Aris Water Solutions, Inc. (NYSE:ARIS) Q4 2023 Earnings Call Transcript
Aris Water Solutions, Inc. (NYSE:ARIS) Q4 2023 Earnings Call Transcript February 29, 2024
ARIS isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to the Aris Water Solutions Q4 2023 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 of Finance and Investor Relations. Thank you, David. You may begin.
David Tuerff: Good morning and welcome to the Aris Water Solutions fourth 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, 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 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. 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.
Bill Zartler: Thank you, David. 2023 was a fantastic year for the Aris business. We focused on fundamental execution, which include profitability, reduced working capital and improved our operational flexibility, while continuing to grow the business. Volumes were up 16% for the year and we recaptured margins, which had been eroded by inflation and cost challenges driven by our rapid growth in late 2022. Strategically, we have remained disciplined in our approach to capital allocation, growing organically under long-term contractual agreements, while selectively evaluating and closing new agreements in an improving pricing environment. There is greater demand for water infrastructure in the Northern Delaware Basin than there are existing assets, and we have the opportunity to participate in further growth at attractive rates of return.
Inorganically, we have maintained similar discipline with a continued focus on strategic fit and accretion across all metrics in both the short and long-term. Our conservative balance sheet and ample liquidity give us the flexibility to invest when the timing and economics are most compelling. Looking to 2024, we are excited about the business and our opportunity set. We will benefit from our prior capital investments and anticipate being able to better leverage the system to improve capital efficiency going forward. Combined with continued operational and commercial improvements, we anticipate sustained positive free cash flow for the year, which will improve our options for capital allocation, which can include increasing our shareholder returns.
Our team is focused on continuing the strong execution we demonstrated in 2023, operating safely and reliably for our employees and customers while enhancing water sustainability in the Permian Basin. With that, I will turn it over to Amanda.
Amanda Brock: Thank you, Bill. I’d like to start off by echoing Bill’s comments. We had an outstanding year delivering great results quarter-over-quarter and we enter 2024 with significant positive momentum. I want to recognize the tremendous efforts of the Aris team who worked extremely hard and performed consistently above expectations. I am immensely proud of our collective achievements. At the onset of 2023, we said we would improve profitability while continuing our rapid pace of growth and infrastructure expansion. While there is still work to do, we exceeded our annual goals, expanding margins by more than 10% and improving operational and financial efficiency. We maintained a strong rate of growth. We increased produced water volumes 19% and water solutions volumes 9% year-over-year, which combined with our expanded margins, culminated in adjusted EBITDA of $175 million, up 17% for the year and exceeding the upper end of our guidance range.
In our produced water business, we averaged 1.1 million barrels per day for the fourth quarter, ahead of our expectations and continued our sequential growth for the ninth consecutive quarter. As we have previously discussed, we have allocated additional resources to skim oil recovery and averaged approximately 1,360 barrels per day in the fourth quarter, ahead of expectations due primarily to higher volumes from flowbacks and operational improvements. Our large scale infrastructure and proven ability to deliver treated water in large quantities, again, allowed us to win additional spot business, driving higher-than-anticipated water solutions volumes in the fourth quarter. As we’ve previously seen, the water solutions business can be lumpy, and higher water volumes in the fourth quarter were also a function of a pull forward of activity originally scheduled for the first quarter of 2024.
As operators limit their use of groundwater, the growth of produced water recycling in the Permian Basin has been unprecedented. Our water recycling and sourcing business sold 482,000 barrels of water per day or over 44 million barrels in the fourth quarter alone, growing 5% sequentially and 32% year-over-year. We are extremely proud of this growth and our success in managing costs and logistics while optimizing the use of our infrastructure and enhancing water sustainability in the Permian Basin. Over the course of 2023, we reduced rental equipment and diesel fuel expenses by converting facilities to permanent electrified infrastructure. We reduced these costs by approximately $7.6 million on an annualized basis, exceeding the target we set at the beginning of the year.
We have additional facilities identified for conversion, and believe that we can capture further electrification savings in 2024. In terms of revenue, the largest of our annual CPI escalations took effect at the beginning of the third quarter; and combined with the success of our electrification projects and rental expense reductions, drove significant margin expansion of $0.05 per barrel since our cost peaked in the middle of 2022. We’ve also made a lot of progress in the field, piloting technologies for the treatment of produced water for beneficial reuse. The results have been promising, and a lot of lessons learned as we focus on cost and treatment technologies that can operate consistently at scale. Working with our industry partners, ConocoPhillips, Chevron and ExxonMobil, we will be piloting and evaluating two additional desalination technologies and we’ll also be evaluating the commercial viability of mineral extraction from our produced water.
We look forward to updating you next quarter. Looking ahead to 2024, we continue to work closely with our customers to be their partner of choice, delivering safe, reliable and sustainable water infrastructure solutions. Volumetrically, as the basin matures and our customers’ pace of growth moderates, we anticipate our own water volume growth will more closely mirror oil production growth in the Northern Delaware Basin, with year-over-year volumes expected to be up approximately 2% to 5% after adjusting for prior asset divestitures. In addition to the sustainable growth rate, we expect to benefit from improved profitability from the positive momentum on margins coming out of last year, additional operating cost reductions in chemicals, filtration and waste disposal as well as further contractual revenue escalation.
With considerable investment to date in our infrastructure and greater operational visibility and flexibility through our control room and automation efficiencies, we also anticipate being able to more fully leverage our existing assets this year, which should allow us to bring our capital spending down by approximately 40% versus 2023. Steve will expand on the details, but sustainable volume growth, our anticipated continued expansion of operating margins and significantly reduced capital spending, sets up 2024 as a pivotal year for Aris as we anticipate sustained positive free cash flow. Our compelling outlook for this year is a testament to our keen focus on margins and the hard work and consistent results of our team delivered in ‘23, and we’re excited by our continued momentum into the first quarter of 2024.
With that, I’ll turn it over to Steve to discuss our financial results for the quarter and details on our outlook for 2024.
Stephan Tompsett: Thank you, Amanda. We reported adjusted EBITDA for the fourth quarter of $49.3 million, up 37% from the fourth quarter of 2022 and up 10% sequentially from the third quarter of 2023, again, exceeding expectations for the quarter. The sequential increase was largely due to additional short-cycle commercial wins and some pull forward of activity in water solutions, higher-than-anticipated skim oil recoveries and lower G&A costs. For the full year, adjusted EBITDA of $175 million was above the high end of our original guidance. For capital expenditures, we incurred approximately $20 million in the quarter, bringing us to $156 million for the year below the low end of our guidance as we were able to optimize and better leverage our existing assets and defer a portion of our capital spend into this year.
For the year, ongoing process improvements delivered an almost 41% decrease in net working capital and a period which saw revenue grow more than 22%, driving a $43 million working capital benefit. Taken together, our operational performance, lower capital investment and working capital improvements delivered $14 million in positive free cash flow in 2023. Looking ahead for the year 2024, we expect produced water volume to be between 1.02 million and 1.07 million barrels of water per day, up approximately 2% to 5% year-over-year when adjusted for the impact of our Martin County asset sale completed in the third quarter of last year. We’re forecasting skim oil recoveries of approximately 1,300 barrels of oil per day at an average WTI price of $76 per barrel.
And as a reminder, each $1 change in oil price relative to expectations would correspond to a change of $475,000 in EBITDA per year. For the water solutions business, we expect first quarter volumes to average 325,000 to 345,000 barrels per day and expect full year volumes of between 430,000 and 470,000 barrels per day, approximately flat year-over-year, which corresponds with currently forecasted Permian Basin rig and frac crew counts. As we’ve seen in the past couple of years, water solutions volumes generally ramp up throughout the year as operator capital budgets are refreshed and wells are drilled in the first half of the year, with flowback activity concentrated in the back half of the year. With the cost reductions Amanda referenced, a focus on continuous improvement and contractual tailwinds from inflation-based rate escalations, we forecast margins between $0.42 and $0.44 per barrel for the year, which represents a 10% increase at the midpoint relative to 2023.
Given the outlook from our customers and continued operational improvements, we are forecasting adjusted EBITDA of $180 million to $200 million for 2024, increasing 9% versus 2023 at the midpoint. Alongside a moderating growth outlook from our customers and our ability to drive further capital efficiencies, we anticipate capital expenditures to total between $85 million and $105 million for the year, including $12 million to $16 million of maintenance and system optimization capital and approximately 40% reduction versus 2023. The higher end of the range includes potential business development projects under evaluation, which could deliver incremental earnings in 2025 and beyond. For the first quarter, we anticipate $30 million to $35 million of capital expenditures as our spending is expected to be weighted towards the first half of the year.
With continued earnings growth and significantly reduced capital expenditures, we anticipate 2024 to deliver a clear and sustained free cash flow inflection point for Aris. We anticipate generating free cash flow of $45 million to $65 million for the year, which will give us the optionality to evaluate greater shareholder returns through either dividend growth or share repurchases. Turning to our balance sheet. We ended the quarter with a healthy debt to adjusted EBITDA of 2.4x, below the low end of our long-term leverage target and $330 million of available liquidity, which provides us with significant financial flexibility. Finally, for the first quarter of 2024, we declared our tenth consecutive dividend of $0.09 per share, to be paid March 21 to shareholders of record as of March 7.
With that, I’ll turn it over to Amanda to wrap up.
Amanda Brock: Thanks, Steve. To close, I want to again highlight the success of 2023, our consistent execution across the year and the momentum it provides us looking forward into 2024. We’ve made great progress, and our business today is more efficient, more profitable and more predictable, which is evident in our 2023 results. We are not done. In 2024, we will continue to identify new opportunities for growth, execute on additional cost reductions and margin expansion and further leverage our existing assets to deliver increased value from our business. Our reduced capital spending will allow us to achieve greater free cash flow and provide us the opportunity to increase shareholder returns. With that, we are happy to take questions.
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