Aris Water Solutions Stock: Misunderstood by the Market (NYSE:ARIS)
Boy Wirat/iStock via Getty Images
The following part is excerpted: This funding letter.
Aris Water Solutions Co., Ltd.New York Stock Exchange: Aris)
We purchased shares of Aris Water Solutions, a $484 million market capitalization company that provides water treatment and recycling solutions for oil and gas. Producers in the Permian Basin. ARIS’s stock price closed the quarter at $8.39, a whopping 33% below its October 2021 IPO price of $13. I believe ARIS is misunderstood by the market because its profits are tied to oil production, not price. ARIS meets the critical need to treat and process water from oil production at up to a 5:1 ratio in the Permian. ARIS is also increasing the amount of produced water that can be reused in drilling, eliminating the need to tap vulnerable aquifers in dry regions. Our conservative price target is set at $12, which represents a potential yield of 43% and an attractive 4.3% dividend yield.
ARIS has a strong financial profile with long-term contracts with customers. ARIS’ network of pipelines and recycling plants represents a barrier to entry for competitors who find it economically difficult to establish a competitive network. ARIS continues to build its collection and processing assets but is expected to continue reducing its net debt level to 2.3 times EBITDA through improved free cash flow. ARIS also has $24 million in cash on its balance sheet, and in October expanded and expanded its revolving credit facility to $350 million, providing ammunition for potential M&A opportunities.
We believe ARIS will benefit from strong revenue growth, margin improvement and free cash flow growth in 2024. ARIS could experience weaker sales if oil production declines sharply, but believes this risk will be minimized because it has strong operating partners, including Conoco. Phillips, Chevron (CVX), and others with significant acreage and long-term drilling and production needs. ARIS is well positioned to grow with our customers through continued additional acquisitions. ARIS has also rebuilt operating margins battered by inflationary pressures through price increases, cost reductions and strategic initiatives such as replacing diesel power with grid-tied and reducing the use of leased and owned assets.
Additionally, while we do not place a value premium on ARIS ESG activities in our target price, we believe these benefits are attractive and could highlight ARIS as an attractive investment for ESG-minded investors. Positive aspects of ESG include replacing trucks with pipelines and reducing groundwater depletion through treatment, reuse, and aquifer recharge. ARIS also has new research partnerships with Conoco, Chevron and Exxon ( I’m doing it. Minerals from treated water streams.
We believe ARIS presents an attractive valuation opportunity at $8.39 as it trades at 6.4x and 5.4x estimated 2023 and 2024 EBITDA, respectively, including the potential burden of legacy partnership tax sharing agreements. We believe consistent execution will help boost the stock price over time, while the 4.3% dividend yield provides a short-term tailwind.
Rewey Asset Management is a registered investment advisor in the State of New Jersey. All information contained herein is derived from sources deemed reliable but cannot be guaranteed. All economic and performance data are 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 of RIA Innovations. These views/opinions are subject to change without notice. This material is provided for informational purposes only and does not constitute recommendations or advice. The investments and strategies mentioned are not suitable for all investors. No one can predict or project performance, and forward-looking statements are not guaranteed. Past performance is not indicative of future results. Investing involves risk, including loss of principal. The indices are unmanaged and you cannot invest directly in them. The information and material contained herein is of a general nature and is for educational purposes only. It does not constitute a recommendation, solicitation or offer to buy or sell any security. There can be no assurance that the securities discussed herein will remain in the portfolio at the time you receive this report or that any securities sold have not been redeemed. The securities discussed are not representative of the entire portfolio and may represent only a small percentage of the portfolio’s holdings as a whole. Individuals should consult their tax, legal or financial advisors before investing or using any strategy. |
Editor’s note: The summary bullet points for this article were selected by Seeking Alpha editors.
