024. While commodity prices continue to fluctuate, we have not seen any material impact to our customers' activity levels or our water volumes. We believe this is reflective of the strength of our primary large contracted operators who have made long-term commitments to the Permian Basin and continue to invest as planned through the commodity price cycles. The industry's need for high-capacity water handling with the flexibility to deliver high rates of recycled produced water continues to expand. We are fortunate that our primary areas of operation are located in some of the best acreage in the Permian Basin, which has supported the consistent growth of our produced water volumes since inception, including our 23% volume growth in 2022. While we will continue to grow alongside current and new customers by investing in our infrastructure to support their growth, capital efficiency and shareholder returns remain core priorities as we evaluate opportunities. Coming out of the challenging second half of 2022, we have focused on improving internal business processes, driving operational efficiencies and cost reduction initiatives. While there is still more progress to be made, we are beginning to see tangible impacts to the bottom line and are pleased with our performance going into the second quarter. We are also encouraged that our proprietary treatment processes have potential applications outside of the oil and gas industry. I'm proud of our team's execution thus far in 2023 and our prospects for the rest of the year. With that, I'll turn it over to Amanda.
Amanda Brock: Thank you, Bill. We are pleased with our improved operating results and positive progress in the first quarter. Our continued focus on driving operational efficiencies and improving internal business processes has already delivered substantial improvements, particularly in skim oil recovery and working capital. The cost savings initiatives we referenced in our first quarter earnings call, including electrification of field infrastructure and reducing rentals are proceeding as planned and are expected to deliver meaningful incremental margins in the second half of the year. For the quarter, we grew our total water volumes by 5% and adjusted EBITDA by 6%. In our produced water business, as customer volumes came in higher than forecasted, we saw volumetric growth of 3% as compared to the fourth quarter of 2022, averaging 971,000 barrels per day. We also saw the benefit of significantly higher skim oil recoveries in the quarter, which were the result of operational changes we made, which drove incremental skim oil capture, and as a result, recovered volumes that we believe were not captured in the fourth quarter of 2022. Going forward, however, we believe we can consistently increase skim oil yields by at least 10% as compared to 2022. Our water recycling and sourcing business grew sequentially by 11% in the first quarter as we sold 405,000 barrels per day. This growth was benefited by some pull forward of demand as a portion of water scheduled to be sold in the second quarter was sold in the first quarter due to operator changes in contracted completion schedules. The Permian Basin, like other areas continues to be impacted by the effects of unprecedented inflation in 2022. While the rate of inflation has tempered in 2023, we have not yet seen prices materially decrease. As a result, we continue to be extremely focused on our cost reduction initiatives and identifying additional opportunities to reduce costs over the remaining course of the year. Our project to convert booster pumps from diesel to permanent power is tracking well. We have nine locations scheduled to be completed by the end of the second quarter and another 10 scheduled to be completed in the second half of the year. As we mentioned last quarter, we are working closely with our regulated power provider in New Mexico to try and maintain the timelines they provided us to connect our newer reuse facilities to line power. These conversions to permanent power should deliver annual savings of approximately $4.4 million once complete. Similarly, our project to replace rental pumps at numerous locations with company-owned assets is progressing well with one location complete, equipment deliveries for three more sites scheduled in May and the remaining four locations expected to be off rental equipment in the second half of the year. We still expect the annual cost savings for this project to be approximately $3.2 million. From an organic growth perspective, we continue to work closely with our contracted customers to expand our system and capacity to accommodate their development plans. We also continue to focus on incremental growth and are evaluating numerous opportunities. However, we will be selective as it relates to executing new contracts as we focus on capital efficiency and underwriting new transactions to ensure accretive growth. We are pleased with the progress we've made on our beneficial reuse pilot project with Chevron, ConocoPhillips and ExxonMobil. As we previously indicated, the purpose of this pivotal pilot is to identify, evaluate and develop proprietary treatment processes to support cost-effective beneficial reuse of treated produced water outside of the oil and gas industry and support water sustainability in the Permian Basin. Following a detailed evaluation process, the pilot team has selected thermal and membrane desalination technologies for field testing with a full pilot phase expected to be completed in the first half of 2024. Contemporaneously with our pilot studies, we are also actively evaluating and identifying potential avenues to collaborate and partner with various companies in the chemical, agricultural, fertilizer hydrogen and power sectors who can potentially utilize treated produced water or minerals and trained in the [indiscernible]. We are also pleased to announce that after a detailed review, Aris has been selected as one of only four finalists in the water reuse project of the Year at the Global Water Intelligence 2023 Global Water Awards in Berlin in May. This recognizes Aris' accomplishments to date and water conservation as a result of our water reuse efforts in the energy industry. \ In conclusion, we finished the quarter with positive momentum carrying into the second quarter, and I'm very pleased with the team's execution and performance in the first quarter against the plan we laid out. And with that, I'll turn it over to Steve to discuss our financial results for the quarter.
Stephan Tompsett: Thank you, Amanda. We recorded adjusted EBITDA for the first quarter of $38.1 million, up 6% from both the first quarter of 2022 and sequentially from the fourth quarter of 2022. The sequential increase was largely due to our produced water and Water Solutions volume growth as well as approximately $2 million of skim oil revenue above expectations. We also realized $675,000 of lower G&A expense relative to our plan as some spending was reduced or delayed until later in the year. For capital expenditures, we incurred approximately $48 million for the quarter, in line with our expectations and guidance. Looking ahead to the second quarter, we expect produced water volumes to average approximately one million barrels per day, reflecting continued growth consistent with our outlook for the year. We are also forecasting skim oil recoveries of 0.10% of produced water inlet volumes at an average realized price of $68 per barrel. For the Water Solutions business, we expect volumes of 365,000 to 375,000 barrels of water per day for the quarter and expect to recycle approximately 25% of inlet produced water volumes. On the cost side, well maintenance expense is forecasted to be approximately $1.5 million higher relative to the first quarter, which is part of the annual increase we highlighted on our last earnings call. We also expect G&A expense to be approximately $500,000 higher than the first quarter, largely due to ongoing accounting improvements and increased headcount. Taken together, we are forecasting adjusted EBITDA of $35 million to $37 million for the second quarter as compared to first quarter guidance of $33 million to $35 million, which would imply a 6% increase at the midpoint, excluding one-time benefits we saw in the first quarter. We also forecast capital expenditures to total between $55 million and $65 million, consistent with our full-year capital plan of $140 million to $155 million, which, as we noted last quarter, is weighted towards the first half of the year. Turning to our balance sheet. We ended the quarter with a debt to adjusted EBITDA ratio of 2.7x and approximately $159 million available under our credit facility. We have increased our focus on improving working capital and have made meaningful progress in reducing our accounts receivable balance by $27 million or 21% from year-end 2022, while growing revenue 11% sequentially. Finally, we recently announced our seventh consecutive dividend of $0.09 per share, which will be paid June 29th to shareholders of record as of June 16th. Now looking forward, we recognized the importance of free cash flow and return of capital to shareholders. We continue to grow our business volumes and see additional opportunities for expansion. While it is still too early to provide a formal outlook for 2024, based on our current outlook, we are focused on achieving a free cash flow inflection point in 2024 and providing an update to our shareholder return framework to supplement our high-return organic growth opportunities. With that, I'll turn it over to Amanda to wrap up.
Amanda Brock: Thanks, Steve. We are proud of the Aris team's performance in the first quarter. We are optimistic for the rest of the year. But notwithstanding the first quarter's improvement, we still have work to do, and we are going to remain focused on reducing our operating costs, enhancing capital efficiency and selectively pursuing additional growth opportunities where we feel we can invest capital at attractive returns. We are also going to continue to work towards improving our operating margins and where possible, increased pricing in our shorter revenue cycle businesses. While it's premature to make changes to our full-year guidance, our successful start to the year gives us further confidence in meeting our financial targets. With that, we'll take questions.
Operator: Thank you. We will now conduct a question-and-answer session. [Operator Instructions] Our first question comes from Spiro Dounis with Citi. Please proceed.
Operator: [Operator Instructions] Our next question comes from Samantha Hoh with Evercore. Please proceed.
Operator: Thank you. Our next question comes from Wade Suki with Capital One. Please proceed.
Operator: The next question comes from Selman Akyol with Stifel. Please proceed.
Operator: Thank you. At this time, there are no further questions in queue. I would like to turn the call back over to management for closing comments.
Amanda Brock: Thank you. So thank you very much for joining us today. We've had a strong quarter. We look forward to coming back and talking again at the end of second quarter. We also want to thank all of our shareholders and stakeholders, including our customers and most importantly, our sort of dedicated employees who have been working very hard to continue to make the improvements that we talked about today. So thank you very much and talk to you at the end of second quarter.
Operator: This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
