Q3 2024 Earnings Summary
- Sustainable Margin Improvement: Executives highlighted improved skim oil recoveries and operational efficiencies that have delivered durable margin improvements and increased cash generation, supporting ongoing profitability.
- Robust Customer-Driven Growth: Guidance for mid-single-digit produced water volume growth (around 4% to 7%) is fueled by strong long-term contracts and consistent customer demand, laying the groundwork for revenue expansion.
- Strong Financial Flexibility: The company maintains a strong balance sheet with low leverage and ample liquidity, which supports capital efficiency, potential dividend growth, and the pursuit of accretive M&A opportunities.
- Regulatory and Environmental Uncertainty: Questions on produced water disposal and the potential shift to surface discharge highlight regulatory challenges. The reliance on obtaining permits for alternatives like discharge into the Pecos River, coupled with high water salinity, could lead to increased costs or delays if regulations tighten or fail to evolve favorably.
- Lack of Immediate Inorganic Growth Options: Management has yet to identify any attractive accretive M&A opportunities and has even opted against initiating a share repurchase program due to the limited float. This absence of near-term inorganic growth drivers may constrain future earnings expansion.
- Unclear 2025 Outlook: The company is not providing formal guidance for 2025, relying instead on customer forecasts and existing contracts, which introduces uncertainty about its future volume and margin growth.
-
Dividend Outlook
Q: Dividend growth in line with organic EBITDA?
A: Management expects dividend growth that aligns with sustainable, organic EBITDA growth rather than a dramatic step change, reinforcing their long‐term capital allocation strategy. -
Production Growth Assumptions
Q: Does growth forecast assume new customer additions?
A: They clarified that the current mid-single-digit growth forecast for produced water volumes is based on existing customer contracts with early-year visibility, not factoring in new customers at this stage. -
Volume & EBITDA Impact
Q: How does water volume growth influence EBITDA?
A: Management indicated that with a 4%-7% growth in produced water volumes, there is an expectation of a commensurate improvement in EBITDA, reflecting strong customer performance. -
Capital Allocation
Q: How are M&A, dividends, and repurchases prioritized?
A: They maintain a disciplined approach to capital allocation, favoring accretive M&A opportunities while keeping returns to shareholders in focus, especially with low leverage. -
Inorganic M&A
Q: Are bid-ask spreads narrowing for potential M&A deals?
A: Management noted that while they continue to evaluate attractive inorganic opportunities, the bid-ask spreads have not significantly narrowed to date. -
Texas Disposal Regulation
Q: What’s progress on surface system disposal in Texas?
A: They are actively pursuing surface discharge permits as an alternative to traditional disposal, mindful of the high salinity that necessitates treatment before potential discharge into systems like the Pecos River. -
Customer Expansion
Q: Are new basin customers being added?
A: The commercial team is actively engaging with both existing and prospective customers, indicating robust efforts to grow operations throughout the basin. -
Desalination & Minerals
Q: What about desalination and mineral extraction projects?
A: The outlook remains promising for desalination scale-up and mineral extraction initiatives, though no additional projects beyond current plans are anticipated at this time. -
Disposal Royalties Strategy
Q: Can acquiring surface acreage lower disposal royalties?
A: They are exploring strategies such as purchasing land to further reduce royalty expenses, while also leveraging favorable existing partnerships. -
Skim Oil Improvements
Q: What is driving enhanced skim oil recoveries?
A: Focused field teams and operational changes have delivered improved skim oil recoveries, supported by better processes and technology deployment. -
New Mexico Setback
Q: How might New Mexico’s setback rule affect operations?
A: Customers have proactively adjusted schedules and permitting, and management expects any impact from the proposed setback rule to be minimal. -
Texas Surface Discharge
Q: Progress on using surface water like the Pecos River?
A: They are pursuing regulatory paths for surface discharge into systems such as the Pecos River, with the understanding that significant pre-treatment is required due to water quality constraints. -
JIP Financial Roles
Q: What are Aris’ capital commitments under JIP projects?
A: For 2025, their financial commitment will be minimal, with costs shared with partners and a royalty-based model for projects like the iodine extraction facility.