Great post! Do you think WaterBridge will eventually make the transition to waste or industrial sector analysts instead of midstream analysts in the future? Any indications on this path yet?
Given that they went public using JPM’s midstream team and just collected a bunch of midstream analysts covering them, probably not. In Secure’s case, they were covered by energy services analysts for a long time, so it was probably easier for them to make the transition.
Although, the WaterBridge team definitely understands the waste thesis and will likely be pounding the table on it soon. They’ll probably have an analyst day in the second half of the year, where I would definitely expect to see the thesis be a prominent part of their presentations. I would hope we start to see glimpses of it soon in the upcoming earnings call and at LandBridge’s analyst day. I do not know if getting the sell side switched over is required to pull off being valued as a waste company. I saw Secure present and Ray J’s conference this week. Unfortunately, it was not recorded. But it was excellent in making the points on the waste thesis. Fortunately, the Gabelli conference is coming up and that presentation should be public. I think WaterBridge and Secure both discussing the waste thesis will be beneficial to both companies.
Hey man, great write-up, your research is mindful, kudos! Few (maybe naïve) questions: do you see the business model applying to water recycling in data centers (for cooling)? Your point on lower new drilling activity being positive, is it because water is recycled more instead of used for frac directly? Why Delaware Basin has the lowest break-even producer economics and is this structural/sustainable? You don't mind on relying on a single area, i.e. not having exposure to other regions (just as an insurance would have to minimize local black swans).
And finally, you touched on Waste Management companies having their multiples expanded in the past years, is that also sustainable? [I see their business model is attractive and robust, so answer might be yes.] But having they are not attached to any drilling activity or variable commodity, but the habitual trash that every single person generates. Does this imply a justified lower multiple for WBI and SES?
1) Assuming the Permian Basin data center thesis is correct, I don't know about cooling. Question on cooling is how much of the cooling water can be recycled. That said, they would certainly need water for power generation purposes. That raises the question can you clean produced water to the level required for this activity at an low enough cost. As pore space is used up, incremental pore space becomes more expensive. Also, cleaning technologies will evolve lower the cost of beneficial re-use.
2) It's not a long-term positive, but short-term because it would, hopefully, prove the thesis on how resilient the business is.
3) I think its sustainable for a long time, plus new areas are opening up there, such as the sour gas region. Also, WB has a small amount of non-Delaware assets, and will likely merge with Deep Blue, which is ~ equal its size. DB is in the Midland Basin.
4) Waste management multiples expanded long-ago. The higher multiples are likely more sustainable for the firms with more tuck-in opportunities. Granted, this may become harder for certain companies and the sector overall, which would make produced water companies take-out targets. Municipal waste isn't tainted by oil and gas exposure, but their returns are worse than produced water companies - lot's of trucks to pay for.
5) I think both WBI and SES deserve much higher multiples.
Hi, thanks for the article! I like the SES.TO case and actually own it. What stops me from pulling a trigger on WBI is their cash flows. While SES.TO has almost 7% FCF yield (excluding growth CAPEX, which is ~50% of total CAPEX), WBI has ~2% yield (if you assume 30% of their CAPEX is maintenance). I am curious what is your take on this?
Very little maintenance capex in these businesses (even SES's "maintenance" capex has some growth). WBI's cash flow is burdened by a lot of growth spend.
hm, even if we count on pure operating cash flow, it's still 4% OCF yield, almost twice that of SES.TO's FCF yield. Or do you think they will outgrow it?
I think they are both interesting. That said, I think the pore space thesis needs to be further developed for both. It would be nice to have a joint analyst day in the near future.
High quality research 10/10.
One of my favorite stack posts I’ve read in some time. Nice work.
Great post
Good stuff. Thank you
Great piece, thanks for sharing!
Thanks for the kind words.
Great post! Do you think WaterBridge will eventually make the transition to waste or industrial sector analysts instead of midstream analysts in the future? Any indications on this path yet?
Given that they went public using JPM’s midstream team and just collected a bunch of midstream analysts covering them, probably not. In Secure’s case, they were covered by energy services analysts for a long time, so it was probably easier for them to make the transition.
Although, the WaterBridge team definitely understands the waste thesis and will likely be pounding the table on it soon. They’ll probably have an analyst day in the second half of the year, where I would definitely expect to see the thesis be a prominent part of their presentations. I would hope we start to see glimpses of it soon in the upcoming earnings call and at LandBridge’s analyst day. I do not know if getting the sell side switched over is required to pull off being valued as a waste company. I saw Secure present and Ray J’s conference this week. Unfortunately, it was not recorded. But it was excellent in making the points on the waste thesis. Fortunately, the Gabelli conference is coming up and that presentation should be public. I think WaterBridge and Secure both discussing the waste thesis will be beneficial to both companies.
Got it, thanks! Hope to see you at the LB Investor Day!
Hey man, great write-up, your research is mindful, kudos! Few (maybe naïve) questions: do you see the business model applying to water recycling in data centers (for cooling)? Your point on lower new drilling activity being positive, is it because water is recycled more instead of used for frac directly? Why Delaware Basin has the lowest break-even producer economics and is this structural/sustainable? You don't mind on relying on a single area, i.e. not having exposure to other regions (just as an insurance would have to minimize local black swans).
And finally, you touched on Waste Management companies having their multiples expanded in the past years, is that also sustainable? [I see their business model is attractive and robust, so answer might be yes.] But having they are not attached to any drilling activity or variable commodity, but the habitual trash that every single person generates. Does this imply a justified lower multiple for WBI and SES?
Thank you for your answers! Hugs, Carlos :)
Thanks for the kind words:
1) Assuming the Permian Basin data center thesis is correct, I don't know about cooling. Question on cooling is how much of the cooling water can be recycled. That said, they would certainly need water for power generation purposes. That raises the question can you clean produced water to the level required for this activity at an low enough cost. As pore space is used up, incremental pore space becomes more expensive. Also, cleaning technologies will evolve lower the cost of beneficial re-use.
2) It's not a long-term positive, but short-term because it would, hopefully, prove the thesis on how resilient the business is.
3) I think its sustainable for a long time, plus new areas are opening up there, such as the sour gas region. Also, WB has a small amount of non-Delaware assets, and will likely merge with Deep Blue, which is ~ equal its size. DB is in the Midland Basin.
4) Waste management multiples expanded long-ago. The higher multiples are likely more sustainable for the firms with more tuck-in opportunities. Granted, this may become harder for certain companies and the sector overall, which would make produced water companies take-out targets. Municipal waste isn't tainted by oil and gas exposure, but their returns are worse than produced water companies - lot's of trucks to pay for.
5) I think both WBI and SES deserve much higher multiples.
Hi, thanks for the article! I like the SES.TO case and actually own it. What stops me from pulling a trigger on WBI is their cash flows. While SES.TO has almost 7% FCF yield (excluding growth CAPEX, which is ~50% of total CAPEX), WBI has ~2% yield (if you assume 30% of their CAPEX is maintenance). I am curious what is your take on this?
Very little maintenance capex in these businesses (even SES's "maintenance" capex has some growth). WBI's cash flow is burdened by a lot of growth spend.
hm, even if we count on pure operating cash flow, it's still 4% OCF yield, almost twice that of SES.TO's FCF yield. Or do you think they will outgrow it?
There's a lot of growth coming. BPX, Speedway, sour gas opportunity.....Don't think the growth is really baked into SS models yet.
This is a fantastic post. Thank you. How do you look at risk vs reward owning LB vs WBI? What do you think is better from here?
I think they are both interesting. That said, I think the pore space thesis needs to be further developed for both. It would be nice to have a joint analyst day in the near future.