Why Shares of Aris Water Solutions Are Sinking Today

What happened

While the S&P 500 and Dow Jones Industrial Average open today's trading session inching higher, Aris Water Solutions (ARIS 3.05%) promptly headed in the other direction. The company, a provider of water handling and recycling solutions for energy companies, reported fourth-quarter 2022 financial results before the market opened, and investors were clearly not impressed. 

As of 10:55 a.m. ET, shares of Aris Water Solutions were down 20%.

So what

Failing to meet analysts' estimates that it would book Q4 2022 revenue of $86.6 million, Aris reported sales of $82.9 million. Similarly, the company came up short of expectations on the bottom of the income statement. Whereas analysts had expected Q4 2022 earnings per share of $0.18, Aris reported EPS of $0.06.

It's not only the headline figures though that disappointed investors. Aris Water Solutions reported a year-over-year narrowing of its adjusted operating margin. Wheras the company had an adjusted operating margin of $0.41 per barrel in 2021, it reported an adjusted operating margin of $0.39 per barrel in 2022.

In the press release accompanying the earnings report, management attributed the margin contraction to "inflationary cost pressures." Although inflation seemed to be ebbing, a recent report suggested that perhaps it hasn't peaked yet. This concern may have investors speculating that Aris will continue to encounter pressure in its operating margin in 2023.

Now what

Although the company failed to meet analysts' expectations last quarter, today's sell-off seems a little excessive. Aris succeeded in growing total water volumes -- about 36% -- in 2022 compared to 2021, and recycled produced water volumes rose 144% year over year -- two strong signs of growth.

Providing water management water services to upstream companies that operate in the Permian Basin, Aris offers investors an opportunity to gain exposure to the energy industry. For those interested in mitigating the risk of investing in an individual energy company, Aris is a stock to consider -- one that shouldn't be dismissed solely because of today's sell-off.