Water Management Innovations Fueling Sustainable Growth And Profitability Surge

Key Takeaways

• Strengthened revenue growth through increased water volumes from long-term contracts and leveraging existing infrastructure for operational efficiency.
  
• Potential for enhanced net margins and long-term growth through sustainable water management solutions and strategic acquisitions.
  
• Reliance on production volumes and efficiency, along with ambitious investments and regulatory risks, poses challenges to revenue growth and earnings stability.

Catalysts

An environmental infrastructure and solutions company, provides water handling and recycling solutions.

• Growing water volumes driven by long-term contracted customers’ oil production volumes and operational efficiencies, improving revenue stability and growth prospects by leveraging existing infrastructure. Impacts revenue growth
  
• Enhanced operational execution and structurally improved margins through efficiencies such as electrification assets, reduced chemical costs, and improved solid waste handling processes. Enhances net margins
  
• Increased adjusted EBITDA guidance for 2024 based on strong first half performance, suggesting confidence in sustained profitability and efficiency gains. Indicates higher expected earnings
  
• Significant balance sheet capacity and flexibility for high-return organic growth projects and strategic inorganic acquisitions, while returning excess cash flow to shareholders. Could lead to revenue growth and improved earnings per share
  
• Development of sustainable water management solutions and beneficial reuse projects, including the iodine extraction project, which could create new revenue streams and contribute to long-term growth. Potential to expand revenue and improve net margins

Assumptions

• Analysts are assuming Aris Water Solutions's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.6% today to 24.6% in 3 years time.
• Analysts expect earnings to reach $120.3 million (and earnings per share of $1.65) by about October 2027, up from $22.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.5x on those 2027 earnings, down from 22.6x today. This future PE is lower than the current PE for the US Commercial Services industry at 26.6x.
• Analysts expect the number of shares outstanding to grow by 0.84% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.16%, as per the Simply Wall St company report.

Risks

• The reliance on customer efficiency gains and production volumes for water management revenue creates a risk if oil production volumes decrease or efficiency gains plateau, potentially impacting revenue growth.
  
• A softer quarter in water volumes indicates vulnerability to natural declines and flowback volume timing, which could cause fluctuations in revenue and challenge steady growth projections.
  
• The ambitious capital expenditure program and strategic investments, while potentially beneficial long-term, pose risks to net margins and earnings if these investments do not yield the expected returns or if market conditions change.
  
• The venture into iodine extraction from produced water, while innovative, introduces operational and market risk if the commercial viability does not meet expectations, potentially impacting projected revenue streams from new ventures.
  
• Regulatory and environmental risks associated with produced water management and new beneficial reuse applications could impact operations and revenue if regulations become stricter or if there are delays in approval processes for new water reuse applications.

Valuation

• The analysts have a consensus price target of $19.14 for Aris Water Solutions based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $21.0, and the most bearish reporting a price target of just $17.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $489.1 million, earnings will come to $120.3 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 7.2%.
• Given the current share price of $16.86, the analyst's price target of $19.14 is 11.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.