Greetings. Welcome to Aris Water Solutions Second 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. Please note, this conference is being recorded. I will now turn the conference over to David Tuerff, Senior Vice President, Finance and Investor Relations. Thank you. You may begin.

Good morning, and welcome to the Aris Water Solutions second 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, Stephan Tompsett. 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 and 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. Reconciliations to 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. Aris continued its strong momentum in 2024, driven by resilient volumes from our long-term contracting customers and continued operational execution. We substantially completed our first half weighted capital expenditure program and continue to more effectively leverage our asset footprint. Consistent revenue growth, structurally improved margins, and efficient capital investment have allowed us to generate excess cash and further enhance our ability to increase returns to shareholders. Our steadily growing water volumes are a function of our contracted customers' oil production volumes in top-tier acreage in the Northern Delaware Basin. As our customers continue their efficiency gains, they are driving greater oil recoveries from fewer rigs, pads, and well completions. These productivity gains benefit us as we are more efficient alongside them by leveraging our existing extensive infrastructure, which has over 770 miles of large diameter pipe and 625,000 dedicated acres under contract. We're off to a great start this year and are encouraged by our outlook well into the future. With that, I'll turn it over to Amanda.

Thank you, Bill. Aris had a strong first half of the year. Following a great first quarter, we grew our produced water volumes 5% year-over-year and achieved adjusted EBITDA of $50 million in the second quarter, up 17% year-over-year. As anticipated, we saw a sequentially softer quarter volumetrically due to natural declines from significant produced water flowback volumes that were pulled forward in the second quarter into the first quarter of the year. In the Water Solutions business, we sold 362,000 barrels of water per day, approximately flat with the first quarter. While our customers deferred the few scheduled completions until later in the year, we still expect Water Solutions volumes to increase throughout the third and fourth quarter. For the second straight quarter, we achieved adjusted operating margins of $0.46 per barrel. Our operations team continues to demonstrate the stability of our margin improvement driven in large part by electrification efforts, reduced chemical costs, automation, and improved processes for solid waste handling. Given our strong start to the year and outlook for the second half, we are increasing our adjusted EBITDA guidance range for the full year of 2024. We've maintained our focus on efficient capital deployment and remain on track for the cash flow generation we forecasted at the beginning of the year. We have significant balance sheet capacity and flexibility, providing us opportunities to invest in high-return organic growth projects and strategic inorganic acquisitions while returning excess free cash flow to shareholders. We continue to lead the industry in delivering sustainable water management solutions while evaluating additional opportunities to extract value from our produced water waste stream. In the second quarter, Aris signed a letter of intent with an established iodine production and marketing company who will construct the first iodine extraction facility in the Permian Basin at one of Aris' produced water management facilities. Our development partner operates numerous similar iodine expression facilities in other basins, and this facility will be designed to confirm the commercial viability of extraction of iodine from Aris' produced water. We will provide additional information around the potential economic benefits of this project once those are finalized. As it relates to our beneficial reuse assets, we continue working with regulators to accelerate the approval process for the use of produced water outside of oil and gas. The Aris-led joint industry project with ConocoPhillips, Chevron, and ExxonMobil has successfully completed its second of three desalination pilots and is scheduled to complete testing of the third pilot by year-end. This will conclude Phase 1 of the project verifying that produced water can be cost effectively and safely treated for multiple purposes. We are also pleased to announce that Coterra Energy recently joined the partnership, adding their considerable expertise to the evaluation and piloting process. With that, I'll turn it over to Steve to discuss our financial results for the quarter and details on our outlook for the rest of the year.

Thank you, Amanda. We recorded adjusted EBITDA for the second quarter of $50 million, up 17% from the second quarter of 2023 and down 6% sequentially from the first quarter of 2024 due in large part to natural declines and large flowback volumes delivered earlier in the first quarter. We achieved adjusted operating margin of $0.46 per barrel for the second straight quarter, which reflects a $0.01 per barrel benefit from water sourcing business mix as we sold more recycled water and less lower-margin groundwater than forecast. We also benefited from higher skim recovery than anticipated, providing additional margin of $0.015 per barrel. Notwithstanding the benefits from increased skim in the water supply business mix, the improvements made over the past 24 months are durable, and we expect our core operating margins will be sustained at these levels throughout the rest of the year and beyond. As we noted in the past, we expect our groundwater sales will continue to decline over time as we deliver increased sustainable, profitable, recycled produced water volumes. Turning to CapEx, we indicated earlier in the year that our 2024 capital program would be front-end weighted in the first six months, which unfolded as expected. We invested $37 million in the second quarter, which brings first-half CapEx to $75 million as compared to our expected full year range of $85 million to $105 million, which is consistent with our prior guidance. Looking ahead to the third quarter, we expect produced water volumes to be between 1.06 million and 1.09 million barrels per day, and we're forecasting skin recoveries of approximately 1,300 barrels of oil per day. In the Water Solutions business, we expect third quarter volumes to average 410,000 to 440,000 barrels per day, consistent with our expectation for an uptick in well completions on our dedicated acreage in the second half of the year. Driven by our strong performance in the first half of the year and increased confidence in both the volume and margin outlook for the rest of 2024, we are increasing our full-year adjusted EBITDA range to $195 million to $205 million. With regard to our balance sheet, we ended the quarter with net debt of $438 million and a 2.2 times debt-to-adjusted-EBITDA ratio well below our leverage target range of 2.5 times to 3.5 times and $299 million of available liquidity, which provides us with significant financial flexibility. Finally, I'm pleased to report that our accounting ERP software upgrade we announced last year successfully went live on July 1. This implementation will help drive additional back-office efficiency and provides the necessary corporate infrastructure to support future growth. I'm proud of all that our team has accomplished in delivering this project on time and on budget. With that, I'll turn it over to Amanda to wrap-up.

Thanks, Steve. In closing, I again want to thank our dedicated team. We are operating extremely well and are consistently delivering on our goals. We've paired our long-term underlying revenue growth from our contracted customers with margins that we've demonstrated have structurally and sustainably recovered. We've become more efficient, better leveraging our asset footprint and driving a significant decrease in capital spending while still supporting our customers' growth. The result is increased cash generation, which, with our strong balance sheet, gives us significant optionality for future high-return organic growth and strategic inorganic opportunities, while continuing to increase our returns to shareholders. With that, we will take questions.

Thank you. Our first question is from John Mackay with Goldman Sachs. Please proceed.

Hi. Good morning. Thanks all for the time. I wanted to start on the Permian and maybe just your view on kind of growth into the back half and as we get into 2025. We've heard a couple of different narratives this earnings season on Delaware pace versus Midland pace, improving producer efficiencies, etc. I would just be curious on your view and then maybe how that compares to what you're looking at the beginning of the year. Thanks.

Thanks, John. The Permian continues to produce, particularly in the Northern Delaware, as we predicted and forecasted earlier this year. If you look at who our customers are and how they articulate to describe what they're going to do, we have just seen steady performance, and we continue to see steady performance through year-end. David, would you like to take that further?

Yes, sure. I think, John, we're seeing relatively flat rig count consistent with expectations coming into the year, with improved operator efficiencies driving production growth sort of over and above that. And that tracks with what we're seeing volumetrically on our side of the business, right, with production growth on the produced water side in the mid-single-digit range, consistent with what we expected and consistent with what our producers are doing in the basin. And the sourcing volume is relatively flat corresponding to the rig count. So I would say, looking on out into 2025, we see that theme largely continuing. And we see sort of mid-single-digit production growth consistent with what our customers have said about the next year.

We are seeing, John, some narrative among customers about whether or not they increase the rig count in the Delaware. You do see some softening of rig count in the Midland Basin versus the Delaware, but that has not yet been determined. We watch that carefully like everybody else.

I appreciate that. Thanks. And maybe shifting gears a little bit to as there's been a broader focus recently on disposal capacity and overall availability of port space. Can you just talk a little bit about what your strategy is here? And what that means for your cost structure? Thanks.

Certainly, as we've previously discussed, particularly when we did the alliance with TPL, we've always been focused on being proactive on making sure that we have access to sufficient port space where we can drill, granted permits when our customer supplies dictate. So at this point, we have about 90 permits in space, across a large geographic diversified region. We have relationships with landowners like Texas Pacific and that was a very important alliance that we announced a couple of years ago, where we have the ability to go ahead and permit on TPL land and then drill as needed. So we continue to identify areas of growth, where our customers are moving and staying ahead of that by aggressively and carefully actually finding port space, applying for permits, and being ahead of any concerns.

All right. It's clear. Thank you very much.

Our next question is from...

Thank you.

Hi. This is Chad, on for Spiro. So starting off, leverage is below target levels that you see have seen dry powder. Can you refresh us on the uses of capital here and provide an update on the M&A landscape given some recent deal activity?

Good. I'll have Steve start with our capital program, and then we'll address the M&A landscape.

Yeah. Good morning. In terms of capital allocation, there's really no change in the framework that we approach to that. Our balance sheet is in great shape. And we're going to continue to focus on that. We never want to put ourselves in a position where leverage is a concern. Beyond that, we are focused on deploying capital into attractive organic growth projects and inorganic opportunities where they present themselves. And as you saw last quarter, with our dividend raise, we expect to increase shareholder returns sustainably and consistently over the long term. So we remain focused in that framework and look to deliver on that consistently quarter-over-quarter.

As it relates to the M&A landscape, what we have seen is some recent interest in the sector. You've seen two recent transactions and Waste Connections buying the Lane midstream business. And then I think yesterday, the announcement of Delek buying H2O Midstream in the Midland Basin. In the case of the latter, that had been a transaction in process a number of years, H2O within a sales process for over two years. It has come to market. We have looked at those assets. For many reasons, we had determined that from a value perspective, we did not feel comfortable with the valuations the sponsor was expecting. So again, Delek has reasons for doing that transaction, but we do remain very interested in the M&A market. And we do see opportunities with companies and that may be private equity backed, and there may be some fatigue where at the right price we would be interested in moving forward. Bill Zartler is on the phone. So Bill, if you want to add to that, given the landscape we're working on right now.

I think you covered it. I mean our focus is making sure that we have our business, and we know what it's trading for. We've got the buildup of how we've structured our contracts and our partners throughout the business, and we're going to be carefully looking for the right opportunities. And I think they will be out there over the course of the next year or so. If they're not, we'll continue to build our business, and we see no shortage of fairly attractive organic projects to do within our core at the same time.

Thanks. That's really helpful. And then the second question. You've reached another milestone on mineral extraction. Can you talk about next steps from here and ultimately what you hope the strategy achieves?

Certainly, and thank you for that question. We previously indicated that beneficial reuse, obviously, is a long-term play as we try to find other uses for our produced water other than just disposal. When we spent over a year looking at what was in our water, we told everybody that we've identified certain high-value minerals that we thought were attractive. And in the last quarter, we said we would come back with milestones and we were talking to potential channel partners who could evaluate whether or not what was in our water could be extracted in a commercial way. So we are now announcing that we've entered into an LOI as it relates to one mineral, which is iodine. The Manolis company has a lot of experience, has other facilities in other areas where there have been brine mining for this mineral. And it is not a large facility. They will be putting up the CapEx. It will be all of our produced water on one of our facilities. And we right now think we will structure it as kind of a royalty, a tolling where they pay us a royalty per barrel, but we are very optimistic that we're going to be able to see how this can be done. And at the same time, we continue to have conversations as it relates to other minerals that are in our water. So it is a milestone. What we indicated is when we have something like this happen, we will communicate as we make progress.

Got it. That's very helpful. Thanks for the time.

Thank you.

Good morning. Congratulations on the strong quarter. My first question, I just wondered, did you expect iodine to emerge as the first commercial target for mineral recovery? And what's your view as to why that became the first one to emerge?

I'm not a scientist, and thanks, Jeffrey, for the question. I think we did expect it to emerge more quickly than the others. It's a function of the technology that's available, the references that were out there in a different basin. So we did expect it to emerge first. And what it means for the other is we are on the route of talking to people as it relates to magnesium, ammonia, and different processes, but certainly removing iodine from the water does not then prevent you from moving other minerals from the water. But this was not unexpected.

Okay. Great. Thank you. And my other question, I noted with interest the MOU with Texas Tech University regarding agricultural applications of the JIP water. Can you contrast your intending work with Texas Tech with that you've already done at Texas A&M and other academic institutions?

Texas Tech is where the Texas consortium is where multiple parties belong to the consortium, looking at ways to use produced water beneficially outside of the oil and gas environment. We were pioneers and very early working with Texas A&M picking up on a program that began just a year ago, and that was treating produced water for use in cotton agriculture, and we were very successful. We now also have a DOE grant, which we have mentioned before. The steel rates in the process are being executed, and that will take us a step further with our partners and actually growing more cotton in the ground rather than a greenhouse to further verify that this can be done cost-effectively with carbon sequestration associated with the roof structure and soil.

Great. Thanks very much.

Thank you.

Hi, everyone. This is Eli on for Jeremy. Maybe to start on some of the sustained margin strength through the first half of the year. It seems like these cost optimization efforts have really worked. So how should we think about the stronger margins? And are they likely to persist in 2025 and beyond? Or what might be the key items to monitor around the business to sustain this type of performance?

Thanks, Eli, and thanks for recognizing that they are sustainable. I'll have Steve go ahead and take you through where we've been successful with the low-hanging fruit and where we think there have been some structural changes and then where we always guide on skim and others where there may be some lumpiness quarter-to-quarter.

Yes. Good morning. No, you're right. We've seen tremendous progress in our margin improvement. A lot of that is due to the efforts over the last 12 to 18 months around electrification, getting off of rental equipment and onto permanent equipment, and then some efforts around chemicals and other items. Those are sustainable, we believe, in the long term, and we've guided to $0.43 per barrel, which we think is a long-term number. That will, of course, creep up with the CPI escalators that we have in our contracts on the revenue side. The outperformance for the last two quarters, we do believe, were one-time items to provide guidance based on where we have high confidence, and to the extent that we're able to outperform on skim, that would be a benefit above it. But what we've done is sustainable and durable over the long term.

Awesome. That's good color there. And maybe just as a follow-up, I know the decision to keep CapEx flat alongside the EBITDA raise might be some timing of investment opportunities. But just thinking about the strong balance sheet, how does the team think about the timing of potential dividend hikes? Did you guys consider another one this year? And then what do you see as the cadence for dividend growth for the business going forward?

Yes. We discussed it internally as well with our Board on a quarterly basis, not just for the short term, but for our long-term strategy. And as I said earlier, we do intend to increase shareholder returns in a sustainable manner over the long term. I don't think you should anticipate quarterly dividend increases, but we certainly anticipate and intend to have long-term consistent dividend growth. We evaluate share buybacks as well. It's just more of a nuanced topic, given the low float that we have. But you should expect long-term shareholder returns to increase over time.

Bill, would you like to add to that, just given how seeing everything is in the balance sheet optionality?

Yes, I mean, I think that Stephan's got it, we're evaluating as we continue to go, and there's nothing wrong with having a super great balance sheet. And if we don't find the opportunity, we'll pay the debt down and watch for the next opportunity. So, I think it's — we're in this for the long haul, and it's steady right opportunities for inorganic, organic, as well as the continued distribution to our shareholders, that will continue over a period of time. And we're not looking at this on a quarter-by-quarter basis; we're looking at it over the long haul.

Thank you.

And with no further questions at this time, I would like to turn the conference back over to Amanda Brock for closing remarks.

Getting a lot of feedback, hoping everybody is hearing it better than we are. We had a great quarter. We all remain very focused on the efficiencies and operational excellence. We are very pleased, but we are not done yet. There is more to go. We are very optimistic about the future. As Bill said, we're in this for the long haul. We are seeing some opportunities out there. We are working extremely hard. So, thank you to all of our employees and for contributing to where we are today. Thank you to our customers and our shareholders, and we look forward to talking to you next quarter, if not before. Have a great day.

Thank you. This will conclude today's conference. You may disconnect your lines at this time.