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The following segment was excerpted from this fund letter.
Aris Water Solutions Inc. (NYSE:ARIS)
We purchased shares of Aris Water Solutions, a $484 million market cap provider of water disposal and recycling solutions to oil and gas producers in the Permian Basin. Shares of ARIS ended the quarter at $8.39, a whopping 33% below its October 2021 IPO price of $13. We think ARIS is misunderstood by the market, as its revenues correlate with produced oil volumes, not prices. ARIS fills the critical need to treat and dispose of water that is produced in oil production, up to a 5:1 ratio in the Permian. ARIS is also increasing the amount of produced water that can be re-used in drilling, avoiding the need to tap fragile aquifers in the arid region. Our conservative price target is set at $12, which represents a potential 43% return, plus its attractive 4.3% dividend yield.
ARIS has a strong financial profile, supported by its long-term contracts with customers. ARIS’s network of pipelines and recycling plants represents a barrier to entry to competitors, who would find it economically challenging to create a competing network. Although it continues to build out its gathering and treatment assets, we believe ARIS will continue to reduce its net debt level of 2.3x EBITDA, through improving free cash flow. Additionally, ARIS has $24 million in cash on its balance sheet, and in October it extended and upsized its revolving credit facility to $350 million, providing ammunition for potential M&A opportunities.
We believe ARIS stands to benefit from strong revenue growth, margin improvement and free cash flow growth in 2024. While ARIS could suffer revenue weakness if oil production were to fall dramatically, we believe this risk is minimal as it has strong operating partners, including Conoco Phillips, Chevron (CVX) and others with significant acreage and long-term drilling and production needs. ARIS stands well positioned to grow alongside customers and through continued bolt-on acquisitions. ARIS has also rebuilt its operating margins, which were hit by inflationary pressures, through price increases, cost reductions and strategic initiatives like replacing diesel power with hook-ups to the electric grid and reducing the use of rented vs. owned assets.
Additionally, while we have ascribed no value premium to ARIS ESG activities in our price-target, we think these benefits are compelling and could highlight ARIS as an attractive investment for ESG minded investors. Its ESG positives include replacing trucks with pipelines and reducing ground water depletion through treatment, reuse, and aquifer recharging. Also, through its new research partnership with Conoco, Chevron and Exxon (XOM), ARIS has gained approvals from Texas to use treated water to irrigate non-consumed agriculture products like cotton and ryegrass to trap carbon and is evaluating the potential to extract and sell minerals from its treated water streams.
We believe ARIS represents a compelling valuation opportunity at $8.39, as it trades for 6.4x and 5.4x 2023 and 2024 EBITDA estimates, respectively, including the potential burden of its legacy partnership tax sharing agreements. We think consistent execution will help propel the shares higher over time, while the 4.3% dividend yield provides a near-term tailwind.
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Rewey Asset Management is a registered investment advisor in the State of New Jersey All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by RIA Innovations. These views/opinions are subject to change without notice. This material is for informational purposes only and is not a recommendation or advice. Investments and strategies mentioned are not suitable for all investors. No one can predict or project performance, and forward-looking statements are not guarantees. Past performance is not indicative of future results. Investing involves risk, including the loss of principal. Indices are unmanaged and you cannot invest directly in an index. The information and material contained herein is of a general nature and is intended for educational purposes only. This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. There is no assurance that any securities discussed herein will remain in the portfolio at the time you receive this report or that the securities sold have not been repurchased. Securities discussed do not represent the entire portfolio and in aggregate may represent only a small percentage of the portfolio’s holdings. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor. |
