10-Q: Aris Water Q2 Sees Revenue Surge Amid WES Merger Plan

Aris Water Solutions reported a 23% revenue increase in Q2 2025, alongside progress on its planned merger with Western Midstream Partners and strategic acquisitions.

Summary

• Total revenue for Q2 2025 increased by 23% to $124.1 million compared to $101.1 million in Q2 2024.
• Net income for Q2 2025 rose by 7% to $14.1 million from $13.1 million in Q2 2024.
• Adjusted EBITDA for Q2 2025 increased by 9% to $54.6 million, up from $50.0 million in Q2 2024.
• Produced water handling volumes grew by 13% to 1,234 thousand barrels of water per day (kbwpd) in Q2 2025.
• Water solutions volumes sold surged by 44% to 523 kbwpd in Q2 2025.
• The company entered into an Agreement and Plan of Merger with Western Midstream Partners, LP (WES) on August 6, 2025, under which Aris will become a wholly-owned subsidiary of WES.
• Consideration for the merger includes options for WES common units, cash, or a combination, with a cash election subject to proration to ensure aggregate cash paid does not exceed $415 million.
• An amendment to the Tax Receivable Agreement (TRA) was executed, resulting in an $80 million cash payment to TRA Holders upon merger closing, terminating the TRA.
• Acquired five produced water handling facilities and land in Reeves County, Texas for $13.2 million cash, subsequently selling the land for $4.5 million.
• Acquired intellectual property and assets from Crosstek Membrane Technology LLC for $2.9 million, expanding into industrial water and wastewater treatment.
• Extended the water gathering and handling agreement with ConocoPhillips from May 31, 2033, to May 31, 2040.
• Issued $500.0 million aggregate principal amount of 7.250% Senior Notes due 2030, using proceeds to satisfy and discharge $400.0 million of 2026 Notes and repay Credit Facility borrowings.

Sentiment

Score: 7

Explanation: The filing presents a generally positive outlook, primarily driven by the announced merger with WES and a favorable TRA amendment, which significantly de-risks a major liability. Operational performance shows strong volume and revenue growth, although per-barrel margins have declined due to cost pressures and lower skim oil prices. Strategic acquisitions and R&D initiatives in beneficial reuse and mineral extraction demonstrate forward-looking growth and sustainability efforts. The merger, if completed, offers a clear strategic path, outweighing the mixed operational efficiency metrics for the quarter.

Positives

• Strong revenue growth of 23% in Q2 2025 and 20% for the six months ended June 30, 2025, driven by increased produced water handling and water solutions volumes.
• Significant volume increases: produced water handling volumes up 13% and water solutions volumes up 44% in Q2 2025.
• Net income and Adjusted EBITDA showed positive growth in Q2 2025, indicating overall profitability improvement.
• Increased quarterly dividend by 33% to $0.14 per share in Q2 2025 compared to Q2 2024.
• Strategic merger with WES provides a clear path for future growth and integration into a larger midstream entity.
• Favorable amendment to the Tax Receivable Agreement (TRA) reduces a potential liability, with an $80 million cash payment to TRA Holders upon merger closing, significantly less than the estimated $183.4 million early termination payment.
• Successful acquisitions of Reeves County assets and Crosstek technology expand operational footprint and diversify into industrial water treatment.
• Long-term water gathering and handling agreement with ConocoPhillips extended to 2040, securing significant future revenue.
• Active participation in beneficial reuse initiatives (Joint Industry Project, NAWI, UCLA) demonstrates commitment to sustainability and potential new revenue streams from treated water and mineral extraction.

Negatives

• Direct operating costs per barrel increased by 20% to $0.36 in Q2 2025, driven by higher water transfer, groundwater, electricity, fuel, landowner royalties, and workover costs.
• Gross margin per barrel decreased by 9% to $0.29 in Q2 2025, impacted by higher maintenance expenses and lower market prices for skim oil sales.
• Adjusted operating margin per barrel decreased by 11% to $0.41 in Q2 2025, reflecting the same cost pressures and lower skim oil prices.
• Skim oil sales revenue per barrel of skim oil decreased by 22% to $56.90 in Q2 2025, despite a 91% increase in skim oil volumes recovered.
• Net income growth for the six months ended June 30, 2025, was negligible (0%) compared to the same period in 2024, despite significant revenue growth, indicating increased expenses.
• Interest expense increased due to higher average outstanding debt balances from the new 2030 Notes and a decrease in capitalized interest.

Risks

• The planned merger with Western Midstream Partners, LP (WES) may not be completed on anticipated terms, expected timing, or at all, due to regulatory approvals, stockholder approval, or other conditions.
• Anticipated benefits of the merger, such as synergies and operational efficiencies, may not be realized or may not be realized within the expected time period.
• Disruptions from the merger, including diversion of management's time and attention, could harm business operations and current plans.
• Potential adverse reactions or changes to business relationships with customers, regulators, and employees resulting from the announcement, pendency, or completion of the merger.
• The market price of WES Common Units, which form part of the merger consideration, has fluctuated and will continue to fluctuate, creating uncertainty regarding the value of consideration received by stockholders.
• The merger agreement limits the company's ability to pursue alternative transactions and includes a $57 million termination fee payable to WES under certain circumstances, potentially discouraging other acquisition proposals.
• Failure to complete the merger could negatively impact the company's share price, future business, and financial results, and lead to substantial costs.
• Potential litigation related to the merger could result in substantial costs, injunctions preventing completion, or damage payments.
• The company's business is highly reliant on a limited number of customers and a particular region (Permian Basin), making it vulnerable to changes in their capital spending and activity levels.
• Fluctuations in crude oil and natural gas prices, influenced by geopolitical conflicts (Russia-Ukraine, Middle East), tariffs, and recessionary concerns, can impact customer drilling activity and the company's revenue, particularly from skim oil sales and contracts tied to WTI prices.
• Increased wage and price inflation, where contractual CPI-based adjustments are capped, could lead to operating margins deteriorating if costs rise faster than fees.
• Regulatory responses to seismic activity in operating areas could lead to future curtailments or restrictions, impacting volumes and operations.
• The degree to which exploration and production customers may elect to operate their water-management services in-house rather than outsourcing could reduce demand for the company's services.
• Capacity constraints on regional oil, natural gas, and water gathering, processing, and pipeline systems could slow drilling and completion activity, reducing demand for services.
• The potential deterioration of customers' financial condition, including defaults resulting from actual or potential insolvencies, poses a credit risk.
• The company's ability to retain key management and employees and to hire and retain skilled labor is crucial for operations.
• Compliance with current and future environmental laws and regulations, including those related to hydraulic fracturing, water access, produced water handling, carbon pricing, and taxation of emissions, could increase costs or restrict operations.
• Delays or restrictions in obtaining, utilizing, or maintaining permits and/or rights-of-way by the company or its customers could hinder expansion or operations.
• Advances in technologies or practices that reduce the amount of water used or produced in oil and gas production could reduce demand for the company's services.

Future Outlook

The company expects capital expenditures for 2025 to be between $85.0 million and $105.0 million, based on current customer outlooks and excluding any merger impact. The planned merger with WES is expected to close in the fourth quarter of 2025, subject to shareholder and regulatory approvals. The company is evaluating the financial impact of the recently enacted 'One Big Beautiful Bill' (OBBB) tax legislation. Efforts continue on developing beneficial reuse technologies for produced water, with Phase 2 testing launching and a goal for an iodine extraction facility to be operational in the first half of 2026. The company will cease to be an emerging growth company effective December 31, 2025, if the merger has not closed, requiring an independent auditor's attestation report on internal controls.

Management Comments

• Our integrated pipelines and related infrastructure create long-term value by delivering high-capacity, comprehensive produced water management, recycling and supply solutions to operators in the core areas of the Permian Basin.
• Our key customers' capital allocation to the Permian Basin and New Mexico, in particular, remains consistent and significant, including on acreage where the water sourcing and production is dedicated to us.
• Permian Basin oil and associated water production growth continues to outpace production growth in other parts of the United States.
• Many industry trends such as simultaneous multi-well operations and reuse applications of produced water, particularly in the areas of the Permian Basin where we operate, are improving efficiencies and returns and provide us with significant opportunities for both our Produced Water Handling and Water Solutions businesses.
• We believe that our cash flows, availability under our Credit Facility and leverage profile provide us with the financial flexibility to fund attractive growth opportunities in the future.
• Our goal under the Joint Industry Project (JIP) is to develop cost effective and scalable methods of treating produced water to create a potential water source for industrial, commercial and non-consumptive agricultural purposes.

Industry Context

The company operates within the U.S. energy services sector, specifically focusing on water management in the Permian Basin, a key oil and gas production region. The industry is influenced by global commodity prices, geopolitical conflicts (Russia-Ukraine, Middle East), and inflationary pressures. Despite these challenges, Permian Basin oil and associated water production growth continues to outpace other U.S. regions, providing a strong demand backdrop for water management services. Industry trends like multi-well operations and produced water reuse are driving efficiency and creating opportunities. The company's strategic acquisitions and R&D initiatives align with broader industry shifts towards sustainability, water recycling, and beneficial reuse, positioning it for growth beyond traditional produced water handling.

Comparison to Industry Standards

• The company's 23% revenue growth and 13% increase in produced water handling volumes in Q2 2025 demonstrate strong operational activity, potentially outpacing some competitors in the Permian Basin water management sector, given the overall Permian production growth.
• The 44% increase in water solutions volumes sold highlights a significant shift towards water recycling and reuse, aligning with and potentially leading industry best practices for sustainable operations, especially compared to companies solely focused on disposal.
• The decline in per-barrel gross margin and adjusted operating margin, coupled with a 20% increase in direct operating costs per barrel, suggests that the company is experiencing higher cost pressures (e.g., water transfer, groundwater, electricity, fuel, landowner royalties, workover costs) that may be common across the industry but are impacting its profitability metrics more significantly than its revenue growth.
• The decrease in skim oil sales revenue per barrel, despite higher volumes, reflects the broader trend of lower West Texas Intermediate (WTI) crude oil spot prices ($64.57 in Q2 2025 vs. $81.81 in Q2 2024), which affects all companies with exposure to commodity prices.
• The company's Joint Industry Project (JIP) with major operators like Chevron, ConocoPhillips, Exxon Mobil, and Coterra Energy for beneficial reuse technologies positions it at the forefront of innovation in produced water treatment, potentially setting new benchmarks for water sustainability in the Permian Basin compared to smaller, less integrated players.
• The acquisition of Crosstek Membrane Technology LLC indicates a strategic move into broader industrial water and wastewater treatment markets, diversifying revenue streams beyond oil and gas, a trend that some larger, more diversified environmental services companies might also be pursuing.

Corporate Governance

Legal Proceedings

• No material changes to the status of legal proceedings previously disclosed in the 2024 Annual Report.
• No other pending litigation, disputes, or claims are expected to have a material adverse effect on financial condition, cash flows, or results of operations.
• Potential securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into merger agreements, which could result in substantial costs, injunctions, or damages.

Related Party Transactions

• The company and ConocoPhillips, a significant stockholder, are parties to long-term water gathering and handling and water supply agreements.
• Receivables from ConocoPhillips were $24.4 million as of June 30, 2025, up from $12.0 million at December 31, 2024.
• Payables to ConocoPhillips were $3.5 million as of June 30, 2025, up from $0.7 million at December 31, 2024.
• Revenues related to ConocoPhillips were $41.7 million for Q2 2025 (up from $32.0 million in Q2 2024) and $83.4 million for the six months ended June 30, 2025 (up from $64.1 million in the prior year period).
• In January 2025, the company entered an agreement with ConocoPhillips to purchase three water ponds for $3.7 million, paid via a $0.04 per barrel credit on monthly revenue billings.
• The Joint Industry Project (JIP) for beneficial reuse is a collaborative arrangement with Chevron U.S.A. Inc., ConocoPhillips, Exxon Mobil Corporation, and Coterra Energy Inc., with research and development costs split equally among alliance members.

Stakeholder Impact

• Shareholders: Will receive merger consideration (cash and/or WES units) if the merger closes, providing a liquidity event. Dividend payments continue at $0.14 per share, but future increases are capped by the merger agreement. Risk of share price decline if merger fails.
• Employees: The Crosstek acquisition brings a skilled workforce. The merger introduces uncertainty regarding future employment and integration into WES, though management's time is diverted to merger-related issues.
• Customers: Long-term contract extensions (e.g., ConocoPhillips) ensure continued service. The merger could lead to changes in business relationships or service offerings, but the company aims to maintain service without material disruption.
• Creditors: The company refinanced debt by issuing new 2030 Notes and repaying older notes and credit facility, impacting debt structure. Compliance with debt covenants is maintained.
• TRA Holders: Will receive an $80 million cash payment upon merger closing, terminating the Tax Receivable Agreement, which is a favorable outcome compared to the original estimated early termination payment.

Next Steps

• Obtain Aris Inc. shareholder approval for the merger with WES.
• Secure required governmental and regulatory approvals for the merger (e.g., HSR Act expiration/termination).
• Complete the merger with WES, expected in Q4 2025.
• Make aggregate payments of $80 million in cash to TRA Holders upon the closing date of the merger.
• Continue evaluating the financial impact of the 'One Big Beautiful Bill' (OBBB) tax legislation.
• Launch Phase 2 testing for beneficial reuse technologies under the Joint Industry Project (JIP).
• Work towards making the iodine extraction facility operational in the first half of 2026.
• If the merger does not close by December 31, 2025, the company will be required to provide an independent auditor's attestation report on the effectiveness of its system of control over financial reporting.

Key Dates

Recommendation

The primary driver for Aris Water Solutions' stock price is the pending merger with Western Midstream Partners, LP (WES). The stock is likely to trade in line with the implied merger consideration, making it an arbitrage play rather than a fundamental investment based on standalone operations. While the company reported strong revenue and volume growth, per-barrel profitability metrics declined, indicating operational cost pressures. The favorable amendment to the Tax Receivable Agreement (TRA) is a significant positive related to the merger. Given the high probability of the merger closing (subject to approvals), a 'hold' recommendation is appropriate for existing shareholders to realize the merger consideration, or for new investors to consider a merger arbitrage strategy if the spread is attractive. A 'buy' or 'sell' based on operational fundamentals is less relevant given the impending acquisition.

Keywords

Water Solutions, Produced Water Handling, Permian Basin, Midstream, Oil and Gas Services, Water Management, Environmental Infrastructure, Recycling, Wastewater Treatment, SEC Filing, 10-Q, Merger, Western Midstream Partners, ARIS, WES, Energy Services