Aris Water Solutions, Inc.

Greetings and welcome to ARIES Water Solutions fourth quarter 2024 earnings conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this call is being recorded. It is now my pleasure to introduce David Turf. Thank you, David. You may begin.

Good morning and welcome to the ARIES Water Solutions fourth quarter 2024 earnings conference call. I am joined today by our president and CEO, Amanda Brock, our founder and executive chairman, Bill Zartler and our CFO, Steven Thompson. Before we begin, I'd like to remind you that in this call and the related presentation, we will make forward looking statements regarding our current beliefs, plans and expectations, which are not guarantees of future performance and are subject to a number of known and unknown risks and uncertainties and other factors that could cause actual results to differ materially from results and events contemplated by such forward looking statements. You are cautioned not to place undue reliance on forward looking statements. Please refer to the risk factors and other cautionary statements included in our filings made from time to time with the Securities and Exchange Commission. I would also like to point out that our investor presentation in today's conference call will contain discussion of non-GAAP financial measures, which we believe are useful in evaluating our performance. These supplemental measures should not be considered in isolation or as a substitute for financial measures prepared in accordance with US GAAP. Reconciliation for the most directly comparable GAAP measures are included in our earnings release and the appendix of today's accompanying presentation. I'll now turn the call over to our founder and executive chairman, Bill Zartler. Thank you, David.

AERS finished a tremendous 2024 with a strong fourth quarter. We saw continued steady produce water volumes as well as increased completion activity during the quarter, leading to a record quarter for our water solutions business. Margins remain strong in the fourth quarter and we pay robust earnings with continued capital efficiency generating significant free cashflow for the quarter and the year. 2024 represented a meaningful inflection point in cash generation, which allows us to significantly increase shareholder returns in 2025 and beyond while continuing to reinvest in the business. We have much to be proud of as we assess the year, but of all our metrics, our most important accomplishment was safety. We ended 2024 without a single employee or contractor recordable safety incident. I'd like to congratulate our entire operations team and recognize the diligence that they demonstrate every hour of every day. There's no greater priority than the safety of our team and those on our sites. And we're immensely proud of what was accomplished during 2024. As we look to 2025, we see steady completion activity and production growth from our long-term contracted customers. We will continue to pursue operating efficiencies to maintain and expand the margins we achieved in 2024. And we'll continue our disciplined capital investment focusing on cash generation and increasing returns to shareholders. Alongside a solid outlook for our current business, we closed a few strategic initiatives, including the purchase of the McNeil Ranch in Lee County, New Mexico, in Gaines and Andrew counties, Texas. Continued progress on our beneficial reuse activities and mineral extraction, as well as expansion into industrial water treatment beyond the oil and gas industry. We want to express our thanks to our team, our customers and our suppliers for a phenomenal 2024 and are excited as we look forward into 2025 and beyond. With that, I'll turn it over to Amanda for more details.

Thank you, Bill. 2024 was a remarkable year and I'm extremely proud of our entire team. Our goals at this time last year were to operate safely, grow alongside our customers as they expanded their production on our dedicated acreage, improve our margins and operational efficiency and leverage our existing asset footprint to optimize our capital spending. We're proud to say we exceeded those objectives and as a result, we generated significant free cashflow. Supported by this cash and consistent with our commitment to increasing shareholder returns, we're pleased to announce a 33% increase to our dividend to 14 cents per share. We had a strong finish to the year. We achieved record quarterly volumes in our water solutions business and we grew our water solution volumes 14% sequentially. We continue to see consistent activity on our dedicated acreage in the core of the Permian Basin from our large long-term dedicated customers. We grew our produced water volume 7% year over year in 2024 and our customers still have multiple decades remaining inventory in our dedicated acreage providing us significant visibility long-term. We maintained our improved margins in the fourth quarter achieving an adjusted operating margin of 44 cents a barrel and adjusted EBITDA of 54.5 million. For the year, we invested approximately 101 million in CAPEX and generated 73 million of free cashflow. Steve will go into more detail on our strong financial performance. As the industry becomes more efficient with larger pad designs, longer lateral lengths and faster completions, operators need access to large scale infrastructure to ensure a reliable long-term supply of recycled produced water. We recently extended an acreage dedication contract on one of our largest customers that dedicates their water sourcing in New Mexico to Ares and we now have over 450,000 acres dedicated to our water solutions business with an average contracted tenor of approximately eight years. This means that over 80% of our forecasted 2025 water solutions volumes are now under long-term contract which together with our long-term contracts and produced water handling gives us substantial visibility into future volumes. Looking forward to 2025, our customers are forecasting mid single digit production growth in the Permian Basin and our produced water volumes will grow alongside them. We anticipate an increase in water solutions activity in 2025 as certain customers increase their completion activity in our dedicated areas. We believe we can maintain the margin improvements we achieved in 2024 and we anticipate further growth in free cashflow. Steve will provide additional details around our 2025 guidance. We will also continue to pursue strategic initiatives that will allow us to accelerate our growth well into the future. As Bill mentioned, in the fourth quarter, we acquired the McNeil Ranch comprised of approximately 45,000 surface acres which provides Ares with significant optionality and long-term operational advantages. We believe the location of the ranch can support the industry's growing need for long-term water injection. We purchased the ranch after detailed subsurface analysis in collaboration with several of our largest customers and believe it features promising geology and porosity for long-term water infrastructure development. The ranch also provides a compelling opportunity to reduce our largest down-hole operating expense by eliminating landowner royalties for volumes disposed on the ranch. In addition, we have significant flexibility to maximize the value of the ranch by generating surface income through rights of way, utilization of the surface for power and renewable development, beneficial reuse and other industrial applications. We're in discussions with both current and potential new customers to commercialize the use of the ranch which we purchased at an attractive valuation relative to recent transactions on adjacent acreage. We continue to make progress on beneficial reuse alongside our partners ExxonMobil, Chevron, ConocoPhillips and Cotera. After extensive testing and development of treatment technologies, we have applied to the Texas Commission on Environmental Quality for a discharge permit for up to 475,000 barrels of reclaimed water per day. We hope to have a permit in hand by the end of 2025 with the ability to discharge water in 2026. ERIS is also applying its expertise in complex water treatment to industrial users outside of the oil and gas industry. We're extremely pleased to have recently added assets, intellectual property and an experienced team to help us with our expansion into the broader industrial market. This team has developed projects for numerous large industrial companies and positions us well strategically. We look forward to providing further updates as this business grows. And with that, I'll turn it over to Steve to discuss our financial results for the quarter and details on our outlook for 2025.

Thank you, Amanda. We recorded adjusted EBITDA for the fourth quarter of $54.5 million and adjusted operating margin of 44 cents per barrel. For the full year, we recorded adjusted EBITDA of $211.9 million, up 21% from 2023 and adjusted operating margins of 45 cents per barrel up 15% from the prior year. Turning to CapEx, we spent $18 million in the fourth quarter and $101 million for the full year. Expenditures were down 35% year over year, which paired with our strong earnings performance generated $73 million in free cashflow during the year. Looking ahead to 2025, we expect produced water volumes for the year to be between 1.15 and 1.21 million barrels per day, up 5% versus 2024 at the midpoint. We're forecasting skim recoveries of approximately 1,820 barrels of oil per day for the year at an average price of $70 per barrel, which is down approximately $4 per barrel or 7% as compared to 2024 for an estimated $3 million annual impact. In the water solutions business, we expect volumes to average between 460 and 520,000 barrels per day for the year, up 15% versus 2024 due to increased customer completion activity. We are forecasting continued strong margin performance with adjusted operating margin anticipated to be between 43 and 45 cents per barrel, depending on skim oil recoveries, skim oil pricing, and customer volume mix. This continued produced water volume growth, strong completion activity, sustained margin strength are expected to deliver adjusted EVTA of 215 to $235 million for 2025. Finally, our capital expenditures are anticipated to be between 85 and $105 million, consistent with 2024 levels, leading to free cashflow generation between 75 and $95 million, up 17% over 2024 at the midpoint. For the first quarter, we expect produced water volumes to be between 1.085 and 1.125 million barrels per day, and water solutions volumes to be between 510 and 550,000 barrels per day. This outlook reflects the impact of cold weather which shut in some customer production in January and February. This forecast also reflects unexpected well completion downtime from one of our largest customers, which pushed out certain water solutions volumes in January and February. While these issues have been resolved and activity is expected to resume in March, there is potential that some activity could be delayed until later in the year. Despite these volume impacts, we believe our margins will be largely unaffected, between 43 and 45 cents per barrel for the quarter. While production has now returned to normal levels, we anticipate the one-time weather-related impact to Eris's first quarter adjusted EBITDA to be approximately $1.5 million. Net of this amount for the first quarter, we anticipate adjusted EBITDA between 50 and $54 million. Turning to our balance sheet, we ended the quarter with net debt of $422 million and a 2.0 times debt to adjusted EBITDA ratio, with $332 million of liquidity. In terms of financing, our $400 million senior notes are scheduled to go current in April and we have begun assessing our refinancing options. Finally, we declared our first quarter dividend of 14 cents per share to be paid March 27th to shareholders of record on March 13th. This dividend represents a 33% increase over the fourth quarter of 2024 and is a reflection of our stable contracted cash flows, low leverage and confidence in 2025 and beyond. With that, I'll turn it back to Amanda.

Thanks, Steve. In closing, we would like to offer sincere appreciation to our loyal customers and also our team for all of their hard work and consistent execution in 2024. Our performance was exceptional across all metrics, safety, commercial contracting, volumetric growth, cost efficiency and discipline capital investment, alongside continuous focus on our core business, our new strategic initiatives set us up for additional growth in 2025 and beyond in both produced water infrastructure and adjacent industries. We remain focused on providing exceptional service to our customers, prudently reinvesting in the business and returning excess cash to shareholders. We built a sustainable platform from which we can make investments in new growth areas and we look forward to updating you throughout 2025 on our progress. And with that, we are happy to take questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. Confirmation total indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up a handset before pressing the star keys. One moment while we poll for questions. And our first question comes from John McKay with the Goldman Sachs. Please proceed with your question.

Hey, good morning. Thanks for the time. I wanna start on the ranch acquisition. It's definitely screening much lower per acre than some other deals we've seen. Just curious if you could frame up for us how you're thinking about the return profile on the acquisition and maybe just what the steps are to realizing that return.

Certainly. Thanks, John. So early last year, we began looking at what suitable locations with great sub-surface characteristics for us to secure future disposal locations for ourselves and our customers looking forward. And we bought the McNeil Ranch at a very attractive price. We evaluated the sub-surface with two of our largest customers. And we believe that ranch has great porosity and injectivity. It gives us great optionality. It is located adjacent to some of the fastest growing areas of the Northern Delaware. It's got rail power, gas transmission lines. It straddles New Mexico and Texas. And we believe there are over 400,000 barrels of available disposal capacity. And we've already been granted six permits of about 180,000 barrels of disposal capacity. That being said, we think there is great future growth associated with this ranch. We're in discussions with our customers on accessing this ranch for future volumes in the 26-27 timeframe. So we expect that any topics associated with the development of this ranch will be underwritten by long-term contracts and MVCs at attractive rates. And we expect to develop the ranch in the same way as we have developed our existing network, which is to enter into contracts with our customers and then underwrite the infrastructure and expansion needed. So as we look forward, it is early days. We are in discussions with our customers. We are also very encouraged by inbounds that have come in, unrelated to sub-surface. We've had inbounds on solar, leasing the ranch for solar, for wind, for battery. We've got right of way for substations. So all in all, this has been a great acquisition, giving us great optionality and operational advantages. So we look forward to updating you as we go forward. We view this as a great growth opportunity for us to continue to develop it. And at the same time, we're remaining very focused on long-term free cashflow generation, and we're gonna be balancing returns to shareholders and growth. Steve, if you wanna add in terms of how we look at it from a financial perspective, we're just very encouraged.

Yeah, and just to echo some of what Amanda said, this is really about the strategic ability to secure a poor space for future growth for the next five to 10 years. So John, when we look at ownership of the land, this really comes down to lease versus buy. And as long as we can retain the strategic optionality for the poor space and development of it, it's gonna come down to you having to compete on a return basis with any other project.

That's clear, thanks for all

the comments.

Oh, go ahead, sorry.

Sorry, John, the last thing to mention is that we did foreshadow some of this as it's related to addressing royalties. And for barrels that we dispose on this ranch, we obviously will be not paying royalties.

Yeah, absolutely, that's clear. Maybe just a quick follow-up, you touched on this briefly, but would you expect to kind of stay active on the surface acquisition side? Is this kind of it for now? You've talked more broadly about kind of more traditional water M&A, maybe just frame up the kind of go-forward acquisition strategy for us.

We continue to look for opportunities for inorganic growth.

And

we continue to evaluate companies as they come to market. But as we have consistently said, they've got to have great contracts, great assets, good inventory, and for there to be strategic imperatives to buy them at a price that we believe can be supported. So we will continue to look at companies and we will continue to look at other opportunities to ensure that we have got a...

They continue to

grow the land business and kind of the pace that we had at this over the next years, that's probably not part of the core strategy, but really a strategic move to really protect the business and have a lot of options with it.

All right, absolutely, that's clear. Appreciate the time, thank you.

Thanks, John.

Thank you. And our next question comes from Spiro Dunis with Citi. Please receive the question.

I have this chat on for Spiro. I think just starting off on the dividend, you've grown it very rapidly over the past two years. Can you talk about what more normalized growth looks like and if you have a specific target or yield in mind going forward?

Yeah, Chad, good morning. Thanks for the question. Yeah, we have stated growing shareholder returns in a sustainable manner is really one of our key goals and we're pleased that we could deliver with this increase to our shareholders. We have been starting out from a relatively low payout, you know, relative to midstream names and with strong performance that we had in 2024, this 33% increase was really meant to underscore our commitment to growing those returns over time as well as reflecting management's confidence in the long-term outlook for the business. You know, so going forward, we don't have an explicit target around payouts, but we will look to evaluate dividends, most likely on an annual basis. I would expect future increases to be at a more consistent level, though likely at a lower growth rate relative to the 33%. But we don't have a specific number or range at this time.

Okay, understood. And then just following up on McNeil acquisition, can you talk about sort of timing to develop this asset and when we can expect to see benefits show up in EBITDA?

Certainly, I think we are looking at developing this ranch in the sort of 26, 27 timeframe. So looking at revenue off the ranch, other than the surface revenue associated with some of the activities that we're looking at right now, meaningful impact really in those later years and sort of 27 timeframe.

Okay, got it. Thanks for the time. That's all I had. Thanks,

Chad.

Thank you. And our next question comes from Jeremy Tonnet with JP Morgan. Please proceed with your question.

Hey, this is Noah Katz on for Jeremy. Thanks for the question. Going back to the McNeil Ranch acquisition, you guys spoke to it a bit, but how do you plan to integrate the ranch into your existing operations and what synergies do you expect to receive from the acquisition? Can you speak to any optimization efforts that can be accomplished to cut future costs? Thanks.

Good morning, Noah, and thanks for the question. So, I mean, the comment I made to John's question if we're disposing on the ranch, we don't pay royalties. And that is one of our largest up ex-items. So that immediately is an optimization, is a benefit as we look to grow our position. The location of the ranch is adjacent to one of the fastest growing areas in the Northern Delaware. So it is associated with where we have been investing in infrastructure and signing contracts in that area. So we see it as very synergistic. We see it as giving us great optionality and giving us the operational advantages associated with the fact that the ranch has got these great subsurface characteristics that some of our largest customers have found very attractive. So, got to have an up ex advantage and we think positions as well for future growth opportunities with our customers.

Thanks for that. And then switching gears a bit as a follow-up, can you provide an update on the potential you see for the desalination and mineral extraction projects? Should we expect any other projects coming up the pipeline like these? And do you have any further updates you can provide relating to these revenue streams in 2025? Thanks.

Noah, we've been pretty specific that there's unlikely to be revenue in 25. We are looking more toward 26. We continue to work on the iodine projects in siting those locations. We expect to be under construction toward the end of the year on those projects where we will be looking at a royalty stream type structure and not be required to contribute any capex. We are working on magnesium. We are continuing to see progress in our pilot. And most importantly, we have filed for a permit with the TCEQ in Texas, which has been very constructive for the surface discharge of 475,000 barrels a day. We expect to have draft permits in hand by year end and be able to in 26 work with our customers who want access to that disposal capacity to develop and operate facilities to discharge this water safely.

Okay, thanks for that. I'll leave it there.

Thanks, sir.

Thank you. And our next question comes from Praneeth Satish with Wells Fargo. Please receive us your question.

Thanks, good morning. So I guess you kind of alluded to this, but it seems like the plan for the ranch is potentially building a water pipeline to bring your customers' volumes to new disposal wells that you build at the ranch. Can you give us a ballpark of how much capex would be involved with this type of project and developing it? Would it be comparable in scale to one of your peers announced a large water pipeline last night? Would it be kind of in that range in the hundreds of millions of dollars or potentially less than that?

Morning, Praneeth. And yes, we expected given timing of that release that we would get a question like that. So the answer is no, we do not expect to be looking at capex in that range. One of the advantages of the location of this ranch and where development is, is that we have the ability to do this in phases. And so we will work very closely with our customers as these new volumes need to be moved to the ranch. It's all going to be, you know, phase development as I said, so we do not expect to have a significant capex number like the headline number that was in the release from Wes. Steve, you want to talk about how we look at underwriting this?

Yeah, I think Praneeth, as we look at potential commercial opportunities here, it is going to be underwritten by contracts that support long-term growth, free cashflow growth to company. So it's going to be consistent with a structure that's going to support the company's long-term outlook and balance sheet health.

Got it, thanks. And then maybe turning to beneficial reuse, so the permit with the Texas commission of 475,000 barrels, pretty, quite significant. First question, do you have customers already committed to this volume or expressing interest? And then what kind of capital would be required for this project? I guess it's called the Red Bluff Treatment Facility. How large is that? Would you bring in any partners? And when would you need to make an FID decision on that?

Great questions, Praneeth. And from a competitive standpoint, I will just sort of say, yes, we are in detailed discussions and there's considerable interest in accessing those volumes. We work very closely, as you know, in the consortium with Exxon and Cotera, Conoco and Chevron, all of whom are very familiar with what we are proposing to do with this project. We anticipate it will be a combined project where we ultimately will operate it. We are going to be looking at feed toward end of year as we see the project go through the regulatory process. So this is something that we will update you on as we go, but it will absolutely be with partners. And we expect our role to be more technology, design, operation for a consortium.

Got it. Okay, thank you.

Thank you.

And our next question comes from Jeffrey Campbell with Seaport Research Partners. Please receive the question.

Good morning and congratulations on the strong quarter. I wanted to ask you a couple of questions about the industrial water recycling that you alluded to on slide five of the presentation. The first question is, this sounds like this is going to involve working with somebody else's water versus deriving value from your own. Is that correct? If so, that seems like an intrinsically different business and I wondered if you could just give us some kind of an early snapshot of what this might look like.

I'm sure, Jeffrey, yes. The industrial water sector is growing rapidly and we have been pretty consistent on saying that we have developed expertise in proprietary treatment and we know how to deal with complex water. We've been doing that for the produced water industry. As we look forward, we believe there is a real opportunity to take our expertise through the treatment of industrial wastewater. And so that is why we brought this team in-house. They've got deep expertise in industrial wastewater projects where they've successfully completed projects for large industrial customers. Their focus is on high recovery treatment solutions where they're minimizing waste streams. It is in some part using reverse osmosis systems, which we are using in beneficial reuse. So this is a great platform of bringing in people, expertise, and assets to help us not only in our own beneficial reuse efforts, but also to position us very well to continue using them and their backlog in delivering projects outside of oil and gas in adjacent verticals. We are very encouraged by what we think we can do in the industrial water sector. So that's

that. Great. And just as a follow-up to that, depending on how this evolves, would these projects be primarily limited to Texas and New Mexico near your current oil and gas operations, or could this become a multi-state endeavor?

Jeffrey, the way we see this is really as a multi-state endeavor. This team already has a backlog of projects in multiple states. It has great references with very large industrials. And we would see this as, obviously not just Texas and not related to the Permian, but in a multi-state rollout.

Great, thank you. I appreciate the color.

Thank you. And our next question comes from Derek Whitfield with Texas Capital. Please proceed with your question.

Thanks, good morning all, and congrats on your year-end close and updates. Starting on McNeil Ranch and thinking beyond your direct operations, could you speak to how you're organizing your commercial teams to attract other service activity, which would drive additional income through power development, beneficial reuse, and other industrial applications?

Thanks for the question, Derek. And honestly, we closed on the ranch at the end of last year.

And we

have not exactly gone out looking for opportunities. We are very encouraged because these have been inbounds from people who know where the ranch is, who understand what the advantages are associated with the ranch. It's got a gas transmission line, a power line, it's got a railway line, there are substations being built around it, there's a power plant being built across the street, it's located next door to Hobbs, which is the fastest growing town in New Mexico. So these inbounds have come to us without us having to go out. At this point, however, we are allocating time and people to responding to these inbounds as we continue to focus on our core operations, which is permitting working with customers for long-term opportunities associated with disposal and beneficial reuse.

Terrific, and then maybe leaning in on slide 12 a bit, you're providing a more fulsome update on beneficial reuse cases with this update regarding reservoir replenishment. How should we think about the cost of desalination and the potential ramp to discharge up to 275,000 barrels?

We've spent a lot of time with the pilot in focusing on technologies that not only are robust enough to deal with this complex water, but are cost effective. And we have made tremendous progress with our partners on getting the cost of desalination on an operational perspective down to a pace that it becomes to be competitive. And as we look at how we are going to do this, as I said in an earlier answer, the CAPEX associated with this, which I think is what your question is about, will be with partners and we are evaluating, one, how we phase into this, whether or not we start with 100,000 desalination from a design perspective is modular. So it is easy to add desalination trains as you grow. So we look forward to sort of giving you more data on this as we get further with the permit process.

Terrific, great update.

Thank you. And our next question comes from Don Chris with Johnson Rice. Please proceed with your question.

Good morning, everybody. I wanted to touch on activity levels. It feels like most of your customers are very stable in their operations, but one of your larger customers has come out with some layoffs and stuff around the world. And didn't know if that impacted y'all at all. Just wanted to clarify that the activity that one of your larger customers is doing on your, or in your dedicated acreages is still moving forward as we thought it would, in the past years.

It is all systems go, Don. So I think Chevron has announced layoffs and they have announced some initiatives that will impact production in other parts of the world. But if you drill down to what they are saying about the Permian and what they're saying about their operations in the Delaware, they've been very specific about hitting this milestone of over a million barrels a day. They are still ramping up. So we are not seeing anything that is impacting their activity on our property and our acreage dedications. It is all systems go. And if anything right now, we are seeing a slight uptick in activity, definitely on the completion side. And what's great about that is that we know, we're providing water for completions, we're gonna get more water for disposal.

That's good to hear. And one kind of broader kind of industry question, particularly on M&A, Diamondback came out and said that they could possibly sell their water systems to pay down some of the debt from the acquisitions they did recently. I don't know if that is necessarily in your wheelhouse or not, but just a broader M&A question, do you feel like that is, that the industry is gonna continue to consolidate over the next couple of years? And would y'all be a major player in that?

I don't know, I think that's right. As we said, we really make sure that what we're looking at from an asset perspective really fits the criteria that we're looking for in terms of quality assets, quality of contract, and obviously if an operator is spinning out some of their own and operated assets, you need to make sure that you can commercialize that business for other folks' water to really make the economics work, and then you're really negotiating the contract directly with the operator to ensure that you have a position. And we did that with Concho and Conoco several years ago. So that model still exists, and there's still opportunity sets, both for consolidation among water peers, as well as operator-owned systems that might find a better home with more of a water midstream operator.

I appreciate the color. Thanks a lot, Gus.

Thanks, Don. Thanks, Don.

Thank you. It looks like there are no further questions at this time. I would like to turn the call back to Amanda Brock for closing comments.

Thanks. So we had a great 2024, and as we've expressed, we're very encouraged about our 2025 outlook. We want to thank our customers. We want to thank the team, and we look forward to updating you on our progress and the strategic initiatives as the year develops. So thank you for calling in. And if we don't talk to you before, we will talk to you at the next quarter earnings. Have a great day.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.