Aris Water Solutions, Inc.   Symbol    $16.00-$18.00 17.65 million shares Underwriters: Goldman Sachs, Citigroup, JP Morgan, Wells Fargo, Barclays, Evercore ISI   Co-Managers: Capital One Securities, Johnson Rice & Co., Raymond James, Stifel, U.S. Capital Advisors Proposed trade date of 10/22 They are a leading, growth-oriented environmental infrastructure and solutions company that directly helps their customers reduce their water and carbon footprints.

Aris Water Solutions, Inc.   ARIS

• 17,650,000 shares to be offered between $16.00 and $18.00 per share
• Underwriters: Goldman Sachs, Citigroup, JP Morgan, Wells Fargo, Barclays, Evercore ISI Co-Managers:
• Proposed trade date of 10/22
• Rating = 2

Click here to view the prospectus.

Company Overview

They are a leading, growth-oriented environmental infrastructure and solutions company that directly helps their customers reduce their water and carbon footprints. They deliver full-cycle water handling and recycling solutions that increase the sustainability of energy company operations. Their 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.

They provide critical environmental solutions to many of the most active and well-capitalized companies operating in the Permian Basin, including affiliates of ConocoPhillips, Occidental Petroleum Corporation, Exxon Mobil Corporation, Marathon Oil Corporation, Chevron Corporation and Mewbourne Oil Company. Operators are increasingly focused on minimizing their environmental impact as a measure of success with an emphasis on rapidly increasing the use of recycled produced water in their operations. Their expansive infrastructure, advanced logistics and water treatment methods allow them to reliably gather their customers’ produced water and recycle it for use in their operations. They believe their solutions make a significant contribution to the ability of their customers to achieve their sustainability-related objectives. Since inception, they have been committed to responsibly developing, operating and deploying technology to safely reduce their customers’ environmental footprint.

Their business provides reliable and sustainable water solutions that address the operational and environmental demands of the energy industry and actively reduce emissions. Through their significant investment in permanent pipeline infrastructure to safely gather and transport produced water, they minimize the need for produced water trucking, a major contributor of greenhouse gas emission, traffic congestion and road safety concerns in the communities in which they operate. Additionally, they are leaders in the evaluation, piloting and advancement of water treatment technologies, including the development of solutions for the use of treated produced water outside of the oil and gas industry. For example, they are piloting and developing proprietary processes for treating produced water for environmental, agricultural and industrial water demand, including evaluating the use of treated produced water as process water for carbon sequestration and direct air capture.

The Permian Basin

The Permian Basin is the leading basin in the United States with respect to drilling activity, oil production, oil production growth and economic returns to operators. It is one of the most prolific crude oil and natural gas basins in the world, spanning more than 75,000 square miles across West Texas and New Mexico. The Permian Basin has a history of over 100 years of crude oil and natural gas production and is characterized by high volumes of crude oil and liquids-rich natural gas production, multiple horizontal target horizons, extensive production history, long-lived reserves and high drilling success rates. Over 35 billion barrels of crude have been recovered in the basin since the first well was drilled in 1920 with more than 95 billion barrels of recoverable oil remaining, according to the EIA. In February 2021, the Permian accounted for 52% of onshore U.S. oil production, according to the EIA. The Midland and Delaware sub-basins of the Permian Basin boast among the lowest breakeven oil prices of any basins in the country, according to Enverus. They operate in one of the most active regions in the Permian Basin. During 2020 and first quarter 2021 annualized, completions in the New Mexico Delaware have grown at a significantly higher pace than the broader Permian Basin as operators increasingly shift focus to the region.

Their Operations

They manage their business through a single operating segment comprising two primary revenue streams, Produced Water Handling and Water Solutions. 

Their Produced Water Handling business gathers, transports and, unless recycled, handles produced water generated from oil and natural gas production. Their Produced Water Handling business is supported by long-term contracts with acreage dedications or minimum volume commitments (“MVCs”), primarily with large, investment-grade operators.

Their Water Solutions business develops and operates recycling facilities to treat, store and recycle produced water. By aggregating significant volumes of produced water from multiple customers on their connected pipeline networks, they can efficiently recycle large volumes of produced water and deliver this recycled water back to their customers in the time frames, volumes and specifications required by their operations. As needed, they also supplement their recycled produced water with groundwater to meet the demands of their customers’ operations. They also transfer groundwater on behalf of third-party purchasers and sellers.

Their revenues are primarily driven by gathering produced water volumes for their Produced Water Handling business and delivering recycled water and groundwater volumes to customers for their Water Solutions business. Their Produced Water Handling volumes have more than doubled in the past two years as they continue to win long-term contracts with premier operators. Their Water Solutions volumes have experienced similar growth as activity levels have returned following volatile macroeconomic conditions in 2020.

Their Assets

Their pipeline and water handling assets are comprised primarily of pipelines, pumps and handling and recycling facilities in the core of the Delaware and Midland Basins. These interconnected assets support both their Produced Water Handling and Water Solutions businesses. Their pipeline network consists of over 640 installed miles of gathering pipelines, which includes over 440 miles of larger diameter (12- to 24-inch) pipelines.

Their handling facilities, which are designed to process, store and/or dispose of produced water that is not recycled, are essential to their ability to deliver reliable and cost-effective water gathering services to existing and prospective customers across a large geographic footprint. As of June 30, 2021, they had acquired or constructed 48 produced water handling facilities which had over 1.2 million barrels per day of capacity. They have secured significant permits and rights-of-way for additional pipelines and water handling facilities. As of June 30, 2021, they had 225 miles of additional permitted pipeline rights-of-way and approved permits for an additional 48 produced water handling facilities with over 1.5 million barrels per day of permitted handling capacity. 

Customers 

They have long-term contracts with some of the most active and well-capitalized oil and gas operators in the Permian Basin which are increasingly focused on sustainability and minimizing the environmental impact of their operations. Since inception, they have consistently won new contracts and deepened relationships with existing customers, many of which have executed multiple contracts with them. As of June 30, 2021, they had entered into over 125 contracts for their Produced Water Handling and Water Solutions businesses with more than 35 different customers across approximately 550,000 dedicated acres. As of June 30, 2021, the weighted average remaining life of their Produced Water Handling acreage dedication contracts was approximately 10 years. Their five largest customers for the six months ended June 30, 2021 were affiliates of ConocoPhillips, Occidental Petroleum Corporation, Exxon Mobil Corporation, Marathon Oil Corporation and Chevron Corporation. These five customers represented approximately 76% of their revenues for the six months ended June 30, 2021.

Full-Cycle Water Management

The volume of water required for hydraulic fracturing and the volume of produced water generated from oil and gas production are each expected to significantly increase in the Permian Basin. Additionally, energy producers are increasingly focused on maximizing sustainability and minimizing the environmental impact in the areas in which they operate. These trends represent significant challenges for energy producers. They believe energy producers will increasingly depend on their expansive integrated produced water gathering and recycling assets that are designed specifically to meet these challenges. By developing these partnerships and outsourcing full-cycle produced water management, energy producers can preserve capital for their core operations and ultimately lower water management costs. They provide access to a substantial and growing source of produced water that can be recycled to support energy production, enabling energy producers to lower their water management costs and do so in an environmentally-responsible way.

DIVIDEND POLICY

Depending on factors deemed relevant by their Board, following completion of this offering, their Board may elect to declare cash dividends on their Class A common stock, subject to their compliance with applicable law, and depending on, among other things, their financial condition, results of operations, projections, liquidity, earnings, legal requirements, and restrictions in their debt. Their ability to pay any dividends depends on their receipt of cash dividends from their operating subsidiaries, which may further restrict their ability to pay dividends as a result of the laws of their jurisdiction of organization, agreements of their subsidiaries or covenants under any existing and future outstanding indebtedness they or their subsidiaries incur. 

IPO Detail

This is the initial public offering of Aris Water Solutions, Inc. and no public market currently exists for its common stock. Aris Water Solutions, Inc. is offering 17,650,000 shares of common stock as described in the prospectus. The company expects the initial public offering price of its common stock to be between $16.00 and $18.00 per share. The company has applied to list its common stock on the NASDAQ Global Market New York Stock Exchange under the symbol “ARIS.”

Each share of Class A common stock will entitle its holder to one vote on all matters to be voted on by stockholders generally. Each share of Class B common stock has no economic rights but will entitle its holder to one vote on all matters to be voted on by stockholders generally.  Through their ownership of all the Class B common stock and some Class A common stock, their Existing Owners (as defined herein) will own 67.0% of the combined voting power of their common stock immediately after this offering.

Use of Proceeds

They estimate that their net proceeds from this offering will be approximately $280.2 million. The principal purposes of this offering are to increase their financial flexibility, create a public market for their Class A common stock, and facilitate their future access to the capital markets.

They intend to contribute approximately $280.2 million of the net proceeds from this offering in exchange for newly issued Solaris LLC Units from Solaris LLC, at a per-unit price equal to the per-share price paid by the underwriters for shares of their Class A common stock in this offering. Accordingly, they will not retain any of this portion of the proceeds.

Following such contribution, they intend to cause Solaris LLC to distribute approximately $236.3 million of the net proceeds to Existing Owners as part of the corporate reorganization being undertaken in connection with this offering. Solaris LLC will retain the remaining $43.9 million of the net proceeds. As of the date of this prospectus, they have no specific plan for these remaining net proceeds received by them. However, they intend to cause Solaris LLC to use the remaining net proceeds for general corporate purposes, which may include capital expenditures, working capital and potential acquisitions and strategic transactions.

Competition

Market Opportunity

The Permian Basin is the leading basin in the United States with respect to drilling activity, oil production, oil production growth and economic returns to operators. It is one of the most prolific crude oil and natural gas basins in the world, spanning more than 75,000 square miles across West Texas and New Mexico. Produced water naturally exists in underground formations and is brought to the surface during crude oil and natural gas production. Produced water is produced throughout the entire life of the well and is of particular importance to operators in the Permian Basin given the high produced water-to-oil ratio prevalent across the basin. Approximately two to five barrels of produced water are produced for every barrel of oil produced in the Permian Basin, according to Enverus. The Permian Basin is expected to produce over 17.1 million barrels of water a day in 2021 according to Rystad while only producing 4.2 million barrels a day of crude oil according to Wood Mackenzie. As a result, the total market for produced water gathering in terms of number of barrels is significantly larger than that of crude oil gathering. Additionally, produced water handling costs comprise up to 40% of producers’ total lease-level operating expenses in the Permian Basin according to Wood Mackenzie. Many of our customers have stated goals of managing produced water volumes in an environmentally- responsible and cost-effective manner, highlighting the importance of our water management expertise and integrated and extensive asset base. 

Target Markets

Utilize their integrated systems to maximize value for shareholders while generating multiple streams of revenue They operate their assets as integrated, high-capacity infrastructure networks capable of gathering, recycling, redelivering and handling produced water. Their assets allow them to gather produced water at multiple points from multiple operators and recycle and redistribute such water to their customers. The connectivity and flexibility of their systems provide their customers with operational reliability and access to a high-volume supply of recycled water. The scale of their assets relative to their dedicated acreage and excess capacity built into their systems allows them to efficiently deploy capital across their system, resulting in highly accretive growth projects. Because their produced water handling and recycling services are integrated, they can generate revenue at multiple points for the same barrel of water, further enhancing their expected returns from capital deployed.

Focus on long-term relationships with blue chip customers under fee-based contracts to grow their cash flows They intend to grow their cash flows by supporting their existing customers in their growth objectives while continuing their business development efforts to capture additional contracts from new or existing customers. Since inception, they have focused on strong business development as an integral to success and they have continually grown their relationships with the majority of their customers. In 2020 alone they added over 200,000 dedicated acres and established new water recycling relationships with five new customers. As they grow, they intend to maintain their focus on providing services under long-term, fee-based contracts in order to enhance the stability of their cash flows. They target long-term contracts with an average term of over 10 years. Additionally, many of their contracts include MVCs and/or acreage dedications, and they intend to enter into contracts with similar or more favorable provisions in the future as they continue to grow their business. For the six months ended June 30, 2021 and the year ended December 31, 2020, approximately 92% of their Produced Water Handling revenues were attributable to acreage dedications or MVC contracts.

Increase their recycled water throughput and reduce groundwater withdrawals to advance sustainability and improve their margins They are committed to responsibly developing and operating their infrastructure and deploying technology to advance sustainability. They are a leader in helping operators in the Permian Basin transition away from using groundwater sources for completions and instead utilize a sustainable source of recycled water. Increasing the use of recycled water not only helps their customers achieve their sustainability goals but also allows them to collect multiple fees on the same barrel of water while improving their profit margins as they are able to avoid certain costs associated with standalone produced water handling. The ability to increase cost savings and improve margins provides them with a second leg of earnings growth beyond increasing their throughput volumes. Through their ambitious long-term targets, they will continue to facilitate greater recycled-produced water adoption across the industry. They have set internal goals that 85% and 98% of all water sold to their customers will be recycled produced water by 2025 and 2030, respectively.

Maximize shareholder value and capitalize on accretive expansion opportunities They seek to maximize shareholder returns by prudently deploying capital to the most accretive growth opportunities, returning capital to shareholders where appropriate, and conservatively managing their balance sheet. Their business plan focuses on growing their free cash flows by supporting their customers’ regional production and sustainability goals through long-term, fee-based contracts. They believe growing their free cash flows over time will allow them flexibility to enhance shareholder returns by returning capital to shareholders, such as through dividends and share buybacks (to the extent determined by their Board).

They have a disciplined capital allocation process and evaluate all growth capital expenditures on a project-level returns basis. They maintain close relationships and open communication with their customers, which allows them to accelerate or delay their capital plans in real-time, maximizing their efficiency and return on capital deployed.

Their management has successfully permitted, developed, constructed and operated the assets needed to service growing total barrels handled, sold or transferred in the Permian Basin, while maintaining a conservative capital structure, sufficient liquidity and ample financial flexibility to meet their objectives and those of their customers. They intend to continue to pursue accretive growth projects that meet their return thresholds and strategically improve the value of their assets. Their integrated network provides accretive, organic growth opportunities where they expect to expand and enhance the value of their existing infrastructure.

In addition, they plan to evaluate and strategically pursue acquisitions that create synergies, strengthen their relationships with existing and prospective customers and meet their financial return thresholds while maintaining significant balance sheet flexibility.

Company's Unique Strengths

Extensive infrastructure asset footprint in the Permian Basin provides a strong platform for growth Their infrastructure assets are strategically located in the core areas of the Permian Basin, one of the most prolific crude oil and natural gas basins in the world. The acreage that their assets overlay has some of the highest returns of unconventional plays in the United States. They believe that the compelling economics underlying the acreage dedicated to their system makes such acreage core to their customers’ long-term development plans. Their customers are increasingly prioritizing the sustainability of their operations, and they believe that increased adoption of recycled water in their operations will help them achieve certain sustainability-focused goals. Their extensive asset base, which includes more than 640 miles of produced water pipelines, 48 water handling facilities and 10 high-capacity produced water recycling facilities, comprises the infrastructure network of choice for many of the leading operators in the Permian Basin.

They believe that to ensure a reliable supply of recycled produced water requires large scale assets with the capability to simultaneously gather produced water from and supply recycled produced water to multiple operators. Their infrastructure footprint is complementary to the operations of many blue-chip operators in the Permian Basin. They believe their long-term contracts with their strong customer base, together with their asset base, which required years to design, permit and construct, represent both significant barriers to entry for new entrants and a competitive advantage over existing competitors which may have smaller or more divided pipeline systems, operate in other basins or less prolific areas of the Permian, or who do not have the ability to provide full-cycle water management solutions.

Cash flow growth supported by long-term contracts with blue chip customers They believe their customer base is the strongest amongst their peers, with four of their top five customers in 2020 rated as investment grade. They believe that this financial strength positions their customers well to execute on their near-term and long-term business objectives, provides the capital necessary to efficiently develop their upstream assets and supports their long-term financial outlook. They have dedications with all the top 10 oil producers in the Northern Delaware Basin. In addition, their top three customers accounted for approximately 28% of Northern Delaware oil production and approximately 21% of total Delaware and Midland production for the six months ended June 30, 2021.

As of June 30, 2021, they had entered into over 125 contracts for their Produced Water Handling and Water Solutions businesses with more than 35 different customers. For the six months ended June 30, 2021 and the year ended December 31, 2020, approximately 92% of their Produced Water Handling revenues were attributable to acreage dedications or MVC contracts. They believe these arrangements provide a stable base of cash flows that support the prudent, organic growth of their operations. Their customers have guaranteed over 160,000 barrels per day of MVCs with a weighted average remaining life of over three years as of June 30, 2021.

Demonstrated leadership and innovation in recycling and sustainable water management They believe their leadership in sustainable water management is valued by their customers and enables them to achieve certain sustainability-related objectives. They believe they are the leading independent third-party provider of recycled water gathered on a proprietary network in the Permian Basin and, upon completion of this offering, will be the only independent pure-play Permian infrastructure company in the public market. They reduce the carbon and water footprint of oil and gas operators by supplying them with meaningful quantities of recycled water across their expansive pipeline network and eliminating the need for trucks to haul water. Their goal is to maximize the amount of produced water they recycle as a percentage of the produced water they gather, providing significant economic and environmental benefits. By transporting their customers’ produced water by pipeline rather than traditional trucking methods, they contribute to a meaningful reduction of their carbon footprint and enable them to achieve certain environmental goals. They estimate that in the six months ended June 30, 2021 and the year ended December 31, 2020, they eliminated approximately 1.0 million and 1.8 million truck trips, respectively, and avoided the release of approximately 89,000 and 160,000 metric tons of carbon dioxide equivalent into the environment, respectively.

Through one of their subsidiaries, they are partnering with leading scientists and universities in the field of water treatment to identify, adapt and pilot innovative technologies for beneficial reuse of produced water. They are actively working with the U.S. Department of Energy and the New Mexico Produced Water Research Consortium to advance certain initiatives related to produced water management, treatment technologies and beneficial reuse. They have identified potential opportunities to treat and discharge produced water for beneficial use including supplementing irrigation water demand, recharging aquifer systems, providing irrigation for range grasses for carbon sequestration, and process water for direct air capture carbon sequestration. They are well-positioned to help the energy industry through continued research and development of technology related to the recycling and beneficial use of produced water. These initiatives are expected to provide long-term benefits to their customers, shareholders and the communities in which they operate.

Strong financial profile with flexibility to support their growth objectives Since inception in 2016, they have invested a significant amount of capital in organic growth projects and acquisitions to build scale and provide an attractive and resilient free cash flow profile. They are recognizing the benefits of these prior investments and focusing on continuing to deploy capital to the most accretive near and long-term growth opportunities. They conservatively manage their balance sheet with a leverage target of 2.5 to 3.5 times net debt to Adjusted EBITDA. They believe that their cash flows, undrawn credit facility and conservative leverage profile will provide them with the financial flexibility to fund attractive growth opportunities in the future.

Company's Unique Risks

The widespread outbreak of an illness or any other communicable disease, or any other public health crisis, such as the COVID-19 pandemic, could adversely affect their business, results of operations and financial condition.

If oil prices or natural gas prices remain volatile or were to decline, the demand for their services could be adversely affected.

They may face opposition to the operation of their water pipelines and facilities from various groups.

The fees charged to customers under their agreements for the gathering, transportation or handling of produced water may not escalate sufficiently to cover increases in costs and the agreements may be suspended in some circumstances, which would affect their profitability.

Their operations are subject to inherent risks in the oil and gas industry, some of which are beyond their control. These risks may be self-insured, or may not be fully covered under their insurance policies.

Because a significant portion of their revenues is derived from ConocoPhillips, any development that materially and adversely affects ConocoPhillips’ operations, financial condition or market reputation could have a material adverse impact on them. For the six months ended June 30, 2021 and the year ended December 31, 2020, ConocoPhillips and its affiliates accounted for approximately 51% and 38% of their revenues, respectively. As of June 30, 2021, ConocoPhillips and its affiliates accounted for approximately 35% of their accounts receivable.

Their lack of diversification increases the risk of an investment in them and they are vulnerable to risks associated with operating primarily in one geographic area. They have historically entered into a number of transactions with related parties. In particular, they have entered into a water gathering and handling agreement with ConocoPhillips, which upon completion of this offering (assuming no exercise of the underwriters’ option to purchase additional shares) will own approximately 28.9% of their Class B common stock and an approximate 18.4% interest in Solaris LLC (representing approximately 18.4% of their combined economic interest and voting power), and certain of the Board members of Solaris LLC are affiliated with ConocoPhillips. 

Restrictions on the ability to procure water or changes in water sourcing requirements could decrease the demand for their services. Their access to the water they supply may be limited due to reasons such as prolonged drought or their inability to acquire or maintain water sourcing permits or other rights. In addition, some state and local governmental authorities have begun to monitor or restrict the use of water subject to their jurisdiction for hydraulic fracturing to ensure adequate local water supply.

Legislation or regulatory initiatives intended to address seismic activity could restrict their ability to recycle or handle produced water gathered from their E&P customers and, accordingly, could have a material adverse effect on their business.

Climate change legislation, laws and regulations restricting emissions of greenhouse gases or prohibiting, restricting, or delaying oil and gas development on public lands, or legal or other action taken by public or private entities related to climate change could force their customers to incur increased capital and operating costs and could have a material adverse effect on their financial condition, results of operations and cash flows, as well as their reputation.

Their principal stockholders will collectively hold a substantial majority of the voting power of their common stock. Holders of Class A common stock and Class B common stock will vote together as a single class on all matters presented to their stockholders for their vote or approval, except as otherwise required by applicable law or their amended and restated certificate of incorporation. Upon completion of this offering (assuming no exercise of the underwriters’ option to purchase additional shares), the Existing Owners will own approximately 9.1% of their Class A common stock, 100.0% of their Class B common stock and a 63.7% interest in Solaris LLC (representing 67.0% of their combined economic interest and voting power) of which, (i) ConocoPhillips will own approximately 28.9% of their Class B common stock and an approximate 18.4% interest in Solaris LLC (representing approximately 18.4% of their combined economic interest and voting power), (ii) Trilantic will own approximately 9.1% of their Class A common stock, 22.7% of their Class B common stock and an approximate 14.5% interest in Solaris LLC (representing approximately 17.8% of their combined economic interest and voting power) and (iii) Yorktown will own approximately 22.5% of their Class B common stock and an approximate 14.3% interest in Solaris LLC (representing approximately 14.3% of their combined economic interest and voting power).

Certain of their directors have significant duties with, and spend significant time serving, entities that may compete with them in seeking acquisitions and business opportunities and, accordingly, may have conflicts of interest in allocating time or pursuing business opportunities.

Bottom Line

Their total revenues were $118.8 million and $171.5 million and their net income was $13.1 million and $7 thousand dollars in 2019 and 2020, respectively. Their total revenue was $84.1  million and $102.8 million in the first half of 2020 and 2021, respectively.

They deliver full-cycle water handling and recycling solutions that increase the sustainability of energy company operations. They provide critical environmental solutions to many of the most active and well-capitalized companies operating in the Permian Basin, including affiliates of ConocoPhillips, Occidental Petroleum Corporation, Exxon Mobil Corporation, Marathon Oil Corporation, Chevron Corporation and Mewbourne Oil Company. Their expansive infrastructure, advanced logistics and water treatment methods allow them to reliably gather their customers’ produced water and recycle it for use in their operations. Through their significant investment in permanent pipeline infrastructure to safely gather and transport produced water, they minimize the need for produced water trucking, a major contributor of greenhouse gas emission, traffic congestion and road safety concerns in the communities in which they operate. They are piloting and developing proprietary processes for treating produced water for environmental, agricultural and industrial water demand, including evaluating the use of treated produced water as process water for carbon sequestration and direct air capture. The Permian Basin is the leading basin in the United States with respect to drilling activity, oil production, oil production growth and economic returns to operators. It is one of the most prolific crude oil and natural gas basins in the world, spanning more than 75,000 square miles across West Texas and New Mexico. They operate in one of the most active regions in the Permian Basin. During 2020 and first quarter 2021 annualized, completions in the New Mexico Delaware have grown at a significantly higher pace than the broader Permian Basin as operators increasingly shift focus to the region. They manage their business through a single operating segment comprising two primary revenue streams, Produced Water Handling and Water Solutions. Their Produced Water Handling business gathers, transports and, unless recycled, handles produced water generated from oil and natural gas production. Their Produced Water Handling business is supported by long-term contracts with acreage dedications or minimum volume commitments (“MVCs”), primarily with large, investment-grade operators. Their Water Solutions business develops and operates recycling facilities to treat, store and recycle produced water. By aggregating significant volumes of produced water from multiple customers on their connected pipeline networks, they can efficiently recycle large volumes of produced water and deliver this recycled water back to their customers in the time frames, volumes and specifications required by their operations. Their pipeline and water handling assets are comprised primarily of pipelines, pumps and handling and recycling facilities in the core of the Delaware and Midland Basins. These interconnected assets support both their Produced Water Handling and Water Solutions businesses. Their pipeline network consists of over 640 installed miles of gathering pipelines, which includes over 440 miles of larger diameter (12- to 24-inch) pipelines. . As of June 30, 2021, they had 225 miles of additional permitted pipeline rights-of-way and approved permits for an additional 48 produced water handling facilities with over 1.5 million barrels per day of permitted handling capacity. As of June 30, 2021, they had entered into over 125 contracts for their Produced Water Handling and Water Solutions businesses with more than 35 different customers across approximately 550,000 dedicated acres. As of June 30, 2021, the weighted average remaining life of their Produced Water Handling acreage dedication contracts was approximately 10 years. Their five largest customers for the six months ended June 30, 2021 were affiliates of ConocoPhillips, Occidental Petroleum Corporation, Exxon Mobil Corporation, Marathon Oil Corporation and Chevron Corporation. These five customers represented approximately 76% of their revenues for the six months ended June 30, 2021. The volume of water required for hydraulic fracturing and the volume of produced water generated from oil and gas production are each expected to significantly increase in the Permian Basin. Depending on factors deemed relevant by their Board, following completion of this offering, their Board may elect to declare cash dividends on their Class A common stock, subject to their compliance with applicable law, and depending on, among other things, their financial condition, results of operations, projections, liquidity, earnings, legal requirements, and restrictions in their debt.

The Permian Basin is the leading basin in the United States with respect to drilling activity, oil production, oil production growth and economic returns to operators. It is one of the most prolific crude oil and natural gas basins in the world, spanning more than 75,000 square miles across West Texas and New Mexico. Produced water is produced throughout the entire life of the well and is of particular importance to operators in the Permian Basin given the high produced water-to-oil ratio prevalent across the basin. Approximately two to five barrels of produced water are produced for every barrel of oil produced in the Permian Basin, according to Enverus. The Permian Basin is expected to produce over 17.1 million barrels of water a day in 2021 according to Rystad while only producing 4.2 million barrels a day of crude oil according to Wood Mackenzie. As a result, the total market for produced water gathering in terms of number of barrels is significantly larger than that of crude oil gathering. Additionally, produced water handling costs comprise up to 40% of producers’ total lease-level operating expenses in the Permian Basin according to Wood Mackenzie. Many of our customers have stated goals of managing produced water volumes in an environmentally- responsible and cost-effective manner, highlighting the importance of our water management expertise and integrated and extensive asset base. 

Because their produced water handling and recycling services are integrated, they can generate revenue at multiple points for the same barrel of water, further enhancing their expected returns from capital deployed. They target long-term contracts with an average term of over 10 years. Additionally, many of their contracts include MVCs and/or acreage dedications, and they intend to enter into contracts with similar or more favorable provisions in the future as they continue to grow their business. They are committed to responsibly developing and operating their infrastructure and deploying technology to advance sustainability. Through their ambitious long-term targets, they will continue to facilitate greater recycled-produced water adoption across the industry. They have set internal goals that 85% and 98% of all water sold to their customers will be recycled produced water by 2025 and 2030, respectively. They seek to maximize shareholder returns by prudently deploying capital to the most accretive growth opportunities, returning capital to shareholders where appropriate, and conservatively managing their balance sheet. In addition, they plan to evaluate and strategically pursue acquisitions that create synergies, strengthen their relationships with existing and prospective customers and meet their financial return thresholds while maintaining significant balance sheet flexibility.

They believe that the compelling economics underlying the acreage dedicated to their system makes such acreage core to their customers’ long-term development plans. They believe their long-term contracts with their strong customer base, together with their asset base, which required years to design, permit and construct, represent both significant barriers to entry for new entrants and a competitive advantage over existing competitors which may have smaller or more divided pipeline systems, operate in other basins or less prolific areas of the Permian, or who do not have the ability to provide full-cycle water management solutions. They believe their customer base is the strongest amongst their peers, with four of their top five customers in 2020 rated as investment grade. They believe that this financial strength positions their customers well to execute on their near-term and long-term business objectives, provides the capital necessary to efficiently develop their upstream assets and supports their long-term financial outlook. Their customers have guaranteed over 160,000 barrels per day of MVCs with a weighted average remaining life of over three years as of June 30, 2021. They believe their leadership in sustainable water management is valued by their customers and enables them to achieve certain sustainability-related objectives. They believe they are the leading independent third-party provider of recycled water gathered on a proprietary network in the Permian Basin and, upon completion of this offering, will be the only independent pure-play Permian infrastructure company in the public market. equivalent into the environment, respectively. Through one of their subsidiaries, they are partnering with leading scientists and universities in the field of water treatment to identify, adapt and pilot innovative technologies for beneficial reuse of produced water. They are well-positioned to help the energy industry through continued research and development of technology related to the recycling and beneficial use of produced water. These initiatives are expected to provide long-term benefits to their customers, shareholders and the communities in which they operate. They believe that their cash flows, undrawn credit facility and conservative leverage profile will provide them with the financial flexibility to fund attractive growth opportunities in the future.

The widespread outbreak of an illness or any other communicable disease, or any other public health crisis, such as the COVID-19 pandemic, could adversely affect their business, results of operations and financial condition. If oil prices or natural gas prices remain volatile or were to decline, the demand for their services could be adversely affected. They may face opposition to the operation of their water pipelines and facilities from various groups. The fees charged to customers under their agreements for the gathering, transportation or handling of produced water may not escalate sufficiently to cover increases in costs and the agreements may be suspended in some circumstances, which would affect their profitability. Their operations are subject to inherent risks in the oil and gas industry, some of which are beyond their control. These risks may be self-insured, or may not be fully covered under their insurance policies. For the six months ended June 30, 2021 and the year ended December 31, 2020, ConocoPhillips and its affiliates accounted for approximately 51% and 38% of their revenues, respectively. As of June 30, 2021, ConocoPhillips and its affiliates accounted for approximately 35% of their accounts receivable. Their lack of diversification increases the risk of an investment in them and they are vulnerable to risks associated with operating primarily in one geographic area. In particular, they have entered into a water gathering and handling agreement with ConocoPhillips, which upon completion of this offering (assuming no exercise of the underwriters’ option to purchase additional shares) will own approximately 28.9% of their Class B common stock and an approximate 18.4% interest in Solaris LLC (representing approximately 18.4% of their combined economic interest and voting power), and certain of the Board members of Solaris LLC are affiliated with ConocoPhillips. Restrictions on the ability to procure water or changes in water sourcing requirements could decrease the demand for their services. In addition, some state and local governmental authorities have begun to monitor or restrict the use of water subject to their jurisdiction for hydraulic fracturing to ensure adequate local water supply. Legislation or regulatory initiatives intended to address seismic activity could restrict their ability to recycle or handle produced water gathered from their E&P customers and, accordingly, could have a material adverse effect on their business. Climate change legislation, laws and regulations restricting emissions of greenhouse gases or prohibiting, restricting, or delaying oil and gas development on public lands, or legal or other action taken by public or private entities related to climate change could force their customers to incur increased capital and operating costs and could have a material adverse effect on their financial condition, results of operations and cash flows, as well as their reputation. Upon completion of this offering (assuming no exercise of the underwriters’ option to purchase additional shares), the Existing Owners will own approximately 9.1% of their Class A common stock, 100.0% of their Class B common stock and a 63.7% interest in Solaris LLC (representing 67.0% of their combined economic interest and voting power) of which, (i) ConocoPhillips will own approximately 28.9% of their Class B common stock and an approximate 18.4% interest in Solaris LLC (representing approximately 18.4% of their combined economic interest and voting power), (ii) Trilantic will own approximately 9.1% of their Class A common stock, 22.7% of their Class B common stock and an approximate 14.5% interest in Solaris LLC (representing approximately 17.8% of their combined economic interest and voting power) and (iii) Yorktown will own approximately 22.5% of their Class B common stock and an approximate 14.3% interest in Solaris LLC (representing approximately 14.3% of their combined economic interest and voting power). Certain of their directors have significant duties with, and spend significant time serving, entities that may compete with them in seeking acquisitions and business opportunities and, accordingly, may have conflicts of interest in allocating time or pursuing business opportunities.