Good morning, and welcome to the Aris Water Solutions second quarter 2023 earnings conference call. I am joined today by our President and CEO, Amanda Brock; our Founder and Executive Chairman, Bill Zartler; and our CFO, Stephen Thompsett.

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 U.S. 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, and thanks, everyone, for joining us this morning. Aris has delivered another strong quarter with steadily increasing volumes and solid earnings growth as reflected by our results.

Over the quarter, our contracted customers remained active in our core area of the Northern Delaware basin and 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.

Our captured area in the Northern Delaware continues to offer operators a compelling combination of inventory depth and well economics which are driving additional well completions and outsized production growth relative to the rest of the U.S. onshore production.

The need for comprehensive proven large scale water management solutions for produced water handling and supply for completions is of increasing importance to our customers, and Aris’ expanding infrastructure network is well positioned to capture additional volumes. This steady production growth has supported Aris throughout its development.

A high quality acreage under contract with decades of remaining inventory will be developed consistently under a wide range of commodity price environment. Aris’ water volumes have more than tripled since 2019 and we're making demonstrated progress in recapturing margins to continue to grow cash flow alongside our water volumes.

While there's still more progress to be made, we are pleased to be executing on our business plan ahead of schedule and have seen tangible impacts to the bottom line from our cost reduction and asset optimization efforts. Our team has performed well through the first half of the year, and I'm excited for the rest of 2023 and beyond.

With that, I'll turn it over to Amanda.

Thank you, Bill. We are very encouraged by our results over the first half of the year.

Our focus on execution, operating cost initiatives and business process improvements have delivered meaningful bottom line results. Quarter-over-quarter, we grew our total water volumes by 9% and adjusted EBITDA by 12%.

As production increases in our core operating area of the Northern Delaware, our customers have additional demand for our reliable, critical water management infrastructure. To support our customers, we continue to expand our infrastructure network to capture additional volumes, which will further solidify our leadership position in the basin.

In our produced water business, we had volumetric growth of 8% as compared to the first quarter of 2023. We averaged just over 1 million barrels per day, exceeding our forecast.

Skim oil recoveries of 0.1% per inlet barrel of produced water were in line with our expectations, as operational changes implemented earlier this year are delivering consistent results. Tracking our customers’ public commentary related to the increased New Mexico activity, we saw significantly higher completion activity in the second quarter leading to increased water solution sales.

Our water recycling and sourcing business sold 452,000 barrels of water per day in the second quarter, growing sequentially by 12%, driven by our system's capability to aggregate and deliver large quantities of recycled water throughout the basin. We also made tangible progress in reducing rental equipment expenses during the second quarter as our installed permanent infrastructure is now catching up to support our rapid pace of growth.

To date, we're ahead of schedule to reduce our rental equipment cost by approximately 3.2 million on an annualized basis versus the end of second quarter last year, which highlights the early success of our cost reduction initiatives. While completion schedules may fluctuate quarter-to-quarter, we continue to benefit from the broad trends of increased capital allocation to the Northern Delaware, customers preference for recycled water and the physical reach of our network.

We are managing through the continued impact of inflation and working with our vendors on our controllable cost reduction initiatives. Our project to convert booster pumps from diesel to permanent power is tracking well, with nine locations completed to date and 12 more scheduled to be completed in the second half of 2023.

As we mentioned previously, we are working closely with our regulated power provider in New Mexico to maintain the timelines they provided us to connect our newer facilities to line power. We expect our CPI escalation clauses, electrification projects, and rental expense reductions will deliver meaningful incremental margin improvement in the second half of the year.

As trusted infrastructure providers, we are working closely with our long-term customers who have driven our consistent volumetric growth. Seven large customers have indicated they're increasing their production in our core acreage, and others have swapped our contracted acreage with smaller producers who plan to accelerate development.

As running plans and volume forecasts in our contract acreage increase, we will expand our infrastructure network in areas with compelling upstream economics and decades of inventory. Accordingly, we are modestly increasing our growth capital outlook for the second half of this year, positioning us to capture these incremental volumes, support our existing customers and execute on new opportunities.

In beneficial reuse, we continue working alongside Chevron, ConocoPhillips and ExxonMobil and are now in active testing of promising treatment technologies and proprietary processes in the field. The goal of this testing is to develop cost effective, robust methods of treatment to support commercial opportunities to use treated produced water outside of the oil and gas industry.

We also continue to collaborate with regulators to develop appropriate oversight frameworks for the use of this treated produced water. We look forward to seeing progress over the next several quarters.

Furthering our beneficial reuse initiatives, we are pleased to announce that Dr. Eric Hoek will be joining us this month as an advisor to focus specifically on the commercialization of high-value materials and minerals in our brine stream.

Dr. Hoek, a professor of engineering at UCLA and a faculty scientist at Lawrence Berkeley National Laboratory, is a globally recognized leader in developing water technologies and has successfully commercialized numerous technologies over the years.

We are also pleased to announce that we were the recipient of Hart Energy's 2023 ESG Award for public midstream companies this past quarter, recognizing our contributions towards sustainability in the Permian Basin. With that, I'll turn it over to Steve to discuss our financial results for the quarter.

Thank you, Amanda. We recorded adjusted EBITDA for the second quarter of $42.6 million, up 40% from the second quarter of 2022 and up 12% sequentially from the first quarter of 2023, well exceeding our expectations for the quarter.

The sequential increase was largely due to our produced water and water solutions volume growth as well as approximately $1.6 million in maintenance costs, which were delayed into the third quarter due to supply chain issues. The quarter also benefited from an estimated $1.7 million of one-time items, including higher margins on minimum volume contract efficiencies, lower G&A expense, and lower property taxes.

Excluding these one-time items, our core volumetric growth and operational performance exceeded the high end of our guidance range for the quarter by approximately 6%. On capital expenditures, we incurred $49 million below our guidance for the quarter due to slightly delayed timing of capital project spending.

Looking ahead to the third quarter, we expect produced water volumes to average just over 1 million barrels per day, slightly below volumes for the second quarter before growing again in the fourth quarter. We're forecasting skim oil recoveries to remain approximately 0.1% of produced water inlet volumes at an average WTI price of approximately $74 per barrel.

As a reminder, every $1 change in oil price relative to our expectations would correspond to a change of an estimated $100,000 in EBITDA per quarter. For the water solutions business, we expect volumes of 375,000 to 390,000 barrels of water per day for the quarter, down sequentially from the second quarter again due to fluctuations in customer timing, but expect it to meaningfully increase again in the fourth quarter.

On the cost side, well maintenance expense is forecasted to be $2.1 million higher relative to the second quarter, inclusive of 1.6 million of maintenance costs delayed from the second quarter. We also expect third quarter G&A expense to be $1.2 million higher than the second quarter due to office relocation, accounting system projects and increased headcount.

For the third quarter, we're forecasting adjusted EBITDA of $39 million to $42 million as operating cost improvements and CPI linked revenue escalation are expected to offset slightly lower volumes. For the full year, we are increasing adjusted EBITDA guidance to the top half of our previous range of $150 million to $170 million to $160 million to $170 million.

As Amanda mentioned, we are increasing 2023 growth capital expenditures by approximately $10 million and maintenance capital by approximately $5 million, which brings our capital guidance for the year to $160 million to $170 million. Turning to our balance sheet.

We ended the quarter with a debt to adjusted EBITDA ratio below the midpoint of our long-term leverage target and $171 million of available liquidity. We continue to improve working capital during the second quarter, and have now reduced our accounts receivables by 53 days sales outstanding, or 37% since the end of last year.

Finally, we recently announced our eighth consecutive dividend of $0.09 per share, which will be paid on September 28 to shareholders of record as of September 14. At this time, we are primarily focused on executing on the rest of 2023 and early 2024.

Longer term, we look to balance the production growth targets of our operators, the return profiles of capital investments under our long-term agreements, and our shareholder return framework for long-term value maximization. We continue to receive forecasts from our contracted customers for 2024, and look forward to providing an update to our organic growth, business development and shareholder return frameworks as those schedules become better defined.

With that, I'll turn it over to Amanda to wrap up.

Thanks, Steve. We've made significant progress in the first half of the year, and I want to congratulate our team.

As we said before, we still have work to do and remain focused on execution, margin expansion, and ensuring we fully realize the cost efficiencies we identified at the beginning of 2023. We are growing consistently and are reinvesting in our footprint, which is underpinned by the best-in-class operators in the core of the Northern Delaware basin.

With further margin improvement efforts underway and increased volume forecast from key customers, I'm confident in our outlook for the rest of this year and excited for our long-term future. With that, we will take questions.

[Indiscernible] some of your producers. I know it's a little early for specific potential, maybe talk about what you're seeing behind your footprint right now and the implications for growth looking beyond '23?

Charles, thank you for your question. Unfortunately, you were a little bit garbled in the beginning, but I think you're asking a question about how we are seeing volumes grow from '23 beyond?

Yes.

Thank you and thanks for that question. Obviously, we have continued to track and exceed expectations on volumes in our area.

We see strong volumes continuing to grow in our area of focus. We've got great inventory.

We're in great rock [ph]. And we are seeing basically a disproportionate allocation of capital to our acreage, which really means that we will continue to see additional growth end of '23 and beyond.

We've also had some of our customers publicly state that they are allocating additional capital and expect to grow in New Mexico, so all of those trends very positively.

Okay. Thanks for that.

That's helpful. And just a follow-up question.

Could you maybe talk about the M&A landscape and how you're seeing it around your footprint? And how you see that fitting into your growth strategy in the future?

Certainly. In fact, I'll have Bill take that question.

I think, Charles, the market is there that we continue to see opportunities to put capital to work in organic with better returns. There's a few things that may begin to pop on the market over time, but our focus is really executing on the organic growth we have right now.

And we continue to evaluate opportunities as they come up and have made outgoing indications to folks about stuff. But I think at this point, things are not tracking for really consolidation at this point.

Okay, understood. That's helpful.

Thanks for the time today.

Thank you.

Good morning, everybody.

Good morning, Don.

Amanda, I just wanted to touch on the third quarter guide a little bit. Obviously, the second quarter was super strong and the third quarter’s pulling back a little bit.

I just wanted to make sure that that was just timing related, maybe a patch [ph] slipped into the second quarter versus the third quarter. And we've seen some of your other peers kind of indicate that activity is slow, and just want to make sure that that's not the case here at Aris?

Thank you, Don, and good morning. Great question.

We obviously outperformed our expectations in Q2, and we did guide down water solutions, particularly in Q3. As we've always said, water supply is lumpy, really short cycle.

But I'll have Steve go ahead and give you some more detail about how we view Q3 and obviously how we see additional strength and production in Q4.

Yes. Don, as Amanda said, the business on the water solution site is lumpy.

We look at our produced water forecast, we're still forecasting 17%, 18% year-over-year growth. We brought up the lower end of our EBITDA guidance for the year.

So we're not seeing any impact on financial performance. We're confident on the full year outlook.

Volume is going to be there. Although, it may vary quarter-to-quarter, we feel good about where the business is going.

And we do point out that if you saw us coming into Q2, we outperformed supply. We indicated that some of Q2 had moved into Q1.

Yet, we also completely exceeded our own expectations. So it is difficult to forecast even though we have long-term contracts.

And it's just the nature of how completions work. But this is not a problem for Q3.

We feel very optimistic about how everything is going to roll out.

I appreciate that color. And if I could just touch one on the removal of rental equipment and reduction of costs there.

Where are you in that process? I don't know if you could put a percentage on it or not.

But are we 30% or 40% through that process now? The cost came down pretty significantly in the second quarter.

Should we expect further reductions in the back half of the year on the removal of rental equipment?

Don, we should. We are extremely pleased by the results of all of our focus on our cost reduction efforts which bore fruit earlier than expected.

We still see additional reduction in Q3 and Q4. Again, Steve, why don't you explain with more granularity how we see this breakdown?

Yes. We're about halfway through -- almost halfway through on the rental side.

The other major project we have is connected to permanent line power. And as we stated, we're about just under halfway there.

We have nine of about 20 locations converted over, so that project is tracking. And again, we're there on the regulated utility schedule, but tracking nicely.

So we expect some incremental margin improvement from those two projects over the course of the second half of the year, as well as some additional margin expansion from our CPI escalators with one of our largest contracts having kicked in the start of July. So we should see some additional expansion over the course of the second half of the year.

I appreciate all the color. I'll turn it back.

Thanks. Good quarter.

Thank you.

Thank you.

Thank you very much and thank you for all who connected in today. We had a strong second quarter.

We are executing well and making significant progress on the plan we laid out for 2023. We feel very optimistic about the rest of the year and beyond.

And in that vein, want to thank our customers and also want to particularly call out our employees. Our team has worked and continues to work extremely hard, and we are very grateful for their efforts.

We look forward to talking to you all again next quarter. Thank you very much.