Q1 2024 Earnings Summary
- Sustainable water sales growth: The company’s water business is benefiting from strong tailwinds—robust water sales are supported by rising simul frac activity and a broad geographic reach, which together indicate continued demand for its water and related services ( , ).
- Innovative desalination technology: The firm is advancing produced water desalination with a target treatment cost of $0.75 per barrel, positioning its technology to be cost competitive against traditional subsurface injection and creating potential for higher-margin, capital-light revenue streams ( , ).
- Emerging beneficial reuse opportunities: The company’s focus on beneficial reuse initiatives, which include testing for crop irrigation and potential downstream revenue streams, could open up additional markets as industry standards evolve ( ).
- High capital expenditure burden: The company faces a $20 million capital investment for its next-phase desalination test facility, which could strain financial resources in the near term.
- Uncertainty in the commercial model: Management has not yet established a firm commercial structure for monetizing the beneficial reuse of desalinated water, creating uncertainty about future revenue streams.
- Operational challenges from high energy costs: The desalination process is heavily dependent on energy, which accounts for 75% to 80% of operating expenses, posing a risk if cost efficiencies are not met.
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Capital Allocation
Q: How is extra capital being deployed?
A: Management is taking a measured approach by keeping its capital allocation strategy unchanged, continuing to evaluate opportunities while enjoying a robust cash position, ensuring disciplined deployment of free cash flow. -
Water Revenue Growth
Q: What drove strong water revenue this quarter?
A: The increase was driven by strong water sales volumes—bolstered by simul frac activity and an extensive well inventory—that supported record numbers, including nearly $37 million in water sales. -
Desalination Focus
Q: Why highlight produced water desalination now?
A: They emphasized a breakthrough in energy-efficient desalination, making a $20 million capex investment to position the technology for potential near-term revenue, despite the expected operating costs. -
Commercial Model
Q: How will the water treatment cost structure work?
A: The plan is to achieve a treatment cost of about $0.75 per barrel, blending traditional midstream pricing with their unique capital-light model to ensure competitiveness against traditional injection methods. -
Water Sales Sustainability
Q: Are current water sales levels sustainable?
A: Management indicated that water sales remain on a strong, sustainable trend with robust upcoming schedules, mirroring last year’s record performance, which supports continued growth. -
Beneficial Reuse Opportunities
Q: What is the outlook for beneficial reuse markets?
A: There’s emerging potential in beneficial reuse, with possible downstream revenue from things like water rights retention and byproducts, though the current focus is on fitting within the upstream economics. -
Operational Hurdles
Q: What are the main challenges in scaling operations?
A: The primary hurdles include managing regulatory requirements and reducing the energy consumption—which constitutes 75-80% of operating expenses—as they transition from pilot to full-scale commercialization. -
Governance Approach
Q: Will M&A decisions now be board-led?
A: Management clarified that while an acquisition committee now formalizes the process, it still serves as a vetting step, retaining management’s central role with board oversight.