Aris Water Solutions’ strong 2022 revenue growth and potential challenges provide mixed outlook for investors
Mar 9th 2023, 5:51 pm
Part 1: Performance Analysis Aris Water Solutions, Inc. has shown a strong performance during the year ended December 31, 2022, as evidenced by the significant increase in total revenue by 40% from the prior year. The increase in revenue was mainly due to the rise in total water volumes handled or sold of 1,284 kbwpd, a 36% increase from the prior year. The company has also shown an increase of 24% in its Adjusted EBITDA, which is a non-GAAP financial measure, from the prior year, amounting to $149.0 million. Recycled produced water volumes sold of 300 kbwpd increased by 144% from the prior year. The company has successfully expanded its TPL alliance, and acquired two assets during the year. A new long-term full-cycle water management agreement with Chevron U.S.A. was signed along with a strategic beneficial reuse agreement with Chevron U.S.A. and ConocoPhillips, with ExxonMobil joining the agreement in January 2023. The expansion of the company's key customers’ capital allocation to the Permian Basin remains consistent and significant, providing the company with a steady growth opportunity. However, the company also faced challenges during the year, including abandoned well costs amounting to $15.8 million, a decrease of 45% from the prior year. The company also recorded impairment expense of $15.6 million. Part 2: Forward-Looking Analysis Despite these challenges, the company has several industry trends that continue to provide meaningful support for future growth, such as the average longer horizontal lateral lengths, which correspond to increased water sourcing and produced water handling volumes. The industry trends such as simultaneous multi-well operations and reuse applications of produced water, particularly in the areas of the Permian Basin where the company operates, are improving efficiencies and returns and provide significant opportunities for both the company's Produced Water Handling and Water Solutions businesses. The current conflict between Russia and Ukraine is having significant global economic implications, resulting in higher inflation, weaker real GDP growth, and disruption to global financial markets. The extent of these impacts will depend on the length of the conflict and whether the conflict spreads beyond Ukraine’s borders. The company will continue to face cost inflation due to increased wage and price inflation, as evidenced by increases in the CPI, which could negatively impact its operating margins. If inflation in the CPI remains significantly higher than contractually allowed fee increases, the company’s operating margins could be negatively affected. Lastly, seismicity remains an ongoing concern for the company. The company operates four wells located within the Hat Mesa Seismic Response Area (“SRA”) that are subject to the associated Seismic Response Protocol. The company has partially curtailed injection in one of the wells and continues to operate its partially curtailed well. If there's further seismic activity in the future, it may affect the company's operations. In conclusion, Aris Water Solutions, Inc. has shown a strong performance during the year ended December 31, 2022, with opportunities for future growth. The company has also shown resilience in facing challenges, although there are still potential challenges that could affect its future performance. Overall, the company’s competitive position remains firm, providing a favorable outlook for investors.