Aris Water Solutions, Inc. (NYSE: ARIS) is a leading environmental infrastructure and solutions company that helps its customers reduce their water and carbon footprints. The company provides full-cycle water handling and recycling solutions to increase the sustainability of energy company operations. Its integrated pipelines and related infrastructure create long-term value by delivering high-capacity, comprehensive produced water management, recycling and supply solutions to operators in the core areas of the Permian Basin.
Business Overview
Aris Water Solutions has established itself as a premier provider of water infrastructure and solutions in the Permian Basin. The company's operations are focused on the Northern Delaware Basin, which is widely regarded as the growth engine of the broader Permian region. Aris' business model is underpinned by long-term, fee-based contracts with well-capitalized, active customers, providing the company with stable and growing revenues.Over 80% of Aris' revenue is derived from currently flowing production volumes under these long-term contracts, which deliver revenue visibility and security. The company's consistent volumetric growth is a testament to the strength of its customer relationships and the robust activity levels in its core operating areas. In the first quarter of 2024, Aris reported a 19% year-over-year increase in produced water handling volumes, reaching 1,159 thousand barrels of water per day (kbwpd).
Aris' Water Solutions segment, which includes the sale of recycled produced water and groundwater, contributed 364 kbwpd in the first quarter, down 10% year-over-year due to a seasonal decline, but still ahead of the company's expectations. Management expects Water Solutions volumes to ramp up throughout the year, supported by the growing demand for sustainable water management solutions from its customers.
Financial Performance and Outlook
Aris delivered strong financial results in the first quarter of 2024, with revenue of $103.4 million, up 13% year-over-year. The company's net income for the quarter was $16.8 million, and its annual net income for 2023 was $18.9 million. Aris' annual revenue for 2023 was $392.1 million, and its annual operating cash flow was $183.9 million. The company's annual free cash flow for 2023 was $14.1 million.The company's profitability continues to improve, with Aris reporting a record adjusted operating margin of $0.46 per barrel in the first quarter of 2024, up 18% year-over-year. This margin expansion was driven by the benefits of inflation escalators in the company's long-term contracts, as well as cost improvements from its electrification efforts and other operational efficiencies.
Looking ahead, Aris provided guidance for the second quarter of 2024, expecting produced water volumes to be between 1.02 billion and 1.05 million barrels per day, with Water Solutions volumes expected to average 400,000 to 430,000 barrels per day. The company anticipates adjusted EBITDA between $44 million and $48 million for the second quarter, with adjusted operating margins expected to be between $0.42 and $0.44 per barrel.
For the full year 2024, Aris has increased its adjusted EBITDA guidance to a range of $185 million to $200 million, reflecting the strong first-quarter performance and the company's confidence in its contracted volume outlook and sustainable margin recovery.
Capital Allocation and Shareholder Returns
Aris' consistent financial performance and growing free cash flow have enabled the company to enhance its capital allocation framework, including an increase in its quarterly dividend. In the first quarter of 2024, the company raised its dividend by 17% to $0.105 per share, reflecting its confidence in the business's long-term growth prospects and its commitment to returning capital to shareholders.The company's capital allocation priorities remain focused on maintaining a strong balance sheet and investing in high-return organic growth opportunities. With a debt-to-adjusted EBITDA ratio of 2.15x as of the end of the first quarter, Aris has significant financial flexibility to pursue strategic initiatives, including potential accretive acquisitions, while also returning excess cash flow to shareholders.
Aris is also exploring opportunities to expand its business beyond its core water infrastructure and solutions offerings. The company is leading the development of technologies and processes to treat produced water for potential beneficial reuse, such as in agriculture and industrial applications. Additionally, Aris is evaluating the extraction of valuable minerals and constituents from its produced water streams, which could unlock additional revenue streams and further enhance the company's sustainability profile.
Risks and Challenges
While Aris has demonstrated impressive operational and financial performance, the company faces several risks and challenges that investors should consider. The company's business is heavily dependent on the activity levels and capital spending of its key customers, which are primarily exploration and production companies operating in the Permian Basin. Any significant reduction in customer drilling and completion activity could adversely impact Aris' volumes and financial results.Additionally, the company's operations are subject to various environmental regulations, and changes in these regulations or the company's ability to obtain necessary permits could impact its business. Aris also faces competition from other water infrastructure providers, as well as the potential for customers to develop in-house water management capabilities, which could erode the company's market share over time.