Chadd Garcia 拆解 WaterBridge IPO 后的价值创造逻辑 $WBI

Chadd, how’s it going?

Good. Good. I think it’s the fifth time.

No way. That means you qualify for the shirt. I should have worn the shirt today. We’ll talk about that after the podcast.

I have my hat in the background, so you know.

But both of our hairs are on point today, so we can’t mess that up with a hat.

I’m super excited to talk today. This is actually one of the most interesting companies I’ve stumbled on this year. Before we get to it, just a disclaimer: Nothing on this podcast is investing advice. You can see the full disclaimer at the end of the podcast.

Chadd, the company we’re going to talk about today is WaterBridge. The ticker is WBI. You’ve done fantastic work on this. I read your Q3 letter, and you and I had dinner the night before this IPOed, and we were talking a bunch about it. I’m just going to toss it over to you and let you cook. What is WBI, and why are they so interesting?

WaterBridge is the leading processor, cleaner, and disposal company of produced water. They primarily operate in the Delaware Basin in the Permian Basin.

When oil is fracked, some water comes up. Some of that is the water used in the fracking process, but most of it is water that was seawater buried millions of years ago with the organic matter that turned into the oil and gas they’re extracting through the fracking process. That produced water flows out with the oil for as long as the oil well flows.

In the Delaware Basin, you get 4 barrels of produced water for 1 barrel of oil. They call that the water cut. What they’ve noticed is that as a well ages, the water cut goes up over time. Various areas also have higher water cuts. Right now, you’re starting off with a 4-to-1 water cut; in 2030, you’ll likely have a 6-to-1 water cut.

Water is the choke point for oil production. If you’re Exxon and you’re developing in the Permian Basin, if you don’t have a place to put the water, your production shuts down. WaterBridge, which went public a couple of months ago, has a vast network of pipelines. They also have a relationship with LandBridge, a sister company that went public about a year and a half ago and owns a lot of the land where the pore space is located.

The pore space is the geological formation where the water is deposited. Think of that as a landfill.

Perfect. That’s a great overview. Specifically, you mentioned that WaterBridge handles the water cut from all this oil and gas in the Permian Basin, from any well that’s being drilled out there. You mentioned that LandBridge is where you take the water, inject it, and store it. What specifically does WaterBridge own in this process?

They own the pipelines that transport it and the cleaning facilities that separate the oil, because there’s going to be oil mixed in with the sludge, solids, and produced water. They separate out the oil and recover it, and they can sell that. It’s called skim oil.

The solids are removed and deposited into an industrial landfill. They own some industrial landfills as well. The remaining liquids are deposited into the pore space.

Perfect. Let’s start here. You mentioned they IPOed in late September, I want to say. About 45 days ago, they were picked up by, I think, 12 brokers for coverage. It looks like 7 of them have buys and 4 have neutrals, something like that.

The stock IPOed at $20 and is at $24 per share right now. I lay all that out to ask you this: It looks relatively well covered, the IPO was pretty successful, and the stock is up 20% in 45 days. This isn’t CoreWeave going up 5 times in 30 days, but that’s a pretty nice IPO, particularly for a more mature industry.

The company is well covered, well regarded, and had a successful IPO. What are you seeing that the market is missing that makes this an alpha opportunity?

It was 11 times oversubscribed, so for an oil company, I think that was pretty good. It wasn’t 20 times oversubscribed like Circle Internet Group or something, but it was still strong.

The last time I counted, there were 11 sell-side analysts covering it. I’ve read 8 of the reports, and not one mentions the parallels between this business and waste.

You and I had a podcast last year on Secure Energy Services, which has subsequently changed its name to Secure Waste Infrastructure Corp. That’s where I learned a lot about this business, working with them and from my investments in the waste space with Waste Connections and GFL.

There’s a similar situation between the 2 companies. Secure was covered for many years by energy services analysts. If you look at the economics of their businesses and some of the moats surrounding their operations, they look like waste companies. They have landfills, including industrial landfills. That parallel doesn’t get any clearer.

The pore space where you deposit the water also has very similar geographic and regulatory moats to a landfill. Secure made that connection in the last year. They converted most of the analysts covering them to waste analysts or general industrial analysts. They’ve been saying, “We’re not an energy company; we’re a waste company,” for a couple of years now. But it’s in Canada, it’s a small-cap company, and nobody’s paying any attention.

WaterBridge goes public, and they can’t go public with a story people aren’t ready for. They hire JPMorgan’s energy bankers, who do a good job getting it public. The pitch looks like a midstream pitch. A midstream pipeline business might trade at 9, 10, or 11 times. Maybe this one has somewhat better economics and a higher return, so it should trade at a bit of a premium, but nobody is making the waste parallels yet.

Just like Secure has been making that argument, WaterBridge’s management understands the parallels between its business and the waste industry. They’re going to be beating that drum, too, and they’ll likely have a much bigger megaphone than the Secure guys did because they’re an American company and will get more exposure.

Right now, all the analysts covering it are midstream analysts. They’re looking at it through that lens rather than through a waste lens.

If I were summarizing what you’re saying, it’s this: WaterBridge IPOed, and people were taking, as you said, an MLP energy-infrastructure viewpoint. That got it a fine multiple. We can talk about the multiple it’s trading at, but it’s a low-double-digit multiple right now, I think.

One of the reasons this is an alpha opportunity is that it has a lot more in common with the waste-management industry, and the waste-management industry probably trades for a mid-teens multiple. You think there’s a lot of multiple expansion as the company delivers and people come to understand the story. Am I summarizing that correctly?

Well, I think they’re going to have ample growth within their own business. From my risk-management perspective, I’m thinking, “Okay, on earnings growth by itself, this is, call it, a double in 5 years. I can underwrite that.”

But it trades at 9 times EBITDA, while waste companies trade at 15 times EBITDA. You get the earnings growth plus the multiple expansion, and that’s where things get really interesting.

Let’s talk about the earnings growth. Why don’t we lay out what that looks like? They just IPOed in September, and this podcast is a little bit different to prepare for because there’s the S-1, and then there’s nothing else public from these guys yet. They’re in the post-IPO blackout period.

We don't have an earnings call. We don't have Q3 earnings.

Well, the post-IPO blackout period ended, but it ended right into the earnings blackout. Also, [laughter]—blackout's a blackout.

I'm not going to say my college days, but maybe every now and then, my Mardi Gras days. What are you forecasting? Let's lay out what the valuation looks like on a 2025 or a next-12-month number, whatever you want. Let's lay out that valuation, and then we can use it to build to the out-years.

Over 70% of the revenues are contracted, and a lot of the recent contracts they've been getting are minimum-volume contracts. They've announced 3 large projects that they're spending capital on, and those 3 large projects are minimum-volume contracts. What's interesting is that the pricing of these contracts is well above the spot rate.

The spot rate is 65 cents a barrel for processing. The last contract that they signed was just over $1, and that was a 10- to 15-year contract. That gives you some indication that the E&P companies are worried about having an outlet for their water in the future. If they can lock it up for a decade, maybe a decade and a half, then they'll pay a premium for that.

On the minimum-volume contracts alone, their volume should increase in the low double digits—say, 10%. But they can also pick up more business within their existing network that's not fully utilized. Nobody sets minimum-volume contracts at the maximum level they think they're going to do. They set it below that, so there are probably incremental volumes from those contracts that are going to flow in.

They have 3 large contracts already disclosed that they're spending capital on. One of them is probably ripe for a Phase 2 expansion. I would imagine that would be announced within the coming months, so there's a lot of growth coming their way. It's easy to get to mid-teens to high-teens volume growth, and then you get pricing flowing through, probably with not much incremental cost. From an earnings-growth perspective, it should be even nicer.

But if we could just quantify it, what do you think the near-term EBITDA looks like over the next 12 months?

For 2025, $450 million in EBITDA, I think, would be very conservative. Then you just compound that at 15% to 20% for the next 3 years.

Yep. So, about $450 million in EBITDA, and you could be talking about—if I took it a little further—$900 million in EBITDA isn't out of the question before 2030, if I'm doing that math in my head correctly.

Yeah. From an incremental pore-space perspective, they'll probably do 2.8 million barrels a day in 2025, and they've got incremental pore space of 6 million barrels a day that they have access to. Depending on pricing, that's probably worth between $1 billion and $1.4 billion of incremental EBITDA.

You can see how they can get to $1.5 billion to $2 billion of EBITDA just within the pore space they currently have, and that's not including some pore space that LandBridge just bought. If you look at LandBridge's press release, they bought some more pore space. They paid a little over $200 million for it, but they haven't quantified how much incremental pore space it represents yet. Hopefully, we'll get that on the earnings call.

I think there's going to be a need for the pore space in the Permian because the water cuts go up over time. The areas where they're going to be drilling in the near future are going to have higher initial water cuts. They have plenty of incremental pore space and pipeline capacity to get it there, so I think it's just a matter of speed, as opposed to how much growth they end up with. It's a matter of how quickly it happens.

I want to come back to that in a second, but just to quantify it: The stock, as you and I are talking, is at $24 per share. You can correct me if I'm wrong, but I've got the enterprise value around $4 billion at these prices.

Yeah.

Okay. We just said $450 million in EBITDA, so people—

Probably $4.3 billion.

So people can do that math: slightly under 10 times, around 9 times EBITDA, on the near-term numbers. If you go out, you quickly get to 5 times EBITDA if and when all this growth gets delivered.

Let's talk about that growth. These guys' returns on invested capital are—I don't want to say insane, but they're really effing good. You're talking about multimillion-dollar projects, these pipelines, all the pore space and everything, and they're getting 20%-plus returns on invested capital, unlevered, right? 25% to 30% is not out of the question.

That $1 billion to $1.4 billion of incremental EBITDA from the pore space that they have would probably cost them $3 billion to $3.5 billion to realize.

It's like a platform. You have the Speedway project right now, which they're probably getting a 3-year payback on, on an unlevered basis, right?

That is running right through a sour-gas region that's going to be developed shortly. There are already minimum-volume contracts for processing that sour gas. That's ripe for an expansion of the Speedway pipeline. I would imagine that if you're expanding a pipeline, as opposed to initially putting one in, it's probably a 2-year payback.

But that's what I want to ask, because these returns are phenomenal. These are phenomenal for infrastructure assets, right? You're talking about multimillion-dollar projects, these pipelines, all the pore space and everything, and they're getting 20%-plus returns on invested capital, unlevered, right? 25% to 30% is not out of the question.

But they're not paying for the pore space. We'll talk about the pore space when we talk about LandBridge in a second, but the returns on their infrastructure projects are phenomenal. I've done a little bit of work on midstream pipelines, especially offshore oil and gas pipelines. Offshore, those are some of the most pristine assets.

When these guys build, they build, and there's a lot involved. You're building things 3,000 feet under the sea. The returns there are 20% to 25%, so these guys are actually getting better returns. Now, as you said, there's no pore space, but I just wondered: Why can they get these types of returns?

In my mind, billions of dollars of capital and 30% returns—people try to compete that away, right? We can talk about all the ways people can do that, but just at a high level, why do they have the right to get such great returns on pretty significant amounts of capital?

I think it's their relationship with LandBridge. Look at where a lot of this water is flowing. A lot of this water is flowing out of New Mexico and into Texas. If you're going from the north-south part of the border, on the western part of that is TPL property.

LandBridge went and bought up a lot of the acres there. They're checkerboarded, so TPL had a big area with checkerboarded property, and LandBridge went and bought up the rest of the checkerboard and entered into an agreement with them. They've got that area locked up.

There's a ranch just east of that that was one of the initial areas where they would put in shallow saltwater-disposal wells. It's kind of overpressurized, so there's not going to be any incremental pore space there. Then there's a ranch next to that where there are no wells currently, and then you're back to LandBridge property. From there, it starts to go up into the Panhandle.

Anytime you want to cross land, a landowner is going to want to take a toll charge on the water that's crossing over their land. It's not only having a massive pipeline network, but having one that's efficient, where you can avoid having to cross property where you have to pay the—

Let's go to LandBridge right now, right? I think that's the first thing that jumps out at you when you read this S-1 and when you and I first started talking about it. They have a sister company, LandBridge.

For those who don't know, Chadd—and I know this because we've talked and I've read your letters—was very early on the LandBridge story. The stock is up even after a recent pullback. What, 150% since it IPOed at $17? It's at $60, maybe, today.

Yeah.

The reason my ears perked up when you mentioned WaterBridge was that I was like, “Oh, Chadd pitched LandBridge. This guy knows.” But I think there is a question. LandBridge is WaterBridge's sister company, right? They are sister companies. You can hear it in the bridge. They have the same controlling shareholder, all this sort of stuff.

No, no, no. They have the same sponsor, but the shareholders are different.

My fault. This is the same sponsor that owns a ton of both of these, right? But I think the question—my first question when you see this—is: You said, “Hey, why can they charge these rates?” And it's because they cross the land. Think about the corner store at the corner of 86th and Lex.

It gets a ton of foot traffic, but that doesn't mean it's going to make a lot of economic profit, because guess what? The landlord keeps charging them. Every time, the landlord is taking pricing, and they're going to keep charging for the marginal customer.

I guess my first pushback would be: Yes, I know they've got a sister company in LandBridge, but why isn't LandBridge ultimately the one saying, “Hey, the pore space and the land are the critical things. We're going to keep charging you, and we get all the economic profit—not you, the pipeline”?

I think it's having both the pipelines and a pipeline network that provides redundancy. So, if you're an E&P operator and you have 1 water company with 1 pipeline and 1 amount of pore space, that might work for a few years. But what happens if something goes wrong with the saltwater disposal well? It loses its permit in years 5, 6, 7, 8, 9, or 10, or it could have a force majeure. You want to have a vast network with multiple access points for saltwater disposal wells, and so it's having the whole network plus the pore space that gives it its real value.

Both of these entities are creating value, and LandBridge gets paid a nice royalty fee. Some would say maybe a little bit above market, but I think it's within market now. Over time, as pore space is used up, the rates that WaterBridge charges and the rates that LandBridge charges should both go up in tandem. But there is a risk that WaterBridge could privilege LandBridge and some economics could kind of leak out there.

Keep in mind that Devon Energy owns 20% of WaterBridge and is a big customer. I doubt Devon would like to see some of its economics as a shareholder of WaterBridge leak out to LandBridge. They're a big customer, and so there's a stick there, right?

I'm going to come to Devon in a second. Actually, we'll get there in a second. I did look it up: Devon is mentioned 135 times in the S-1. I really do want to talk about that, but I want to ask 1 other question.

LandBridge has the land. They are the landlord who owns the property at the corner. You kind of can't get around that land, right? You've got the land. That's a great spot. The other way returns here could get competed away is, yes, WaterBridge builds the pipeline, but somebody else could come build the pipeline, right?

A lot of these are new builds or expansions, and somebody else could come and say—or even Devon or ExxonMobil, these customers have huge balance sheets. ExxonMobil owns and knows how to operate pipelines. They could say, “Hey, WaterBridge is about to spend $3 billion for $1 billion in EBITDA. Why don't we just do that ourselves?”

Or why don't we go to—name your other water operator here—and say, “Hey, why don't you guys spend $3 billion for $900 million in EBITDA? Take that return rate down and start having people compete against each other.” So, my second question is—

Yes, Devon did enter into basically a call-option-on-pore-space-type agreement with LandBridge. The history of this is that the operator goes to the water company, and the water company goes and finds the landowner. That's the history of the industry.

But Devon, which owns part of WaterBridge, is worried about access to pore space in the future, and they went and forward-contracted pore space with LandBridge directly. So, they went around WaterBridge, but in doing so, they did commit to use WaterBridge as the deliverer of it.

To your point, these companies can have balance sheets and have run water businesses in the past, but the trend is for the large operators to divest of their water businesses because you want some scale, right? You want to be able to handle the water of operators that surround your property.

But if ExxonMobil has a water asset and you're some small independent company, and they say, “Hey, you can use our water asset,” if pore space becomes tight, who do you think is going to get squeezed out? The small operator. It just makes much more sense for these water companies to be independent.

If you look at Diamondback, it had a water business called Rattler that they spun out, and it traded at a horrible multiple because they couldn't maximize the value because of that dilemma. They ended up selling it to Five Point Energy, which is the sponsor behind WaterBridge and LandBridge, and that asset is in the Midland Basin.

I do think that asset would work well in WaterBridge, and ultimately you may see it merge with WaterBridge. But to my point, if WaterBridge is getting mistreated and LandBridge is getting privileged, how happy do you think Diamondback, which owns a good chunk of D. Blue, would be to wait in line to kind of merge these assets together?

I think there are plenty of people within the WaterBridge shareholder base that are also customers with big sticks, just to make sure that everybody's treated fairly.

Let me ask this question in a different way. The Devon deal—we've mentioned that multiple times, and now I think we all understand why they would go with LandBridge, right? Again, LandBridge has the land. You need to go with them.

But you said LandBridge went behind WaterBridge's back and then decided to do it all through WaterBridge. Devon had, I believe, an internal operation that they could have used. They could have tried to find a 3rd party. Why does Devon choose to go with WaterBridge here?

Why? Because they have the space.

I mean, why do they choose not to contract with WaterBridge—or—no, why does Devon choose to use WaterBridge for the pipelines, right? Devon could—I think Devon had internal operations. They could have tried to do it themselves. They had to deal with LandBridge. They chose WaterBridge. So, why do they choose WaterBridge and take equity?

Right. Right. Well, probably because they own 20% of it and have a vested interest in seeing it do well.

But they got the 20% from choosing WaterBridge, right? So, they did still have to—

I think it was probably committed assets at 1 point in the history.

Okay, that's good. Let's go to something else—the elephant in the room. We mentioned the LandBridge deal a little bit, right? And you mentioned how there's a lot of customers here in WaterBridge's stock. So, if LandBridge is getting favored, they're going to have a big problem, and you don't want your—

I think people are going to read the S-1 and quickly jump and say, “Hey, there's the LandBridge relationship. I've got worries there. Five Point is the sponsor here. There's the tax receivable agreement. Five Point has other assets in the industry. There's a lot of potential for conflicts of interest here.” So, that is kind of the elephant in the room when you look at this business. How do you think about all of that?

Well, the way—I mean, Five Point is the controlling sponsor, but the funds were different funds for WaterBridge and LandBridge, and so they've been managing this conflict for a long time. The way they've done it is first by setting up policies where, if it's a low-level conflict, here are the policies. Then, if it's a higher-level conflict, they set up independent conflict committees made up of the shareholders of each of the funds to get together and work them out.

They've been managing this for a long time, and they've done it well. I think they'll continue to do it in the future. Plus, you have Devon in WaterBridge and maybe Diamondback at some point, if they ever merge D. Blue into WaterBridge.

1 weird risk here, when you read the S-1—and you mentioned it earlier as well—is that a lot of the business is taking water from New Mexico, where it is difficult to permit water assets, and bringing it across state lines into Texas, where it's easy to get permits, right? That's a ton of the business. You can read the S-1, and there are all these arrows going from the middle of New Mexico right into Texas.

Is there a regulatory risk here in 1 of 2 ways? Either New Mexico gets a lot easier on permitting, so a lot of this infrastructure that's designed to take water out of New Mexico into Texas is kind of excess capacity. Or the other way, Texas says, “Oh my gosh, early in fracking, when people were disposing of water, they were putting water into fault lines and causing many earthquakes and stuff.” Texas starts saying, “Oh my gosh, we need to regulate this. We're having risks of earthquakes. We're having environmental risk.”

Is there any risk in that regulatory arbitrage, if that makes sense? Is there any risk in 1 coming down and 1 coming up?

Well, Texas is—so, the initial saltwater disposal wells, when the fracking industry was created, would put it into deep, deep water wells, which are basically old vertical wells that were kind of empty. They put the water into deep formations, and that caused a lot of the seismic activity that fracking is known for. So, they stopped doing that.

Then they put them into shallow disposal wells that are slightly above the mineral formations. A lot of the industry would use 4 disposal wells per section, whereas LandBridge or WaterBridge, throughout their history, has used 1.

And WaterBridge's philosophy is that if you underpressurize your disposal well, it can last almost forever. They have some that are over a decade old, and you run less risk of having an environmental issue where it blows out a well and comes out on the surface, or where you interfere with surrounding neighbors' E&P operations. So that's been their practice.

The rest of the industry has had some of those issues come up. They've blown out some disposal wells, and it's caused some environmental damage—not WaterBridge, but the industry. Some of the wells have been overpressurized to the point where they've interfered with the oil and gas production of surrounding neighbors, and there are some lawsuits going on there.

The state of Texas got involved in 2024 and changed the regulations. Not only do they permit the volume of water that can go into a disposal well, but they also permit the pressure. WaterBridge claims that they've helped write those regulations. Basically, they've increased the regulations to bring the rest of the industry up to where WaterBridge already was.

I don't think you're going to see any more regulation from Texas because they've already made a very big change.

By the way, I totally believe WaterBridge when they say that, because one of the things that jumped out to me via the S-1 is that WaterBridge notes they are responsible for roughly 40% of the water injection permits in Texas and New Mexico. That just blew my mind. That's so much of it by one company. I totally believe they have a big hand in any regulation that's happening there.

They do it better if you see them in person, which I hope they have an analyst day. We can get to that, but there is a slide where they have the pore space, and it's in red where it's over the overpressurized areas.

With the 4 red areas? Yeah, I know exactly what you're talking about. When you see it in the IPO process, they were able to show that as a time-lapse. It was pretty amazing to see. If they ever do an analyst day, which I hope they do, it'd be nice to see that.

But with respect to New Mexico, you have federal land, private land, and state land, and they're all intermixed. You have 3 levels of regulations there to deal with, and it may be difficult, even if they wanted to make a change, to actually get stuff done.

Even if they did make a change, I don't know if the operators would trust it, because changes have been made in the past and then 2 years later you have a new administration and they revert back to it. These E&P operators want it to be resolved. They have an oil well that's going to go for a decade or a decade and a half; they want the problem to be gone.

So even if people start making noise about softening regulations in New Mexico, a) it's probably very hard to do, and b) I don't know if anybody would trust it.

One thing that, when I started looking at this company, you will hear energy bulls talk a lot about how the Permian is getting gassier. The Tier 1 stuff has been tapped out. They're basically calling for Permian oil output to decline. Even if money invested goes up there, they're saying, “Hey, Permian oil production is going to decline.”

All of this is Texas and New Mexico water assets for the most part, right? I just want to ask you: if the energy bulls are right, if the Permian is not the growth engine for the world's oil anymore, how does that play into WaterBridge's hands—or not play into it, I guess?

The Permian is large. It's not just the Delaware Basin. I think that within the Delaware Basin, there's going to be oil output for a long time. It's the lowest-cost part of the Permian. You can definitely see how other basins in the U.S.—if the U.S. is going to decline in its oil production volume, it's definitely going to happen in other places. It could happen in parts of the Permian, but the Delaware is going to be the last place for it to decline.

You can also correct me, but I think one of the reasons it's declining is because the easiest stuff has gotten tapped. The newer stuff is gassier, and it has heavier water cuts. So even if you're seeing the overall volume of oil going down, there's a chance that these guys are actually going to see water production go up. You can correct me.

Yeah, you will see water production go up. Right now, the water production of a well goes up as the well ages, so you have that. I was reading today that they expect the water cuts initially to be at 6:1 by 2030, whereas right now it's at 4:1.

That's 4 barrels of water for every 1 barrel of oil, going up to 6 barrels of water for every 1 barrel of oil.

Correct. Some areas in the Delaware Basin are at 10:1.

Speaking of energy bulls and bears, all of this water is coming off because oil is getting produced, for the most part, right?

If we were doing this podcast 2-ish years ago, oil was in the $80-per-barrel range. If we were doing it 3 years ago, oil was in the $90-per-barrel range. Today it's in the $60s. The forward curve is in backwardation; it's in the mid-$50s if you go out a year.

Where do oil prices need to go before you start seeing some shut-ins or wells decline and start saying, “Hey, even if the cuts are getting waterier, the volumes just aren't there”? We do have the MVCs, but there's just not going to be any growth, so it's starting to impact WaterBridge.

Oil at $100 doesn't matter. Oil at $90 doesn't matter—actually, it's great for them—but there's got to be some price where you start seeing volumes really decline. Where does that really kick in?

I think ongoing production—I don't think you'll see shut-ins unless you have a COVID situation where demand stops. Ongoing production will keep going. It's the new drilling that slows down, and you're already seeing a lot of new drilling slow down. That's happening, but produced water volume is still holding up.

We don't have WaterBridge's first report yet, but if you look at SECURE Energy Services, for example, their rig count was down 15% last quarter and their produced water volumes were down 3%. There were a lot of facility shutdowns that may have affected that, so it could have just as easily been flat.

If earlier we talked about near-term EBITDA—let's call it $450 million—and 3-to-5-year-out EBITDA, let's call it $900 million, the path to basically doubling EBITDA over the next couple of years: how much of that is organic in terms of pricing and volumes versus inorganic, in terms of building out the $1 billion-plus in CapEx we talked about at 30% unlevered IRRs, versus—

Inorganically, they've got 10-year contracts with minimum volume commitments, probably growing volumes at 10%. Pricing layers in, so I think you're pretty well covered.

The gassy region—the sour gas region—that hasn't been developed yet, I heard that there's capital being committed to that. Even if oil prices get into the $40s, it's still going to go because people have already started signing up for minimum volume commitments and processing the sour gas.

That would be another project that WaterBridge will do to service the water needs of that area, which should be coming—it should be announced pretty shortly. I can see that generating cash flow by 2028.

If we're talking 2028, it's probably more a 2029 or 2030 thing, but let's say $900 million in EBITDA. Can you break down what the—I mean, there are pipelines, there are real physical assets here—what is the maintenance CapEx required for that $900 million?

I look at SECURE Energy Services as a comp, just because we don't have as much data on this one. Keep in mind that 30% of their business is pipelines, so they do have some pipelines in their business too. Those are oil takeaway pipelines, which aren't as much affiliated with the water business, although some of their newer growth contracts do have some pipelines.

They have to pay for pore space, and their maintenance CapEx has incremental replacement of pore space within it. About 15% of their EBITDA goes to sustaining CapEx, so that would be a pretty good comp here as well.

On the $900 million of EBITDA—and obviously there's interest and other things—but this is a pretty—

$140 million, maybe. So $140 million of maintenance CapEx on that.

I think people hear “assets” and think there's a lot of maintenance CapEx. This is a very cash-flow-rich business, as you would expect from a pipeline like that. All the pipeline businesses—you put it in the ground, they last 30 years, and there's just—

I mean, you look at SECURE Energy Services and they're doing the same type of ROICs. Of course, they have gathering and transportation pipelines in their business, but if you look at what they're talking about when they deploy capital, they're deploying it in the waste business at approximately 25% unlevered IRRs initially, with the ability to put more volume through that as those businesses grow. They can work those up into the upper 20s and low 30s IRRs.

Let’s choose $900 million in EBITDA, $140 million in maintenance capex, and, to make the math really easy, just say $750 million in unlevered free cash flow 4 to 5 years out.

Obviously, there are a lot of growth projects here in the next couple of years that are going to consume a lot of capital. But at some point, the great thing about a high-growth business that’s growing a lot with not a lot of capex is that you’re generating just a ton of cash flow. What does capital allocation look like as the growth projects wind down and cash flow starts to exceed even what they can put into growth projects?

Well, I think it depends upon the valuation at the time. Obviously, they would do some nominal dividend in order to check the box for investors that have to have a dividend-paying stock in order to invest in it. I would hope that they don’t go too crazy. My favorite dividend is the de minimis but growing one, to check those 2 boxes, and if you need to pay a big one because your stock’s overvalued, you can do a special one.

But these guys are very commercially savvy, and they’re very financially savvy. So I think if their stock’s undervalued, they’re going to be preferring share repurchases.

And if, on that $900 million in EBITDA that we kind of said—if this goes right and all these growth projects are a couple of years out—how do you think about multiple valuation at that point, just so people kind of know what they’re playing for 4 or 5 years out?

I mean, I think that you look at one of the waste companies that reported in the last couple of weeks, and they have an oil-recycling business that they’re putting money into—pretty significant, like $400 million or $500 million—and they’re talking about a 7-year payback. That business trades at a much higher multiple than what WaterBridge trades at, and WaterBridge has 3-year paybacks.

I think people are going to be making the connection. You know where the waste multiples are: They’re in the mid-teens. Don’t take my word for it, or don’t take SECURE’s word for it, which has been beating that drum for a long time. Take Waste Connections’ word for it.

Waste Connections is one of the highest-quality municipal-waste operators in the country. They invested in R360 over a decade ago. They paid, I think, about 7.5 times EBITDA for it when their multiple was at maybe 7.8 times. So it wasn’t that both their multiples were low.

And in 2024, they bought 20% of the industry’s capacity in Western Canada by buying the SECURE assets that the Competition Tribunal forced SECURE to sell. Rumor is they bought a small E&P asset in the Permian that was sold by a sponsor in Q1. So the waste companies definitely see that the attributes of these businesses are similar to theirs, if not better than theirs, and they’re putting money into this business as well.

So if I’m just doing that in my head, you’re saying, hey, look, 5 years out, $900 million in EBITDA. Let’s assume that all the free cash flow between now and then goes to growth capex, though I think that’s kind of an aggressive assumption. So, $900 million in EBITDA, a 15x multiple if it’s kind of the waste multiple, so you’re getting to $13.5 billion of EV. They’ve got—what is it right now?—like $2 billion of debt. So you’d get an $11.5 billion market cap.

And you get an $11.5 billion market cap. I think they’re around $3 billion in market cap post-IPO. So you’re kind of looking at a 3- to 4-bagger on that math.

Yeah, yeah. Okay, let me ask just 2 pushbacks on the multiple, right? And I don’t think it matters that much, because you could do the same math that I just did on a 10x and you would still get a pretty solid return over the next few years. But let me just do some pushback on the multiple.

I do hear you on the 15x, right? These are quality businesses. But I guess the 2 things I’d point to are Waste Connections—you mentioned they bought some stuff—but when I think waste, I guess it’s the permanency of the assets that I think people are going to come to. A hundred years from now, people are still going to need their trash taken out. I don’t know if the Permian is going to be getting drilled in the same way, call it, 30 years from now.

So, I mean, maybe—but is the difference between this at 10x and the 15x that Waste Connections should get kind of the questionability of the terminal value of the assets? Does that make sense?

I think that the wells are going to produce for a long time, so over a decade. So even if you drill 10 years from now, those wells will still be going. But, yeah, you could say it deserves a slight discount because you have a little bit more terminal-value risk there, or maybe there’s the perception that the revenue is a little less resilient because it’s tied to oil and gas.

Yeah. Look, I don’t think it matters. I don’t think it matters all that much.

Yeah, let me finish.

Yeah.

So say you give it a little bit of a discount, but then I would say, well, what premium would you give it for not having to pay for the trucks? I mean, look at the ROIC of a municipal-waste company. I mean, they’re horrible—10%, 11%. They’re growing, but they always have to replace the trucks. You don’t have the collection assets that the municipal-waste companies have.

So, yeah, there are some attributes of the municipal-waste companies that I’d like to see in this business. Yes, maybe you should knock it a little bit, but on the other hand, with respect to the maintenance capex that you don’t have here, I mean, that’s a big premium.

Great point, great point. Let me ask you: If I put oil prices to the side—because we mentioned oil prices—Permian is going to be producing at $50. If you said oil prices are going to $10, this probably isn’t the investment for you. But if I put a dramatic collapse in oil prices to the side, what keeps you up at night about WaterBridge?

Alternatively, we talked about how a lot of this growth is built in—it’s MVCs, it’s contract pricing, all this sort of stuff. Again, what breaks this? What keeps you up at night? What could stop that inevitable march to the $900 million we talked about, where, if we’re recording this on your 10th podcast appearance 3 years from now, we say, hey, this didn’t work out for XYZ reason?

Yeah, I think that some environmental disaster or something like that—a pipeline breaks, you have some expensive lawsuit, some remediation work that’s really expensive—I mean, that would be worrisome. I don’t think it’s a long-term risk, but anytime you have something that’s complicated with respect to this, where you have the sister companies LandBridge and WaterBridge, it’s always going to be ripe for short reports to attack it. So you may wake up one day and it be down 20% because some short report came out. I don’t think that is a long-term issue for the business, but it doesn’t make it fun in the short term.

This is completely off the cuff, so forgive me for this, but on the remediation and pipeline spill, I’ve been involved with pipeline spills before on the oil side, and it’s a disaster, right? It’s generally pipeline spills in the ocean, but even on the ground it’s a disaster. Oil kills everything. It coats everything, kills everything. If you had a pipeline spill here, I mean, I understand this water is not potable, right? You and I aren’t going to go drink this water or something, but if you had a pipeline—

Yeah, it’s corrosive. It’s nasty stuff.

But would it be as big a disaster as oil? Because it’s—I mean, at its base, it’s water. Would it be like, hey, eventually it evaporates and kind of goes away, and it’s not as bad? An oil spill—we’re talking hundreds of millions of cleanup here. If there’s a spill, is it tens of millions? Is it single-digit millions?

Yeah, I don’t know. It would probably drive a lot of business to their landfill. [Laughter]

So if it was their customer—if it was a customer that caused the spill—then it would be fantastic. It’d be business-generative for them. But no, that is true. I was just curious because sometimes it does help when you quantify the actual downside.

I do merger arb. In merger arb, you’re always worried about the deal breaking on the downside. But every now and then, you’ll have something where it’s like, hey, in between the deal announcement and the deal closing, they announced 4 new contracts for $100 million each. Guess what? The downside used to be 40. Now the downside’s 50. And that completely changes the calculus.

If the downside here is an oil spill à la Exxon Valdez, and we’re talking billions in cleanup costs, that’s one thing. If a spill here is, hey, we need to go—I don’t know—take hair dryers and evaporate all this water—

I think the environmental damage of the Exxon Valdez in the ocean is probably much more dramatic than it is in the middle of the desert, in the most desolate part of the country, too. That’s exactly one of the many things I was driving to, right? It is a very desolate piece of the desert.

So maybe a spill can be remediated in a lot of cheaper ways than we think about spills. Yeah.

I mean, oil prices are obviously the big risk that you want to keep an eye on. I think that it could be a good thing to have low oil prices in the short term just to prove out the resilience of the thesis, but it's definitely tied to oil. And then the LandBridge-WaterBridge common-management, dual-stock kind of structure just makes them susceptible to conflicts of interest. I mean, they have to manage the conflicts well. They've done it in the past, and I think they'll do it in the future, but you'll have short reports coming out where they make some claims.

Yeah. So, I've probably asked 4 questions on the potential for conflicts of interest, and I think you've had good answers. They've managed this for years, but you've said it is there. A short report will probably come out at some point highlighting the conflicts of interest on one side or the other.

They already have.

Oh, really? I hadn't seen one.

One. There is one that came out before WaterBridge went public, but yeah.

Okay. I will go find that. But why even have these as different businesses? It just strikes me that the integration would make a lot of sense here.

Well, the integration operationally makes a lot of sense, which is why they do it. But if you look at land royalty companies like Texas Pacific Land and LandBridge, they can trade 25 to 40 times. That is not going to get appropriately valued within WaterBridge. And so it makes sense to have that separate.

I think I hear you, though. If you put these under the same roof and started breaking out segment earnings, everybody would just say, “Oh, how are you doing segment pricing?” So they'd probably have the same issues, and you'd never get the multiple. But it does strike me that these businesses belong together.

Well, as a shareholder of both, I kind of like having them separate. If it makes people more comfortable, I'm a larger shareholder of WaterBridge.

That's great. I think we've covered everything I wanted to cover. Anything else you want to talk about, or anything a listener should go away thinking about?

I think we're pretty good. I mean, the thesis is pretty simple. There's a lot of organic growth within the next few years. It wouldn't surprise me if they do an analyst day, which I really think is needed, because right now most of the people that are looking at this are energy investors or midstream investors.

You want to get the waste guys looking at it. You want to get the generalists looking at it. The concept of the produced-water space is tough initially to get your arms around. It worked out for me because I was invested for years in TPL. I would see the royalties that they would get paid for their produced-water business.

I owned some waste companies. I sat down with the Secure guys at a conference, and they explained the business to me. So for me, it was a little easier to get because I've had so much exposure to it. But I think LandBridge and WaterBridge really need to have an investor day. Now that they're both public, I could see them doing that in the next 2, 3, or 4 months.

Forget the investor day. You know what they needed? They needed you to come on this podcast, because I know you came on this podcast for Secure, what, 12 or 15 months ago or whatever. You mentioned the generalists. How many generalists do you see writing in their letters, “Hey, new position: Secure. It used to be Secure Energy. Now it's Secure Water Solutions?”

Secure's got a nice cadre of fans on Substack and Twitter. Canadian companies are a little bit different, where you don't have to report that you're a shareholder unless you're over, like, 10%.

Yeah.

There are some pretty clever funds that I do know are within the Secure shareholder base that I wish they would disclose their positions, because it would help get a lot more exposure to that company. But you brought up LandBridge on the Secure call that we did, and LandBridge got inbound calls because of that.

And so that helped me get closer to the management team and probably secure a larger allocation of the WaterBridge IPO. So I have you to thank for that.

Good for you, man. That's awesome. Cool. Well, hey, Chadd, this is great. I'm going to go count up the podcasts, because if this is the 5th one, we're losing the tie for the next one. You've got the exclusive Yet Another Value Podcast shirt coming in the mail, but this is great. Looking forward to chatting soon and looking forward to the next podcast.

All right, man. Have a good day.