Waterbridge: Oil and Water - [Business Breakdowns, EP.228] | Business Breakdowns Brief

Key Takeaways

Waterbridge leads Texas water infrastructure, managing disposal of oil and gas byproduct in the Permian Basin.
Four barrels of highly saline water are produced for every barrel of oil in the Permian, creating critical disposal demand.
Horizon Kinetics views Waterbridge and Landbridge as unique, capital-light businesses within the energy infrastructure sector.
Waterbridge leverages long-term, utility-like acreage dedication contracts, benefiting from scarce disposal capacity and regulatory hurdles.
The water disposal industry is consolidating, with major producers increasingly outsourcing management to specialized third parties.
Waterbridge projects 15%+ organic growth, high EBITDA margins, and significant returns on capital from projects like Speedway.

Horizon Kinetics (HK) has a long-standing interest in unique, capital-light businesses, dating back to a 1995 investment in Texas Pacific Land Corporation (TPL).
TPL originated from land grants provided to the Texas and Pacific Railway in the late 1880s.
Initially a liquidating trust, TPL generated returns through stock buybacks, effectively acquiring land at a low implied price.
The advent of fracking and Permian Basin development transformed the landscape, highlighting the nascent water infrastructure industry within the U.S. energy sector.

The Permian Basin, the largest U.S. oil and gas producing region, generates approximately four barrels of highly saline water for every barrel of oil extracted.
Early water disposal involved re-injection for enhanced oil recovery, but increased volumes necessitated dedicated disposal wells.
Approximately 75% of shallow disposal wells pose a risk of interfering with valuable oil and gas formations and carry potential liability for mineral extraction interference.
Increased injection pressure leads to challenges like sinkholes and potential blowouts, exacerbating the scarcity of disposal 'pore space' and making third-party operators critical.

Waterbridge operates under 'all-in' contracts with landowners like Landbridge, often priced per barrel for saltwater disposal (SWD) wells, offering flexible terms.
Shale oil production in the Permian Basin is characterized by rapid decline curves and high initial production rates, requiring continuous drilling to sustain output.
Unlike oil, water production from wells demonstrates more stability over decades, with increasing water cuts as wells age.
This stable, increasing water cut, particularly from lower-tier formations, indicates organic growth for water volumes in the Permian Basin even if oil production remains flat.

Five Point Infrastructure, founded in 2012 by David Copa Bianco, serves as the sponsor behind Waterbridge and Landbridge.
A key early move involved acquiring a water company run by Jason Long, who now serves as CEO for both Waterbridge and Landbridge.
Waterbridge's growth strategy included acquiring water companies and securing land access, notably through a symbiotic joint venture with Texas Pacific Land Corporation.
Five Point has also pursued ventures such as Northwind (sold to MPLX) and Powerbridge, aimed at facilitating large-scale data center development in Texas.

The strategic decision to separate Landbridge (a land company) and Waterbridge (water infrastructure) created distinct, pure-play investments.
This separation was intended to address the undervaluation of land assets within broader portfolios, which often require a different capitalization rate.
Landbridge's IPO initially priced below expectations due to market confusion but has since performed well.
Its core business involves assembling complementary ranches in Texas and New Mexico to support water infrastructure development, including beneficial water reuse.

Producers require secured water disposal solutions before drilling, leading to long-term contracts, typically 11 years for Waterbridge.
Primary contract types include acreage dedication (preferred, with per-barrel fees and CPI escalators) and minimum volume commitments (offering less security).
The scarcity of disposal capacity, highlighted by companies like Devon Energy paying for future pore space reservation, is expected to lead to pricing power for Waterbridge.
Acreage dedication, which includes penalties for non-use, is considered the more powerful and attractive long-term contract type compared to minimum volume commitments.

The difficulty of switching water disposal providers is increasing due to issues with porosity and permitting, making it harder to secure new wells.
The development of long-haul pipelines, dominated by a few companies like Waterbridge, will further consolidate the industry and make vendor substitution very challenging.
Water disposal has become increasingly complex, leading producers like Devon and Conoco to outsource this function to third parties by contributing their infrastructure assets.
This outsourcing trend is driven by the complexity of managing easements and multiple landowners, making third-party specialists more efficient.

Waterbridge's Speedway project involves approximately $3.5 billion in capital expenditure, projected to generate $1 billion in EBITDA.
This yields an estimated 30% unlevered return on invested capital, surpassing returns from traditional oil and gas midstream infrastructure.
The strategy for the Speedway project focuses on controlling land and scaling operations to capture significant market share.
This identified capital expenditure is projected to be spent over a timeframe of five to 10 years as developments occur.

Waterbridge generates high margins, operating at approximately 56% per barrel from produced water and a 51% consolidated EBITDA margin.
The company projects 15% or better organic growth over the next three to five years, driven by expansions, sour gas development, and potential bolt-on acquisitions.
Long-term contracts and high margins suggest a valuation multiple comparable to waste management companies, which is significantly higher than current trading multiples.
Key variables for success include stable or growing Permian Basin production volumes (particularly in the Delaware region), the company's ability to capture volume, and increasing prices.