Aris Water Solutions(ARIS)2024-11-05 17:23Financial Data and Key Metrics - Adjusted EBITDA for Q3 2024 was 0.45 per barrel, up 13% year-over-year, driven by operational efficiencies and cost reductions [13][24] - Full-year 2024 adjusted EBITDA guidance increased to 212 million, reflecting strong performance and slightly increased customer activity levels [15][28] - Q3 capital expenditures were 98-422 million, with a debt-to-adjusted EBITDA ratio of 2.0x, well below the target range of 2.5x-3.5x [30] Business Line Performance - Produced water volumes grew 2% sequentially and 6% year-over-year in Q3 2024 [11] - Recycled water volumes increased 25% sequentially and 16% year-over-year, driven by higher completion activity [12] - Skim oil recoveries improved significantly, with Q4 2024 guidance reflecting a 20% increase compared to Q3 [27] - Water Solutions business volumes are expected to average 450,000-490,000 barrels per day in Q4 2024 [28] Market and Industry Trends - The Permian Basin, particularly the Northern Delaware Basin, continues to drive growth due to low break-even costs and decades of remaining inventory [16] - Steady to moderately increasing activity levels are expected to continue into 2025, supported by strong customer forecasts [16][17] - The company anticipates mid-single-digit growth in produced water volumes in 2025, consistent with customer growth rates and overall oil production forecasts in the Delaware Basin [17][35] Strategic Direction and Competitive Landscape - The company is focused on reinvesting in growth projects while enhancing shareholder returns, supported by strong cash flow generation [8][18] - Opportunities for inorganic growth are being evaluated, with a focus on adjacent assets in core operating areas that offer strategic fit and financial accretion [9] - Efforts to improve margins include CPI-linked revenue escalation clauses, water handling cost efficiencies, and potential reductions in third-party landowner royalties [19][20] - The company is advancing beneficial reuse projects, including desalination technologies and mineral extraction (e.g., iodine, magnesium, ammonia, lithium), with commercialization expected in 2025 [21][22][23] Management Commentary on Operating Environment and Outlook - Management remains optimistic about the end of 2024 and beyond, citing strong operational execution and customer activity levels [10][32] - The company expects to maintain a similar level of capital investment in 2025 as in 2024, with continued volume growth and margin improvements driving increased cash flow [18] - Regulatory progress on beneficial reuse and surface water disposal in Texas is ongoing, with potential cost advantages over traditional underground injection [40][43] Other Key Information - The company declared a Q4 2024 dividend of $0.105 per share, with plans to revisit the dividend payout level after Q4, given strong liquidity and low leverage [31][55] - The company is exploring opportunities in industrial water treatment, leveraging its expertise in handling complex water [61] Q&A Session Summary Question: 2025 Volume Growth and EBITDA Outlook - The company anticipates mid-single-digit growth in produced water volumes (4%-7%) in 2025, aligning with customer forecasts [35] - EBITDA growth will depend on volume increases, margin improvements, and efficient capital allocation [35] Question: Disposal Royalties and Surface Acreage Acquisition - The company is evaluating opportunities to reduce third-party landowner royalties, including acquiring surface acreage or partnering with landowners [38] - A long runway of permits and diverse locations provides flexibility for future growth [38] Question: Regulatory Update on Beneficial Reuse and Surface Disposal - Progress is being made on permitting for surface discharge into the Pecos River, with potential cost advantages over underground disposal [43] - High salinity levels in Delaware Basin produced water require treatment before surface discharge [43] Question: Capital Allocation Priorities for 2025 - The company remains disciplined in evaluating accretive M&A opportunities but has not yet found suitable targets [59] - Share repurchases are being considered but are less likely due to limited float [59] - Dividend growth is expected to align with sustainable business growth, with no significant step changes anticipated [55] Question: Skim Oil Recovery Improvements - A dedicated team and operational changes have driven significant improvements in skim oil recoveries [68] - The company expects sustained recoveries, with some variability quarter-to-quarter [14][68] Question: Potential Impact of New Mexico Setback Rules - Customers have adjusted drilling schedules and permits to mitigate potential impacts, with no expected disruption to the company's operations [65]