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We’re back with another edition of Elevator Pitches.
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In this week’s issue, we're happy to share eight new ideas.
We start with a hidden gem in the water services sector—an overlooked microcap poised for significant growth. After that, we have 7 more ideas, including an emerging player in the insurance space, a timely pitch for a small cap distributor, and a high quality life sciences player, among others.
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Let’s get to it.
Rewey Asset Management initiated a position in ARIS Water Solutions (ARIS), a microcap water services provider that operates in the oil patch. Rewey sees upside upside in excess of 40% in this relatively recent IPO.
ARIS Water Solutions Inc. (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 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, ARIS has gained approvals from Texas to use treated water to irrigate nonconsumed 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.
We have 7 more ideas below, exclusively for paid subscribers.