ARIS - Aris Water Solutions Is Positioned For Further Growth

Summary

• Aris Water Solutions went public in October 2021, raising approximately $230 million in an IPO.
• The firm provides water handling and recycling services to exploration & production companies operating in the Permian Basin.
• ARIS has grown revenue and operating income and appears well-positioned in a supportive pricing environment for oil & gas products.
• My outlook on ARIS is a Buy at around $16.50 per share.

A Quick Take On Aris Water Solutions

Aris Water Solutions ( ARIS ) went public in October 2021, raising approximately $230 million in gross proceeds from an IPO that priced at $13.00 per share.

The firm provides water handling, recycling and related services to oil & gas exploration companies operating in the Permian Basin.

Assuming a positive pricing environment as a support for continued exploration demand, the company appears well-positioned for further growth, so my outlook on ARIS is a Buy at around $16.50.

Aris Water Overview

Houston, Texas-based Aris was founded to develop infrastructure solutions to water usage by E&P companies located in the Permian Basin.

Management is headed by founder and Executive Chairman William Zartler, who has been with the firm since inception and was previously founder of Solaris Oilfield Infrastructure (SOI).

The company's primary offerings include:

• Produced water

• Water recycling

• Full-cycle water management

The firm pursues clients among Exploration & Production operators within the Permian Basin.

Aris/Solaris counts major E&P companies as customers, including ConocoPhillips (COP), Occidental Petroleum (OXY), Exxon Mobil (XOM), Marathon Oil (MRO), Chevron (CVX) and Mewbourne Oil Company.

Aris Water's Market & Competition

According to a 2019 market research report by IHS Markit, the US oilfield water management market was valued at $37.5 billion in 2019.

This figure represented a 12% annual growth over 2018's results.

The main drivers for this expected growth are the growth in demand in the Permian Basin, accounting for $13.3 billion in estimated spending in 2019.

Also, below is a chart from IHS showing the US onshore water handling market by region in 2019:

Major competitive or other industry participants include:

• Select Energy Services (WTTR)

• Others

Aris Water's Recent Financial Performance

• Total revenue by quarter has risen according to the following chart:

• Operating income by quarter has grown markedly in recent quarters:

• Earnings per share (Diluted) have fluctuated in recent reporting periods:

(All data in above charts is GAAP)

Since its IPO, ARIS' stock price has risen 23.1% vs. the U.S. S&P 500 index's drop of around 19.2%, as the chart below indicates:

Valuation And Other Metrics For Aris Water

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

As a reference, a relevant partial public comparable would be Select Energy Services; shown below is a comparison of their primary valuation metrics:

(Source - Seeking Alpha)

A full comparison of the two companies' performance metrics may be viewed here .

Commentary On Aris Water

In its last earnings call ( Source - Seeking Alpha), covering Q2 2022's results, management highlighted customer delays and supply chain constraints which added to cost inflation.

While its long-term contracts are linked to CPI results, they generally only update annually, so there is some revenue mismatch.

After the quarter, the firm announced the acquisition of assets of Delaware Energy Services, which adds handling capacity in the New Mexico area of operations.

Management continues to 'look for attractive opportunities to add capabilities and scale' to its network.

As to its financial results, revenue rose 35% year-over-year while operating income plateaued on a sequential basis but grew 40% year-over-year.

Adjusted operating margin per barrel was down $0.01 to $0.41 per barrel due to increasing labor and chemical treatment costs.

While earnings per share turned positive, the company's net results have been quite volatile in recent quarters.

For the balance sheet, the firm finished the quarter with $35 million in cash and equivalents and long-term debt of $393 million.

Over the trailing twelve months, operating cash flow was $65.4 million.

Looking ahead, management expects to continue investing in capital improvements as it seeks to support its customers throughout 2023.

Regarding valuation, the market is valuing Aris at an EV/Revenue multiple of around 4.3x, a significant premium to partial comparable Select Energy Services.

The primary risk to the company's outlook is the price volatility in oil & gas markets and concomitant changes in E&P company budgets. A secondary risk is continued cost inflation, reduced earnings in the process.

Despite a forecasted recession (or substantial slowdown) in 2023, demand for domestic oil & gas production is likely to remain elevated.

The company's customer base includes large exploration firms with long-term time-horizons and management believes that recent delays are diminishing.

Assuming a positive pricing environment as a support for continued exploration demand, the company appears well-positioned for further growth, so my outlook on ARIS is a Buy at around $16.50 per share.

For further details see: