WTTR - Aris Water Solutions Sees Volume Increases Ahead

2023-10-16 17:21:47 ET

Summary

• Aris Water Solutions, Inc. provides water handling and recycling services to oil & gas companies in the Permian Basin.
• The company's management is confident about increasing activity in the near future and has increased its forward adjusted EBITDA guidance.
• I remain Bullish [Buy] on Aris Water Solutions stock at around $9.30 per share.

A Quick Take On Aris Water Solutions

Aris Water Solutions, Inc. ( ARIS ) provides water handling, recycling and related services to oil & gas exploration companies operating in the Permian Basin.

I previously wrote about ARIS with a Buy outlook.

Pricing has remained robust even as drilling volumes have receded somewhat.

Management increased its forward adjusted EBITDA guidance and is confident about increasing activity in the near future.

My outlook remains Bullish [Buy] on ARIS at around $9.30.

Aris Water Overview And Market

Texas-based Aris was founded to develop infrastructure solutions to water usage by Exploration & Production companies operating in the Permian Basin.

The firm is led by founder and Executive Chairman William Zartler, who has been with the company since its inception and was previously founder of Solaris Oilfield Infrastructure, which spun off Aris in 2021.

The company’s main offerings include:

• Produced water

• Water recycling

• Full-cycle water management.

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

According to a 2023 market research report by Mordor Intelligence, the global oil & gas water management market is expected to grow at a compound annual growth rate [CAGR] of 8.3% from 2020 to 2025.

The rise of unconventional oil and gas production (fracking), along with stringent regulatory requirements, is expected to increase the demand for water services in E&P phases.

The company has said that its water inventory sources are a ‘key competitive advantage’ by being able to offer the large volumes of water required for hydraulic fracturing operations.

The water services part of the support system to E&P customers remains fragmented and is composed of primarily small firms, who typically don’t offer an integrated suite of services.

Major oilfield services firms provide water services but do so as a side business rather than their primary focus.

Major competitive or other industry participants include:

• Halliburton

• Schlumberger

• Baker Hughes

• Ovivo

• Aquatech International

• Veolia

• Select Water Solutions.

Aris Water’s Recent Financial Trends

Total revenue by quarter has continued to grow, although with greater variability in recent quarters; Operating income by quarter has also risen more recently.

Earnings per share (Diluted) have grown more consistently in recent quarters, as the chart shows below:

(All data in the above charts is GAAP.)

In the past 12 months, ARIS’ stock price has fallen 34.15% vs. that of Select Water Solutions, Inc.’s ( WTTR ) drop of only 4.39%:

For balance sheet results, the firm ended the quarter with $4.0 million in cash and equivalents and $423.9 million in total debt, of which no amount was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $129.4 million.

Valuation And Other Metrics For Aris Water Solutions

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

(Source - Seeking Alpha.)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Based on the DCF, the firm’s shares would be valued at approximately $12.17 versus the current price of $9.31, indicating they are potentially currently undervalued.

As a reference, a relevant partial public comparable would be Select Water Solutions:

(Source - Seeking Alpha.)

Sentiment Analysis

The chart below shows the frequency of various keywords in management's most recent financial results conference call:

The chart shows no negative sentiment on the part of management or analysts, at least for the keywords searched.

Analysts asked leadership about volume growth dynamics, M&A opportunities and forward outlook changes.

Management replied that it sees strong volume continuing to grow in 2023 and 2024 for a variety of reasons, including great inventory, capital allocation to its acreage and client growth plans in New Mexico.

On M&A, leadership said the market is not currently attractive for consolidation now, so it is focused on organic growth opportunities.

The forward growth outlook is a function of certain ‘lumpy’ aspects of its Water Solutions business that are timing-related and not a function of any expected activity slowdown.

Commentary On Aris Water

In its last earnings call (Source - Seeking Alpha ), covering Q2 2023’s results, management’s prepared remarks highlighted "steadily increasing volumes and solid earnings growth."

Contracted customers have "remained active" in its core operational area of the Northern Delaware portion of the Permian Basin.

Importantly, management says its customers there "have indicated that they will continue to do so despite fluctuation in commodity prices and the overall reduction in U.S. drilling and completion levels."

Total revenue for Q2 2023 rose by 26.4% year-over-year, and gross profit margin was unchanged.

Operating income increased by 13.6% YoY to $20.1 million.

The company's financial position is moderate, with limited cash, significant long-term debt but strong free cash flow.

Looking ahead, management increased its adjusted EBITDA guidance to $165 million at the midpoint of the range, up slightly from the previous $160 million guidance.

A potential upside catalyst to the stock could include increased drilling and completion activity in the Permian Basin as a result of higher commodity prices.

With a strong runup in the price of WTI in recent months, as the chart shows below, and the potential for continued rise in tensions in the Middle East, the price environment may be constructive for service providers like Aris Water:

My discounted cash flow calculation suggests that ARIS may be undervalued at its present price of around $9.30.

However, I tend to favor WTTR over ARIS due to Select Water’s higher growth rate and net income margin combined with lower valuations.

Still, my outlook for ARIS is Bullish [Buy] at around $9.30 per share.

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