This article is about Arris Water Solutions (ARIS), a provider of water recycling treatment solutions for oil drilling companies that completed its IPO in October 2021. We hope it will be helpful in your stock selection.
Let us first look at the mechanics of shale gas and oil extraction and the positioning of water treatment in order to understand the water treatment business offered by Arris Water Solutions.
How shale gas and oil extraction works and the need for water treatment
Shale gas and oil extraction uses a technique called "hydraulic fracturing. As shown in the figure below, water mixed with sand and chemicals is pumped under high pressure into the wellbore to create cracks in the formation, from which the gas and oil seeping out is collected for production.
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Because the water used in hydraulic fracturing and the groundwater that comes up during mining contains sand and chemicals, it has been pointed out that if disposed of as is, it could cause water pollution and other environmental problems, and energy companies engaged in oil and gas extraction are required to minimize their impact on the environment.
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Business overview of Arris Water Solutions (ARIS)
Overview of Services Provided
Arris Water Solutions provides a comprehensive range of water treatment and recycling services for use during shale gas and oil extraction. Water discharged during production is collected through pipelines, treated or recycled at the plant, and the recycled water is sold. Oil mining companies can outsource to Arris Water Solutions the portion of the water used during extraction that eliminates environmental problems.
Recycled water is used primarily to irrigate non-food agricultural products such as cotton and for industrial use.
Business Areas
Aris Water Solutions operates in the Permian Basin, which straddles Texas and Delaware in the United States.
The Permian Basin is the fourth most productive shale oil producing region in the U.S., with productivity increasing rapidly since 2015.
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Assets held
Arris Water Solutions has 684 miles of water treatment pipeline laid throughout the Permian Basin, 13 recycling facilities, and numerous water treatment facility infrastructure.
Customers
Alice Water Solutions' clients include the following energy companies with oil drilling operations in the Permian Basin.
- ConocoPhillips
- Occidental Petroleum Corporation
- ExxonMobil Corporation
- Marathon Oil Corporation
- Chevron Corporation
- Mewbourne Oil Company
In terms of percentage of sales, ConocoPhillips has the largest share of sales at 34%, followed by Mewbourne and Chevron. The company has long-term contracts with 35 of its clients.
Financial Report for Q1 2022
Alice Water Solutions' business model is to charge by the volume of water treated, such as $0.78 per barrel. As customers extract more oil and gas, the volume of water treated increases and so do sales. The volume of water treated is up 130% over last year.
- Revenues of $71.0M were up 54% over the same period last year and Adjusted EBITDA was also up 54%.
- We have a new long-term contract with Chevron for Q1 2022.
Chevron's full-year 2022 guidance has been raised due to new contract wins, and Adjusted EBITDA is expected to increase as follows
Adjusted EBITDA $165.0M-$175.0M vs. previous $150.0-$160.0M
Here is the stock chart, sales and EPS, which has started to rise strongly with the third largest volume after the IPO on 5/27.
Conclusion.
We expect shale gas and oil extraction in the U.S. to remain active due to rising oil prices and geopolitical factors.
In this context, we believe that Arris Water Solutions is a promising investment that has the potential to grow together with energy companies, as it possesses infrastructure that can provide comprehensive water treatment solutions to energy companies that are required to consider and address environmental issues caused by water generated during mining.
However, if the demand for crude oil or natural gas declines due to economic recession or other factors that cause prices to drop significantly, extraction activity will also decline, in which case there is a risk that growth will cease along with energy companies. Like oil stocks, these stocks will be affected by the price of crude oil and natural gas. It is a good idea to pay attention to the economic trends in the U.S. and Europe while investing and trading.
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