Business Overview and History
Aris Water Solutions, Inc. (ARIS) is a leading, growth-oriented environmental infrastructure and solutions company that directly helps its customers reduce their water and carbon footprints. The company delivers full-cycle water handling and recycling solutions that increase the sustainability of energy company operations in the core areas of the Permian Basin.
Aris Water Solutions, Inc. was founded in 2016 as an independent, environmentally-focused company that provides sustainability-enhancing services to oil and natural gas operators in the Permian Basin. The company's initial focus was on developing, constructing and operating integrated produced water handling and recycling infrastructure to provide comprehensive produced water management, recycling and supply solutions for its customers.
In 2017, Aris began building out its pipeline network and water handling facilities in the Permian Basin, leveraging its expertise in the treatment and reuse of produced water. The company secured several long-term acreage dedications from major exploration and production companies, providing a foundation for its growth.
Over the next few years, Aris continued to expand its asset footprint and capabilities, establishing itself as a leading provider of integrated water management services in the region. The company faced some challenges, including navigating regulatory changes related to seismic activity and managing the impact of commodity price volatility on its customers' drilling and completion activity.
In 2021, Aris made the strategic decision to become a publicly traded company, completing an initial public offering on the New York Stock Exchange. This provided the company with additional access to capital to further invest in its infrastructure and technology capabilities. Throughout this period, Aris remained focused on operational excellence, cost efficiency, and developing innovative solutions to enhance the sustainability of its customers' operations.
Today, Aris operates an extensive network of water pipelines, recycling facilities, and related infrastructure across the core of the Permian Basin in West Texas and southeastern New Mexico. The company serves a diverse customer base of large, well-capitalized exploration and production (E&P) companies under long-term, fee-based contracts that provide stable and predictable cash flows.
Financial Overview
Financial Performance
Aris has demonstrated impressive financial performance in recent years, with robust growth in revenue, EBITDA, and free cash flow. In 2023, the company reported annual revenue of $392.12 million, a 22% increase from the prior year. Net income for the year totaled $18.89 million. EBITDA for the year totaled $158 million, up 59% year-over-year, while free cash flow was $14.14 million. Operating cash flow for 2023 reached $183.87 million.
In the most recent quarter (Q3 2024), Aris reported revenue of $112.31 million, representing a year-over-year growth of 12.6%. Net income for the quarter was $16.43 million, showing a robust 34% increase compared to the same period last year. Operating cash flow for Q3 2024 was $53.08 million, while free cash flow reached an impressive $109.96 million.
The company's strong financial position is underpinned by its asset-light, high-margin business model. Aris generates the majority of its revenue from produced water handling services, which carry attractive margins due to the company's extensive infrastructure and efficient operations. Water solutions, which include the sale of recycled produced water and groundwater, contribute additional high-margin revenue streams.
Liquidity and Capital Structure
Aris maintains a prudent capital structure, with a net debt to EBITDA ratio of 2.6x as of the end of 2023. This provides the company with ample financial flexibility to fund future growth initiatives while also returning capital to shareholders through a dividend program that was initiated in 2021.
As of the most recent reporting period, Aris had a debt-to-equity ratio of 1.32, indicating a balanced approach to leverage. The company's cash position stood at $32.76 million, with an additional $291.70 million available under its $350 million revolving credit facility. This strong liquidity position is further evidenced by a current ratio of 1.72 and a quick ratio of 1.37, demonstrating the company's ability to meet its short-term obligations comfortably.
Operational Highlights and Growth Drivers
Aris has consistently demonstrated its ability to grow alongside its E&P customers, expanding its water handling and recycling volumes in lockstep with their drilling and completion activities. In the third quarter of 2024, the company reported a 6% year-over-year increase in produced water volumes to 1.12 thousand barrels of water per day (kbwpd) and a 16% rise in recycled water volumes to 393 kbwpd.
The company's growth has been underpinned by its strong customer relationships and positioning within the core of the Permian Basin, one of the most prolific and lowest-cost oil and gas production regions in the United States. Aris benefits from long-term, fee-based contracts with large, investment-grade E&P operators that dedicate substantial acreage to the company.
In its Produced Water Handling segment, Aris saw a 10% year-over-year increase in revenue per barrel to $0.86 in Q3 2024, while maintaining direct operating costs at $0.32 per barrel. This led to a 13% increase in adjusted operating margin per barrel to $0.45.
The Water Solutions segment experienced some shifts, with total water solutions volumes remaining flat year-over-year at 459 kbwpd in Q3 2024. However, there was a notable increase in recycled produced water volumes sold, which rose by 16% to 393 kbwpd, offset by a 45% decrease in groundwater volumes sold to 66 kbwpd. The revenue per barrel in this segment decreased by 11% to $0.49.
Looking ahead, Aris is well-positioned to capitalize on several key industry trends that are driving increased demand for its services, including:
1. Rising produced water volumes: As E&P activity in the Permian continues to grow, the volume of produced water requiring handling and disposal is expected to increase substantially, creating opportunities for Aris to expand its water infrastructure footprint.
2. Increased water recycling and reuse: Operators are increasingly focused on maximizing the recycling and reuse of produced water to reduce freshwater consumption and disposal costs, aligning with Aris' core capabilities.
3. Sustainability and emissions reduction: Oil and gas producers are under growing pressure to improve the environmental sustainability of their operations, driving demand for Aris' water management solutions that help reduce emissions and freshwater usage.
Aris is leveraging these industry trends to drive organic growth, while also pursuing strategic acquisitions that can further strengthen its market position and service capabilities. The company has a robust pipeline of potential M&A targets that could expand its geographic reach or add complementary water infrastructure and recycling technologies.
Risks and Challenges
While Aris has demonstrated impressive operational and financial performance, the company faces several risks and challenges that investors should be aware of:
1. Concentration risk: A significant portion of Aris' revenue is derived from a limited number of large E&P customers, making the company vulnerable to changes in the spending or operational plans of these key customers.
2. Regulatory environment: Aris operates in a highly regulated industry, and changes to environmental, safety, or other regulations could impact the company's costs or operations.
3. Commodity price volatility: Fluctuations in oil and gas prices can affect the drilling and completion activity of Aris' customers, which could impact the company's water handling and recycling volumes.
4. Competition: Aris faces competition from other water midstream providers, as well as from E&P companies that may choose to handle water management services in-house rather than outsourcing to third-party providers.
5. Integration and execution risk: As Aris continues to grow, both organically and through acquisitions, the company must effectively integrate new assets and operations to maintain its strong operational and financial performance.
Aris has demonstrated its ability to navigate these challenges thus far, but investors should monitor the company's risk management strategies and its ability to adapt to changing market conditions.
Outlook and Conclusion
Aris Water Solutions is well-positioned to capitalize on the growing demand for sustainable water management solutions in the Permian Basin. The company's integrated infrastructure, long-term customer relationships, and focus on operational excellence have driven impressive financial and operational results, and the company's growth prospects remain strong.
Looking ahead, Aris has provided guidance for full-year 2024 adjusted EBITDA in the range of $208 million to $212 million, reflecting continued volume growth and margin expansion. This represents an increase from their previous guidance, demonstrating confidence in their operational performance and market conditions. For Q4 2024, Aris expects produced water volumes between 1.08 - 1.11 million barrels per day, skim oil recoveries of approximately 1,550 barrels of oil per day, Water Solutions volumes to average 450,000 - 490,000 barrels per day, and adjusted EBITDA of $51 - $55 million.
The company also expects to maintain its capital expenditure guidance of $98 million to $105 million for the year, demonstrating its commitment to prudent investment in support of its long-term growth strategy. Aris anticipates being able to grow alongside its existing customers in 2025 at a similar level of capital investment as 2024, with mid-single digit growth in produced water volumes expected.
Industry trends continue to favor Aris's business model. The Permian Basin and New Mexico continue to lead oil production within the United States, and Aris anticipates sustained strong investment on and around its asset footprint. The company forecasts produced water volume growth in 2025 to be consistent with its 2024 growth rate of 4-7%.
Overall, Aris Water Solutions' unique positioning, financial strength, and focus on sustainability make it a compelling investment opportunity in the water infrastructure and services space. As the company continues to execute on its growth plan and navigate industry challenges, it could emerge as an increasingly important player in the Permian Basin's energy ecosystem. The company plans to provide a full 2025 outlook when reporting Q4 2024 earnings, which will offer further insight into its long-term growth trajectory and strategic initiatives.